As filed with the Securities and Exchange Commission on October 8, 2010

Registration No. 001-34805

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of The Securities Exchange Act of 1934

 

 

MOTOROLA MOBILITY HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware  

27-2780868

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

600 North US Highway 45
Libertyville, Illinois
  60048
(Address of Principal Executive Offices)   (Zip Code)

847-523-5000

(Registrant’s telephone number, including area code)

 

 

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

to be so registered

 

Name of each exchange on which

each class is to be registered

Common Stock, par value $0.01 per share   New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act

None

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

¨ Large accelerated filer

  ¨ Accelerated filer

þ Non-accelerated filer

  ¨ Smaller reporting company
(Do not check if a smaller reporting company)

 

 

 


INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND

ITEMS OF FORM 10

Our Information Statement is filed as Exhibit 99.1 to this Form 10 (“Information Statement”). For your convenience, we have provided below a cross-reference sheet identifying where the items required by Form 10 can be found in our Information Statement. None of the information contained in the Information Statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

 

Item No.

  

Caption

  

Location in Information Statement

Item 1.    Business    The following sections of our Information Statement are hereby incorporated by reference: “Summary,” “Risk Factors,” “Forward-Looking Statements,” “The Separation,” “Capitalization,” “Business,” “Certain Relationships and Related Party Transactions,” “Where You Can Find More Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Item 1A.    Risk Factors    The following sections of our Information Statement are hereby incorporated by reference: “Risk Factors” and “Forward-Looking Statements”
Item 2.    Financial Information    The following sections of our Information Statement are hereby incorporated by reference: “Summary—Selected Financial Data of Motorola Mobility Holdings, Inc.,” “Risk Factors,” “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Item 3.    Properties    The following section of our Information Statement is hereby incorporated by reference: “Business—Other Information—Properties/Manufacturing,”
Item 4.   

Security Ownership of Certain Beneficial

Owners and Management

   The following section of our Information Statement is hereby incorporated by reference: “Security Ownership of Management, Directors and Principal Stockholders”
Item 5.    Directors and Executive Officers    The following section of our Information Statement is hereby incorporated by reference: “Management”
Item 6.    Executive Compensation   

The following sections of our Information Statement are hereby incorporated by reference: “Management,” “Compensation Discussion and Analysis,” “Named Executive Officer Compensation” and “Certain Relationships

and Related Party Transactions”

Item 7.    Certain Relationships and Related Transactions and Director Independence    The following sections of our Information Statement are hereby incorporated by reference: “Certain Relationships and Related Party Transactions,” “Management” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”


Item No.

  

Caption

  

Location in Information Statement

Item 8.    Legal Proceedings    The following section of our Information Statement is hereby incorporated by reference: “Business—Legal Proceedings”
Item 9.    Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters    The following sections of our Information Statement are hereby incorporated by reference: “Summary,” “The Separation,” “Dividend Policy,” “Capitalization” and “Description of Capital Stock”
Item 10.    Recent Sales of Unregistered Securities    Not applicable
Item 11.   

Description of Registrant’s Securities to be

Registered

   The following sections of our Information Statement are hereby incorporated by reference: “Dividend Policy” and “Description of Capital Stock”
Item 12.    Indemnification of Directors and Officers    The following section of our Information Statement is hereby incorporated by reference: “Description of Capital Stock—Limitation on Liability of Directors and Indemnification of Directors and Officers”
Item 13.    Financial Statements and Supplementary Data    The following sections of our Information Statement are hereby incorporated by reference: “Index to Financial Statements” and the statements referenced therein
Item 14.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    Not Applicable
Item 15.    Financial Statements and Exhibits    The following sections of our Information Statement are hereby incorporated by reference: “Unaudited Pro Forma Condensed Combined Financial Statements” and “Index to Financial Statements” and the statements referenced therein

 

  (a) List of Financial Statements and Schedules .

The following financial statements are included in the Information Statement and filed as part of this Registration Statement on Form 10:

 

  (1) Unaudited Pro Forma Condensed Combined Financial Statements of Motorola Mobility Holdings, Inc.; and

 

  (2) Financial Statements, including Report of Independent Registered Public Accounting Firm

 

  (b) Exhibits .

The following documents are filed as exhibits hereto:

 

Exhibit No.

  

Exhibit Description

2.1    Amended and Restated Master Separation and Distribution Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
3.1    Form of Restated Certificate of Incorporation of the Registrant.
3.2    Form of Restated Bylaws of the Registrant.
10.1    Amended and Restated Intellectual Property Assignment Agreement between Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†


Exhibit No.

  

Exhibit Description

10.2    Amended and Restated Intellectual Property License Agreement between Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
10.3    Trademark License Agreement between Motorola Trademark Holdings, LLC and Motorola, Inc. effective as of July 30, 2010.*
10.4    Tax Sharing Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
10.5    Form of Transition Services Agreement—Motorola Mobility Provided Services among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc.
10.6    Form of Transition Services Agreement—Motorola Solutions Provided Services among Motorola, Inc., Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation) and Motorola Mobility, Inc.
10.7    Amended and Restated Employee Matters Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.
10.8    Employment Agreement between Motorola Mobility Holdings, Inc. and Dr. Sanjay K. Jha effective as of [ ] .*
10.9    Employment Offer Letter between Motorola, Inc. and Daniel M. Moloney effective as of July 30, 2010.†
10.10    Employment Offer Letter between Motorola, Inc. and William C. Ogle effective as of July 6, 2009.†
10.11    Motorola Mobility Holdings, Inc. Legacy Incentive Plan.*
10.12    Motorola Mobility Holdings, Inc. 2011 Incentive Compensation Plan.*
10.13    Motorola Mobility Holdings, Inc. Employee Stock Purchase Plan.*
10.14    Mobile Application Distribution Agreement between Motorola, Inc. and Google Inc. dated as of June 8, 2009.**
10.15    Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc. dated as of December 31, 2003.**
10.16    Amendment Twenty-Seven to the Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc., effective January 1, 2010.
10.17    Corporate Supply Agreement between Broadcom Corporation and Motorola, Inc. dated as of November 17, 2008.**
21    List of subsidiaries of Motorola Mobility Holdings, Inc.
99.1    Preliminary Information Statement of Motorola Mobility Holdings, Inc., subject to completion, dated October 8, 2010.
99.2    Opinion of Wachtell, Lipton, Rosen & Katz relating to certain tax matters.†
99.3    Opinion of Wachtell, Lipton, Rosen & Katz relating to certain tax matters.*

 

* To be filed by amendment.
** An application for confidential treatment for selected portions of this agreement has been filed with the Securities and Exchange Commission.
Previously filed on August 31, 2010.


SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MOTOROLA MOBILITY HOLDINGS, INC.

By:

 

/s/ Sanjay K. Jha

Name:

  Dr. Sanjay K. Jha

Title:

  Chief Executive Officer

Dated: October 8, 2010


EXHIBIT INDEX

 

Exhibit No.

  

Exhibit Description

  2.1    Amended and Restated Master Separation and Distribution Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
  3.1    Form of Restated Certificate of Incorporation of the Registrant.
  3.2    Form of Restated Bylaws of the Registrant.*
10.1    Amended and Restated Intellectual Property Assignment Agreement between Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
10.2    Amended and Restated Intellectual Property License Agreement between Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
10.3    Trademark License Agreement between Motorola Trademark Holdings, LLC and Motorola, Inc. effective as of July 30, 2010.*
10.4    Tax Sharing Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.†
10.5    Form of Transition Services Agreement—Motorola Mobility Provided Services among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc.
10.6    Form of Transition Services Agreement—Motorola Solutions Provided Services among Motorola, Inc., Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation) and Motorola Mobility, Inc.
10.7    Amended and Restated Employee Matters Agreement among Motorola Mobility Holdings, Inc. (f/k/a Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010.
10.8    Employment Agreement between Motorola Mobility Holdings, Inc. and Dr. Sanjay K. Jha effective as of [ ] .*
10.9    Employment Offer Letter between Motorola, Inc. and Daniel M. Moloney effective as of July 30, 2010.†
10.10    Employment Offer Letter between Motorola, Inc. and William C. Ogle effective as of July 6, 2009.†
10.11    Motorola Mobility Holdings, Inc. Legacy Incentive Plan.*
10.12    Motorola Mobility Holdings, Inc. 2011 Incentive Compensation Plan.*
10.13    Motorola Mobility Holdings, Inc. Employee Stock Purchase Plan.*
10.14    Mobile Application Distribution Agreement between Motorola, Inc. and Google Inc. dated as of June 8, 2009.**
10.15    Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc. dated as of December 31, 2003.**
10.16    Amendment Twenty-Seven to the Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc., effective January 1, 2010.
10.17    Corporate Supply Agreement between Broadcom Corporation and Motorola, Inc. dated as of November 17, 2008.**
21    List of subsidiaries of Motorola Mobility Holdings, Inc.
99.1    Preliminary Information Statement of Motorola Mobility Holdings, Inc., subject to completion, dated October 8, 2010.
99.2    Opinion of Wachtell, Lipton, Rosen & Katz relating to certain tax matters.†
99.3    Opinion of Wachtell, Lipton, Rosen & Katz relating to certain tax matters.*

 

* To be filed by amendment.
** An application for confidential treatment for selected portions of this agreement has been filed with the Securities and Exchange Commission.
Previously filed on August 31, 2010.

EXHIBIT 3.1

FORM OF

RESTATED CERTIFICATE OF INCORPORATION

OF

MOTOROLA MOBILITY HOLDINGS, INC.

ARTICLE 1

The name of the corporation is MOTOROLA MOBILITY HOLDINGS, INC.

ARTICLE 2

The address of the corporation’s registered office in the State of Delaware is c/o The Corporation Trust Company, The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware 19801. The name of the corporation’s registered agent at such address is The Corporation Trust Company.

ARTICLE 3

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE 4

The number of shares which the corporation shall have authority to issue, itemized by classes, par value of shares, and series, if any within a class, is:

 

Class

   Series
(if any)
   Number of
Shares
    Par Value
Per Share

Preferred

   To be issued in series    [   $ 0.01

Common

   None    [   $ 0.01

The powers, preferences and rights, and the qualifications, limitations or restrictions thereof relating to the Preferred Stock and the Common Stock are:

The Preferred Stock :

 

(1) The Preferred Stock may be issued from time to time in one or more series and with such designation for each such series as shall be stated and expressed in the resolution or resolutions providing for the issue of each such series adopted by the Board of Directors. The Board of Directors in any such resolution or resolutions is expressly authorized to state and express for each such series:

 

  (i) The voting powers, if any, of the holders of stock of such series;

 

  (ii) The rate per annum and the times at and conditions upon which the holders of stock of such series shall be entitled to receive dividends, and whether such dividends shall be cumulative or noncumulative and if cumulative the terms upon which such dividends shall be cumulative;

 

  (iii) The price or prices and the time or times at and the manner in which the stock of such series shall be redeemable;

 

  (iv) The right to which the holders of the shares of stock of such series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the corporation;

 

  (v) The terms, if any, upon which shares of stock of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;


  (vi) The number of shares constituting such series; and

 

  (vii) Any other designations, powers, preferences, and relative, participating, optional or other special rights, and qualification, limitations or restrictions thereof so far as they are not inconsistent with the provisions of the Certificate of Incorporation, as amended, and to the full extent now or hereafter permitted by the laws of Delaware.

 

(2) All shares of the Preferred Stock of any one series shall be identical to each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if cumulative, shall be cumulative.

The Common Stock :

 

(1) The Common Stock may be issued by the corporation from time to time for such consideration and upon such terms as may be fixed from time to time by the Board of Directors and as may be permitted by law, without action by any stockholders.

 

(2) The holders of Common Stock shall be entitled to dividends only if, when and as the same shall be declared by the Board of Directors and as may be permitted by law and the preferences of any outstanding Preferred Stock.

 

(3) Each share of the Common Stock shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the stockholders of the corporation on all propositions before such meetings and on all elections of Directors of the corporation. The holders of Common Stock shall not have cumulative voting rights for the election of directors or for any other purpose.

 

(4) Except as otherwise provided by law, or by the resolution or resolutions adopted by the Board of Directors designating the rights, powers and preferences of any series of Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes.

ARTICLE 5

The number of directors of the corporation shall be fixed by the bylaws and may be altered from time to time as may be provided therein, but in no event shall the number of directors of the corporation be less than three. Unless and except to the extent that the bylaws of the corporation shall so require, the election of directors of the corporation need not be by written ballot.

ARTICLE 6

The following provisions are inserted for the regulation of the business and for the conduct of the affairs of the corporation.

 

Section 1. In furtherance and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized, to amend or repeal the bylaws or to adopt new bylaws, subject to any limitations that may be contained in such bylaws and the power of the stockholders of the corporation to alter or repeal any bylaws made by the Board of Directors.

 

Section 2. Any action required or permitted to be taken by the stockholders of the corporation at a stockholder meeting may be effected by consent in writing by such stockholders in accordance with the bylaws and the laws of the State of Delaware.

 

Section 3. The corporation reserves the right to amend, alter or repeal any provision contained in its Certificate of Incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by the laws of the State of Delaware, and except as set forth in Article 7 below, all rights, preferences and privileges of whatsoever nature conferred on directors, stockholders or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended herein are granted subject to this reservation.


ARTICLE 7

A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended.

Any repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification.

ARTICLE 8

The corporation elects not to be governed by Section 203 of the General Corporation Law of Delaware.

ARTICLE 9

If any provision or provisions of this Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (a) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Certificate of Incorporation (including, without limitation, each portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Certificate of Incorporation (including, without limitation, each such portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to permit the corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service to or for the benefit of the corporation to the fullest extent permitted by law.

EXHIBIT 3.2

FORM OF

RESTATED BYLAWS

OF

MOTOROLA MOBILITY HOLDINGS, INC.

Incorporated under the Laws of the State of Delaware

 

 

ARTICLE I

OFFICES AND RECORDS

Section 1.1. Delaware Office . The address of MOTOROLA MOBILTY HOLDINGS, INC’S (the “Corporation”) registered office in the State of Delaware is c/o The Corporation Trust Company, The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware 19801. The name of the corporation’s registered agent at such address is The Corporation Trust Company.

Section 1.2. Other Offices . The Corporation may have such other offices, either inside or outside the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require.

Section 1.3. Books and Records . The books and records of the Corporation may be kept inside or outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors.

ARTICLE II

STOCKHOLDERS

Section 2.1. Annual Meeting . The annual meeting of the stockholders of the Corporation shall be held on such date and time as may be fixed by resolution of the Board of Directors.

Section 2.2. Special Meeting . Subject to the rights of the holders of any series of stock (“Preferred Stock”) having a preference over the common stock, par value $0.01 per share, of the Corporation as to dividends, voting or upon liquidation with respect to such series of Preferred Stock, special meetings of the stockholders may be called only by the Chairman of the Board of Directors or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no


vacancies (the “Whole Board”) or by the Chief Executive Officer of the Corporation (the “CEO”) or the Secretary at the request in proper form of the holders of not less than 20 percent of the voting power of the issued and outstanding voting stock of the Corporation entitled to vote generally for the election of directors (the “Voting Stock”). To be in proper form, such stockholder request (the “Request”) for a special meeting shall:

(a) be directed to the Secretary in writing and shall be signed by each stockholder requesting the special meeting, or a duly authorized agent of such stockholder; and

(b) be accompanied by a written notice setting forth the specific purpose(s) of the special meeting and information required by Section 2.8 of these Bylaws, including the information as to any nominations proposed to be presented and any other business proposed to be conducted at such special meeting and as to the stockholder(s) requesting the special meeting.

(c) A special meeting requested by stockholders shall be held at such date, time and place as may be designated by the Board of Directors or Chairman of the Board of Directors; provided , however , that the date of any such special meeting shall be not more than 90 days after receipt by the Secretary of a Request satisfying the requirements of this Section 2.2. Notwithstanding the foregoing, a special meeting requested by stockholders shall not be held if:

(i) a valid Request is not delivered in the manner and form prescribed pursuant to this Section 2.2;

(ii) the stated business to be brought before the special meeting is not a proper subject for stockholder action under applicable law;

(iii) the Chairman of the Board of Directors or the Board of Directors has called or calls for an annual or special meeting of stockholders to be held within 90 days of the time the Secretary receives the Request for the special meeting and the Board of Directors determines in good faith that the business of such annual or special meeting includes (among any other matters properly brought before the annual or special meeting) the business specified in the stockholder Request;

(iv) an identical or substantially similar item was presented at any meeting of stockholders held within 120 days prior to the stockholder Request for a special meeting; or

(v) documentary evidence of the record and beneficial ownership of such shares of stock as of the record date is not established as required by this Section 2.2 and Section 2.8 of these Bylaws.

(d) A stockholder may revoke a Request for a special meeting at any time by written revocation delivered to the Secretary, and if, following such revocation, there are unrevoked Requests from stockholders holding in the aggregate less than the requisite number of shares of stock entitling the stockholders to request a special meeting be called in Section 2.2(a), the Chairman of the Board of Directors or the Board of Directors, in their discretion, may cancel the special meeting. If none of the stockholders who submitted the Request for a special meeting appears or sends a qualified representative to present the nominations proposed to be presented or other business proposed to be conducted at the special meeting, the Corporation need not present such nominations or other business for a vote at such meeting.

 

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(e) Business transacted at special meetings shall be confined to the purposes stated in the Corporation’s notice of the meeting or in any supplemental notice delivered by the Corporation in accordance with Section 2.4 of these Bylaws.

Section 2.3. Place of Meeting . The Board of Directors, the Chairman of the Board of Directors or the CEO, as the case may be, may designate the place of meeting for any annual or special meeting of the stockholders. If no designation is so made, the place of meeting shall be the principal office of the Corporation.

Section 2.4. Notice of Meeting . Written or printed notice, stating the place, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by the Corporation by or at the direction of the Board of Directors, Chairman of the Board or the Secretary, or the officer calling the meeting not less than ten days nor more than 60 days before the date of the meeting, either personally, by electronic transmission in the manner provided in Section 232 of the General Corporation Law of the State of Delaware (except to the extent prohibited by Section 232(e) of the General Corporation Law of the State of Delaware) or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at the address as it appears on the stock transfer books of the Corporation. If notice is given by electronic transmission, such notice shall be deemed to be given at the times provided in the General Corporation Law of the State of Delaware. Such further notice shall be given as may be required by law. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 7.4 of these Bylaws. Any previously scheduled meeting of the stockholders may be postponed, and (a) unless the Certificate of Incorporation otherwise provides, any special meeting of the stockholders called by the Chairman of the Board or the Board of Directors may be cancelled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders and (b) any special meeting of stockholders called by the CEO or the Secretary at the request of stockholders pursuant to Section 2.2(a) of these Bylaws may be cancelled in accordance with Section 2.2(d) of these Bylaws.

Section 2.5. Quorum and Adjournment . Except as otherwise provided by law or by the Certificate of Incorporation, the holders of one-third of the Voting Stock, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The Presiding Stockholder Meeting Chair (as defined below) may adjourn the meeting from time to time, whether or not there is a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

 

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Section 2.6. Proxies . At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such manner prescribed by the General Corporation Law of the State of Delaware) by the stockholder, or by his duly authorized attorney in fact.

Section 2.7. Order of Business .

(a) Meetings of Stockholders . At any annual or special meeting of the stockholders, only such business shall be conducted or considered, as shall have been properly brought before the meeting. For nominations to be properly made at an annual meeting or at a special meeting at which directors are to be elected pursuant to the Corporation’s notice of meeting, and proposals of other business to be properly brought before an annual or special meeting, such nominations and proposals of other business must be (i) specified in the Corporation’s notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly made at the annual meeting, or brought before the special meeting, by or at the direction of the Board of Directors or (iii) otherwise properly requested to be brought before the annual or special meeting by a stockholder of the Corporation in accordance with these Bylaws. For nominations of persons for election to the Board of Directors or proposals of other business to be properly requested by a stockholder to be made at an annual meeting, or brought before a special meeting, a stockholder must (A) in the case of a special meeting, with respect to (x) nominations of persons for election to the Board, either have called such meeting in accordance with Section 2.2 of these Bylaws or be making nominations solely in response to nominations made by the Company or by another stockholder who has properly called such special meeting in accordance with Section 2.2 of these Bylaws or (y) proposals of business to be conducted at such special meeting, have properly called such special meeting in accordance with Section 2.2 of these Bylaws, (B) be a stockholder of record at the time of giving of notice of such annual or special meeting by or at the direction of the Board of Directors and at the time of the annual or special meeting, (C) be entitled to vote at such annual or special meeting and (D) comply with the procedures set forth in these Bylaws as to such business or nomination; provided no nominations will be deemed properly requested by a stockholder to be brought before a special meeting unless the Board of Directors shall have determined that directors shall be elected at such special meeting.

(b) General . Section 2.7(a) shall be the exclusive means for a stockholder to make nominations or other business proposals (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and included in the Corporation’s notice of meeting) before an annual or special meeting of stockholders. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the Presiding Stockholder Meeting Chair (as defined below) of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with these Bylaws and, if any proposed nomination or other business is not in compliance with these Bylaws, to declare that no action shall be taken on such nomination or other proposal and such nomination or other proposal shall be disregarded.

 

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(c) Meeting Procedures . The Chairman of the Board or other person presiding as provided in these Bylaws or by the Board of Directors (the “Presiding Stockholder Meeting Chair”), shall call meetings of the stockholders to order. The Secretary, or in the event of his or her absence or disability, the Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary, an appointee of the Presiding Stockholder Meeting Chair, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be determined by such Presiding Stockholder Meeting Chair. Except to the extent inconsistent with applicable law, these Bylaws or any rules and regulations adopted by the Board of Directors, the Presiding Stockholder Meeting Chair of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts, including causing an adjournment of such meeting, as, in the judgment of such Presiding Stockholder Meeting Chair, are appropriate. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the Presiding Stockholder Meeting Chair of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the Presiding Stockholder Meeting Chair shall permit; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; (e) limitations on the time allotted to questions or comments by participants; and (f) establishing times for opening and closing of the voting polls for each item upon which a vote is to be taken. Unless, and to the extent determined by the Board of Directors or the Presiding Stockholder Meeting Chair of the meeting, meetings of the stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

Section 2.8. Advance Notice of Stockholder Business and Nominations .

(a) Annual Meeting of Stockholders . Without qualification or limitation, subject to Section 2.8(c)(iv) of these Bylaws, for any nominations or any other business to be properly brought before an annual meeting by a stockholder pursuant to Section 2.7(a) of these Bylaws, the stockholder must have given timely notice thereof and timely updates and supplements thereof in writing to the Secretary and such other business must otherwise be a proper matter for stockholder action.

To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided , however , that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 120th day prior to the date of such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting, or the public announcement thereof, commence a new time period for the giving of a stockholder’s notice as described above.

 

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Notwithstanding anything in the immediately preceding paragraph to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased by the Board of Directors, and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 2.8(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

In addition, to be timely, a stockholder’s notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for the meeting in the case of the update and supplement required to be made as of the record date, and not later than eight business days prior to the date for the meeting, any adjournment or postponement thereof in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof.

(b) Special Meetings of Stockholders . Without qualification or limitation, subject to Section 2.8(c)(iv) of these Bylaws, for any business to be properly requested to be brought before a special meeting by a stockholder pursuant to Section 2.7(a) of these Bylaws, the stockholder must have given timely notice of such business and timely updates and supplements thereof in writing to the Secretary and such business must otherwise be a proper matter for stockholder action.

To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th days prior to the date of such special meeting and not later than the close of business on the later of the 90th day prior to the date of such special meeting or, if the first public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, the 10th day following the day on which public announcement of the date of the special meeting is first made. In no event shall an adjournment or postponement of a special meeting of stockholders, or the public announcement thereof, commence a new time period for the giving of a stockholder’s notice as described above.

In addition, to be timely, a stockholder’s notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is ten business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five business days after the record date for the meeting in the case of

 

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the update and supplement required to be made as of the record date, and not later than eight business days prior to the date for the meeting, any adjournment or postponement thereof in the case of the update and supplement required to be made as of ten business days prior to the meeting or any adjournment or postponement thereof.

Subject to Section 2.8(c)(iv) of these Bylaws, in the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, provided that the stockholder’s notice with respect to any nomination (including the completed and signed questionnaire, representation and agreement required by Section 2.9 of these Bylaws) shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to the date of such special meeting and not later than the close of business on the later of the 90th day prior to the date of such special meeting or, if the first public announcement of the date of such special meeting is less than 100 days prior to the date of such special meeting, the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting, or the public announcement thereof, commence a new time period for the giving of a stockholder’s notice as described above.

(c) Other Provisions .

(i) To be in proper form, a stockholder’s notice given pursuant to Section 2.7(a) of these Bylaws to the Secretary must include the following, as applicable.

(A) As to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, a stockholder’s notice must set forth: (1) the name and address of such stockholder, as they appear on the Corporation’s books, of such beneficial owner, if any, and of their respective affiliates or associates or others acting in concert therewith, (2) (x) the class or series and number of shares of the Corporation which are, directly or indirectly, owned beneficially and of record by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, (y) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, any derivative or synthetic arrangement having the characteristics of a long position in any class or series of shares of the Corporation, or any contract, derivative, swap or other transaction or series of transactions designed to produce economic benefits and risks that correspond substantially to the ownership of any class or series of shares of the Corporation, including due to the fact that the value of such contract, derivative, swap or other transaction or series of transactions is determined by reference to the price, value or volatility of any class or series of shares of the Corporation, whether or not such instrument, contract or right shall be subject to settlement in the underlying

 

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class or series of shares of the Corporation, through the delivery of cash or other property, or otherwise, and without regard of whether the stockholder of record, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, may have entered into transactions that hedge or mitigate the economic effect of such instrument, contract or right (a “Derivative Instrument”) directly or indirectly owned beneficially by such stockholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation, (3) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder has a right to vote any class or series of shares of the Corporation, (4) any agreement, arrangement, understanding, relationship or otherwise, including any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged in, directly or indirectly, by such stockholder, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of any class or series of the shares of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such stockholder with respect to any class or series of the shares of the Corporation, or which provides, directly or indirectly, the opportunity to profit or share in any profit derived from any decrease in the price or value of any class or series of the shares of the Corporation (“Short Interests”), (5) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder that are separated or separable from the underlying shares of the Corporation, (6) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner of such general or limited partnership, (7) any performance-related fees (other than an asset-based fee) that such stockholder is entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, including without limitation any such interests held by members of such stockholder’s immediate family sharing the same household, (8) any significant equity interests or any Derivative Instruments or Short Interests in any principal competitor of the Corporation held by such stockholder, (9) any direct or indirect interest of such stockholder in any contract with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement), and (10) any other information relating to such stockholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder;

 

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(B) If the notice relates to any business other than a nomination of a director or directors that the stockholder proposes to bring before the meeting, a stockholder’s notice must, in addition to the matters set forth in paragraph (A) above, also set forth: (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder and beneficial owner, if any, in such business, (2) the text of the proposal or business (including the text of any resolutions proposed for consideration), and (3) a description of all agreements, arrangements and understandings between such stockholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder;

(C) As to each person, if any, whom the stockholder proposes to nominate for election or reelection to the Board of Directors, a stockholder’s notice must, in addition to the matters set forth in paragraph (A) above, also set forth: (1) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such person’s written consent to being named in the proxy statement and form of proxy as a nominee and to serving as a director if elected) and (2) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant; and

(D) With respect to each person, if any, whom the stockholder proposes to nominate for election or reelection to the Board of Directors, a stockholder’s notice must, in addition to the matters set forth in paragraphs (A) and (C) above, also include a completed and signed questionnaire, representation and agreement required by Section 2.9 of these Bylaws. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.

(ii) For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.

 

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(iii) Notwithstanding the foregoing provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these Bylaws; provided , however , that any references in these Bylaws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to Section 2.7 of these Bylaws.

(iv) Nothing in these Bylaws shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (B) of the holders of any series of Preferred Stock if and to the extent provided for under law, the Certificate of Incorporation or these Bylaws. Subject to Rule 14a-8 under the Exchange Act, nothing in these Bylaws shall be construed to permit any stockholder, or give any stockholder the right, to include or have disseminated or described in the Corporation’s proxy statement any nomination of director or directors or any other business proposal.

 

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Section 2.9. Submission of Questionnaire, Representation and Agreement . With respect to each person, if any, whom a stockholder proposes to nominate for election or reelection to the Board of Directors, in order for such person to be eligible to be a nominee for election or reelection as a director of the Corporation, such stockholder must deliver to the Secretary at the principal executive offices of the Corporation (in accordance with the time periods prescribed for delivery of notice under Section 2.8 of these Bylaws), in addition to the information required under Section 2.8 by these Bylaws, a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request), and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (a) is not and will not become a party to (i) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (ii) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (b) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (c) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary the information that is required pursuant to this Section 2.9.

Section 2.10. Procedure for Election of Directors; Required Vote .

(a) Except as set forth below, election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a majority of the votes cast at any meeting for the election of directors at which a quorum is present shall elect directors. For purposes of this Bylaw, a majority of votes cast shall mean that the number of shares voted “for” a director’s election must exceed the number of votes cast “against” that director’s election. Votes cast shall exclude abstentions with respect to that director’s election. Notwithstanding the foregoing, in the event of a “contested election” of directors, directors shall be elected by the vote of a plurality of the votes cast at any meeting for the election of directors at which a quorum is present. For purposes of this Bylaw, a “contested election” shall mean any election of directors in which the number of candidates for election as directors exceeds the number of directors to be elected, with the determination thereof being made by the Secretary as of the close of the applicable notice of nomination period set forth in Section 2.8 of these Bylaws or under applicable law, based on whether one or more notice(s) of nomination were timely filed in accordance with said Section 2.8; provided , however , that the determination that an election is a “contested election” shall be determinative only as to the

 

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timeliness of a notice of nomination and not otherwise as to its validity. If, prior to the time the Corporation mails its initial proxy statement in connection with such election of directors, one or more notices of nomination are withdrawn such that the number of candidates for election as director no longer exceeds the number of directors to be elected, the election shall not be considered a contested election, but in all other cases, once an election is determined to be a contested election, directors shall be elected by the vote of a plurality of the votes cast.

(b) If a nominee for director who is an incumbent director is not elected and no successor has been elected at such meeting, the director shall promptly tender his or her resignation to the Board of Directors. The nominating committee or such other committee designated by the Board of Directors pursuant to these Bylaws for the purpose of recommending director nominees to the Board of Directors (“Nominating Committee”), shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation, taking into account the Nominating Committee’s recommendation, and publicly disclose (by a press release, a filing with the Securities and Exchange Commission or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The Nominating Committee in making its recommendation, and the Board of Directors in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation shall not participate in the recommendation of the Nominating Committee or the decision of the Board of Directors with respect to his or her resignation. If such incumbent director’s resignation is not accepted by the Board of Directors, such director shall continue to serve until the next annual meeting and until his or her successor is duly elected, or his or her earlier resignation or removal. If a director’s resignation is accepted by the Board of Directors pursuant to this Bylaw, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of Section 3.10 of these Bylaws or may decrease the size of the Board of Directors pursuant to the provisions of Section 3.2 of these Bylaws.

(c) Except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws, in all matters other than the election of directors, the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders.

Section 2.11. Inspectors of Elections; Opening and Closing the Polls . The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may, but do not need to, include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Presiding Stockholder Meeting Chair of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law.

 

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The Presiding Stockholder Meeting Chair of the meeting shall be appointed by the inspector or inspectors to fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting.

Section 2.12. Record Date for Action by Written Consent . In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall request the Board of Directors to fix a record date, which request shall be in proper form and delivered to the Secretary at the principal executive offices of the Corporation. To be in proper form, such request must be in writing, shall state the purpose or purposes of the action or actions proposed to be taken by written consent.

The Board of Directors shall promptly, but in all events within ten days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action.

Section 2.13. Inspectors of Written Consent . In the event of the delivery, in the manner provided by Section 2.12 of these Bylaws, to the Corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the Corporation shall engage nationally recognized independent inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the independent inspectors certify to the Corporation that the consents delivered to the Corporation in accordance with Section 2.12 of these Bylaws represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this paragraph shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the independent inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

 

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Section 2.14. Effectiveness of Written Consent . Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated written consent received in accordance with Section 2.12 of these Bylaws, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the Corporation in the manner prescribed in Section 2.12 of these Bylaws under the General Corporation Laws of the State of Delaware.

Section 2.15. Stockholder Rights Plans

(a) The adoption of any stockholder rights plan, rights agreement or any other form of “poison pill” which is designed to or has the effect of making acquisition of large holdings of shares of Common Stock more difficult or expensive (a “Stockholder Rights Plan”) or the amendment of any such Stockholder Rights Plan which has the effect of extending the term of any rights or options provided thereunder, shall require the affirmative vote of the holders of record of a majority of shares of Common Stock.

(b) Anything in Section 2.15(a) of these Bylaws to the contrary notwithstanding, a Stockholder Rights Plan or the amendment of any such Stockholder Rights Plan which has the effect of extending the term of any rights or options provided thereunder may be adopted by the affirmative vote of the directors then in office if an Acquisition Proposal has been made and any such Stockholder Rights Plan so adopted or amended shall expire no later than 135 days following the later of the date of its adoption and the date of its last such amendment, unless such Stockholder Rights Plan or amendment thereto is approved by the affirmative vote of the holders of record of a majority of the shares of Common Stock prior to the expiration of such 135-day period. For purposes of this Bylaw, an “Acquisition Proposal” shall mean (i) the commencement of a tender offer to acquire shares of Common Stock or (ii) the delivery of a “bear hug” letter to the corporation or its Board of Directors.

(c) Any decision by the Board of Directors to repeal or amend this Section 2.15 shall require the affirmative vote of the holders of record of a majority of the shares of Common Stock.

ARTICLE III

BOARD OF DIRECTORS

Section 3.1. General Powers . The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders.

 

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Section 3.2. Number, Tenure and Qualifications . Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board; provided however that the Board of Directors shall at no time consist of fewer than three directors. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director.

The directors shall be elected at the annual meetings of stockholders as specified in the Certificate of Incorporation except as otherwise provided in the Certificate of Incorporation and in these Bylaws, and each director of the Corporation shall hold office until such director’s successor is elected and qualified or until such director’s earlier death, resignation or removal. The directors shall not be divided into classes of directors with terms of office that are greater than one year and which terms of office expire at different times.

Section 3.3. Regular Meetings . A regular meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting, shall be held without other notice than this Bylaw immediately after, and at the same place as, the Annual Meeting of Stockholders unless by resolution of the Board of Directors a different date, time and place is designated for this regular meeting. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without other notice than such resolution.

Section 3.4. Special Meetings . Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board of Directors, the CEO or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings.

Section 3.5. Meetings in Executive Session . During any regular meeting or special meeting of the Board of Directors, the Board of Directors may have an executive session with only the nonemployee directors or only the independent directors present and such other invitees as the directors participating in the executive session shall so determine. No separate notice of the executive session is required. The presiding director, as determined by the Board of Directors’ established procedures, shall preside at such executive session unless the directors participating in such session shall select another director to preside.

Section 3.6. Notice . Notice of any regular meeting (if other than by resolution) or special meeting of directors shall be given to each director at his or her usual place of business or residence in writing by hand delivery, first-class or overnight mail or courier service, email or other electronic means or facsimile transmission, or orally by telephone, including a voice messaging system, or other system or technology designed to record and communicate messages. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by overnight mail or courier service, such notice shall be deemed adequately delivered when the notice is delivered to the overnight mail or courier service company at least

 

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24 hours before such meeting. If by email or other electronic means, facsimile transmission, telephone or by hand, such notice shall be deemed adequately delivered when the notice is transmitted at least 12 hours before such meeting. If, however, the meeting is called by or at the request of the Chairman of the Board and if the Chairman of the Board decides that unusual and urgent business is to be transacted at the meeting (which decision shall be conclusively demonstrated by the Chairman of the Board giving notice of the meeting less than 12 hours prior to the meeting), then at least 2 hours prior notice shall be given. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws, as provided under Section 9.1 of these Bylaws. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with Section 7.4 of these Bylaws. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting except where a director attends a meeting and objects at the meeting to the transaction of any business because the meeting is not lawfully called or convened.

Section 3.7. Action by Consent of Board of Directors . Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a consent in writing or by electronic transmission setting forth the action so taken, shall be signed by all members of the Board or committee, as the case may be, entitled to vote or not abstaining from the vote, and is filed with the minutes of proceedings of the Board of Directors or committee.

Section 3.8. Conference Telephone Meetings . Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

Section 3.9. Quorum . Subject to Section 3.10 of these Bylaws, a whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum.

Section 3.10. Vacancies . Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, and unless the Board of Directors otherwise determines, vacancies occurring in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s successor shall have been duly elected and qualified or until such director’s earlier death, resignation or removal, with or without cause; provided that in lieu of filling a vacancy, the Board of Directors may reduce the number of directors pursuant to Section 3.2 of these Bylaws.

 

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Section 3.11. Compensation . Directors who also are employees of the Corporation shall not receive any additional compensation for services provided as a member of the Board of Directors. The non-employee directors shall be entitled to receive pursuant to resolution of the Board of Directors, fixed fees or other compensation for their services as directors, including committee fees. In addition, reimbursement of travel and other expenses incurred for attendance at each regular or special meeting of the Board of Directors or at any meeting of a committee of the Board of Directors or in connection with their other services to the Corporation may be permitted. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 3.12. Committees . The Board of Directors may designate any committee as appropriate, which shall consist of two or more directors of the Corporation and the Board shall also designate a chairman of each committee. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Each member (and each alternate member of any such committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy, or otherwise) shall serve as a member of such committee until his or her successor shall have been designated or until he or she shall cease to be a director, or until his or her resignation or removal, with or without cause, from such committee. Any such committee may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. The members of each committee shall designate a person to act as secretary of the committee to keep written minutes, and to serve notices for, its meetings and perform such other duties as the committee may direct. Such person may, but need not be, a member of the committee and the chairman of each committee shall report such committee’s proceedings to the Board of Directors when required.

Except as otherwise specified in a resolution designating a committee, one-third of the members of a committee shall be necessary to constitute a quorum of that committee for the transaction of business. The act of a majority of committee members present at a meeting at which a quorum is present shall be the act of the committee, including. fixing the time and place of its meetings, unless the Board of Directors shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 3.6 of these Bylaws. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve, any such committee. Nothing herein shall be deemed to prevent the Board of Directors from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided , however , that no such committee shall have or may exercise any authority of the Board of Directors.

 

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Section 3.13. Removal . Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all of the then-outstanding shares of Voting Stock, voting together as a single class.

Section 3.14. Records . The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board of Directors and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Corporation.

Section 3.15. Validity of Contracts . No contract or other transaction entered into by the Corporation shall be affected by the fact that a director or officer of the Corporation is in any way interested in or connected with any party to such contract or transaction, or such director or officer is a party to such contract or transaction, even though in the case of a director the vote of the director having such interest or connection shall have been necessary to obligate the Corporation upon such contract or transaction; provided, however, that in any such case (i) the material facts of such interest are known or disclosed to the directors or stockholders and the contract or transaction is authorized or approved in good faith by the stockholders or by the Board of Directors or a committee thereof through the affirmative vote of a majority of the disinterested directors (even though not a quorum), or (ii) the contract or transaction is fair to the Corporation as of the time it is authorized, approved or ratified by the stockholders, or by the Board of Directors, or by a committee thereof.

ARTICLE IV

OFFICERS AND CHAIRMAN OF THE BOARD

Section 4.1. Elected and Appointed Officers . The elected officers of the Corporation shall include a Chief Executive Officer and a Secretary and such other officers as the Board of Directors may designate by resolution or in any other manner as the Board of Directors may determine. Any number of offices may be held by the same person. All elected officers shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such elected officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof or by any other manner as the Board of Directors may determine.

The Chief Executive Officer may appoint such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, and Assistant Controllers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these Bylaws or as may be prescribed by the Chief Executive Officer, as the case may be.

Section 4.2. Election and Term of Office . The elected officers of the Corporation shall be elected by the Board of Directors or in such other manner as the Board of Directors may determine. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified or until his death or resignation or removal.

 

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Section 4.3. Chairman of the Board of Directors . The Board of Directors shall annually elect one of its own members to be the Chairman of the Board of Directors (“Chairman of the Board of Directors”). The Chairman of the Board of Directors may also be an elected officer of the Corporation. The Chairman of the Board of Directors shall preside at all meetings of the Board of Directors and of the stockholders, except as otherwise provided under these Bylaws, and may at any time call any meeting of the Board of Directors. The Board of Directors may remove or replace the Chairman of the Board of Directors as Chairman at any time for any reason.

Section 4.4. Chief Executive Officer . The Board of Directors may appoint one or officers of the Corporation as the Chief Executive Officer (such one or more individuals, the “CEO”). The CEO shall be the senior executive officer of the Corporation and shall in general supervise and control all the business and affairs of the Corporation. The CEO shall direct the policies of the Corporation and shall perform all other duties incident to the office or as may be delegated or assigned by the Board of Directors by resolution from time to time. The CEO may delegate powers to any other officer of the Corporation.

Section 4.5. President . The President (who may also be the Chief Operating Officer), if any, shall act in a general executive capacity and shall assist the CEO in the administration and operation of the Corporation’s business and general supervision of its policies and affairs and shall perform all other duties incident to the office or as may be delegated or assigned by the Board of Directors by resolution from time to time. Prior to any action by the Board of Directors, the President shall, in the absence of or because of the inability to act of the CEO, perform all duties of the CEO. There is no requirement that there be a President.

Section 4.6. Chief Financial Officer . The Chief Financial Officer, if any, shall be a Vice President and the senior financial officer and act in an executive financial capacity. The Chief Financial Officer shall assist the CEO in the general supervision of the Corporation’s financial policies and affairs and shall have such duties as are incident to such office or as may be delegated or assigned from time to time by the CEO or by the Board of Directors.

Section 4.7. Vice Presidents . A Vice President may be designated as an Executive Vice President, a Senior Vice President, a Corporate Vice President or such other designation as may be determined by the Board of Directors. Vice Presidents, if any, shall have such duties as are incident to such office or as may be delegated or assigned by the Board of Directors by resolution from time to time .

Section 4.8. Treasurer . The Treasurer, if any, shall exercise general supervision over the receipt, custody and disbursement of corporate funds. The Treasurer shall cause the funds of the Corporation to be deposited in such banks as may be authorized by the Board of Directors, or in such banks as may be designated as depositaries in the manner provided by resolution of the Board of Directors. The Treasurer shall have such further powers and duties and shall be subject to such directions as may be granted or imposed upon him or her from time to time by the CEO, or by the Board of Directors. The Treasurer may appoint one or more Assistant Treasurers to perform such duties as may be assigned by the Treasurer.

 

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Section 4.9. Controller . The Controller shall be the Chief Accounting Officer of the Corporation and shall have such duties as are incident to such office or as may be delegated or assigned from time to time by the CEO, or by the Board of Directors.

Section 4.10. Secretary . The Secretary shall keep or cause to be kept in one or more books provided for that purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the stockholders; she or he shall see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; she or he shall be custodian of the records and the seal of the Corporation and affix and attest the seal to all stock certificates of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; and she or he shall see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and in general, she or he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to her or him by the Board of Directors. The Secretary may appoint one or more Assistant Secretaries, each of whom shall have the power to affix and attest the corporate seal of the Corporation, and to attest to the execution of documents on behalf of the Corporation and perform such duties as may be assigned by the Secretary.

Section 4.11. Statutory Duties . Each respective officer shall discharge any and all duties pertaining to their respective office, which is imposed on such officer by the provisions of any present or future statute of the State of Delaware.

Section 4.12. Delegation of Duties . In case of the absence of any officer of the Corporation, the Chairman of the Board or the Board of Directors may delegate, for the time being, the duties of such officer to any other officer or to any director.

Section 4.13. Removal . Any officer elected, or agent appointed, by the Board of Directors may be removed from office with or without cause by the affirmative vote of a majority of the Whole Board. Except as may be otherwise determined by the Board of Directors, any elected officer of the Corporation other than the Chief Financial Officer, the Secretary or the Controller may be removed at any time for any reason by the CEO provided that the CEO is a member of the Board of Directors. Any officer or agent appointed by the CEO may be removed by him or her with or without cause. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his or her successor, his or her death, his or her resignation or his or her removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan.

Section 4.14. Vacancies . A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors or in such other manner as the Board of Directors determines. Any vacancy in an office appointed by the CEO because of death, resignation, or removal may be filled by the CEO.

 

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ARTICLE V

STOCK CERTIFICATES AND TRANSFERS

Section 5.1. Certificated and Uncertificated Stock; Transfers . The shares of stock of the Corporation representing the interest of each stockholder of the Corporation shall be uncertificated or may be evidenced by certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe.

The shares of the stock of the Corporation shall be transferred on the books of the Corporation, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such person’s attorney duly authorized in writing, and upon compliance with appropriate procedures for transferring shares in uncertificated form, and in the case of certificated shares of stock, by the holder thereof in person or by his or her attorney duly authorized in writing, upon surrender for cancellation of certificates for at least the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.

Notwithstanding anything to the contrary in these Bylaws, at all times that the Corporation’s stock is listed on a stock exchange, the shares of the stock of the Corporation shall comply with all direct registration system eligibility requirements established by such exchange, including any requirement that shares of the Corporation’s stock be eligible for issue in book-entry form. All issuances and transfers of shares of the Corporation’s stock shall be entered on the books of the Corporation with all information necessary to comply with such direct registration system eligibility requirements, including the name and address of the person to whom the shares of stock are issued, the number of shares of stock issued and the date of issue. The Board of Directors shall have the power and authority to make such rules and regulations as it may deem necessary or proper concerning the issue, transfer and registration of shares of stock of the Corporation in both the uncertificated and certificated form.

Section 5.2. Lost, Stolen or Destroyed Certificates . No certificate for shares of stock or uncertificated shares in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms and secured by such surety, as the Board of Directors or any financial officer may in its or his or her discretion require.

 

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Section 5.3. Record Owners . The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law.

Section 5.4. Transfer and Registry Agents . The Corporation may from time to time maintain one or more transfer offices or agencies and registry offices or agencies at such place or places as may be determined from time to time by the Board of Directors.

ARTICLE VI

INDEMNIFICATION

Section 6.1. Indemnification .

(a) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “Proceeding”), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was, at any time during which this Bylaw is in effect (whether or not such person continues to serve in such capacity at the time any indemnification or advancement of expenses pursuant hereto is sought or at the time any Proceeding relating thereto exists or is brought), a director or elected officer of the Corporation or is or was serving (at such time as such person is or was a director or elected officer of the Corporation) at the request of the Corporation as a director, elected officer, trustee, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation (hereinafter, a “Covered Person”), whether the basis of such Proceeding is alleged action in an official capacity as a director, elected officer, trustee, employee or agent or in any other capacity while serving as a director, elected officer, trustee, employee or agent, shall be (and shall be deemed to have a contractual right to be) indemnified and held harmless by the Corporation (and any successor of the Corporation by merger or otherwise) to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended or modified from time to time (but, in the case of any such amendment or modification, only to the extent that such amendment or modification permits the Corporation to provide greater indemnification rights than said law permitted the Corporation to provide prior to such amendment or modification), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Covered Person in connection therewith and such indemnification shall continue as to a Covered Person who has ceased to be a director, elected officer, trustee, employee or agent and shall inure to the benefit of his or her heirs, executors and

 

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administrators; provided , however , that except as provided in paragraph (a) of Section 6.3 of these Bylaws, the Corporation shall indemnify any such Covered Person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such Covered Person only if such Proceeding (or part thereof) was authorized by the Board of Directors.

(b) To obtain indemnification under this Bylaw, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification, a determination, if required by applicable law, with respect to the claimant’s entitlement thereto shall be made as follows: (i) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (ii) if no request is made by the claimant for a determination by Independent Counsel, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (C) if a quorum of Disinterested Directors so directs, by a majority vote of the stockholders of the Corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within two years prior to the date of the commencement of the Proceeding for which indemnification is claimed a “Change of Control” as defined in the Corporation’s Most Recent Option Plan, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within ten days after such determination. For purposes this Bylaw, “Most Recent Option Plan” means the incentive compensation, stock ownership, stock appreciation, restricted stock, stock option, stock unit, “phantom” stock, change in control or other similar employee benefit plan of the Corporation last adopted by stockholders of the Corporation prior to the date of the commencement of the Proceeding for which indemnification is claimed.

Section 6.2. Mandatory Advancement of Expenses . To the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended or modified from time to time (but, in the case of any such amendment or modification, only to the extent that such amendment or modification permits the Corporation to provide greater rights to advancement of expenses than said law permitted the Corporation to provide prior to such amendment or modification), each Covered Person shall have (and shall be deemed to have a contractual right to have) the right, without the need for any action by the Board of Directors, to be paid by the Corporation (and any successor of the Corporation by merger or otherwise) the expenses incurred in connection with any Proceeding in advance of its final disposition, such advances to be paid by the Corporation within 60 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided , however , that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a Covered Person in his or her capacity as a director or elected officer (and not in any other capacity in which service was or is rendered by such person while a director or elected officer, including, without limitation, service

 

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to an employee benefit plan) in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Corporation of an undertaking (hereinafter, the “Undertaking”) by or on behalf of such Covered Person, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right of appeal (a “final disposition”) that such Covered Person is not entitled to be indemnified for such expenses under this Bylaw or otherwise.

Section 6.3. Claims .

(a)(i) If a claim for indemnification under this Article VI is not paid in full by the Corporation within 30 days after a written claim pursuant to Section 6.1(b) of these Bylaws has been received by the Corporation, or (ii) if a request for advancement of expenses under this Article VI is not paid in full by the Corporation within 20 days after a statement pursuant to Section 6.2 of these Bylaws and the required Undertaking, if any, have been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim for indemnification or request for advancement of expenses and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action that, under the General Corporation Law of the State of Delaware, the claimant has not met the standard of conduct which makes it permissible for the Corporation to indemnify the claimant for the amount claimed or that the claimant is not entitled to the requested advancement of expenses, but (except where the required Undertaking, if any, has not been tendered to the Corporation) the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

(b) If a determination shall have been made pursuant to Section 6.1(b) of these Bylaws that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 6.3(a) of these Bylaws.

(c) The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (a) of this Section 6.3 that the procedures and presumptions of this Bylaw are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this Bylaw.

Section 6.4. Contract Rights; Amendment and Repeal; Non-exclusivity of Rights .

(a) All of the rights conferred in this Article VI, as to indemnification, advancement of expenses and otherwise, shall be contract rights between the Corporation and each Covered Person to whom such rights are extended that vest at the commencement of such

 

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Covered Person’s service to or at the request of the Corporation and (i) any amendment or modification of this Article VI that in any way diminishes or adversely affects any such rights shall be prospective only and shall not in any way diminish or adversely affect any such rights with respect to any actual or alleged state of facts, occurrence, action or omission occurring prior to the time of such amendment or modification, or Proceeding previously or thereafter brought or threatened based in whole or in part upon any such actual or alleged state of facts, occurrence, action or omission, and (ii) all of such rights shall continue as to any such Covered Person who has ceased to be a director or elected officer of the Corporation or ceased to serve at the Corporation’s request as a director, elected officer, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, as described herein, and shall inure to the benefit of such Covered Person’s heirs, executors and administrators.

(b) All of the rights conferred in this Article VI, as to indemnification, advancement of expenses and otherwise, (i) shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise and (ii) cannot be terminated by the Corporation, the Board of Directors or the stockholders of the Corporation with respect to a person’s service prior to the date of such termination.

Section 6.5. Insurance, Other Indemnification and Advancement of Expenses .

(a) The Corporation may maintain insurance, at its expense, to protect itself and any current or former director, elected officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such current or former director or elected officer, and each such agent or employee to which rights to indemnification have been granted as provided in paragraph (b) of this Section 6.5, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such current or former director, elected officer, employee or agent.

(b) The Corporation may, to the extent authorized from time to time by the Audit Committee of the Board of Directors, the CEO or the General Counsel of the Corporation , grant rights to indemnification and rights to advancement of expenses incurred in connection with any Proceeding in advance of its final disposition, to any current or former employee or agent or person in an equivalent position of the Corporation or any of its majority owned corporations, partnerships, joint ventures, limited liability companies, trusts or other enterprises located throughout the world, to the fullest extent of the provisions of this Bylaw with respect to the indemnification and advancement of expenses of current or former directors and elected officers of the Corporation.

Section 6.6. Definitions . For purposes of this Bylaw:

(a) “Disinterested Director” means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant.

 

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(b) “Independent Counsel” means a law firm, a member of a law firm, or an independent practitioner, that is experienced in matters of corporation law and shall include any person who, under the applicable standards of professional conduct then prevailing, would not have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant’s rights under this Bylaw.

Any notice, request or other communication required or permitted to be given to the Corporation under this Bylaw shall be in writing and either delivered in person or sent by facsimile, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary and shall be effective only upon receipt by the Secretary.

Section 6.7. Severability . If any provision or provisions of this Bylaw shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Bylaw (including, without limitation, each portion of any paragraph of this Bylaw containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Bylaw (including, without limitation, each such portion of any paragraph of this Bylaw containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

ARTICLE VII

MISCELLANEOUS PROVISIONS

Section 7.1. Fiscal Year . The fiscal year of the Corporation shall begin on the first day of January and end on the thirty-first day of December of each year or as otherwise determined by the Board of Directors.

Section 7.2. Dividends . The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation.

Section 7.3. Seal . The corporate seal shall have enscribed thereon the words “Corporate Seal”, the year of incorporation and around the margin thereof the words “MOTOROLA MOBILITY HOLDINGS, INC. - Delaware.”

Section 7.4. Waiver of Notice . Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the General Corporation Law of the State of Delaware or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or regular or special meeting of the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting.

 

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Section 7.5. Resignations . Any director or any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board of Directors, the CEO, or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chairman of the Board of Directors, the CEO, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective.

ARTICLE VIII

Contracts, Proxies, Etc.

Section 8.1 Contracts . Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the Corporation by such officer or officers, agent or agents of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board of Directors may determine. Subject to any restrictions imposed by the Board of Directors or the CEO, the President or any Vice President may delegate contractual powers to others under his or her area of responsibility, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power.

Section 8.2 Proxies . Unless otherwise provided by resolution adopted by the Board of Directors, the CEO, the President or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises.

ARTICLE IX

AMENDMENTS

Section 9.1 Amendments . These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than two days prior to the meeting.

 

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2782091

 

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EXHIBIT 10.5

FORM OF TRANSITION SERVICES AGREEMENT

– MOTOROLA MOBILITY PROVIDED SERVICES

THIS TRANSITION SERVICES AGREEMENT – MOTOROLA MOBILITY PROVIDED SERVICES (this “ Agreement ”) is entered into as of [ ], by and among Motorola, Inc., a Delaware corporation (“ Motorola ”), Motorola Mobility, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (“ Mobility ”), and Motorola Mobility Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (“ SpinCo ”). Each of Motorola, Mobility and SpinCo is sometimes referred to herein as a “ Party ” and collectively as the “ Parties .” Capitalized terms used herein and not otherwise defined herein have the meanings given to such terms in the Amended and Restated Master Separation and Distribution Agreement dated as of July 31, 2010, by and among Motorola, Mobility and SpinCo (as such may be amended from time to time, the “ Separation Agreement ”).

RECITALS

WHEREAS, Motorola has determined that it would be appropriate, desirable and in the best interests of Motorola and Motorola’s stockholders to separate the MD Business and the Home Business from Motorola pursuant to and in accordance with the Separation Agreement;

WHEREAS, in connection with the separation of the MD Business and the Home Business from Motorola, Motorola desires to contribute or otherwise transfer, and to cause certain of its Subsidiaries to contribute or otherwise transfer, (i) certain Assets and Liabilities associated with the Transferred Businesses, including the stock or other equity interests of certain of Motorola’s Subsidiaries dedicated to the Transferred Businesses, to Mobility and certain of its Subsidiaries, and (ii) certain Assets and Liabilities associated with the Transferred Businesses to SpinCo, (iii) shares of capital stock of Mobility to SpinCo, and (iv) stock or other equity interests of certain of Motorola’s Subsidiaries dedicated to the Transferred Businesses other than those set forth in clause (i) above to SpinCo;

WHEREAS, in connection therewith, Motorola desires that SpinCo and/or its Affiliates provide Motorola and/or its Affiliates, as applicable, with certain transition services with respect to the operation of Motorola and its Affiliates following the date hereof, as more fully set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the promises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties each hereby agrees as follows:

ARTICLE 1

TRANSITION SERVICES

Section 1.1 Transition Services . During the term of this Agreement as set forth in Section 2.2, SpinCo will provide, or cause one or more of its Affiliates or third Person service providers designated by SpinCo (including their respective employees, agents or contractors) to provide to the Motorola Group, upon the terms and subject to the conditions hereof, the services more particularly described on Annex A (each service, a “ Transition Service ” and collectively with any Additional Services, the “ Transition Services ”). Motorola and SpinCo may, by mutual written consent (which consent will not be unreasonably withheld), amend the Transition Services to (a) include other administrative services provided by SpinCo to the Motorola Business prior to the date hereof in exchange


for additional fees consistent with the cost of delivery thereof (“ Additional Services ”), or (b) extend the term of any Transition Service so long as such new service term does not extend beyond 12 months from the date hereof. Motorola will and will cause its Affiliates to, if applicable, adhere to any conditions or policies applicable to its use of the Transition Services as set forth in this Agreement or in Annex A .

Section 1.2 Level of Transition Services .

(a) Unless otherwise specifically set forth in Annex A , SpinCo will perform, or cause one or more of its Affiliates or third Persons to provide to Motorola and/or its Affiliates, as applicable, the Transition Services in the manner and at a level of service (including with respect to timing and priority) consistent with past practices with respect to that performed by the SpinCo Group and their third Person service providers for the Motorola Business; provided , however , SpinCo may make changes from time to time in the manner of performing the Transition Services to the extent SpinCo is making similar changes in performing similar services for itself or its Affiliates, so long as such changes do not adversely affect such agreed to level of service.

(b) Unless otherwise specifically set forth in Annex A , Motorola and its Affiliates’ use of any Transition Service will be consistent with past practice with respect to the use by the Motorola Group for the Motorola Business.

(c) Notwithstanding anything to the contrary herein, in no event will any Transition Service include (i) any services that would be or otherwise becomes unlawful for SpinCo to provide, or (ii) the exercise of business judgment or general management for Motorola.

ARTICLE 2

TERMINATION

Section 2.1 No Obligation to Continue to Use Services; Partial Termination . Motorola will have no obligation to continue to use any of the Transition Services and, except as otherwise specified on Annex A , Motorola may terminate any Transition Service by giving SpinCo at least 30 days’ prior written notice of its desire to terminate any Transition Service. To the extent possible, Motorola will give such notice at the beginning of a month to terminate the service as of the beginning of the next month to avoid the need to prorate any monthly payment charges. As soon as reasonably practicable following receipt of any such notice, SpinCo will advise Motorola in writing as to whether termination of such Transition Service will (a) require the termination or partial termination of, or otherwise affect the provision of, certain other Transition Services, or (b) result in any early termination costs (which, with respect to those related to third party providers, will be limited to costs that SpinCo actually incurs). If either will be the case, Motorola may withdraw its termination notice within five Business Days of the receipt of notice. If Motorola does not withdraw the termination within such period, such termination will be final. Upon such termination, Motorola’s obligation to pay for such Transition Service(s) will terminate, and SpinCo will cease, or cause its Affiliates or third Person service providers to cease, providing the terminated Transition Service(s), in each case subject to the terms of Section 2.2(c); provided , however , that Motorola will reimburse SpinCo for the reasonable termination costs actually incurred by SpinCo resulting from Motorola’s early termination of such Transition Services, including those owed to third Person providers. SpinCo will use commercially reasonable efforts to mitigate such termination costs.

Section 2.2 Term and Termination .

(a) Subject to Section 2.1, the term of this Agreement will commence on the date hereof and continue with respect to each of the Transition Services for the term thereof as set forth in Annex A ; the last date in each such term being referred to herein as a “ Service Termination Date ” for each such Transition Service.

 

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(b) Notwithstanding the foregoing, this Agreement may be terminated:

(i) by SpinCo, immediately by giving written notice to Motorola if Motorola breaches or is in default of any payment obligation, which default is capable of being cured, and such breach or default has not been cured within 30 days after Motorola’s receipt of notice of such a breach or default from SpinCo; or

(ii) by any Party, upon 30 days’ advance written notice to the other Parties, in the event: (A) such Party (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its properties, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the United States Bankruptcy Code, as now or hereafter in effect (the “ Bankruptcy Code ”), or (4) fails to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under the Bankruptcy Code; or (B) a proceeding or case will be commenced against such Party in any court of competent jurisdiction, seeking (1) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of such Party or of all or any substantial part of its assets, or (3) similar relief under any Bankruptcy Laws, or an order, judgment or decree approving any of the foregoing will be entered and continue unstayed for a period of 60 days, or an order for relief against such Party will be entered in an involuntary case under the Bankruptcy Code.

(c) The terms and conditions of this Agreement that, by their terms, require performance following the termination or expiration of this Agreement will survive such termination or expiration.

Section 2.3 General Intent . Motorola will use commercially reasonable efforts to end its use of the Transition Services as soon as commercially practicable, but in no event later than the applicable Service Termination Date.

ARTICLE 3

FEES

Section 3.1 Consideration . As consideration for the provision of any Transition Services and any Additional Services hereunder, Motorola will pay to SpinCo (or will cause its Affiliates to pay to SpinCo or SpinCo’s Affiliates, as applicable) the amount specified for each Transition Service as set forth in Annex A , plus any applicable sales, use, or service tax, value added tax (“ VAT ”) or any other similar tax (together with any related interest and penalties) imposed on, or payable with respect to, any fees or charges payable pursuant to this Agreement on a monthly basis except (i) as otherwise specified in Annex A with respect to a particular Transition Service, and (ii) reimbursement for Tigers purchases, Web Money reimbursements, other “normal” department charges which will result in a cash disbursement made by SpinCo or its Affiliates on behalf of Motorola or its Affiliates, will be made as described in Section 3.2 below. Unless Motorola and SpinCo otherwise agree in writing, where Transition Services are provided to Motorola’s Affiliates outside of the United States by a Person located in the same country, amounts will be billed and paid in the local currency of the entity providing the Transition Services. Unless Motorola and SpinCo otherwise agree in writing, if payments are to be made between legal entities not within the same country, such amounts will be billed and paid in U.S. Dollars. To the extent necessary, local currency conversion will be based on SpinCo’s internal exchange rate for the then-current month. The Transition Services to be provided by third Person providers will be charged to

 

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Motorola at no higher cost than the actual payments made by SpinCo to third Person providers for providing such Transition Services. All charges based on a monthly or other time basis will be pro rated based on actual days elapsed during the period of service. Upon the termination of any Transition Service in accordance with and subject to Section 2.1 or Section 2.2 above, the consideration to be paid under this Article 3 will be the accrued pro rated daily fees payable under this Section 3.1 except in cases where SpinCo or its Affiliate has already procured and pre-paid for the services of a third Person provider. The Parties agree to use commercially reasonable efforts to cooperate to minimize any sales, use or service tax, VAT or any other similar tax with respect to the Transition Services.

Section 3.2 Invoices . Except as otherwise set forth on Annex A , within 10 days after the end of each fiscal month, SpinCo and each of its Affiliates providing Transition Services will submit one invoice to each of Motorola and each of its Affiliates receiving Transition Services for (i) all Transition Services provided during such fiscal month pursuant to this Agreement, (ii) reimbursement for Tigers purchases, Web Money reimbursements, other “normal” department charges and payments to third parties on behalf of Motorola or its Affiliates which result in a cash disbursement made by SpinCo or its Affiliates on behalf of Motorola or its Affiliates, and (iii) any applicable sales, use or service tax, VAT or any other similar taxes (other than income or franchise taxes) imposed on or payable with respect to any fees or charges payable pursuant to this Agreement. The invoices will break out the amount for each type of Transition Service and amounts subject to reimbursement. SpinCo will provide documentation supporting any amounts invoiced pursuant to this Section 3.2 as Motorola may from time to time reasonably request, including, without limitation, detail with respect to any third party billing information relating to the Transition Services provided under this Agreement.

Section 3.3 Invoice Disputes . In the event that Motorola in good faith disputes an invoice submitted by SpinCo, Motorola may withhold payment of any amount subject to the dispute; provided , however , that (i) Motorola will continue to pay all undisputed amounts in accordance with the terms hereof, and (ii) Motorola will notify SpinCo, in writing, of any disputed amounts and the reason for any dispute by the due date for payment of the invoice containing any disputed charges. In the event of a dispute regarding the amount of any invoice, the Parties will use all reasonable efforts to resolve such dispute within 30 days after Motorola provides written notification of such dispute to SpinCo. Each Party will provide full supporting documentation concerning any disputed amount or invoice within 30 days after written notification of the dispute. Unpaid fees that are under good faith dispute will not be considered a basis for default hereunder. To the extent that a dispute regarding the amount of any invoice cannot be resolved pursuant to this Section 3.3, the dispute resolution procedures set forth in Section 7.10 herein will apply.

Section 3.4 Time of Payment . Except as otherwise set forth in Annex A , Motorola will pay and will cause each of its Affiliates to pay all amounts due pursuant to this Agreement within 30 days after receipt of each such invoice hereunder for (i) the Transition Services and (ii) the amounts subject to reimbursement; provided , however , that in the event that Motorola, in good faith and upon reasonable grounds in accordance with Section 3.3, questions any invoiced item, payment of that item may be made after resolution of such question. To the extent that any amounts required to be paid under this Agreement are not timely paid pursuant to the terms of this Agreement, such amounts shall accrue interest in accordance with the Separation Agreement. Any pre-existing obligations to make payment for any Transition Services provided hereunder will survive the termination of this Agreement.

ARTICLE 4

PERSONNEL

Section 4.1 Right to Designate and Change Personnel . SpinCo will make available such personnel as will be required to provide the Transition Services. SpinCo will have the right to designate

 

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which personnel it will assign to perform the Transition Services. SpinCo also will have the right to remove and replace any such personnel at any time or designate any of its Affiliates or a third Person service provider at any time to perform the Transition Services; provided , however , that SpinCo will use its commercially reasonable efforts to limit the disruption to Motorola in the transition of the Transition Services to different personnel or a third Person. In the event that personnel with the designated level of experience are not then employed by SpinCo, SpinCo will substitute such personnel or third party personnel having an adequate level of experience; provided , however , that SpinCo will have no obligation to retain any individual employee for the sole purpose of providing a particular Transition Service.

Section 4.2 Financial Responsibility for Motorola Personnel . SpinCo will pay for all personnel expenses, including wages of its employees performing the Transition Services. Any request by Motorola for travel by any SpinCo employee will be considered and treated as a request for Additional Services pursuant to Section 1.1 and the costs of such travel will be charged as additional fees.

Section 4.3 Managers .

(a) During the term of this Agreement, Motorola will appoint one of its employees (the “ Motorola Manager ”) who will have overall responsibility for managing and coordinating the delivery of the Transition Services and one of its employees for each category of service, as applicable (the “ Motorola Sub-Manager ”). The Motorola Manager and each of the Motorola Sub-Managers will coordinate and consult with the SpinCo Manager (as defined in Section 4.3(b)) and each of the SpinCo Sub-Managers (as defined in Section 4.3(b)). Motorola may, at its discretion, select other individuals to serve in these capacities during the term of this Agreement; provided , however , Motorola will notify SpinCo promptly (and in any event within three Business Days) of any change in individuals serving in these capacities, setting forth the name of the replacement, and stating that such replacement is authorized to act for Motorola in accordance with this Section 4.3(a).

(b) During the term of this Agreement, SpinCo will appoint one of its employees (the “ SpinCo Manager ”) who will have overall responsibility for managing and coordinating the delivery of the Transition Services and one of its employees for each category of service (the “ SpinCo Sub-Manager ”). The SpinCo Manager and each of the SpinCo Sub-Managers will coordinate and consult with the Motorola Manager and each of the Motorola Sub-Managers. SpinCo may, at its discretion, select other individuals to serve in these capacities during the term of this Agreement; provided , however , SpinCo will notify Motorola promptly (and in any event within three Business Days) of any change in individuals serving in these capacities, setting forth the name of the replacement, and stating that such replacement is authorized to act for SpinCo in accordance with this Section 4.3(b).

(c) The Motorola Manager and the SpinCo Manager will meet as expeditiously as possible to resolve any dispute hereunder, and any dispute that is not so resolved within 30 days will be resolved in accordance with the dispute resolution procedures set forth in Section 7.3 of the Separation Agreement. Motorola may treat an act of the SpinCo Manager, and SpinCo may treat the act of the Motorola Manager, in each case, which is consistent with the provisions of this Agreement, as being authorized by such other Party without inquiring behind such act or ascertaining whether the Motorola Manager or the SpinCo Manager, as applicable, had authority to so act; provided , however , that neither the Motorola Manager nor the SpinCo Manager will have authority to amend this Agreement.

 

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ARTICLE 5

PROPRIETARY RIGHTS

Section 5.1 Software .

(a) In addition to the consideration set forth elsewhere herein, Motorola will also promptly pay any amounts that are required to be paid to any third Person licensors of software that is used by SpinCo in connection with the provision of any Transition Services hereunder, including, without limitation, (i) license, temporary right-to-use and royalty fees and (ii) any amounts that are required to be paid to any such licensors to obtain the consent of such licensors to allow SpinCo to provide any of the Transition Services hereunder. Motorola agrees to comply and cause its Affiliates to comply with the terms of any license or other agreement of SpinCo or any of its Affiliates relating to software that is used in connection with the provision of any Transition Services hereunder. Subject to the foregoing and the terms of the Separation Agreement, SpinCo will use commercially reasonable efforts to obtain any consent that may be required from such licensors in order to provide any of the Transition Services hereunder and the Parties will cooperate to identify any material licenses or consents and use commercially reasonable efforts to minimize the costs associated therewith.

(b) Any software, development tools, know-how, methodologies, processes, technologies or algorithms owned by SpinCo or its Affiliates and which may during the term of this Agreement be operated or used by SpinCo or its Affiliates in connection with the performance of the Transition Services hereunder will remain the property of SpinCo or its Affiliates, as the case may be, and Motorola and its Affiliates will have no rights or interests therein, except as may otherwise be set forth in the Intellectual Property License Agreement.

(c) Neither Motorola nor SpinCo will use or have any rights to the trademarks or service marks of the other without prior written consent to such use other than as provided for in the Intellectual Property License Agreement or the Trademark License Agreement. To the extent that such consent is granted, use of such trademarks or service marks will be in accordance with the guidelines set forth by the Party owning such trademarks or service marks with all proper indicia of ownership, including those set forth in the Intellectual Property License Agreement or the Trademark License Agreement.

Section 5.2 IT Services .

(a) While using any data processing or communications services of SpinCo (whether or not identified in Annex A ), Motorola will and will cause each of its Affiliates to, adhere in all respects to SpinCo’s corporate information policies (including policies with respect to protection of proprietary information, data privacy and other policies regarding the use of computing resources) as in effect from time to time.

(b) The employees of Motorola and its Affiliates and non-employee representative of Motorola and its Affiliates who have access to the Motorola network may continue to have access to the SpinCo network and associated computer applications if they meet the following criteria: (i) such employee and non-employee representative is listed in the SpinCo LDAP/”core directory” or any updates thereto and a current list of these employees and non-employee representatives is available promptly upon request, and a documented process is in place for notification to SpinCo of all voluntary and involuntary separations; (ii) Motorola has a legitimate business need to access resources on the SpinCo network during the term of this Agreement; and (iii) such employee and non-employee representative is bound by a non-disclosure agreement or other binding confidentiality obligations for the benefit of SpinCo. Motorola employee and non-employee representative computer and system accounts on the SpinCo network that are not required for the transition must be locked. Motorola’s employees and non-employee representatives that are connected to the SpinCo network must continue to adhere in all respects to the information protection safeguards defined in SpinCo’s Information Protection Policy IP-01 and Standards for Information Users (which will initially replicate Motorola’s Information Protection Policy IP-01 and Standards for Information Users which can be found at http:///mips.mot.com/policy/genuserstd.htm )) as

 

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well as any other security standards for requiring current antivirus protection active at all times, strong access control for all computer access, no sharing of passwords, no dual connections to the Motorola network or any other non-SpinCo networks and the Internet or other entity networks, and compliance with the requirements for protection of SpinCo’s confidential proprietary information and intellectual assets/property. SpinCo’s Information Protection Policy IP-01 and Complete Set of Standards (which will initially replicate Motorola’s Information Protection Policy IP-01 and Complete Set of Standards which can be found at http://mips.mot.com/policy/itstandardscomplete.htm ) must be followed when connecting SpinCo’s network to Motorola’s network or any other non-SpinCo networks and all external connections to the SpinCo network require the review and the written approval of SpinCo’s information protection services. Computing assets connected to SpinCo’s network are subject to monitoring by intrusion detection instrumentation and are subject to routine vulnerability assessment scans which may occur during connect time.

(c) SpinCo and Motorola will jointly develop mutually acceptable systems conversion plans as soon as reasonably practicable. If necessary to facilitate such conversion, SpinCo agrees to use commercially reasonable efforts to assist Motorola to meet the mutually agreed upon milestones, timelines and resource requirements identified in the final detailed systems conversion plan. Following this process, the plan will be considered firm and will be used by both Motorola and SpinCo to synchronize their own related project efforts. In the event SpinCo expects to incur any extraordinary costs in connection with facilitating such conversion, it will notify Motorola in advance and the Parties will reasonably negotiate and agree upon the items and amounts that Motorola will pay. Such amounts will be considered and treated as a request for Additional Services pursuant to Section 1.1. Any schedule modifications occurring after the plan is firm will require joint approval by SpinCo and Motorola, such approval not to be unreasonably withheld.

(d) If Motorola increases its use of SpinCo’s central processing unit, storage, server or other network systems and such increased use contributes to the need for SpinCo to purchase additional computing capacity that SpinCo will not utilize following termination of the Transition Services, Motorola will pay for that capacity. SpinCo will notify Motorola in advance of capacity issues to allow Motorola to respond and possibly discontinue use of certain SpinCo systems in advance of any additional purchases. Usage consistent with recent past practice of the Motorola Business will serve as the basis from which to measure increases in usage. The need for purchasing additional capacity will be subject to the mutual agreement of Motorola and SpinCo.

ARTICLE 6

WARRANTY

Section 6.1 No Warranty; Exclusive Remedy .

(a) Motorola and SpinCo both acknowledge and agree that SpinCo has agreed to provide or cause to be provided the Transition Services hereunder as an accommodation to Motorola. NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED (INCLUDING WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION), ARE MADE BY ANY MEMBER OF THE SPINCO GROUP WITH RESPECT TO THE PROVISION OF TRANSITION SERVICES UNDER THIS AGREEMENT AND, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL SUCH REPRESENTATIONS OR WARRANTIES ARE HEREBY WAIVED AND DISCLAIMED.

(b) Other than in the event of SpinCo’s gross negligence or willful misconduct for which Motorola shall have a right to seek indemnity hereunder (and without limiting the indemnification

 

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rights under Section 6.2(c)), the sole and exclusive remedy of Motorola with respect to any and all Damages caused by or arising from the performance or non-performance of any Transition Service by SpinCo (either directly or indirectly) will be the termination of this Agreement in accordance with Section 2.1 hereof; provided , however , that, if capable of being performed or re-performed and if requested by Motorola, SpinCo agrees to perform or re-perform, as applicable, or will cause one or more of its Affiliates or third Persons to perform or re-perform, as applicable, any Transition Service that does not comply with the requirements and level of service set forth in Annex A and Section 1.2(a) hereof.

Section 6.2 Limitation of Liability and Indemnification .

(a) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, IN NO EVENT WILL ANY PARTY OR ANY OF ITS GROUP MEMBERS BE LIABLE UNDER ANY CIRCUMSTANCES OR LEGAL THEORY FOR DAMAGES RELATED TO INCONVENIENCE, DOWNTIME, INTEREST, COST OF CAPITAL, FRUSTRATION OF ECONOMIC OR BUSINESS EXPECTATIONS, LOST PROFITS, LOST REVENUES, LOST SAVINGS, LOSS OF USE, TIME, DATA, OR GOOD WILL, OR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, COLLATERAL OR CONSEQUENTIAL DAMAGES, REGARDLESS OF WHETHER SUCH LOSSES ARE FORESEEABLE; PROVIDED , HOWEVER , THAT TO THE EXTENT AN INDEMNIFIED PARTY IS REQUIRED TO PAY ANY DAMAGES RELATED TO INCONVENIENCE, DOWNTIME, INTEREST, COST OF CAPITAL, FRUSTRATION OF ECONOMIC OR BUSINESS EXPECTATIONS, LOST PROFITS, LOST REVENUES, LOST SAVINGS, LOSS OF USE, TIME, DATA, OR GOODWILL, OR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, COLLATERAL OR CONSEQUENTIAL DAMAGES, TO A PERSON WHO IS NOT A MEMBER OF ANY GROUP IN CONNECTION WITH A THIRD PARTY CLAIM, SUCH DAMAGES WILL CONSTITUTE DIRECT DAMAGES NOT SUBJECT TO THE LIMITATION SET FORTH IN THIS SECTION 6.2. THIS SECTION SURVIVES THE TERMINATION OR EXPIRATION OF THIS AGREEMENT.

(b) Except insofar as the claim, demand, suit or recovery relates to SpinCo’s gross negligence or willful misconduct, and notwithstanding anything to the contrary and without limiting the Parties’ indemnification rights set forth in the Separation Agreement, Motorola will and will cause its Affiliates to indemnify and hold harmless SpinCo and its Affiliates or any employees providing Transition Services (collectively, the “ Indemnified Party ”) from and against any Damages (including, without limitation, reasonable expenses of investigation and attorneys’ fees incurred or suffered by the Indemnified Party) arising out of any claim made against any member of the SpinCo Group by a third Person to the extent caused by or resulting from any of the Transition Services rendered pursuant to the terms of this Agreement; provided , however , that the foregoing will not limit the indemnification obligations of SpinCo under Section 6.2(c).

(c) Notwithstanding anything to the contrary and without limiting the Parties’ indemnification rights set forth in the Separation Agreement, SpinCo will indemnify Motorola and its Affiliates (collectively, the “ Motorola Indemnified Parties ”) against and agrees to defend and hold the Motorola Indemnified Parties harmless from and against any Damages (including, without limitation, reasonable expenses of investigation and attorneys’ fees incurred or suffered by the Motorola Indemnified Parties) arising out of the performance of any Transition Service by a third Person service provider on behalf of SpinCo, but only to the extent SpinCo is indemnified or otherwise compensated by such third Person service provider for any breach of its obligations to SpinCo with respect to the provision of such Transition Service and, in such event, only on a pro rata basis taking into account all businesses of SpinCo and its Affiliates similarly affected.

 

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Section 6.3 Relationship of the Parties . Each of Motorola and SpinCo is and will remain at all times an independent contractor of the other Party in the performance of all Transition Services hereunder. In all matters relating to this Agreement, each of Motorola and SpinCo will be solely responsible for the acts of its employees and agents, and employees or agents of one Party will not be considered employees or agents of the other Party nor entitled to any employee benefits of such other Party as a result of this Agreement. Except as otherwise provided herein, no Party will have any right, power or authority to create any obligation, express or implied, on behalf of any other Party nor will any Party act or represent or hold itself out as having authority to act as an agent or partner of any other Party, or in any way bind or commit any other Party to any obligations. Nothing in this Agreement is intended to create or constitute a joint venture, partnership, agency, trust or other association of any kind among the Parties or persons referred to herein and each Party will be responsible only for its respective obligations as set forth in this Agreement.

Section 6.4 Compliance with Laws . Each of Motorola and SpinCo will comply with all applicable laws, rules, ordinances and regulations of any governmental entity or regulatory agency governing the Transition Services to be provided hereunder. Neither Motorola nor SpinCo will take any action in violation of any applicable law, rule, ordinance or regulation that could result in liability being imposed on the other Party.

Section 6.5 Remedies . The Parties agree that irreparable damage may occur in the event that any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached. It is accordingly agreed that each of the Parties shall be entitled to seek equitable relief to prevent or remedy breaches of this Agreement, without the proof of actual damages, including in the form of an injunction or injunctions or orders for specific performance in respect of such breaches. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy.

ARTICLE 7

GENERAL

Section 7.1 Binding Effect and Assignment . This Agreement binds and benefits the Parties and their respective successors and assigns. No Party may assign any of its rights or delegate any of its obligations under this Agreement without the written consent of the other Parties, which consent may be withheld in such Party’s sole and absolute discretion and any assignment or attempted assignment in violation of the foregoing will be null and void; provided , however , that, subject to Section 4.1, SpinCo may delegate its duties hereunder to such Affiliates or third Person service providers as may be qualified to provide the Transition Services; provided , further , that SpinCo will provide at least 45 days’ notice to Motorola prior to any such delegation of any duties hereunder, and in the event Motorola reasonably objects to any such delegation, SpinCo will reasonably assist in the process of transitioning such service to Motorola or Motorola’s designee prior to any such delegation.

Section 7.2 Entire Agreement; Amendments . This Agreement, the Separation Agreement and each of the annexes, exhibits and schedules appended hereto and thereto constitute the final agreement among the Parties, and is the complete and exclusive statement of the Parties’ agreement, on the matters contained herein. All prior and contemporaneous negotiations and agreements among the Parties with respect to the matters contained herein are superseded by this Agreement and Annex A . The Parties may amend this Agreement and Annex A only by a written agreement signed by each Party to be bound by the amendment and that identifies itself as an amendment to this Agreement or Annex A .

Section 7.3 Force Majeure . In the event that Motorola is delayed in or prevented from performing its obligations under this Agreement, in whole or in part, due to an act of God, fire, flood,

 

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storm, explosion, civil disorder, strike, lockout or other labor trouble, material shortages of utilities, facilities, labor, materials or equipment, delay in transportation, breakdown or accident, any law, order, proclamation, regulation, ordinance, demand or requirement of any governmental authority, riot, war, acts of terror, rebellion, or other cause beyond the control of SpinCo (each a “ Force Majeure Event ”), then upon written notice to Motorola, (i) the affected provisions and/or other requirements of this Agreement will be suspended to the extent necessary during the period of such disability, (ii) SpinCo will have the right to apportion its services in an equitable manner to all users and (iii) SpinCo will have no liability to Motorola or any other party in connection therewith. SpinCo will resume full performance of this Agreement as soon as reasonably practicable following the conclusion of the Force Majeure Event.

Section 7.4 Construction of Agreement .

(a) Where this Agreement or Annex A states that a Party “ will ” perform in some manner or otherwise act or omit to act, it means that the Party is legally obligated to do so in accordance with this Agreement or Annex A .

(b) The captions, titles and headings included in this Agreement and Annex A are for convenience only, and do not affect this Agreement’s or Annex A ’s construction or interpretation. When a reference is made in this Agreement to an Article or a Section, annex, exhibit or schedule, such reference will be to an Article or Section of, or an annex, exhibit or schedule to, this Agreement unless otherwise indicated.

(c) This Agreement is for the sole benefit of the Parties hereto and do not, and are not intended to, confer any rights or remedies in favor of any Person (including any employee or stockholder of Motorola or SpinCo) other than the Parties signing this Agreement.

(d) The words “ including ,” “ includes ,” or “ include ” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “ without limitation ” or “ but not limited to ” are used in each instance.

(e) Any reference in this Agreement or Annex A to the singular includes the plural where appropriate. Any reference in this Agreement or Annex A to the masculine, feminine or neuter gender includes the other genders where appropriate.

(f) Unless otherwise specified, all references in this Agreement or Annex A to “ dollars ” or “ $ ” means United States Dollars.

Section 7.5 Severability . If any provision of this Agreement is determined to be invalid, illegal or unenforceable, the remaining provisions of this Agreement remain in full force, if the essential terms and conditions of this Agreement for each Party remain valid, binding and enforceable.

Section 7.6 Counterparts . The Parties may execute this Agreement in multiple counterparts, each of which constitutes an original as against the Party that signed it, and all of which together constitute one agreement. The signatures of the Parties need not appear on the same counterpart. The delivery of signed counterparts by facsimile or email transmission that includes a copy of the sending Party’s signature is as effective as signing and delivering the counterpart in person.

Section 7.7 Notices . Each Party giving any notice required or permitted under this Agreement will give the notice in writing and use one of the following methods of delivery to the Party to be notified, at the address set forth below or another address of which the sending Party has been notified in accordance with this Section 7.7: (a) personal delivery; (b) facsimile or telecopy transmission with a

 

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reasonable method of confirming transmission; (c) commercial overnight courier with a reasonable method of confirming delivery; or (d) pre-paid, United States of America certified or registered mail, return receipt requested. Notice to a Party is effective for purposes of this Agreement only if given as provided in this Section 7.7 and will be deemed given on the date that the intended addressee actually receives the notice.

 

If to Motorola :

 

Motorola, Inc.

1303 East Algonquin Road

Schaumburg, Illinois 60196

Attention: Chief Financial Officer

Facsimile: (847) 576-1402

  

with a copy to:

 

Motorola, Inc.

1303 East Algonquin Road

Schaumburg, Illinois 60196

Attention: General Counsel

Facsimile: (847) 576-3628

If to SpinCo or Mobility :

 

Motorola Mobility, Inc.

600 North US-45

Libertyville, Illinois 60048

Attention: Chief Financial Officer

Facsimile: (847) 523-0438

  

with a copy to:

 

Motorola Mobility, Inc.

600 North US-45

Libertyville, Illinois 60048

Attention: General Counsel

Facsimile: (847) 523-0727

Section 7.8 Nonwaiver . The Parties may waive a provision of this Agreement or Annex A only by a writing signed by the Party intended to be bound by the waiver. A Party is not prevented from enforcing any right, remedy or condition in the Party’s favor because of any failure or delay in exercising any right or remedy or in requiring satisfaction of any condition, except to the extent that the Party specifically waives the same in writing. A written waiver given for one matter or occasion is effective only in that instance and only for the purpose stated. A waiver once given is not to be construed as a waiver for any other matter or occasion. Any enumeration of a Party’s rights and remedies in this Agreement is not intended to be exclusive, and a Party’s rights and remedies are intended to be cumulative to the extent permitted by law and include any rights and remedies authorized in law or in equity.

Section 7.9 Confidentiality . Subject to the terms of the Separation Agreement, each Party will cause each of its Affiliates and each of their officers, directors, employees, agents, representatives, successors and assigns to hold all information relating to the business of any other Party disclosed to it by reason of this Agreement confidential and will not disclose any of such information to any party unless legally compelled to disclose such information; provided , however , that to the extent that a Party may become so legally compelled, such Party may only disclose such information if it will first have used reasonable efforts to, and, if practicable, will have afforded the other Parties the opportunity to obtain, an appropriate protective order or other satisfactory assurance of confidential treatment for the information required to be so disclosed.

Section 7.10 Governing Law . The internal laws of the State of Delaware (without reference to its principles of conflicts of law) govern the construction, interpretation and other matters arising out of or in connection with this Agreement, and each of the annexes, schedules or exhibits hereto (whether arising in contract, tort, equity or otherwise). Any disputes arising hereunder will be resolved in accordance with Section 7.3 of the Separation Agreement, the terms of which are incorporated by reference herein.

 

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[This space intentionally left blank]

* * * * *

 

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IN WITNESS WHEREOF, each of the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date and year first set forth above.

 

“Motorola”     “SpinCo”
MOTOROLA, INC.,     MOTOROLA MOBILITY HOLDINGS, INC.,
a Delaware corporation     a Delaware corporation
By:  

 

    By:  

 

Name:  

 

    Name:  

 

Title:  

 

    Title:  

 

“Mobility”    
MOTOROLA MOBILITY, INC.,    
a Delaware corporation    
By:  

 

     
Name:  

 

     
Title:  

 

     

 

13

EXHIBIT 10.6

FORM OF TRANSITION SERVICES AGREEMENT

– MOTOROLA SOLUTIONS PROVIDED SERVICES

THIS TRANSITION SERVICES AGREEMENT – MOTOROLA SOLUTIONS PROVIDED SERVICES (this “ Agreement ”) is entered into as of [ ], by and among Motorola, Inc., a Delaware corporation (“ Motorola ”), Motorola Mobility, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (“ Mobility ”), and Motorola Mobility Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (“ SpinCo ”). Each of Motorola, Mobility and SpinCo is sometimes referred to herein as a “ Party ” and collectively as the “ Parties .” Capitalized terms used herein and not otherwise defined herein have the meanings given to such terms in the Amended and Restated Master Separation and Distribution Agreement dated as of July 31, 2010, by and among Motorola, Mobility and SpinCo (as such may be amended from time to time, the “ Separation Agreement ”).

RECITALS

WHEREAS, Motorola has determined that it would be appropriate, desirable and in the best interests of Motorola and Motorola’s stockholders to separate the MD Business and the Home Business from Motorola pursuant to and in accordance with the Separation Agreement;

WHEREAS, in connection with the separation of the MD Business and the Home Business from Motorola, Motorola desires to contribute or otherwise transfer, and to cause certain of its Subsidiaries to contribute or otherwise transfer, (i) certain Assets and Liabilities associated with the Transferred Businesses, including the stock or other equity interests of certain of Motorola’s Subsidiaries dedicated to the Transferred Businesses, to Mobility and certain of its Subsidiaries, and (ii) certain Assets and Liabilities associated with the Transferred Businesses to SpinCo, (iii) shares of capital stock of Mobility to SpinCo, and (iv) stock or other equity interests of certain of Motorola’s Subsidiaries dedicated to the Transferred Businesses other than those set forth in clause (i) above to SpinCo;

WHEREAS, in connection therewith, SpinCo desires that Motorola and/or its Affiliates provide SpinCo and/or its Affiliates, as applicable, with certain transition services with respect to the operation of SpinCo and its Affiliates following the date hereof, as more fully set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the promises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties each hereby agrees as follows:

ARTICLE 1

TRANSITION SERVICES

Section 1.1 Transition Services . During the term of this Agreement as set forth in Section 2.2, Motorola will provide, or cause one or more of its Affiliates or third Person service providers designated by Motorola (including their respective employees, agents or contractors) to provide to the SpinCo Group, upon the terms and subject to the conditions hereof, the services more particularly described on Annex A (each service, a “ Transition Service ” and collectively with any Additional Services, the “ Transition Services ”). Motorola and SpinCo may, by mutual written consent (which consent will not be unreasonably withheld), amend the Transition Services to (a) include other administrative services provided by Motorola to the Transferred Businesses prior to the date hereof in exchange for additional fees consistent with the cost of delivery thereof (“ Additional Services ”), or (b)


extend the term of any Transition Service so long as such new service term does not extend beyond 12 months from the date hereof. SpinCo will and will cause its Affiliates to, if applicable, adhere to any conditions or policies applicable to its use of the Transition Services as set forth in this Agreement or in Annex A .

Section 1.2 Level of Transition Services .

(a) Unless otherwise specifically set forth in Annex A , Motorola will perform, or cause one or more of its Affiliates or third Persons to provide to SpinCo and/or its Affiliates, as applicable, the Transition Services in the manner and at a level of service (including with respect to timing and priority) consistent with past practices with respect to that performed by the Motorola Group and their third Person service providers for the Transferred Businesses; provided , however , Motorola may make changes from time to time in the manner of performing the Transition Services to the extent Motorola is making similar changes in performing similar services for itself or its Affiliates, so long as such changes do not adversely affect such agreed to level of service.

(b) Unless otherwise specifically set forth in Annex A , SpinCo and its Affiliates’ use of any Transition Service will be consistent with past practice with respect to the use by the Motorola Group for the Transferred Businesses.

(c) Notwithstanding anything to the contrary herein, in no event will any Transition Service include (i) any services that would be or otherwise becomes unlawful for Motorola to provide, or (ii) the exercise of business judgment or general management for SpinCo.

ARTICLE 2

TERMINATION

Section 2.1 No Obligation to Continue to Use Services; Partial Termination . SpinCo will have no obligation to continue to use any of the Transition Services and, except as otherwise specified on Annex A , SpinCo may terminate any Transition Service by giving Motorola at least 30 days’ prior written notice of its desire to terminate any Transition Service. To the extent possible, SpinCo will give such notice at the beginning of a month to terminate the service as of the beginning of the next month to avoid the need to prorate any monthly payment charges. As soon as reasonably practicable following receipt of any such notice, Motorola will advise SpinCo in writing as to whether termination of such Transition Service will (a) require the termination or partial termination of, or otherwise affect the provision of, certain other Transition Services, or (b) result in any early termination costs (which, with respect to those related to third party providers, will be limited to costs that Motorola actually incurs). If either will be the case, SpinCo may withdraw its termination notice within five Business Days of the receipt of notice. If SpinCo does not withdraw the termination within such period, such termination will be final. Upon such termination, SpinCo’s obligation to pay for such Transition Service(s) will terminate, and Motorola will cease, or cause its Affiliates or third Person service providers to cease, providing the terminated Transition Service(s), in each case subject to the terms of Section 2.2(c); provided , however , that SpinCo will reimburse Motorola for the reasonable termination costs actually incurred by Motorola resulting from SpinCo’s early termination of such Transition Services, including those owed to third Person providers. Motorola will use commercially reasonable efforts to mitigate such termination costs.

Section 2.2 Term and Termination .

(a) Subject to Section 2.1, the term of this Agreement will commence on the date hereof and continue with respect to each of the Transition Services for the term thereof as set forth in Annex A ; the last date in each such term being referred to herein as a “ Service Termination Date ” for each such Transition Service.

 

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(b) Notwithstanding the foregoing, this Agreement may be terminated:

(i) by Motorola, immediately by giving written notice to SpinCo if SpinCo breaches or is in default of any payment obligation, which default is capable of being cured, and such breach or default has not been cured within 30 days after SpinCo’s receipt of notice of such a breach or default from Motorola; or

(ii) by any Party, upon 30 days’ advance written notice to the other Parties, in the event: (A) such Party (1) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its properties, (2) makes a general assignment for the benefit of its creditors, (3) commences a voluntary case under the United States Bankruptcy Code, as now or hereafter in effect (the “ Bankruptcy Code ”), or (4) fails to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under the Bankruptcy Code; or (B) a proceeding or case will be commenced against such Party in any court of competent jurisdiction, seeking (1) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of such Party or of all or any substantial part of its assets, or (3) similar relief under any Bankruptcy Laws, or an order, judgment or decree approving any of the foregoing will be entered and continue unstayed for a period of 60 days, or an order for relief against such Party will be entered in an involuntary case under the Bankruptcy Code.

(c) The terms and conditions of this Agreement that, by their terms, require performance following the termination or expiration of this Agreement will survive such termination or expiration.

Section 2.3 General Intent . SpinCo will use commercially reasonable efforts to end its use of the Transition Services as soon as commercially practicable, but in no event later than the applicable Service Termination Date.

ARTICLE 3

FEES

Section 3.1 Consideration . As consideration for the provision of any Transition Services and any Additional Services hereunder, SpinCo will pay to Motorola (or will cause its Affiliates to pay to Motorola or Motorola’s Affiliates, as applicable) the amount specified for each Transition Service as set forth in Annex A , plus any applicable sales, use, or service tax, value added tax (“ VAT ”) or any other similar tax (together with any related interest and penalties) imposed on, or payable with respect to, any fees or charges payable pursuant to this Agreement on a monthly basis except (i) as otherwise specified in Annex A with respect to a particular Transition Service, and (ii) reimbursement for Tigers purchases, Web Money reimbursements, other “normal” department charges which will result in a cash disbursement made by Motorola or its Affiliates on behalf of SpinCo or its Affiliates, will be made as described in Section 3.2 below. Unless Motorola and SpinCo otherwise agree in writing, where Transition Services are provided to SpinCo’s Affiliates outside of the United States by a Person located in the same country, amounts will be billed and paid in the local currency of the entity providing the Transition Services. Unless Motorola and SpinCo otherwise agree in writing, if payments are to be made between legal entities not within the same country, such amounts will be billed and paid in U.S. Dollars. To the extent necessary, local currency conversion will be based on Motorola’s internal exchange rate for the then-current month. The Transition Services to be provided by third Person providers will be charged to

 

3


SpinCo at no higher cost than the actual payments made by Motorola to third Person providers for providing such Transition Services. All charges based on a monthly or other time basis will be pro rated based on actual days elapsed during the period of service. Upon the termination of any Transition Service in accordance with and subject to Section 2.1 or Section 2.2 above, the consideration to be paid under this Article 3 will be the accrued pro rated daily fees payable under this Section 3.1 except in cases where Motorola or its Affiliate has already procured and pre-paid for the services of a third Person provider. The Parties agree to use commercially reasonable efforts to cooperate to minimize any sales, use or service tax, VAT or any other similar tax with respect to the Transition Services.

Section 3.2 Invoices . Except as otherwise set forth on Annex A , within 10 days after the end of each fiscal month, Motorola and each of its Affiliates providing Transition Services will submit one invoice to each of SpinCo and each of its Affiliates receiving Transition Services for (i) all Transition Services provided during such fiscal month pursuant to this Agreement, (ii) reimbursement for Tigers purchases, Web Money reimbursements, other “normal” department charges and payments to third parties on behalf of SpinCo or its Affiliates which result in a cash disbursement made by Motorola or its Affiliates on behalf of SpinCo or its Affiliates, and (iii) any applicable sales, use or service tax, VAT or any other similar taxes (other than income or franchise taxes) imposed on or payable with respect to any fees or charges payable pursuant to this Agreement. The invoices will break out the amount for each type of Transition Service and amounts subject to reimbursement. Motorola will provide documentation supporting any amounts invoiced pursuant to this Section 3.2 as SpinCo may from time to time reasonably request, including, without limitation, detail with respect to any third party billing information relating to the Transition Services provided under this Agreement.

Section 3.3 Invoice Disputes . In the event that SpinCo in good faith disputes an invoice submitted by Motorola, SpinCo may withhold payment of any amount subject to the dispute; provided , however , that (i) SpinCo will continue to pay all undisputed amounts in accordance with the terms hereof, and (ii) SpinCo will notify Motorola, in writing, of any disputed amounts and the reason for any dispute by the due date for payment of the invoice containing any disputed charges. In the event of a dispute regarding the amount of any invoice, the Parties will use all reasonable efforts to resolve such dispute within 30 days after SpinCo provides written notification of such dispute to Motorola. Each Party will provide full supporting documentation concerning any disputed amount or invoice within 30 days after written notification of the dispute. Unpaid fees that are under good faith dispute will not be considered a basis for default hereunder. To the extent that a dispute regarding the amount of any invoice cannot be resolved pursuant to this Section 3.3, the dispute resolution procedures set forth in Section 7.10 herein will apply.

Section 3.4 Time of Payment . Except as otherwise set forth in Annex A , SpinCo will pay and will cause each of its Affiliates to pay all amounts due pursuant to this Agreement within 30 days after receipt of each such invoice hereunder for (i) the Transition Services and (ii) the amounts subject to reimbursement; provided , however , that in the event that SpinCo, in good faith and upon reasonable grounds in accordance with Section 3.3, questions any invoiced item, payment of that item may be made after resolution of such question. To the extent that any amounts required to be paid under this Agreement are not timely paid pursuant to the terms of this Agreement, such amounts shall accrue interest in accordance with the Separation Agreement. Any pre-existing obligations to make payment for any Transition Services provided hereunder will survive the termination of this Agreement.

ARTICLE 4

PERSONNEL

Section 4.1 Right to Designate and Change Personnel . Motorola will make available such personnel as will be required to provide the Transition Services. Motorola will have the right to designate

 

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which personnel it will assign to perform the Transition Services. Motorola also will have the right to remove and replace any such personnel at any time or designate any of its Affiliates or a third Person service provider at any time to perform the Transition Services; provided , however , that Motorola will use its commercially reasonable efforts to limit the disruption to SpinCo in the transition of the Transition Services to different personnel or a third Person. In the event that personnel with the designated level of experience are not then employed by Motorola, Motorola will substitute such personnel or third party personnel having an adequate level of experience; provided , however , that Motorola will have no obligation to retain any individual employee for the sole purpose of providing a particular Transition Service.

Section 4.2 Financial Responsibility for Motorola Personnel . Motorola will pay for all personnel expenses, including wages of its employees performing the Transition Services. Any request by SpinCo for travel by any Motorola employee will be considered and treated as a request for Additional Services pursuant to Section 1.1 and the costs of such travel will be charged as additional fees.

Section 4.3 Managers .

(a) During the term of this Agreement, Motorola will appoint one of its employees (the “ Motorola Manager ”) who will have overall responsibility for managing and coordinating the delivery of the Transition Services and one of its employees for each category of service, as applicable (the “ Motorola Sub-Manager ”). The Motorola Manager and each of the Motorola Sub-Managers will coordinate and consult with the SpinCo Manager (as defined in Section 4.3(b)) and each of the SpinCo Sub-Managers (as defined in Section 4.3(b)). Motorola may, at its discretion, select other individuals to serve in these capacities during the term of this Agreement; provided , however , Motorola will notify SpinCo promptly (and in any event within three Business Days) of any change in individuals serving in these capacities, setting forth the name of the replacement, and stating that such replacement is authorized to act for Motorola in accordance with this Section 4.3(a).

(b) During the term of this Agreement, SpinCo will appoint one of its employees (the “ SpinCo Manager ”) who will have overall responsibility for managing and coordinating the delivery of the Transition Services and one of its employees for each category of service (the “ SpinCo Sub-Manager ”). The SpinCo Manager and each of the SpinCo Sub-Managers will coordinate and consult with the Motorola Manager and each of the Motorola Sub-Managers. SpinCo may, at its discretion, select other individuals to serve in these capacities during the term of this Agreement; provided , however , SpinCo will notify Motorola promptly (and in any event within three Business Days) of any change in individuals serving in these capacities, setting forth the name of the replacement, and stating that such replacement is authorized to act for SpinCo in accordance with this Section 4.3(b).

(c) The Motorola Manager and the SpinCo Manager will meet as expeditiously as possible to resolve any dispute hereunder, and any dispute that is not so resolved within 30 days will be resolved in accordance with the dispute resolution procedures set forth in Section 7.3 of the Separation Agreement. Motorola may treat an act of the SpinCo Manager, and SpinCo may treat the act of the Motorola Manager, in each case, which is consistent with the provisions of this Agreement, as being authorized by such other Party without inquiring behind such act or ascertaining whether the Motorola Manager or the SpinCo Manager, as applicable, had authority to so act; provided , however , that neither the Motorola Manager nor the SpinCo Manager will have authority to amend this Agreement.

 

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ARTICLE 5

PROPRIETARY RIGHTS

Section 5.1 Software .

(a) In addition to the consideration set forth elsewhere herein, SpinCo will also promptly pay any amounts that are required to be paid to any third Person licensors of software that is used by Motorola in connection with the provision of any Transition Services hereunder, including, without limitation, (i) license, temporary right-to-use and royalty fees and (ii) any amounts that are required to be paid to any such licensors to obtain the consent of such licensors to allow Motorola to provide any of the Transition Services hereunder. SpinCo agrees to comply and cause its Affiliates to comply with the terms of any license or other agreement of Motorola or any of its Affiliates relating to software that is used in connection with the provision of any Transition Services hereunder. Subject to the foregoing and the terms of the Separation Agreement, Motorola will use commercially reasonable efforts to obtain any consent that may be required from such licensors in order to provide any of the Transition Services hereunder and the Parties will cooperate to identify any material licenses or consents and use commercially reasonable efforts to minimize the costs associated therewith.

(b) Any software, development tools, know-how, methodologies, processes, technologies or algorithms owned by Motorola or its Affiliates and which may during the term of this Agreement be operated or used by Motorola or its Affiliates in connection with the performance of the Transition Services hereunder will remain the property of Motorola or its Affiliates, as the case may be, and SpinCo and its Affiliates will have no rights or interests therein, except as may otherwise be set forth in the Intellectual Property License Agreement.

(c) Neither Motorola nor SpinCo will use or have any rights to the trademarks or service marks of the other without prior written consent to such use other than as provided for in the Intellectual Property License Agreement or the Trademark License Agreement. To the extent that such consent is granted, use of such trademarks or service marks will be in accordance with the guidelines set forth by the Party owning such trademarks or service marks with all proper indicia of ownership, including those set forth in the Intellectual Property License Agreement or the Trademark License Agreement.

Section 5.2 IT Services .

(a) While using any data processing or communications services of Motorola (whether or not identified in Annex A ), SpinCo will and will cause each of its Affiliates to, adhere in all respects to Motorola’s corporate information policies (including policies with respect to protection of proprietary information, data privacy and other policies regarding the use of computing resources) as in effect from time to time.

(b) The employees of SpinCo and its Affiliates and non-employee representative of SpinCo and its Affiliates who have access to the SpinCo network may continue to have access to the Motorola Intranet and associated computer applications if they meet the following criteria: (i) such employee and non-employee representative is listed in the SpinCo LDAP/”core directory” or any updates thereto and a current list of these employees and non-employee representatives is available promptly upon request, and a documented process is in place for notification to Motorola of all voluntary and involuntary separations; (ii) SpinCo has a legitimate business need to access resources on the Motorola Intranet during the term of this Agreement; and (iii) such employee and non-employee representative is bound by a non-disclosure agreement or other binding confidentiality obligations for the benefit of Motorola. SpinCo employee and non-employee representative computer and system accounts on the Motorola Intranet that are not required for the transition must be locked. SpinCo’s employees and non-employee representatives that are connected to the Motorola Intranet must continue to adhere in all respects to the information protection safeguards defined in Motorola’s Information Protection Policy IP-01 and Standards for Information Users ( http:///mips.mot.com/policy/genuserstd.htm ) as well as any other security standards for requiring current antivirus protection active at all times, strong access control for all

 

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computer access, no sharing of passwords, no dual connections to the SpinCo network or any other non-Motorola networks and the Internet or other entity networks, and compliance with the requirements for protection of Motorola’s confidential proprietary information and intellectual assets/property. Motorola’s Information Protection Policy IP-01 and Complete Set of Standards ( http://mips.mot.com/policy/itstandardscomplete.htm ) must be followed when connecting Motorola’s Intranet to SpinCo’s network or any other non-Motorola networks and all external connections to the Motorola network require the review and the written approval of Motorola’s information protection services. Computing assets connected to Motorola’s network are subject to monitoring by intrusion detection instrumentation and are subject to routine vulnerability assessment scans which may occur during connect time.

(c) SpinCo and Motorola will jointly develop mutually acceptable systems conversion plans as soon as reasonably practicable. If necessary to facilitate such conversion, Motorola agrees to use commercially reasonable efforts to assist SpinCo to meet the mutually agreed upon milestones, timelines and resource requirements identified in the final detailed systems conversion plan. Following this process, the plan will be considered firm and will be used by both Motorola and SpinCo to synchronize their own related project efforts. In the event Motorola expects to incur any extraordinary costs in connection with facilitating such conversion, it will notify SpinCo in advance and the Parties will reasonably negotiate and agree upon the items and amounts that SpinCo will pay. Such amounts will be considered and treated as a request for Additional Services pursuant to Section 1.1. Any schedule modifications occurring after the plan is firm will require joint approval by SpinCo and Motorola, such approval not to be unreasonably withheld.

(d) If SpinCo increases its use of Motorola’s central processing unit, storage, server or other network systems and such increased use contributes to the need for Motorola to purchase additional computing capacity that Motorola will not utilize following termination of the Transition Services, SpinCo will pay for that capacity. Motorola will notify SpinCo in advance of capacity issues to allow SpinCo to respond and possibly discontinue use of certain Motorola systems in advance of any additional purchases. Usage consistent with recent past practice of the Transferred Businesses will serve as the basis from which to measure increases in usage. The need for purchasing additional capacity will be subject to the mutual agreement of Motorola and SpinCo.

ARTICLE 6

WARRANTY

Section 6.1 No Warranty; Exclusive Remedy .

(a) Motorola and SpinCo both acknowledge and agree that Motorola has agreed to provide or cause to be provided the Transition Services hereunder as an accommodation to SpinCo. NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED (INCLUDING WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION), ARE MADE BY ANY MEMBER OF THE MOTOROLA GROUP WITH RESPECT TO THE PROVISION OF TRANSITION SERVICES UNDER THIS AGREEMENT AND, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ALL SUCH REPRESENTATIONS OR WARRANTIES ARE HEREBY WAIVED AND DISCLAIMED.

(b) Other than in the event of Motorola’s gross negligence or willful misconduct for which SpinCo shall have a right to seek indemnity hereunder (and without limiting the indemnification rights under Section 6.2(c)), the sole and exclusive remedy of SpinCo with respect to any and all Damages caused by or arising from the performance or non-performance of any Transition Service by

 

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Motorola (either directly or indirectly) will be the termination of this Agreement in accordance with Section 2.1 hereof; provided , however , that, if capable of being performed or re-performed and if requested by SpinCo, Motorola agrees to perform or re-perform, as applicable, or will cause one or more of its Affiliates or third Persons to perform or re-perform, as applicable, any Transition Service that does not comply with the requirements and level of service set forth in Annex A and Section 1.2(a) hereof.

Section 6.2 Limitation of Liability and Indemnification .

(a) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, IN NO EVENT WILL ANY PARTY OR ANY OF ITS GROUP MEMBERS BE LIABLE UNDER ANY CIRCUMSTANCES OR LEGAL THEORY FOR DAMAGES RELATED TO INCONVENIENCE, DOWNTIME, INTEREST, COST OF CAPITAL, FRUSTRATION OF ECONOMIC OR BUSINESS EXPECTATIONS, LOST PROFITS, LOST REVENUES, LOST SAVINGS, LOSS OF USE, TIME, DATA, OR GOOD WILL, OR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, COLLATERAL OR CONSEQUENTIAL DAMAGES, REGARDLESS OF WHETHER SUCH LOSSES ARE FORESEEABLE; PROVIDED , HOWEVER , THAT TO THE EXTENT AN INDEMNIFIED PARTY IS REQUIRED TO PAY ANY DAMAGES RELATED TO INCONVENIENCE, DOWNTIME, INTEREST, COST OF CAPITAL, FRUSTRATION OF ECONOMIC OR BUSINESS EXPECTATIONS, LOST PROFITS, LOST REVENUES, LOST SAVINGS, LOSS OF USE, TIME, DATA, OR GOODWILL, OR ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL, COLLATERAL OR CONSEQUENTIAL DAMAGES, TO A PERSON WHO IS NOT A MEMBER OF ANY GROUP IN CONNECTION WITH A THIRD PARTY CLAIM, SUCH DAMAGES WILL CONSTITUTE DIRECT DAMAGES NOT SUBJECT TO THE LIMITATION SET FORTH IN THIS SECTION 6.2. THIS SECTION SURVIVES THE TERMINATION OR EXPIRATION OF THIS AGREEMENT.

(b) Except insofar as the claim, demand, suit or recovery relates to Motorola’s gross negligence or willful misconduct, and notwithstanding anything to the contrary and without limiting the Parties’ indemnification rights set forth in the Separation Agreement, SpinCo will and will cause its Affiliates to indemnify and hold harmless Motorola and its Affiliates or any employees providing Transition Services (collectively, the “ Indemnified Party ”) from and against any Damages (including, without limitation, reasonable expenses of investigation and attorneys’ fees incurred or suffered by the Indemnified Party) arising out of any claim made against any member of the Motorola Group by a third Person to the extent caused by or resulting from any of the Transition Services rendered pursuant to the terms of this Agreement; provided , however , that the foregoing will not limit the indemnification obligations of Motorola under Section 6.2(c).

(c) Notwithstanding anything to the contrary and without limiting the Parties’ indemnification rights set forth in the Separation Agreement, Motorola will indemnify SpinCo and its Affiliates (collectively, the “ SpinCo Indemnified Parties ”) against and agrees to defend and hold the SpinCo Indemnified Parties harmless from and against any Damages (including, without limitation, reasonable expenses of investigation and attorneys’ fees incurred or suffered by the SpinCo Indemnified Parties) arising out of the performance of any Transition Service by a third Person service provider on behalf of Motorola, but only to the extent Motorola is indemnified or otherwise compensated by such third Person service provider for any breach of its obligations to Motorola with respect to the provision of such Transition Service and, in such event, only on a pro rata basis taking into account all businesses of Motorola and its Affiliates similarly affected.

Section 6.3 Relationship of the Parties . Each of Motorola and SpinCo is and will remain at all times an independent contractor of the other Party in the performance of all Transition Services hereunder. In all matters relating to this Agreement, each of Motorola and SpinCo will be solely

 

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responsible for the acts of its employees and agents, and employees or agents of one Party will not be considered employees or agents of the other Party nor entitled to any employee benefits of such other Party as a result of this Agreement. Except as otherwise provided herein, no Party will have any right, power or authority to create any obligation, express or implied, on behalf of any other Party nor will any Party act or represent or hold itself out as having authority to act as an agent or partner of any other Party, or in any way bind or commit any other Party to any obligations. Nothing in this Agreement is intended to create or constitute a joint venture, partnership, agency, trust or other association of any kind among the Parties or persons referred to herein and each Party will be responsible only for its respective obligations as set forth in this Agreement.

Section 6.4 Compliance with Laws . Each of Motorola and SpinCo will comply with all applicable laws, rules, ordinances and regulations of any governmental entity or regulatory agency governing the Transition Services to be provided hereunder. Neither Motorola nor SpinCo will take any action in violation of any applicable law, rule, ordinance or regulation that could result in liability being imposed on the other Party.

Section 6.5 Remedies . The Parties agree that irreparable damage may occur in the event that any of the provisions of this Agreement are not performed in accordance with their specific terms or are otherwise breached. It is accordingly agreed that each of the Parties shall be entitled to seek equitable relief to prevent or remedy breaches of this Agreement, without the proof of actual damages, including in the form of an injunction or injunctions or orders for specific performance in respect of such breaches. Each Party agrees to waive any requirement for the security or posting of any bond in connection with any such equitable remedy.

ARTICLE 7

GENERAL

Section 7.1 Binding Effect and Assignment . This Agreement binds and benefits the Parties and their respective successors and assigns. No Party may assign any of its rights or delegate any of its obligations under this Agreement without the written consent of the other Parties, which consent may be withheld in such Party’s sole and absolute discretion and any assignment or attempted assignment in violation of the foregoing will be null and void; provided , however , that, subject to Section 4.1, Motorola may delegate its duties hereunder to such Affiliates or third Person service providers as may be qualified to provide the Transition Services; provided , further , that Motorola will provide at least 45 days’ notice to SpinCo prior to any such delegation of any duties hereunder, and in the event SpinCo reasonably objects to any such delegation, Motorola will reasonably assist in the process of transitioning such service to SpinCo or SpinCo’s designee prior to any such delegation.

Section 7.2 Entire Agreement; Amendments . This Agreement, the Separation Agreement and each of the annexes, exhibits and schedules appended hereto and thereto constitute the final agreement among the Parties, and is the complete and exclusive statement of the Parties’ agreement, on the matters contained herein. All prior and contemporaneous negotiations and agreements among the Parties with respect to the matters contained herein are superseded by this Agreement and Annex A . The Parties may amend this Agreement and Annex A only by a written agreement signed by each Party to be bound by the amendment and that identifies itself as an amendment to this Agreement or Annex A .

Section 7.3 Force Majeure . In the event that Motorola is delayed in or prevented from performing its obligations under this Agreement, in whole or in part, due to an act of God, fire, flood, storm, explosion, civil disorder, strike, lockout or other labor trouble, material shortages of utilities, facilities, labor, materials or equipment, delay in transportation, breakdown or accident, any law, order, proclamation, regulation, ordinance, demand or requirement of any governmental authority, riot, war, acts

 

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of terror, rebellion, or other cause beyond the control of Motorola (each a “ Force Majeure Event ”), then upon written notice to SpinCo, (i) the affected provisions and/or other requirements of this Agreement will be suspended to the extent necessary during the period of such disability, (ii) Motorola will have the right to apportion its services in an equitable manner to all users and (iii) Motorola will have no liability to SpinCo or any other party in connection therewith. Motorola will resume full performance of this Agreement as soon as reasonably practicable following the conclusion of the Force Majeure Event.

Section 7.4 Construction of Agreement .

(a) Where this Agreement or Annex A states that a Party “ will ” perform in some manner or otherwise act or omit to act, it means that the Party is legally obligated to do so in accordance with this Agreement or Annex A .

(b) The captions, titles and headings included in this Agreement and Annex A are for convenience only, and do not affect this Agreement’s or Annex A ’s construction or interpretation. When a reference is made in this Agreement to an Article or a Section, annex, exhibit or schedule, such reference will be to an Article or Section of, or an annex, exhibit or schedule to, this Agreement unless otherwise indicated.

(c) This Agreement is for the sole benefit of the Parties hereto and do not, and are not intended to, confer any rights or remedies in favor of any Person (including any employee or stockholder of Motorola or SpinCo) other than the Parties signing this Agreement.

(d) The words “ including ,” “ includes ,” or “ include ” are to be read as listing non-exclusive examples of the matters referred to, whether or not words such as “ without limitation ” or “ but not limited to ” are used in each instance.

(e) Any reference in this Agreement or Annex A to the singular includes the plural where appropriate. Any reference in this Agreement or Annex A to the masculine, feminine or neuter gender includes the other genders where appropriate.

(f) Unless otherwise specified, all references in this Agreement or Annex A to “ dollars ” or “ $ ” means United States Dollars.

Section 7.5 Severability . If any provision of this Agreement is determined to be invalid, illegal or unenforceable, the remaining provisions of this Agreement remain in full force, if the essential terms and conditions of this Agreement for each Party remain valid, binding and enforceable.

Section 7.6 Counterparts . The Parties may execute this Agreement in multiple counterparts, each of which constitutes an original as against the Party that signed it, and all of which together constitute one agreement. The signatures of the Parties need not appear on the same counterpart. The delivery of signed counterparts by facsimile or email transmission that includes a copy of the sending Party’s signature is as effective as signing and delivering the counterpart in person.

Section 7.7 Notices . Each Party giving any notice required or permitted under this Agreement will give the notice in writing and use one of the following methods of delivery to the Party to be notified, at the address set forth below or another address of which the sending Party has been notified in accordance with this Section 7.7: (a) personal delivery; (b) facsimile or telecopy transmission with a reasonable method of confirming transmission; (c) commercial overnight courier with a reasonable method of confirming delivery; or (d) pre-paid, United States of America certified or registered mail, return receipt requested. Notice to a Party is effective for purposes of this Agreement only if given as provided in this Section 7.7 and will be deemed given on the date that the intended addressee actually receives the notice.

 

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If to Motorola :

 

Motorola, Inc.

1303 East Algonquin Road

Schaumburg, Illinois 60196

Attention: Chief Financial Officer

Facsimile: (847) 576-1402

 

with a copy to:

 

Motorola, Inc.

1303 East Algonquin Road

Schaumburg, Illinois 60196

Attention: General Counsel

Facsimile: (847) 576-3628

 

If to SpinCo or Mobility :

 

Motorola Mobility, Inc.

600 North US-45

Libertyville, Illinois 60048

Attention: Chief Financial Officer

Facsimile: (847) 523-0438

 

 

with a copy to:

 

Motorola Mobility, Inc.

600 North US-45

Libertyville, Illinois 60048

Attention: General Counsel

Facsimile: (847) 523-0727

Section 7.8 Nonwaiver . The Parties may waive a provision of this Agreement or Annex A only by a writing signed by the Party intended to be bound by the waiver. A Party is not prevented from enforcing any right, remedy or condition in the Party’s favor because of any failure or delay in exercising any right or remedy or in requiring satisfaction of any condition, except to the extent that the Party specifically waives the same in writing. A written waiver given for one matter or occasion is effective only in that instance and only for the purpose stated. A waiver once given is not to be construed as a waiver for any other matter or occasion. Any enumeration of a Party’s rights and remedies in this Agreement is not intended to be exclusive, and a Party’s rights and remedies are intended to be cumulative to the extent permitted by law and include any rights and remedies authorized in law or in equity.

Section 7.9 Confidentiality . Subject to the terms of the Separation Agreement, each Party will cause each of its Affiliates and each of their officers, directors, employees, agents, representatives, successors and assigns to hold all information relating to the business of any other Party disclosed to it by reason of this Agreement confidential and will not disclose any of such information to any party unless legally compelled to disclose such information; provided , however , that to the extent that a Party may become so legally compelled, such Party may only disclose such information if it will first have used reasonable efforts to, and, if practicable, will have afforded the other Parties the opportunity to obtain, an appropriate protective order or other satisfactory assurance of confidential treatment for the information required to be so disclosed.

Section 7.10 Governing Law . The internal laws of the State of Delaware (without reference to its principles of conflicts of law) govern the construction, interpretation and other matters arising out of or in connection with this Agreement, and each of the annexes, schedules or exhibits hereto (whether arising in contract, tort, equity or otherwise). Any disputes arising hereunder will be resolved in accordance with Section 7.3 of the Separation Agreement, the terms of which are incorporated by reference herein.

[This space intentionally left blank]

 

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* * * * *

 

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IN WITNESS WHEREOF, each of the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date and year first set forth above.

 

“Motorola”     “SpinCo”
MOTOROLA, INC.,     MOTOROLA MOBILITY HOLDINGS, INC.,
a Delaware corporation     a Delaware corporation
By:  

 

    By:  

 

Name:  

 

    Name:  

 

Title:  

 

    Title:  

 

“Mobility”      
MOTOROLA MOBILITY, INC.,      
a Delaware corporation      
By:  

 

     
Name:  

 

     
Title:  

 

     

 

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EXHIBIT 10.7

AMENDED AND RESTATED EMPLOYEE MATTERS AGREEMENT

THIS AMENDED AND RESTATED EMPLOYEE MATTERS AGREEMENT (the “ Agreement ”) is made and entered into effective as of July 31, 2010 by and among Motorola, Inc., a Delaware corporation (“ Motorola ”), Motorola SpinCo Holdings Corporation, a Delaware corporation and a wholly-owned subsidiary of Motorola (“ SpinCo ”), and Motorola Mobility, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (“ Mobility ”). Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Separation Agreement (as defined herein).

RECITALS

WHEREAS, Motorola has determined that it would be appropriate, desirable and in the best interests of Motorola and Motorola’s stockholders to separate the Transferred Businesses from Motorola pursuant to and in accordance with the Master Separation and Distribution Agreement dated July 31, 2010 by and among Motorola, SpinCo and Mobility (as it may have been amended and restated from time to time, the “ Separation Agreement ”);

WHEREAS, certain individuals who work in or are assigned to the Transferred Businesses and are directly employed by Motorola or its Affiliates will receive offers of employment from, or will otherwise become employees of, SpinCo, Mobility or their Affiliates pursuant to this Agreement or by operation of applicable local laws; and

WHEREAS, the parties hereto wish to set forth their agreement as to certain matters regarding the treatment of, and the compensation and employee benefits provided to, those former employees of Motorola or its Affiliates who become employees of SpinCo, Mobility, or their Affiliates as described above, pursuant to the terms of this Agreement or by operation of applicable local laws.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth below and in the Separation Agreement and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows:

ARTICLE 1

DEFINITIONS

For purposes of this Agreement, the following definitions apply:

Affiliate ” of any specified Person means any other Person directly or indirectly “ controlling ,” “ controlled by ,” or “ under common control with ” (within the meaning of the Securities Act), such specified Person; provided , however , that for purposes of this Agreement, unless this Agreement expressly provides otherwise, the determination of whether a Person is an Affiliate of another Person will be made assuming that no member of the Motorola Group is an Affiliate of any member of the SpinCo Group.

Business Day ” means a day other than a Saturday, a Sunday or a day on which banking institutions located in Chicago, Illinois or New York, New York are authorized or obligated by law or executive order to close.


Code ” means the Internal Revenue Code of 1986, as amended.

Contractor ” means a person, other than an employee, who works in or is assigned to the businesses of Motorola, SpinCo, Mobility, or any of their Affiliates.

Controlled Group Member ” means, as to Motorola or SpinCo, any other entity which either is part of a controlled group of corporations which includes that party or is a trade or business under common control with that party, as defined in Sections 414(b), (c), and (m) of the Code.

Delayed Transfer Countries ” means the Czech Republic, India, Germany, Greece, South Korea, Vietnam, Ecuador, and Guatemala.

Distribution ” means the distribution of all of the outstanding shares of SpinCo Common Stock to holders of shares of Motorola Common Stock.

Distribution Date ” means the date on which the Distribution occurs.

Distribution Ratio ” means the fraction, (i) the numerator of which is the number of shares of SpinCo Common Stock beneficially owned by Motorola or any other member of the Motorola Group on the Record Date, and (ii) the denominator of which is the number of shares of Motorola Common Stock outstanding on the Record Date.

Effective Date ” means July 31, 2010.

Eligible Inactive Employees ” means those U.S. Employees and Non-U.S. Employees who are on an approved leave of absence at the time of the SpinCo Employment Date and who the parties agree will not transfer their employment on the SpinCo Employment Date unless legally required. Eligible Inactive Employees will be separately identified as such on Schedules 1(a) and 1(b). Notwithstanding the foregoing, if any such U.S. Employee or Non-U.S. Employee would fall within this definition of “Eligible Inactive Employee” but has otherwise been expressly designated prior to the SpinCo Employment Date to immediately participate in the corollary SpinCo or Mobility Employee Benefit Plan which governs such leave of absence immediately as of such SpinCo Employment Date (instead of the Motorola Employee Benefit Plan which would normally govern such leave of absence), then such U.S. Employee or Non-U.S. Employee will not constitute an “Eligible Inactive Employee” but instead will qualify as a Transferred Employee and otherwise not be identified on Schedule 1(a).

Employee Benefit Plan ” means:

(a) any plan, fund, or program which provides health, medical, surgical, hospital or dental care or other welfare benefits, or benefits in the event of sickness, accident or disability, or death benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services;

(b) any plan, fund, or program which provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond;

(c) any plan, fund or program which provides severance, unemployment, vacation or fringe benefits (including dependent and health care accounts);

 

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(d) any incentive compensation plan, deferred compensation plan, stock option or stock-based incentive or compensation plan, or stock purchase plan; or

(e) any other “employee pension benefit plan” (as defined in Section 3(2) of ERISA), any other “employee welfare benefit plan” (as defined in Section 3(1) of ERISA), and any other written or oral plan, agreement or arrangement involving direct or indirect compensation including, without limitation, insurance coverage, severance benefits, disability benefits, fringe benefits, pension or retirement plans, profit sharing, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement compensation.

ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

Motorola Adjustment Factor ” means the ratio of (i) the “regular way” closing price per share of Motorola Common Stock on the New York Stock Exchange on the trading date immediately prior to the Post-Distribution Trading Date, divided by (ii) the volume weighted average price per share of Motorola Common Stock trades on the New York Stock Exchange between 8:30 Central Standard Time and 15:00 Central Standard Time on the Post-Distribution Trading Date, as published by Bloomberg at or about 15:30 Central Standard Time on the Post-Distribution Trading Date. The Motorola Adjustment Factor will be carried out to six decimal places.

Motorola Business ” means the businesses or operations of the Motorola Group other than the Transferred Businesses.

Motorola Common Stock ” means the common stock, par value $0.01 per share, of Motorola.

Motorola Equity Plans ” means the Motorola Omnibus Incentive Plan of 2006, the Motorola Omnibus Incentive Plan of 2003, the Motorola Omnibus Incentive Plan of 2002, the Motorola Omnibus Incentive Plan of 2000, the Motorola Compensation/Acquisition Plan of 2000, and the Motorola Amended and Restated Incentive Plan of 1998.

Motorola Group ” means Motorola and each Person that is or becomes an Affiliate of Motorola (other than any member of the SpinCo Group).

Motorola Non-U.S. Plans ” means Motorola’s and its Affiliates’ Employee Benefit Plans (i) in which any of the Non-U.S. Transferred Employees have been eligible to participate immediately prior to the SpinCo Employment Date or (ii) with respect to which any of the Non-U.S. Transferred Employees constituted an employee group covered thereunder immediately prior to the SpinCo Employment Date even if not yet participating thereunder until completion of all applicable eligibility requirements.

Motorola Shared Employee Contract ” means any agreements entered into by Motorola or one of its Affiliates with current or former employees and not included in the Transferred Assets that relate to the protection of trade secrets, intellectual property, confidential information, customer relationships and goodwill of the Transferred Businesses, including, but not limited to, any Confidentiality and Assignment of Inventions Agreement, Stock Option Consideration Agreement, or Restricted Stock Unit Agreement and any such agreements that limit or restrict the activities of employees during or following termination of employment.

Motorola U.S. Plans ” means Motorola’s and its Affiliates’ Employee Benefit Plans (i) in which any of the U.S. Transferred Employees have been eligible to participate immediately prior to the SpinCo Employment Date or (ii) with respect to which any of the U.S. Transferred Employees constituted an employee group covered thereunder immediately prior to the SpinCo Employment Date even if not yet participating thereunder until completion of all applicable eligibility requirements.

 

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Non-U.S. Employee ” means each employee of Motorola or of any Affiliate of Motorola on a non-U.S. payroll immediately prior to the SpinCo Employment Date who works in or is assigned to the Transferred Businesses and is listed on Schedule 1(a), as such Schedule 1(a) will be amended between the SpinCo Employment Date and the Distribution Date to reflect changes which the parties agree have occurred in the ordinary course of business. Schedule 1(a) will be completed by Motorola in cooperation with SpinCo and Mobility; an initial version will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time prior to the SpinCo Employment Date, and an updated version thereof will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time after the Distribution Date.

Non-U.S. Transferred Employee ” means each Non-U.S. Employee who accepts an offer of employment from, or otherwise by the operation of applicable local law becomes an employee of, SpinCo, Mobility, or one of their Affiliates, as contemplated by Article 3. Each such person will be separately identified as such on each version of Schedule 1(a) following the applicable SpinCo Employment Date.

Other Non-U.S. SpinCo Employee ” means each employee of SpinCo, Mobility, or one of their Affiliates on a non-U.S. payroll as of the Distribution Date other than a Non-U.S. Transferred Employee.

Other U.S. SpinCo Employee ” means each employee of SpinCo, Mobility, or one of their Affiliates on a U.S. payroll as of the Distribution Date other than a U.S. Transferred Employee.

Post-Distribution Trading Date ” means the date on which Spinco Common Stock begins to trade “regular way” on the New York Stock Exchange.

Record Date ” means the close of business on the date to be determined by Motorola’s board of directors as the record date for determining the stockholders of Motorola entitled to receive shares of SpinCo Common Stock pursuant to the Distribution.

Reverse Transfer ” has the meaning set forth in Section 2.8 of the Separation Agreement. As described therein, a Reverse Transfer occurs when a Reverse Transferor transfers the local Motorola Business to a Reverse Transferee so that the shares of the Reverse Transferor can be included in the Transferred Assets and the Reverse Transferor can become part of the SpinCo Group.

Reverse Transferee ” has the meaning set forth in Section 2.8 of the Separation Agreement. As described therein, a Reverse Transferee is a Motorola Subsidiary that receives the local Motorola Business from a Reverse Transferor in a country in which a Reverse Transfer takes place. Reverse Transferees will remain members of the Motorola Group following the Distribution Date.

Reverse Transfer Employee ” means each employee of a Reverse Transferor on a non-U.S. payroll immediately prior to the date of a Reverse Transfer who works in or is assigned to the Motorola Business and is listed on Schedule 1(c), as such Schedule 1(c) will be amended between the date of the Reverse Transfer and the Distribution Date to reflect changes which the parties agree have occurred in the ordinary course of business. Schedule 1(c) will be completed by Motorola in cooperation with SpinCo and Mobility; an initial version will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time prior to the date of the Reverse Transfer, and an updated version thereof will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time after the Distribution Date.

 

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Reverse Transfer Hired Employee ” means each Reverse Transfer Employee who accepts an offer of employment from, or otherwise by the operation of applicable local law becomes an employee of, a Reverse Transferee, as contemplated by Section 3.5. Each such person will be separately identified as such on each version of Schedule 1(c) following the date of the applicable Reverse Transfer.

Reverse Transferor ” has the meaning set forth in Section 2.8 of the Separation Agreement. As described therein, a Reverse Transferor is an existing Motorola Subsidiary that transfers the local Motorola Business to a Reverse Transferee in a country in which a Reverse Transfer takes place. Reverse Transferors will become members of the SpinCo Group after giving effect to the Contribution.

SpinCo Adjustment Factor ” means the ratio of (i) the “regular way” closing price per share of Motorola Common Stock on the New York Stock Exchange on the trading date immediately prior to the Post-Distribution Trading Date, divided by (ii) the volume weighted average price per share of SpinCo Common Stock trades on the New York Stock Exchange between 8:30 Central Standard Time and 15:00 Central Standard Time on the Post-Distribution Trading Date, as published by Bloomberg at or about 15:30 Central Standard Time on the Post-Distribution Trading Date. The SpinCo Adjustment Factor will be carried out to six decimal places.

SpinCo COBRA Qualified Beneficiaries ” means former U.S. Employees who are actively employed on the SpinCo Employment Date, but terminate employment prior to the Distribution Date and who timely elect continuation coverage under an applicable Motorola Employee Benefit Plan. Each such person will be separately identified as such on Schedule 1(d). Schedule 1(d) will be completed by Motorola in cooperation with SpinCo and Mobility within a reasonable period of time after the Distribution Date.

SpinCo Common Stock ” means the common stock, par value $0.01 per share, of SpinCo.

SpinCo Employment Date ” means (i) with respect to any country and any Transferred Employee, the date that SpinCo, Mobility, or one of their Affiliates will become the employer of the Transferred Employees in that country pursuant to Articles 2 or 3 below, as applicable, or (ii) with respect to any Other U.S. SpinCo Employee or Other Non-U.S. SpinCo Employee, the date that SpinCo, Mobility, or one of their Affiliates becomes the employer of the Other U.S. SpinCo Employee or Other Non-U.S. SpinCo Employee. The SpinCo Employment Date of all Transferred Employees not on a payroll in the Delayed Transfer Countries will be July 31, 2010, and the SpinCo Employment Date of all Transferred Employees on a payroll in the Delayed Transfer Countries will be a date to be mutually determined by the parties, but not later than the Distribution Date.

SpinCo Group ” means SpinCo, Mobility, each Subsidiary of Mobility as of the Effective Date, each Person that becomes a Subsidiary of Mobility pursuant to the Mobility Contribution, and each other Person that becomes an Affiliate of SpinCo and Mobility after the Effective Date.

SpinCo Non-U.S. Plans ” means SpinCo’s, Mobility’s, or one of their Affiliates’ Employee Benefit Plans under which any of the Non-U.S. Transferred Employees will be eligible to participate as of the SpinCo Employment Date or a later date.

SpinCo Shared Employee Contract ” means any agreements entered into by (i) Motorola with current or former employees of Motorola or subsidiaries of Motorola or (ii) SpinCo or Mobility with any Transferred Employee as a replacement or conversion of the agreements described in clause (i) of this definition, in each case, that relate to the protection of trade secrets, intellectual property, confidential information, customer relationships and goodwill of the Motorola Business, including, but not limited to, any Confidentiality and Assignment of Inventions Agreement, Stock Option Consideration Agreement, or Restricted Stock Unit Agreement and any such agreements that limit or restrict the activities of employees during or following termination of employment.

 

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SpinCo U.S. Plans ” means SpinCo’s, Mobility’s, or one of their Affiliates’ Employee Benefit Plans under which any of the U.S. Transferred Employees will be eligible to participate as of January 1, 2011, or as of the Distribution Date, as specified herein.

Transferred Businesses ” means the MD Business and the Home Business, as those terms are defined in the Separation Agreement.

Transferred Contractor ” means each Contractor who works in or is assigned to the Transferred Businesses as of the SpinCo Employment Date in each country where the Contractor is engaged.

Transferred Employee ” means any U.S. Transferred Employee and any Non-U.S. Transferred Employee.

U.S. Employee ” means each employee of Motorola or any Affiliate of Motorola on a U.S. payroll immediately prior to the SpinCo Employment Date who works in or is assigned to the Transferred Businesses and is listed on Schedule 1(b), as such Schedule 1(b) will be amended between the SpinCo Employment Date and the Distribution Date to reflect changes which the parties agree have occurred in the ordinary course of business. Schedule 1(b) will be completed by Motorola in cooperation with SpinCo and Mobility; an initial version will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time prior to the SpinCo Employment Date; and an updated version thereof will be agreed between Motorola, SpinCo, and Mobility within a reasonable period of time after the Distribution Date.

U.S. Transferred Employee ” means each U.S. Employee transferred to employment with SpinCo, Mobility, or one of their Affiliates as provided in Article 2. Each such person will be separately identified as such on each version of Schedule 1(b) following the applicable SpinCo Employment Date.

ARTICLE 2

U.S. TRANSFERRED EMPLOYEE MATTERS

2.1 U.S. Transferred Employees .

(a) Effective as of the SpinCo Employment Date, SpinCo or Mobility, as the case may be, will become the employer of each U.S. Employee who is transferred on the SpinCo Employment Date and elects to continue in his or her employment thereafter.

(b) If any Eligible Inactive Employee on the U.S. payroll becomes eligible to return to active work status after the SpinCo Employment Date and at a time when he or she would be entitled to reemployment under either applicable law or Motorola’s policies and procedures in existence immediately prior to the SpinCo Employment Date, SpinCo or Mobility, as the case may be, will extend an offer of employment to such person within five Business Days after SpinCo’s first being notified in writing by the Eligible Inactive Employee, or Motorola on his/her behalf, of such person’s becoming eligible to work, and any such person who accepts such an offer will be treated as a U.S. Transferred Employee as of his or her date of hire with SpinCo or Mobility, as the case may be, (which date of hire will be specified in the written offer from SpinCo or Mobility, as the case may be, to the Eligible Inactive Employee and will be substituted for the “SpinCo Employment Date” as to that U.S. Transferred Employee for all purposes of this Agreement). SpinCo or Mobility, as the case may be, agrees that its offer of employment will meet whatever requirements may exist for reinstating the Eligible Inactive Employee under applicable law or Motorola’s policies and procedures in existence immediately prior to the SpinCo Employment Date.

 

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(c) If any U.S. Transferred Employee is hired by any Affiliate of SpinCo or Mobility, then that Affiliate will be bound by (and SpinCo or Mobility, as the case may be, will cause that Affiliate to honor) all of the provisions of this Agreement that would have applied to SpinCo or Mobility, as the case may be, with respect to that U.S. Transferred Employee, for such period as SpinCo or Mobility, as the case may be, would have been bound by such provisions.

2.2 Compensation . SpinCo or Mobility, as the case may be, will compensate each U.S. Transferred Employee at the time of the SpinCo Employment Date:

(a) at a base wage or base salary rate and any applicable variable pay rate (e.g., shift differential pay) which will not be less than that provided to the U.S. Transferred Employee by Motorola immediately prior to the SpinCo Employment Date; provided , however , that the foregoing provisions of this Section 2.2(a) will not preclude SpinCo or Mobility, as the case may be, from making individual wage and salary adjustments in the ordinary course of business, including, but not limited to, aligning pay to job responsibilities; and

(b) with target incentive pay or other additional compensation opportunities substantially comparable in the aggregate to the target incentive pay or other compensation opportunities for which the U.S. Transferred Employee was eligible immediately prior to the SpinCo Employment Date.

2.3 Severance . Effective on the Distribution Date, SpinCo or Mobility, as the case may be, will create a severance program (the “ SpinCo Severance Plan ”) which provides severance allowances and benefits which are no less favorable than the severance allowance and benefits that would have been provided with respect to any U.S. Transferred Employee who would have been severed under the Motorola, Inc. Involuntary Severance Plan as in effect on the date hereof (the “ Motorola Severance Plan ”). The SpinCo Severance Plan will credit all U.S. Transferred Employees with their service with Motorola and its Affiliates prior to the SpinCo Employment Date in accordance with Section 2.5.

2.4 Paid Time Off . During the period from the SpinCo Employment Date through 11:59 p.m. on the day preceding the Distribution Date, SpinCo or Mobility, as the case may be, will adopt and adhere to the Paid Time Off policy of Motorola as in effect on the date hereof for the benefit of all U.S. Transferred Employees and Other U.S. SpinCo Employees, and will be responsible for paying or providing all accrued leave thereunder with respect to such U.S. Transferred Employees and Other U.S. SpinCo Employees. On and after the Distribution Date, U.S. Transferred Employees’ and Other U.S. SpinCo Employees’ entitlement to Paid Time Off or vacation time will be accrued and used only in accordance with SpinCo’s or Mobility’s, as the case may be, own Paid Time Off or vacation policy.

2.5 Service Credit . SpinCo or Mobility, as the case may be, will provide each U.S. Transferred Employee or Other U.S. SpinCo Employee with full credit for all purposes under the SpinCo U.S. Plans (including, without limitation, any SpinCo paid time off and severance plans or policies), for pre-Distribution Date (i) service with Motorola and its Affiliates and Controlled Group Members (including SpinCo), and (ii) service credited under the comparable Motorola U.S. Plans for employment other than with Motorola and its Affiliates and Controlled Group Members; provided , however , that in no event will SpinCo be required to provide any service credit to any U.S. Transferred Employee or Other U.S. SpinCo Employee to the extent SpinCo determines in its discretion that the provision of such credit would result in any duplication of benefits or unusual or unintended increase in benefits.

 

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2.6 401(k) Plan .

(a) Effective for the period commencing on the SpinCo Employment Date and continuing through December 31, 2010, SpinCo and/or Mobility will adopt the Motorola 401(k) Plan (the “ Motorola 401(k) Plan ”) for the benefit of SpinCo’s and/or Mobility’s eligible employees, and Motorola will consent to such adoption, in accordance with the terms of the Motorola 401(k) Plan. Effective 11:59 p.m. on December 31, 2010, the U.S. Transferred Employees and Other U.S. SpinCo Employees will cease to participate in the Motorola 401(k) Plan. Effective January 1, 2011, the U.S. Transferred Employees and Other U.S. SpinCo Employees will be eligible to commence participation in the 401(k) plan established by SpinCo (the “ SpinCo 401(k) Plan ”) that will be comparable to the Motorola 401(k) Plan. The SpinCo 401(k) Plan will credit all U.S. Transferred Employees and Other U.S. SpinCo Employees with their service with Motorola, SpinCo, Mobility and their Affiliates prior to the SpinCo Employment Date in accordance with Section 2.5.

(b) As soon as is reasonably practicable following January 1, 2011, Motorola and SpinCo and/or Mobility, as the case may be, will cause a trust-to-trust transfer of account balances related to the U.S. Transferred Employees and any Other U.S. SpinCo Employees (including any outstanding loans) from the Motorola 401(k) Plan to the SpinCo 401(k) Plan, in accordance with Section 411(d)(6) and 414(1) of the Code and the terms of a 401(k) transfer agreement, which will be executed by the parties prior to such transfer. SpinCo employees who hold shares of Motorola Common Stock in their 401(k) Plan account as of the record date for the Distribution will have their account credited with shares of SpinCo Common Stock resulting from the Distribution. On the Distribution Date, shares of SpinCo Common Stock based on the distribution ratio for every share of Motorola Common Stock held in such employee’s Motorola 401(k) Plan stock fund account, will be credited to an account for the SpinCo employee under the SpinCo 401(k) Plan. If such shares of SpinCo common stock are not actually delivered to the SpinCo 401(k) Plan on the Distribution Date, they will be delivered as soon as practicable thereafter. The SpinCo employees will be obligated to sell the shares of Motorola Common Stock and SpinCo Common Stock credited to their SpinCo 401(k) Plan accounts in the Distribution by no later than December 31, 2011, subject to the provisions of the SpinCo 401(k) Plan and applicable law. No additional shares of SpinCo and/or Motorola Common Stock may be acquired and held in the SpinCo 401(k) Plan by the SpinCo employees.

2.7 Motorola Pension Plan .

(a) Immediately prior to the Distribution Date, each U.S. Transferred Employee and Other U.S. SpinCo Employee who is a participant in the Motorola Pension Plan will cease to actively participate in the Motorola Pension Plan. As of the Distribution Date, each such U.S. Transferred Employee and Other U.S. SpinCo Employee will be treated as a terminated vested participant under the Motorola Pension Plan.

(b) As soon as practicable after the Distribution Date, Motorola will cause the Motorola Pension Plan to (i) inform the U.S. Transferred Employees and Other U.S. SpinCo Employees who are participants in such plan of their rights thereunder; and (ii) permit any U.S. Transferred Employees and Other U.S. SpinCo Employees who are eligible to receive their vested accrued benefit under the Motorola Pension Plan to elect to take a distribution in accordance with the terms of the Motorola Pension Plan. Following this, SpinCo or Mobility, as the case may be, will direct the plan administrator of the SpinCo 401(k) Plan to take any and all necessary action to permit the U.S. Transferred Employees and Other U.S. SpinCo Employees described in clause (ii) above, if requested by them, to roll over directly their distributions from the Motorola Pension Plan to the SpinCo 401(k) Plan, so long as such rollover is in accordance with the rollover provisions of the SpinCo 401(k) Plan.

 

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2.8 Medical and Dental Plans . Effective for the period commencing on the SpinCo Employment Date and ending on December 31, 2010, SpinCo and Mobility will be added as participating employers to the Motorola Employee Medical Benefits Plan (the “ Motorola Medical Plan ”) and the Motorola Employee Dental Benefits Plan (the “ Motorola Dental Plan ”) for the benefit of the eligible U.S. Transferred Employees and Other U.S. SpinCo Employees and SpinCo COBRA Qualified Beneficiaries, and Motorola will consent thereto, all in accordance with the terms of those plans. Effective 11:59 p.m. on December 31, 2010, the U.S. Transferred Employees and the Other U.S. SpinCo Employees, and SpinCo COBRA Qualified Beneficiaries will cease to participate in the Motorola Medical Plan and Motorola Dental Plan. Commencing on January 1, 2011, SpinCo and/or Mobility, as the case may be, will provide each eligible U.S. Transferred Employee and Other U.S. SpinCo Employee and SpinCo COBRA Qualified Beneficiaries with the medical and dental coverage, under one or more medical plan(s) and dental plan(s) maintained by SpinCo or Mobility, as the case may be, covering eligible U.S. Transferred Employees and Other U.S. SpinCo Employees and SpinCo COBRA Qualified Beneficiaries (the “ SpinCo Medical Plan(s) ” and “ SpinCo Dental Plan(s) ,” respectively), comparable to the coverage that will be provided under the Motorola Medical Plan and the Motorola Dental Plan to Motorola employees as of December 31, 2010; provided however, such coverage will comply with the Patient Protection and Affordable Care Act.

2.9 Retiree Medical Coverage . Effective for the period commencing on the SpinCo Employment Date and ending on the day preceding the Distribution Date, SpinCo and/or Mobility, as the case may be, will adopt as a participating employer the Motorola Post-Employment Health Benefits Plan (the “ Retiree Health Plan ”) for the period commencing as of the SpinCo Employment Date through the day preceding the Distribution Date for the benefit of the eligible U.S. Transferred Employees, Other U.S. SpinCo Employees, and SpinCo COBRA Qualified Beneficiaries, and Motorola will consent thereto, all in accordance with the terms of those plans. As of the Distribution Date, SpinCo or Mobility, as the case may be, will no longer be a participating employer in the Retiree Health Plan and any Transferred Employee who meets the eligibility requirements of the Retiree Health Plan as of 11:59 p.m. on the day preceding the Distribution Date will be eligible for coverage at a future date pursuant to the terms of the Retiree Health Plan. If such Transferred Employee is not eligible as of 11:59 p.m. on the day preceding the Distribution Date, the Transferred Employee will not be eligible for Retiree Health Plan benefits pursuant to the terms of the Retiree Health Plan. Notwithstanding any other provision of this Agreement, Motorola expressly reserves the right to amend, alter, modify the terms of, or terminate the Retiree Health Plan at any time and to interpret the provisions of that plan with respect to all of its current or former employees.

2.10 Flexible Spending Accounts . Effective for the period commencing on the SpinCo Employment Date and ending on December 31, 2010, SpinCo and/or Mobility, as the case may be, will be added as a participating employer, to the Motorola Pre-Tax Contributions and Healthcare Flexible Benefits Plan and the Motorola Dependent Care Plan, (the “ Motorola FSA Plan ” and “ Motorola DCA Plan ,” respectively), both designed to comply with Section 125 of the Code, for the benefit of its eligible employees, and Motorola will consent thereto, in accordance with the respective terms of such plans. Effective 11:59 p.m. on December 31, 2010, the U.S. Transferred Employees, Other U.S. SpinCo Employees, and SpinCo COBRA Qualified Beneficiaries under the FSA and/or DCA Plans will cease to contribute to the Motorola FSA and/or DCA Plans, in accordance with the respective terms of such plans. Commencing on January 1, 2011, SpinCo and/or Mobility, as the case may be, will provide each eligible U.S. Transferred Employee, Other U.S. SpinCo Employee, and SpinCo COBRA Qualified Beneficiaries with flexible spending accounts under the flexible spending plans maintained by SpinCo or Mobility, as the case may be, covering eligible U.S. Transferred Employees and Other U.S. SpinCo Employees and SpinCo COBRA Qualified Beneficiaries (the “ SpinCo FSA Plan ” and “ SpinCo DCA Plan ”, respectively) comparable to the coverage that had been provided to Motorola employees under the Motorola FSA Plan and the Motorola DCA Plan as of December 31, 2010; provided however, such coverage will comply with the Patient Protection and Affordable Care Act.

 

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2.11 Life Insurance, Adoption and Other Welfare Benefits . Effective for the period commencing on the SpinCo Employment Date and ending on December 31, 2010, SpinCo and/or Mobility, as the case may be, will be added, as a participating employer, to the following Motorola welfare plans: Motorola Adoption Assistance Program, the Motorola Group Life and Business Travel Accident Insurance Benefit Plan, and the Motorola, Inc. New Jersey Short Term Disability Benefit Plan, (the “ Motorola Other Welfare Plans ”) for the benefit of its eligible employees, and Motorola will consent thereto, all in accordance with the terms of those plans. Effective as of 11:59 p.m. on December 31, 2010, the U.S. Transferred Employees and the Other U.S. SpinCo Employees will cease to participate in these Motorola Other Welfare Plans. Commencing on January 1, 2011, SpinCo or Mobility, as the case may be, will provide each eligible U.S. Transferred Employee and Other U.S. SpinCo Employee with coverage, under one or more welfare plan(s) maintained by SpinCo or Mobility, as the case may be, covering eligible U.S. Transferred Employees and Other U.S. SpinCo Employees (the “ SpinCo Other Welfare Plans”) and comparable to the coverage that will be provided to Motorola employees under the Motorola Other Welfare Plans as of December 31, 2010; provided however, that benefit levels may vary under the SpinCo Adoption Assistance Program.

2.12 Disability Benefits . Effective for the period commencing on the SpinCo Employment Date and ending on December 31, 2010, SpinCo and/or Mobility, as the case may be, will be added, as a participating employer, to the Motorola Disability Income Plan (the “ Motorola Disability Plan ”). Effective as of 11:59 p.m. December 31, 2010, all U.S. Transferred Employees and Other U.S. SpinCo Employees who participate in the Motorola Disability Plan will cease to participate in that plan. Commencing on January 1, 2011, SpinCo or Mobility, as the case may be, will provide each eligible U.S. Transferred Employee and Other U.S. SpinCo Employee with the disability income plan maintained by SpinCo or Mobility, as the case may be, covering eligible U.S. Transferred Employees and Other U.S. SpinCo Employees (the “ SpinCo Disability Plan) ” comparable to the coverage that had been provided to the U.S. Transferred Employee or Other U.S. SpinCo Employee as of December 31, 2010. Immediate prior coverage under the Motorola Disability Income Plan will be used to establish the SpinCo Employment Date for SpinCo’s long-term and short-term disability plan for purposes of satisfying any eligibility, waiting, and pre-existing condition periods under the SpinCo Disability Plan. Notwithstanding the above, any U.S. Transferred Employee and any Other U.S. SpinCo Employee who began to receive long-term disability benefits July 1, 2010 or later are covered under a separate long term disability policy entered into between SpinCo and the carrier and will be covered under the SpinCo long term disability plan as of January 1, 2011. Any U.S. Transferred Employee and any Other U.S. SpinCo Employee who is receiving short term disability benefits as of December 31, 2010, will be covered under the SpinCo short term disability plan as of January 1, 2011.

2.13 Nonqualified Retirement Plans .

(a) Any U.S. Transferred Employee who was a participant in the Motorola Supplemental Pension Plan (the “ MSPP ”) will continue to remain a participant until 11:59 p.m. on the day preceding the Distribution Date. On or after the Distribution Date, such U.S. Transferred Employees will be eligible to receive a distribution of any benefits to which they are entitled under the MSPP but such distributions will be made at the time and in the manner provided for under the MSPP.

(b) Any U.S. Transferred Employee who was a participant in the Motorola Management Deferred Compensation Plan (the “ Motorola DCP ”) will continue to remain a participant until 11:59 p.m. on the day preceding the Distribution Date. On or after the Distribution Date, such U.S. Transferred Employees will receive a distribution of any benefits to which they are entitled under the Motorola DCP but such distributions will be made at the time and in the manner provided for under the Motorola DCP and pursuant to their individual elections.

 

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2.14 Certain Foreign National Employees . The parties recognize that certain of the U.S. Transferred Employees and possibly Other U.S. SpinCo Employees are in nonimmigrant visa status or have applications for lawful permanent residence pending with the relevant governmental authorities (the “ Affected Foreign National Employees ”). The parties further recognize that new or amended petitions with respect to such Affected Foreign National Employees may be required in certain of these cases, unless SpinCo or Mobility, as the case may be, is deemed the “successor-in-interest” to Motorola (as such term is used in pronouncements by the U.S. Citizenship and Immigration Service (“ USCIS ”)) with respect to such Affected Foreign National Employees. Accordingly, SpinCo or Mobility, as the case may be, hereby expressly agrees to assume, and Motorola hereby assigns, in each case effective as of the SpinCo Employment Date, all of the immigration related liabilities of the Affected Foreign National Employees (including, without limitation, any obligations, liabilities and undertakings arising from or under attestations made in each certified and still effective Labor Condition Application filed by Motorola with respect to any such Affected Foreign National Employees). The parties each agree to take such actions as may reasonably be requested at and following the SpinCo Employment Date to document to the USCIS or such other governmental agency, as the case may be, the “successor-in-interest” relationship with respect to any Affected Foreign National Employees.

2.15 Payroll and Related Taxes . The parties agree that (i) Motorola will furnish a Form W-2 to all U.S. Employees for the period prior to the SpinCo Employment Date in the United States, and (ii) SpinCo or Mobility, as the case may be, will furnish a Form W-2 to all U.S. Transferred Employees for the period following the SpinCo Employment Date to the end of the same calendar year.

2.16 Workers’ Compensation . The U.S. Transferred Employees and Other U.S. SpinCo Employees will be covered under Motorola’s workers’ compensation insurance until 11:59 p.m. on the day preceding the Distribution Date. On and after the Distribution Date, the U.S. Transferred Employees and Other U.S. SpinCo Employees will be covered under the workers’ compensation insurance of SpinCo or Mobility, as the case may be.

2.17 Reimbursement for Expense of Coverage . To the extent any U.S. Transferred Employees or Other U.S. SpinCo Employees continue to participate in any Employee Benefit Plans maintained by Motorola or any of its Affiliates during the period from the SpinCo Employment Date to the Distribution Date, SpinCo, Mobility, and their applicable Affiliates will indemnify Motorola and its Affiliates and reimburse them for any and all expenses incurred under said plans in respect of such continuation of coverage. For purposes of the preceding sentence, “expenses” shall be deemed to refer to the cost of any claims as well as any amounts paid by Motorola and its Affiliates to third parties in connection with such coverage.

ARTICLE 3

NON-U.S. TRANSFERRED EMPLOYEE MATTERS

3.1 Non-U.S. Transferred Employees .

(a) Subject to Section 3.5 herein, effective as of the SpinCo Employment Date, SpinCo or Mobility, as the case may be, agrees to employ, or cause one of their applicable Affiliates to employ, the Non-U.S. Employees who accept offers of employment from the applicable Affiliate of SpinCo or Mobility, as the case may be, or who otherwise become employees of the applicable Affiliate of SpinCo or Mobility, as the case may be, by operation of law (other than any Eligible Inactive Employee). Where a transfer of employment is necessary, such transfer will be carried out in compliance

 

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with applicable transfer laws and regulations, including, without limitation, the European Union Acquired Rights Directive (as amended and as implemented from country to country from time to time) or any such similar transfer law or regulation in other countries that provides for the transfer of employment by operation of law (such transfer laws and regulations collectively, the “ Transfer Laws ”). Where a transfer of employment is necessary and the Transfer Laws are not applicable, SpinCo or Mobility, as the case may be, agrees that the employment of each Non-U.S. Employee will be transferred to SpinCo, Mobility, or one of their Affiliates by substitution of employer, three-party contract, assignment, subjective novation, or as may otherwise reasonably be required or permitted to obtain the consent of the Non-U.S. Employee to the transfer and to the extent possible without triggering the obligation to pay severance or other termination liabilities. The parties agree to fully and timely cooperate in the transition activities and also to comply (and cause their applicable Affiliates to comply) with the Transfer Laws.

(b) In the event that, within thirty days after the SpinCo Employment Date, a Non-U.S. Employee is found not to have transferred to SpinCo, Mobility, or their applicable Affiliate (when such transfer was contemplated by the Separation Agreement or this Agreement), then SpinCo or Mobility, as the case may be, in consultation with Motorola will as soon as practicable, but in any event within ten days that are business days in the relevant jurisdiction of being so requested by Motorola, make or cause an Affiliate to make to each such Non-U.S. Employee an offer in writing meeting the requirements of Section 3.1(a) to employ him or her under a new contract of employment to take effect immediately. As of acceptance of the offer made pursuant to this Section 3.1(b), the employment of the Non-U.S. Employee will terminate with Motorola or its applicable Affiliate.

(c) If within thirty days after the SpinCo Employment Date, any employee of Motorola or any Motorola Affiliate (other than a Non-U.S. Employee) is found to have transferred to SpinCo, Mobility, or one of their Affiliates (when such transfer was not contemplated by the Separation Agreement or this Agreement), (i) Motorola in consultation with SpinCo will as soon as practicable, but in any event within ten days that are business days in the relevant jurisdiction of being so requested by SpinCo, make or cause one of its Affiliates to make to each such person an offer in writing to employ him or her under a new contract of employment to take effect immediately and (ii) Motorola’s offer will be for terms and conditions of employment that are substantially comparable to the corresponding provisions of the employee’s contract of employment as existing immediately prior to the SpinCo Employment Date. As of acceptance of the offer made pursuant to this Section 3.1(c), the employment of the employee will terminate with SpinCo, Mobility, or one of their Affiliates, as applicable.

(d) If any Eligible Inactive Employee on a non-U.S. payroll becomes eligible to return to active work status after the SpinCo Employment Date and at a time when he or she would be entitled to reemployment under either applicable law or Motorola’s policies and procedures in existence immediately prior to the SpinCo Employment Date, SpinCo, Mobility, or one of their Affiliates will immediately take such steps as may be necessary to employ the Eligible Inactive Employee. Such employment will satisfy the requirements of applicable law and Motorola’s policies and procedures in existence immediately prior to the SpinCo Employment Date. In addition, the termination of the Eligible Inactive Employee from Motorola or its Affiliate and the employment of such Eligible Inactive Employee by SpinCo, Mobility, or one of their Affiliates will if possible be conducted in such a manner as to avoid triggering the obligation to pay the Eligible Inactive Employee severance or other termination liabilities. Any Eligible Inactive Employee who becomes employed by SpinCo, Mobility, or one of their Affiliates pursuant to this Section 3.1(d) will be treated as a Non-U.S. Transferred Employee as of his or her date of hire with SpinCo, Mobility, or one of their Affiliates (which date of hire will be substituted for the “SpinCo Employment Date” as to that Non-U.S. Transferred Employee for all purposes of this Agreement).

 

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3.2 Non-U.S. Employee Benefits .

(a) SpinCo or Mobility, as the case may be, will cause its Affiliates to establish or maintain the SpinCo Non-U.S. Plans and such other employee benefit plans outside of the United States as may be required by applicable law and Section 3.1(a). To the extent any Non-U.S. Transferred Employees or Other Non-U.S. SpinCo Employees continue to participate in any Employee Benefit Plans maintained by Motorola or any of its Affiliates during the period from the SpinCo Employment Date to the Distribution Date, SpinCo, Mobility, and their applicable Affiliates will indemnify Motorola and its Affiliates and reimburse them for any and all expenses incurred under said plans in respect of such continuation of coverage. For purposes of the preceding sentence, “expenses” shall be deemed to refer to the cost of any claims as well as any amounts paid by Motorola and its Affiliates to third parties in connection with such coverage.

(b) As of 11:59 p.m. on the day preceding the Distribution Date (or such later date as provided in Schedule 3.2 or in subsequent written agreements between the parties for the adoption of the SpinCo Non-U.S. Plan of the same type), Motorola and/or its Affiliates will cease all responsibility or liability with respect to coverage for any Non-U.S. Transferred Employee and any Other Non-U.S. SpinCo Employee under any Employee Benefit Plans maintained by Motorola or any of its Affiliates. To the extent such coverages are permitted to cease under applicable law and are not continued by Motorola or its Affiliates in accordance with the immediately following sentence, the coverages will so cease immediately prior to the Distribution Date. To the extent (i) such coverages are required to continue on or beyond said applicable date under applicable law or (ii) Motorola and SpinCo or Mobility, as the case may be, agree in writing that any such coverages will continue after said applicable date for other purposes not inconsistent with applicable law, Motorola and/or its Affiliates will continue to provide coverage for any Non-U.S. Transferred Employee and any Other Non-U.S. SpinCo Employee under any benefit plans, programs or policies maintained by Motorola or any of its Affiliates on and after the aforesaid date to the extent so required or agreed, and SpinCo, Mobility, and their Affiliates will indemnify Motorola and its Affiliates and reimburse them for any and all expenses (as defined in Section 3.2(a) above) incurred under said plans in respect of such continuation of coverage on and after the aforesaid date. Reimbursement under this Section 3.2(b) will be made within 30 days after SpinCo, Mobility, or their applicable Affiliate receives from Motorola or its applicable Affiliate an itemized statement setting forth the types and amounts of said expenses. Schedule 3.2 sets forth the Motorola Non-U.S. Plans in which Non-U.S. Transferred Employees and any Other Non-U.S. SpinCo Employees will continue to participate on and after the Distribution Date or such other applicable date, as well as the anticipated date on which their participation in such plans will cease.

(c) During the period from the SpinCo Employment Date through 11:59 p.m. on the day preceding the Distribution Date, SpinCo and Mobility will assume and fulfill, and will cause their Affiliates to assume and fulfill, in a timely manner, all of the accrued obligations and liabilities relating to the vacation, annual leave, and holiday policies (collectively, “ Paid Leave Days ”) of Motorola and its Affiliates immediately prior to the SpinCo Employment Date with regard to Non-U.S. Transferred Employees and any Other Non-U.S. SpinCo Employees, including allowing Non-U.S. Transferred Employees and Other Non-U.S. SpinCo Employees to use and be paid for their accrued but unused Paid Leave Days. On and after the Distribution Date and subject to Section 3.3 below and the requirements of applicable law, Non-U.S. Transferred Employees and Other Non-U.S. SpinCo Employees will be entitled to accrue and use Paid Leave Days only in accordance with the policies and procedures of SpinCo, Mobility, or their Affiliates applicable to similarly situated employees.

3.3 Service Credit . Without limiting anything in Section 3.1 above and consistent therewith, SpinCo, Mobility, and their Affiliates will provide each Non-U.S. Transferred Employee with full credit for service recognized by Motorola and its Affiliates for all purposes (but not for any defined benefit

 

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pension plan or retiree medical plan purpose unless either a plan-to-plan transfer of assets and liabilities has occurred or applicable law requires the recognition of such service); provided , however , that in no event will SpinCo, Mobility, or any of their Affiliates be required to provide any service credit to any Non-U.S. Transferred Employee to the extent SpinCo, Mobility, or their applicable Affiliate determines in its discretion the provision of such credit would result in any duplication of benefits or unusual or unintended increase in benefits. To the extent that a Non-U.S. Transferred Employee is paid severance as a result of his transfer of employment to SpinCo, Mobility, or one of their Affiliates, and to the extent permitted by applicable law, neither SpinCo, Mobility, nor their applicable Affiliate will provide that Non-U.S. Transferred Employee with full credit for service recognized by Motorola or Motorola’s Affiliate, for purposes of any future severance or severance-like payments.

3.4 Immigration and Visa Matters . Where legally permissible and unless the parties agree otherwise, SpinCo, Mobility, or one of their Affiliates will assume, in each case effective as of the SpinCo Employment Date, any work permits, visas or other immigration documents relating to any Non-U.S. Transferred Employee and following the Distribution Date will be solely responsible for the costs associated with the transfer of these documents, including, if necessary, the costs of third-party attorneys or consultants. Where permitted by law and/or applicable regulation, Motorola will assign to SpinCo, Mobility, or one of their Affiliates, and will cause its applicable Affiliate to assign to SpinCo, Mobility, or one of their Affiliates, in each case effective as of the SpinCo Employment Date, such work permits, visas or other immigration documents and all immigration-related Liabilities.

3.5 Reverse Transfers . In connection with any Reverse Transfer occurring pursuant to Section 2.8 of the Separation Agreement, the parties agree that Motorola will employ, or will cause the applicable Reverse Transferee to employ, as of the date of the Reverse Transfer, any Reverse Transfer Employees who accept offers of employment from or who otherwise by operation of law become employees of the Reverse Transferee. Such reverse transfers will be carried out in compliance with Sections 3.1, 3.2, 3.3, and 3.4 hereof, except that for the limited purposes of such reverse transfers, the references to Motorola and its Affiliates in those sections will be understood to refer to the applicable Reverse Transferor, the references to SpinCo, Mobility, and their Affiliates will be understood to refer to the applicable Reverse Transferee, the references to the SpinCo Employment Date will be understood to refer to the date of the applicable Reverse Transfer, the references to the Non-U.S. Employees will be understood to refer to the Reverse Transfer Employees, and the references to the Non-U.S. Transferred Employees will be understood to refer to the Reverse Transfer Hired Employees.

ARTICLE 4

EQUITY AWARDS AND INCENTIVE COMPENSATION

4.1 Motorola Stock Options and Stock Appreciation Rights .

(a) Motorola will take any and all action as is necessary or appropriate so that each option to purchase Motorola Common Stock and each Motorola stock appreciation right (each, a “ Motorola Stock Option ”) issued under the Motorola Equity Plans held at the close of business on the Distribution Date by current and former employees of Motorola and its Affiliates who will not be Transferred Employees will, pursuant to the terms of the Motorola Equity Plans, be equitably adjusted into an option to purchase Motorola Common Stock or a Motorola stock appreciation right, as applicable, on the same terms and conditions as were applicable under the corresponding Motorola Stock Option, the number of shares of Motorola Common Stock (rounded down to the nearest whole share) determined by multiplying (x) the number of shares of Motorola Common Stock subject to such Motorola Stock Option immediately prior to the Distribution Date for which such Motorola Stock Option has not theretofore been exercised by (y) the Motorola Adjustment Factor (each, as so adjusted, an “ Adjusted Motorola Stock Option ”). The exercise price per share of each Adjusted Motorola Stock Option will be equal to the per share exercise price for the shares of Motorola Common Stock pursuant to the corresponding Motorola Stock Option divided by the Motorola Adjustment Factor, and rounded up to the nearest whole cent.

 

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(b) Motorola and SpinCo will take any and all action as is necessary or appropriate so that each Motorola Stock Option held at the close of business on the Distribution Date by Transferred Employees will, pursuant to the terms of the Motorola Equity Plans and the equity plan or plans established by SpinCo (the “ SpinCo Equity Plan ”), be replaced with a substitute option to purchase SpinCo Common Stock or a substitute SpinCo stock appreciation right, on the same terms and conditions as were applicable under the corresponding Motorola Stock Option, with the number of shares of SpinCo Common Stock (rounded down to the nearest whole share) determined by multiplying (x) the number of shares of Motorola Common Stock subject to such Motorola Stock Option immediately prior to the Distribution Date for which such Motorola Stock Option has not theretofore have been exercised by (y) the SpinCo Adjustment Factor (each, as so substituted, a “ Substitute SpinCo Stock Option ”). The exercise price per share of each Substitute SpinCo Stock Option will be equal to the per share exercise price for the shares of Motorola Common Stock pursuant to the corresponding Motorola Stock Option divided by the SpinCo Adjustment Factor, and rounded up to the nearest whole cent.

(c) Each Adjusted Motorola Stock Option and each Substitute SpinCo Stock Option described in this Section 4.1 will, in each case, in the exclusive and sole discretion of the Compensation and Leadership Committee of the Motorola Board of Directors, preserve the intrinsic value and fair value of the corresponding Motorola Stock Option immediately prior to the Distribution Date.

(d) The adjustments provided in this Section 4.1 with respect to Motorola Stock Options, whether or not they are “incentive stock options” as defined in Section 422 of the Code, are intended to be effected in a manner that is consistent with Section 424(a) and Section 409A of the Code.

4.2 Motorola Stock Units without Dividend Equivalents .

(a) Motorola will take any and all action as is necessary or appropriate so that each unvested Motorola restricted stock unit without dividend equivalent rights (“ Motorola Stock Units ”) issued under the Motorola Equity Plans held at the close of business on the Distribution Date by current and former employees of Motorola and its Affiliates who will not be Transferred Employees will, pursuant to the terms of the Motorola Equity Plans, be equitably adjusted into a Motorola restricted stock unit, on the same terms and conditions as were applicable under the corresponding Motorola Stock Unit, with the number of shares of Motorola Common Stock (rounded down to the nearest whole share) determined by multiplying (x) the number of shares of Motorola Common Stock subject to such Motorola Stock Unit immediately prior to the Distribution Date by (y) the Motorola Adjustment Factor (as so adjusted, “ Adjusted Motorola Stock Units ”).

(b) Motorola and SpinCo will take any and all action as is necessary or appropriate so that each unvested Motorola Stock Unit held at the close of business on the Distribution Date by Transferred Employees will, pursuant to the terms of the Motorola Equity Plans and the SpinCo Equity Plan, be replaced with a substitute SpinCo restricted stock unit, on the same terms and conditions as were applicable under the corresponding Motorola Stock Unit, with the number of shares of SpinCo Common Stock (rounded down to the nearest whole share) determined by multiplying (x) the number of shares of Motorola Common Stock subject to such Motorola Stock Unit immediately prior to the Distribution Date by (y) the SpinCo Adjustment Factor (as so substituted, “ Substitute SpinCo Stock Units ”).

(c) Adjusted Motorola Stock Units and Substitute SpinCo Stock Units described in this Section 4.2 will, in each case, in the exclusive and sole discretion of the Compensation and Leadership Committee of the Motorola Board of Directors, preserve the intrinsic value and fair value of the corresponding Motorola Stock Units immediately prior to the Distribution Date.

 

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(d) The adjustments provided in this Section 4.2 with respect to Motorola Stock Units are intended to be effected in a manner that is consistent with Section 409A of the Code.

4.3 Motorola Stock Units with Dividend Equivalent Rights .

(a) Motorola and SpinCo will take any and all action as is necessary or appropriate so that each Motorola restricted stock unit with dividend equivalent rights (“ Motorola Restricted Stock Units ”) issued under the Motorola Equity Plans held at the close of business on the Distribution Date by Transferred Employees will, pursuant to the terms of the Motorola Equity Plans and the SpinCo Equity Plan, be replaced with substitute SpinCo restricted stock units with dividend equivalent rights, on the same terms and conditions as were applicable under the corresponding Motorola Restricted Stock Units with the number of shares of SpinCo Common Stock (rounded down to the nearest whole share) determined by multiplying (x) the number of shares of Motorola Common Stock subject to such Motorola Restricted Stock Units immediately prior to the Distribution Date by (y) the SpinCo Adjustment Factor (as so substituted, “ Substitute SpinCo Restricted Stock Units ”). Such substitution will be deemed to satisfy any obligation of Motorola or SpinCo to deliver shares of SpinCo Common Stock in the Distribution in connection with the dividend equivalent rights of Motorola Restricted Stock Units held by Transferred Employees.

(b) Motorola will take any and all action as is necessary or appropriate so that Motorola Restricted Stock Units issued under the Motorola Equity Plans and held at the close of business on the Distribution Date by current and former employees of Motorola and its Affiliates who will not be Transferred Employees will be credited with SpinCo restricted stock units (“ SpinCo Restricted Stock Unit Dividends ”) with the number of shares of SpinCo Common Stock (rounded down to the nearest whole share) subject to such SpinCo Restricted Stock Unit Dividends equal to (x) the number of shares of Motorola Common Stock subject to such Motorola Restricted Stock Units immediately prior to the Distribution Date multiplied by (y) the Distribution Ratio; provided , however , that, if deemed necessary or appropriate by the Compensation and Leadership Committee of the Motorola Board of Directors, Motorola may satisfy its obligation to deliver such SpinCo Restricted Stock Unit Dividends by equitably adjusting the Motorola Restricted Stock Units held by current and former employees of Motorola and its Affiliates who will not be Transferred Employees into Motorola restricted stock units with dividend equivalent rights, on the same terms and conditions as were applicable under the corresponding Motorola Restricted Stock Units, with the number of shares of Motorola Common Stock (rounded down to the nearest whole share) determined by multiplying (A) the number of shares of Motorola Common Stock subject to such Motorola Restricted Stock Units immediately prior to the Distribution Date by (B) the Motorola Adjustment Factor. The SpinCo Restricted Stock Unit Dividends described in this Section 4.3(b) will be subject to the same restrictions and other terms and conditions as the corresponding Motorola Restricted Stock Units.

(c) Except as set forth in Section 4.3(b), Motorola Restricted Stock Units issued under the Motorola Equity Plans held at the close of business on the Distribution Date by current and former employees of Motorola and its Affiliates who will not be Transferred Employees will remain outstanding, on the same terms and conditions, without adjustment of the number of shares of Motorola Common Stock subject to such Motorola Restricted Stock Units.

(d) Substitute SpinCo Restricted Stock Units described in this Section 4.3 will, in the exclusive and sole discretion of the Compensation and Leadership Committee of the Motorola Board of Directors, preserve the intrinsic value and fair value of the corresponding Motorola Restricted Stock Units immediately prior to the Distribution Date.

 

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(e) The adjustments provided in this Section 4.3 with respect to Motorola Restricted Stock Units are intended to be effected in a manner that is consistent with Section 409A of the Code.

4.4 Motorola Stock Purchase Plan .

(a) Motorola will take any and all action as is necessary or appropriate so that the closing price of shares of Motorola Common Stock at the beginning of the Motorola Employee Stock Purchase Plan of 1999 (the “ MOT Share Plan ”) offering period in effect on the Distribution Date will, pursuant to the terms of the MOT Share Plan, be equitably adjusted by dividing such closing price by the Motorola Adjustment Factor, and rounding up to the nearest whole cent.

(b) If the Distribution Date is within three months of the end of the MOT Share Plan offering period in effect on the Distribution Date, Motorola will take any and all action as is necessary or appropriate to allow amounts contributed by Transferred Employees to the MOT Share Plan prior to the Distribution Date to be used to purchase shares of Motorola Common Stock as of the end of the MOT Share Plan offering period in effect on the Distribution Date pursuant to the terms of the MOT Share Plan; provided , however , that in no event will Transferred Employees be permitted to contribute amounts to the MOT Share Plan on or after the Distribution Date.

(c) If the Distribution Date is not within three months of the end of the MOT Share Plan offering period in effect on the Distribution Date, Motorola will take any and all action as is necessary or appropriate to refund any amounts contributed by Transferred Employees to the MOT Share Plan prior to the Distribution Date, without interest, as soon as practicable after the Distribution Date.

(d) Motorola, SpinCo, members of the Motorola Group and of the SpinCo Group will cooperate to facilitate eligible Transferred Employees’ participation in and purchase of shares of Motorola Common Stock pursuant to the MOT Share Plan. Such cooperation will include coordination in order to (i) transmit amounts contributed by Transferred Employees for purposes of the MOT Share Plan to Motorola or its designate in order to effectuate Transferred Employees’ purchase of shares of Motorola Common Stock; (ii) ensure that any tax-related deductions (or withholdings) pursuant to applicable law are deducted (or withheld) from the relevant Transferred Employee’s compensation; and (iii) make internal and external reports relating to the MOT Share Plan in the same manner as was customary prior to the SpinCo Employment Date. It is agreed that nothing in this paragraph expands eligibility under the MOT Share Plan or creates a right to eligibility for or participation in the MOT Share Plan that did not otherwise exist.

4.5 Motorola Incentive Plan . Motorola and SpinCo will take any and all action as is necessary or appropriate so that awards earned under the 2009 Motorola Incentive Plan for the calendar-year performance period ending December 31, 2010 are paid to eligible employees in accordance with the terms of the 2009 Motorola Incentive Plan. Following the Distribution Date, each of Motorola and SpinCo or Mobility, as the case may be, are expected to implement their own annual incentive plans for calendar year 2011 in which their non-Transferred Employees and Transferred Employees, respectively, will participate.

 

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4.6 Motorola Long-Range Incentive Plan .

(a) Eligible employees of Motorola and its Affiliates, including Transferred Employees (collectively, “ Eligible Employees ”), will continue to participate through the Distribution Date in the Motorola Long-Range Incentive Plan of 2009 (the “ LRIP ”) for the performance cycles ending December 31, 2011 and December 31, 2012. Motorola and SpinCo will take any and all action as is necessary or appropriate so that each Eligible Employee, including each Eligible Employee that is a Transferred Employee, will be eligible to be paid (i) a portion of the award earned under the LRIP for the performance cycle ending December 31, 2011, if any, and (ii) a portion of the award earned under the LRIP for the performance cycle ending December 31, 2012, if any. Subject to Section 4.6(c), the portion of the award payable to each Eligible Employee for the performance cycle ending December 31, 2011 and the performance cycle ending December 31, 2012 will be determined by measuring performance through the Distribution Date and multiplying the corresponding award by a fraction, the numerator of which is the participant’s number of completed months of employment within the performance cycle and the denominator of which is 36; provided, however, that each participant’s completed months of employment will not include any month that is completed following the Distribution Date. Awards paid to each Eligible Employee who is a Transferred Employee pursuant to the LRIP will be the obligation of SpinCo or Mobility, as the case may be, and of Motorola for all other employees.

(b) Notwithstanding Section 4.6(a), Motorola and SpinCo will take any and all action as is necessary or appropriate so that LRIP awards for the performance cycles ending December 31, 2011 and December 31, 2012 paid to Eligible Employees who are Covered Employees (as defined in the Motorola Omnibus Incentive Plan of 2006) will be equal to the lesser of (x) awards determined in accordance with Section 4.6(a) and (y) awards determined by measuring performance through December 31, 2011 and December 31, 2012, as applicable, without pro ration in accordance with the terms of the LRIP.

(c) LRIP awards for the performance cycles ending December 31, 2011 and December 31, 2012 will remain subject to the other terms and conditions of the LRIP, including with respect to timing of payment, as specified in the LRIP.

4.7 Tax Withholding and Reporting Relating to Awards . Motorola, SpinCo, and Mobility agree that, unless prohibited by applicable law, (a) Motorola will be responsible for all tax withholding and reporting obligations that arise in connection with the grant, vesting, exercise, transfer or other settlement of the substitute and replacement awards held by current and former employees of Motorola and its Affiliates who will not be Transferred Employees, and (b) SpinCo or Mobility, as the case may be, will be responsible for all tax withholding and reporting obligations that arise in connection with the grant, vesting, exercise, transfer or other settlement of the substitute and replacement awards held by Transferred Employees. Motorola, SpinCo, and Mobility agree to enter into any necessary agreements regarding the subject matter of this Section 4.7 to enable Motorola, SpinCo, and Mobility to fulfill their respective obligations hereunder, including but not limited to compliance with all applicable laws and regulations regarding the reporting, withholding or remitting of income.

4.8 No Change of Control . The Distribution will not constitute a “change of control” for purposes of the Motorola Equity Plans and the Motorola equity awards that are outstanding as of the Distribution Date.

4.9 Establishment of SpinCo Equity Plan . Effective as of the Distribution Date, SpinCo will establish the SpinCo Equity Plan to provide for awards which may include the following: (i) stock options (both qualified and nonqualified), (ii) stock appreciation rights, (iii) restricted stock, (iv) restricted stock units, (v) deferred share units, (vi) phantom stock units, (vii) performance grants and (viii) bonus awards, including, without limitation, the awards provided for herein.

 

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ARTICLE 5

OTHER EMPLOYMENT MATTERS

5.1 Notification of Organizing Activity . Each party agrees to provide the other, to the extent permitted by applicable law, with prompt notice of and information about any effort by any union to organize any of its employees at any facility or property shared by SpinCo, Mobility, or one of their Affiliates with Motorola. Such obligation will cease on the date SpinCo, Mobility, or their Affiliate and Motorola no longer share the facility or property.

5.2 Contractors . As of the SpinCo Employment Date, in each country and where legally permissible, Motorola or its applicable Affiliate will assign to SpinCo, Mobility, or their applicable Affiliate the engagements of Transferred Contractors and SpinCo, Mobility, or their applicable Affiliate will accept such assignments. Where not legally permissible to assign such engagements, Motorola or its applicable Affiliate will terminate the engagements of each Transferred Contractor as of the applicable SpinCo Employment Date, and immediately thereafter SpinCo, Mobility, or their applicable Affiliate will offer to engage such Transferred Contractor.

5.3 Expatriates . SpinCo or Mobility, as the case may be, will assume and honor, or will cause their applicable Affiliate to assume and honor, any agreements, obligations and liabilities relating to any Transferred Employee who is an expatriate, including, without limitation, agreements, obligations and liabilities relating to repatriation, relocation, equalization of taxes and living standards in the host country. For purposes of this Section 5.3, the term “expatriate” will refer to any employee who was hired in one country by Motorola or one of its Affiliates, designated as an expatriate, and sent to work in another country on a temporary basis.

5.4 Shared Employee Contracts .

(a) At the written request of SpinCo or Mobility, as the case may be, Motorola will, and will cause other members of the Motorola Group to, to the extent permitted by the applicable Motorola Shared Employee Contract and applicable law, make available to SpinCo, Mobility, or applicable members of the SpinCo Group the benefits and rights under the Motorola Shared Employee Contracts, including, but not limited to, the investigation, prosecution, and/or defense of litigation to enforce a Motorola Shared Employee Contract on behalf of SpinCo, which are substantially comparable to the benefits and rights enjoyed by the Motorola Group under each Motorola Shared Employee Contract for which such request is made by SpinCo or Mobility, as the case may be, to the extent such benefits and rights relate to the Transferred Businesses; provided , however , that the applicable members of the SpinCo Group will assume and discharge (or promptly reimburse Motorola for) the obligations and liabilities under the relevant Motorola Shared Employee Contracts associated with the benefits and rights so made available to them.

(b) At the written request of Motorola, SpinCo or Mobility, as the case may be, will, and will cause other members of the SpinCo Group to, to the extent permitted by the applicable SpinCo Shared Employee Contract and applicable law, make available to Motorola or applicable members of the Motorola Group the benefits and rights under the SpinCo Shared Employee Contracts, including, but not limited to, the investigation, prosecution, and/or defense of litigation to enforce a SpinCo Shared Employee Contract on behalf of the Motorola Group, which are substantially comparable to the benefits and rights enjoyed by the SpinCo Group under each SpinCo Shared Employee Contract for which such request is made by Motorola, to the extent such benefits and rights relate to the Motorola Business; provided , however , that the applicable members of the Motorola Group will assume and discharge (or promptly reimburse SpinCo or Mobility, as the case may be, for) the obligations and liabilities under the relevant SpinCo Shared Employee Contracts associated with the benefits and rights so made available to them.

 

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5.5 Restrictions on Hiring of Current and Former Employees After Distribution Date .

(a) For a period of 12 months after the Distribution Date, to the extent permitted by applicable law, Motorola and its Affiliates will not solicit for hire or hire employees of SpinCo, Mobility, or any of their Affiliates, and SpinCo, Mobility, and their Affiliates, will not solicit for hire or hire employees of Motorola or any of its Affiliates, unless written approval for such hiring is given by the senior Human Resources officers of Motorola and of SpinCo or Mobility, as the case may be, prior to any offer of employment being extended either verbally or in writing. Motorola, SpinCo, and Mobility will be responsible for implementing appropriate internal procedures to ensure compliance with this Section 5.5(a).

(b) Nothing in Section 5.5(a) will prevent Motorola and its Affiliates from hiring a former employee of SpinCo, Mobility, or one of their Affiliates, or SpinCo, Mobility, and their Affiliates from hiring a former employee of Motorola or one of its Affiliates (the entity engaging in such hiring will be referred to as the “ Hiring Entity ” and the entity for whom the employee formerly worked will be referred to as the “ Former Employer ”), provided that the former employee was either involuntarily terminated by the Former Employer or voluntarily terminated his or her employment prior to being contacted by or applying for employment with the Hiring Entity.

(c) Notwithstanding anything else in Sections 5.5(a) or (b) and to the extent permitted by applicable law, for the period beginning on the SpinCo Employment Date and ending on the first anniversary of the Distribution Date, neither Motorola, SpinCo, Mobility, nor their Affiliates will solicit for employment or employ (or engage as an independent contractor or consultant) any employee who refuses a transfer of employment contemplated by Sections 2.1(a), 3.1(a), or 3.5.

(d) The provisions of this Section 5.5 of this Agreement are severable. In the event that any provision of this Section 5.5 is deemed unenforceable, a court of competent jurisdiction shall reform such provision to the extent necessary to cause it to be enforceable to the maximum extent permitted by law. The parties agree that they desire the court to reform such provision, and therefore agree that the court will have jurisdiction to do so and that they will abide by what the court determines.

ARTICLE 6

RESPONSIBILITY FOR EMPLOYEES AND CONTRACTORS

6.1 Responsibility for SpinCo Group Employees . Except as expressly provided otherwise herein and subject to Section 6.7 hereof, SpinCo or Mobility, as the case may be, to the exclusion of the Motorola Group, will and will cause their applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all employment, compensation, employee benefit, and benefit plan fiduciary Liabilities relating to any U.S. Employee, U.S. Transferred Employee, Non-U.S. Employee, Non-U.S. Transferred Employee, Other U.S. SpinCo Employee, Other Non-U.S. SpinCo Employee, and other past, present, and future employees of SpinCo, Mobility, and their Affiliates or of the Transferred Businesses (in the case of an employee who terminated employment prior to the preparation of the initial versions of Schedules 1(a) and 1(b), such employee will be considered to have been an employee of the Transferred Businesses if he or she was employed in or provided a majority of his or her services to the Transferred Business as of the date of such termination, or if his or her claim relates exclusively to the provision of services to the Transferred Businesses, regardless of whether or to what degree he or she also provided services to other businesses) (all such employees, the “ SpinCo Group Employees ”), which arise before, on or after the Effective Date, including, without limitation:

 

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(a) those arising from any claim that Motorola or any of its Motorola Group Affiliates is the actual employer, co-employer or joint employer of any of the SpinCo Group Employees;

(b) any and all employment-related claims under any national or local law or ordinance, all as they may have been or may in the future be amended;

(c) all Liabilities relating to or arising out of any alleged failure to comply with the Transfer Laws with respect to the SpinCo Group Employees; and

(d) all termination and severance Liabilities, claims for lost wages, compensation, and benefits, claims for damages, claims for breach of fiduciary duty without regard to whether such claims might also be deemed to be in any sense claims for benefits, and claims for unfair or wrongful dismissal, together with all costs and expenses (including but not limited to attorneys fees) associated therewith,

(collectively, and with the other Liabilities for which any member of the SpinCo Group is explicitly responsible under the terms of this Agreement, the “ SpinCo Employment Liabilities ”); provided , however , that the following will not be SpinCo Employment Liabilities: severance costs paid to Non-U.S. Employees in China, Vietnam, and Peru in connection with the transfers contemplated pursuant to Section 3.1 and Motorola Benefit Liabilities, as defined in Section 6.6(a) below.

6.2 Responsibility for SpinCo Group Contractors . Except as expressly provided otherwise herein and subject to Section 6.7 hereof, SpinCo or Mobility, as the case may be, to the exclusion of the Motorola Group, will and will cause their applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all Liabilities relating to any Transferred Contractor and any other past, present, and future Contractor of SpinCo, Mobility, or their Affiliates or of the Transferred Businesses (such Contractor will be considered to have been engaged by the Transferred Businesses if he or she provided a majority of his or her services to the Transferred Businesses or if his or her claim relates exclusively to the provision of services to the Transferred Businesses, regardless of whether or to what degree he or she also provided services to other businesses) (the “ SpinCo Group Contractors ”) which arise before, on or after the Effective Date, including, without limitation, all Liabilities relating to or arising out of the assignment or termination by Motorola or its Affiliates of the engagements of such SpinCo Group Contractors (the “ SpinCo Contractor Liabilities ”).

6.3 Responsibility for Certain Corporate Function Employees . Effective at and after the Distribution Date and except as expressly provided otherwise herein or in Schedule 1 of the Separation Agreement, and subject to Section 6.7 hereof, in the case of employment, compensation, employee benefit, and benefit plan fiduciary Liabilities relating to employees whose principal responsibilities were to provide corporate services to the corporation as a whole (even though their work on given projects may have benefited one business unit more than another), who are not Spinco Group Employees or Motorola Group Employees, and whose employment terminated prior to the preparation of Schedules 1(a) and 1(b), such Liabilities will be shared equally between Motorola and Spinco (“ Prior Corporate Function Liabilities ”).

6.4 Responsibility for Motorola Group Employees . Effective at and after the Distribution Date and except as expressly provided otherwise herein, and subject to Section 6.7 hereof, Motorola, to the exclusion of the SpinCo Group, will and will cause its applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all employment, compensation, employee benefit, and benefit plan fiduciary Liabilities relating to its current, former and future employees of the Motorola Group or of the Enterprise Mobility Solutions or Networks businesses (“the Motorola Group Businesses”) (in the case of an employee who terminated employment prior to the preparation of the initial versions of

 

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Schedules 1(a) and 1(b), such employee will be considered to have been an employee of the Motorola Group Businesses if he or she was employed in or provided a majority of his or her services to the Motorola Group Businesses as of the date of such termination, or if his or her claim relates exclusively to the provision of services to the Motorola Group Businesses, regardless of whether or to what degree he or she also provided services to other businesses), but excluding the SpinCo Group Employees (the “ Motorola Group Employees ”), including, without limitation:

(a) those arising from any claim that SpinCo or any of its SpinCo Group Affiliates is the actual employer, co-employer or joint employer of any of the Motorola Group Employees;

(b) any and all employment-related claims under any national or local law or ordinance, all as they may have been or may in the future be amended;

(c) all Liabilities relating to or arising out of any alleged failure to comply with the Transfer Laws with respect to the Motorola Group Employees; and

(d) all termination and severance Liabilities, claims for lost wages, compensation, and benefits, claims for damages, claims for breach of fiduciary duty without regard to whether such claims might also be deemed to be in any sense claims for benefits, and claims for unfair or wrongful dismissal, together with all costs and expenses (including but not limited to attorneys fees) associated therewith,

(collectively and with the other Liabilities for which any member of the Motorola Group is explicitly responsible under the terms of this Agreement, the “ Motorola Employment Liabilities ”); provided , further , that severance costs paid to Non-U.S. Employees in China, Vietnam, and Peru in connection with the transfers contemplated pursuant to Section 3.1 will also be Motorola Employment Liabilities; provided , however , that SpinCo Benefit Liabilities, as defined in Section 6.6(b) below, will not be Motorola Employment Liabilities or Motorola Benefit Liabilities.

6.5 Responsibility for Motorola Group Contractors . Effective at and after the Distribution Date and except as expressly provided otherwise herein, and subject to Section 6.7 hereof, Motorola, to the exclusion of the SpinCo Group, will and will cause its applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all Liabilities relating to past, present, and future Contractors of Motorola or its Affiliates, other than the SpinCo Group Contractors (the “ Motorola Group Contractors ”), including, without limitation, all Liabilities relating to or arising out of the assignment or termination by SpinCo or members of the SpinCo Group of the engagements of such Motorola Group Contractors (the “ Motorola Contractor Liabilities ”).

6.6 Responsibility for Certain Benefits Matters .

(a) Notwithstanding any provision of Sections 6.1 to 6.5 of this Agreement and effective at and after the Distribution Date, and subject to Sections 6.6(b) and 6.7 hereof, Motorola, to the exclusion of the SpinCo Group, will and will cause its applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all Liabilities incurred in connection with (i) the Motorola Pension Plan, the MSPP, any other U.S. pension plan, and the Retiree Health Plan; (ii) with limited exceptions described in Section 5 and Schedule 1.4(iii) of the Asset Purchase Agreement between Motorola Limited and Motorola Mobility UK Limited, the defined benefit pension plan in the United Kingdom; and (iii) with respect to Actions for benefits under any Employee Benefit Plan of Motorola (other than the plans described in subsections (i) and (ii) above) or alleging breach of fiduciary duty in connection with any such Employee Benefit Plan of Motorola, as follows: (A) as to Liabilities arising from such Actions filed on or commenced before, on or after the Distribution Date that involve only pre-

 

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Distribution acts or omissions, Motorola will treat them as Indemnified Matters, (B) as to Liabilities arising from such Actions filed on or commenced before, on or after the Distribution Date that involve pre-Distribution acts or omissions and post-Distribution acts or omissions, Motorola will treat such pre-Distribution acts or omissions as Indemnified Matters and Motorola and SpinCo or Mobility, as the case may be, will be responsible for their own Liabilities, including those of their employees, directors, fiduciaries and agents, as to that portion of any settlement, judgment, costs and expenses resulting from such post-Distribution acts or omissions, and (C) as to Liabilities arising from such Actions filed on or commenced before, on or after the Distribution Date that do not involve alleged pre-Distribution acts or omissions, Motorola will not indemnify Spinco or Mobility, nor will SpinCo or Mobility indemnify Motorola, and neither will indemnify the employees, directors, fiduciaries or agents of the other (such Liabilities as are to be indemnified by Motorola, “ Motorola Benefit Liabilities ”).

(b) Notwithstanding any provision of Sections 6.1 to 6.5 of this Agreement, and subject to Section 6.7 hereof, SpinCo or Mobility, as the case may be, to the exclusion of the Motorola Group, will and will cause their applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge, any and all Liabilities: (i) to the extent provided in Sections 6.6(a)(iii)(B) and (C) above; (ii) relating in any way to any SpinCo Employee Benefit Plan; (iii) arising from any post-Distribution act or omission by SpinCo or Mobility or an employee, director, fiduciary or agent of SpinCo or Mobility relating in any way to any Motorola Employee Benefit Plan; (iv) under Section 510 of ERISA, or otherwise, relating to the absence following the Distribution Date of a SpinCo or Mobility U.S. or U.K. defined benefit pension plan or U.S. retiree medical plan; and (v) arising from any change in terms and conditions of employment by SpinCo or Mobility in the terms and conditions of employment of any SpinCo Group Employees in comparison with their terms and conditions of employment as of the date immediately preceding their SpinCo Employment Date (“ SpinCo Benefit Liabilities ”).

6.7 Reimbursement and Indemnification .

(a) Damages incurred by SpinCo, Mobility, Motorola, and/or their applicable Affiliates or their respective Employee Benefit Plans or plan fiduciaries relating to employment, compensation, employee benefit, and benefit plan fiduciary Damages and Liabilities will be paid to the maximum extent available under applicable insurance. In no respect shall SpinCo, Mobility, Motorola, or their Affiliates or their respective Employee Benefit Plans or plan fiduciaries be deemed to indemnify, assume, or agree to share insured losses. To the extent that any such Damages are not fully indemnified or reimbursed by applicable insurance, then SpinCo or Mobility, as the case may be, and Motorola (or the applicable Affiliates of SpinCo, Mobility, and Motorola) will be responsible for payment of such amounts (including amounts within retentions, deductibles, co-insurance, retrospective premiums and amounts in excess of insurance or not covered by insurance), whether by reimbursement, indemnification or otherwise, in the proportion to and according to whether such Damages relate to SpinCo Employment Liabilities, SpinCo Contractor Liabilities, Motorola Employment Liabilities, Motorola Contractor Liabilities, Prior Corporate Function Liabilities, Motorola Benefit Liabilities, or SpinCo Benefit Liabilities, as set forth in this Article 6. For purpose of clarification, if pursuant to the provisions in this Article 6 Motorola, to the exclusion of the SpinCo Group, will or will cause its applicable Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge any Liability, then Motorola or its applicable Affiliate will be deemed the “Indemnifying Party” and the SpinCo Group will be deemed the “Indemnified Party” for purposes of Section 6.3 of the Separation Agreement in the event the SpinCo Group incurs any Damages related to such Liability. Similarly, if pursuant to the provisions in this Article 6 SpinCo or Mobility, as the case may be, to the exclusion of the Motorola Group, will or will cause their Affiliates to assume, be responsible for, and pay, perform, satisfy and discharge any Liability, then SpinCo or Mobility, as the case may be, or their applicable Affiliate will be deemed the “Indemnifying Party” and the Motorola Group will be deemed the “Indemnified Party” for purposes of Section 6.3 of the Separation Agreement in the event the Motorola Group incurs any Damages related to such Liability.

 

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(b) Claims for breach of this Agreement or for indemnification or reimbursement or with respect to insurance under this Agreement shall be resolved as set forth in, and shall be subject to the terms of, Sections 5.3, 5.4, 6.3, 6.4, 7.2, 7.3, and 7.15 of the Separation Agreement. This shall in no way limit the applicability of other provisions of the Separation Agreement.

(c) For the avoidance of doubt, it is understood and agreed that (i) SpinCo Employment Liabilities and SpinCo Contractor Liabilities will arise in connection with SpinCo Exclusive Litigation Matters or Shared Litigation Matters, as defined in the Separation Agreement, (ii) Motorola Employment Liabilities and Motorola Contractor Liabilities will arise in connection Motorola Exclusive Litigation Matters or Shared Litigation Matters, as defined in the Separation Agreement, (iii) Prior Corporate Function Liabilities will arise in connection with Shared Litigation Matters, as defined in the Separation Agreement, except as provided in Schedule 1 therein, (iv) SpinCo Benefit Liabilities will arise in connection with SpinCo Exclusive Litigation Matters or Corporate Litigation Matters, as defined in the Separation Agreement, and (v) Motorola Benefit Liabilities will arise in connection with Motorola Exclusive Litigation Matters or Corporate Litigation Matters, as defined in the Separation Agreement.

ARTICLE 7

TERMINATION

7.1 Termination of Agreement . This Agreement will terminate automatically and without need for further action by either party in the event that the Separation Agreement is terminated in accordance with its respective terms.

7.2 Effect of Termination . Upon termination of this Agreement pursuant to this Article 7, this Agreement and the rights and obligations of the parties under this Agreement automatically end without any liability against any party or its Affiliates, except as otherwise provided in the Separation Agreement.

ARTICLE 8

MISCELLANEOUS

8.1 Entire Agreement . This Agreement amends and restates in its entirety the Employee Matters Agreement by and among Motorola, Spinco and Mobility, dated July 31, 2010. This Agreement is an integral part of, is subject to, and is to be interpreted consistently with, the Separation Agreement, and the provisions of the Separation Agreement that do not conflict with the provisions of this Agreement are hereby incorporated by reference; in all other respects this Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior written and oral (and all contemporaneous oral) agreements and understandings with respect to the express subject matter hereof. The provisions of Article 7 of the Separation Agreement (Miscellaneous) not otherwise expressly covered in this Article 8 are hereby incorporated by reference into this Agreement. For purposes of this Section 8.1 only, references herein to this Agreement will include the Schedules and Exhibits to this Agreement, the “Employees” section of any country’s Ancillary Agreement, and Annex A of the Transition Services Agreement.

8.2 Cooperation . Motorola, SpinCo, and Mobility agree to, and to cause their Affiliates to, cooperate and use reasonable efforts to promptly (i) comply with all requirements of this Agreement, ERISA, the Code and other laws and regulations which may be applicable to the matters addressed herein, and (ii) subject to applicable law, provide each other with such information reasonably requested by the other party to assist the other party in administering its Employee Benefit Plans and complying with applicable law and regulations and the terms of this Agreement.

 

24


8.3 Third Party Beneficiaries . This Agreement will not confer third-party beneficiary rights upon any Transferred Employee or any other person or entity. Nothing in this Agreement will be construed as giving to any Transferred Employee or other person any legal or equitable right against Motorola, SpinCo, Mobility, or their Affiliates. This Agreement will not constitute a contract of employment and will not give any Transferred Employee a right to be retained in the employ of either Motorola, SpinCo, Mobility, or any of their Affiliates, unless the Transferred Employee would otherwise have that right under applicable law. With regard to any Transferred Employee who was an employee-at-will prior to becoming a Transferred Employee, this Agreement will not be deemed to change that at-will status in any way. Furthermore, no provision in this Agreement modifies or amends or creates any employee benefit plan, program, or document (“ Intended Benefit Plan ”) unless this Agreement explicitly states that the provision “amends” or “creates” that Intended Benefit Plan. This shall not prevent the parties to this Agreement from enforcing any provision in this Agreement, but no other party shall be entitled to enforce any provision in this Agreement on the grounds that it is an amendment to, or a creation of, an Intended Benefit Plan, unless the provision explicitly states that such enforcement rights are being conferred. If a party not entitled to enforce this Agreement brings a lawsuit or other action to enforce any provision in this Agreement as an amendment to, or creation of, an Intended Benefit Plan, and that provision is construed to be such an amendment or creation despite not being explicitly designated as one in this Agreement, that provision shall lapse retroactively, thereby precluding it from having any effect.

8.4 Employment Records . The parties agree that on or within a reasonable time period after the Distribution Date, the party transferring employees (the “ Transferor ”) agrees to provide the party receiving the employees (the “ Transferee ”) with all employment records for the employees required to be kept under applicable law or necessary for the conduct of the Transferee’s business, provided (a) that such records will not include any records to the extent such a transfer would violate applicable law or cause the Transferor to breach any agreement with a third party, and (b) that such records are in the possession of the Transferor. The Transferor may make, at its expense, and keep copies of such records.

(This space intentionally left blank)

 

25


IN WITNESS WHEREOF, each party has caused this Amended and Restated Employee Matters Agreement to be executed on its behalf by a duly authorized officer effective as of the date first set forth above.

 

“Motorola”     “SpinCo”
MOTOROLA, INC., a Delaware corporation    

MOTOROLA SPINCO HOLDINGS

CORPORATION, a Delaware corporation

By:   /s/ Gregory Q. Brown     By:   /s/ Sanjay Jha
Name:   Gregory Q. Brown     Name:   Sanjay Jha
Title:   Co-CEO     Title:   CEO
“Mobility”    

MOTOROLA MOBILITY, INC., a Delaware

corporation

   
By:   /s/ Sanjay Jha      
Name:   Sanjay Jha      
Title:   CEO      

 

26


SCHEDULES

 

Schedule:    1(a)    Non-U.S. Employees
   1(b)    U.S. Employees
   1(c)    Reverse Transfer Employees
   1(d)    SpinCo COBRA Qualified Beneficiaries
   3.2    SpinCo Participation in Motorola Non-U.S. Plans

 

27

Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT 10.14

MOBILE APPLICATION DISTRIBUTION AGREEMENT

(ANDROID)

 

LOGO

  

Google Inc.

1600 Amphitheatre Parkway

Mountain View, CA 94043

  

Google SPD Rep: Jennie Ebbitt

Google SPD Director:

Google Sales Engineer: Lan Roche

Google Legal Contact: Frank Montes

     
     
     

 

        

 

              

COMPANY:

 

          
       
     Company Contact Information:    Company Technical Contact:    Company Legal Notices to:
     

Attention:

 

  

Christy Wyatt

 

  

Stephen McDonnell

 

  

Head of Legal

 

     
Title:   

Vice President

Software Applications and Ecosystem

 

   Global Alliance Manager, Google    Mobile Devices Business
     

Address, City, State,

Postal Code, Country:

 

  

809 11th Ave

Sunnyvale, CA, 94089

 

  

809 11th Ave

Sunnyvale, CA, 94089

 

  

600 N US Highway 45

Libertyville, IL 60048

 

     
Phone:    408 541 6755    415-686-8886     
     

Fax:

 

              
     

Email:

 

  

Christy@motorola.com

 

  

smcdonnell@motorola.com

 

    
Effective Date : May 1, 2009 (must be start of calendar month)
Term : Starting on the Effective Date and continuing through December 31, 2011 (inclusive)

Renewal Term: None.

 

This Mobile Application Distribution Agreement, including all exhibits hereto (collectively referred to as the “ Agreement ”), effective as of the date noted above (the “ Effective Date ”), is made by and between Motorola, Inc., a Delaware corporation with offices at the address noted above (“ Company ” or “ Motorola ”), and Google Inc., with offices at the address noted above (which, with its affiliates, shall be referred to herein as “ Google ”).

1. Definitions. The following capitalized terms shall have the meanings set forth below:

1.1 “Android” means those components of Google’s mobile phone software being delivered from time to time either under the Android License Agreement between the Parties with the Effective Date of April 22, 2008, or otherwise made available as open source software.

1.2 “Client ID” means unique alphanumeric code(s) provided by Google to Company to be used to identify Google Applications usage on Company Devices, as such Client IDs may be modified by Google from time to time in its sole discretion upon notice to Company.

1.3 “Device” means the wireless device(s) set forth in Exhibit A as may be updated by the Parties from time to time and using only the Android operating system which is enabled by Company and used by an End User to access the Service.

1.4 “End User(s)” means an end user customer of the Device.

1.5 “Final Embed Date” means the latest possible date, as determined at Company’s sole discretion, that Company can accept updated Google Applications from Google for a specific Device deployment.

1.6 “Google Applications” means the machine-readable binary code version of the Google Applications listed in Exhibit A which are provided to Company in accordance with this Agreement, and any modifications or updates to Google Applications that Google may make available to Company hereunder from time to time in its sole discretion and any modifications or updates thereto that Google makes generally available.

 

Page 1 of 16

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

1.7 “Google Mobile Branding Guidelines” means Google’s brand treatment guidelines for mobile in effect from time to time (and any content contained or referenced therein), which are located at http://www.google.com/wssynd/mobile_guidelines.html and http://www.google.com/permissions/guidelines.html (or such other URLs as may be provided by Google from time to time), together with such additional brand treatment guidelines for mobile as Google may make available to Company from time to time.

1.8 “Intellectual Property Rights” means any and all rights existing from time to time under patent law, copyright law, semiconductor chip protection law, moral rights law, trade secret law, trademark law, unfair competition law, publicity rights law, privacy rights law, and any and all other proprietary rights, as well as, any and all applications, renewals, extensions, restorations and re-instatements thereof, now or hereafter in force and effect worldwide.

1.9 “ODM” means an original device manufacturer that manufactures Motorola-branded Devices for Motorola.

1.10 “Service” means the wireless service owned and/or operated by Telecom Operator that allows End Users using a Device to access the Internet.

1.11 “Telecom Operator” a company that provides wireless service that allows End Users using a Device to access the Internet approved by Google to distribute Google Applications to End Users in the Territories.

1.12 “Territories” means the country or countries in which distribution of Google Applications is permitted under the conditions listed in Exhibit A (together with such other countries and conditions as may be added to Exhibit A from time to time upon the mutual written agreement of the parties). Distribution of Google Applications outside of the Territories is prohibited.

1.13 “Trademarks” means the trade names, trademarks, service marks, logos, domain names and other distinctive brand features of each party as owned by such party from time to time.

2. Google Applications.

2.1 License Grant.

2.1.1 Applications. Subject to the terms and conditions of this Agreement (including Section 2.7), Google hereby grants to Company a nontransferable, nonsublicensable (except Company may sublicense to affiliates, resellers, distributors, ODMs and Telecom Operators with whom Company has a written agreement and as set forth in 2.1.3 below), nonexclusive license during the Term to: (a) use, demonstrate, display and reproduce each of (and/or any total number of) the Google Applications to the extent necessary to exercise the right granted in (b) through (c), (b) distribute each of (and/or any total number of) the Google Applications for no cost directly to End Users only in the Territories via the distribution methods specified in Exhibit A, and (c) distribute each of (and/or any total number of) the Google Applications for no cost    [***]

. The pre-loading of a Device with Google Applications in each individual Territory shall be    [***]

pursuant to the applicable Launch Addendum(s), which shall be substantially similar to the example Launch Addendum set forth in Attachment 1 to Exhibit A. Additionally, where Google specifies a specific version of a Google Application to be distributed in a certain Territory on the Launch Addendum, Company shall distribute only such version within such Territory (as such versions are changed from time to time at Google’s sole discretion upon notice to Motorola and Motorola shall have reasonable time to adjust to such changes, as set forth in Section 2.3.1. It is the express intent of the parties that Company be enabled to include Google Applications on its Devices and that the parties will work in good faith and in a timely manner with each other with respect to approving the implementation of Google Application on Company’s Devices.

2.1.2 Documentation License and Documentation Dérivatives. Subject to the terms and conditions of this Agreement Google grants to Motorola a nontransferable, non-sublicensable (except as provided for herein), nonexclusive license to reproduce, and create derivative works of: (a) Google documentation for the Google Applications, which may be provided by Google to Motorola for insertion into Motorola written or electronic manuals or documentation related to the operation of a Device; and (b) Google Applications solely in the form of screen shots of Google Applications on Devices for insertion into Motorola written manuals or documentation related to the operation of Devices. Motorola shall provide Google with a copy of such Motorola documentation and screen shots, for Google’s review and written consent, which shall not be unreasonably delayed or withheld. Google shall use commercially reasonable efforts in providing comments and/or consent back to Motorola on such documentations within fifteen (15) business days of their receipt. For clarity and the avoidance of doubt, once Motorola obtains Google’s consent with regard to any particular Motorola documentation or screen shot, Motorola shall

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

not need to obtain Google’s consent for such particular Motorola documentation or screen shot for future uses, and Motorola may modify such approved documentation or screen shot for purposes of internationalization or reformatting so long as any such modifications adhere to the Branding Guidelines (as such Branding Guidelines are changed from time to time at Google’s sole discretion upon notice to Motorola and Motorola shall have reasonable time to adjust to such changes); provided, however, that Motorola shall make any such modified documentation or screen shot available to Google for review upon Google’s written request.

2.1.4 Sublicensing. Notwithstanding anything herein to the contrary, (i) Motorola may sublicense the licenses granted to it by Google pursuant to Section 2.1.1 to its ODMs for manufacturing; (ii) Motorola may sublicense the documentation licenses granted to it by Google pursuant to Section 2.1.2 to its vendors and suppliers, provided that such ODMs, vendors or suppliers, as the case may be, are deemed to be and subject to the same requirements as described in Section 2.1.5 with respect to Contractors.

2.1.5 Delegation to Contractors. Except as otherwise specifically set forth in this Agreement, each party (a “ Delegating Party ”) may delegate the exercise and/or performance of all or a portion of its rights and/or obligations set forth in this Agreement to its Affiliates, contractors, and/or ODMs (each, a “ Contractor ”), provided that such Contractors are each bound in writing to an agreement with the Delegating Party where each such agreement is at least as protective of the other party (the “ Non-Delegating Party ”) as this Agreement (however, the parties acknowledge and agree that, except with regard to the Non-Delegating Party’s Confidential Information, such agreement may not be exactly as protective with regard to each individual aspect of this Agreement). Each Contractor may delegate the exercise and/or performance of all or a portion of its rights and/or obligations set forth in this Agreement to subcontractors, provided that such subcontractors are each bound in writing to an agreement with the Delegating Party or the applicable Contractor where each such agreement is at least as protective of the Non-Delegating Party as this Agreement (however, the parties acknowledge and agree that, except with regard to the Non-Delegating Party’s Confidential Information, such agreement may not be exactly as protective with regard to each individual aspect of this Agreement). For clarity, it is understood that any Delegating Party or any Contractor, as applicable, need not mention the Non-Delegating Party by name in any such written agreement. The Delegating Party shall indemnify the Non-Delegating Party from and against any loss, damage, liability, fees, cost and/or expense incurred by the Non-Delegating Party arising out of any delegation permitted under this Section.

2.2 License Grant Restrictions. Company shall not, and shall not allow any third party to: (a) disassemble, de-compile or otherwise reverse engineer the Google Applications or otherwise attempt to learn the source code or algorithms underlying the Google Applications; (b) create derivative works from or based on the Google Applications; (c) except as expressly set forth in this Agreement, provide, sell, license, distribute, lease, lend, or disclose the Google Applications to any third party; (d) use the Google Applications for timeshare, service bureau, or other unauthorized purposes; (e) exceed the scope of any license granted to Company hereunder; or (f) ship, divert, transship, transfer, export or re-export the Google Applications, or any component thereof, into any country or use it in any manner prohibited by any export control laws, restrictions, or regulations administered by the U.S. Commerce Department’s Bureau of Export Administration, the U.S. Department of Treasury’s Office of Foreign Assets Control or any other applicable government agency.

2.3 Delivery.

2.3.1 Applications. Upon general availability to any third party, Google shall deliver the Google Applications to Company. For the sake of clarity, the parties acknowledge and agree that Google has no obligation to develop or deliver any Google Application, and any such development is at Google’s sole discretion. If Company receives an updated version of a Google Application more than 30 days before submitting a Device to a Telecom Operator for testing, Company shall commence distribution of updated versions of Google Applications to such Telecom Operator within 30 days of receipt from Google. If Company receives an updated version of a Google Application, less than 30 days before submitting a Device to a Telecom Operator for testing but prior to commercial distribution of such Device, Company will use commercially reasonable efforts to distribute the updated version of a Google Application to the Telecom Operator. If Company cannot, after using commercially reasonable efforts, distribute the updated version of a Google Application to the Telecom Operator, then Company will cooperate with Google pursuant to Section 4.5 to update the Google Application by over-the air updates.

2.4 Form of Distribution Offering. (a) During the Term, upon Google’s approval as described in Section 4.3, Company shall make the Google Applications available to End Users on the Device as described in this Agreement. The form of any such offering shall be as set forth in this Agreement, and shall adhere to the Google Mobile Branding Guidelines. Without limiting the foregoing sentence, except for End Users as expressly set forth in this Agreement, Company shall not offer or distribute the Google Applications to any third party (except as set forth in Section 2.1). (b) Company (or any third party) shall not: (i) serve or otherwise place any advertisements during the launch process of the Google Applications; (ii) offer, download or install, or allow any third party to offer, download or install, any additional products during the launch process of the Google Applications; or (iii) preload, install or launch any Google Application (or otherwise act or fail to act) such that an End User is denied the opportunity to review and accept (or reject) the relevant Google terms of service.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

2.5 Accurate Reproduction. Company agrees that in connection with its exercise of the right granted in Section 2.1 of this Agreement, it will accurately reproduce the Google Applications (including any legal notices and marks contained therein) and will not insert into the Google Applications any viruses, worms, date bombs, time bombs, or other code that is specifically designed to cause the Google Applications to cease operating, or to damage, interrupt, allow access to or interfere with any Google Applications or End User data.

2.6 Open Devices. The parties will create an open environment for the Devices by making all Android applications and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

2.7 Authorization to Distribute Google Applications on the Devices Based Upon Android Compatibility Testing The license to distribute Google Applications in Section 2.1 is contingent upon Motorola certifying that the Device passes the Android Compatibility Test Suite and conforms to the Android Compatibility Definition. The Android Compatibility Test Suite (the “CTS”) as defined below may change from time to time at Google’s sole discretion, however the parties agree that once a Device is approved for Launch pursuant to this Agreement (including, among other things, by virtue of having passed the then-current version of the CTS applicable to the version of Android loaded on the Device) then such Google-approved Device shall not be required to pass future versions of the CTS in order to continue to be distributed in the Google-approved Territories: a) Any additional tests or changes to CTS shall not apply to any Device(s) that passed the CTS any time prior to the implementation of any changes to the CTS have already received terminal acceptance by both parties. The final software build of Devices must pass the Compatibility Test Suite prior to Launch. For purposes of this Agreement, the CTS shall only apply to the functionality of Android and related APIs, and while CTS may require a Device to include certain functionality in order to pass (such as the ability to send and receive email) a Device will be able to pass CTS without including for distribution of any specific applications, including but not limited to Google Applications (such as a particular email application).

2.8 Privacy. To the extent that the Google Application stores, tracks or transmits user-identifiable information the Parties agree to the following:

2.8.1 Consumer Privacy Rights. The parties will post their privacy rights policies in an easily consumer-findable location and note both the existence of such policies and location in their End User License Agreement or another mutually agreed to location.

2.9 Legacy Sunset. To the extent that Google wishes to discontinue or make inoperable any Google Application previously provided hereunder, ( “Discontinued Software” ), Google shall provide Motorola with written notice of such Discontinued Software and shall support such Discontinued Software for          [***]         from the date such notification was received by Motorola; provided that Google makes such support for Discontinued Software generally available to third parties and further provided, however, that Google may support such Discontinued Software for a shorter period if the decision to discontinue or make inoperable such Software arises from applicable law or other factors outside of Google’s control. The parties will discuss in good faith the timing for the discontinuation of any distribution of Google Applications that are licensed pursuant to this Agreement.

2.10 Other Agreements. This Agreement will supersede any agreements between the parties or any of their respective affiliates ((including, but not limited to (a) the Master Framework Agreement, dated March 13, 2007, by and between Motorola, Inc. and Google Inc. and (b) the Directed Traffic Distribution Agreement, dated December 28, 2005 (“Directed Traffic Agreement”), by and between Motorola, Inc. and Google Inc.) regarding the Google Applications provided by Google that are distributed on Devices that run on Android, but will have no affect on any other agreements between the parties regarding other devices or other Google services or applications. Notwithstanding the foregoing, if and when the Directed Traffic Agreement is amended by the parties (or the parties agree to a new agreement)          [***]

shall apply to the Devices distributed with the Google Applications licensed hereunder contingent upon the parties’ compliance with the terms of the Directed Traffic Agreement or other agreement as applicable.

3. Device Distribution. Company agrees that it will be solely responsible for the distribution of the Devices and managing its inventory.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

4. General.

4.1 Payments.

4.1.1 Except as set forth in Section 2.10 (Other Agreements), Company and Google shall each retain any and all revenue generated from provision of their respective products or services. For the sake of clarity, except as expressly set forth in this Agreement, neither party shall be required to account to the other or otherwise make any payment to the other regarding the Google Applications, Google products or services, the Devices or any revenue generated therefrom.

4.2 Reports. The parties shall provide the reports detailed in Exhibit B.

4.3 Google Approval and Launch. The distribution of each of (and/or any total number of) the Google Applications shall be subject to Google’s prior written approval (not to be unreasonably withheld or delayed) to ensure adherence to the terms and conditions of this Agreement, including but not limited to the Google Mobile Branding Guidelines (as such Google Mobile Branding Guidelines are changed from time to time at Google’s sole discretion and Motorola shall have reasonable time to adjust to such changes).    [***]

Upon receipt of each such Google approval, Company shall promptly begin distribution and implementation in accordance with this Agreement (each, “Launch” or “Launch Date”) . Company will provide written confirmation to Google of Launch promptly following the launch of any Device in each Territory. For the avoidance of doubt, each new Territory, each new Device, and each new Telecom Operator in each Territory needs to be approved by Google prior to Launch.

4.4 Implementation Requirements. The parties shall provide the materials and information listed in Exhibit C hereto. Additionally, Company shall provide any and all other information, equipment and/or assistance necessary to allow Google to deliver the Google Applications and make the Google Applications (including over-the-air updates thereto) available on the Service and the Devices.

4.5 Over-the-Air Updates.

4.5.1 Google may auto-update Google Applications over-the-air at Google’s reasonable discretion in accordance with the terms set forth in this Section 4.5.1. The parties shall work together in good faith to deliver the most up to date Google Applications on the Devices. The parties acknowledge that it is unreasonable to make any update to the Google Applications that causes a material malfunction in the Google Applications, the Devices, or the Telecom Operator’s network. Company shall not prevent such over-the-air auto-updates. Google acknowledges that in the event Company sells Devices to a Telecom Operator, such Telecom Operator may impose restrictions regarding over-the-air updates of applications, including Google Applications. Company shall, in good faith, use commercially reasonable efforts to ensure that a Telecom Operator will not preclude over-the-air updates to Google Applications.

4.6 Site Pages. Company shall not redirect an End User away from, block access to, frame, or modify or change the look or feel of any web page or web site accessed via a Google Application, or place anything on or near any web site page that in any way implies that Google is responsible for the contents of such page.

4.7 Data Collection and Reporting. Each party’s applicable privacy and security policies shall apply with respect to the user information collected by it. The parties will provide each other reasonable aggregate information about usage of the Devices during the Term, in order to help each party improve End User’s experience with the Device, consistent with each party’s privacy policies. Such information will not involve any personal information.

4.8 Mobile Service Operator Customer Restrictions. The parties acknowledge and agree that the placement and distribution obligations contained in Section 2.1 are subject to restrictions placed upon Company by its direct mobile service operator customers. However, pursuant to Section 2.1, if a Google Application is on a Device, then any such placement and distribution, including the appearance of Google Applications, shall be subject to Google’s prior written approval as set forth herein, and shall adhere to the terms and conditions of this Agreement including but not limited to the Google Mobile Branding Guidelines.

4.9 No Connectivity Notice. Where an End User launches a Device’s web browser or launches a Google Application and there is no data connectivity available, Company will ensure that such End User is presented with a message indicating lack of data connectivity.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

4.10 Points of Contact. Company and Google shall each appoint a partner manager (the “Partner Manager” ) who shall be the point of contact for all issues concerning this Agreement.

5. Term and Termination.

5.1 Term. The term of this Agreement will be the “Term” set forth on the cover page of this Agreement, unless earlier terminated as provided in this Agreement.

5.2 Termination. (a) Either party may suspend performance or terminate this Agreement if (i) the other party is in material breach of the Agreement and fails to cure that breach within thirty (30) days after written notice; or (ii) the other party ceases its business operations or becomes subject to insolvency proceedings and the proceedings are not dismissed within ninety (90) days. (b) Notwithstanding the foregoing, either party may terminate this Agreement immediately upon written notice upon a breach of Sections 2.1 to 2.2 (License Grant and Restrictions), Section 2.4(b)(iii) (opportunity to review and accept Google terms of service), Section 2.5 (Accurate Reproduction), Section 6.1 (Confidentiality) or Section 7 (Trademarks), or as set forth in Section 12.4 (Change of Control). (c) Notwithstanding anything to the contrary, in the event that the government or controlling body of any country or territory in which the Google Applications are distributed or made available imposes any law, restriction or regulation that makes it illegal to distribute or make available the Google Applications, or any portion thereof, into such country or territory, or if any such law, restriction or regulation places a substantial burden on Google, where substantial is measured with respect to Google’s economic benefit relating to the promulgation of the Android platform and/or the distribution of Google Applications, as determined by Google in its commercially reasonable and good faith judgment (such substantial burden, a “Substantial Burden”) then Google shall have the right to suspend the distribution and/or availability of such Google Applications in such country or territory until such time as such law, restriction or regulation is repealed or nullified or modified such that there it is no longer illegal or a Substantial Burden, as applicable, for the Google Applications to be distributed or made available in such country or territory ( “Special Suspension”) .

5.3 Effect of Termination. Upon expiration or termination of this Agreement: (a) except as otherwise set forth herein, all rights and licenses granted hereunder shall immediately cease (provided that all rights granted to End Users shall not be terminated); (b) except as set forth herein, including but not limited to Section 5.4 below, Company will immediately stop reproducing, offering or distributing the Google Applications (except as set forth in Section 5.4 below); and (c) each Party shall return or destroy (and a duly appointed officer shall certify to such destruction) all copies of the Google Applications (in the case of Company) and any other Confidential Information in its possession which it is aware and to which it has access and is reasonably able to destroy or delete (which, for the avoidance of doubt, does not include archived back up copies which are not in live working use and which are no longer easily accessible or retrievable), including from all hard disks and memory. Neither party shall be liable to the other for any damages resulting solely from termination of this Agreement as permitted for under this Agreement.

5.4 Sell-Off Right. Notwithstanding the provisions of Section 5.3 above, for a period of         [***]         following expiration or termination of this Agreement ( “Sell-Off Period”), Company shall have the right to distribute in accordance with the terms and conditions of this Agreement all Google Application(s) actually preloaded on the Device inventory as of the date of expiration or termination of this Agreement ( “Inventory” ), and such party shall have the right to use the Google Trademarks in accordance with this Agreement in connection with such Inventory ( “Sell-Off Right”); provided, however, that Company shall provide no less than thirty (30) days prior written notification to Google of its intent to exercise the Sell-Off Right ( “Sell-Off Right Notice” ). Notwithstanding anything to the contrary, the Sell-Off Right shall not apply in the event that either (a) Company does not provide the Sell-Off Right Notice as set forth above in this Section 5.4, or (b) this Agreement (or any right granted hereunder) is suspended or terminated by Google pursuant to Section 5.2 of this Agreement. Notwithstanding anything to the contrary, Company shall not be entitled to receive any payments related to revenue share from Google upon termination or expiration of this Agreement, regardless of whether or not it chooses to utilize any Sell-Off Right.

5.5 Survival. The provisions of Sections 1 (Definitions), 2.2 (License Grant Restrictions), 5.5 (Survival), 6.1 (Confidentiality), 8 (Proprietary Rights), 9.2 (Disclaimer), 10 (Limitation of Liability), 11 (Indemnification) and 12 (General) shall survive expiration or termination of this Agreement.

6. Confidentiality and PR.

6.1 Confidentiality. (a) Definition. “Confidential Information” is information disclosed by one party to the other party under this Agreement that is marked as confidential or would normally under the circumstances be considered confidential information of the disclosing party. Confidential Information does not include information that the recipient already knew, that

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

becomes public through no fault of the recipient, that was independently developed by the recipient, or that was rightfully given to the recipient by another party. (b) Confidentiality Obligations. The recipient will not disclose the Confidential Information, except to affiliates, employees, and agents who need to know it and who have agreed in writing to keep it confidential. The recipient, its affiliates, employees, and agents may use Confidential Information only to exercise rights and fulfill obligations under this agreement, while using reasonable care to protect it. The recipient may also disclose Confidential Information when required by law after giving reasonable notice to discloser.

6.2 Publicity. Each party shall make reasonable efforts to provide, for review and consent, all PR materials that mention or recite the other party, its trademarks, its products or services, or this Agreement, to such other party at least four business (4) days prior to publication or release of such PR Materials. Neither party will publish or release any PR materials or make any public announcement relating to this Agreement without the other party’s prior written consent; except to the extent such information is required to be disclosed under operation of law, by a court order, or by a governmental agency with jurisdiction, provided that the announcing party notifies the other party promptly in writing and cooperates with the other party, at the other party’s request and expense, to contest or limit the scope of such required disclosure.

7. Trademarks.

7.1 General. Each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Trademarks. Some, but not all examples of Google Trademarks are located at: http://www.google.com/permissions/trademarks.html (or such other URLs Google may provide from time to time). Except to the limited extent expressly provided in this Agreement, neither party grants, and the other party shall not acquire, any right, title or interest (including, without limitation, any implied license) in or to any Trademarks of the first party; and all rights not expressly granted herein are deemed withheld. All use by Google of Company Trademarks (including any goodwill associated therewith) shall inure to the benefit of Company and all use by Company of Google Trademarks (including any goodwill associated therewith) shall inure to the benefit of Google. No party shall challenge or assist others to challenge the Trademarks of the other party (except to protect such party’s rights with respect to its own Trademarks) or the registration thereof by the other party, nor shall either party attempt to register any Trademarks or domain names that are confusingly similar to those of the other party.

7.2 License to Google Trademarks. Subject to Google’s written approval prior to each use of a Google Trademark and to the terms and conditions of this Agreement, Google grants to Company a limited, nonexclusive and nonsublicensable license during the Term to display those Google Trademarks expressly authorized for use in this Agreement, solely for the purposes expressly set forth herein as well as for advertising and marketing the Google Applications on Devices, subject to any restrictions listed in each Launch Addendum. Notwithstanding anything to the contrary, if Motorola materially breaches the Trademark license granted herein Google may revoke the license granted herein to use Google’s Trademarks upon providing Company with written notice thereof and a reasonable period of time to cease such usage as set forth in the Sell-Off Provisions provided herein. Furthermore, in its use of any Google Trademarks, Company agrees to adhere to the Google Mobile Branding Guidelines (as such Google Mobile Branding Guidelines are changed from time to time at Google’s sole discretion and Motorola shall have reasonable time to adjust to such changes) . If Google expressly approves a use of a Google Trademark that does not comply with the Google Mobile Branding Guidelines, then Company will not be in breach of this Section 7.2.

7.2.1 Prior to any distribution of Google Applications, the appearance and Implementation (as defined below) of such Google Applications shall be subject to Google’s prior written approval (not to be unreasonably withheld or delayed). Such appearance and Implementation shall adhere to the terms and conditions of this Agreement, including but not limited to the Google Brand Guidelines. For purposes of this Agreement, an “Implementation” shall mean the combination of the screen size, resolution, orientation, type of operating system and operating system version. For clarity and avoidance of doubt, once a particular appearance and Implementation of Google Applications has been approved for a specific model of a Device, Motorola shall be permitted, without further approval from Google (except for approval of language translations with respect to the appearance of the Google Applications), to use the same appearance and substantially similar Implementation for other models of Devices that have Implementations substantially similar to the specific model of Device for which Google has granted approval with respect to appearance and Implementation. If either party discovers material problems with the appearance or Implementation of the Google Applications, the parties agree to cooperate in good faith and to use commercially reasonable efforts to remedy such material problems as soon as practicable

7.2.2 Company shall not, and shall not allow any third party to produce any consumer packaging or materials for the Device that identifies or suggests that Google is the manufacturer of the Device. In this regard, Company shall ensure that any Device packaging or user guide produced by the Company identifies Company as the manufacturer of the Device and provides contact details in the applicable Territories in which the Device is distributed.

 

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7.3 License to Company Trademarks. Subject to the terms and conditions of this Agreement, Company grants to Google a limited, nonexclusive and nonsublicensable license during the Term to display those Company Trademarks expressly authorized for use in this Agreement, solely for the purposes expressly set forth herein. Notwithstanding anything to the contrary, Company may revoke the license granted herein to use Company’s Trademarks upon providing Google with written notice thereof and a reasonable period of time to cease such usage.

8. Proprietary Rights. (a) Company acknowledges that, as between the parties, Google (and/or its licensors) retains all right, title and interest, including without limitation all rights in copyrights, trademarks, trade secrets, patents and knowhow, in and to the Google Applications and the Google Trademarks. Company has, and shall acquire, no rights in the foregoing except those expressly granted by this Agreement. Google shall not be restricted from selling, licensing, modifying, or otherwise distributing the Google Applications and/or the Google Trademarks to any third party. (b) Google acknowledges that, as between the parties, Company (and/or its licensors) retains all right, title and interest, including without limitation all rights in copyrights, trademarks, trade secrets, patents and know-how, in and to the Service and the Company Trademarks. Google has, and shall acquire, no rights in the foregoing except those expressly granted by this Agreement. Except as set forth in this Agreement, Company shall not be restricted from selling, licensing, modifying, or otherwise distributing the Service and/or the Company Trademarks to any third party.

9. Representations, Warranties and Disclaimer.

9.1 Representations and Warranties. Each party represents and warrants to the other that it has full power and authority to enter into this Agreement, and that the execution and delivery of this Agreement, and the performance of its obligations hereunder, will not constitute a breach or default of or otherwise violate any agreement to which such party or any of its affiliates are a party or violate any rights of any third parties arising therefrom. Company represents and warrants that it has and will maintain throughout the Term all rights, authorizations and licenses that are required with respect to the Devices and any Company content or services, and that the Devices and the Company’s content or services, and their use, distribution, sale and license, do and shall continue to comply with all applicable foreign, federal, state, and local laws, rules and regulations. Google represents and warrants that throughout the Term, it will abide by the privacy policies set forth on its website and comply with all applicable foreign, federal, state and local laws, rules and regulations.

9.2 Disclaimer. OTHER THAN THE REPRESENTATIONS AND WARRANTIES CONTAINED IN SECTION 9.1 THE GOOGLE APPLICATIONS AND THE ANDROID PLATFORM ARE PROVIDED “AS IS” AND WITHOUT WARRANTY OF ANY KIND AND GOOGLE EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. GOOGLE DOES NOT WARRANT THAT THE APPLICATIONS AND/OR ANY OTHER GOOGLE PRODUCTS OR SERVICES PROVIDED HEREUNDER WILL MEET ALL OF COMPANY’S REQUIREMENTS OR THAT PERFORMANCE OF SUCH SERVICES WILL BE UNINTERRUPTED, VIRUS-FREE, SECURE OR ERROR-FREE. OTHER THAN THE REPRESENTATIONS AND WARRANTIES CONTAINED IN SECTION 9.1, COMPANY MAKES NO WARRANTY OF ANY KIND TO GOOGLE WITH RESPECT TO THE DEVICES, AND EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.

10. Limitation of Liability.

10.1 Limitations. Subject to Section 10.2: (a) Limitation on Indirect Liability. NEITHER PARTY MAY BE HELD LIABLE UNDER THIS AGREEMENT FOR ANY DAMAGES OTHER THAN DIRECT DAMAGES, EVEN IF THE PARTY IS AWARE OR SHOULD KNOW THAT SUCH DAMAGES ARE POSSIBLE AND EVEN IF DIRECT DAMAGES DO NOT SATISFY A REMEDY. (b) Limitation on Amount of Liability. NEITHER PARTY MAY BE HELD LIABLE UNDER THIS AGREEMENT FOR MORE THAN    [***]

10.2 Exceptions to Limitations. These limitations of liability do not apply to:    [***]

, Section 2.4(b)(iii) (opportunity to review and accept Google terms of service), or Section 2.5 (Accurate Reproduction).

10.3 Allocation of Risk. The parties agree that (a) the mutual agreements made in this Section 10 reflect a reasonable allocation of risk, and (b) that each party would not enter into the Agreement without these limitations on liability.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

11. Indemnification.

11.1 By Google. Google will defend, or at its option settle, any third party lawsuit or proceeding brought against Company based upon or otherwise arising out of: (a) any breach or claimed breach of the first sentence of Section 9.1;        [***]

. Notwithstanding the foregoing, in no event shall Google have any obligations or liability under this Section 11.1 arising from: (i) modifications of the Google Applications or the Google Trademarks by any party other than Google; (ii) combination of the Google Applications or the Google Trademarks with any other software or products or any other materials; and (iii) third party claims to the extent covered in Section 11.2 below). Google, in its sole and reasonable discretion, reserves the right to terminate Company’s continued distribution of or access to the Google Applications or the Google Trademarks which are alleged or believed by Google to infringe the rights of a third party. Google shall have no obligations under this Section 11.1 regarding the Android platform or any third party products distributed through the Android Market.

11.2 By Company. Company will defend, or at its option settle, any third party lawsuit or proceeding brought against Google based upon or otherwise arising out of: (a) any breach or claimed breach of Section 9.1; (b) Company’s or any third party’s improper or unauthorized replication, packaging, marketing, distribution, or installation of the Google Applications, including without limitation claims based on representations, warranties, or misrepresentations made by Company; (c) any breach or claimed breach of Section 2.4(b)(iii);    [***]

11.3 Exclusions. Notwithstanding the foregoing, the indemnifying party ( “Indemnitor” ) will have no obligation under this Section with respect to any infringement claim based upon (a) any unauthorized use, reproduction, or distribution of the Devices or Google Applications, as applicable, by the party seeking indemnification ( “Indemnitee” ) or any of its Telecom Operators,        [***]

(c) any modification of the Devices or Google Applications, as applicable, by any person other than (i) authorized modifications by Motorola, its Telecom Operators, its Contractors, and their subcontractors to Devices and (ii) Google to Google Applications,        [***]

or (f) content which was not installed by or on behalf of Indemnitor or its Telecom Operators.

11.4 Conditions of Indemnification. The party seeking indemnification must promptly notify the other party of the claim and cooperate with the other party in defending the claim. The indemnifying party has full control and authority over the defense, but the other party may join in the defense with its own counsel at its own expense. THE INDEMNITIES ABOVE ARE THE ONLY REMEDY UNDER THIS AGREEMENT FOR VIOLATION OF A THIRD PARTY’S INTELLECTUAL PROPERTY RIGHTS.

11.5 Distribution Remedy.

11.5.1 If any Google Application or Google Trademark furnished under this Agreement: (i) is held to constitute an infringement and its use enjoined;    [***]

then    [***]

, shall provide written notice indicating the affected or potentially affected Google Application, or Google Trademark        [***]        , and, at Google’s own expense and option (as relates to options (a) and (b) below), Google may: (a) procure for Motorola the right to continue using the affected or potentially affected Google Application or Google Trademark; (b) replace or modify the affected or potentially affected Google Application or Google Trademark with a functional, non-infringing, substantially equivalent version,        [***]

; or (c) terminate the affected license(s) granted under this Agreement [***]

. Notwithstanding anything to the contrary, Company shall not be entitled to receive any payments related to revenue share from Google upon termination of the affected licenses pursuant to Section 11.5.1(c) .

11.5.2 If option (b) or (c) above in Section 11.5.1 are chosen, Motorola will discontinue, as soon as is practicable but no later than        [***]         after Motorola’s receipt of Google’s notice, the manufacture of affected Devices containing the

 

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affected or potentially affected Google Application or Google Trademark, and any distribution of the affected or potentially affected Google Application or Google Trademark for such jurisdiction(s). [***]

For purposes of clarity, all affected Devices which have passed from Motorola’s distribution pipeline during the    [***]

For Devices and Google Applications in Motorola’s distribution pipeline [***]

11.5.3 Any continued distribution of any affected Device containing the affected or potentially affected Google Application or Google Trademark by Motorola    [***]

for any such continued Motorola use and/or distribution. [***]

11.5.4 Nothing in Section 11.5 shall affect or diminish either party’s rights under the indemnity provisions of Section 11.1 and 11.2.

12. General.

12.1 Notices. All notices must be in writing and addressed to the attention of the other party’s Legal Department and primary point of contact. Notice will be deemed given (a) when verified by written receipt if sent by personal courier, overnight courier, or mail; or (b) when verified by automated receipt or electronic logs if sent by facsimile or email.

12.2 Force Majeure. Neither party will be liable for inadequate performance to the extent caused by a condition (for example, natural disaster, act of war or terrorism, riot, labor condition, governmental action, and Internet disturbance) that was beyond the party’s reasonable control.

12.3 Assignment. The rights and obligations of each party under this Agreement may not be transferred or assigned directly or indirectly without the prior written consent of the other party; except that in the event of a party’s divestiture, spinoff, or other separation of a party’s business, the applicable party may assign its rights or obligations under this Agreement, in whole or in part, at no additional cost and without having to obtain the other party’s prior written consent. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. Should a party assign the Agreement as outlined above, the assignee will assume the rights and obligations pursuant to the Agreement.

12.4 Change of Control. Upon a change of control (for example, through a stock purchase or sale, merger, or other form of corporate transaction), (a) the party experiencing the change of control will provide written notice to the other party within 30 days after the change of control, and (b) the other party may immediately terminate this Agreement any time between the change of control and 30 days after it receives the written notice in subsection (a) of this Section 12.4.

12.5 No Waiver; Severability; No Agency; No Third-Party Beneficiaries. Failure to enforce any provision will not constitute a waiver. If any provision is found unenforceable, it and any related provisions will be interpreted to best accomplish the unenforceable provision’s essential purpose. The parties are independent contractors, and this Agreement does not create an agency, partnership or joint venture. There are no third-party beneficiaries to this Agreement.

12.6 Controlling Law. This Agreement, and all matters arising out of or relating to this Agreement, shall be governed by the laws of the State of New York ,without giving account to its conflict of law principles. Nothing in this Agreement will limit either party’s ability to seek equitable relief.

12.7 Entire Agreement; Amendments; Counterparts. This Agreement is the parties’ entire agreement relating to its subject and supersedes any prior or contemporaneous agreements on that subject. Any amendment must be in writing and expressly state that it is amending this Agreement. The parties may execute this Agreement in counterparts, including facsimile, PDF, and other electronic copies, which taken together will constitute one instrument.

 

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IN WITNESS WHEREOF, the parties have executed this Agreement by persons duly authorized as of the Effective Date.

 

COMPANY:       GOOGLE INC.

/s/ Jeff Bulger

     
By      

/s/ Andy Rubin

Jeff Bulger

      By
Name      

Andy Rubin

GCM - Embedded Software

      Name
Title      

Director

5/20/09

      Title
Date      

6/8/09

      Date

 

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EXHIBIT A - Google Applications and Device Requirements

The following Google Applications are available to be pre-installed and distributed on Devices and the Google Applications for each Device shall be agreed upon in a Launch Addendum signed by Google.

 

1. Google Applications:

 

   

Set-up Wizard

 

   

Google Phone-top Search

 

   

Gmail

 

   

Google Calendar

 

   

Google Talk

 

   

YouTube

 

   

Google Maps for Mobile

 

   

Google Street View

 

   

Contact Sync

 

   

Android Market Client (not products downloaded from Android Market)

 

   

Google Voice Search

 

   

Network Location Provider

For use of the Network Location Provider, Company shall ensure that the appropriate prompts are displayed to the End User seeking the End User’s acceptance of the terms of service and privacy policies for Network Location Provider as provided by Google. Company shall not prevent the End User from accepting the relevant terms of service prior to enabling Network Location Provider or any application making use of Network Location Provider.

 

2. Devices, Territories and Telecom Operators

The Devices, Device Forecast Target Terminal Acceptance Dates, Target Launch Dates, Territories, Telecom Operator, Google Trademark, specific Google Applications, Google Trademark, and Restrictions on Google Applications shall be as set forth in separately executed addendums to this Exhibit A. Each such addendum will be in the form attached hereto as Attachment 1 (Form of Launch Addendum) (in any event, pursuant to Sections 2.1, and 4.3, initial distribution in each individual Territory shall be subject to Google’s execution of an approved, written Addendum):

In addition to the requirements set forth in the Agreement the following terms set forth in this Exhibit A shall apply to each Device and each Launch:    [***]

; (b) per the last sentence of Section 2.1 of the Agreement, where Google specifies a specific version of a Google Application to be distributed in a certain Territory, Company shall distribute only such version within such Territory; and (c) Company shall indemnify Google from and against any loss, damage, liability, fees, cost and/or expense incurred by Google arising out of or relating to breach of this Section 2 of Exhibit A. NOTWITHSTANDING ANYTHING TO THE CONTRARY, ANY PAYMENT OBLIGATIONS ARISING OUT OF THIS SECTION 2 OF EXHIBIT A SHALL NOT BE SUBJECT TO SECTION 10 OF THIS AGREEMENT.

Company understands and agrees that it shall not Actively Promote (as defined below) , and shall use commercially reasonable efforts to prevent any third party (including its affiliates, resellers, distributors and Telecom Operators) from

 

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Actively Promoting Google Applications or any Google services except in those Territories in which such Google Applications or services are expressly authorized by Google in this Agreement. For purposes of this Agreement, “Actively Promote” or “Actively Promoting” means the proactive promotion of a Google Application on any Device as a key value proposition of the device, including point of sale promotion, media advertising, and general consumer-focused promotion of Google Applications or Google services on any Device.

Google understands and agrees that the Launch Addendums are Confidential Information of Company and extremely sensitive information and as a result agrees that the Launch Addendums shall only be disclosed to those employees with a need to know such information for capacity planning and risk assessment and mitigation purposes.

 

3. Placement Requirements: Where Google search is pre-loaded, a Google search box must be [***] , and other Google Application placement requirements to be defined by Google or otherwise mutually agreed upon by the Parties.

 

4. Distribution: Company shall distribute the Google Applications via the following distribution methods (in any event, all in accordance with Section 4.3, each implementation and/or distribution of any Google Applications shall be subject to Google’s prior written approval): Company shall preload the Google Applications on the Devices as follows: After preload, an icon representing each Google Application shall appear on the Device phonetop, or as otherwise specified by the parties in a Launch Addendum.

 

5. General:

 

a. Preload by Company of a Google Application shall be limited to installation by Company of the Google Application, and shall not involve launch of the Google Application

 

b. End User selection of an icon representing an already preloaded Google Application shall launch such Google Application.

 

6. Support. Company is solely responsible for customer care and support of its users. Google will provide support for Google Applications as made generally available to users of Google Applications.[

 

7. Branding. Branding on the hardware of the Devices will be determined by Company, but shall not include any Google branding or Google Trademarks, unless specifically agreed to in writing by the Parties.

 

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ATTACHMENT 1 TO EXHIBIT A

FORM OF LAUNCH ADDENDUM

LAUNCH ADDENDUM #     

This Launch Addendum is entered under and subject to the Mobile Application Distribution Agreement effective May 1, 2009 between Motorola, Inc. (Company) and Google Inc. (Google) (the “MADA”)..

Upon execution of this Addendum, Company and Google agree to the Launch the Device as set forth below. No Launch may proceed until the both parties confirm Terminal Acceptance in writing. All Launches are subject to the terms and conditions of the MADA.

 

Device    Device
Forecast
for the
Territory
(first 12
months
after
Launch
Date in the
Territory) .
   Target
Terminal
Acceptance
(TA) Date
   Target
Launch
Date
   Territory    Telecom
Operator
   List of
Google
Applications
   Google
Trademark
(if any)
   Restrictions
on Google
Applications
(e.g., No
YouTube in
China)
To be determined    To be
determined.
   To be
determined.
   To be
determined
   To be
determined
   To be
determined
   To be
determined
   To be
determined
   To be
determined

Additional Terms (if any):

 

 

COMPANY:                                                               GOOGLE INC.
By      

 

     

 

Name       By

 

     

 

Title       Name

 

     

 

Date       Title
     

 

      Date

 

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EXHIBIT B - Reports

Company Reports - Within the later of forty-five (45) days of the end of each calendar quarter or upon Company’s public quarterly reporting during the Term, Company shall provide the following reports:

1. Total number of Devices distributed with a preloaded version of a Google Application during such calendar quarter (by Google Application, country and Device model within each country).

 

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EXHIBIT C- Implementation Requirements

1. Company shall deliver to Google no less than four (4) Devices representative of Devices used by End Users for terminal acceptance as set out in Section 4.3 of this Agreement. Google may use such Devices to test the operation and presentation of relevant Google products, services and sites.

2. If at any time the Devices provided under Section 1 of Exhibit C are no longer capable of displaying the current implementation of relevant Google products, services or sites, Company will provide Google with replacement Devices as required.

3. Company will provide free access to all necessary Application Programming Interfaces (APIs) and associated data in order to allow Google to optimize the Google products and services (such as Device ID, session ID, billing API, location API (when available), and any other APIs and enablers generally offered by Company to partners).

4. Google may from time to time provide Company with an Application and tests that should be run on Devices (which may represent families of Devices) on which such Applications will be loaded to assure the operation and presentation of such Application. In such an event, Company may execute and may provide to Google the test results.

5. Company shall configure the appropriate Client ID for each Device as provided by Google.

6. Company agrees to reasonably assist Google with ongoing testing of Devices and Android applications. Google may, from time to time, provide Company with Android-based applications and tests to run on Devices (which may represent families of Devices). Company may load such Applications on Devices and may run such test in a timely manner to help assess the operation and presentation of such applications and provide the test results to Google.

 

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EXHIBIT 10.15

TERM SHEET FOR SUBSCRIBER UNITS AND SERVICES

AGREEMENT BETWEEN

NEXTEL COMMUNICATIONS, INC. AND

MOTOROLA, INC.

This term sheet agreement (“Term Sheet”) is between Nextel Communications, Inc. (“Nextel”) and Motorola, Inc. (“Motorola”), collectively the “Parties”, for the supply of iDEN Subscriber Units, iDEN Subscriber Unit Features (“ISUF”), and Services. The Parties intend to enter into a final multi-year supply agreement. It is the intent of the Parties that this Term Sheet expresses the general basis for that multi-year supply agreement and that substantially similar terms and conditions as stated herein will be incorporated into that agreement. The terms and conditions contained herein are interim terms only, and the parties agree that all terms and conditions whether or not included in this Term Sheet shall be negotiated in good faith as part of the 2003-05 Agreement (as defined below). [***]

Additionally, during the term of this Term Sheet, the Parties will conduct business consistent with the material terms and conditions stated herein.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

INDEX

 

                 Page

1

   

Term

   3

2

   

Financial Proposal and Terms

   3
   

2.1      2003 Promotional Programs

   3
   

2.2      Co-operative Advertising Program for the Term

   5
   

2.3      Planning and Forecasting

   6
   

2.4      Subscriber Equipment Unit Post-paid Pricing and Terms

   6
   

2.5      Purchase Advance (“PA”) and Ongoing [***] PA Process

   8
   

2.6      “Efficiency Curve Price Adjustments”

   13
   

2.7      Benchmarking Process

   14
   

2.8      Soft Launch Handsets for Initial Launch

   16
   

2.9      Transceiver and DBR Pricing

   16
   

2.10    Upgrade Programs

   16
   

2.11    Tooling Costs

   16
   

2.12    Project Documentation Process (“PDP) Augmentation

   16

3

   

Intellectual Property

   16

4

   

[***]

   17

5

   

Confidentiality

   17

6

   

Purchase Terms and Conditions

   18

7

   

Additional Terms and Conditions

   18

8

   

Force Majeure

   18

9

   

Survival of Terms

   18

10

   

Choice of Law and Dispute Resolution

   18

11

   

Limitation of Liability

   19

Exhibits

Exhibit A: [***] Platform Pricing Menu

Exhibit B-1: [***] Pre-Paid Pricing Menu

Exhibit B-2: [***] Post-Paid Pricing Menu

Exhibit C-1: Post-paid PA Projects and Payment Schedule

Exhibit C-2: Pre-paid (Boost) PA Projects and Payment Schedule

Exhibit C-3: ISUF Projects and Payment Milestones

Exhibit D: Product Terms and Conditions

Exhibit E: Transceiver and DBR Pricing

Exhibit F: Sample of the Application of Efficiency Curve and PA Price Adjustments

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

1 Term:

It is the intent of the Parties that this Term Sheet will be replaced and superseded by a multi-year supply agreement for iDEN platform based subscriber radios sold through Motorola’s iDEN Subscriber Group (“Handset Units”), which will cover the minimum time period from 1/1/03 to 12/31/05 (“2003-05 Agreement”). The renewal terms of the multi-year supply agreement will be addressed in the multi-year supply agreement. This Term Sheet will remain in effect for 120 days from the date both Parties sign this Term Sheet (“Term Sheet Effective Date”), or until the 2003-2005 supply agreement is executed by the Parties, whichever occurs first. Parties will negotiate in good faith during the 120-day period and may extend the Term Sheet by mutual agreement of both parties.

In the event the 2003-05 Agreement is not reached within 120 days from the Term Sheet Effective Date and the Term Sheet has not been extended by mutual agreement of both Parties in writing, then from such point:

 

  1) The Term Sheet will expire.

 

  2) All Subscriber Unit pricing will return to the Not-to-Exceed Pricing as indicated in Exhibits B-1 and B-2.

 

  3) All PA payments that have not already been credited back to Nextel in the form of PA Credits will be refunded to Nextel in full.

 

  4) All outstanding orders (or partial orders outstanding) will be amended by the Parties to reflect the appropriate Not-to-Exceed Pricing as indicated in Exhibits B-1 and B-2.

 

  5) The parties will work together to reconcile invoices and make appropriate payment adjustments to reflect #1-4 above.

Finalization of the 2003-05 Agreement is contingent upon the Parties’ resolution of relationship issues currently being addressed by Senior Management.

 

2 Financial Proposal and Terms:

 

  2.1 2003 Promotional Programs:

 

  2.1.1 Platinum Partners and Platinum Partners Plus:

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

[***]

 

  2.1.2 Coming In First:

[***]

 

  2.1.3 Pre-Paid Programs:

During the term of the 2003-05 Agreement, Nextel will be eligible for the reduced base package pricing for pre-paid Handset Units described in Exhibit B-1, in accordance with the terms and conditions specified in the section entitled “Subscriber Unit Pre-paid Pricing” below.

In addition, Motorola may from time to time offer additional pre-paid handset promotional funding and programs, provided that Nextel’s post-paid Handset Unit purchases [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

[***]

The 2003 programs outlined above in Table 2.1 will not extend beyond 2003.

Nextel and Motorola will meet at least three (3) months prior to the end of each calendar year to review the current business conditions and effectiveness of the Platinum Partners, Platinum Partners Plus, Volume Rebate Incentive, and the Pre-paid/Boost programs, and to determine appropriate promotional programs for the following contract year.

 

  2.1.4 Boost Market Development Offer:

[***]

 

  2.2 Co-operative Advertising Program for the Term:

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

[***]

 

  2.3 Planning and Forecasting:

For planning and operational purposes, Nextel shall provide Motorola with a detailed twelve month (12-month) rolling forecast as follows:

 

  1. Nextel will submit “Monthly Purchase Forecast” fourteen (14) days prior to the first (1st) day of each upcoming month for warehouse orders and nine (9) days prior to the first (1st) day of each upcoming month for Value Added Distribution (VAD).

 

  2. Monthly purchase orders will be released to Motorola after the Monthly Purchase Forecast has been submitted, or ten (10) to thirteen (13) days prior to the first (1st) day of each upcoming month.

 

  3. Upon receipt and review of the Monthly Purchase Forecast and purchase orders, Motorola will provide a written response to Nextel within seven (7) days, confirming or highlighting any key issues of the submitted Forecast.

 

  2.4 Subscriber Equipment Unit Post-paid Pricing and Terms:

 

  2.4.1 [***] Subscriber Unit Post-Paid Pricing:

The pricing for Handset Units is specified in Exhibit A. Nextel and Motorola agree to periodically discuss joint cost savings opportunities available to both Parties from the elimination of specific handset models, process improvements, sourcing strategies, component modifications, and warranty cost alternatives.

 

  2.4.2 [***] Subscriber Unit Post-Paid Pricing:

The pricing for each of the post-paid Handset Units is specified in Exhibit B-2 and shall constitute the maximum Base Package price that Motorola shall charge Nextel for the listed Handset Units (“Not to Exceed,” or “NTE” price).

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

  2.4.3 Subscriber Equipment Unit Pre-Paid Pricing and Terms:

The pricing of Nextel/Boost pre-paid Handset Units for 2004 will be as specified in Exhibit B-1 , and as may be amended, provided the following two conditions are both satisfied:

 

  1) For the term of the Agreement, the post-paid Handset Unit annual volume purchases will be [ *** ]

 

  2) Volume and Mix Pricing Conditions, Commitments & Adjustments

 

  a) Exhibit B-1 Pricing of Nextel/Boost pre-paid Handset Units for 2004 requires [***]
    Handset Units to be purchased in 2004 (January 1, 2004 through December 31, 2004); and

 

  b) No greater than [***] of the pre-paid Handset Unit volume purchases starting from July 1, 2004 through the remainder of the term of the Agreement will consist of [***]

 

    Furthermore, this clause is contingent upon Motorola meeting the Ship Acceptance dates [***]

                                                                                                                   The Parties acknowledge that the [ *** ]                                                      may be changed by mutual agreement to some other model and/or models         [ *** ]         and in such case this clause would be appropriately modified to reflect the mutually agreed upon changes. If any of the aforementioned models, and/or their mutually agreed replacements, have their Ship Acceptance dates delayed, unless the delays are agreed to by both parties, the         [ *** ]         mix requirement will become effective in the same month that the Motorola Ship Acceptance has been achieved for the last remaining product of the aforementioned models or their substitutes, as may be agreed upon.

In the event any of the above stated conditions in Items 1) and 2) above are not satisfied, then the following conditions will apply:

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

  I. If conditions set forth in Item 1) are not met by December 31, 2004, then all pre-paid handsets will be priced equivalent to [***]

, adjusted for any Efficiency Curve Pricing Adjustments, PA credit (per unit), or competitive benchmarking adjustment, for the remainder of the term of the Agreement. With the exception of [ *** ]                        , in the event a comparable post-paid Handset unit model does not exist                 [ *** ]             , the base package price of the pre-paid Handset Unit model will increase by [***] of the base package price specified in Exhibit B-1 and all volumes of pre-paid Handset Units will be included in the appropriate Efficiency Curve calculations going forward. The pre-paid handsets will receive the associated price reduction based on its tier classification.

 

  II. If either of the conditions set forth in Item 2) are not met, all pre-paid Handset Units will be priced equivalent to [***]

, adjusted for any Efficiency Curve Pricing Adjustments, PA credit (per unit), or competitive benchmarking adjustment for the remainder of the term of the Agreement. With the exception of [***]                                     , in the event a comparable post-paid Handset unit model does not exist                 [***]             , the base package price of the pre-paid Handset Unit model will increase by [***] of the base package price specified in Exhibit B-1 and all volumes of pre-paid Handset Units will be included in the appropriate Efficiency Curve calculations going forward. The price adjustment (via a debit memo) will be applied retroactively to all pre-paid units shipped from [***] 2004. The pre-paid handsets will receive the associated price reduction based on its tier classification.

 

  2.5 Purchase Advance (“PA”) and Ongoing Falcon PA Process:

For certain proposed products or features, Motorola will, at its sole discretion, offer Nextel, including Boost, the option to purchase the specified product or feature on special terms and conditions called the “PA Model.” Under the PA Model, Nextel will pre-pay agreed amounts, pursuant to an agreed payment schedule, for specified finished products or features to be delivered by Motorola as part of the agreed PA Model project. Except as otherwise agreed in Section 2.5.3 below, all pre-payments must be made according to the project’s milestone dates with the final pre-payment being made on the project prior to a project’s commercial release by Motorola (hereinafter “Ship Acceptance”) to be eligible as an PA Model project.

The 2003-05 Agreement shall address the process applicable to the ISUF projects.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

  2.5.1 PA Process:

For each product or feature offered under the PA Model, Motorola will provide the following information in the given timeframes to Nextel as part of the Product Development Process (“PDP”), and Nextel will participate and provide the following responses as part of the PDP process.

 

  1) MRD Draft to Nextel

 

  a) Motorola to provide initial NTE pricing to Nextel.

 

  b) Motorola to provide NTE PA total amount and maximum time period over which product purchases by Nextel will be eligible for the PA credit (“PA period”) described below. In no event will the PA period be greater than [***] from the Ship Acceptance date of each specific model.

 

  c) Motorola to provide PA payment schedule by quarter (Timing of payments may be subject to change).

 

  d) Nextel to provide initial feedback and responses to Motorola.

 

  2) Review and Approval of MRD by Nextel

 

  a) Motorola to provide updated, if needed, PA total amount, NTE pricing and PA period (considering MRD draft inputs, comments, and responses from Nextel).

 

  b) Motorola to provide final PA payment schedule by quarter (Timing of payments may be subject to change).

 

  c) Nextel to provide approval of MRD and/or feedback. Approval of the MRD signifies Nextel’s agreement to proceed.

 

  3) Schedule Baseline

 

  a) Motorola to provide final PA payment schedule by due date specified in Exhibits C-1 and C-2 .

 

  b) The PA Model project schedule will commence only upon receipt of the Nextel/Boost approval signatures on MRD and pricing addendum for the project and any PA payment(s) due prior to project commencement.

 

  c)

The Parties agree to review the project schedule progress for each PA Model project monthly, for a period of [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

 

[***]   ( i.e. , a rolling [***] quarter view), after commencement of the PA Model project. The Parties will utilize the current PDP and Subscriber Roadmap process as the forum for such discussions.

 

  d) Motorola’s obligation to perform the agreed project is contingent upon Nextel making scheduled PA payments. Subject to Motorola’s written notification to Nextel of late payment, Motorola will offer a 10 calendar day cure period for the PA payment to be made. In the event that Nextel fails to make any PA payments when due or within the cure period, Motorola reserves the right to continue, postpone, substantially modify or cancel any PA Model project, in whole or in part, for which payment was not timely made without any further liability whatsoever.

 

  e) In the event that a PA Model project is postponed, substantially modified or canceled by Nextel, all PA Model payments made up to that date for that PA Model project will be forfeited by Nextel and, in the event the project is continued and commercially released by Motorola, no PA credits will be applied to the Nextel purchases of that product or feature. In the event that a PA Model project is materially delayed through no fault of Nextel, or Motorola is in material breach of this Section 2.5, all PA payments made up to that date for that PA Model project only will be returned at Nextel’s discretion, without further liability for that PA Model project whatsoever, and no PA credits will be applied to the Nextel purchases of that product or feature. For purposes of the above sentence, a material delay will in no event be less than a period of [***] days.

Once the MRD has been approved, any modifications to projects, including changes in schedules, must be submitted by Nextel to Motorola’s Change Control Board (“CCB”) for review and evaluation, and will be effective only upon mutual agreement of the Parties. Failure to approve a change proposed by Nextel to the approved MRD does not constitute a material breach on the part of Motorola with respect to that PA Model project. If the PA Model does not meet the specifications as stated in the approved MRD, the Parties will negotiate in good faith a mutually acceptable solution.

 

  2.5.2 PA Administration

For all PA Model projects, if Nextel makes the PA Model payments in full for the respective PA Models, through PA Model Ship Acceptance, Motorola will apply an account credit in an amount equal to the total PA

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

Model payments made for the respective PA Model projects, [***]

against actual purchases of the PA Model product or feature completed under that PA Model project. Until the PA amount is exhausted for a specific PA Model project, the purchase price of the unit on the Nextel purchase order to Motorola shall be as indicated on the line entitled “BASE PACKAGE PRICE (*Feature/ Accessory is included)” in Exhibits B-1 and B-2 . The applicable PA credit amount may be shown as a line item on the purchase order. The net amount that will be due to Motorola by Nextel for the respective models is indicated in Exhibits B-1 and B-2 on the line entitled “WITH PA CREDIT, BALANCE OF BASE PACKAGE PRICE AMOUNT DUE AT SHIPMENT”. The PA Model account credit will be allocated on the invoice for each Nextel purchase of the PA Model product (“PA Credit”) until such time as all PA Model funds paid by Nextel for the PA Model project have been exhausted or the PA period elapses, whichever event occurs earlier. If the PA model payments are not fully exhausted within the PA period, the portion of the PA model payment that has not been exhausted is forfeited to Motorola [***]

. PA payments and PA credits cannot be redeemed for cash, are non-transferable, and PA payments made for one product model or feature may not be applied toward the purchase of any other product model or feature.

The Parties previously agreed to apply the PA Model to certain products set forth in Exhibits C-1 and C-2 and certain payments related to supplying ISUF as set forth in Exhibit C-3 . Accordingly, no later than January 10 th 2004, Nextel will pay Motorola (via a special wire transfer) the following PA Model payments and ISUF payments, as outlined in Exhibit C-1 , Exhibit C-2 and Exhibit C-3 :

 

  a) All of the life-to-date 2002 and 2003 PA payments due for completed project work on the following [***] models: [***]

. The PA period for the products in Exhibit C-1 and Exhibit C-2 shall not be greater than [***] months from the earlier of Ship Acceptance date of each specific model [***]

.

 

  b) All of the life-to-date ISUF payments due for completed project work on the [***] and [***]

features. All the ISUF payments to Motorola as stated in Exhibit C-3 are non-refundable and no credit shall be applied to product purchases.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

Nextel further agrees to pay the remaining PA Model and ISUF payments as outlined in Exhibits C-1 , C-2 and C-3  via the Rebate File as the respective milestones are completed. For each ISUF project or feature, assuming that all ISUF payments are made per project or feature, the sum of the ISUF payments for individual features (as identified in Exhibit C-3 ) represent fees for an irrevocable and perpetual right to use the feature with respect to iDEN subscriber units sold by Motorola to Nextel under this Term Sheet.

 

  2.5.3 Special Treatment of PA for [***]                                                                                                    Handset Units

The [***]                            handsets have been shipped [***]

prior to the signing of the Term Sheet. The Parties mutually acknowledge that these models do not represent the completed work product as specified in the executed MRDs [***]                                                                      . Motorola and Nextel agree to recognize these Handset Unit models as PA Model projects. Accordingly, the PA Model and Efficiency Curve structure will be implemented with the initial shipments of these Handset Units [***]

. For these handset models, Nextel shall make PA payments up through completion of the respective “Beta” milestone as shown in Exhibit C1 . The final payment per the “Ship Acceptance” milestone for these models shall be due no later than 10 days after these handsets start shipping [***]                .   For each PA Model project addressed by this Section 2.5.3, upon full payment of all PA amounts up through completion of the respective “Beta” milestone set forth in Exhibits C-1 and C-2 , Motorola will begin to apply the associated PA Model per unit credits to Nextel’s purchases of these [***] products such that the amount due and payable for each purchase will equal the per unit amount indicated on Exhibits B-1 and B-2 to this Term Sheet as “With PA Credit, Balance of Base Package Price Amount Due at Shipment” (plus applicable “Kit Adders”). In the event that such pending PA payments are not made prior to January 10th 2004, no PA credit will apply to those [***] products, and the amount due and payable for each purchase will equal the Base Package Price per unit price indicated on Exhibits B-1 and B-2 . Accordingly, respective purchase orders, shipments, and invoices will be reconciled and adjustments made thereto such that the net corrected unit pricing and PA credits per unit for purchase orders, shipments and invoices to date (starting with [***]                    shipments) will conform to Exhibits B-1 and B-2 (Base Package Price + “Kit Adders” – 9% of Base Package Price). Other promotions, rebates, terms and conditions outlined within this Term Sheet remain in effect. The Parties mutually agree to:

 

  1.

Reconcile [***]                                         shipments, invoices and any required adjustments by December 30, 2003 and reconcile December shipments, invoices and any required adjustments by January 10, 2004. Motorola will issue PA credits applicable to

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

 

these products shipped September through November 2003 on the January 2004 Rebate File, provided Nextel has remitted all amounts in accordance with Section 2.5.2 a) above.

 

  2. After initial reconciliation, PA credits will be applied to subsequent shipments in accordance with the PA methodology set forth in Section 2.5.2 above.

Unless agreed in writing otherwise, in no event will a price reduction pursuant to the PA Model occur for these Handset Units if the final PA payment milestone due at Ship Acceptance has not been made by Nextel.

 

  2.5.4 Additional PA Projects

It is the Parties’ intent that additional 2003 – 2004 [***] projects [***]                                                                      will also proceed under the PA Model, pursuant to the PA Model process set forth in Sections 2.5.1 and 2.5.2 above, and will be added to the appropriate respective Exhibits once the details are agreed to by the Parties.

 

  2.6 “Efficiency Curve Price Adjustments”

The following price reductions or Efficiency Curve Price Adjustments will apply to iDEN        [***]        Handset Units purchased by Nextel, excluding Limited Edition, Special Edition, NASCAR, and DBR models, and excluding Nextel sourced/selected items (i.e., SIM Cards, collateral pieces, and associated pick fees) (“Eligible        [***]        Handset Units”). The Efficiency Curve Price Adjustments will apply to iDEN [***] Handset Units if the conditions under subparagraph 1) and 2) of the Section 2.4.3 (entitled “Subscriber Equipment Unit Pre-Paid Pricing and Terms”) are not met.

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

[***]

 

  2.7 Benchmarking Process:

 

  2.7.1 Benchmarking Process Framework Overview

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

[***]

 

  2.7.2 Pre-Ship Acceptance

Approximately sixty (60) days prior to Ship Acceptance of each new Eligible Post-Paid Handset, the Parties will benchmark the new handset per the Benchmarking Process Set forth above.    [***]

 

  2.7.3 Post-Ship Acceptance

The Parties will perform the Benchmarking Process described above on an annual basis during the month of [***]

for those Eligible    [***] Handset models that have not undergone the benchmarking process within the past        [***]        months. The consolidation of the benchmarking activities for the Eligible models is intended to reduce administrative impact.

In the event that the Parties mutually agree that market conditions warrant an interim review, the Parties will perform such benchmarking activities or engage in pricing review discussions on an exception basis. Any Eligible         [***]        Handset Unit model that receives an Interim Price Adjustment pursuant to the Benchmarking Process will be excluded from the next subsequent Efficiency Curve Price Adjustment, however,

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

purchases of those units will still count toward the Efficiency Curve purchase milestones

 

  2.8 Soft Launch Handsets for Initial Launch:

Prior to each Eligible        [***]        Handset Unit or data device initial launch, Motorola will provide Nextel with up to a [***] discount off of the Base Package price on up to [***] units, to be negotiated by the Parties, (typically a quantity of [***] units). The discount will be applied to the “Total Package” price ( i.e. , “Fully Kitted” price which includes all “Adders”), but excluding the SIM Card, SIM Card pick fees, and any incremental customer specified collateral for handsets.

 

  2.9 Transceiver and DBR Pricing:

See Exhibit E for Transceiver Only and DBR Pricing. Nextel agrees not to repackage the Transceiver Only and DBR units as fully kitted phones. Further conditions on use of Transceiver and DBR units to be included in the multi-year agreement.

 

  2.10 Upgrade Programs:

The Parties intend to explore the possibility of developing an upgrade program, in particular with respect to [***] products.

 

  2.11 Tooling Costs:

Motorola will pay for 2003 tooling costs associated with [***] products. The 2003-05 Agreement will include appropriate provisions regarding future tooling costs.

 

  2.12 Project Documentation Process (“PDP) Augmentation:

As part of the on-going PDP process, Nextel and Motorola will hold a “Business Reconciliation Meeting” within five (5) business days of the monthly PDP subscriber unit meeting, unless otherwise agreed to by the parties. The purpose of this meeting will be to discuss and document potential issues and financial impacts to handset pricing and PA funding that may arise due to changes in product specifications, marketing programs, or other discussions that occur during the monthly PDP subscriber unit meeting.

 

3 Intellectual Property:

The parties agree to negotiate in good faith on terms and conditions related to intellectual property rights for the definitive 2003 -05 Agreement. However, during this Term Sheet and any extensions thereto, and in the absence of an express written provision as to ownership of intellectual property, the ownership of any intellectual property created as a direct result of the fulfillment of the terms and conditions of this Term Sheet shall be determined by application of law, and Nextel shall have the normal non-exclusive

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

royalty-free license, which is implied or otherwise arises by operation of law, solely to use and sell to its customers only those products sold by Motorola to Nextel under this Term sheet. No other licenses are granted directly or indirectly under this Term Sheet by either Party.

 

4 [***]

 

5 Confidentiality:

“Confidential Information” shall mean the terms, conditions, and pricing of this Term Sheet and the content of any documents or information, which is identified in writing as being confidential and which is acquired from the other party in connection with this Term Sheet or the negotiations between the Parties regarding the multi-year supply agreement that are contemplated by this Term Sheet. Each party shall copy and use any such Confidential Information solely for the purpose of fulfilling their respective obligations under this Term Sheet. The Parties agree not to disclose any Confidential Information to any third party for any purpose without prior written approval from the other Party, and shall not use any Confidential Information for any purpose other than in furtherance of this Term Sheet or as expressly permitted under the terms of the NDA applicable to the information.

Each Party shall use its best efforts, but in no instance less than reasonable care, to limit dissemination of Confidential Information disclosed to it by the other Party to only its employees and agents who have a strict need to know in the performance of the Party’s duties hereunder, and not to disclose the Confidential Information of the other Party to any third party without the other Party’s prior approval.

The Parties agree to take appropriate action, by instruction, agreement, or otherwise, with any persons permitted access to the other’s Confidential Information so as to assure that they will hold such information in confidence as required in this Term Sheet.

The obligations imposed upon either party under this Section shall not apply to information whether or not designated as “Confidential”: (i) which is made public by the disclosing party; (ii) which the receiving party can reasonably demonstrate is already in the possession of the receiving party and not subject to an existing agreement of confidence; (iii) which is received from a third party without restriction and without breach of this Letter Agreement; (iv) which is independently developed by the receiving party as evidenced by its records; (v) which the receiving party is required to disclose pursuant to a valid order of a court or other governmental body or any political subdivision thereof, provided , however , that the recipient of the information shall first have given notice to the disclosing party and made a reasonable effort to obtain a

 

Nextel – Motorola Proprietary and Confidential    17


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

protective order requiring that the information and/or documents so disclosed be used only for the purposes for which the order was issued.

 

6 Purchase Terms and Conditions:

The Parties agree that the terms and conditions set forth in Exhibit D attached hereto will apply to iDEN Platform based products, services or features supplied to Nextel by Motorola under this Term Sheet and neither Nextel’s purchase orders nor Motorola’s invoices shall change, alter or add to the terms and conditions of Exhibit D or this Term Sheet in any way. The parties shall negotiate in good faith more detailed purchase and terms and conditions as part of the 2003-05 Supply Agreement.

 

7 Additional Terms and Conditions:

The Parties agree to include additional provisions, such as End of Life Process, Value Added Distribution (VAD), Warranty Fulfillment (Pre-paid and Post-paid) Service and Repair, Accessories, i58sr and i88 End of Life Support (EOL) Support, and Advance Source Parts to the multi-year supply agreement.

 

8 Force Majeure:

Neither party shall be liable for delays in delivery or performance, or for failure to manufacture, deliver or perform when caused by any of the following, which are beyond reasonable control of the delayed party:

Acts of God, acts of the public enemy, acts or failures to act by the other party, acts of civil or military authority, governmental priorities and regulatory actions, strikes or other labor disturbances, hurricanes, earthquakes, fires, floods, epidemics, embargoes, wars, riots, delays in transportation, and loss or damage to goods in transit, or acts or failures to act by the suppliers of the delayed party.

 

9 Survival of Terms:

“Confidentiality”, “Intellectual Property”, “Purchase Terms and Conditions”, “Choice of Law and Dispute Resolution” and “Limitation of Liability” will become binding upon signature of the last party signing below and will survive the cancellation, termination or expiration of this Term Sheet.

 

10 Choice of Law and Dispute Resolution:

The validity, performance, and all matters relating to the effect of this Term Sheet and any amendment hereto shall be governed by the laws of the state of Illinois without regard to its conflicts of laws provisions.

Motorola and Nextel will attempt to settle any claim or controversy arising out of this Term Sheet through consultation and negotiation in good faith and a spirit of mutual cooperation. If those attempts fail, then, except for disputes related to alleged patent, copyright, or trademark infringement, or breach of confidentiality, the dispute will be

 

Nextel – Motorola Proprietary and Confidential    18


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

mediated by a mutually acceptable mediator to be chosen by Motorola and Nextel within thirty (30) days after written notice by the other demanding mediation. Neither Party may unreasonably withhold consent to the selection of a mediator, and Motorola and Nextel will share the costs of the mediation equally. Venue for mediation shall be the United States of America. By mutual agreement, however, the parties may postpone mediation until they have each completed some specified but limited discovery about the dispute. The Parties may also agree to replace mediation with some other form of alternative dispute (ADR), such as neutral fact-finding or a mini-trial.

Any dispute which the Parties cannot resolve through negotiation, mediation, or other form of ADR within four (4) months of the date of the initial demand for it may then be submitted to the Federal District Court of Delaware for resolution. The use of any ADR procedures will not be construed under the doctrines of latches, waiver, or estoppel to affect adversely the rights of either Party. And nothing in this section will prevent either party from resorting to judicial proceedings if (a) good faith efforts to resolve the dispute under these procedures have been unsuccessful or (b) interim relief from a court is necessary to prevent serious and irreparable injury to one party or to others.

 

11 Limitation of Liability:

NEITHER PARTY, WHETHER AS A RESULT OF BREACH OF AGREEMENT, WARRANTY, TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE), PATENT INFRINGEMENT, COPYRIGHT INFRINGEMENT, OR OTHERWISE, SHALL HAVE ANY LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFIT OR REVENUES, LOSS OF USE OF THE PRODUCTS OR ANY ASSOCIATED EQUIPMENT, COST OF CAPITAL, COST OF SUBSTITUTE PRODUCTS, FACILITIES OR SERVICE, OR DOWNTIME COSTS OR CLAIMS OF THIRD PARTIES TO THE FULL EXTENT SUCH MAY BE DISCLAIMED BY LAW.

 

Motorola, Inc.   Nextel Communications, Inc.
By:  

/s/ [Signature]

  By:  

/s/ [Signature]

(Authorized Signatory)   (Authorized Signatory)
Title:     Title:  
Date:  

12-23-2003

  Date:  

12-31-03

 

Nextel – Motorola Proprietary and Confidential    19


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT A

2003 IDEN SUBSCRIBER GROUP

[*] PLATFORM PRICING MENU (RADIO IN-KIT PRICING ONLY)

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT B-1

2003-2004 IDEN SUBSCRIBER GROUP

[*] PRE-PAID MODELS PRICING MENU AS OF 12-18-03

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT B-2

IDEN SUBSCRIBER GROUP

[*] POSTPAID HANDSET PRICING MENU AS OF 12-18-03

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT C-1

NEXTEL COMMUNICATIONS, INC. (NCI)

POST-PAID PROJECTS AND PAYMENT MILESTONES

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT C-2

NEXTEL COMMUNICATIONS, INC. (NCI)

BOOST NRA PROJECTS AND PAYMENT MILESTONES (TOTAL)

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT C-3

NEXTEL COMMUNICATIONS, INC. (NCI)

ISUF PROJECTS AND PAYMENT MILESTONES

[*]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT D

PRODUCT TERMS AND CONDITIONS OF SALE

 

1. Products and Prices. The Products and the prices therefore are as agreed to by the Parties in the Agreement. This Agreement is for sales of Products in the Agreement only and does not create any obligation on Motorola with respect to any other products or services of Motorola’s iDEN Subscriber Group or any other division, group or sector of Motorola.

 

2. Orders. The only effect of any terms and conditions in Nextel’s orders shall be to request the time and place of delivery and number of units to be delivered, subject to Motorola’s acceptance, but they shall not change, alter or add to the terms and conditions of the Agreement in any way.

 

3. Deliveries. All deliveries are FOB Shipping Point. Title to the Products and risk of loss will pass to Nextel at the Shipping Point. Delivery dates are best estimates only. Motorola is not liable for any delays in delivery for any reason. Motorola will ship Products to Nextel’s designated locations in the United States.

 

4. Payment. Motorola will invoice Nextel for the Products on or about the date of shipment thereof. Payment of each invoiced amount is due within 30 days of the date of the invoice unless otherwise agreed by the Parties hereto. Nextel may withhold any disputed amounts and the withholding of such amounts shall not constitute a breach or default under this agreement or any other agreement between the parties. Upon resolution of such disputes, Nextel shall remit payment promptly, if any is due.

 

5. Warranty. Motorola warrants each Product only to the original end user in accordance with the Limited Warranty as stated in the Product’s Getting Started Guide that is provided to the end user with each Product. Motorola makes no other representation or warranty of any kind, express or implied. MOTOROLA SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

 

6. Incorporated Terms. The following terms and conditions set forth in Attachment B to the Letter of Agreement between the Parties dated November 4, 1991 are hereby incorporated by reference: Sections 4, 6, and 8-18. All references in these identified sections to “Letter Agreement” are hereby replaced with “Agreement” and all references to “FCI” or “Buyer” are hereby replaced with “Nextel”.

[END OF PRODUCT TERMS AND CONDITIONS OF SALE]


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

 

EXHIBIT E

IDEN SUBSCRIBER GROUP

TRANSCEIVER & DBR PRICING

[*]

EXHIBIT 10.16

AMENDMENT TWENTY-SEVEN TO THE

TERM SHEET FOR SUBSCRIBER UNITS AND SERVICES AGREEMENT BETWEEN

NEXTEL COMMUNICATIONS, INC. AND MOTOROLA, INC.

This Amendment Twenty-Seven to the Term Sheet for Subscriber Units and Services (“Amendment”) will be deemed effective as of January 1, 2010 (“Effective Date”) between MOTOROLA, INC., a Delaware corporation, with offices at 8000 West Sunrise Boulevard, Plantation, FL 33322 (“Motorola”), and NEXTEL COMMUNICATIONS, INC. a Delaware corporation, with offices at 2001 Edmund Halley Drive, Reston, VA 20191 (“Sprint” or “Nextel”) with Sprint / United Management Company as agent for Nextel Communications, Inc. and its Affiliates; (Motorola and Nextel to be collectively referred to as the “Parties” and each a “Party”).

WHEREAS, Motorola and Sprint entered into the Term Sheet for Subscriber Units and Services dated as of the 31st day of December 2003, as amended (the “Handset Term Sheet” or “Agreement”); and

WHEREAS, Motorola and Sprint wish to make certain amendments to the Handset Term Sheet to reflect agreement to certain business terms intended to be effective prior to execution of a master sales agreement;

NOW , THEREFORE , in consideration of the promises and mutual obligations contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, Motorola and Sprint agree as follows:

 

1. General

 

  1.1 Except as set forth herein, all capitalized terms not defined herein will have the meanings given to them in the Handset Term Sheet.

 

  1.2 All references are to sections in the Handset Term Sheet.

 

  1.3 Unless otherwise stated, all references to Sprint or Nextel include Nextel Communications, Inc. and its Affiliates (including Boost Mobile, LLC, Sprint/United Management Company, and Virgin Mobile USA, Inc.).

 

Page 1 of 2


2. Agreement Modifications

Motorola and Sprint agree that the following sections of the Agreement are modified to read as follows:

 

  a. Section 1 entitled “Term” of the Term Sheet for Subscriber Units and Services Agreement is deleted in its entirety and replaced with the following:

 

  1. “Term”:

This Agreement shall be effective from the Effective Date of this Agreement through December 31, 2010 (the “Initial Term”). This Agreement shall renew for one-year periods (each a “Renewal Term”) thereafter, unless either party provides written notice of non-renewal of this Agreement at least sixty (60) calendar days before the last day of the Initial Term or any Sprint Motorola Confidential Renewal Term or unless the parties agree otherwise. The Initial Term and any Renewal Terms are referred to herein collectively as the “Term”. For the avoidance of doubt, this shall be considered a fixed term agreement regardless of the number of Renewal Terms.

 

3. Ratification

Except as specifically stated in this Amendment, the Handset Term Sheet is, in all other respects, ratified, confirmed and continues in full force and effect.

 

4. Authority

Each party hereto represents and warrants that: (i) it has obtained all necessary and requisite approvals, consents and authorizations of third parties and governmental authorities to enter into this Amendment and to perform and carry out its obligations hereunder; (ii) the persons executing this Amendment on behalf of each party have express authority to do so, and, in so doing, to bind the party thereto; (iii) the execution, delivery, and performance of this Amendment does not violate any provision of any bylaw, charter, regulation, or any other governing authority of the party; and, (iv) the execution, delivery and performance of this Amendment has been duly authorized by all necessary partnership or corporate action and this Amendment is a valid and binding obligation of such party, enforceable in accordance with its terms.

IN WITNESS WHEREOF , Motorola and Sprint have entered into this Amendment as of the Effective Date first written above.

Signed:

 

 

N EXTEL C OMMUNICATIONS , I NC .

 

  

M OTOROLA I NC .

 

     

 

(Signature)

 

  

 

/s/ Shaun Moore

 

  

 

(Signature)

 

  

 

/s/ Richard Gadd

 

     

 

(Print Name)

 

  

 

Shaun Moore

 

  

 

(Print Name)

 

  

 

Richard Gadd

 

     

 

(Title)

 

  

 

Sourcing Manager

 

  

 

(Title)

 

  

 

Vice President, Sales

 

     

 

(Date)

 

  

 

12-23-09

 

  

 

(Date)

 

  

 

12-23-09

 

 

Page 2 of 2

Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

EXHIBIT 10.17

C O N F I D E N T I A L    P R O P R I E T A R Y

 

CORPORATE SUPPLY AGREEMENT

BETWEEN BROADCOM CORPORATION AND

MOTOROLA, INC.

This Corporate Supply Agreement (this “Agreement”), dated as of November 17, 2008 (the “Effective Date”), is between Motorola, Inc., located at 1303 E. Algonquin Road, Schaumburg, IL 60196 (“Motorola” or “Customer”) and Broadcom Corporation located at 5300 California Avenue, Irvine, CA 92617 (“Supplier”). Each may be referred to as a party (“Party”), or they may be collectively known as parties (the “Parties”). In consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, the Parties hereto agree that Supplier will supply Products to Motorola under the following terms and conditions:

1. SCOPE OF THIS AGREEMENT

1.1 General Applicability . This Agreement applies to all Motorola purchases of Products from Supplier from the Effective Date [***]

                         . References to “Motorola” or “Customer”, and “Supplier” include all entities of each respective Party that control, are controlled by, or are under common control with, that Party (“Affiliates”). An entity “controls” another entity when it owns more than fifty percent of the voting stock or other ownership interest of that entity or has the ability to direct its management.

1.2 Product Schedules . Motorola and Supplier may enter into written and signed product schedules (the “Product Schedules”) to establish additional terms and conditions applicable to one or more Products, or to establish project-specific terms and conditions required in connection with a particular project (e.g., customer-specific requirements). If the terms and conditions of a Product Schedule add to or conflict with this Agreement, the applicable Product Schedule will control as to the inconsistency only. A Product Schedule covering purchases of Products by Motorola for inclusion in Motorola’s broadband set-top boxes is attached as Product Schedule #1 to this Agreement and in addition Product Schedules covering purchases of other Products are attached hereto as Product Schedule 2 and Product Schedule 3.

1.3 Certain Definitions . As used in this Agreement, the following capitalized terms have the following meanings:

a. “Confidential Information” means confidential or proprietary data or information disclosed by one Party to the other under this Agreement (i) in written, graphic, machine recognizable, electronic, sample, or any other visually perceptible form, which is clearly designated as “confidential” or “proprietary” at the time of disclosure, and (ii) in oral form, if it is identified as confidential at the time of disclosure, and confirmed in a written summary designated as “confidential” or “proprietary” within thirty (30) days after disclosure.

b. “Derivative Work” means a work that is based on one or more pre-existing works, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion, or any other form in which such pre-existing work may be recast, transformed, or adapted, and, if prepared without authorization of the copyright owner of such pre-existing work, would constitute a copyright infringement. A Derivative Work includes a compilation that incorporates such pre-existing work.

c. “Documentation” means, in a format as mutually agreed, the user guide, compilation instructions, documents, manuals and computer-readable files, regarding the installation, use, operation, functionality, troubleshooting and other technical information sufficient to use the Software.

 

1


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

d. “End-User(s)” means customers (including distributors and service providers) who acquire Motorola product(s) that incorporates a Supplier Product.

e. “End User Agreement” means a written, legally enforceable agreement that (i) stipulates that the Free-Standing Software is licensed, not sold, and that title to and ownership of the Free-Standing Software and any portion thereof remain with Supplier or its licensors; and (ii) prohibits the end user from (a) copying the Free-Standing Software, except as reasonably necessary for internal back-up purposes, (b) using and/or transferring the Free-Standing Software to any third party apart from a products that incorporate or are interoperating with the Products, (c) modifying the Free-Standing Software, (d) attempting to reverse engineer, decompile or disassemble any portion of the Free-Standing Software delivered in Object Code, or (e) exporting the Free-Standing Software or any underlying technology in contravention of any applicable U.S. or foreign export laws and regulations.

f. “Excessive Failure” means (i) a verified repetitive and material failure in excess of [***] , of a Product to meet and operate in accordance with the applicable Product specifications [***], or (ii) a defect that occurs in more than [***]                                                                                                           , or other separately distinguishable group of Products, [***]; or (iii) [***]

                                                                           . Notwithstanding the foregoing, in the event of an Excessive Failure under subsection (ii) above, Motorola’s remedies for Excessive Failure described in subsections (iii) and (iv) of the first paragraph of Section 6.9 of this Agreement shall not apply to field failures of new Products [***]

                                                                                                                    .

g. “Forecast” means Motorola’s nonbinding, advance calculation of its future requirements.

h. “Illicit Code” means any computer instructions in the Software that can disable, destroy, or otherwise alter the software or hardware [***]

i. “Intellectual Property Rights” means any and all: (i) copyrights, trademarks, trade names, domain names, goodwill associated with trademarks and trade names, designs, and patents; (ii) rights relating to innovations, know-how, trade secrets, and confidential, technical, and non-technical information; (iii) moral rights, mask work rights, author’s rights, and rights of publicity; and (iv) other industrial, proprietary and intellectual property related rights anywhere in the world, that exist as of the Effective Date or hereafter come into existence, and all renewals and extensions of the foregoing, regardless of whether or not such rights have been registered with the appropriate authorities in such jurisdictions in accordance with the relevant legislation.

j. “MINT System” means the Motorola Internet Negotiation System.

k. “Non-Standard Product” means any Product that is not a Standard Product.

l. “Object Code” means computer-programming code in machine-readable form provided by Supplier to Motorola.

m. “Order” means the direction provided by Motorola to Supplier. As used in this Agreement, the term Order includes electronic communications made by Motorola under Schedule Sharing and written purchase order forms issued by Motorola.

n. “Order and Supply Period” means any period of time identified in any attached Product Schedule which specifies a particular period of time for Supplier to make any Products available for Order by Motorola. Supplier will supply such Products for the period of time identified in the Product Schedule, unless Motorola agrees in writing to a shorter period of time.

 

2


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

o. “Products” includes hardware; [***]

(iv) Documentation relating to the Software or [***]

                    . This Agreement applies to all Products provided by Supplier, directly or indirectly, to or for Motorola.

p. “Publicly Available Software” means [***]

q. “Software” means Object Code or Source Code or both, its Documentation [***]

r. “Source Code” means human readable computer programming code provided to Motorola by Supplier.

s. “Standard Product” is defined in Exhibit A.

2. TERM AND TERMINATION

2.1 Term and Renewal . This Agreement will have an initial term of     [***]         , starting on the Effective Date. After the initial term, the Agreement will automatically renew for additional successive one-year period(s) unless either Party provides the other with at least     [***]                                 days written notice of its intention not to renew the Agreement prior to the expiration of the initial term or any one-year renewal period.

2.2 Termination .

a. Either Party may terminate this Agreement if the other Party breaches a material obligation under this Agreement, and that breach continues uncured for a period of [***] days after receiving written notice of the breach.

b. Either Party may immediately terminate this Agreement in the event the other Party files a bankruptcy petition of any type or has a bankruptcy petition of any type filed against it, ceases to conduct business in the normal course, becomes insolvent, enters into suspension of payments, moratorium, reorganization or bankruptcy, makes a general assignment for the benefit of creditors, admits in writing its inability to pay debts as they mature, goes into receivership, or avails itself of or becomes subject to any other judicial or administrative proceeding that relates to insolvency or protection of creditors’ rights.

c. Late deliveries, deliveries of non-conforming or defective goods, failure to perform as agreed, or failure to provide reasonable assurances of future performance upon request, will entitle Motorola to terminate this Agreement, in whole or in part (including any individual Order) for cause, in which case, [***]

                                                                                                      .

 

3


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

d. Motorola may terminate this Agreement, or any applicable open Order(s), Product Schedule(s) and related Forecast(s), upon providing Supplier with prior written notice and not less than a thirty (30) day opportunity to cure in the event [***]

.

e. Motorola may terminate for convenience upon ninety (90) days prior written notice to Supplier.

2.3 Effect of Termination . Upon the expiration or termination of this Agreement for any reason:

a. Each Party will immediately stop using, and destroy or return to the other Party, all items that contain any Confidential Information belonging to the other Party (including without limitation all Motorola-consigned inventory and all types of Motorola Property as defined in Section 7 of this Agreement), except Motorola may retain one copy of any Confidential Information, [***] and Documentation necessary for the purpose of supporting Products sold to then-existing customers.

b. Motorola may continue to use and sell, in the ordinary course of business, any of its then existing inventory of Products. [***]

c. All Orders for Products issued prior to termination shall be subject to the terms and conditions of this Agreement, including payment terms.

3. FORECASTING AND ORDERING

3.1 Schedule Sharing . Unless agreed otherwise in writing, the Parties will use Motorola’s internet-based forecasting, ordering and delivery system as more fully described in Exhibit A (“Schedule Sharing”). All electronic communications made by Motorola and Supplier under Schedule Sharing will be considered to be “in writing” and the Parties agree not to contest the enforceability of those communications under the provisions of any applicable law relating to whether certain agreements must be in writing and signed by the Party to be bound thereby. Those communications, if introduced as evidence on paper in any judicial, arbitration, mediation, or administrative proceedings, will be admissible to the same extent as business records originated and maintained in documentary form.

3.2 Purchase Orders and Sales Acknowledgments . Upon mutual agreement, the Parties may exchange purchase orders, sales acknowledgments and invoice forms. All use of forms and Orders will be governed by the terms and conditions of this Agreement (including Exhibits and Product Schedules). No pre-printed terms and conditions on purchase order forms issued by Motorola, or any terms and conditions contained in Supplier’s quotations, acceptance, sales acknowledgments, and/or invoice forms, will supersede, extinguish, add to, alter or amend the provisions of this Agreement, even if signed by either or both Parties.

4. PRICES, PAYMENT TERMS, AND TAXES

4.1 General . Pricing for Products (the “Prices”) will be as stated in the MINT System or the applicable Product Schedule or Order. If the Parties agree to a Price change for any Product, unless agreed to otherwise in writing the new Price is applicable to all Product units received on or after the effective date of the price change, [***]

                                                                                                                                   . Supplier will promptly refund to Motorola any overpayment for Product units purchased by Motorola on or after the new Price effective date. All Prices are stated in US dollars unless agreed and specifically noted otherwise in the applicable Product Schedule and Order.

 

4


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

4.2 [***]

4.3 Ongoing Cost Reduction . Supplier and Motorola will engage in periodic benchmarking sessions with the goal of reviewing and maintaining best in class pricing for Motorola, which will be driven by a fact-based cost review process.

4.4 Payment Terms . Supplier will invoice Motorola upon delivery of the Products and, for Ancillary Services, upon completion of such services. Payment is due [***]                         days from the date of title transfer to Motorola of the Products. [***]

                                                                                          If there is a bone fide dispute with respect to the specific order for which payment is owing that is not resolved within those periods, payment with respect to the disputed portion of the order will be due ten (10) calendar days after such dispute is resolved. Time is of the essence of Motorola’s obligations under this section. If Supplier has entered into a Motorola self-billing agreement with Motorola and is participating in Motorola’s “Pay from Receipt” program, then invoices will be generated by Motorola in accordance with that program instead of by Supplier. Other than the Party responsible for generating the invoice, all other payment terms specified in the Agreement will govern.

4.5 Taxes and Tax Exempt Orders . Supplier shall separately state on each applicable invoice (and not include them in the purchase price), any import duties or sales, use, value added, excise or similar tax. Supplier shall not charge tax if Motorola is exempt from such taxes and furnishes Supplier with a certificate of exemption in a form reasonably acceptable to Supplier. Motorola will be responsible for any sales, use, VAT, or similar taxes, customs duties or any other such assessment however designated. All payments due under this Agreement will be made without deduction or withholding, unless such deduction or withholding is required by any applicable law of any relevant governmental revenue authority then in effect. If Motorola is required to so deduct or withhold income or profits tax, Motorola will pay the

 

5


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

required amount to the relevant governmental authority; furnish Supplier with evidence of all withholding tax payments paid by it on behalf of Supplier which, to the extent permitted by law, will be in the name of Supplier. Motorola shall deliver to Supplier all original tax receipts or certified copies or other documentation with respect to the payment of such taxes as Supplier may reasonably request promptly after receipt from the relevant tax authority. Supplier’s invoice shall then be paid net of said withholding tax.

5. PACKAGING, INSPECTION, AND DELIVERY

5.1 Packaging . Supplier will pack and ship all Products according to instructions or specifications provided by Motorola. In the absence of any Motorola instructions, Supplier will comply with best commercial packaging and shipping practices to ensure safe arrival at destination at the lowest transportation cost.

5.2 Delivery . Unless otherwise stated in a Product Schedule or an SOI Agreement (as that term is defined in Section 13 below), all deliveries are “ [***]                        (Incoterms 2000).”

Motorola will pay all applicable freight and transportation charges from the applicable delivery point. Supplier’s invoice must itemize any and all other applicable charges. No charge will be allowed for packing, labeling, commissions, customs, duties, storage, crating, express handling or travel, unless specifically indicated on an Order or under a mutually agreed separate logistics support program.

5.3 Return Material Authorization Process . Motorola will have a reasonable opportunity to inspect Products. Supplier promptly shall issue a return material authorization (“RMA”) to Motorola for nonconforming Products unless Motorola or Supplier requests a failure analysis. If either party requests a failure analysis, then Motorola will provide Supplier with samples of nonconforming Products, Supplier promptly will evaluate samples of non-conforming Products to determine non-conformance and its root cause, and will provide Motorola with an analysis of the nonconforming Products and a solution.

[***]

5.4 Late Delivery .

[***]

 

6


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[***]

5.5 Inspection . Motorola shall have the right to inspect all components and materials shipped by Supplier for nonconformance and/or defects. At its discretion, Motorola may also choose to have a third party (subject to appropriate confidentiality restrictions) perform such inspections.

6. WARRANTIES AND REMEDIES

6.1 Supplier represents to the best of its knowledge, and warrants that the Products provided under this Agreement are wholly new and contain new components and parts throughout. [***]

                                                                                                                                                                                    Motorola represents to the best of its knowledge, and warrants that it has full power and authority to convey all rights and licenses granted to Supplier under this Agreement.

6.2 [***]

6.3 [INTENTIONALLY LEFT BLANK]

6.4 Unless specified otherwise in the applicable Product Schedule, for a period of [***]                     from the date of Product delivery or for the period of Supplier’s standard warranty, whichever is longer (the “Warranty Period”), [***]

. All warranties run to Motorola. All warranties survive any inspection, acceptance, payment, or incorporation into final products by Motorola. This warranty does not apply to any Product which has been misused (including static discharge due to improper handling), improper installation, repair, accident, or use not in accordance with Broadcom instructions provided to Motorola. NOTWITHSTANDING THE FOREGOING, SUPPLIER PROVIDES PROTOTYPES “AS IS”, WITH ALL FAULTS, WITHOUT WARRANTY OF ANY KIND.

6.5 Except to the extent Software is covered by a separate software license agreement executed in writing between the parties, Supplier represents to the best of its knowledge, and warrants the following:

a. Software will perform in conformance with the relevant Specifications and Documentation and will be free from Illicit Code.

 

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b. [***]

c. [***]

6.6 Publicly Available Software

[***]

d. Each Party represents to the best of its knowledge, and warrants to the other Party that it has reasonably adequate processes and precautions necessary to prevent any risk that any software of the other Party will be provided to, or become subject to an obligation to be provided to the open source community or otherwise into the public domain, as a result of its activities pursuant to this Agreement.

6.7 Supplier agrees that its representations and warranties are reaffirmed with each shipment or delivery of Products. For clarity, Supplier warrants a repaired Product only for the unexpired term of the warranty for the affected Product.

6.8 [***]

 

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[***]

6.9 [***]

6.10 THE WARRANTIES STATED IN THIS SECTION 6 AND ELSEWHERE IN THIS AGREEMENT ARE EXCLUSIVE, AND SUPPLIER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT.

7. LICENSE GRANTS

7.1 Object Code License .

7.1.1 Except to the extent covered by a separate software license agreement executed in writing between the parties, [***]

                                                                                                                   , Supplier grants to Motorola [***]

                                                                              license [***]                                                                                                       , to use, make, reproduce, demonstrate, create Derivative Works of, market, sublicense and/or otherwise distribute Documentation and Object Code incorporated into Products

7.1.2 Supplier also grants Motorola [***]

license [***]

: (i) use, make or have made, demonstrate, or have demonstrated, market or have marketed, import, offer or have offered for sale, sell or have sold, license or have licensed, and otherwise sublicense and/or distribute or have distributed, Motorola’s products into which the Software has been incorporated [***]

 

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7.2 Source Code License . Except to the extent covered by a separate software license agreement executed in writing between the parties, [***]

[***]                                                                                                                                                                                     Supplier grants to Motorola a [***]

[***]

license [***]

                                             distribute the Object Code pursuant to the license granted in Section 7.1.1: in each case, solely in connection with products that incorporate or are interoperating with the Products and solely at Motorola facilities.

7.3 [***]

Upon any termination of this Agreement [***]                                                          , the rights and licenses granted to Motorola [***]                                 under this Agreement [***]                         shall immediately terminate; provided, however, that [***]

                                                                                                                                                   Motorola shall have the right to use a limited number of copies of [***]         Software for support and maintenance.

7.4 [***]

7.4.1 [***]

 

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[***]

7.4.2 The obligations of Supplier and its Affiliates in Section 7.4.1 with respect to the Motorola Parties will survive expiration or termination of this Agreement (i) for any secondary supplier’s Qualified Products supplied to or for a Motorola Party during the term of this Agreement and (ii) for any Motorola or Motorola Affiliate products incorporating such secondary supplier’s Qualified Products. [***]

7.4.3 [***]

7.4.4 The parties also agree that in the event that any Motorola, Party asserts, brings, or causes to be brought any litigation against Supplier, [***]

7.4.5 [***]

7.5 All trademarks, service marks, insignia, symbols, or decorative designs, and trade names and other symbols and devices associated with Motorola and Motorola’s products and services (“Motorola Marks”) are the sole property of Motorola. Supplier acknowledges and agrees that it: (i) has no right to use the Motorola Marks without Motorola’s prior written consent; (ii) will take no action which might derogate from Motorola’s rights in, ownership of, or the goodwill associated with such Motorola Marks; and (iii) will remove all Motorola Marks from any Products not purchased by Motorola.

7.6 All tools, equipment, dies, gauges, models, drawings, or other materials paid for or furnished or bailed by Motorola to Supplier (“Property”) are, and will remain, the sole property of Motorola. Supplier will safeguard all Property: (i) while it is in Supplier’s custody and control; (ii) be liable for any loss or damage to the Property; (iii) keep the Property free from all mechanic’s, materialmen’s and other similar liens or charges; (iv) use the Property only for Motorola orders; and (v) return the Property to Motorola upon request without further bond or action. Supplier agrees to waive and hereby does waive any lien it may have in regard to the Property and to ensure that subcontractors do the same.

7.7 For the term of this Agreement, Motorola grants to Supplier a royalty-free, non-transferable, nonexclusive license to use all software in object code form and related documentation furnished by Motorola (“Motorola Supplied Software”) for internal use by Supplier’s employees at Supplier’s facilities

 

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for the purpose of manufacturing, testing and supplying Products or components thereof to Motorola pursuant to this Agreement. Supplier may make up a reasonable number of copies of the Motorola Supplied Software as necessary for Supplier’s internal use permitted under the foregoing license. Supplier agrees that all Motorola Supplied Software will be deemed to be Confidential Information of Motorola that is subject to the terms and conditions of Section 10 of this Agreement.

7.8 Co-development between Supplier and Motorola, if any, will be addressed in a separate agreement.

8. PRODUCT CHANGE, PRODUCT DISCONTINUANCE, NEW TECHNOLOGY, SERVICE AND SUPPORT

8.1 Product Change. Supplier will not make changes to Products [***]

                                                                                                                                                                                                             without providing prior written notice to Motorola of the proposed changes. [***]

                                                                                                                                   Unless a longer period is specified in the applicable Product Schedule, Supplier will provide Motorola a minimum of [***]             prior written notice of any intent to change the design, content, form, fit, or function of any Product, and (B)                                     prior written notice of any intent to change [***]

Motorola will promptly respond to each Product Change Notice (“PCN”). If Motorola provides written acceptance, Supplier may make the requested change(s) and begin to ship modified Products once they have been qualified. If Motorola rejects the proposed change(s) then Supplier may not make such changes. Motorola’s acceptance of a proposed change [***]

8.2 Discontinued Product .

8.2.1 If Supplier intends to stop offering any Product for sale to Motorola for any reason (“Discontinued Product”), unless a longer period is specified in the applicable Product Schedule, Supplier will give Motorola a minimum of [***] prior written notice, [***]

                                                                                                                                                                (“End of Life Period”). During the End of Life Period, Motorola will a) provide Supplier with a forecast of anticipated demand for the Discontinued Product during the End of Life Period and a final lifetime buy volume forecast; [***]

                                                                                                                               . Additionally, at Motorola’s request, Supplier will work with Motorola in good faith in and assist in making alternative supply arrangements for the manufacture and supply of substitutes for the Discontinued Product.

8.2.2 Notwithstanding anything contained in this Agreement and subject to Supplier following the provisions of Sections 8.1 and 8.2, unless otherwise mutually agreed between the Parties Supplier shall continue to supply each Product as follows:

(i) MDb Products. For mobile device Products, Supplier shall [***]

 

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(ii) All Other Products. For all other Products, Supplier shall [***]

(iii) Except for sole sourced Products, the foregoing shall apply only if [***]

                                                                                          .

The foregoing time periods stated in Sections 8.2.2(i) through (iii) above include the [***]

                                                                                                                                       periods described

in 8.2.1.

[***]

8.3 Motorola Changes . Motorola may request changes to Products by submitting a change request to Supplier. Supplier will respond in writing to all such change requests indicating if the requested changes will increase or decrease the cost of performance or the time required to perform. Supplier will not implement the change until Motorola gives Supplier written authorization to do so.

8.4 New Technology . In the event Supplier intends to offer for sale, or to license reference designs and related technology for, products and/or software that incorporate new or improved technology that may be relevant for Motorola’s broadband product portfolio and wireless product portfolio (including products on Motorola’s roadmap of which Broadcom is aware), Supplier will [***]

8.5 Service and Support . Supplier will provide training and documentation to Motorola as set forth in Exhibit D, Training and Documentation Requirements. Supplier will, make available support services commensurate with those provided prior to Product discontinuance (but in no event less than service levels being provided as of the Effective Date) for a period of five (5) years after notice of Product discontinuance unless a longer period is specified in the Product Schedule and shall thereafter provide Motorola with commercially reasonable levels of support; provided, however, that this paragraph shall not override or supersede any other obligation of Supplier or right of Motorola in this Agreement relating to the Products, including without limitation those contained in Section 6. If in connection with the purchase of Products under this Agreement the Parties have executed a separate Software license agreement or Software support and/or maintenance agreement, then the terms and conditions of such separate agreement will supplement this Agreement.

 

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8.6 Status Meetings, Reports, and Reviews . Supplier will provide Motorola information about, and participate in regular meetings with Motorola to discuss, the status of outstanding deliverables, and any actual or potential issues that may arise related to Supplier’s performance under this Agreement.

9. QUALITY AND INSPECTION

9.1 All Products supplied to Motorola will be in conformity with the Specifications, which include, but are not limited to, Broadcom datasheet, [***]                                                                              All Products must satisfy [***]

9.2 Upon request, Supplier will provide to Motorola the quality data described in Exhibit B, for Products supplied. The average of the total defects per unit (“DPU”) will be tracked continuously on a monthly basis for the term of this Agreement and for each Product. Additionally, Supplier will provide, upon request, [***]

9.3 Supplier will cooperate with Motorola, as requested, in the implementation by Supplier of a Quality Assurance/Reliability program reasonably satisfactory to Motorola. Supplier will engage in continuous improved quality performance [***] :

 

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10. CONFIDENTIAL INFORMATION

Except to the extent covered by a separate Non-Disclosure Agreement specific to the particular subject matter (i.e. not general in nature):

10.1 The Parties will (i) maintain the confidentiality of each other’s Confidential Information and not disclose it to any third party, except as authorized by the original disclosing party in writing; (ii) restrict disclosure of Confidential Information only to employees, contract employees and third party contractors who have a “need to know” in order for the party to perform its obligations and exercise its rights under this Agreement, and who are bound to maintain the confidentiality of the Confidential Information by terms of nondisclosure no less restrictive than those contained herein; (iii) handle Confidential Information with the same degree of care the receiving party applies to its own confidential information, but in no event, less than reasonable care, and (iv) use Confidential Information only for the purpose of performing, and to the extent necessary to fulfill, their respective obligations under this Agreement; (v) promptly notify the other Party upon discovery of any unauthorized use or disclosure of the Confidential Information and take reasonable steps to regain possession of the Confidential Information and prevent further unauthorized actions or breaches of this Agreement. Neither party will reverse engineer, de-compile, or disassemble any Confidential Information. Confidential Information is and at all times will remain the property of the disclosing Party. No use of any Confidential Information is permitted except as expressly provided herein, and no grant under any proprietary rights is hereby given or intended, including any license implied or otherwise. Upon receipt of either party’s written request, the other party will return to the disclosing party all Confidential Information disclosed by such party, along with all copies and portions thereof.

10.2 Notwithstanding anything to the contrary herein, the receiving Party has no obligation to preserve the confidentiality of any information that is (i) previously known, or received rightfully by the receiving Party without any obligation to keep it confidential, (ii) distributed to third parties by the disclosing Party without restriction, (iii) publicly available other than by unauthorized disclosure by the receiving Party, (iv) independently developed by the receiving Party, or (v) disclosed to a governmental authority lawfully demanding Confidential Information, provided that the receiving Party provides sufficient prior written notice of the demand to allow the disclosing Party a reasonable opportunity to object to the scope or terms of the governmental demand or obtain a protective order, the receiving Party uses all reasonable efforts to resist disclosure before complying with the disclosure request, and if disclosure ultimately is required, the receiving Party discloses only the Confidential Information specifically required and only to the extent compelled to do so, and the receiving Party otherwise continues to maintain confidentiality after the required disclosure.

10.3 Motorola will retain ownership of all specifications provided by Motorola to Supplier under this Agreement, and Broadcom will retain ownership of all specifications provided by Supplier to Motorola under this Agreement. The receiving Party shall treat the disclosing Party’s specifications received hereunder as Confidential Information subject to the provisions of this Section 10. The parties’ obligations as stated in this Section 10.3 will survive the expiration or termination of this Agreement.

10.4 The existence of this Agreement, and its terms and conditions, are Confidential Information.

10.5 Each Party’s obligations under this Agreement to keep confidential and restrict use of the other Party’s Confidential Information will survive five (5) years from expiration or termination of this Agreement.

11. INDEMNIFICATION

11.1.1 Each Party will [***]                                              the other Party, its affiliates, officers, directors, employees, contractors, successors, assigns, customers and agents (“Indemnified Parties”) from and against any and all claims by third parties, damages, expenses, suits, losses, or liabilities (“Claims”) for any death, injury [***]

(“Indemnifying Parties”) arising from or connected with the performance of this Agreement.

11.1.2 Each party will [***]                                                      the other party and its Indemnified Parties against all Claims that arise out of, or are connected with, [***]

[***]                                                                                                                                                                                                              , breach of the confidentiality obligations, [***]

.            

 

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11.1.3 To receive the indemnities in Sections 11.1.1 and 11.1.2, the Party seeking indemnification must promptly notify the other in writing of a Claim and provide reasonable cooperation and full authority to defend or settle the Claim. Neither Party will have any obligation to indemnify the other under any settlement made without its written consent.

11.2 INTELLECTUAL PROPERTY RIGHTS INDEMNIFICATION

11.2.1 Supplier agrees to [***]                                                                          Motorola Indemnified Parties, from any and all Claims [***]

                                     to the extent arising from or by reason of any actual or claimed infringement of any patents, trade secrets, trademarks, maskworks, copyrights or other intellectual property rights by the use, license, distribution, importation or sale, of Products [***]

provided that: (i) Motorola gives Supplier prompt notice in writing of any such Claim and permits Supplier, through counsel of its choice, to answer the charge of infringement and defend the Claim; (ii) Motorola provides Supplier information, assistance and authority, at Supplier’s expense, to enable Supplier to defend the Claim; and (iii) Motorola gives Supplier full control of any settlement negotiations. If Supplier has taken over the defense of any such infringement Claim pursuant to this Section 11.2, Motorola agrees to assert, or permit Supplier to assert on Motorola’s behalf, against such third party, any defense that Motorola may have to such infringement Claim, [***]

11.2.2 If the use of any portion of the Products provided hereunder is or is reasonably likely to be enjoined or excluded from importation as a result of any such Claim of infringement, then Supplier, at no expense to Motorola and its customers, will either (i) procure the right for Motorola and its customers to continue using the Products or (ii) replace or modify the Products so that they become non-infringing [***]

                                                                                                                           . In addition, Supplier agrees [***]                                                              will act in good faith to satisfy its foregoing obligations, as soon as practical after the use of any portion of the Products provided hereunder is [***]                                                                                                   as a result of any such Claim of infringement. If such Claim of infringement or any suit or proceeding based thereon is also directed to products supplied to Motorola by third-party suppliers, [***]

11.2.3 [***]

 

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[***]

11.3 [***]

.

11.4 [***]

.

11.5 [***]

SUBJECT TO THE LIMITATIONS ON LIABILITY SET FORTH IN SECTION 12, THE INDEMNITIES AND REMEDIES STATED IN THIS SECTION 11 AND ELSEWHERE IN THIS AGREEMENT ARE THE PARTIES’ SOLE AND EXCLUSIVE RIGHTS AND REMEDIES FOR THIRD PARTY INFRINGEMENT, AND THE INDEMNIFYING PARTY DISCLAIMS ALL OTHER INDEMNITIES AND REMEDIES, EXPRESS AND IMPLIED, FOR THIRD PARTY INFRINGEMENT.

 

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12. LIMITATION OF LIABILITY

EXCEPT FOR EACH PARTIES’ OBLIGATIONS IN [***]

                                                                                                                                                                , IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES, INCLUDING LOST PROFITS OR BUSINESS INTERRUPTION, OR LOSS OF GOODWILL, WHETHER IN AN ACTION IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE, EVEN IF ADVISED OF THE POSSIBLITY OF THOSE DAMAGES. THE LIMITATIONS IN THIS PARAGRAPH SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. [***]

SUPPLIER’S LIABILITY UNDER THIS AGREEMENT DURING ANY TWELVE (12) MONTH PERIOD WILL NOT EXCEED [***]

14. INSURANCE

14.1 Supplier will (i) maintain statutory Worker’s Compensation, Employer’s Liability, Broad Form Commercial General Liability, and Business Automobile Liability Insurance on behalf of Supplier and its subcontractors, and Contractual Liability Insurance for liability under this Agreement, [***]

                                         ; (ii) maintain insurance covering [***]

                                                         ; (iii) maintain Umbrella / Excess Liability Insurance of [***]

 

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[***]

14.2 Nothing contained within these insurance requirements will be deemed to limit or expand the scope, application and/or limits of the coverage afforded, which coverage will apply to each insured to the full extent provided by the terms and conditions of the policies. Nothing contained within this provision will affect and/or alter the application of any other provision contained with this Agreement. Deductibles or self-insured retentions must not exceed [***] unless declared to and approved by Motorola prior to the date of this Agreement. The deductible and/or self-insured retention of the policies will not limit or apply to the Supplier’s liability to Motorola and will be the sole responsibility of the Supplier.

15. FORCE MAJEURE

Neither Party will be in default of its obligation hereunder (other than purely monetary obligations) to the extent that its performance is delayed or prevented by a force majeure, which is defined as an event, circumstance, or act of a third party that is beyond the Party’s reasonable control and could not have been avoided by the exercise of due care. Upon the occurrence of a force majeure, the Party claiming a force majeure will provide the other Party with written notice, including the estimated delay and actions being taken or planned to avoid or minimize the impact of any delay. The Party claiming a force majeure will have the burden of establishing that a force majeure has delayed delivery or performance and to use commercially reasonable efforts to minimize the delay. If a force majeure event results in a delay of more than [***]             days, the other Party may cancel any further delivery or performance, including pending deliveries, with no liability.

16. GOVERNING LAW AND DISPUTE RESOLUTION

16.1 Governing Law. This Agreement is governed by and construed in accordance with the laws of [***]                     , without regard to its conflicts of law provisions. The Parties specifically disclaim application of the United Nations Convention on Contracts for the International Sale of Goods.

16.2 Dispute Resolution . Motorola and Supplier will attempt to settle any claim or controversy arising out of this Agreement through consultation and negotiation in good faith and spirit of mutual cooperation. Disputes will be resolved by the following process. The dispute will be submitted in writing to a panel of two (2) senior executives from each of Motorola and Supplier for resolution. If the executives are unable to resolve the dispute [***]                         , either Party may refer the dispute to mediation, [***]

. Neither Party will unreasonably withhold consent to the selection of the mediator. Mediation will be conducted in Illinois. If the dispute cannot be resolved through mediation within [***]             days, either Party may submit the dispute to a state or federal court of competent jurisdiction in Northern Illinois, U.S.A.

Use of any dispute resolution procedure will not be construed under the doctrines of laches, waiver, or estoppel to adversely affect the rights of either Party. Nothing herein prevents either Party from resorting directly to judicial proceedings if the dispute is with respect to intellectual property rights, or interim relief from a court is necessary to prevent serious and irreparable injury to a Party or others. Supplier’s performance under this Agreement will not be suspended during the pendency of any dispute.

17. OTHER TERMS AND CONDITIONS

17.1 Assignment . Except as otherwise provided herein, neither Party may assign or transfer this Agreement, or delegate any of its rights or obligations hereunder, without the prior written approval of the other Party which will not unreasonably be withheld or delayed. Any such attempted assignment, delegation or transfer without the necessary approval shall, without limitation of the non-assigning party’s other rights or remedies with respect thereto, be null and void and of no effect. In the event of any sale, divestiture or other transfer of any Supplier business unit, group or division providing Products hereunder (or a material portion or all of the assets thereof), whether by operation of law or otherwise, if the

 

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transferee does not commit to fulfill all of Supplier’s obligations under this Agreement pertaining to the separated or transferred business/assets (including without limitation, any Product supply and pricing commitments made by the transferred business/assets hereunder), in addition to any other rights and remedies available to Motorola, Motorola may reduce any then-current commitments to Supplier under this Agreement pertaining to the separated or transferred business/assets.

.

Notwithstanding the foregoing, Supplier agrees that it will not withhold its consent with respect to an assignment or a proposed “split” of this Agreement by Motorola (with “split” meaning that Motorola and its Assignee (as defined below) each will have their own complete separate Corporate Supply Agreement with Supplier with, subject to the following, all the terms and conditions from this Agreement applicable to their respective business), in connection with the spin-off or other separation of a business unit, group or division of Motorola (a “Permitted Assignment”), and Supplier will work cooperatively with Motorola and the Assignee to ensure a smooth and orderly transition at no additional cost to Motorola or the Assignee so as to preserve the obligations and benefits of this Agreement for both Motorola and the Assignee following such Permitted Assignment, provided that:

(a) Motorola and the assignee entity(ies) thereof (the “Assignee”) send a written acknowledgement to Supplier committing to fulfill their respective obligations under this Agreement and specifically confirming the details of the assignment and assumption pursuant to the requirements set forth in subsections (b) – (h), below);

(b) without limitation of the foregoing, the Assignee commits to fulfill all of Motorola’s obligations under this Agreement pertaining to the separated or transferred business/assets, including without limitation, any purchase commitment made by a separating Motorola business unit, group or division under this Agreement;

(c) [***]

(d) Supplier will work with the Assignee in good faith to agree on revisions to Sections 3.1 (schedule sharing), 13 (Supplier Owned Inventory), 14 (Insurance) and 18.2 (ethics and compliance), if and as needed, to reflect the changed nature of such Assignee;

(e) the payment terms set forth in Section 4.4 shall be subject to review based on the creditworthiness of the Assignee, provided however that Section 4.4 shall continue for so long as Assignee remains in continued compliance with its payment obligations under Section 4.4;

(f) [***]

 

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[***]

(g) after separation and assignment, Motorola and the Assignee may each independently amend their respective agreements with Supplier, without having to get consent of the other party(ies) to whom, or from whom, the Permitted Assignment was made;

(h) Motorola has not been given written notice by Supplier of an uncured material breach of its obligations under this Agreement that remains uncured as of the time Motorola gives notice to Supplier of such proposed Permitted Assignment; and

(i) other than as described in this Section 17.1, there shall be no other changes to this Agreement without the consent of the other Party to this Agreement, including without limitation no diminishment of Motorola’s coverage under Section 12 of this Agreement as a result of any assignment or transfer hereunder.

17.2 Authority . Each Party represents to the best of its knowledge, and warrants that (i) it has obtained all necessary approvals, consents and authorizations to enter into this Agreement and to perform and carry out its obligations under this Agreement, (ii) the person executing this Agreement on its behalf has express authority to do so and to bind the Party, and (iii) the execution, delivery, and performance of this Agreement does not violate any provision of any bylaw, charter, regulation, or any other governing authority of the Party, and has been duly authorized by all necessary partnership or corporate action, and this Agreement is a valid and binding obligation of that Party.

17.3 Non Solicitation . Except as otherwise agreed to in writing between authorized officers of the Parties (in the case of Motorola, its Chief Procurement Officer, and in the case of Broadcom, its Corporate Compliance Officer) to whom any non-solicitation exception request is to be submitted, from the Effective Date of this Agreement and for a period of one (1) year after termination thereof, except as hereinafter provided and subject to local law, each Party agrees not to actively solicit, directly or indirectly, for hire or employment, any of the other Party’s employees assigned to work under this Agreement. The term “actively solicit” will not include (i) any solicitation through the means of advertisements, job postings, job fairs and the like and (ii) any solicitation where the employee is no longer employed by the other party, provided that such Party does not knowingly cause the employee to violate an otherwise enforceable non-competition agreement,. In the event of a breach of the foregoing by either party, (i) the operation of this Section 17.3 will be deemed no longer in force as to the non-breaching Party for so long as the breaching party has either failed to cure its default or pay the damages specified below, and (ii) the breaching party shall pay to the non-breaching party as liquidated damages (and not a penalty) and as the sole and exclusive remedy of the non-breaching party, 200% of the solicited person’s annualized salary or contracted fee; provided, however, that the breaching party will have no such liability unless and until such employee is employed by the breaching party. A breach of this section shall not give rise to an ability to terminate this Agreement.

17.4 Business Interruption and Recovery Plan . Within    [***]    days of a request by Motorola, Supplier will provide Motorola with a detailed, appropriate, written business interruption and recovery plan, including business impact and risk assessment, crisis management, information technology disaster recovery, and business continuity. Supplier will update the plan annually. Supplier will notify Motorola in writing within        [***]        hours of any activation of the plan.

 

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17.5 Counterparts and Signatures . This Agreement may be executed in one or more counterparts, all of which will be considered one and the same Agreement. This Agreement is fully executed when each Party has signed one or more counterparts and delivered the counterparts to the other Party. Facsimile signatures will be binding to the same degree as original signatures.

17.6 Cumulative Remedies . Unless specifically prohibited by this Agreement, if either Party breaches this Agreement, the non-breaching Party has the right to assert all available legal and equitable remedies.

17.7 Disclosures . This Agreement does not grant Supplier or any third Party, by implication, estoppel, or otherwise, any right to inspect or examine any of Motorola’s data, documents, instruments, financial statements, balance sheets, business records, software, systems, premises, or plants.

17.8 Express License Grants . No license, implied or express, under any Motorola or Supplier Intellectual Property Rights, including any license to use, exercise, or incorporate any Motorola or Supplier Intellectual Property Rights in the Products or any other products, is conveyed to Supplier by Motorola or to Motorola by Supplier unless expressly conveyed in this Agreement or other agreements executed by Supplier and Motorola.

17.9 Headings . The headings in this Agreement are for convenience and do not form a part of this Agreement.

17.10 Publicity . Neither party will issue a press release or make any other disclosure regarding this Agreement, the Parties’ business relationship or about Motorola or Motorola’s business generally, without Motorola’s prior written consent.

17.11 Records and Inspections . Supplier will maintain all records related to the Products, as required by law, rule, or regulation. Motorola may inspect Supplier’s facilities, equipment, materials, records, and the Products that pertain to this Agreement, and may audit for compliance with this Agreement. Upon expiration or termination of this Agreement, at Motorola’s request, Supplier will transfer all records that pertain to this Agreement to Motorola, but retain a copy of any records required to be kept by law, rule, regulation, or in connection with any legal process or proceeding, subject at all times to applicable confidentiality obligations.

17.12 Relationship . Supplier will perform under this Agreement solely as an independent contractor, and nothing in this Agreement will be construed to be inconsistent with that relationship. Under no circumstances will any of Supplier’s personnel be considered employees or agents of Motorola. Nothing in this Agreement grants either Party the right or authority to make commitments of any kind for the other, implied or otherwise, without the other Party’s prior written agreement. This Agreement does not constitute or create, in any manner, a joint venture, partnership, or formal business organization of any kind.

17.13 [intentionally omitted]

17.14 Security . Each Party agrees that, when employees or agents of the visiting Party are on the premises of the host Party, they will at all times comply with all security regulations in effect. The visiting Party further agrees to abide at all times with off-premises security regulation when the visiting Party has Confidential Information of the host Party. Motorola and Supplier specifically agree not to disclose to any third party any proprietary information, systems, equipment, ideas, processes or methods of operation observed by visiting employees or agents, at either Party’s facilities, all of which shall be deemed Confidential Information as defined herein.

17.15 INTENTIONALLY OMITTED

17.16 Severability . If one or more provisions of this Agreement is held to be unenforceable under applicable law, the unenforceable portion will not affect any other provision of this Agreement, this Agreement will be construed as if the unenforceable provision was not present, and the Parties will negotiate in good faith to replace the unenforceable provision with an enforceable provision with effect nearest to that of the provision being replaced.

 

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17.17 Subcontracting . Except for fabrication, assembly, packaging and test functions (which are subject to the requirements of section 8.1 of this Agreement with respect to changes thereof), Supplier will not subcontract any of its obligations under this Agreement without Motorola’s prior written consent, which consent or the denial thereof will not be unreasonably withheld or delayed. Supplier retains responsibility for all services subcontracted hereunder and will indemnify Motorola against any liability caused by the acts or omissions of Supplier’s subcontractors to the extent such liability would have given rise to liability by Supplier hereunder.

17.18 Successors . This Agreement is binding upon, inures to the benefit of, and is enforceable by, the Parties and their respective successors and permitted assigns.

17.19 Survival . A provision of this Agreement will survive expiration or termination of this Agreement if the context of the provision indicates that it is intended to survive.

17.20 Waiver . Failure of either Party to insist upon the performance of any term, covenant, or condition in this Agreement, or to exercise any rights under this Agreement, will not be construed as a waiver or relinquishment of the future performance of any such term, covenant, or condition, or the future exercise of any such right, and the obligation of each Party with respect to such future performance will continue in full force and effect.

17.21 Calendar Days . Unless expressly defined otherwise, all references to “day” or “days” in this Agreement shall mean calendar days.

18. ETHICS AND COMPLIANCE.

18.1 The Parties acknowledge their commitment to conduct their business, directly through its employees and officers, and indirectly though third parties, in conformance with key beliefs of uncompromising integrity and constant respect for people. In recognition of the significance of this commitment, the Parties agree to conduct themselves at all times in the performance of this Agreement honestly and fairly, using the highest ethical standards, and to treat their employees, agents, contractors and customers with dignity.

18.2 Supplier, on behalf of itself and its suppliers and subcontractors (collectively, its “Supply Chain”), represents to the best of its knowledge, and warrants that (i) all Products are produced, manufactured, assembled, packaged, labeled, and supplied, and (ii) services are rendered, and (iii) the actual Products and services provided are in compliance with applicable laws, rules, regulations and standards, including those set out in Exhibit C, and (iv) Supplier holds an affirmative duty to immediately correct any non-compliance with the foregoing requirements. Supplier will indemnify, defend and hold harmless Motorola Indemnitees from Claims arising from acts or omissions of Supplier’s Supply Chain. Upon request Supplier will re-certify compliance annually.

19. LEGAL NOTICES AND OTHER DOCUMENTS

All notices and other communications required or contemplated under this Agreement must be written and signed by an authorized representative of the Party providing such notice and be transmitted to the address shown below either by (i) personal delivery, (ii) expedited messenger service, (iii) registered or certified mail, postage prepaid and return receipt requested, (iv) electronic facsimile with confirmed answer back, or (v) electronic mail with confirmed answer back. Notices in conformity with the requirements of this Section 19 will be deemed given as of the day received.

 

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To Motorola :

Adderess: 1475 W. Shure Drive – 3rd Floor

Arlington Heights, IL 60004

Attention: Vice President, Semiconductor Category

Fax number: 847-435-1152

With a copy to Motorola Law Department:

Motorola, Inc.

Address: 1303 E ALGONQUIN ROAD

SCHAUMBURG IL 60196

UNITED STATES

Attention: Corporate Vice President, Law – Integrated Supply Chain

Fax: 847-435-1143

To Supplier :

Broadcom Corporation

5300 California Avenue

Irvine, CA 92617

Attention: Chief Executive Officer

Fax: (949) 926-9244

With a copy to:

Broadcom Corporation

5300 California Avenue

Irvine, CA 92617

Attention: General Counsel

Fax: (949) 926-9244

20. ENTIRE AGREEMENT

This Agreement, together with the attached Exhibits and all Product Schedules that are entered into by the Parties in accordance with this Agreement, is the entire understanding between the Parties concerning the subject matter hereof and supersedes all prior discussions, agreements and representations, whether oral or written, express or implied. No alterations or modifications of this Agreement will be binding upon either Party unless made in writing and signed by an authorized representative of each Party.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the Effective Date.

 

MOTOROLA, INC.      BROADCOM CORPORATION
By:  

/s/ Rich Valin

     By:   

/s/ Scott McGregor

Name:  

Rich Valin

     Name:   

Scott McGregor

Title:  

CVP Finance & CPO

     Title:   

President & CEO

Date of Signature:  

11/26/08

  Date of Signature:   

11/24/08

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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Exhibit A to Corporate Supply Agreement

Two-Way Schedule Sharing

1. Pursuant to Section 3.1 of the Agreement, unless agreed otherwise in writing between Motorola and Supplier, these terms and conditions will govern the use of Two-Way Schedule Sharing to exchange Forecasts, Orders and delivery commitments for Products to be purchased hereunder. If the parties elect to use individual purchase orders for Products, then such purchase orders will be subject to the terms and conditions of this Exhibit A, including the rescheduling, cancellation liability and acceptance provisions hereof.

2. Definitions:

a. “Acceptable status” means Available Inventory of a Product is either between the then current Minimum Inventory Level and Maximum Inventory Level or higher than the Maximum Inventory Level for such Product but less than the then current Backlog for such Product plus the current week requirement plus the midpoint of the then current Minimum Inventory Level and the Maximum Inventory Level for such Product.

b. “Available Inventory” means the inventory of Products available at a Motorola facility (including Motorola’s Affiliates and subcontractors) and/or in a Hub (if applicable), to be used to satisfy Backlog and Gross Demand.

c. “Backlog” means Motorola’s current demand for a Product in excess of the current week’s Gross Demand that is also projected to be consumed in the current week.

d. “Gross Demand” means Motorola’s current or future demand for a Product, forecasted to be consumed during the relevant period.

e. “High status” means the Available Inventory for a Product is higher than the then current Maximum Inventory Level for such Product.

f. “Lead Time” means the period of time required for Supplier to fulfill an Order for Motorola, starting from date of receipt of the Order and ending at date of delivery to Motorola.

g. “Low status” means the Available Inventory for a Product is less than the then current Minimum Inventory Level for such Product.

h. “Manufacturing Cycle Time” for any Product means the period of time that it takes under normal conditions to manufacture the Product, starting from the date the raw materials start in production at the factory and ending at final test and packaging.

i. “Minimum Inventory Level” and “Maximum Inventory Level” mean the calculated range of Available Inventory specified by Motorola as desired to support production without risk of a Stock Out, and without risk of inflating the inventory. The Minimum Inventory Level and Maximum Inventory Level are recalculated by Motorola and communicated to Supplier at least once per week based on average Gross Demand.

j. “Net Demand” means the expected delivery quantities of a Product for the week, calculated as follows: (the mid-point between the Minimum Inventory Level and the Maximum Inventory Level + Backlog + Gross Demand for the current week) minus Available Inventory.

k. “Stock out” means the    [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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l. Standard Product means Products [***]

m. Non-Standard Product means Products that do not meet the definition of “Standard Product.”

3. [***]

4. [***]

5. [***]

6. Requirements Reports and Forecasts . After the Blanket Purchase Order is issued, Motorola will then begin transmitting, on at least a weekly basis, electronic reports which detail Motorola’s requirements for the Product (“Requirements Reports”). The first Requirements Report sent after the Blanket Purchase Order is issued will provide up to a fifty two (52) week forecast of Motorola’s requirements (the “Forecast”), and all subsequent Requirements Reports will update that Forecast on up to a rolling fifty two (52) week basis.

The Forecast will be stated in the various formats set out below indicating, among other things, Gross Demand and Net Demand as follows:

Via Two-Way Schedule Sharing:

Weeks    [***]

Weeks    [***]

The data is also available in the earlier one-way schedule sharing format as follows:

Weeks    [***]

Weekly average for Weeks    [***]

Weekly Average Demand for Weeks    [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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Via Download Data:        By week for fifty two (52) weeks

Supplier will not be liable for Motorola errors in the transmission of Motorola’s requirements (eg, data not populated, data missing, data incorrect, etc).

7. Available Inventory; Minimum and Maximum Inventory Levels . Each Requirements Report will report the Available Inventory and specify the Minimum Inventory Level and Maximum Inventory Level for the Product for the coming week. The Minimum Inventory Level and Maximum Inventory Levels in each Requirements Report may be adjusted by Motorola, without liability to Supplier, subject to Section 6 and Sections 12 through 15 hereof.

8. [***]

9. Receipt of Supplier’s Delivery Commitment via Schedule Sharing, assuming Motorola has accurately identified its Available Inventory:

 

   

Must be received by Motorola for all Low Status, Stock Out items, Acceptable Status and High Status items on Tuesday of each week by Noon PST.

   

Should be provided for the same horizon as the Net Demand provided by Motorola (up to fifty two (52) weeks). Outside of Supplier’s leadtime, Supplier’s Delivery Commitment is for reference only.

   

Must include any quantities in transit and not yet received by Motorola.

   

Must be updated during the same week by the Supplier if there are subsequent modifications to the Delivery Commitment.

10. [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

11. 52 Week Commitment . Supplier shall also provide a 52 week commitment (“52 Week Commitment”) that covers Motorola’s delivery requirements that will match Motorola’s weekly delivery requirements for all deliveries scheduled for dates occurring later than the issuance date of the most recent Forecast update, plus the Lead Time for the Product (the “Outside of Lead Time” period). Any 52 Week Commitment made by Supplier is not binding on Supplier for Products forecasted for delivery outside of the Additional Delivery Commitment period.

12. Cancellation and Reschedule .

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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13. Cancellation inside Manufacturing Cycle Time.    [***]

14. [***]

15. [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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PRODUCT SCHEDULE #1

TO CORPORATE SUPPLY AGREEMENT, DATED AS OF              , 2008

BETWEEN

BROADCOM CORPORATION AND MOTOROLA, Inc.

PRODUCTS, PRICES

The following are certain Products referred to in this Agreement for which prices have been agreed. The per unit prices to be paid for such Products are as set forth below for the calendar half year or quarter in which the Product is received, subject to adjustment as hereinafter set forth:

Subject to all of the conditions stated in this Product Schedule, the prices for the following Products will be no higher than as follows for each calendar half year through December 31, 2009:

[***]

MINIMUM PURCHASE COMMITMENT

Subject to all of the conditions stated in this Product Schedule, during the periods stated below Customer (directly or through the Customer Affiliates (defined below)) shall in the aggregate purchase from Supplier and its Affiliates the Products listed in this Product Schedule (or mutually agreed substitute products) in amounts no less than [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

5. Press Release [***]

6. [***]

7. [***]

8. [***]

9. [***]

10. Additional Terms related to Minimum Purchase Commitment

(a) [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

(b) [***]

(c) [***]

(d) [***]

(e) The parties acknowledge that Customer will use commercially reasonable efforts to meet the Minimum Purchase Commitment specified above subject to variances due to the following conditions: i) one or more Customer Products in which Products are used do not achieve the level of success in the marketplace that was expected by Customer; ii) one or more Customer products in which Products are used, or the Products themselves, launch late, experience quality problems, are delayed in qualification, experience a production interruption, or are cancelled for whatever reason [***]

(f) [***]

(g) [***]

(h) In the event that any of the conditions described in this Product Schedule occur, or Supplier fails to meet any of its obligations in this Agreement, [***]

Customer will be excused from its Minimum Purchase Commitment during such quarter (or to the extent arising from such conditions, will be excused from the variances attributable to such conditions), [***]

 

34


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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(i) Subject to the conditions stated in this Product Schedule, if Customer fails to satisfy the Minimum Purchase Commitment for any calendar quarter on or before the date which is thirty (30) days following the end of such quarter [***]

 

  A. both sides will work in good faith to find a new plan acceptable to both parties;

 

  B. in the event a new plan cannot be agreed to within 90 days from the end of the quarter in question, the matter will be escalated to senior management of each of the companies for resolution;

 

  C. if this process fails to result in a new agreed plan [***]

                                     ; and

 

  D. thereafter, both parties will in good faith negotiate a new Product Schedule to cover pricing and minimum purchase commitments for the Products previously covered under this Product Schedule.

(j) If the parties agree on a new plan and/or negotiate a new Product Schedule pursuant [***]

                                                                                                                                       , provided that Customer complies with the processes set forth in such Sections, the remedies stated [***]

(k) [***]

(l) [***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

COMPETITIVENESS

[***]

Periodic Review of Prices

Starting no later than [***]              and no later than the end of each [***]         period thereafter during the term of this Agreement, Supplier and Customer shall review the prices set forth in this Product Schedule to determine what adjustments, if any, are appropriate in light of the conditions then prevailing in the market for Customer’s products. Supplier and Customer shall negotiate any such adjustments in good faith, but neither party shall have an obligation to agree to such adjustments.

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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PRODUCT SCHEDULE #2

TO CORPORATE SUPPLY AGREEMENT, DATED              , 2008

BETWEEN

BROADCOM CORPORATION AND MOTOROLA, Inc.

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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PRODUCT SCHEDULE #3

TO CORPORATE SUPPLY AGREEMENT, DATED                     

BETWEEN

BROADCOM CORPORATION AND MOTOROLA, Inc.

PRODUCTS, PRICES

The following are certain Products referred to in this Agreement for which prices have been agreed. The per unit prices to be paid for such Products are as set forth below for the portion of year in which the Product is shipped, subject to adjustment as hereinafter set forth. Subject to all of the conditions stated in this Product Schedule, the prices for the following Products will be no higher than as follows:

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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Exhibit B to Corporate Supply Agreement

QUALITY REPORTING

Upon request, Supplier will send to Motorola quality reports which should contain the following minimum Quality indices:

[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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Exhibit C to Corporate Supply Agreement

Compliance with Laws

1. Ethical Conduct, Anticorruption and Unfair Business Practices

Motorola has historically depended on product quality and superiority, combined with outstanding support

[***]

2. Antidiscrimination and Humane Treatment of Workers

    [***]

3. Environmental Protection

    [***]

4. Material Safety Data Sheets

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

5. Imports and Customs

    [***]

6. Export Restriction

    [***]

7. Utilization of Small Business Concerns

    [***]

8. Equal Opportunity

    [***]

9. Government Subcontract

    [***]

10. Supplier Diversity

    [***]

11. Product Safety and Regulatory Compliance

    [***]

12. ICT Supplier Self Assessment Questionnaire

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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[***]

 

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Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

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Exhibit D to Corporate Supply Agreement

TECHNICAL TRAINING AND PUBLICATIONS

Technical Training

If requested by Motorola in writing, Supplier will provide one (1) specific technical Product training course necessary to facilitate the most effective working relationship between Motorola and Supplier    [***]             . The audience for this training will include internal Motorola engineers, sales personnel, and/or factory technicians and other audiences deemed necessary by Motorola. If Supplier has existing technical Product training, Motorola will review the curriculum(s) content to ensure Supplier’s training meets Motorola’s training requirements. If Supplier’s curriculum(s) content does not meet Motorola’s training requirements, Supplier will be responsible for making the necessary changes as identified by Motorola. Motorola will review Supplier’s changes, as identified by Motorola, and approve or make further recommendations.

In-depth technical training will be delivered in one or both of the following delivery formats (the delivery format will be determined based on the type of information that needs to be delivered and the audience):

1. On-site Classroom Instructor-Led : This involves live instructor-led delivery that includes hands-on labs and demonstrations. Supplier will be responsible for providing and shipping the necessary electronic presentations, instructor guides (set of materials that provide direction, answers to tests, helpful hints, or any supplemental information.), student guides, hardware and/or software to conduct the training. A location and time will be mutually agreed upon by Motorola and Supplier.

2. Live e-Learning Event : This involves an electronic classroom consisting of off-site students (who could be in several locations), where instruction involves the synchronous use of a live Internet-based delivery platform via web browser technology (web conferencing) and a separate phone line to hear the audio portion of the course. Supplier will be responsible for providing the necessary electronic presentations, instructor guides (set of materials that provide direction, answers to tests, helpful hints, or any supplemental information.), student guides and other supporting material prior to the delivery. A location and time will be mutually agreed upon by Motorola and Supplier.

For both delivery formats, On-site Classroom Instructor-Led and Live e-Learning, Motorola’s Training Organization will identify the syllabus (the information that will be delivered to meet the training requirements of the specific audience(s).

Upon request, Supplier will discuss licensing its training courseware, including instructor guides, student guides and lab guides    [***]

Supplier agrees to permit Motorola to digitally record training sessions either On-site Classroom Instructor-Led or Live e-Learning delivery formats to be used for training either internal Motorola and/or Motorola’s external customers. If Motorola requires Supplier to deliver training for or on behalf of Motorola, Supplier agrees to provide a formal quote for training delivery at any of Motorola’s customer locations worldwide. Supplier agrees to provide:

- High resolution EPS files of images used in courseware.

- Vector-based EPS files of images used in courseware.

 

46


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

Technical Documentation

Supplier Documentation

If requested by Motorola in writing, Supplier will provide documentation according to Motorola guidelines as listed. Key elements pertaining to evaluation, responsibilities, and copyright release of Supplier-supplied documents will be provided by Motorola to ensure accuracy and timeliness of Motorola customers’ document acceptance.

Supplier Documentation

If the Product is standard supplier product,    then Supplier will provide its standard installation/programming/configuration manual to Motorola for Motorola to use and to provide to its customers. Supplier will deliver the final document to Motorola in PDF form. The document also will be made available for download by Motorola customers 1 .
If the Product is custom-designed for Motorola, and Supplier develops the final source for documentation,   

then Supplier will provide an accompanying

custom-designed

installation/programming/configuration manual to

Motorola for Motorola to use and to provide to its

customers. In this case, Motorola will provide a

document template or front matter information and

document part number to Supplier to use for this

purpose. Supplier will deliver the final document to

Motorola in PDF form. The document also will be

made available for download by Motorola

customers. 1

1              Motorola and Supplier will agree upon the site from which the manual is to be downloaded (e.g., a Motorola Literature Catalog or a specified link to Supplier’s web site). The link-to and source on Supplier sites must have revision control to ensure that the linked document reflects the Product as shipped to Motorola customers.

Motorola Documentation

If the Product is custom-designed for Motorola, but Supplier only produces engineering specifications,   then Supplier will provide the necessary specifications and any other relevant information to Motorola, and Motorola will develop the installation/user’s manual.

 

47


Portions of this document have been redacted pursuant to a Request for Confidential Treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Redacted portions are indicated with the notation “[***]”.

C O N F I D E N T I A L    P R O P R I E T A R Y

 

 

Exhibit E to Corporate Supply Agreement

[***]

 

48

EXHIBIT 21

MOTOROLA MOBILITY HOLDINGS, INC.

LISTING OF MAJOR SUBSIDIARIES

The following entities are direct and indirect subsidiaries of Motorola Mobility, Inc., which is the main U.S. operating subsidiary of Motorola Mobility Holdings, Inc. (“Registrant”). Motorola Mobility, Inc. will be contributed to the Registrant prior to the distribution described in this Registration Statement on Form 10 and as a result all of the following entities will be directly and indirectly wholly owned by the Registrant as of the distribution date.

 

Motorola Industrial Ltda.    Brazil
Motorola Mobility Canada Ltd.    Canada
Motorola Mobility Technologies (China) Co., Ltd.    China
Motorola (Beijing) Mobility Technologies Co., Ltd.    China
Hangzhou Motorola Technologies Limited    China
Motorola Mobility Germany GmbH    Germany
Motorola Korea, Inc.    Korea
Motorola Mobility Singapore Pte. Ltd.    Singapore
Kreatel Communications A.B.    Sweden
General Instrument of Taiwan, Ltd.    Taiwan
Motorola Mobility, Inc.    US
Quantum Bridge Communications, Inc.    US
General Instrument Corporation    US
Modulus Video, Inc.    US
Leapstone Systems, Inc.    US
Netopia, Inc.    US
Broadbus Technologies, Inc.    US
Table of Contents

Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

Preliminary Information Statement

(Subject to Completion, Dated October 8, 2010)

Information Statement

Distribution of Common Stock of

Motorola Mobility Holdings, Inc.

by

MOTOROLA, INC.

to Motorola, Inc. Stockholders

This Information Statement is being furnished in connection with Motorola, Inc.’s distribution of all of the shares of Motorola Mobility Holdings, Inc. (“Motorola Mobility Holdings, Inc.,” “Motorola Mobility” or the “Company”) common stock owned by Motorola, Inc., which will be 100% of Motorola Mobility’s common stock outstanding immediately prior to the distribution. Motorola Mobility is a wholly owned subsidiary of Motorola, Inc. that at the time of the distribution will hold, through its subsidiaries, the assets and liabilities associated with Motorola, Inc.’s mobile devices (“Mobile Devices”) and home (“Home”) businesses. The main U.S. operating subsidiary of Motorola Mobility will be Motorola Mobility, Inc. To implement the distribution, Motorola, Inc. will distribute the shares of Motorola Mobility common stock on a pro rata basis to the holders of Motorola, Inc. common stock. Each of you, as a holder of Motorola, Inc. common stock, will receive [ ] share of common stock of Motorola Mobility for each share of Motorola, Inc. common stock that you held at the close of business on [ ], 201[ ], the record date for the distribution. The distribution will be made in book-entry form. Motorola, Inc. will not distribute any fractional shares of Motorola Mobility. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing rates and distribute the net cash from proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive fractional shares in the distribution.

The distribution will be effective as of [ ], 201[ ]. Immediately after the distribution is completed, Motorola Mobility will be an independent, publicly traded company. It is expected that the distribution will be tax-free to Motorola, Inc. stockholders for U.S. federal income tax purposes, except to the extent cash is received in lieu of fractional shares.

On the date of the distribution, Motorola, Inc. intends to change its name to Motorola Solutions, Inc. Please refer to the “Note Regarding the Use of Certain Terms” included elsewhere in this Information Statement for a description of how we refer to Motorola, Inc., Motorola Solutions, Inc. and Motorola Mobility in this Information Statement.

We are not asking you for a proxy and you are requested not to send us a proxy.

No vote of Motorola, Inc. stockholders is required in connection with this distribution. You are not required to send us a proxy card. Motorola, Inc. stockholders will not be required to pay any consideration for the shares of Motorola Mobility common stock they receive in the distribution, and they will not be required to surrender or exchange shares of their Motorola, Inc. common stock or take any other action in connection with the distribution. From and after the distribution, certificates representing Motorola, Inc. common stock will represent Motorola Solutions, Inc. common stock as a result of Motorola, Inc.’s name change.

All of the outstanding shares of Motorola Mobility’s common stock are currently owned by Motorola, Inc. Accordingly, there currently is no public trading market for our common stock. We intend to file an application to list our common stock and expect to list under the ticker symbol MMI on the New York Stock Exchange (“NYSE”). Assuming that Motorola Mobility’s common stock is approved for listing, we anticipate that a limited market, commonly known as a “when-issued” trading market, for Motorola Mobility’s common stock will develop on or shortly before the record date for the distribution and will continue up to and including through the distribution date, and we anticipate that the “regular-way” trading of Motorola Mobility’s common stock will begin on the first trading day following the distribution date.

In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “ Risk Factors ” beginning on page 13 of this Information Statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of any of the securities of Motorola Mobility Holdings, Inc. or determined whether this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

This Information Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this Information Statement is                    , 2010.

This Information Statement was first mailed to Motorola, Inc. stockholders on or about                , 2010.

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page

Summary

   1

Our Business

   1

The Separation

   2

Questions and Answers About Motorola Mobility and the Separation

   3

Summary of the Separation and Distribution

   9

Selected Financial Data

   12

Risk Factors

   13

Risks Relating to Our Business

   13

Risks Relating to the Separation

   29

Risks Relating to Our Common Stock

   35

Forward-Looking Statements

   37

The Separation

   39

General

   39

Reasons for the Separation

   39

Formation of a Holding Company Prior to Our Distribution

   40

The Number of Shares You Will Receive

   40

Treatment of Fractional Shares

   40

When and How You Will Receive the Dividend

   41

Treatment of Equity-Based Compensation

   41

Treatment of 401(k) Shares for Current and Former Employees

   42

Results of the Distribution

   43

Material U.S. Federal Income Tax Consequences of the Distribution

   43

Market for Common Stock

   45

Trading Between the Record Date and Distribution Date

   46

Conditions to the Distribution

   46

Reason for Furnishing This Information Statement

   47

Dividend Policy

   47

Capitalization

   48

Business

   49

General

   49

Business Segments

   50

Other Information

   57

Legal Proceedings

   61

Management

   65

Compensation Discussion and Analysis

   73

Named Executive Officer Compensation

   96

Employment Contracts, Termination of Employment and Change in Control Arrangements

   108

Security Ownership of Management, Directors and Principal Stockholders

   118

Certain Relationships and Related Party Transactions

   121

The Separation from Motorola, Inc.

   121

Related Party Transactions

   121

Agreements with Motorola, Inc.

   122

Description of Capital Stock

   131


Table of Contents
     Page

Where You Can Find More Information

   135

Unaudited Pro Forma Condensed Combined Financial Statements

   136

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   141

Introduction

   141

Separation from Motorola, Inc.

   141

Executive Overview

   142

Looking Forward

   146

Basis of Presentation

   147

Results of Operations

   148

Six Months Ended July 3, 2010 and July 4, 2009

   148

Combined Business Results

   148

Segment Results

   150

Reorganization of Businesses

   152

Liquidity and Capital Resources

   155

Years Ended December 31, 2009, 2008 and 2007

   160

Combined Business Results

   160

Segment Results

   165

Reorganization of Businesses

   168

Liquidity and Capital Resources

   172

Critical Accounting Policies

   176

Quantitative and Qualitative Disclosures About Market Risk

   187

Index to Financial Statements

   F-1


Table of Contents

NOTE REGARDING THE USE OF CERTAIN TERMS

We use the following terms to refer to the entities indicated:

“We,” “us,” “our,” “our Company,” “the Company” and “Motorola Mobility” refer to Motorola Mobility Holdings, Inc., the entity that at the time of the distribution will hold, through its subsidiaries, the assets and liabilities associated with the Mobile Devices and Home businesses of Motorola, Inc. and whose shares will be distributed in the distribution. Where appropriate in context, the foregoing terms also include the subsidiaries of this entity.

“Motorola, Inc.” means Motorola, Inc. and on the date of the distribution this entity will change its name to “Motorola Solutions, Inc.”

“Motorola Mobility, Inc.” is the main U.S. wholly owned operating subsidiary of Motorola Mobility Holdings, Inc.

“Motorola Solutions” refers to Motorola, Inc. after it changes its name to Motorola Solutions, Inc., which will be the entity following the distribution holding the remaining assets and liabilities associated with Motorola, Inc.’s enterprise mobility solutions business (“Enterprise Mobility Solutions”) and networks (“Networks”) business. A sale of the majority of the Networks business’s assets to Nokia Siemens Networks is expected to be completed in late 2010 or early 2011 and is subject to customary closing conditions, including regulatory approvals. If the Networks sale is completed prior to the distribution then Motorola Solutions, Inc. will be comprised solely of Enterprise Mobility Solutions.

“Separation” or “separation” refers to the separation of the Mobile Devices and Home businesses from Motorola, Inc. and the creation of an independent, publicly traded company holding the Mobile Devices and Home businesses through a distribution of Motorola Mobility Holdings, Inc. shares to the Motorola, Inc. stockholders as of the record date.

“Distribution” or “distribution” refers to the distribution of all of the shares of Motorola Mobility Holdings, Inc. common stock owned by Motorola, Inc. to stockholders of Motorola, Inc. as of the record date.

“Distribution Date” means the date on which the Distribution occurs.

For reference, acronyms used in this document are defined in the below table.

 

2G

   Second Generation Cellular

3G

   Third Generation Cellular

3D-TV

   Three Dimensional Television

4G

   Fourth Generation Cellular

802.11

   Wireless Local Area Network Set of Standards

ARPU

   Average Revenue Per User

ASP

   Average Selling Price

ATSC

   Advanced Television Systems Committee

CAGR

   Compound Annual Growth Rate

CD&A

   Compensation Discussion and Analysis

CDMA

   Code Division Multiple Access

CMTS

   Cable Modem Termination System

CPE

   Customer Premises Equipment

DGCL

   Delaware General Corporation Law

DOCSIS

   Data Over Cable Service Interface Specification

DRM

   Digital Rights Management

DSL

   Digital Subscriber Line

DSU

   Deferred Stock Units

DVR

   Digital Video Recorder

EMEA

   Europe, Middle East and Africa

ESP

   Estimated Selling Price

ExSP

   Executive Severance Plan

EVDO

   Evolution Data Optimized

FASB

   Financial Accounting Standards Board

FCC

   Federal Communications Commission

FOU

   Field of Use

Gbps

   Gigabits per second

GSM

   Global System for Mobile Communications (cellular telephone standard based on European specifications; ETSI 2nd generation standard)


Table of Contents

H.264

   Standard for Video Compression

HD

   High Definition

HD DVR

   High Definition Digital Video Recorder

HDTV

   High Definition Television

HSDPA

   High Speed Downlink Packet Access

HSUPA

   High Speed Uplink Packet Access

HSOPA

   High Speed Orthogonal Frequency—Division Multiplexing Packet Access

HSxPA

   A generic term referencing either HSDPA, HSUPA, or HSOPA

iDEN

   Integrated Digital Enhanced Network

IMS

   IMS Research

IRD

  

Integrated Receiver Decoder

IP

   Internet Protocol

IPTV

   Internet Protocol Television

IRS

   Internal Revenue Service

ITC

   International Trade Commission

LRIP

   Long-Range Incentive Plan

LTE

   Long-Term Evolution

LTI

   Long-Term Incentive Compensation

Mbps

   Megabits Per Second

MDb

   Mobile Devices business

MIP

   Motorola, Inc. Incentive Plan

MotoDEV

   Motorola Developer Network

MSPP

   Motorola Supplemental Pension Plan

MP3

   Moving Picture Experts Group Format for Audio Layer 3

MPEG

   Moving Picture Experts Group

MPEG-2

   A standard developed by MPEG

MPEG-4

   A standard developed by MPEG

MVPD

   Multichannel Video Programming Distributor

NEO

   Named Executive Officer

NFC

   Near Field Communication

NYSE

   New York Stock Exchange

ODM

   Original Design Manufacturer

OLT

   Optical Line Terminal

OMA

   Open Mobile Alliance

OTT

   Over-the-Top

PON

   Passive Optical Networks

R&D

   Research and Development

RF

  

Radio Frequency

RSU

  

Restricted Stock Unit

SAR

   Stock Appreciation Right

SD

   Standard Definition

SEC

   Securities and Exchange Commission

SG&A

   Selling, General and Administrative

TPE

   Third-Party Evidence of Selling Price

TSR

   Total Shareholder Return

TV

   Television

UI

   User Interface

UK

   United Kingdom

U.S.

   United States

USPTO

   United States Patent and Trademark Office

VIE

   Variable Interest Entity

VOD

   Video-on-Demand

VSOE

   Vendor-Specific Objective Evidence of Selling Price

WiFi

   Wireless Fidelity


Table of Contents

TRADEMARKS AND SERVICE MARKS

Motorola Mobility Holdings, Inc. and Motorola, Inc. logos and the other trademarks, trade names, and service marks mentioned in this Information Statement are currently the property of, and are used with the permission of, Motorola, Inc. Prior to the Separation, certain logos and other trademarks, trade names and service marks, including “MOTOROLA” and the Stylized M logo, and all derivatives and formatives such as “MOTO,” (“Motorola Marks”) as well as other trademarks used exclusively by Motorola Mobility will be transferred to, and become the property of, Motorola Mobility Holdings, Inc. or its subsidiaries. Motorola, Inc. will retain the exclusive right, pursuant to a trademark license agreement, to use the Motorola Marks on a royalty-free basis for use in connection with its business. Motorola, Inc. will also retain ownership of certain other trademarks used exclusively by Motorola, Inc.

MOTOROLA and the Stylized M Logo are registered in the US Patent & Trademark Office. DROID is a trademark of Lucasfilm Ltd. and its related companies. Used under license. GOOGLE and ANDROID are trademarks of Google Inc. All other product or service names are the property of their respective owners. ©  2010, Motorola, Inc. All rights reserved.

INDUSTRY AND MARKET DATA

In this Information Statement, we rely on and refer to information and statistics regarding the wireless mobile device and home industries. We obtained this data from independent publications or other publicly available information. Although we believe these sources are reliable, we have not independently verified and do not guarantee the accuracy and completeness of this information.

All industry and statistical information included in this Information Statement, other than information derived from our financial and accounting records, is presented as of August 31, 2010, unless otherwise indicated.


Table of Contents

SUMMARY

This summary highlights selected information from this Information Statement relating to Motorola Mobility, Motorola Mobility’s separation from Motorola, Inc. and the distribution of Motorola Mobility common stock by Motorola, Inc. to its stockholders. For a more complete understanding of our businesses and the separation and distribution, you should read this Information Statement carefully.

Except as otherwise indicated or unless the context otherwise requires, the information included in this Information Statement, including the combined financial statements of the Mobile Devices and Home businesses of Motorola, Inc., which comprise the assets and liabilities involved in managing and operating the Mobile Devices and Home businesses of Motorola, Inc., assumes the completion of all the transactions referred to in this Information Statement in connection with the separation and distribution.

Our Business

Motorola Mobility Holdings, Inc. is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline, digital communication, information and entertainment experiences. The Company’s integrated products and platforms deliver rich multimedia content, such as video, voice, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers (“multi-screens”). Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.

Motorola Mobility Holdings, Inc. has the following businesses:

 

   

The Mobile Devices segment is a provider of mobile devices and related products and services designed to deliver mobile communications, such as voice, messaging, push-to-talk and video, and to deliver mobile Internet access and content, including multimedia, social networking, navigation and other mobile applications. We have a long history of innovation in wireless communications including the development of the world’s first portable cellular phone. Mobile Devices net revenues represented 65% and 66% of Motorola Mobility’s combined net revenues in 2009 and the first half of 2010, respectively.

 

   

The Home segment is a provider of products and services to cable and wireline telecommunications service providers that enable the delivery of video, voice and data services to consumers. Our product portfolio primarily includes interactive set-top boxes, end-to-end digital video and Internet protocol television (“IPTV”) distribution systems, broadband access infrastructure platforms, and associated data and voice customer premises equipment. Home net revenues represented 35% and 34% of Motorola Mobility’s combined net revenues in 2009 and the first half of 2010, respectively.

Motorola Mobility Holdings, Inc. is a recently formed company organized in 2010 that will, prior to the distribution, receive and hold, through its subsidiaries, all of the assets and liabilities of the Mobile Devices and Home businesses. Motorola Mobility’s headquarters is located at 600 North US Highway 45, Libertyville, Illinois 60048 and its general telephone number is (847) 523-5000.

Later in this Information Statement we describe the Mobile Devices and Home businesses that will be separated from Motorola, Inc. Following the distribution, Motorola Mobility will be an independent, publicly traded company. Motorola, Inc. will change its name to Motorola Solutions, Inc. and will not retain any ownership interest in Motorola Mobility. In connection with the distribution, Motorola Mobility and Motorola, Inc. will enter into a number of agreements that will govern the relationship between Motorola Mobility and Motorola, Inc. following the distribution.

Our business is subject to various risks. For a description of these risks, see the sections entitled “ Risk Factors ” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included elsewhere in this Information Statement.

 

 

1


Table of Contents

The Separation

Overview

On [ ], 2010, the Board of Directors of Motorola, Inc. approved the distribution of all of the shares of common stock of Motorola Mobility Holdings, Inc. (“Motorola Mobility”) owned by Motorola, Inc. Motorola Mobility is a wholly owned subsidiary of Motorola, Inc. that at the time of the distribution will hold, through its subsidiaries, the assets and liabilities associated with the Mobile Devices and Home businesses. Immediately following the distribution, Motorola, Inc. stockholders as of the record date will own 100% of the outstanding shares of common stock of Motorola Mobility.

Motorola Mobility and Motorola Mobility, Inc. have entered into a Master Separation and Distribution Agreement and several other agreements with Motorola, Inc. to effect the separation and distribution and provide a framework for our relationship with Motorola, Inc. after the separation. These agreements provide for the allocation between Motorola Mobility and Motorola, Inc. of Motorola, Inc.’s assets, liabilities and obligations and will govern the relationship between Motorola Mobility and Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc. on the Distribution Date) after the separation (including with respect to employee benefits, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobility’s separation from Motorola, Inc., Motorola Mobility, Motorola Mobility, Inc. and Motorola, Inc. will also enter into transition services agreements and several commercial agreements which will provide for, among other things, the provision of transition services and cooperation with respect to integrated digital enhanced network (“iDEN”) mobile devices and infrastructure products and services, as well as the ongoing sale and support of various other products and services.

The Motorola, Inc. Board of Directors believes that separating the Mobile Devices and Home businesses from Motorola, Inc.’s other businesses through the distribution is in the best interests of Motorola, Inc. and its stockholders and has concluded that the separation will provide each company with a number of material opportunities and benefits, including the following:

 

   

Strategic Focus . Allow each independent company to design and implement corporate strategies and policies that are based on the industries that it serves and its specific business characteristics, including customers, sales cycles and product life cycles.

 

   

Management Focus. Allow management of each independent company to concentrate that company’s resources wholly on its particular markets, customers and core business opportunities. Motorola Mobility is uniquely suited to address the convergence of mobility, media and the Internet. This creates an opportunity for new devices, applications and services that deliver common functionality, content and mobility to consumers in their home or on the go. Motorola, Inc. is well positioned to focus on its government and enterprise customers, with a broad portfolio of end-to-end mission- and business-critical enterprise systems, products and related services, and to the extent the sale of its Networks business to Nokia Siemens Networks has not been completed, on its wireless networks and related telecommunication customers.

 

   

Recruiting and Retaining Employees. Allow each independent company to recruit and retain employees with expertise directly applicable to its needs and pursuant to compensation policies that are appropriate for its specific lines of business. In particular, following the distribution, the value of equity-based incentive compensation arrangements reflected in each company’s stock price should be more closely aligned with the performance of its businesses. Such equity-based compensation arrangements should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel at all levels of the organization, including those key employees considered essential to that company’s future success.

 

   

Access to Capital. Remove the need for the businesses to compete internally for capital. Instead, both companies will have direct access to the capital markets to fund their respective growth strategies and to establish an appropriate capital structure for their business needs.

 

 

2


Table of Contents
   

Strategic Flexibility. Provide each independent company increased strategic flexibility to make acquisitions and form partnerships and alliances in its target markets, unencumbered by considerations of the potential impact on the businesses of the other company; and allow each company to effect future acquisitions utilizing common stock for all or part of the consideration, the value of which will be more closely aligned with the performance of its businesses.

 

   

Investor Choice. Provide investors in each company with a more targeted investment opportunity with different investment and business characteristics, including different opportunities for growth, capital structure, business models and financial returns. This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each company.

A discussion of other opportunities and benefits that the Motorola, Inc. Board of Directors considered in approving the separation is included elsewhere in this Information Statement.

The Motorola, Inc. Board of Directors also considered a number of potentially negative factors in evaluating the separation, including the fact that Motorola Mobility has had substantial operating losses in each of the last three years and that Motorola Mobility may not be profitable; potential for increased costs; potential loss of joint purchasing power; potential disruptions to the businesses as a result of the separation; negative consequences from allocating the patent portfolio and other intellectual property rights between the two companies; the potential loss of synergies; potential for the two companies to compete with one another; potential issues arising from the companies sharing the Motorola brand and logo and using the Motorola Marks; limitations placed on Motorola Mobility as a result of the Tax Sharing Agreement and other agreements it is entering into with Motorola, Inc. in connection with the separation and the distribution; risks of being unable to achieve the benefits expected to be achieved by the separation; risk that the plan of separation might not be completed; and both the one-time and ongoing costs of the separation. The Motorola, Inc. Board of Directors concluded that, notwithstanding these potentially negative factors, separation would be in the best interests of Motorola, Inc. and its stockholders. For more information, see the section entitled “ The Separation—Reasons for the Separation ” included elsewhere in this Information Statement.

The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. For more information, see the sections entitled “ The Separation—Conditions to the Distribution ” and “ Risk Factors—Risks Relating to the Separation ” included elsewhere in this Information Statement.

Motorola Mobility Holdings, Inc. is a recently formed company that will, prior to the distribution receive and hold, through its subsidiaries, all of the assets and liabilities of the Mobile Devices and Home businesses. Motorola Mobility’s headquarters is located at 600 North US Highway 45, Libertyville, Illinois 60048 and its general telephone number is (847) 523-5000. We intend to establish an Internet site at http://www.[ ].com. Our website and the information contained on that site, or connected to that site, are not incorporated by reference into this Information Statement.

Questions and Answers About Motorola Mobility and the Separation

 

How will the separation of Motorola Mobility be implemented?

The separation will be accomplished through a series of transactions in which the assets, liabilities and operations of the Mobile Devices and Home businesses on a global basis will be transferred to Motorola Mobility or entities that are or will become prior to the distribution subsidiaries of Motorola Mobility and the common stock of Motorola Mobility will be distributed by Motorola, Inc. to its stockholders as of the record date.

 

 

3


Table of Contents

Why is the separation of Motorola Mobility structured as a distribution?

Motorola, Inc. believes that a distribution of shares of Motorola Mobility to the Motorola, Inc. stockholders is a tax-efficient way to separate the Mobile Devices and Home businesses from its other businesses in a manner that is intended to enhance long-term value for Motorola, Inc. stockholders.

 

What will I receive in the distribution?

Each Motorola, Inc. stockholder will receive [ ] share of Motorola Mobility common stock for each share of Motorola, Inc. common stock held at the close of business on the record date.

 

What is the record date for the distribution?

Record ownership will be determined at the close of business on [ ], 201[ ], which we refer to as the record date.

 

When will the distribution occur?

We expect that the distribution agent, acting on behalf of Motorola, Inc., will distribute the shares of Motorola Mobility common stock on [ ], 201[ ], which we refer to as the Distribution Date.

 

What do stockholders need to do to participate in the distribution?

Nothing, but we urge you to read this document carefully. Stockholders who hold Motorola, Inc. common stock as of the record date will not be required to take any action to receive Motorola Mobility’s common stock in the distribution. No stockholder approval of the distribution is required or sought. We are not asking you for a vote and we are not requesting you to send us a proxy card. You will not be required to make any payment, surrender or exchange of your shares of Motorola, Inc. common stock or to take any other action to receive your shares of Motorola Mobility common stock.

 

How will Motorola, Inc. distribute shares of Motorola Mobility common stock?

If you own Motorola, Inc. common stock as of the close of business on the record date, Motorola, Inc., with the assistance of the distribution agent, will electronically issue whole shares of Motorola Mobility common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. Motorola Mobility will not issue paper stock certificates. If you are a registered stockholder (meaning you own your stock directly through an account with Motorola, Inc.’s transfer agent, BNY Mellon Shareowner Services (“Mellon” or the “transfer agent”)), Mellon will mail you a book-entry account statement that reflects the number of whole shares of Motorola Mobility you own. If you own your Motorola, Inc. shares through a bank or brokerage account, your bank or brokerage firm will credit your account with the Motorola Mobility shares. On the date of the distribution, Motorola, Inc. intends to change its name to Motorola Solutions, Inc. From and after the distribution, certificates representing Motorola, Inc. common stock will represent Motorola Solutions, Inc. common stock, which at that point will include only the Enterprise Mobility Solutions business and to the extent the sale of Motorola, Inc.’s Networks business to Nokia Siemens Networks has not been completed, the Networks business.

Following the distribution, stockholders whose shares are held at the transfer agent may request that their shares of either Motorola Solutions, Inc. or Motorola Mobility be transferred to a brokerage or other account at any time. You should consult your broker if you wish to transfer your shares.

 

 

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How will fractional shares be treated in the distribution?

No fractional shares will be distributed in connection with the distribution. Instead, the distribution agent, BNY Mellon Shareowner Services (“Mellon” or the “distribution agent”) will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees and other costs, pro rata to each Motorola, Inc. stockholder who would otherwise have been entitled to receive a fractional share in the distribution. See the section entitled “ The Separation—Treatment of Fractional Shares ” of this Information Statement for a more detailed explanation.

 

What are the U.S. federal income tax consequences of the distribution to Motorola, Inc. stockholders?

The distribution is conditioned upon, among other matters, Motorola, Inc.’s receipt of either a ruling by the Internal Revenue Service (“IRS”) or an opinion of counsel to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (“Code”), and such ruling or opinion shall be in form and substance satisfactory to Motorola, Inc., in its sole discretion.

 

  In conjunction with final approval of the distribution by the Motorola, Inc. Board of Directors and prior to the effectiveness of the Form 10 of which this Information Statement is a part, Motorola, Inc. expects to receive an opinion from Wachtell, Lipton, Rosen & Katz that the distribution will so qualify. Accordingly, and so long as the distribution so qualifies, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Motorola Mobility’s common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares. For more information regarding the tax opinion and the potential U.S. federal income tax consequences to you of the distribution, see the section entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement.

 

How will I determine the tax basis I will have in the Motorola Mobility shares I receive in the distribution?

Generally, for U.S. federal income tax purposes, your aggregate basis in the stock you hold in Motorola, Inc. and the new Motorola Mobility shares received in the distribution (including any fractional share interests in Motorola Mobility for which cash is received) will equal the aggregate basis of Motorola, Inc. common stock held by you immediately before the distribution. This aggregate basis should be allocated between your Motorola, Inc. common stock and the Motorola Mobility common stock you receive in the distribution (including any fractional share interests in Motorola Mobility for which cash is received) in proportion to the relative fair market value of each immediately following the distribution. See the section entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement for more information.

 

 

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  You should consult your tax advisor about how this allocation will work in your situation (including a situation where you have purchased Motorola, Inc. shares at different times or for different amounts) and regarding any particular consequences of the distribution to you, including the application of state, local and foreign tax laws.

 

Does Motorola Mobility plan to pay dividends?

We presently intend to retain future earnings, if any, to finance our business. As a result, we do not expect to pay any cash dividends for the foreseeable future. All decisions regarding the payment of dividends by our Company will be made by our Board of Directors from time to time in accordance with applicable law.

 

What will the relationship between Motorola, Inc. and Motorola Mobility be following the separation?

We have entered into a Master Separation and Distribution Agreement and several other agreements with Motorola, Inc. to effect the separation and distribution, and provide a framework for our relationship with Motorola, Inc. after the separation. These agreements provide for the allocation between Motorola Mobility and Motorola, Inc. of Motorola, Inc.’s assets, liabilities and obligations and will govern the relationships between Motorola Mobility and Motorola, Inc. after the separation (including with respect to employee benefits, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobility’s separation from Motorola, Inc., Motorola Mobility, Motorola Mobility, Inc. and Motorola, Inc. will also enter into transition services agreements and several commercial agreements which will provide for, among other things, the provision of transition services and cooperation with respect to iDEN mobile devices and infrastructure products and services, as well as the ongoing sale and support of various other products and services. We cannot assure you that these agreements are or will be on terms as favorable to Motorola Mobility or to Motorola, Inc. as agreements with unaffiliated third-parties. For more information, see the section entitled “ Certain Relationships and Related Party Transactions ” included elsewhere in this Information Statement.

 

What if I want to sell my Motorola, Inc. common stock or my Motorola Mobility common stock?

Neither Motorola, Inc. nor Motorola Mobility makes any recommendations on the purchase, retention or sale of shares of Motorola, Inc. common stock or the Motorola Mobility common stock to be distributed. You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

 

  If you decide to sell any shares of Motorola, Inc. common stock after the record date, but before the Distribution Date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Motorola, Inc. common stock, the Motorola Mobility common stock you will be entitled to receive in the distribution or both. If you sell your Motorola, Inc. common stock prior to the record date or sell your entitlement to receive shares of Motorola Mobility common stock in the distribution on or prior to the Distribution Date, you will not receive any shares of Motorola Mobility common stock in the distribution.

 

 

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Where will I be able to trade shares of Motorola Mobility common stock?

There is not currently a public market for Motorola Mobility’s common stock. We intend to apply to list Motorola Mobility’s common stock on the New York Stock Exchange (“NYSE”), and expect to list under the ticker symbol “MMI.” We anticipate that trading in shares of Motorola Mobility’s common stock will begin on a “when-issued” basis on or shortly before the record date and will continue up to and including through the Distribution Date and that “regular-way” trading in shares of Motorola Mobility’s common stock will begin on the first trading day following the Distribution Date. If trading begins on a “when- issued” basis, you may purchase or sell Motorola Mobility’s common stock up to and including through the Distribution Date, but your transaction will not settle until after the Distribution Date. We cannot predict the trading prices for Motorola, Inc.’s or Motorola Mobility’s common stock before, on or after the Distribution Date. For more information regarding “regular-way” trading and “when-issued” trading, see the section entitled “ The Separation—Trading Between the Record Date and Distribution Date ” included elsewhere in this Information Statement.

 

Will the distribution of the common stock of Motorola Mobility affect the market price of my Motorola, Inc. shares?

Yes. As a result of the distribution, the trading price of shares of Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc. on the Distribution Date) common stock immediately following the distribution is expected to change from the trading price immediately prior to the distribution because the trading price will no longer reflect the value of the Mobile Devices and Home businesses. Furthermore, until the market has fully analyzed the value of Motorola, Inc. after the separation of the Mobile Devices and Home businesses, Motorola, Inc. may experience more stock price volatility than usual. It is possible that the combined value of the equity of Motorola Solutions, Inc. and Motorola Mobility after the distribution will be less than the value of the equity of Motorola, Inc. before the distribution.

In addition, Motorola, Inc. announced on September 24, 2010 that it will hold a special meeting of stockholders on November 29, 2010 to seek approval to effect a reverse stock split of Motorola, Inc.’s outstanding and treasury shares of common stock in a ratio of at least 1-for-3 and of up to 1-for-7 shares, to be determined by Motorola, Inc.’s Board of Directors (the “Reverse Stock Split”). If approved by stockholders, the Reverse Stock Split is expected to be implemented immediately following the distribution and is expected to impact the trading price of shares of Motorola, Inc. common stock.

 

What will happen to the listing of Motorola common stock ?

It is expected that, after the distribution of our common stock, Motorola, Inc. common stock will continue to be traded on the NYSE; however, in connection with and on the Distribution Date Motorola , Inc. intends to change its name to Motorola Solutions, Inc. and expects to change its ticker symbol from “MOT” to “MSI” The number of shares of Motorola, Inc. common stock you own will not change solely as a result of the distribution. However, if approved by

 

 

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stockholders the Reverse Stock Split described above is expected to be implemented immediately following the distribution and will change the number of shares of Motorola, Inc. common stock you own. From and after the distribution, certificates theretofore representing Motorola, Inc. common stock will represent Motorola Solutions, Inc. common stock.

 

Are there risks to owning Motorola Mobility common stock?

Yes. Motorola Mobility’s business is subject to both general and specific risks relating to our business, the separation (including our relationship with Motorola, Inc.) and our operation as an independent, publicly traded company. These risks are described in the section entitled “ Risk Factors ” included elsewhere in this Information Statement. We encourage you to read that section carefully.

 

Can Motorola, Inc. decide to cancel the distribution of the common stock even if all the conditions have been met?

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. For more information, see the section entitled “ The Separation—Conditions to the Distribution ” included elsewhere in this Information Statement. However, Motorola, Inc. has the right to terminate the distribution at any time prior to the Distribution Date, even if all of the conditions are satisfied, if at any time the Board of Directors of Motorola, Inc. determines that the distribution is not in the best interests of Motorola, Inc. and its stockholders.

 

What is the role of BNY Mellon Shareowner Services (“Mellon”) in the distribution?

Mellon has three roles in the distribution. Mellon currently serves and will continue to serve as Motorola, Inc.’s transfer agent and registrar. Mellon also will serve as the distribution agent in the distribution and will assist Motorola, Inc. in the distribution of the stock of Motorola Mobility to Motorola, Inc. stockholders. In addition, Mellon will serve as Motorola Mobility’s transfer agent and registrar following the distribution.

 

Where can Motorola, Inc. stockholders get more information?

Before the separation, if you have any questions relating to the separation, you should contact:

 

  Motorola, Inc.
  Investor Relations
  1303 East Algonquin Road
  Schaumburg, Illinois 60196
  Tel: (847) 538-7367
  Email: investors@motorola.com

Website: www.Motorola.com/investor

 

  After the separation, if you have any questions relating to Motorola Mobility common stock, you should contact:

 

  Motorola Mobility Holdings, Inc.
  Investor Relations
  600 North US Highway 45
  Libertyville, Illinois 60048
  Tel: (847) 523-[ ]
  Email: [ ].com

Website: www.[ ].com

 

 

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  After the separation, if you have any questions relating to the distribution of our shares, you should contact:

 

  Motorola Mobility Holdings, Inc.
  c/o BNY Mellon Shareowner Services
  P.O. Box 3316
  S. Hackensack, NJ 07606
  Tel: (888) 647-8889

Summary of the Separation and Distribution

The following is a summary of the material terms of the separation, distribution and other related transactions.

 

Distributing company

Motorola, Inc., a Delaware corporation. After the distribution, Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc. on the Distribution Date) will not own any shares of Motorola Mobility common stock.

 

Distributed company

Motorola Mobility Holdings, Inc. (referred to in this Information Statement as “Motorola Mobility” or the “Company”), a Delaware corporation, is a wholly owned subsidiary of Motorola, Inc. that was formed in 2010 and that at the time of the distribution will hold, through its subsidiaries, all of the assets and liabilities of the Mobile Devices and Home businesses. After the distribution, Motorola Mobility will be an independent, publicly traded company.

 

Distributed company structure

Motorola Mobility is a holding company. It owns, directly or indirectly, the shares of a number of subsidiaries operating its global business. The main U.S. operating company is Motorola Mobility, Inc.

 

Distribution ratio

Each holder of Motorola, Inc. common stock will receive [ ] share of Motorola Mobility common stock for each share of Motorola, Inc. common stock held on [ ], 201[ ], the record date.

 

Distributed securities

Motorola, Inc. will distribute all of the shares of Motorola Mobility common stock owned by Motorola, Inc., which will be 100% of Motorola Mobility’s common stock outstanding immediately prior to the distribution. Based on the approximately [ ] shares of Motorola, Inc. common stock outstanding on [ ], 201[ ], and applying the distribution ratio of [ ] share of Motorola Mobility common stock for each share of Motorola, Inc. common stock, approximately [ ] million shares of Motorola Mobility common stock will be distributed to Motorola, Inc. stockholders who hold Motorola, Inc. common stock as of the record date.

 

Fractional shares

The distribution agent will not distribute any fractional shares of Motorola Mobility common stock to Motorola, Inc. stockholders. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing

 

 

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market prices and distribute the aggregate cash proceeds, net of brokerage fees and other costs, from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the distribution. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders as described in “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” in this Information Statement.

 

Record date

The record date for the distribution is the close of business on [ ], 201[ ].

 

Distribution method

Motorola Mobility common stock will be issued only in book-entry form. No paper stock certificates will be issued.

 

Distribution date

The Distribution Date is [ ], 201[ ].

 

Conditions to the distribution

The distribution of Motorola Mobility common stock is subject to the satisfaction or waiver by Motorola, Inc. of the following conditions, among other conditions described in this Information Statement in “ The Separation—Conditions to the Distribution ”:

 

   

the Securities and Exchange Commission (“SEC”) will have declared effective our registration statement on Form 10, of which this Information Statement is a part, with no stop order relating to the registration statement being in effect and the Information Statement will have been mailed to Motorola, Inc.’s stockholders;

 

   

any required actions and filings under applicable securities laws or blue sky laws will have been taken or made and, where applicable, have become effective or been accepted;

 

   

the Motorola Mobility common stock will have been accepted for listing on the NYSE, on official notice of issuance;

 

   

Motorola, Inc. will have received either a ruling by the IRS or an opinion of counsel to the effect that the distribution, together with certain related transactions, will qualify as a tax-free reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, and such ruling or opinion will be in form and substance satisfactory to Motorola, Inc. in its sole discretion;

 

   

no order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution will be in effect;

 

 

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any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

   

Motorola, Inc. will have received, in form and substance satisfactory to it, (i) an opinion of counsel, among other things, regarding the appropriateness of the determination by the Motorola, Inc. Board of Directors that Motorola, Inc. has sufficient surplus under Delaware law to permit the distribution, (ii) an opinion from its financial advisors with respect to the ability of Motorola, Inc. and Motorola Mobility to finance their respective operating and capital requirements through a specified date based on conditions in the capital markets as of the date of such opinion, and (iii) certificates from Motorola, Inc. and Motorola Mobility with respect to factual matters required by the advisors to render the opinions referenced in (i) and (ii).

 

  The fulfillment of the foregoing conditions does not create any obligations on Motorola, Inc.’s part to effect the distribution, and the Motorola, Inc. Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the distribution, including by accelerating or delaying the timing of the consummation of all or part of the distribution, at any time prior to the Distribution Date.

 

Stock exchange listing

We intend to file an application to list our shares of common stock on the NYSE and expect to list under the ticker symbol “MMI”.

 

Risks relating to ownership of our common stock and the distribution

Your ownership of common stock of Motorola Mobility and the distribution are subject to both general and specific risks and uncertainties relating to our business, the separation (including our relationship with Motorola, Inc.) and our operations as an independent, publicly traded company. You should carefully read the section entitled “ Risk Factors ” included elsewhere in this Information Statement.

 

U.S. federal income tax consequences

Assuming the distribution, together with certain related transactions, qualifies as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, no gain or loss will be recognized by a stockholder of Motorola Inc., and no amount will be included in the income of a stockholder of Motorola Inc., upon the receipt of shares of our common stock pursuant to the distribution, except with respect to any cash received in lieu of fractional shares. For more information regarding the potential U.S. federal income tax consequences to you of the distribution, see the section entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement.

 

 

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Selected Financial Data

The combined operating and balance sheet data included in the following selected financial data reflect the combined operations of Motorola Mobility Holdings, Inc. (“Motorola Mobility”) and its subsidiaries. We derived the combined operating data for the years ended December 31, 2009, 2008 and 2007, and the combined balance sheet data as of December 31, 2009 and 2008, as set forth below, from Motorola Mobility’s audited combined financial statements, which are included elsewhere in this Information Statement. We derived the combined operating data for the six months ended July 3, 2010 and July 4, 2009 and the combined balance sheet data as of July 3, 2010 from Motorola Mobility’s unaudited condensed combined financial statements, which are included elsewhere in this Information Statement. We derived the combined operating data for the years ended December 31, 2006 and December 31, 2005, and the combined balance sheet data as of July 4, 2009, December 31, 2007, December 31, 2006 and December 31, 2005, from Motorola Mobility’s underlying financial records, which were derived from the financial records of Motorola, Inc. In management’s opinion, the unaudited condensed combined financial statements have been prepared on substantially the same basis as the audited combined financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the combined financial information for the periods presented. The historical results do not necessarily indicate the results expected for any future period.

The selected combined financial data presented below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operation s ” and the combined financial statements and accompanying notes included elsewhere in this Information Statement.

 

     Six Months Ended         Years Ended December 31,
(Dollars in millions)    July 3,
2010
    July 4,
2009
          2009     2008     2007     2006    2005

Combined Operating Results

                 

Net revenues

   $ 5,089      $ 5,668        $ 11,050      $ 17,099      $ 23,373      $ 31,810    $ 24,447

Gross margin

     1,259        920          2,153        2,819        4,483        7,724      6,093

Operating earnings (loss)

     (56     (811       (1,211     (2,040     (1,131     2,593      2,258

Net earnings (loss)

     (134     (881       (1,335     (2,972     (648     1,852      1,576

Net earnings (loss) attributable to Motorola Mobility Holdings, Inc.

     (132     (885       (1,342     (2,969     (656     1,847      1,571
 

Combined Balance Sheet Data

                 

Total assets

   $ 5,623      $ 6,316        $ 5,858      $ 7,167      $ 11,096      $ 12,736    $ 9,901
 

Other Data

                 

Intangible assets amortization expense

   $ 27      $ 28        $ 57      $ 64      $ 88      $ 60    $ 34

Share-based compensation expense

     78        84          166        147        157        133      8

Capital expenditures

     42        33          67        151        195        183      155

Research and development expenditures

     739        821          1,591        2,358        2,550        2,259      1,861
 

 

 

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RISK FACTORS

You should carefully consider each of the following risk factors and all of the other information set forth in this Information Statement. The risk factors generally have been separated into three groups: (1) risks relating to our business, (2) risks relating to the separation, and (3) risks relating to our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our Company in each of these categories of risks. However, the risks and uncertainties our Company faces are not limited to those set forth in the risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.

Risks Relating to Our Business

We have had substantial operating losses in each of the last three years and may continue to incur losses.

In each of the last three years, Motorola Mobility had substantial operating losses as a result of the financial performance of our Mobile Devices business. We cannot be certain that we will return to profitability in the near-term.

In 2009, the telecommunication and cable industries were impacted by the global reduction in capital and consumer spending and our financial performance could be negatively impacted if capital and consumer spending does not substantially improve.

In 2009, the telecommunications and cable industries were impacted by the global reduction in capital spending and consumer spending. As a result, both industries contracted. Our financial plans anticipate the wireless mobile device market to grow in 2010 and some continued contraction in the cable industry. Our financial performance could be negatively impacted if our expectations for our industries are not correct.

We operate in an extremely competitive environment and our success depends in part on our timely introduction of, and effective investment in, new competitive products, and technologies and services, the failure of which could negatively impact our business.

We operate in an extremely competitive environment and the markets for our products are characterized by rapidly changing technologies, frequent new product introductions, short product life cycles and evolving industry standards. The convergence of the telecommunication, data and media industries which is driven by technological development related to Internet protocol (“IP”) based communications is driving rapid change in our industries. Product life cycles can be short and new products are expensive to develop and bring to market. Our success depends, in substantial part, on the timely and successful introduction of new products, services and upgrades of current products to comply with emerging industry standards and to address competing technological and product developments by our competitors. The research and development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and investment, as well as the accurate anticipation of technology, market trends and customer needs. We may focus our resources on technologies that do not become widely accepted, are not timely released or are not commercially viable. In addition, our products may contain defects or errors that are detected only after deployment. If our products are not competitive or do not work properly, our business could suffer and our financial performance could be negatively impacted.

Our results are subject to risks related to our significant investment in developing and introducing new products and services, such as advanced wireless mobile devices, including smartphones, and products for transmission of telephony and high speed data over hybrid fiber coaxial cable systems. These risks include: (1) difficulties and delays in the development, production, testing and marketing of products, (2) customer

 

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acceptance of products, (3) the development of, approval of and compliance with industry standards, (4) the significant amount of resources we must devote to the development of new technologies, and (5) the ability to differentiate our products and compete with other companies in the same markets.

We have several large customers and the loss of, or a significant reduction in revenue from, one or more of these customers could have a negative impact on our business .

During 2009, approximately 17% of our net revenues were from Verizon Communications Inc. (including Verizon Wireless) (“Verizon”) and approximately 13% of our net revenues were from Sprint Nextel Corporation (“Sprint Nextel”). In 2009, Verizon was the single largest customer of both of our businesses. It may be difficult to replace or find new large customers, especially in the U.S. where there are a limited numbers of carriers. If any significant customer, particularly Verizon or Sprint Nextel or other large customers, such as Comcast, stopped doing business with us, or significantly reduced the level of business they do with us, it could impact our ability to service other customers using similar technology and our financial results could be negatively impacted.

Our contracts with wireless carriers do not provide for long-term guaranteed volumes of purchases or exclusivity and are cancellable by our customers with little, if any, notice. Our financial results could be negatively impacted as a result of doing business with wireless carriers under these types of arrangements.

We sell substantially all of our handsets to wireless carriers. Currently, we do not have long-term exclusivity arrangements with our customers or commitments by them to purchase guaranteed volumes. Moreover, our customers can cancel orders or contracts with us with little, if any, notice. Some of our current competitors have more favorable contractual arrangements with some wireless carriers, including exclusivity arrangements. These more favorable contractual arrangements have given our competitors competitive advantages. Our financial results could be negatively impacted as a result of doing business with wireless carriers under these types of arrangements.

We have lost significant market share in our Mobile Devices business and such loss has negatively impacted our performance and could continue to negatively impact our financial results.

Our share of the worldwide wireless mobile device market has declined significantly in the last several years. While we reduced our costs during this period of time, our significantly lower sales volume and the resulting market share declines have had a negative impact on our financial results. Although our primary focus is profitable growth, if our global market share of smartphone shipments does not increase, our strategy to return our Mobile Devices business to profitability could be negatively impacted.

If our current product strategy and operating system strategy are not successful, our Mobile Devices business could be negatively impacted.

Our current strategy is to concentrate our mobile devices portfolio on smartphones and to use third-party and/or open-source operating systems and associated application ecosystems, predominantly the Google Android operating system (a royalty-free open-source platform) and marketplace, in our wireless products. As a result, we are dependent on third-parties’ continued development of operating systems, software application ecosystem infrastructures and such third-parties’ approval of our implementations of their operating system and associated applications. If we had to change our strategy, our financial results could be negatively impacted because a resulting shift away from using Android and the associated applications ecosystem could be costly and difficult. A strategy shift could increase the burden of development on Motorola Mobility and potentially create a gap in our portfolio for a period of time, which could competitively disadvantage Motorola Mobility.

We are at risk if Android-based smartphones do not remain competitive in the marketplace. Even if Android-based smartphones remain competitive, the Android operating system is an open-source platform and many other companies sell competing Android-based smartphones. If the Android-based smartphones of our competitors are more successful than ours, our financial results could be negatively impacted. It is also critical to

 

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the success of the Android operating system that third-party developers continue to develop and offer applications for this operating system that are competitive with applications developed for other operating systems. From an overall risk perspective, the industry is currently engaged in an extremely competitive phase with respect to operating system platforms, applications and software generally. If Android does not to continue to gain operator and/or developer adoption, or any updated versions or new releases of Google’s Android operating system or applications are not made available to Motorola Mobility in a timely fashion, Motorola Mobility could be competitively disadvantaged and Motorola Mobility’s financial results could be negatively impacted.

As part of our ongoing effort to improve the product portfolio of our Mobile Devices business, we also have been rationalizing our hardware platforms to reduce the complexity of our product platforms and system architecture. This allows us to lower our costs to develop and produce mobile devices and to enable richer consumer experiences. Failure to continue to execute on these rationalization plans in a timely and effective manner could cause us to be competitively disadvantaged in many areas, including but not limited to, cost, time-to-market and the ability to ramp-up production in a timely fashion with acceptable quality and improved/additional features.

We have identified priority markets as we introduce our new smartphone products and rebuild our business and our Mobile Devices business could be negatively impacted if we are not successful in these priority markets or are unable to succeed in other markets.

Our current priority markets for our new smartphones are North America and China, followed by Western Europe, Latin America and other parts of Asia. Our ability to rebuild our business so that we can expand into more markets and achieve the scale we need to be profitable is highly dependent on our initial success in North America and China. While North America has traditionally been our strongest market and we have been successful in China, we face intense competition in both markets, and there can be no assurance that we can achieve the levels of sales and profitability in these markets that we will need to continue to rebuild our business and expand our markets.

Our future financial results may be negatively impacted if we do not execute on our Original Design Manufacturer (“ODM”) strategy of delivering low- to mid-tier voice-centric products.

We rely on ODMs to develop and manufacture our low- to mid-tier voice-centric mobile products. However, customer demand for these products in these locations could exceed the ODMs’ development capabilities, manufacturing capacity and/or material availability which could negatively impact our operating results. A significant quality issue could disrupt plans to launch products into these markets and result in cancelled orders and missed sales opportunities. In addition, commercial terms with our ODMs could be less favorable on future devices making these products more expensive to produce and, consequently, less competitive in these markets, negatively impacting our sales and operating results.

The effects of Federal Communications Commission (“FCC”) regulations requiring separation of security functionality from set-top boxes could negatively impact our sales of set-top boxes to cable providers.

Historically, reception of digital television (“TV”) programming from a cable broadband network required a set-top box with security technology. Traditionally, cable service providers leased their set-top boxes to their customers. This security technology limited the availability of set-top boxes to those manufactured by a few cable network manufacturers, including Motorola Mobility. In 2007, FCC regulations requiring separation of security functionality from set-top boxes became effective. This has increased competition for sales of set-top boxes to cable operators and enabled retail distribution of set-top boxes. Moreover, it also enabled retail distribution of televisions with other video devices capable of accessing encrypted cable programming. Several major cable operators are working to support full two-way security interface architecture that allows retail customers access to all programming available on a cable operator’s network without the need for a set-top box. In addition, a few television and video device manufacturers have begun shipping or are developing such devices. If either of these strategies achieve a meaningful volume of sales it could negatively impact Motorola Mobility’s sales of set-top boxes.

 

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The AllVid/Smart Video Notice of Inquiry currently in process by the FCC is exploring standardization of interfaces, protocols and operations related to set-top boxes and gateways. While the process is in its infancy and no decisions have been made, future rules adopting some or all of the proposed standards could negatively impact our set-top box business.

We have taken significant cost-reduction actions, which may expose us to additional production risk and could have a negative impact on our sales, profitability and ability to attract and retain employees.

We have been reducing costs and simplifying our product portfolios in our businesses, with sizable reductions in our Mobile Devices business. We have discontinued product lines, consolidated manufacturing operations, increased reliance on third-parties, reduced our employee population and changed our compensation and benefits programs.

The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors, including, but not limited to: (1) our ability to successfully complete these ongoing efforts, (2) our ability to generate the remaining level of cost savings we expect, (3) delays in implementing anticipated workforce reductions in highly regulated locations outside the U.S., particularly in Europe, (4) decline in employee morale and the potential inability to meet operational targets due to the loss of employees, (5) our ability to retain or recruit key employees, (6) the adequacy of our manufacturing capacity, including capacity provided by third-parties, (7) the performance of other parties under contract manufacturing arrangements on which we rely for the manufacture of certain products, parts and components, and (8) possible litigation or other third-party intervention.

Our business has consolidated or exited certain facilities and our products are manufactured in fewer facilities than in the past. While we have business continuity and risk management plans in place in case capacity is significantly reduced or eliminated at a given facility, the reduced number of alternative facilities could cause the duration of any manufacturing disruption to be longer or more severe. As a result, we could have difficulties fulfilling our orders and our sales and profits could decline.

We face many risks relating to intellectual property rights.

Our business could be harmed if: (1) we, our customers and/or our suppliers are found to have infringed intellectual property rights of third-parties, (2) the intellectual property indemnities in our supplier agreements are inadequate to cover damages and losses we suffer due to infringement of third-party intellectual property rights by our suppliers’ products, (3) we are required to indemnify our customers for significant amounts under agreements providing for intellectual property indemnities that have been entered into with some of our customers, (4) our intellectual property protection is inadequate to protect our proprietary rights, (5) the indemnity rights passed through by our customers are insufficient, or (6) our competitors negotiate significantly more favorable terms for licensed intellectual property. We may be harmed if we are forced to make publicly available, under the relevant open-source licenses, certain internally developed software related intellectual property as a result of either our use of open-source software code or the use of third-party software that contains open-source code. Our intellectual property protection could be limited due to the use of such open-source software code in our products.

Intellectual Property Infringement Risks

Because our products are comprised of complex technology, we are often involved in or impacted by assertions, including both requests to take licenses and litigation, regarding infringement of patent and other intellectual property rights of third-parties. Third-parties have asserted, and in the future may assert, intellectual property infringement claims against us and against our customers and suppliers. These assertions against us and our customers and suppliers have become more frequent as the complexity of our products and the intensity of competition in our industry has increased. Increasingly, many of these assertions are brought by non-practicing entities whose principal business model is to secure patent licensing based revenue from product manufacturing companies. The patent holders often make broad and sweeping claims regarding the applicability of their patents

 

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to our products and the products of our customers and suppliers, seeking a percentage of sales or a percentage of downstream customer revenues as license fees, or seeking injunctions to pressure us, our customers and suppliers into taking a license, or a combination thereof. Defending claims, including pursuant to indemnity obligations, may be expensive and divert the time and efforts of our management and employees. Increasingly, third-parties have sought broad injunctive relief by filing claims in the International Trade Commission (“ITC”) which could limit our ability to sell our products in the U.S. or elsewhere if our products or those of our customers or suppliers are found to infringe the intellectual property subject to the claims. If we do not succeed in such litigation, we could be required to expend significant resources to pay damages, to develop non-infringing products or to obtain licenses to the intellectual property that is the subject of such litigation, each of which could have a negative impact on our financial results. We cannot be certain that any such licenses, if available at all, will be available to us on commercially reasonable terms. In some cases, we might be forced to stop delivering certain products if we or our customers or suppliers are subject to a final injunction.

Intellectual Property Indemnity Risks

We attempt to negotiate favorable intellectual property indemnities with our suppliers for infringement by their products of third-party intellectual property rights. However, certain suppliers require us to provide intellectual property infringement indemnification or provide limited or no intellectual property infringement indemnities to us in existing contracts. There is no assurance that we will be successful in our future negotiations, that a supplier’s indemnity will cover all damages and losses suffered by us and our customers due to any infringing products, or that a supplier may choose to accept a license or modify or replace its products with non-infringing products which would otherwise mitigate such damages and losses. Further, we may not be able to participate in intellectual property litigation involving a supplier and may not be able to influence any ultimate resolution or outcome that could negatively impact our sales if a court enters an injunction against the supplier’s products or if the ITC issues an exclusionary order that blocks our products from importation into the U.S. that contain their components or software. As our volumes of Android-based smartphones increase, we could be affected if a third-party successfully asserted an intellectual property infringement claim against our supplier, Google, and the supply of Android software for our products were limited or foreclosed.

In addition, our customers increasingly demand that we indemnify them broadly from damages and losses resulting from intellectual property litigation against them relating to our products. Customers may also demand third-party content without providing sufficient pass-through indemnities. Because our customers often derive much larger revenue streams by reselling or leasing our products than we generate from the sale of our products to them, these indemnity claims by our customers have the potential to expose us to damages that are much higher than we would be exposed to if we were sued directly.

Intellectual Property Protection Risks

Our patent and other intellectual property rights are important competitive tools that we use to generate income under license agreements or to give us a competitive advantage over our competitors. We regard our intellectual property as proprietary and attempt to protect it with patents, copyrights, trademarks, trade secret laws, confidentiality agreements and other methods. We also generally restrict access to and distribution of our proprietary information. Despite these precautions, it may be possible for a third-party to obtain and use our proprietary information or develop similar technology independently. In the course of litigation, courts may also invalidate our intellectual property rights. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. Unauthorized use of our intellectual property rights by third-parties and the cost of any litigation necessary to enforce our intellectual property rights could have a negative impact on our business.

Intellectual Property Competition Risks

As we expand our business, including through acquisitions, and compete with new competitors in new markets, the breadth and strength of our intellectual property portfolio in those new areas may not be as developed as in our longer standing businesses. This may expose us to a heightened risk of litigation and other

 

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challenges from competitors in these new markets. Further, competitors may be able to negotiate significantly more favorable terms for licensed intellectual property than we are able to, which would put them at a competitive advantage.

Intellectual Property Separation Risks

As a business segment of Motorola, Inc., we are the beneficiary of certain of Motorola, Inc.’s intellectual property licensing arrangements with respect to technology incorporated in our products and used to operate our businesses, including cross-licensing arrangements with leading telecommunications equipment companies, various royalty bearing license agreements, and other licensing agreements entered into with third-parties. Some of these agreements are assignable unilaterally by Motorola, Inc., while the assignment of others may be subject to consent or other conditions. We expect to seek assignments of some of these agreements, as well as to enter into our own agreements and arrangements with certain third-parties, with respect to intellectual property and technology that is important to our business and that was previously licensed through Motorola, Inc. It is possible that some third-parties may use the requirement of a consent or a new agreement to seek to obtain more favorable contractual terms or refuse to enter into a new arrangement. In addition, there may be third-parties who have refrained from asserting intellectual property infringement claims against our products while we were a business segment of Motorola, Inc. that elect to pursue such claims against us after our separation from Motorola, Inc. Failure to retain or secure licenses on terms and conditions as favorable as those secured by our competitors or those we have enjoyed while part of Motorola, Inc. could put us at a competitive disadvantage.

Motorola Mobility’s reliance on marks owned by third-parties presents additional business risks.

Motorola, Inc. has licensed, or has otherwise obtained the rights from third-parties to use, certain trademarks in connection with our products, including ANDROID , DROID and CLIQ . Such third-party ownership rights may be challenged by other third-parties. In the event that such third-party licensor is successfully challenged, our continued use of such trademarks could result in an injunction barring the sale of our products, and if such third-party licensor refuses or fails to indemnify the Company, we could be liable for payment of damages resulting from trademark infringement, thereby disrupting our continued and/or long-term use of such trademarks. We are aware that ANDROID is currently the subject of a trademark infringement lawsuit between Google and Android Data Corporation, and that the latter’s ANDROID DATA registration has initially been cited by the United States Patent and Trademark Office (“USPTO”) against the owner of the pending application for DROID.

The occurrence or perception of a breach of our security or privacy policies, or inappropriate disclosure of end-user confidential or personal information could harm our business.

MOTOBLUR , our service platform, handles the transmission of personally identifiable and other confidential information and data from end-users (“User Information”), and as such, provides the Company with access to such User Information. In addition, information stored in our smartphone products is subject to virus and security attacks related to the wireless transmission of data. In the event that the security measures implemented by us, our customers or our third-party service providers are breached, or if there is an inappropriate disclosure of User Information, including as a result of a security breach relating to either MOTOBLUR or our smartphones, we could be exposed to litigation or regulatory action, which may result in significant liability or other sanctions. Even if we are not held liable, a security breach or inappropriate disclosure of User Information could harm our reputation, and even the perception of security vulnerabilities or risks associated with our products could lead some customers to reduce or delay future purchases, or to purchase competing products or services. In addition, we may be required to invest additional resources to protect the Company against these actual or perceived disruptions or security breaches in the future.

The collection, storage, transmission, use and distribution of User Information and other personally identifiable information could give rise to liabilities or additional costs as a result of laws, governmental regulations or carrier and other customer requirements or differing views of personal privacy rights.

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operating systems and procedures as well as our MOTOBLUR service and smartphone products and related services. This information is increasingly subject to legislation and regulations in numerous jurisdictions around the world. Governmental regulations are typically intended to protect the privacy and security of such User Information and other personally identifiable information as well as to regulate the collection, storage, transmission, transfer, use and distribution of such information.

We could be adversely affected if domestic or international legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business. If we are required to allocate significant resources to modify our internal operating systems and procedures as well as our MOTOBLUR service or smartphones to enable enhanced security of User Information that we transmit and store, our business results could be adversely affected.

In addition, because various foreign jurisdictions have different laws and regulations concerning the storage and transmission of User Information and other personally identifiable information, we may face requirements that pose compliance challenges in new international markets that we seek to enter. Such variation could subject us to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

Our wireless carrier or other customers may have differing expectations or impose particular requirements for the collection, storage, processing and transmittal of User Information and other personally identifiable information in connection with our MOTOBLUR service, or smartphone product and service offerings. Such expectations or requirements could subject us to costs, liabilities or negative publicity, and limit our future growth. If we are required to allocate significant resources to modify our MOTOBLUR service or smartphone product and service offerings to meet such requirements, we may incur additional costs to meet such requirements, and our time-to-market with various product and service offerings could be negatively affected.

Our customers, suppliers, employees and facilities are located throughout the world and, as a result, we face risks that other non-global companies may not face.

Our customers and suppliers are located throughout the world and in 2009 approximately 42% of our Mobile Devices business sales and 29% of our Home business sales were made to customers outside the U.S. In addition, we have many manufacturing, research and development, administrative and sales facilities outside the U.S. and more than half of our employees are employed outside the U.S. Most of our suppliers’ operations are outside the U.S. and all of our products (other than some prototypes) are manufactured outside the U.S.

As with all companies that have sizeable sales and operations outside the U.S., we are exposed to risks that could negatively impact sales or profitability, including but not limited to: (1) import/export regulations, tariffs, trade barriers and trade disputes, customs classifications and certifications, including but not limited to changes in classifications or errors or omissions related to such classifications and certifications, (2) patent infringement actions in the ITC, (3) changes in U.S. and non-U.S. rules related to trade, the environment, health and safety, technical standards and consumer protection, (4) longer payment cycles, (5) tax issues, such as tax law changes, variations in tax laws from country to country and as compared to the U.S., obligations under tax incentive agreements, and difficulties in repatriating cash generated or held abroad in a tax-efficient manner, (6) currency fluctuations, particularly in the Chinese renminbi, euro, Brazilian real, Taiwan dollar, and Korean won which could negatively impact our revenues and profits, (7) foreign exchange regulations, which may limit Motorola Mobility’s ability to convert or repatriate foreign currency, (8) challenges in collecting accounts receivable, (9) cultural and language differences, (10) employment regulations and local labor conditions, (11) difficulties protecting intellectual property in foreign countries, (12) instability in economic or political conditions, including inflation, recession and actual or anticipated military or political conflicts, including war and other hostilities, (13) natural disasters, (14) public health issues or outbreaks, (15) changes in laws or regulations that negatively impact benefits, such as tax benefits, being received by Motorola Mobility, (16) the impact of each of the foregoing on our outsourcing and procurement arrangements, and (17) litigation in foreign judicial systems and foreign administrative proceedings.

 

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We also face additional challenges in emerging markets, including creating demand for our products and the negative impact of changes in the law or interpretation of the law in those countries.

We also are subject to risks that our operations outside the U.S. could be conducted by our employees, contractors, service providers, representatives or agents in ways that violate the Foreign Corrupt Practices Act or other similar anti-bribery laws. While we have polices and procedures to comply with these laws, our employees, contractors, service providers, representatives and agents may take actions that violate our policies. Any such violations could have a negative impact on our business. Moreover, we face additional risks that our anti-bribery policy and procedures may be violated by third-party sales representatives or other agents that help sell our products or provide other services, because such representatives or agents are not our employees and it may be more difficult to oversee their conduct.

Our products are manufactured outside the U.S., primarily in China, Taiwan and Brazil, and our performance could be negatively impacted if manufacturing is disrupted or as a result of unique risks of doing business in these countries.

Our products are manufactured outside the U.S. primarily in China, Taiwan and Brazil. If our manufacturing in these regions is disrupted, our overall capacity could be significantly reduced and sales or profitability could be negatively impacted. Furthermore, the legal systems in these countries are still developing and we face risks related to the negative impact of changes in the laws, or the interpretation of the laws, in these countries. In China and elsewhere, we face risks that our proprietary information may not be afforded the same protection under law as it is in countries with well-developed intellectual property laws similar to those in the U.S. Also in China, certain China-based competitors are acquiring very large portfolios of Chinese patents and may use those patents to interfere with our China-based manufacturing operations.

In Brazil, we face additional risks related to that country’s complex tax, labor, trade compliance and consumer protection laws and regulations. In Brazil, we manufacture and sell products and employ over 1,000 people. In connection with those activities we have had and continue to have legal disputes and controversies, including labor, trade compliance, tax controversies and legal cases that take many years to resolve. We incur legal and other costs in managing and defending these matters and expect to continue to incur such costs. Based on our assessment of these cases, we have recorded reserves on only a small portion of the total potential exposure, and/or in court cases, we have had to deposit cash in escrow accounts or provide surety bonds or letters of credit in some of the matters. It is, however, very difficult to predict the outcome of legal disputes and controversies, including litigation in Brazil, and our ultimate exposure may be significantly greater than our current assessments. Our operations in Brazil could be negatively impacted if we are deemed to be in violation of laws or regulations and we may be subject to substantial fines, taxes, judgments and litigation costs. We also face additional challenges in Brazil due to frequent changes in laws that may impact our operations and market strategy.

If the quality of our products does not meet our customers’ expectations or our products are found to be defective, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted.

The products we sell may have quality issues resulting from the design or manufacture of the product, or from the software used in the product. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. Often these issues are identified prior to the shipment of the products and may cause delays in shipping products to customers, or even the cancellation of orders by customers. Sometimes, we discover quality issues in the products after they have been shipped to our customers, distributors or end-users, requiring us to resolve such issues in a manner that is the least disruptive to our customers. Such pre-shipment and post-shipment quality issues can have legal and financial ramifications, including delays in the recognition of revenue, loss of revenue or future orders, customer imposed penalties for failure to meet our contractual requirements, penalties from regulatory agencies, increased costs associated with repairing or replacing products, a negative impact on our goodwill and brand name reputation, warranty claims and litigation, including class action litigation.

 

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In some cases, if the quality issue affects the product’s safety or regulatory compliance, then such a “defective” product may need to be recalled or be subject to other actions in the field. Depending on the nature of the defect and the number of products in the field, it could cause us to incur substantial recall or field action costs, in addition to the costs associated with the potential loss of future orders and the damage to our goodwill or brand reputation. In addition, we may be required, under certain customer contracts, to pay damages for failed performance that might exceed the revenue that we receive from the contracts. Recalls involving regulatory agencies could also result in fines and additional costs and trigger indemnification obligations. Finally, product defects could result in third-party litigation, including class action litigation by persons alleging common harm resulting from the purchase of the products.

If the volume of our sales decreases or does not reach projected targets, we could face increased materials and manufacturing costs that could make our products less competitive, which could negatively impact our financial results.

We have negotiated favorable pricing terms with many of our suppliers, some of which have volume-based pricing. Under such pricing arrangements, we may experience higher than anticipated costs if current volume-based purchase projections are not met. Some contracts have minimum purchase commitments and we may incur financial liabilities or price increases if these commitments are not met. We also may have unused production capacity if our current volume projections are not met, increasing our production cost per unit. In the future, as we establish new pricing terms, our volume demand could negatively impact future pricing from suppliers. All of these outcomes may result in our products being more costly per unit to manufacture and therefore less competitive or could negatively impact our financial results.

Failure to meet supply demands could negatively impact our relationship with customers and results of operations.

A failure to meet the supply demands of our customers can lead customers to drop or otherwise restrict our products from promotions and key product placements. This could negatively impact our relationship with customers and our financial results.

Our future operating results depend on our ability to purchase a sufficient amount of materials, parts and components to meet the demands of our customers and any reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business.

Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Due to increased demand for products, many electronic manufacturers are experiencing shortages for certain components. In the second half of this year, if demand for our products increases from our current expectations, we could experience shortages. We have experienced shortages in the past driven by raw material availability, manufacturing capacity, labor shortages, industry allocations, natural disasters and significant changes in the financial or business conditions of our suppliers that have negatively impacted our operations. Although we work closely with our suppliers to avoid shortages, there can be no assurance that we will not encounter shortages in the future or that such shortages will not negatively impact our operations.

Furthermore, certain of our components are available only from a single source or limited sources, such as certain specialized components for our smartphones and set-top boxes. We may not be able to diversify sources in a timely manner. A reduction or interruption in supplies or significant increase in the price of supplies could have a negative impact on our business. In addition, our current contractual arrangements with certain suppliers may be cancelled, breached or not extended by such suppliers and therefore not afford the Company with sufficient protection against a reduction or interruption in supplies.

 

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Many of our components and products are designed or manufactured by third-parties. If third-party manufacturers lack sufficient quality control or if there are significant changes in the financial or business condition of such third-party manufacturers, it could have a negative impact on our business.

We rely on third-party manufacturers to manufacture many of our assemblies and finished products. If we are not able to engage such manufacturers with the capabilities or capacities required by our business, or if such third-parties lack sufficient quality control or if there are significant changes in the financial or business condition of such third-parties, it could have a negative impact on our business. We also have third-party arrangements for the design or manufacture of certain products, parts and components, including batteries. If we are not able to engage such parties with the capabilities or capacities required by our business, or if these third-parties fail to deliver quality products, parts and components on time and at reasonable prices, we could have difficulties fulfilling our orders and that could have a negative impact on our sales and results of operations.

Failure of our suppliers, business partners and customers to use acceptable ethical business practices could negatively impact our business.

It is our policy to require our suppliers, business partners and customers to operate in compliance with applicable laws, rules and regulations and our code of business conduct regarding working conditions, employment practices, environmental compliance and trademark and copyright licensing. However, we do not control their labor and other business practices. If one of our suppliers violates labor or other laws or implements labor or other business practices that are regarded as unethical, the shipment of finished products to us could be interrupted, orders could be canceled, relationships could be terminated and our reputation could be damaged. If one of our suppliers fails to procure necessary license rights to trademarks, copyrights or patents owned by third-parties, legal action could be taken against us that could impact the salability of our products and expose us to financial obligations to third-parties. Any of these events could have a negative impact on our sales and results of operations.

Our success is dependent, in part, upon our ability to form successful strategic alliances. If these arrangements do not develop as expected, our business could be negatively impacted.

We currently form alliances with industry leaders to meet customer product and service requirements and to develop innovative advances in design and technology. Some of our alliances allow us to supplement internal manufacturing capacity and share the cost of developing next-generation technologies. Other alliances allow us to offer more services and features to our customers. If such arrangements do not develop as expected, our business could be negatively impacted.

We rely on third-party distributors, representatives and retailers to sell certain of our products and our ability to bring products to market may be adversely affected by the loss or failure of one or more of our distributors.

In addition to our own sales force, we offer our products through a variety of third-party distributors, representatives and retailers. Certain of our distributors, representatives or retailers may also market other products that compete with our products. The loss or termination of one or more of our distributors, representatives or retailers, the failure of one or more of our distributors or representatives to effectively promote our products, or changes in the financial or business condition of these distributors or representatives could affect our ability to bring products to market.

Our future financial results could be negatively impacted if we are not successful in licensing our intellectual property.

As part of our business strategy we generate revenue through the licensing of intellectual property rights. The licensed rights include those that are essential to telecommunications standards, such as the global system for mobile communications (“GSM”), third generation cellular (“3G”) and fourth generation cellular (“4G”) standards. Previously agreed-upon terms of some of our long-standing license agreements have reduced our royalty revenue over the past several years and may continue to reduce that revenue. As an independent legal

 

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entity we may no longer receive certain licensing revenue that was allocated to us when we were part of Motorola, Inc. or if we do receive such revenue the accounting treatment of that revenue may be different than it was when we were part of Motorola, Inc. Uncertainty in the legal environment makes it difficult to assure that we will be able to enter into new license agreements that will be sufficient to offset that reduction in our revenue.

Copyright levies in numerous countries for the sale of products could negatively impact our business.

Motorola Mobility faces the possibility of substantial copyright levies from collecting societies in numerous countries for the sale of products that might be used for the private copying of copyright protected works such as mobile phones, memory cards and set-top boxes. The collecting societies argue that such levies should apply to such products because they include audio/video recording functionality, such as a Moving Picture Experts Group Format for Audio Layer 3 (“MP3”) player or a digital video recorder (“DVR”) or storage capability, despite the fact that such products are not primarily intended to act as a recording device. We are currently working with other major companies who are subject to copyright levies to challenge the applicability of these levies to our products, and are also engaged in aggressive efforts against the levies in general in the European Union. However, if levies are imposed upon our products, our financial results could be negatively impacted.

Industry consolidation in the telecommunications and cable industries could negatively impact our business because there would be fewer network operators and it could be more difficult to replace any lost customers.

The telecommunications and cable industries have experienced consolidation to gain efficiencies and economics of scale and this trend may continue. The convergence of video, voice and data service offerings may cause network operators to further consolidate across wireline, wireless and satellite delivery platforms. Consolidation by or among our customers could result in delays of purchases or in the selection of new suppliers by the merged companies, and negatively impact equipment suppliers, including our business. Due to continuing concentration within the cable industry worldwide, a small number of operators own a majority of cable TV systems and account for a significant portion of the capital spending made by cable telecommunication systems operators. Customer concentration has resulted in a smaller number of telecommunications customers making it more difficult to diversify our customer base.

The uncertainty of current economic and political conditions makes budgeting and forecasting difficult and could reduce demand for our products.

Current conditions in the domestic and world economies remain very uncertain. The global financial crisis, U.S. unemployment levels and ongoing political conflicts in the Middle East and elsewhere have created many economic and political uncertainties that have impacted worldwide markets. As a result, it is difficult to estimate changes in various parts of the world economy, including the markets in which we participate. Because all components of our budgeting and forecasting are dependent upon estimates of demand for our products, the prevailing economic uncertainties render estimates of future income and expenditures difficult.

The potential for future terrorist attacks, increased global conflicts and the escalation of existing conflicts and public health issues have created worldwide uncertainties that have negatively impacted, and could continue to negatively impact, demand for certain of our products.

Changes in our operations or sales outside the U.S. markets could result in lost benefits in impacted countries and increase our cost of doing business.

Motorola, Inc. has entered into agreements , and we may enter into new agreements from time to time, with non-U.S. governments, agencies or similar organizations under which we have received or may receive certain benefits relating to our operations and/or sales in the jurisdiction. If our circumstances change and operations or sales are not at levels originally anticipated, we could be at risk of losing some or all of these benefits and increasing our cost of doing business. In addition, certain of the benefits we enjoyed while part of Motorola, Inc. and its subsidiaries may no longer be available to us as an independent company.

 

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We may not generate sufficient future taxable income, which could require additional deferred tax asset valuation allowances.

If we are unable to generate sufficient future taxable income in certain non-U.S. jurisdictions, or if there are significant changes in tax laws or in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets resulting in an increase in our effective tax rate and a negative impact on future operating results.

The outcome of currently ongoing and future examinations of our income tax returns by the IRS and other tax authorities could impact our financial results.

We are subject to continued examination of the income tax returns filed by certain of our subsidiaries by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuing examinations will not have a negative impact on future operating results.

We may be required to record additional goodwill or other long-lived asset impairment charges, which could result in additional significant charges to earnings.

Under generally accepted accounting principles, we review our long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. Factors that may be considered in assessing whether goodwill or intangible assets may not be recoverable include a decline in our stock price or market capitalization, reduced estimates of future cash flows and slower growth rates in our industry.

While part of Motorola, Inc., our businesses have incurred goodwill impairments and asset impairments. The goodwill impairment charges resulted from lower asset values in the overall market and the impact of the macroeconomic environment on our near-term forecasts. The intangible asset impairments resulted from a change in a technology platform strategy. Further declines in our stock price or reductions in our future cash flow estimates and future operating results may require us to record significant additional goodwill or other long-lived asset impairment charges in our financial statements in future periods, which could negatively impact our financial results.

We may make strategic acquisitions of other companies or businesses and these acquisitions would introduce significant risks and uncertainties, including risks related to integrating the acquired businesses and achieving benefits from the acquisitions.

In order to position ourselves to take advantage of growth opportunities, we may make strategic acquisitions that involve significant risks and uncertainties. These risks and uncertainties include: (1) the difficulty in integrating newly acquired businesses and operations in an efficient and effective manner, (2) the challenges in achieving strategic objectives, cost savings and other anticipated benefits from acquisitions, (3) the risk that our markets do not evolve as anticipated and that the technologies acquired do not prove to be those needed to be successful in those markets, (4) the potential loss of key employees of the acquired businesses, (5) the risk of diverting the attention of senior management from our operations, (6) the risks of entering new markets in which we have limited experience, (7) risks associated with integrating financial reporting and internal control systems, (8) difficulties in expanding information technology systems and other business processes to accommodate the acquired businesses, and (9) future impairments of goodwill of an acquired business.

Acquisition candidates in the industries in which we participate may carry higher relative valuations (based on their earnings) than we do. This is particularly evident in software and services businesses. Acquiring a business that has a higher relative valuation than Motorola Mobility may be dilutive to our earnings, especially if the acquired business has little or no revenue. In addition, we may not pursue opportunities that are highly dilutive to near-term earnings and have, in the past, foregone certain of these acquisition opportunities.

 

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Key employees of acquired businesses may receive substantial value in connection with a transaction in the form of change in control payments, acceleration of stock options and the lifting of restrictions on other equity- based compensation rights. To retain such employees and integrate the acquired business, we may offer additional retention incentives, but it could still be costly and difficult to retain certain key employees.

It may be difficult for us to recruit and retain the types of engineers and other highly skilled employees that are necessary to remain competitive.

Competition for key technical personnel in high technology industries is intense. We believe that our future success depends in large part on our continued ability to hire, assimilate, retain and leverage the skills of qualified engineers and other highly skilled personnel. We may not be as successful as our competitors at recruiting, assimilating, retaining and utilizing these highly skilled personnel. We may have more difficulty attracting or retaining highly skilled personnel during periods of poor operating performance.

Our success depends in part upon our ability to attract, retain and prepare succession plans for senior management and key employees.

The performance of our senior management and other key employees, in particular our chief executive officer, Dr. Jha, is critical to our success. If we are unable to retain talented, highly qualified senior management and other key employees or attract them when needed, it could negatively impact Motorola Mobility. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that is difficult to replace and competition for management with experience in the technology industry is intense. A loss of the chief executive officer, a member of senior management or a key employee, particularly to a competitor, could also place us at a competitive disadvantage. Further, if we fail to adequately plan for the succession of our chief executive officer, senior management and other key employees, our business could be negatively impacted by their loss. The separation may also heighten risk related to the organizational structure of a newly independent company if certain subject matter experts or employees with specialized skills who may currently be shared with Motorola, Inc. will stay with Motorola, Inc. and have to be replaced at Motorola Mobility.

The unfavorable outcome of any pending or future litigation or administrative action could negatively impact Motorola Mobility.

Our financial results could be negatively impacted by unfavorable outcomes to any pending or future litigation, investigation or administrative actions, including those related to the Foreign Corrupt Practices Act and other anti-bribery laws. There can be no assurances as to the favorable outcome of any litigation. In addition, it can be very costly to defend litigation and these costs could negatively impact our financial results. See “ Business—Legal Proceedings ”.

It is important that we are able to obtain many different types of insurance, and if we are not able to obtain insurance we are forced to retain the risk.

As part of Motorola, Inc., we had many types of insurance coverage and also were self-insured for some risks and obligations. We may have more difficulty obtaining certain types of insurance or at sufficient levels of coverage or such insurance may be more costly as an independent company. The insurance market has been disrupted in the past after specific events such as September 11, 2001, the 2005 hurricanes and recent earthquakes and flooding. While the cost and availability of most insurance has stabilized, there are still certain types and levels of insurance that remain difficult to obtain at a cost effective level. Natural disasters and certain risks arising from securities claims and product liability are potential self-insured events that could negatively impact our financial results.

 

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We are subject to a wide range of product regulatory and safety, consumer protection, worker safety and environmental laws and failure to comply with these laws could subject us to future costs or liabilities, impact our production capabilities, constrict our ability to sell, expand or acquire facilities, and negatively impact our financial performance.

Our operations and the products we manufacture and/or sell are subject to a wide range of global laws. We must comply with a variety of laws, standards and other requirements governing, among other things, health and safety, hazardous materials usage, packaging, consumer protection and environmental matters. Our products must obtain regulatory approvals and satisfy other regulatory concerns in the various jurisdictions where they are manufactured and/or sold. Many of our products must meet standards governing, among other things, interference with other electronic equipment and human exposure to radio frequency energy. Failure to comply with such requirements can subject us to liability, additional costs, reputational harm and, in severe cases, prevent us from selling our products in certain jurisdictions.

Compliance with existing or future laws, regulations or government directives could subject us to future costs or liabilities, impact our production capabilities, constrict our ability to sell, expand or acquire facilities, and negatively impact our financial performance. Some of these laws also relate to the use, disposal, clean up of, and exposure to hazardous substances. In the U.S., laws often require parties to fund remedial studies or actions regardless of fault. Changes to U.S. or foreign environmental laws or our discovery of additional obligations under these laws could have a negative impact on Motorola Mobility.

Over the last several years, laws focused on the energy efficiency of electronic products and accessories, recycling of both electronic products and packaging, reducing or eliminating certain hazardous substances in electronic products, and the transportation of batteries have expanded significantly. Laws pertaining to accessibility features of electronic products, standardization of connectors and power supplies, sound levels of music playing devices and other aspects of our products and business are also proliferating.

These laws impact our products and make it more expensive to manufacture and sell products. It may also be difficult to comply with the laws in a timely way. We may not have compliant products available in the quantities requested by our customers, thereby impacting our sales and profitability. We expect these trends to continue. In addition, we anticipate increased demand for products meeting voluntary criteria related to the reduction or elimination of certain hazardous substances from products, increasing energy efficiency, and providing additional accessibility.

Allegations of health risks with using Motorola Mobility products, and the lawsuits and publicity relating to them, regardless of merit, could negatively impact our business, operating cash flows and financial condition.

Assertions about health and safety, hazardous materials usage and other environmental concerns related to using Motorola Mobility products could adversely impact our business, operating cash flows and financial condition. Adverse factual developments or lawsuits against us, or even the perceived risk of adverse health effects from chemical or physical agents associated with the use of smartphones or other handheld devices could negatively impact sales, subject us to costly litigation and/or harm our reputation, business, operating cash flows and financial condition.

There has been public speculation about possible health risks to individuals from exposure to radio frequency energy from the use of mobile devices. Government agencies, international health organizations and other scientific bodies are currently conducting research into these issues. In addition, we have been named in individual plaintiff and class action lawsuits alleging that radio frequency emissions from mobile phones have caused or contributed to brain tumors, and that the use of mobile phones poses a health risk. There has been significant scientific research by various independent research bodies that has indicated that exposure to electromagnetic fields or to radio frequency energy, at levels within the limits prescribed by public health authority standards and recommendations, presents no known adverse effect to human health. Nevertheless, we cannot assure you that other studies will not suggest or identify a link between electromagnetic fields or radio frequency energy and adverse health effects or that we will not be the subject of future lawsuits relating to this issue. See “ Business—Legal Proceedings ” for more details.

 

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Government regulation of radio frequencies may limit the growth of the wireless communications industry or reduce barriers to entry for new competitors.

Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries and limited spectrum space is allocated to wireless services. The growth of the wireless and personal communications industry may be affected: (1) by regulations relating to the access to allocated spectrum for wireless communication users, especially in urban areas, (2) if adequate frequencies are not allocated, or (3) if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth has been and may continue to be affected by the cost of new licenses required to use frequencies and any related frequency relocation costs.

The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include wireless local area network systems, such as Wireless Fidelity (“WiFi”) and Long-Term Evolution (“LTE”). Other countries have also deregulated portions of their available spectrum to allow deployment of new technologies. Deregulation may introduce new opportunities for Motorola Mobility and our customers, but also new competition.

Changes in government policies and laws related to the Internet could negatively impact our financial results.

The laws and regulations that impact access to, content on or commerce conducted on the Internet are still evolving. We could be negatively impacted by any such regulation in any country where we operate, including in the U.S. The adoption of such measures could decrease demand for our products and at the same time increase the cost of selling such products.

We rely on complex information technology systems and networks to operate our business. Any significant system or network disruption could have a negative impact on our operations, sales and operating results.

We rely on the efficient and uninterrupted operation of complex information technology systems and networks, some of which are within Motorola Mobility and some are outsourced. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breach, energy blackouts, natural disasters, terrorism, war and telecommunication failures. We regularly face attempts by others to gain unauthorized access through the Internet to our information technology systems. These attempts, which might be the result of industrial or other espionage, or actions by hackers seeking to harm Motorola Mobility, our products or end-users, are sometimes successful. There also may be system or network disruptions if new or upgraded business management systems are defective or are not installed properly.

We have implemented various measures to manage our risks related to system and network disruptions, but these measures may be insufficient and a system failure or security breach could negatively impact our operations and financial results. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could negatively impact our competitive position. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches.

We face a number of risks related to the recent global financial crisis.

The global financial crisis that affected the banking system and financial markets which began during late 2008 and continued throughout 2009 and into 2010 resulted in a severe tightening in the worldwide credit markets, a low level of liquidity in many financial markets and extreme volatility in credit and equity markets. More recently, the destabilization of various currencies has also negatively impacted the global markets. This financial crisis has impacted, and could continue to impact, our business in a number of ways, including:

 

   

Destabilization of currencies : Recent destabilization of currencies, including the euro, has negatively impacted the credit markets and the valuation of certain currencies and may cause, and in some cases has caused, consumers and businesses to defer purchases in response to tighter credit, decreased purchasing power and/or declining consumer confidence. If future demand for our products declines due to global economic conditions, it could negatively impact our financial results.

 

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Potential deferment or cancellation of purchases and orders by customers : Uncertainty about current and future global economic conditions may cause, and in some cases has caused, consumers, and businesses to defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumer confidence. If future demand for our products declines due to global economic conditions, it could negatively impact our financial results.

 

   

Customers’ inability to obtain financing to make purchases from Motorola Mobility and/or maintain their businesses : Some of our customers require financing in order to fund their operations and make purchases from Motorola Mobility. The inability of these customers to obtain sufficient credit to finance purchases of our products and/or meet their payment obligations to us could have, and in some cases has had and may continue to have, a negative impact on our financial results. In addition, if global economic conditions result in insolvencies for our customers, it could negatively impact our financial results.

 

   

Negative impact from increased financial pressures on key suppliers : Our ability to meet customers’ demands depends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity or liquidity constrained or insolvent, it could result in a reduction or interruption in supplies or an increase in the price of supplies and negatively impact our financial results. In addition, credit constraints at key suppliers have resulted in accelerated payment of accounts payable by Motorola Mobility, impacting our cash flow. If this trend continues, it could negatively impact our cash flow. If suppliers consolidate to address this financial pressure, less competition among suppliers could result in increased costs which could negatively impact our financial results.

 

   

Increased risk of financial counterparty failures could negatively impact our financial position : Motorola Mobility uses derivative financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. We are exposed to credit loss in the event of nonperformance by the counterparties to these derivative financial instruments. In order to minimize this risk, the contracts are distributed among several leading financial institutions, all of whom presently have investment grade credit ratings. Although we have not experienced and do not anticipate nonperformance by the counterparties, in light of the ongoing threats to financial institutions from global economic conditions, there can be no assurance of performance by the counterparties to these financial instruments.

As a new company without long-term debt credit ratings, there can be no assurances that we will have access to the capital markets on terms acceptable to us.

From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although based on the information available to us as of the date of this Information Statement we believe that the sources of capital in place at the time of the distribution will permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors currently and in the future, including: (1) our financial performance, (2) our credit ratings or absence of a credit rating, (3) the liquidity of the overall capital markets, and (4) the state of the economy, including the telecommunications and cable industries. There can be no assurance that we will have access to the capital markets on terms acceptable to us.

We do not expect to have long-term debt and, accordingly, do not expect to have rated debt. As a result, the following activities we conducted at Motorola, Inc., as a rated company, may be more difficult to perform:

 

   

Ability to sell receivables : We may sell certain accounts receivable under facilities that may involve contractual commitments from third-parties to purchase qualifying receivables up to certain stated limits. These sales of receivables provide us the ability to accelerate cash flow when it is prudent to do so. The ability to sell (or “factor”) receivables may be subject to the credit quality of the obligor and our ability to obtain sufficient levels of credit insurance from independent insurance companies. We

 

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could be limited in our ability to sell receivables in the future because of our financial position, the creditworthiness of our customers or our ability to purchase credit insurance.

 

   

Our ability to obtain standby letters of credit and surety bonds could be limited : Certain commercial contracts with our customers require that we arrange for standby letters of credit, performance bonds and surety bonds (collectively referred to as “Performance Bonds”) to be issued on behalf of Motorola Mobility by banks and/or insurance companies. Issuers of these Performance Bonds may be less likely to provide Performance Bonds on our behalf in the future, unless we provide a sufficient level of collateral, and the costs for issuance may be higher. These limitations on issuance may apply to the renewal and extension of existing Performance Bonds, as well as the issuance of new Performance Bonds. Such collateral requirements could result in less liquidity for other operational needs, and financial flexibility would be reduced.

 

   

Our ability to hedge foreign exchange risk could be limited : Counterparties may be unwilling to provide trading and derivative credit facilities for us without cash collateral. This would limit our ability to reduce volatility in earnings and cash flow. Should cash collateral be provided, less liquidity would be available for operational needs, and our financial flexibility would be reduced.

 

   

Our ability to fund our foreign affiliates could be limited : Motorola Mobility relies on uncommitted lines of credit from banks to provide daylight overdraft, short-term loans and other sources of liquidity for foreign affiliates. Lenders may be unwilling to provide credit to our foreign affiliates as Motorola Mobility will have no credit ratings at the time of the distribution. This situation could result in Motorola Mobility using U.S. cash to make loans to these affiliates or provide permanent equity where loans are not possible. If this occurs, less liquidity would be available for other operational needs, and our financial flexibility would be reduced.

 

   

Our trade terms with suppliers may be less favorable than those of our competitors : Suppliers may require letters of credit, cash collateral or other forms of security as part of standard payment conditions. Such requests could result in reduced liquidity and less leverage in pricing negotiations.

 

   

Our access to short-term and long-term financing is extremely limited and could be very costly : As a company with unrated credit, we may have very limited access to short-term and long-term borrowing and the cost of such borrowings could be very high as compared to the cost for companies with credit ratings.

Risks Relating to the Separation

If the distribution, together with certain related transactions, were to fail to qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, then we and/or Motorola, Inc. and our stockholders could be subject to significant tax liability.

The distribution is conditioned upon, among other things, Motorola, Inc.’s receipt of either a ruling by the IRS or an opinion of counsel to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Motorola, Inc. expects to receive an opinion from Wachtell, Lipton, Rosen & Katz that the distribution will so qualify. Although the Motorola, Inc. Board of Directors may waive this condition, Motorola, Inc. has advised us that it does not intend to complete the distribution if it has not obtained such opinion. The opinion will rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and the opinion would not be valid if such representations, assumptions and undertakings were incorrect. Notwithstanding the opinion, the IRS could determine that the distribution should be treated as a taxable transaction if it determines that any of the representations, assumptions or undertakings upon which the opinion relied is false or has been violated or if it disagrees with the conclusions in the tax opinion. For more information regarding the tax opinion, see the section entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement.

 

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If the distribution fails to qualify for tax-free treatment, Motorola, Inc. would be subject to tax on gain, if any, as if it had sold the common stock of our Company in a taxable sale for its fair market value. In addition, if the distribution fails to qualify for tax-free treatment, each of our initial public stockholders would be treated as if the stockholder had received a distribution equal to the fair market value of our common stock that was distributed to the stockholder, which generally would be taxed as a dividend to the extent of the stockholder’s pro rata share of Motorola, Inc.’s current and accumulated earnings and profits and then treated as a non-taxable return of capital to the extent of the stockholder’s basis in the Motorola, Inc. common stock and finally as capital gain from the sale or exchange of Motorola, Inc. common stock. Furthermore, even if the distribution were otherwise to qualify under Sections 355 and 368(a)(1)(D) of the Code, it may be taxable to Motorola, Inc. (but not to Motorola, Inc.’s stockholders) under Section 355(e) of the Code, if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in Motorola, Inc. or us. For this purpose, any acquisitions of Motorola, Inc. stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or Motorola, Inc. may be able to rebut that presumption. For a more detailed discussion, see the section entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement.

Under the Tax Sharing Agreement among Motorola, Inc., Motorola Mobility, Inc. and us, we would generally be required to indemnify Motorola, Inc. against any tax resulting from the distribution to the extent that such tax resulted from any of the following events (among others): (1) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (2) any negotiations, understandings, agreements or arrangements with respect to transactions or events that cause the distribution to be treated as part of a plan pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in Motorola Mobility, (3) certain other actions or failures to act by us, or (4) any breach by us of certain of our representations or undertakings. For a more detailed discussion, see the section entitled “ Certain Relationships and Related Party Transactions—Agreements With Motorola, Inc.—Tax Sharing Agreement ” included elsewhere in this Information Statement. Our indemnification obligations to Motorola, Inc. and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnify Motorola, Inc. or such other persons under the circumstances set forth in the Tax Sharing Agreement, we could be subject to substantial liabilities.

We may be unable to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company.

By separating from Motorola, Inc. there is a risk that our Company may be more susceptible to market fluctuations and other adverse events than we would have otherwise been were we still a part of the current Motorola, Inc. As part of Motorola, Inc., we were able to enjoy certain benefits from Motorola, Inc.’s operating diversity, purchasing and borrowing leverage, and available capital for investments. We may not be able to achieve some or all of the benefits that we expect to achieve as an independent, publicly traded company.

We have no operating history as an independent, publicly traded company, and our historical and pro forma financial statements are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be reliable indicators of our future results.

The historical and pro forma financial statements included in this Information Statement do not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as an independent, publicly traded company during the periods presented or those that we will achieve in the future, primarily as a result of the following factors:

 

   

Prior to our separation, our business was operated by Motorola, Inc. as part of its broader corporate organization, rather than as an independent company. Motorola, Inc. or one of its affiliates performed various corporate functions for us, including, but not limited to, tax administration, treasury activities,

 

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accounting, information technology services, human resources, legal, ethics and compliance program administration, real estate management, investor and public relations, certain governance functions (including internal audit) and external reporting. Our historical and pro forma financial statements reflect allocations of corporate expenses from Motorola, Inc. for these and similar functions. These allocations may be more or less than the comparable expenses we would have incurred had we operated as an independent, publicly traded company.

 

   

Currently, our business is integrated with the other businesses of Motorola, Inc. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. While we expect to enter into short-term transition agreements that will govern certain relationships between us and Motorola, Inc. after the separation, those temporary arrangements may not capture all the benefits our businesses have enjoyed as a result of being integrated with the other businesses of Motorola, Inc. The loss of some or all of these benefits could have an adverse effect on our business, results of operations and financial condition following the completion of the separation.

 

   

Historically, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have been satisfied as part of the corporate-wide liability management processes of Motorola, Inc. Cash generated by Motorola Mobility prior to the separation from Motorola, Inc. was managed and retained by Motorola, Inc. Immediately prior to the separation, Motorola Mobility is expected to be provided with a significant amount of cash from Motorola, Inc. which it will retain in the distribution. Following completion of the distribution, Motorola, Inc. will not be providing us with funds to finance our working capital or other cash requirements. Without the opportunity to obtain financing from Motorola, Inc., we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, and such arrangements may not be available to us or available on terms that are as favorable as those we could have obtained when we were part of Motorola, Inc.

 

   

Other significant changes may occur in our cost structure, management, financing and business operations as a result of our operation as a company separate from Motorola, Inc.

Motorola, Inc. will be using certain logos and other trademarks, trade names and service marks, including “MOTOROLA” and the Stylized M logo and all derivatives and formatives thereof such as MOTO (“Motorola Marks”), under license from Motorola Mobility following the distribution, which could result in product and market confusion and negatively impact our ability to expand our business under the Motorola brand.

Although each of Motorola Mobility and Motorola, Inc. will be an independent company following the distribution, Motorola, Inc. will continue to use the Motorola Marks as part of its name, which Motorola, Inc. intends to change to Motorola Solutions, Inc., and in connection with many of its products. Motorola, Inc.’s use of the Motorola Marks is governed by an agreement between Motorola Mobility and Motorola, Inc. as further described in the section entitled “ Certain Relationships and Related Party Transactions—Agreements With Motorola, Inc.—Intellectual Property Agreements ”.

There are risks associated with both Motorola Mobility and Motorola, Inc. using the Motorola Marks. Because both Motorola Mobility and Motorola, Inc. will be using the Motorola Marks, confusion could arise in the market, including customer and investor confusion regarding the products offered by the two companies. This risk could increase as both Motorola, Inc.’s and our products continue to converge. Also, any negative publicity associated with either company in the future could adversely affect the public image of the other.

In addition because Motorola, Inc. will have the exclusive right to use the Motorola Marks with products and services within its specified fields of use, Motorola Mobility will not be permitted to use the Motorola Marks in those fields of use. In the event that Motorola Mobility desires to expand its business into any of Motorola, Inc.’s fields of use, it will need to do so with a brand other than Motorola. Developing a brand as well-known and

 

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with as much brand equity as Motorola could take considerable time and expense. The risk of needing to develop a second brand increases as Motorola, Inc.’s and our products continue to converge.

A change of control related to Motorola, Inc. could result in an incompatible third-party being entitled to use the Motorola Marks, thereby increasing the risks associated with sharing the Motorola Marks.

Motorola, Inc.’s license to use the Motorola Marks is assignable to an acquiring entity. Similarly, in the event of a liquidation of Motorola, Inc., it is possible that a bankruptcy court would permit its license rights to be assigned to a third-party. While Motorola, Inc.’s right to use the Motorola Marks is limited to a specific field of use, in the event of a change of control, it is possible that Motorola Mobility could be party to a license arrangement with a third-party whose interests are incompatible with those of Motorola Mobility, thereby potentially making the license arrangement difficult to administer, and increasing the costs and risks associated with sharing the Motorola Marks.

As part of Motorola, Inc., we benefited from licenses held by Motorola, Inc. and we may incur additional unanticipated cost as an independent company when we no longer have the benefit of such licenses.

As part of Motorola, Inc., we enjoyed the benefits of a number of intellectual property licenses, including patent and software licenses, which covered all of Motorola, Inc.’s businesses. As an independent company, we may have additional unanticipated costs to license intellectual property rights that in the past we had access to as part of Motorola, Inc. Such costs could include license fees or litigation costs. Although we cannot predict the extent of such unanticipated costs, it is possible such costs could negatively impact our financial results.

We may have higher levels of restricted cash as a stand-alone, independent, publicly traded company and we do not expect to have a credit rating, which could result in less liquidity and financial flexibility for Motorola Mobility.

As a stand-alone company we expect to use more cash to obtain standby letters of credit, surety bonds and performance bonds (collectively “Performance Bonds”) as part of our ordinary operations, which means such cash will not be immediately available to us. Historically, as part of Motorola, Inc. and based primarily on Motorola, Inc.’s credit ratings we did not need to use cash at these levels to obtain Performance Bonds as part of ordinary operations. The use of cash to obtain Performance Bonds could result in less liquidity for other important operational needs, and financial flexibility would be reduced.

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as an independent company, and we may experience increased costs as a result of the separation.

Following the completion of our separation, Motorola, Inc. will be contractually obligated to provide to us only those transition services specified in the Transition Services Agreement and the other agreements we enter into with Motorola, Inc. in connection with the separation. The expiration date of the Transition Services Agreement varies by service provided, but is generally no longer than 12 months from the date of the distribution. We may be unable to replace in a timely manner or on comparable terms the services or other benefits that Motorola, Inc. previously provided to us. Upon the expiration of the Transition Services Agreement or other agreements, many of the services that are covered in such agreements will be provided internally or by unaffiliated third-parties, and we expect that, in some instances, we will incur higher costs to obtain such services than we incurred prior to the separation or under the terms of such agreements. If Motorola, Inc. does not effectively perform the transition services and the other services that are called for under the Transition Services Agreement and other agreements, we may not be able to operate our business effectively and our profitability may decline. After the expiration of the Transition Services Agreement and the other agreements, we may be unable to replace the services specified in such agreements in a timely manner or on comparable terms.

Similarly, we currently purchase a wide variety of products and services, including software licenses, from third-parties as part of Motorola, Inc. We may experience some increased costs after the separation as a result of

 

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our inability to continue to purchase products and services on terms that are as favorable to us as those obtained under these combined purchasing arrangements. Although we cannot predict the extent of any such increased costs, it is possible that such costs could have a negative impact on our business and results of operations.

We may have been able to receive better terms from unaffiliated third-parties than the terms provided in our agreements with Motorola, Inc.

The agreements related to our separation from Motorola, Inc., including the Master Separation and Distribution Agreement, Transition Services Agreement, Trademark License Agreement, Intellectual Property Agreements and other agreements, were negotiated in the context of our separation from Motorola, Inc. while we were still part of Motorola, Inc. and, accordingly, may not reflect terms that would have been reached between unaffiliated parties. The terms of the agreements we negotiated in the context of our separation relate to, among other things, allocation of assets, liabilities, rights, indemnifications and other obligations between Motorola, Inc. and us as well as certain ongoing arrangements between Motorola, Inc. and us. Had these agreements been negotiated with unaffiliated third-parties, they might have been more favorable to us. For more information, see the section entitled “ Certain Relationships and Related Party Transactions ” included elsewhere in this Information Statement.

Motorola Mobility and Motorola, Inc. might not be able to engage in desirable strategic transactions and equity issuances following the distribution.

To preserve the tax-free treatment to Motorola, Inc. of the distribution, under the Tax Sharing Agreement that we entered into with Motorola, Inc. and Motorola Mobility, Inc., we are prohibited from taking or failing to take any action that prevents the distribution and related transactions from being tax-free. Further, for the two-year period following the distribution, we may be prohibited, except in specified circumstances, from:

 

   

entering into any transaction resulting in the acquisition of 40% or more of our stock or 60% or more of our assets, whether by merger or otherwise;

 

   

merging, consolidating or liquidating;

 

   

issuing equity securities beyond certain thresholds;

 

   

repurchasing Motorola Mobility common stock; and

 

   

ceasing to actively conduct the Mobile Devices business.

These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. For more information, see the sections entitled “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” and “ Certain Relationships and Related Party Transactions—Agreements With Motorola, Inc.—Tax Sharing Agreement ” included elsewhere in this Information Statement.

Many contracts which will need to be assigned from Motorola, Inc. or its affiliates to us in connection with our separation from Motorola, Inc. require the consent of the counterparty to such an assignment and failure to obtain consents with any of our large customers could negatively impact our financial condition and future results of operations.

The Master Separation and Distribution Agreement and various local transfer agreements provide that in connection with our separation from Motorola, Inc., a number of contracts with customers, suppliers, landlords and other third-parties are to be assigned from Motorola, Inc. or its affiliates to Motorola Mobility or Motorola Mobility’s affiliates. However, many of these contracts require the contractual counterparty’s consent to such an

 

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assignment. Similarly, in some circumstances, we and another business unit of Motorola, Inc. are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third-party to replicate the contract or assign the portion of the contract related to our business. It is possible that some parties may use the requirement of a consent to seek more favorable contractual terms from us. If we are unable to obtain these consents, we may be unable to obtain the benefits, assets and contractual commitments which are intended to be allocated to us as part of our separation from Motorola, Inc. The failure to obtain consents with respect to contracts with any of our large customers could negatively impact our financial condition and future results of operations.

In connection with our separation from Motorola, Inc., Motorola, Inc. will indemnify us for certain liabilities and we will indemnify Motorola, Inc. for certain liabilities. If we are required to indemnify Motorola, Inc., we may need to divert cash to meet those obligations and our financial results could be negatively impacted. In the case of Motorola, Inc.’s indemnity, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or as to Motorola, Inc.’s ability to satisfy its indemnification obligations in the future.

Pursuant to the Master Separation and Distribution Agreement and certain other agreements with Motorola, Inc., Motorola, Inc. agreed to indemnify us from certain liabilities, and we agreed to indemnify Motorola, Inc. for certain liabilities, in each case for uncapped amounts, as discussed further in the section entitled “ Certain Relationships and Related Party Transactions—Agreements With Motorola, Inc.— ” under each of “ Master Separation and Distribution Agreement—Indemnification ” “ Tax Sharing Agreement ” and “ Employee Matters Agreement ” included elsewhere in this Information Statement. Indemnities that Motorola Mobility may be required to provide Motorola, Inc. are not subject to any cap, may be significant and could negatively impact our business, particularly indemnities relating to our actions that could impact the tax-free nature of the distribution. Third-parties could also seek to hold us responsible for any of the liabilities that Motorola, Inc. has agreed to retain. Further, there can be no assurance that the indemnity from Motorola, Inc. will be sufficient to protect us against the full amount of such liabilities, or that Motorola, Inc. will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Motorola, Inc., any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

A court could deem the distribution to be a fraudulent conveyance and void the transaction or impose substantial liabilities upon us.

A court could deem the distribution or certain internal restructuring transactions undertaken by Motorola, Inc. in connection with the separation to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. A court could void the transactions or impose substantial liabilities upon us, which could adversely affect our financial condition and our results of operations. Among other things, the court could require our stockholders to return to Motorola, Inc. some or all of the shares of our common stock issued in the distribution, or require us to fund liabilities of other companies involved in the restructuring transactions for the benefit of creditors. Whether a transaction is a fraudulent conveyance or transfer will vary depending upon the jurisdiction whose law is being applied.

Until the distribution occurs, Motorola, Inc. has the sole discretion to change the terms of the distribution in ways which may be unfavorable to us.

Until the distribution occurs, Motorola, Inc. will have the sole and absolute discretion to determine and change the terms of the distribution, including the establishment of the record date and distribution date. These changes could be unfavorable to us. In addition, Motorola, Inc. may decide at any time not to proceed with the separation.

 

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After the separation, certain of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in Motorola, Inc.

Because of their current or former positions with Motorola, Inc., certain of our directors and executive officers own shares of Motorola, Inc. common stock or hold restricted stock units (“RSUs”), deferred stock units (“DSUs”) or options to acquire shares of Motorola, Inc. Following the distribution, these officers and directors may continue to own shares of Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc. on the Distribution Date) common stock and the individual holdings may be significant for some of these individuals compared to their total assets. This ownership may create, or, may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for Motorola, Inc. and Motorola Mobility.

For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between Motorola Mobility and Motorola, Inc. regarding the terms of the agreements governing the separation and the relationship thereafter between the companies. Potential conflicts of interest could also arise if Motorola Mobility and Motorola, Inc. enter into additional commercial arrangements with each other in the future.

Risks Relating to Our Common Stock

There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.

There is currently no public market for our common stock. It is anticipated that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue up to and including through the Distribution Date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future.

We cannot predict the prices at which our common stock may trade after the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond Motorola Mobility’s control, including:

 

   

our business profile and market capitalization may not fit the investment objectives of Motorola, Inc.’s current stockholders, including stockholders who hold Motorola, Inc. stock based on Motorola Inc.’s inclusion in the Standard & Poor’s 500 Index (“S&P 500”) and other indices, as Motorola Mobility’s common stock may not be included in the S&P 500 and certain other indices after the distribution, causing certain holders to sell their shares. This may lead to increased volatility in our stock;

 

   

a shift in our investor base;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

actual or anticipated fluctuations in our operating results;

 

   

announcements by us or our competitors of significant acquisitions or dispositions;

 

   

the failure of securities analysts to cover our common stock after the distribution;

 

   

changes in earnings estimates by securities analysts or our ability to meet our earnings guidance;

 

   

the operating and stock price performance of other comparable companies; and

 

   

overall market fluctuations and general economic conditions.

 

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Stock markets in general have also experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could negatively affect the trading price of our common stock.

Substantial sales of common stock may occur in connection with this distribution, which could cause our stock price to decline.

The shares of Motorola Mobility common stock that Motorola, Inc. distributes to its stockholders generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any 5% or greater stockholder to sell Motorola Mobility’s common stock following the separation, it is possible that some Motorola, Inc. stockholders, including possibly some of Motorola, Inc.’s large stockholders and index fund investors, will sell Motorola, Inc. or Motorola Mobility common stock received in the distribution for various reasons, for example, if our business profile or market capitalization as an independent company does not fit their investment objectives. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.

Your percentage ownership in Motorola Mobility may be diluted in the future.

As with any publicly traded company, your percentage ownership in Motorola Mobility may be diluted in the future because of equity awards that we expect will be granted to our directors, officers and employees. For a description of the Motorola Mobility stock incentive plan arrangements and the adjustments being made to outstanding Motorola, Inc. equity awards held by individuals who will become our directors, officers or employees, see the section entitled “ The Separation—When and How You Will Receive the Dividend, ” “ Employment Contracts, Termination of Employment and Change in Control Arrangements—Employment Agreement With Sanjay K. Jha ” and “ Certain Relationships and Related Party Transactions—Agreements With Motorola, Inc.—Employee Matters Agreement ” included elsewhere in this Information Statement.

We do not expect to pay any cash dividends for the foreseeable future.

We presently intend to retain future earnings, if any, to finance our business. As a result, we do not expect to pay any cash dividends for the foreseeable future. All decisions regarding the payment of dividends by our Company will be made by our Board of Directors from time to time in accordance with applicable law. There can be no assurance that we will have sufficient surplus under Delaware law to be able to pay any dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures or increases in reserves. If we do not pay dividends, the price of our common stock that you receive in the distribution must appreciate for you to receive a gain on your investment in Motorola Mobility. This appreciation may not occur. Further, you may have to sell some or all of your shares of our common stock in order to generate cash flow from your investment.

 

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FORWARD-LOOKING STATEMENTS

Forward-looking statements in our public filings or other public statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements or other public statements. These forward-looking statements were based on various facts and were derived utilizing numerous important assumptions and other important factors, and changes in such facts, assumptions or factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. You should understand that the factors described under “ Risk Factors ” and the following important factors could affect our future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

 

   

adverse developments in general business, economic and political conditions or any outbreak or escalation of hostilities on a national, regional or international basis;

 

   

the uncertain economic climate and its impact on the markets in general or on the ability of our suppliers to meet their commitments to us, or the timing of purchases by our current and potential customers, and other general economic and business conditions;

 

   

the impact of our separation from Motorola, Inc. and risks relating to our ability to operate effectively as an independent, publicly traded company;

 

   

changes in our cost structure, management, financing and business operations following our separation from Motorola, Inc.;

 

   

the rapidly changing and intensely competitive nature of the Mobile Devices and Home businesses;

 

   

fluctuations in our operating results, unanticipated delays or accelerations in our sales cycles and the difficulty of accurately estimating revenues;

 

   

competition in our existing and future lines of business and the financial resources of competitors; and

 

   

risks inherent in operating in foreign countries, including the impact of economic, political, legal, regulatory, compliance, cultural, foreign currency fluctuations and other conditions abroad.

Except for historical matters, the matters discussed in this Form 10 of which this Information Statement is a part are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements that relate to, or statements that are subject to risks, contingencies or uncertainties that relate to:

 

   

the expected benefits of the separation;

 

   

our business strategies, plans and objectives, including the anticipated impact of such strategies, plans and objectives;

 

   

our future operating and financial performance;

 

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estimated cash and cash equivalents that Motorola, Inc. is expected to fund Motorola Mobility with at the time of the separation;

 

   

future levels of revenues, operating margins, income from operations, net income, earnings per share and other financial information;

 

   

expectations regarding the Company’s ability to finance its operations and its ability to obtain, and the cost of, performance related bonds;

 

   

future hedging activities;

 

   

anticipated levels of demand for our products and services;

 

   

expectations regarding our research and development activities and intellectual property, including expectations regarding the competitiveness of the patent portfolio;

 

   

the success or timing of completion of ongoing or anticipated capital or maintenance projects;

 

   

expectations regarding opportunities for growth;

 

   

expectations regarding availability of materials and components, energy supplies and labor;

 

   

the potential effects of judicial or other proceedings and of the financial markets on our business, financial condition, results of operations and cash flows; and

 

   

the anticipated effects of actions of third-parties such as competitors, counterparties, or federal, foreign, state or local regulatory authorities, or plaintiffs in litigation.

In particular, information included under “ The Separation ,” “ Risk Factors ,” “ Dividend Po l icy ,” “ Business ” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” contain forward-looking statements.

Other factors not identified above, including the risk factors described in the section entitled “ Risk Factors ” included elsewhere in this Information Statement, may also cause actual results to differ materially from those projected by our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our reasonable control.

You should consider the areas of risk described above, as well as those set forth in the section entitled “ Risk Factors ” included elsewhere in this Information Statement, in connection with considering any forward-looking statements that may be made by us and our businesses generally. We cannot assure you that projected results or events reflected in the forward-looking statements will be achieved or occur. The forward-looking statements included in this document are made as of the date of this Information Statement. We undertake no obligation to publicly release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

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THE SEPARATION

General

On [ ], 2010, the Motorola, Inc. Board of Directors approved the distribution of all of Motorola, Inc.’s shares of common stock of Motorola Mobility Holdings, Inc. to holders of Motorola, Inc. common stock as of the record date. On [ ], 201[ ], the Distribution Date, each Motorola, Inc. stockholder will receive [ ] share of our common stock for each share of Motorola, Inc. common stock held at the close of business on the record date, as described below. Immediately following the distribution, Motorola, Inc. stockholders will own 100% of our outstanding common stock. You will not be required to make any payment, surrender or exchange your shares of Motorola, Inc. common stock or take any other action to receive your shares of Motorola Mobility’s common stock.

Furthermore, the distribution of Motorola Mobility’s common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the distribution will be completed. For a more detailed description of these conditions, see the caption entitled “ Conditions to the Distribution ” included elsewhere in this section.

Reasons for the Separation

The Motorola, Inc. Board of Directors believes that separating Motorola, Inc. into two independent, publicly traded companies is in the best interests of Motorola, Inc. and its stockholders, and has concluded that the separation will provide each company with certain opportunities and benefits. The following is a summary of all the material opportunities and benefits considered by the Motorola, Inc. Board of Directors:

 

   

Strategic Focus . Allow each independent company to design and implement corporate strategies and policies that are based on the industries that it serves and its specific business characteristics, including customers, sales cycles and product life cycles.

 

   

Management Focus. Allow management of each independent company to concentrate that company’s resources wholly on its particular markets, customers and core business opportunities. Motorola Mobility is uniquely suited to address the convergence of mobility, media and the Internet. This creates an opportunity for new devices, applications and services that deliver common functionality, content and mobility to consumers in their home or on the go. Motorola, Inc. is well positioned to focus on its government and enterprise customers, with a broad portfolio of end-to-end mission- and business-critical enterprise systems, products and related services, and to the extent the sale of its Networks business to Nokia Siemens Networks has not been completed, on its wireless networks and related telecommunication customers.

 

   

Recruiting and Retaining Employees. Allow each independent company to recruit and retain employees with expertise directly applicable to its needs and pursuant to compensation policies that are appropriate for its specific lines of business. In particular, following the distribution, the value of equity-based incentive compensation arrangements reflected in each company’s stock price should be more closely aligned with the performance of its businesses. Such equity-based compensation arrangements should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel at all levels of the organization, including those key employees considered essential to that company’s future success.

 

   

Access to Capital. Remove the need for the businesses to compete internally for capital. Instead, both companies will have direct access to the capital markets to fund their respective growth strategies and to establish an appropriate capital structure for their business needs.

 

   

Strategic Flexibility. Provide each independent company increased strategic flexibility to make acquisitions and form partnerships and alliances in its target markets, unencumbered by considerations

 

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of the potential impact on the businesses of the other company; and allow each company to effect future acquisitions utilizing common stock for all or part of the consideration, the value of which will be more closely aligned with the performance of its businesses.

 

   

Investor Choice. Provide investors in each company with a more targeted investment opportunity with different investment and business characteristics, including different opportunities for growth, capital structure, business models and financial returns. This will allow investors to evaluate the separate and distinct merits, performance and future prospects of each company.

The Motorola, Inc. Board of Directors also considered a number of potentially negative factors in evaluating the separation, including the fact that Motorola Mobility has had substantial operating losses in each of the last three years and that Motorola Mobility may not be profitable; potential for increased costs; potential loss of joint purchasing power; potential disruptions to the businesses as a result of the separation; negative consequences from allocating the patent portfolio and other intellectual property rights between the two companies; the potential loss of synergies; potential for the two companies to compete with one another; potential issues arising from the companies sharing the Motorola brand and logo and using the Motorola Marks; limitations placed on Motorola Mobility as a result of the Tax Sharing Agreement and other agreements it is entering into with Motorola, Inc. in connection with the separation and the distribution; risks of being unable to achieve the benefits expected to be achieved by the separation; risk that the plan of separation might not be completed; and both the one-time and ongoing costs of the separation. The Motorola, Inc. Board of Directors concluded that, notwithstanding these potentially negative factors, separation would be in the best interests of Motorola, Inc. and its stockholders.

In view of the wide variety of factors considered in connection with the evaluation of the separation and the complexity of these matters, the Motorola, Inc. Board of Directors did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to the factors considered. The individual members of the Motorola, Inc. Board of Directors may have given different weights to each of the factors.

Formation of a Holding Company Prior to Our Distribution

In connection with our distribution, Motorola, Inc. organized Motorola Mobility Holdings, Inc. as a Delaware corporation for the purpose of transferring to Motorola Mobility Holdings, Inc. all of the entities holding the assets and liabilities of the Mobile Devices and Home businesses, including our principal U.S. operating company, Motorola Mobility, Inc. We often refer to Motorola Mobility Holdings, Inc. as Motorola Mobility or the Company in this document.

Following the distribution of our shares of common stock to Motorola, Inc.’s stockholders, Motorola, Inc. will continue as a publicly traded company.

The Number of Shares You Will Receive

For each share of Motorola, Inc. common stock that you owned at the close of business on [ ], 201[ ], the record date, you will receive [ ] share of Motorola Mobility common stock on the Distribution Date.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to Motorola, Inc. stockholders. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds from the sales, net of brokerage fees and other costs, pro rata to each holder who would otherwise have been entitled to receive a fractional share in the distribution. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders as described in the section “ The Separation—Material U.S. Federal Income Tax Consequences of the Distribution ” included elsewhere in this Information Statement.

 

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When and How You Will Receive the Dividend

Motorola, Inc. will distribute the shares of our common stock on [ ], 201[ ], the Distribution Date, to holders of record on the record date. Motorola, Inc.’s transfer agent and registrar, BNY Mellon Shareowner Services (“Mellon”), will serve as transfer agent and registrar for the Motorola Mobility common stock and as distribution agent in connection with the distribution of Motorola Mobility common stock.

If you own Motorola, Inc. common stock as of the close of business on the record date, the shares of Motorola Mobility common stock that you are entitled to receive in the distribution will be issued electronically, as of the Distribution Date, to your account as follows:

 

   

Registered Stockholders . If you own your shares of Motorola, Inc. stock directly, either in book-entry form through an account at Motorola, Inc.’s transfer agent and/or if you hold paper stock certificates, you will receive your shares of Motorola Mobility common stock by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording stock ownership when no physical paper share certificates are issued to stockholders, as is the case in this distribution.

Commencing on or shortly after the Distribution Date, the distribution agent will mail to you an account statement that indicates the number of shares of Motorola Mobility’s common stock that have been registered in book-entry form in your name.

If you have any questions concerning the mechanics of having shares of our common stock registered in book-entry form, we encourage you to contact Mellon at the address set forth in the section “ The Separation ” included elsewhere in this Information Statement.

 

   

Beneficial Stockholders . Most Motorola, Inc. stockholders hold their shares of Motorola, Inc. common stock beneficially through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your Motorola, Inc. common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of Motorola Mobility common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street name”, we encourage you to contact your bank or brokerage firm.

Treatment of Equity-Based Compensation

If you hold Motorola, Inc. equity-based compensation, such as stock options or unvested restricted stock units (“RSUs”), on the Distribution Date, you generally will not be entitled to receive shares of Motorola Mobility common stock in the distribution. Instead, to reflect the distribution, your equity-based compensation interest will be treated as follows:

For the purposes of this section and the following section, (1) “Remaining Motorola, Inc. Employees” refers to former or current officers or employees of Motorola, Inc. or its subsidiaries who either are remaining with Motorola, Inc. or its subsidiaries on or after the Distribution Date or become former officers or employees prior to the Distribution Date other than as a result of their transfer to Motorola Mobility or its subsidiaries and (2) “Motorola Mobility Employees” refers to persons who are or will be officers or employees of Motorola Mobility or its subsidiaries on or after the Distribution Date.

 

   

Stock Options and Stock Appreciation Rights (“SARs”)

 

   

Remaining Motorola, Inc. Employees : Each outstanding Motorola, Inc. stock option to purchase shares of Motorola, Inc. common stock (“Motorola, Inc. stock option”) or Motorola, Inc. SAR that is held by Remaining Motorola, Inc. Employees on the Distribution Date will remain a Motorola, Inc. stock option or Motorola, Inc. SAR, as applicable, subject to the terms of the original stock option or SAR, but the stock option or SAR exercise price and the number of shares subject to the stock option or SAR will be adjusted using a formula designed to generally preserve the intrinsic

 

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value and fair value of the original stock option or SAR immediately prior to the Distribution Date. To the extent the Motorola, Inc. stock option or Motorola, Inc. SAR being adjusted is vested, the adjusted Motorola, Inc. stock option or adjusted Motorola, Inc. SAR, will also be vested. To the extent unvested, the adjusted Motorola, Inc. stock option or adjusted Motorola, Inc. SAR will continue to vest on its existing terms and conditions.

 

   

Motorola Mobility Employees : Each outstanding Motorola, Inc. stock option or Motorola, Inc. SAR that is held by a Motorola Mobility Employee on the Distribution Date will be replaced by a substitute stock option to purchase shares of Motorola Mobility or substitute Motorola Mobility SAR, as applicable. Each of the substitute Motorola Mobility stock options or substitute Motorola Mobility SARs will have the same terms as the Motorola, Inc. stock option or Motorola, Inc. SAR it replaced, but the stock option or SAR exercise price and the number of shares subject to the substitute Motorola Mobility stock option or substitute Motorola Mobility SAR will be adjusted using a formula designed to generally preserve the intrinsic value and fair value of the original Motorola, Inc. stock option or Motorola, Inc. SAR immediately prior to the Distribution Date. To the extent the Motorola Inc. stock option or Motorola Inc. SAR being replaced is vested, the substitute Motorola Mobility stock option or substitute Motorola Mobility SAR will also be vested. To the extent unvested, the substitute Motorola Mobility stock option or substitute Motorola Mobility SAR will continue to vest on its existing terms and conditions.

 

   

Restricted Stock Units (“RSUs”)

 

   

Remaining Motorola, Inc. Employees : Each outstanding unvested Motorola, Inc. RSU without dividend equivalent rights that is held by Remaining Motorola, Inc. Employees on the Distribution Date will remain outstanding, subject to the terms of the original Motorola, Inc. RSU, but the number of RSUs subject to the Motorola, Inc. RSU will be adjusted using a formula designed to generally preserve the intrinsic value and fair value of the original Motorola, Inc. RSU immediately prior to the Distribution Date. Each Motorola, Inc. RSU is intended to be the economic equivalent of one Motorola, Inc. share of common stock. The adjusted Motorola, Inc. RSUs will continue to vest on their existing terms and conditions.

 

   

Motorola Mobility Employees : Each outstanding unvested Motorola, Inc. RSU without dividend equivalent rights that is held by Motorola Mobility Employees on the Distribution Date will be replaced by a substitute Motorola Mobility RSU. Each Motorola Mobility RSU is intended to be the economic equivalent of one Motorola Mobility share of common stock. Each of the substitute Motorola Mobility RSUs will have the same terms as the Motorola, Inc. RSU it replaced, but the number of RSUs subject to the Motorola Mobility RSU will be adjusted using a formula designed to generally preserve the intrinsic value and fair value of the original Motorola, Inc. RSU immediately prior to the Distribution Date. The substitute Motorola Mobility RSUs will continue to vest on their existing terms and conditions.

Treatment of 401(k) Shares for Current and Former Employees

Remaining Motorola, Inc. Employees invested in the Motorola, Inc. Stock Fund of the Motorola, Inc. 401(k) Plan (U.S. only). Remaining Motorola, Inc. Employees who hold shares of Motorola, Inc. common stock in their Motorola, Inc. 401(k) Plan account as of the record date will be entitled to receive shares of Motorola Mobility common stock in the distribution. The account of each such Remaining Motorola, Inc. Employee will be credited on the Distribution Date with shares of Motorola Mobility common stock, based on the distribution ratio, for every share of Motorola, Inc. common stock held in the employee’s account. The Remaining Motorola, Inc. Employees will be obligated to sell the shares of Motorola Mobility common stock credited to their accounts in the distribution by no later than December 31, 2011. No additional shares of Motorola Mobility may be acquired and held in the Motorola, Inc. 401(k) Plan by the Remaining Motorola, Inc. Employees.

 

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Motorola Mobility Employees invested in the Motorola, Inc. Stock Fund of the Motorola, Inc. 401(k) Plan (U.S. only) . Motorola Mobility employees who hold accounts in the Motorola, Inc. 401(k) Plan on December 31, 2010 will have their accounts transferred to the Motorola Mobility 401(k) Plan, as of January 1, 2011, including any shares of Motorola, Inc. common stock held in the Motorola Stock Fund of the Motorola, Inc. 401(k) Plan. Motorola Mobility Employees who hold shares of Motorola, Inc. common stock in their applicable 401(k) Plan account as of the record date for the distribution will be entitled to receive shares of Motorola Mobility common stock in the distribution. On the Distribution Date, shares of Motorola Mobility common stock, based on the distribution ratio for every share of Motorola, Inc. common stock held in such employee’s stock fund account, will be credited to an account for the employee under the Motorola Mobility 401(k) Plan. The Motorola Mobility Employees will be obligated to sell the shares of Motorola, Inc. common stock and Motorola Mobility common stock credited to their accounts in the distribution by no later than December 31, 2011. No additional shares of Motorola Mobility or shares of Motorola, Inc. common stock may be acquired and held in the Motorola Mobility. 401(k) Plan by the Motorola Mobility Employees.

Results of the Distribution

After our distribution from Motorola, Inc., we will be an independent, publicly traded company. Immediately following the distribution, we expect to have approximately [ ] stockholders of record, based on the number of registered stockholders of Motorola, Inc. common stock on [ ], 2010, and approximately [ ] million shares of Motorola Mobility common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any exercise of Motorola, Inc. options and SARS, the vesting of Motorola, Inc. RSUs and the settlement of Motorola, Inc. deferred stock units (“DSUs”) in shares of Motorola, Inc. common stock between the date the Motorola, Inc. Board of Directors declares the dividend for the distribution and the record date for the distribution.

We have entered into a Master Separation and Distribution Agreement and several other agreements with Motorola, Inc. to effect the separation and distribution, and provide a framework for our relationship with Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc.) after the separation. These agreements provide for the allocation between Motorola Mobility and Motorola, Inc. of Motorola, Inc.’s assets, liabilities and obligations and will govern the relationships between Motorola Mobility and Motorola, Inc. after the separation (including with respect to employee benefits, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobility’s separation from Motorola, Inc., Motorola Mobility, Motorola Mobility, Inc. and Motorola, Inc. will also enter into transition services agreements and several commercial agreements, which will provide for, among other things, the provision of transition services and cooperation with respect to iDEN mobile devices and infrastructure products and services, as well as the ongoing sale and support of various other products and services. We cannot assure you that these agreements are or will be on terms as favorable to Motorola Mobility or to Motorola, Inc. as agreements with unaffiliated third-parties. For more information, see the section entitled “ Certain Relationships and Related Party Transactions ” included elsewhere in this Information Statement.

The distribution will not affect the number of outstanding shares of Motorola, Inc. common stock or any rights of Motorola, Inc. stockholders.

Material U.S. Federal Income Tax Consequences of the Distribution

The following is a summary of the material U.S. federal income tax consequences relating to the distribution by Motorola, Inc. This summary is based on the Code, the U.S. Treasury regulations promulgated thereunder, and interpretations of the Code and the U.S. Treasury regulations by the courts and the Internal Revenue Service (“IRS”), in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect. This summary does not discuss all the tax considerations that may be relevant to Motorola, Inc. stockholders in light of their particular circumstances, nor does it address the consequences to Motorola, Inc. stockholders subject to special treatment under the U.S. federal income tax laws (including, for example, non-U.S. persons, insurance companies, dealers or brokers in securities or currencies, tax-exempt organizations, banks, financial institutions, mutual funds, pass-through entities and investors in such entities, holders who have a functional currency other

 

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than the U.S. dollar, holders who hold their shares as a hedge or as part of a hedging, straddle, conversion, synthetic security, integrated investment or other risk-reduction transaction or who are subject to alternative minimum tax or holders who acquired their shares upon the exercise of employee stock options or otherwise as compensation). In addition, this summary does not address the U.S. federal income tax consequences to those Motorola, Inc. stockholders who do not hold their Motorola, Inc. common stock as a capital asset. Finally, this summary does not address any U.S. federal taxes other than U.S. federal income tax, and does not discuss any state, local or foreign tax consequences. MOTOROLA, INC . STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM.

The distribution is conditioned upon, among other things, Motorola, Inc.’s receipt of either a ruling by the IRS or an opinion of counsel to the effect that the distribution, together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. In conjunction with final approval of the distribution by the Motorola, Inc. Board of Directors and prior to the effectiveness of the Form 10 of which this Information Statement is a part, Motorola, Inc. expects to receive an opinion from Wachtell, Lipton, Rosen & Katz that the distribution will so qualify. The opinion will be based on, among other things, certain assumptions and representations made by Motorola, Inc. and us, which if incorrect or inaccurate would jeopardize the conclusions reached by counsel in its opinion. The opinion will not be binding on the IRS or the courts. So long as the distribution qualifies as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code: (1) the distribution will not generally result in any taxable income, gain or loss to Motorola, Inc., (2) no gain or loss will be recognized by (and no amount will be included in the income of) Motorola, Inc. common stockholders upon their receipt of shares of Motorola Mobility common stock in the distribution, except with respect to cash received in lieu of fractional shares, (3) the aggregate basis of the Motorola, Inc. common stock and the Motorola Mobility common stock (including any fractional share interests in Motorola Mobility stock for which cash is received) in the hands of each Motorola, Inc. common stockholder after the distribution will equal the aggregate basis of Motorola, Inc. common stock held by the stockholder immediately before the distribution, allocated between the Motorola, Inc. common stock and the Motorola Mobility common stock (including any fractional share interests in Motorola Mobility stock for which cash is received) in proportion to the relative fair market value of each immediately following the distribution, and (4) the holding period of the Motorola Mobility common stock received by each Motorola, Inc. common stockholder (including any fractional share interests in Motorola Mobility stock for which cash is received) will include the holding period at the time of the distribution for the Motorola, Inc. common stock on which the distribution is made, provided that the Motorola, Inc. common stock is held as a capital asset on the Distribution Date.

Notwithstanding receipt by Motorola, Inc. of the opinion of counsel, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, our initial public stockholders and Motorola, Inc. could be subject to significant U.S. federal income tax liability. In general, Motorola, Inc. would be subject to tax on gain, if any, as if it had sold the common stock of our company in a taxable sale for its fair market value. In addition, each of our initial public stockholders would be treated as if the stockholder had received a distribution equal to the fair market value of our common stock that was distributed to the stockholder, which generally would be taxed as a dividend to the extent of the stockholder’s pro rata share of Motorola, Inc.’s current and accumulated earnings and profits and then treated as a non-taxable return of capital to the extent of the stockholder’s basis in the Motorola, Inc. common stock and finally as capital gain from the sale or exchange of Motorola, Inc. common stock. Furthermore, even if the distribution were otherwise to qualify under Sections 355 and 368(a)(1)(D) of the Code, it may be taxable to Motorola, Inc. (but not to Motorola, Inc.’s stockholders) under Section 355(e) of the Code, if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50% or greater interest in Motorola, Inc. or us. For this purpose, any acquisitions of Motorola, Inc. stock or of our common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although we or Motorola, Inc. may be able to rebut that presumption.

We, Motorola, Inc. and Motorola Mobility, Inc. have entered into a Tax Sharing Agreement pursuant to which we agreed to be responsible for certain liabilities and obligations following the distribution. In general,

 

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under the terms of the Tax Sharing Agreement, in the event the distribution were to fail to qualify for tax-free treatment for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) and if such failure was the result of actions taken by Motorola, Inc. or us, the party responsible for such failure would be responsible for all taxes imposed on Motorola, Inc. to the extent that such taxes result from such actions. However, if such failure was the result of any acquisition of our shares, we would be responsible for all taxes imposed on Motorola, Inc. as a result of such acquisition. For a more detailed discussion, see the section entitled “ Certain Relationships and Related Party Transactions—Agreements with Motorola, Inc.—Tax Sharing Agreemen t” included elsewhere in this Information Statement. Our indemnification obligations to Motorola, Inc. and its subsidiaries, officers and directors are not limited in amount or subject to any cap. If we are required to indemnify Motorola, Inc. and its subsidiaries and their respective officers and directors under the circumstances set forth in the Tax Sharing Agreement, we may be subject to substantial liabilities.

Motorola, Inc. may incur some tax cost in connection with the distribution (as a result of certain intercompany transactions or as a result of certain differences between federal, on the one hand, and state, local and foreign tax rules, on the other), whether or not the distribution qualifies for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Code.

U.S. Treasury regulations require certain stockholders that receive stock in a distribution to attach to their U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth certain information relating to the tax-free nature of the distribution. U.S. Treasury regulations also generally provide that if a Motorola, Inc. common stockholder holds different blocks of Motorola, Inc. common stock (generally shares of Motorola, Inc. common stock purchased or acquired on different dates or at different prices), the aggregate basis for each block of Motorola, Inc. common stock purchased or acquired on the same date and at the same price will be allocated, to the greatest extent possible, between the shares of Motorola Mobility common stock received in the distribution in respect of such block of Motorola, Inc. common stock and such block of Motorola, Inc. common stock, in proportion to their respective fair market values, and the holding period of the shares of Motorola Mobility common stock received in the distribution in respect of such block of Motorola, Inc. common stock will include the holding period of such block of Motorola, Inc. common stock, provided that such block of Motorola, Inc. common stock was held as a capital asset on the Distribution Date. If a Motorola, Inc. common stockholder is not able to identify which particular shares of Motorola Mobility common stock are received in the distribution with respect to a particular block of Motorola, Inc. common stock, for purposes of applying the rules described above, the stockholder may designate which shares of Motorola Mobility common stock are received in the distribution in respect of a particular block of Motorola, Inc. common stock, provided that such designation is consistent with the terms of the distribution. Holders of Motorola, Inc. common stock are urged to consult their own tax advisors regarding the application of these rules to their particular circumstances.

THE FOREGOING IS A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. THE FOREGOING DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF STOCKHOLDERS. EACH MOTOROLA, INC. STOCKHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

Market for Common Stock

There is not currently a public market for Motorola Mobility’s common stock. A condition to the distribution is the listing on the NYSE of our common stock. We intend to apply to list Motorola Mobility common stock on the NYSE and expect to list under the ticker symbol “MMI.”

 

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Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date and continuing up to and including through the Distribution Date, we expect that there will be two markets in Motorola, Inc. common stock: a “regular-way” market and an “ex-distribution” market. Shares of Motorola, Inc. common stock that trade on the regular-way market will trade with an entitlement to receive shares of Motorola Mobility common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of Motorola Mobility common stock distributed pursuant to the distribution. Therefore, if you sell shares of Motorola, Inc. common stock in the “regular-way” market after the close of business on the record date and up to and including through the Distribution Date, you will be selling your right to receive shares of Motorola Mobility common stock in the distribution. If you own shares of Motorola, Inc. common stock at the close of business on the record date and sell those shares on the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of Motorola Mobility common stock that you would be entitled to receive pursuant to your ownership of the shares of Motorola, Inc. common stock.

Furthermore, beginning on or shortly before the record date and continuing up to and including through the Distribution Date, we expect that there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of Motorola Mobility common stock that will be distributed to Motorola, Inc. stockholders on the Distribution Date. If you owned shares of Motorola, Inc. common stock at the close of business on the record date, you would be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of Motorola Mobility common stock, without trading the shares of Motorola, Inc. common stock you own, on the “when-issued” market. On the first trading day following the Distribution Date, “when-issued” trading with respect to Motorola Mobility common stock will end and “regular-way” trading will begin.

Conditions to the Distribution

We expect that the distribution will be effective on [ ], 201[ ], the Distribution Date, provided that, among other conditions described in the Master Separation and Distribution Agreement, the following conditions shall have been satisfied or waived by Motorola, Inc.:

 

   

the Securities and Exchange Commission (“SEC”) will have declared effective our registration statement on Form 10, of which this Information Statement is a part, with no stop order relating to the registration statement being in effect and the Information Statement will have been mailed to Motorola, Inc.’s stockholders;

 

   

any required actions and filings under applicable securities laws or blue sky laws will have been taken or made and, where applicable, have become effective or been accepted;

 

   

the Motorola Mobility common stock will have been accepted for listing on the NYSE, on official notice of issuance;

 

   

Motorola, Inc. will have received either a ruling by the IRS or an opinion of counsel to the effect that the distribution, together with certain related transactions, will qualify as a tax-free reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code and such ruling or opinion shall be in form and substance satisfactory to Motorola, Inc. in its sole discretion;

 

   

no order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution will be in effect and no other event outside the control of Motorola, Inc. will have occurred or failed to occur that prevents the consumation of the distribution;

 

   

any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

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Motorola, Inc. will have received, in form and substance satisfactory to it, (i) an opinion of counsel, among other things, regarding the appropriateness of the determination by the Motorola, Inc. Board of Directors that Motorola, Inc. has sufficient surplus under Delaware law to permit the distribution, (ii) an opinion from its financial advisor with respect to the ability of Motorola, Inc. and Motorola Mobility to finance their respective operating and capital requirements through a specified date based on conditions in the capital markets as of the date of such opinion, and (iii) certificates from Motorola, Inc. and Motorola Mobility with respect to factual matters required by the advisors to render the opinions referenced in (i) and (ii).

The fulfillment of the foregoing conditions does not create any obligations on Motorola, Inc.’s part to effect the distribution, and the Motorola, Inc. Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the distribution, including by accelerating or delaying the timing of the consummation of all or part of the distribution, at any time prior to the Distribution Date.

Reason for Furnishing this Information Statement

This Information Statement is being furnished solely to provide information to Motorola, Inc. stockholders who are entitled to receive shares of our common stock in the distribution. The Information Statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities. We believe that the information in this Information Statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Motorola, Inc. nor we undertake any obligation to update such information except in the normal course of our respective public disclosure obligations.

DIVIDEND POLICY

We presently intend to retain future earnings, if any, to finance our business. As a result, we do not expect to pay any cash dividends for the foreseeable future. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant. There can be no assurance that we will continue to pay any dividend even if we commence the payment of dividends.

 

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CAPITALIZATION

The following table, which should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ,” “ Unaudited Pro Forma Condensed Combined Financial Statements ” and the historical financial statements and accompanying notes included elsewhere in this Information Statement, sets forth our cash and cash equivalents and combined capitalization as of July 3, 2010 and December 31, 2009, on a historical basis and on a pro forma basis after giving effect to the planned transactions to be effected prior to the distribution of Motorola Mobility Holdings, Inc. common stock to Motorola, Inc.’s stockholders, including the formation of Motorola Mobility and its subsidiaries and the contribution to Motorola Mobility and its subsidiaries of all the assets and liabilities of the Mobile Devices and Home businesses, as well as cash and cash equivalents, along with the related issuance of [ ] million shares of Motorola Mobility common stock to holders of Motorola, Inc. common stock.

 

     As of July 3, 2010     As of December 31, 2009
($ in millions)    Historical    Pro Forma     Historical    Pro Forma

Cash and cash equivalents

   $    $ 3,500 (A)    $    N/A

Business equity

     2,002      1,937        1,939    N/A
      

Total capitalization

   $ 2,002    $ 5,437      $ 1,939    N/A
 

 

(A) The adjustment to Cash and cash equivalents represents an estimate of the cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) that Motorola, Inc. is expected to fund Motorola Mobility with at the time of the separation. The amount to be funded is only an estimate at this time. The actual amount ultimately funded to Motorola Mobility by Motorola, Inc. will be determined by the Motorola, Inc. Board of Directors prior to the separation.

 

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BUSINESS

General

Motorola Mobility Holdings, Inc. is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline digital communication, information and entertainment experiences. The Company’s integrated products and platforms deliver rich multimedia content, such as video, voice, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers (“multi-screens”). Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices. We operate our business in two reporting segments, our Mobile Devices segment and our Home segment.

We believe we are well positioned to enable the evolving digital lifestyle by delivering multi-screen experiences across multiple types of devices. Previously separate industries like the wireless, media, the Internet and computing industries are increasingly interacting with each other, creating consumer demand for new devices, applications and services, including cloud-based services. Cloud-based refers to a computing environment where applications and content are shared and delivered over the network using resources that might be located in a single data center, distributed across a number of data centers, or spread throughout the entire network. We offer devices that support these new applications and services like the DROID by MOTOROLA family of smartphones. MOTOBLUR , our cloud-based service platform, manages, aggregates, automatically delivers (referred to as “push”) and uploads personalized digital content, such as photos, videos and social networking updates. We are also a provider of products and services for the delivery of video, voice and data to the home. Our businesses have complementary core strengths and synergies in intellectual property, technology, design, distribution and operator and carrier relationships, which together with a global brand uniquely position us to capitalize on emerging opportunities.

The relationship between consumers, devices and the world around them is rapidly evolving due to the convergence of wireless, media, the Internet and computing, and consumers’ demand for anywhere, anytime communications and collaboration. This convergence is enabling new digital lifestyles, as demonstrated by the following key trends, including:

 

   

Adoption of wireless and wired broadband Internet connectivity;

 

   

Increased use of social networking across multiple devices;

 

   

Growth of online and mobile video; and

 

   

Widespread use of online and mobile commerce.

These digital lifestyles are characterized by new engagement models. Consumers want to:

 

   

Communicate using voice, text, instant messaging, email, social networking and blogs;

 

   

Rapidly access information through broadband connectivity anywhere and anytime;

 

   

Consume and interact with entertainment and media content;

 

   

Capture and share user generated content, such as photos and videos; and

 

   

Purchase goods and services through online and mobile commerce.

 

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We sell our products globally, and in 2009, our net revenues were $11.1 billion. We have over 20,000 employees and we operate in approximately 40 countries, with major facilities in the U.S., China, Brazil and Taiwan. Our direct customers are large, leading telecommunications and cable operators. In 2009, our biggest customers were Verizon, Sprint Nextel and Comcast. We also sell our products through retailers and distributors. We are strongly committed to research and development and we have a broad portfolio of approximately 16,500 granted patents and approximately 8,000 pending patent applications worldwide.

Business Segments

We report financial results for the following two business segments:

Mobile Devices Segment

The Mobile Devices segment is a provider of mobile devices and related products and services designed to deliver mobile communications, such as voice, messaging, push-to-talk and video, and to deliver mobile Internet access and content, including multimedia, social networking, navigation and other mobile applications. We have a long history of innovation in wireless communications including the development of the world’s first portable cellular phone. Mobile Devices net revenues represented 65% and 66% of Motorola Mobility’s combined net revenues in 2009 and the first half of 2010, respectively.

Our Products

We design, manufacture and sell a broad range of mobile devices encompassing multiple network technologies, form factors (which are the physical look and mechanical function of a device), capabilities, price points and geographies. Our product portfolio of mobile devices includes smartphones, which are wireless phones with advanced Internet browsing and application capabilities, feature-phones, which are wireless phones with limited internet browsing and application capabilities, and voice-centric phones. We also provide complementary mobile software, services, and accessories and license our extensive portfolio of intellectual property. We market our products globally to mobile network operators and carriers (collectively “wireless carriers”) and consumers through direct sales, retailers, and distributors.

Our Industry

Over the last ten years, the mobile devices industry has grown rapidly. Informa Telecoms & Media, an independent market research firm, estimates there were approximately 4.6 billion mobile subscriptions in 2009 and this number is forecasted to grow to 6.5 billion mobile subscriptions by 2012. This growth will be driven in part by the widespread availability of wireless networks, reduced end-user device and service costs, and expanded device functionality. According to Gartner’s “Forecast Mobile Devices Worldwide 2003-2014 2Q 2010 Update”, 1.2 billion mobile devices were sold to end customers in 2009 and 1.6 billion mobile devices are forecasted to be sold to end customers in 2012, representing a 9% compound annual growth rate (“CAGR”). Much of the market demand will be fueled by smartphones as the mobile devices industry continues to shift from voice-centric devices to data-centric devices. Gartner forecasts smartphones (devices based on open operating systems), will grow from 172 million units in 2009 to 495 million units by 2012, representing a 42% CAGR. In addition, wireless connectivity is being integrated into new classes of devices (“converged devices”) including e-readers, gaming devices, media tablets and netbooks, creating new growth opportunities for mobile devices manufacturers.

Key drivers of mobile device growth include:

 

   

Growing Consumer Demand for Multi-Function Devices. The mobile device is evolving from a voice-only communications device to a multi-function device with features like digital still camera, video camera, music player, organizer, Internet browsing and gaming. Consumers’ desire for mobile data and their evolving communication patterns will continue to drive the demand for devices with enhanced,

 

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personalized mobile experiences, including easy access to the Internet, content and applications on a real-time basis.

 

   

Wireless Carriers’ Focus on Growing Data ARPU. In response to intense competition and shifting consumer communication behavior, we expect wireless carriers to continue to focus on increasing data average revenue per user (“ARPU”) to offset declining voice ARPU. To drive data ARPU, we believe wireless carriers will continue to promote smartphones and converged devices that provide Internet access, applications and services. In addition, wireless carriers are continuing to deploy higher bandwidth wireless technologies such as 4G to better support smartphones and converged devices that enhance consumers’ overall mobile experience.

 

   

Advanced Device Technology. High performance mobile microprocessors, advanced mobile browsers, and high speed wireless networks are enabling mobile devices to provide functionality similar to what consumers experience on a personal computer. Advanced operating systems have enabled third-party developers to create thousands of new innovative mobile applications that consumers can easily download and install on their mobile devices.

 

   

Emergence of Mobile Cloud-Based Services . Increasingly, cloud-based services and applications are being used to deliver information and content to mobile devices. Examples of these services include sharing and consumption of media, social networking and location based services, such as navigation.

Mobile device manufacturers compete in a rapidly evolving marketplace. To be successful, manufacturers must consistently innovate and deliver a differentiated product portfolio. This requires extensive intellectual property assets and expertise in the integration of hardware, software and, increasingly, services. Manufacturers must also have strong wireless carrier relationships, global distribution capabilities, a strong brand and the ability to effectively build or work within a growing ecosystem of applications.

Our Strengths

We believe the strengths of our Mobile Devices segment position us well to bring to market innovative and differentiated products and services. Our key strengths include:

 

   

Innovative Mobile Technologies. We have a long history of developing innovative mobile devices including the first portable cellular phone, the StarTAC ® and RAZR ® phones and, more recently the DROID by MOTOROLA family of smartphones. We have devoted extensive research and development resources into integrating advanced technologies such as multiple radio interfaces, mobile microprocessors, advanced mobile operating systems and advanced multimedia functionality and industrial design into our mobile devices. In addition, we have extended our expertise into software application and services development to create the MOTOBLUR service platform.

 

   

Broad Product Portfolio. Our broad and diverse global product portfolio includes smartphones, feature phones and voice-centric devices. This portfolio extends across various wireless technologies, capabilities, form factors and price points.

 

   

Deep Customer Relationships. We have extensive relationships with wireless carriers, retailers and global distributors that have been in place for many years. Our global sales organization markets our portfolio of devices and services around the world.

 

   

Strong Patent Portfolio. We have developed an extensive portfolio of intellectual property assets through our significant and continued investment in research and development. The intellectual property assets held by our Mobile Devices segment include approximately 14,600 granted patents and 6,700 pending patent applications, worldwide, which are complemented by another approximately

 

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1,900 granted patents and 1,300 pending patent applications, worldwide, held by our Home segment for a total held by our two segments of approximately 16,500 granted patents and 8,000 pending patent applications, worldwide. These patents and patent applications are directed to inventions in areas such as wireless, audio, video, design and user interface (“UI”).” Further, we believe our portfolio of patents in 4G will position us well in the upcoming technology transition from 2G and 3G.

 

   

Global Brand. Our highly recognizable and successful global brand has been in use for 80 years. We believe our brand is associated with quality, reliability and innovation.

Our Strategy

We are committed to provide a broad portfolio of smartphones and other converged devices that will enhance the mobility of the Internet and deliver interactive, personalized multi-screen experiences and services to consumers around the world. The convergence of these experiences and services onto a single mobile device requires integration of hardware, software, services and UI, which we believe we can provide with our mobile devices. We will also selectively develop devices which target other segments of the mobile device market, including feature phones, and voice-centric devices.

We plan to differentiate ourselves from competitors along a number of dimensions. We will differentiate our portfolio by providing a broad array of innovative and integrated smartphone devices encompassing multiple price points, technologies and geographies. We will also differentiate our products through our global distribution reach, highly recognized brand and extensive customer relationships. As the new digital lifestyle continues to evolve, we plan to take advantage of our capabilities in mobile and wireline communications to meet consumers’ increasing demands to communicate and collaborate inside and outside the home effortlessly on multiple devices. Key elements of our strategy include:

Capitalize on Our Leading Technology Position . We believe that open-source platforms foster rapid innovation and encourage third-party development of applications and services, resulting in an expansive ecosystem of consumer experiences and entertainment. We are currently using the Android TM operating system, a royalty-free open-source platform developed by Google , to develop our portfolio of smartphones, which currently has a large offering of applications and services.

We intend to differentiate certain of our product offerings by using the Android operating system with MOTOBLUR. This platform aggregates data such as social network updates, email and calendar and automatically pushes data to the device rather than requiring the user to login individually to multiple services, which increases network traffic and reduces battery life.

As data consumption continues to increase, next-generation wireless technologies will be critical to ensure efficient use of wireless carriers’ spectrum. We continue to invest in next-generation wireless technologies, including evolved high speed packet access (“HSPA+”) and 4G, including long-term evolution (“LTE”). These investments will enable us to develop devices for high speed networks to enable delivery of converged services and media.

As the new digital lifestyle continues to evolve, we plan to develop advanced mobile devices to meet consumers demand to communicate and collaborate inside and outside the home and access and use their data wherever it is located. Advanced mobile devices are a critical component to enable multi-screen experiences.

Extend Our Product Portfolio . We will continue to focus the development of our portfolio on addressing three segments of the overall mobile device market: (1) smartphones and other converged devices, (2) feature phones, and (3) lower priced, voice centric phones.

Our primary product portfolio focus is developing and marketing a broad portfolio of smartphones and other converged devices. We will continue to expand our portfolio of mobile devices, by offering smartphones that operate

 

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on high speed wireless networks, including evolution data optimized (“EVDO”), high speed packet access (“HSxPA”) and LTE networks. We plan to address multiple price points, ranging from entry level smartphones to premium priced devices. Devices will continue to be differentiated by a variety of factors, including form factor, price, processor speed, display size and consumer experience. One of the key experiences we plan to utilize in certain smartphone products is MOTOBLUR. Moreover, we are enhancing the ecosystem of services and applications available to Android-based smartphones through our Motorola developer network (“ MotoDev”) application development program that provides information and tools for Android application developers. Our smartphone portfolio will initially be targeted at the North America and China markets. As our position in those markets strengthens, we will increase our focus on other markets, including Western Europe, Latin America and other parts of Asia.

In the feature phone market, we will develop a limited number of phones for specific customers or applications. This may include rugged devices for certain wireless carriers and integrated digital enhanced network (“iDEN”) push-to-talk devices. Our feature phone portfolio will be focused primarily on North American based customers.

In order to enhance brand awareness and meet customer requirements in certain markets, we will utilize original design manufacturers (“ODMs”) to develop a portfolio of lower-priced, voice-centric mobile devices. These devices will be our lowest priced devices and will be aimed primarily at retailers and distributors in emerging markets.

Leverage Customer Relationships and Global Distribution. We currently market our mobile devices portfolio to leading wireless carriers, distributors and retailers across the globe through our global sales organization. We recently strengthened our relationship with our customers through the launch of several smartphones in North America, China, Western Europe, Korea and Latin America in 2009 and 2010. We plan to continue to build upon these relationships and use our global reach to drive future business growth.

Maximize Our Intellectual Property. With approximately 16,500 granted patents and approximately 8,000 pending patent applications, worldwide, held by our two segments, we believe we have one of the strongest portfolios of intellectual property assets in the wireless industry. Areas of strength include wireless technologies, video, security, UI, and design. We will use our intellectual property and seek to expand our intellectual property portfolio to maintain our competitive position.

Market Our Products Under Our Highly Recognizable Global Brand . Our brand has been in use for 80 years and we believe it is associated with quality, reliability and innovation. We plan to strengthen our brand through advertising and marketing of our products globally.

Competition

The mobile devices market is highly competitive. Competitors include traditional mobile device manufacturers, as well as new competitors who have entered the market in the last several years. As market demand continues to shift toward smartphones, additional competitors may enter the mobile devices market. Our primary competitors include Apple, HTC, LG, Nokia, Research in Motion, Samsung, and Sony-Ericsson.

As reported by Strategy Analytics, in 2009, these seven mobile device manufacturers held an aggregate market share of approximately 79%. In 2009, our overall mobile devices market share decreased significantly compared to 2008 and we were the fifth-largest worldwide supplier of mobile devices. In the fourth quarter 2009, we introduced our first smartphones using the Android operating system. According to Gartner’s “Market Share: Mobile Devices and Smartphones by Region and Country 2Q10,” from the fourth quarter 2009 through the first half of 2010, we have gained share in the smartphone segment of the mobile device market.

 

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Home Segment

The Home segment is a provider of products and services to cable operators and wireline telecommunications (“telco”) service providers (collectively, “network operators”) that enable the delivery of video, voice and data services to consumers. Our product portfolio primarily includes interactive set-top boxes, end-to-end digital video and Internet protocol television (“IPTV”) distribution systems, broadband access infrastructure platforms, and associated data and voice customer premises equipment (“CPE”). Home net revenues represented 35% and 34% of Motorola Mobility’s combined net revenues in 2009 and the first half of 2010, respectively.

Our Products

Our products and services are used by content providers and network operators throughout the delivery network, and consumers in the home.

 

   

We are a leader in providing set-top boxes and data and voice modems on consumers’ premises . We provide a broad array of set-top boxes for network operators that support standard definition TV and high definition television (“HDTV”) delivery including set-top boxes with integrated digital video recorder (“DVR”) capability. Our set-top boxes support a variety of delivery architectures including conventional cable TV, IPTV and hybrid IP/conventional environments. We also supply modems and gateways for data over cable service interface specification (“DOCSIS”) 3.0, digital subscriber line (“DSL”) and passive optical networks (“PON”).

 

   

We provide a wide range of network equipment to transport signals to and from the end-user premises . Our cable modem termination systems (“CMTS”) for DOCSIS 3.0 networks and our optical headend and network equipment enable network operators to deliver video, data and voice services.

 

   

Our products are used by network operators to process, deliver and manage video, voice and data services . We provide integrated receiver decoders (“IRDs”), multiplexers and transcoders that receive content from the content providers for redistribution over the operators’ networks. We also provide encoders for local programming, video-on-demand (“VOD”) servers and multiplexers for placement of advertising streams. Our portfolio includes software that enables the delivery and management of multi-screen experiences across a wide range of cable, telco and wireless platforms. Our products include security solutions used between the headend and the home and device management technology for set-top boxes and modems.

 

   

We are a leading supplier to content providers . Our Moving Picture Experts Group (“MPEG”)-compliant standard-definition (“SD”) and HDTV video encoding, as well as processing and multiplexing equipment is used by leading content providers to deliver programming to network operators’ headends and central offices. Our conditional access technology secures the video content during transmission.

Our Industry

Over the last 15 years, video delivery technology has converted from analog to digital, greatly increasing program choices for consumers and enabling new capabilities such as HDTV, VOD and interactive services. During this period, both traditional cable operators and telcos have expanded their offerings to deliver video, voice and data services (“triple play”). The triple play packages and advances in wireless data technology are allowing consumers to be in touch and access the same entertainment and information inside and outside the home.

Providing video, voice and data services to consumers is a highly competitive business and our customers compete aggressively to provide individual services, triple play packages and even quad play packages, which also include mobile voice and data services. The competitive environment is driving operators to enhance and expand service offerings by adding more high definition (“HD”) channels, three dimensional television (“3D-TV”), increasing data speeds, mobile data services and providing new experiences that bridge conventional TV

 

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and Internet services. Enabling these new capabilities is driving network operators to regularly upgrade their networks and in-home devices, such as set-top boxes and other customer premises equipment such as modems.

In 2009, adverse macroeconomic conditions caused a slowdown in data and digital video subscriber additions for our customers which, in turn, led to reduced spending by those customers. As economic conditions continue to improve, we expect our customers to invest in and use technology advancements to deliver new experiences.

The highest adoption of advanced video technologies like HDTV and DVR is in the U.S. where the Consumer Electronics Association estimates that 68% of households have an HDTV and 42% have a DVR device. However, there remains growth opportunity in the U.S. as the adoption of advanced video technologies continues. In addition, the majority of global TV households have only begun to adopt these technologies. According to IMS Research (“IMS”), there were 335 million digital TV households that purchased video programming from cable, satellite and telco providers in 2009 and that number is expected to grow to 525 million by 2012, representing a 16% CAGR. IMS also estimates the number of global residential broadband subscribers will grow from 425 million at the end of 2009 to 616 million at the end of 2012, representing a 13% CAGR.

The consumer viewing experience is expanding beyond the TV and consumers now also watch video programming on Internet Protocol (“IP”)-enabled devices, such as PCs, media tablets and smartphones. Video delivery requires substantially more bandwidth than other data services and its growth is driving operators to upgrade their network and customer premises equipment. This expanded data capacity is allowing new content providers and aggregators to use the service providers’ high speed data networks to provide over-the-top (“OTT”) services to consumers. These OTT providers sell content directly to the consumer and deliver it to the consumer’s IP-enabled devices and web-capable BluRay players, TV’s and consumer-purchased set-top boxes. Competition from OTT services is driving network operators to invest to expand their content choices, upgrade their networks and enhance their consumer experiences across TVs, PCs and wireless devices.

Our Strengths

We believe our key strengths position us well to be a leading provider of products and services to network operators. Our key strengths include:

 

   

A Long History of Innovation . We introduced our first cable TV system products in 1950 and have been a major supplier of cable network and in-home products for 60 years. We enabled the first pay-per-view event and launched the first all digital HDTV system. Our industry leadership also includes “firsts” in digital video compression and encryption. We were a pioneer in cable modems, produced the first HD set-top boxes with integrated DVR and developed the first multi-room DVR content distribution system.

 

   

Broad Portfolio of Infrastructure and Devices . We offer a broad portfolio of infrastructure and devices to enable network operators to deliver video, data and voice services. We are an industry leader in providing interactive set-top boxes supporting the major video delivery technologies. We are experienced in enabling video networks with a complete portfolio of video processing equipment and in building broadband access networks.

 

   

Strategic Customer Relationships . Through our global sales organization, we market our portfolio of infrastructure and devices to network operators around the world. In North America, our largest market, we are a provider to all of the top ten cable and telco service providers that provide video services to the premise and together account for over 90% of digital video subscribers. As a result of our history of supplying the industry, we have a large installed base of infrastructure and devices which positions us well to participate in network upgrades.

 

   

Extensive Intellectual Property and Industry Standards Leadership . We have made substantial contributions to industry standards such as MPEG for video compression, Advanced Television

 

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Systems Committee (“ATSC”) for digital TV transmission and DOCSIS for data transmission over cable systems. We believe that being at the forefront of these standardization efforts positions us as a leader in new technology adoption and gives us time-to-market advantages. The Home segment also has a strong intellectual property portfolio with approximately 1,900 granted patents and 1,300 pending patent applications, worldwide, and this portfolio is complemented by the portfolio of the Mobile Devices segment.

 

   

Protection and Security of High-Value Content and Devices . Our industry leading conditional access technology is used by major content providers to protect the content they distribute to network operators and has been deployed by network operators to deliver content to consumers for over 15 years in over 100 million set-top boxes. We believe our core security intellectual property and extensive experience in securing high-value content position us to provide digital rights management (“DRM”) technology for content protection in the multi-screen video market.

Our Strategy

Our Home segment is a provider of products for the delivery of video, data and voice services. We are focused on leading the development of next-generation broadband solutions which will enable the delivery of personalized media experiences across multiple devices. Key elements of our strategy include:

Expand Our Product Portfolio and Capabilities to Support Multi-screen Convergence and 3D Technology. We are focusing on enabling consumers to view video content on multiple screens such as PCs and mobile devices. We are developing products and software for securely streaming and shifting content and enhancing the content experience through linkage with social networking. We have also begun to incorporate the capability to support 3D-TV in our advanced set-top boxes and for our video infrastructure products to support the network operators’ launch of 3D programming when it occurs.

Increase Digital Adoption by Customers of Network Operators in North America. We are working to increase adoption of digital technology by network operators in North America through a portfolio of enhanced set-top boxes. These products range from basic models supporting the industry movement to all digital delivery and advanced units with HD and DVR functions, as well as network-enabled devices that support multi-room DVR playback and access to IP-delivered content. Adoption of digital technology by network operators is a key driver of growth for our business.

Increase Our Sales to Target Customers Outside North America. We also are investing to grow our business globally to capitalize on the growth of video and data services in markets outside North America. We are leveraging our technology portfolio to capitalize on the growth of HDTV in Europe, Middle East and Africa (“EMEA”) and Asia as well and the demand for increased data speeds that are driving infrastructure investment. We also are pursuing a number of opportunities in new markets where customers are looking to deploy advanced networks to enable triple play services.

Continue to Enhance Our Intellectual Property Portfolio. We also are building our intellectual property portfolio to address the changing video network architecture with hybrid IP devices and multimedia home gateways that enable the integration of IP-enabled applications. We are developing software for the network operator’s core network that supports the convergence of the video, data and voice service platforms to deliver integrated experiences. In addition, we are developing in-home and mobile media platforms that use IP-enabled CPE devices and applications to support the discovery and consumption of content across in-home and mobile devices by providing personalized services and social collaboration.

Pursue Complementary Technology Through Acquisitions. We regularly evaluate opportunities to acquire capabilities that complement our internal research and development. We have historically acquired various businesses and technologies to grow our capabilities. We expect to continue targeting acquisition candidates that have complementary technology and products. We also expect to evaluate acquisition candidates that will enable us to expand our business internationally or enter adjacent markets.

 

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Competition

Our set-top boxes and cable and wireline infrastructure equipment products compete in global markets that are highly competitive. We have a broad array of competitors including those with whom we compete across multiple product categories and those who are focused on products in a portion of our portfolio. The rapid technology changes occurring in the markets in which this segment competes may lead to the entry of new competitors. Competitive factors in the market for our products and systems include: technology, product and system performance, price, time-to-market, product features, quality, delivery and availability. Currently, our primary competitors include Cisco, Pace and Arris.

The cable industry had a long history of protecting the video content transmitted over its network by using a conditional access system that was integrated into the set-top box. The Federal Communications Commission (“FCC”) passed regulations that took effect in 2007 requiring separation of security functionality from the set-top box. These regulations enable competitors to sell set-top boxes to cable operators and enable retail distribution of TVs and other devices that are capable of accessing encrypted cable programming through use of a cable operator-supplied security module. Several major cable operators support a full two-way security interface, which allows consumers with such a retail device to access all programming available on the operator’s network without the need for an operator-provided set-top box. As a result, we face competition from several new manufacturers which are able to supply set top boxes to operators, and, to a lesser extent, from consumer electronics manufacturers which sell directly through retail.

Other Information

Customers

Motorola Mobility’s products are primarily sold through wireless carriers, network and cable operators and to end consumers. In 2009, aggregate net revenues from our five largest customers represented approximately 47% of our revenues. During 2009, approximately 17% of net revenues were from Verizon Communications Inc. (including Verizon Wireless) (“Verizon”) and approximately 13% of net revenues were from Sprint Nextel. In 2009, our two largest markets by locale of end customer were North America, accounting for 63% of sales, and Latin America, accounting for 16% of sales. Motorola Mobility has several large customers, the loss of one or more of which could have a material adverse effect on us.

In 2009, aggregate net revenues from the Mobile Devices segment’s five largest customers, which included Verizon and Sprint Nextel, among others, represented approximately 54% of the segment’s net revenues. In addition to selling directly to wireless carriers, our Mobile Devices business also sells products through a variety of third-party distributors and retailers, which accounted for approximately 21% of the segment’s net revenues in 2009.

In 2009, aggregate net revenues from the Home segment’s five largest customers, primarily large cable operators and telecommunication companies located throughout the world, such as Verizon and Comcast, represented approximately 54% of the segment’s net revenues.

In 2009, North America was both segments’ largest market based on locale of end customer, accounting for 60% of Mobile Devices sales and 78% of Home sales.

Research and Development

Motorola Mobility’s business segments participate in very competitive industries with constant changes in technology. Throughout our history, we have relied, and continue to rely, primarily on our research and development (“R&D”) programs for the development of new products, and on our production engineering capabilities for the improvement of existing products. We believe that our commitment to R&D programs should allow each of our segments to remain competitive.

 

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R&D expenditures relating to new product development or product improvement were $1.6 billion in 2009, compared to $2.4 billion in 2008 and $2.6 billion in 2007. R&D expenditures decreased 33% in 2009 as compared to 2008, after decreasing 8% in 2008 as compared to 2007. Motorola Mobility continues to believe that a strong commitment to R&D is required to drive long-term growth and we have professional employees around the world dedicated to R&D activities.

Intellectual Property

The protection of patents, trademarks and other intellectual property is extremely important to our operations. The industries in which the Mobile Devices and Home business segments compete are characterized by the vigorous pursuit and protection of intellectual property rights. We are focused on the development, implementation and customer acceptance of new products, designs and improvements. The development of associated intellectual property rights is an important component of our business and growth strategy. Motorola Mobility has a robust intellectual asset management process for building, maintaining and leveraging its portfolio of patents, trademarks, technology rights and other intellectual property to obtain licenses from other industry participants and to pursue royalty based licensing opportunities. Motorola Mobility intends to continue to obtain patents, trademarks, technology rights and other intellectual property.

At the time of distribution, Motorola Mobility will have a large portfolio of trademarks registered or otherwise effective in various countries around the world. Motorola’s increased focus on marketing products directly to consumers is reflected in an increasing emphasis on brand equity creation and protection.

On the Distribution Date, Motorola Mobility will own approximately 24,500 patents and patent applications, worldwide. These include substantially all of the patents unique to the Mobile Devices and Home businesses, and a number of other patent families allocated to Motorola Mobility and intended in part to mitigate certain intellectual property risks associated with operation as a new entity.

Motorola Mobility’s patent portfolio generally relates to wireless, audio, video, security, user interface and product design, along with applications and services related to our products.

Upon the Distribution Date, the Mobile Devices business segment will have approximately 14,600 granted patents and 6,700 pending patent applications, worldwide, substantially related to the Mobile Devices product portfolio. This patent portfolio includes numerous patents related to various industry standards, including 2G, 3G, 4G, H.264, MPEG-4, 802.11, open mobile alliance (“OMA”) and near field communication (“NFC”). Motorola is an active participant in the development of these and other industry related standards, and has developed a significant portfolio of standards related patents. The patent portfolio also includes substantial sets of patents related to strategic areas of the product portfolio or business including audio codec technology, UI, power management, location based services, wireless email, and other smartphone related applications and services.

Upon the Distribution Date, the Home business segment will have approximately 1,900 granted patents and 1,300 pending patent applications, worldwide, substantially related to the Home product portfolio. We have contributed intellectual property in the industry standards setting process, including MPEG video compression, ATSC for digital TV transmission and DOCSIS for data transmission over cable systems. We seek to focus our intellectual property portfolio upon our core enabling technologies, such as digital compression, encryption and conditional access systems to protect technology we consider important to our business strategy. We develop and maintain our competitive position based on our proprietary knowledge and ongoing technological innovation, and periodically seek to include our proprietary technologies in certain patent pools that support the implementation of standards. We are a founder of MPEG LA, LLC, the patent licensing authority established to foster broad deployment of MPEG-2-compliant systems and have recently joined the MPEG-4 Visual patent pool as a licensor. In addition, we have licensed our digital conditional access technology, DigiCipher ® II, to other equipment suppliers. Our joint ventures with Comcast also support the development and licensing of conditional access technology.

 

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Many of the patents owned by Motorola Mobility on the Distribution Date are used in its operations or licensed for use by others, and Motorola Mobility is licensed to use certain patents owned by others. We enter into license agreements with other industry participants, both as licensor and licensee, covering our products and products of the other party to the cross-license. Royalty and licensing fees vary from year to year and are subject to the terms of the license agreements and sales volumes of the products subject to licenses. The freedom of action afforded to our operations by virtue of these license agreements is important to our competitive position. After the distribution, we will no longer be the beneficiary of some of Motorola, Inc.’s intellectual property arrangements, including cross-licenses, and will be engaged in the negotiation of assignments of certain other existing license agreements.

From time to time, third-parties may and do assert their patent, copyright, trademark and other intellectual property rights against technologies that are important to our business segments. Our ability to develop products and related technologies protected by intellectual property rights will be a significant factor in determining our competitiveness in our target markets.

Motorola Mobility intends to continue to obtain patents and trademarks as part of its intellectual property strategy going forward.

Environmental

During 2009, compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not have a material effect on capital expenditures, earnings or the competitive position of Motorola Mobility.

Employees

At December 31, 2009, there were approximately 20,000 employees in the Mobile Devices and Home businesses of Motorola, Inc. and its subsidiaries. In addition, the Mobile Devices and Home businesses that comprise Motorola Mobility share employees with the other businesses of Motorola, Inc. and those employees are not included in the figures above. At the Distribution Date, we expect to have approximately 21,000 employees reflecting the addition of a portion of those who were historically shared corporate employees with Motorola, Inc.

Payment Terms

Payment terms vary worldwide, depending on the arrangement. In North America, payment is generally due 30 to 60 days from the invoice date. In regions outside of North America, terms vary widely but are typically limited to no more than 90 days.

As required for competitive reasons, extended payment terms are provided to customers from time to time on a limited basis. The Company’s payment terms are consistent with industry practice, as many of our contracts are awarded through a competitive bid process. When required for competitive reasons, we may provide long-term financing in connection with equipment purchases. Financing may cover all or a portion of the purchase price.

Backlog

Motorola Mobility’s aggregate backlog position for all Motorola Mobility segments, as of the end of the last two fiscal years, was approximately as follows:

 

 

December 31, 2009

   $ 787 million

December 31, 2008

   $ 721 million
 

 

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The Mobile Devices segment’s backlog (excluding any deferred revenue) was $409 million at December 31, 2009, compared to $290 million at December 31, 2008. This increase in backlog is primarily due to demand for smartphones that were launched in the fourth quarter of 2009. The Home segment’s backlog was $378 million at December 31, 2009, compared to $431 million at December 31, 2008. The orders supporting the 2009 backlog amounts are believed to be generally firm, and 100% of the backlog on hand at December 31, 2009 is expected to be recognized as revenue in 2010. The forward-looking estimate of the firmness of such orders is subject to future events that may cause the amount recognized to change.

Regulatory Matters

Radio frequencies are required to provide wireless services. The allocation of frequencies is regulated in the U.S. and other countries, and limited spectrum space is allocated to wireless services. The growth of the wireless communications may be affected if adequate frequencies are not allocated or, alternatively, if new technologies are not developed to better utilize the frequencies currently allocated for such use. Industry growth may also be affected by the cost of the new licenses required to use frequencies and any related frequency relocation costs. The U.S. leads the world in spectrum deregulation, allowing new wireless communications technologies to be developed and offered for sale. Examples include wireless local area network systems, such as wireless fidelity (“WiFi”) and wide area networks, such as LTE. Other countries have also deregulated portions of their available spectrum to allow deployment of these and other new technologies. Deregulation may introduce new competition and new opportunities for us and our customers.

Many of the products sold by our business are subject to regulation by the FCC in the U.S. and other communications regulatory agencies around the world. In addition, our customers, and their networks into which our products are incorporated, are subject to government regulation. Government regulatory policies affecting either the willingness or the ability of cable and telecommunication operators, wireless operators and wireline operators to offer certain services, or the terms on which these operators offer the services and conduct their business, may have a material adverse effect on our results. The FCC continues to examine ways to promote commercial availability of retail video CPE devices that can deliver multichannel video programming distributor (“MVPD”) content to consumers. While the FCC has not formally proposed any new regulatory mandates in this area, changes to the existing framework could impact our set-top box business. During 2009, the FCC proposed a National Broadband Plan to the U.S. Congress outlining its strategic vision for the next decade. The plan responds to a Congressional mandate to “use broadband to achieve national purposes, while improving the economics of deployment and adoption.” Included in the plan are recommendations for spectrum allocation for wireless broadband use and broadband subsidies. Long-term goals include providing affordable high speed access and encouraging mobile innovation. The FCC plan calls for providing access to 100 million households with 100 megabits per second (“Mbps”) speeds by 2020 and at least one gigabit per second (“Gbps”) speeds at anchor institutions such as schools, hospitals and military installations. If implemented, the National Broadband Plan may result in increased sales opportunities for the Home businesses as well as increased competition. Other countries have also deregulated portions of their available spectrum to allow deployment of these and other new technologies. Deregulation may introduce new competition and new opportunities for us and our customers.

Beginning in 2007, FCC regulation required the separation of security functionality from cable set-top boxes, resulting in increased competition for sales of set-top boxes to cable operators and enabling retail distribution of TV and other video devices capable of access encrypted cable programming.

Inventory, Raw Materials, Right of Return and Seasonality

Our practice is to carry reasonable amounts of inventory in manufacturing and distribution centers in order to meet customer delivery requirements in a manner consistent with industry standards. At the end of 2009, both the Mobile Devices segment and Home segment had a significantly lower net inventory balance than at the end of 2008. The decrease reflects significant improvements in supply chain management practices adjusted to market demand.

 

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Availability of materials and components is relatively dependable. However, fluctuations in supply and market demand could cause selective shortages and affect results. We currently source certain materials and components from single vendors. Any material disruption from a single-source vendor may have a material adverse impact on our results of operations. If certain key suppliers were to become capacity constrained or insolvent, it could result in a reduction or interruption in supplies or an increase in the price of supplies and adversely impact our financial results.

Natural gas, electricity, and, to a lesser extent, oil are the primary sources of energy required for our manufacturing operations and each of these resources are currently in generally adequate supply for our operations. In addition, the cost of operating our facilities and freight costs are dependent on world oil prices, which steadily increased during 2009, adversely impacting our manufacturing and shipping costs. Labor is generally available in reasonable proximity to our manufacturing facilities. However, difficulties in obtaining any of the aforementioned resources or a significant cost increase could affect our results.

The Mobile Devices segment permits product returns under limited circumstances in order to remain competitive with current industry practices. The Home business generally does not permit customers to return products, other than under standard warranty provisions.

The Mobile Devices segment typically experiences sequentially higher sales in the fourth calendar quarter and sequentially lower sales in the first calendar quarter of each year due to seasonal trends in the wireless mobile device industry. The Home segment has not experienced seasonal buying patterns for its products.

Properties/Manufacturing

Motorola Mobility’s principal executive offices are located at 600 North U.S. Highway 45, Libertyville, Illinois 60048. This location also is the headquarters of our Mobile Devices business. Our Home business headquarters are in Horsham, Pennsylvania. Motorola Mobility also operates manufacturing facilities and sales offices in other U.S. locations and in many other countries. Motorola Mobility owns eight facilities (manufacturing, sales, service and office), five of which are located in the Americas Region (U.S., Canada, Mexico, Central and South America) and three of which are located in other countries. Motorola Mobility leases 68 facilities, 31 of which are located in the Americas Region and 37 of which are located in other countries. Motorola Mobility primarily utilizes three major facilities for the manufacturing and distribution of its products. These facilities are located in: Tianjin, China; Jaguariuna, Brazil; and Hsin Tien, Taiwan.

Motorola Mobility generally considers the productive capacity of the plants operated by each of its business segments to be adequate and sufficient for the requirements of each business group. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year.

A substantial portion of Motorola Mobility’s products are manufactured in Asia, primarily China, either in our own facilities or in the facilities of third-parties who manufacture and assemble products for us. If manufacturing in the region or by the small number of third-party suppliers and manufacturers who make a significant portion of our products were disrupted, Motorola Mobility’s overall productive capacity could be significantly reduced.

Legal Proceedings

Motorola Mobility will assume the liabilities for all actions, claims, demands, disputes, lawsuits, arbitrations, inquiries, proceedings or investigations (referred to as “Actions” or an “Action”) to the extent relating to the Mobile Devices and Home businesses in which Motorola, Inc. or any of its subsidiaries is a defendant or the party against whom the Action is directed. Motorola Mobility will conduct the defense of most of the Actions it assumes at its sole cost and expense and Motorola Mobility will be responsible for all liabilities resulting from the Actions it assumes. The liability for and conduct of the defense of certain Actions that relate in part to our businesses and in part to the remaining Motorola, Inc. businesses will be allocated

 

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between Motorola Mobility and Motorola, Inc. and its affiliates, as agreed to by the parties. Motorola, Inc. and its affiliates will continue to be liable for all other Actions. If Motorola, Inc. or its affiliate is named as a defendant or is a party against whom the Action is directed, Motorola, Inc. or such affiliate may participate in any Action Motorola Mobility assumes at its cost and expense and Motorola Mobility will cooperate with Motorola, Inc. in any settlement of an Action it assumes. If an Action is commenced after the distribution naming Motorola Mobility and Motorola, Inc. as defendants and one party is a nominal defendant, the other party will use commercially reasonable efforts to have the nominal defendant removed from the Action.

Personal Injury Cases

Cases relating to Wireless Telephone Usage

Farina v. Nokia, Inc., et al.

On April 19, 2001, Farina v. Nokia, Inc., et al., was filed in the Pennsylvania Court of Common Pleas, Philadelphia County. Farina , filed on behalf of a Pennsylvania class, claimed that the failure to incorporate a remote headset into cellular phones or warning against using a phone without a headset rendered the phones defective by exposing users to alleged biological injury and health risks and sought compensatory damages and injunctive relief. After removal to federal court, transfer and consolidation with now-dismissed similar cases, an appeal, remand to state court and a second removal, the case proceeded in the federal district court in Philadelphia. The original complaint was amended to add allegations that cellular telephones sold without headsets are defective because they present a safety risk when used while driving. In the current complaint, Plaintiff seeks actual damages in the form of the greater of $100 or the difference in value of a Motorola, Inc. phone as delivered and with a headset, the amount necessary to modify the phones to permit safe use, out of pocket expenses, including the purchase of headsets, treble damages and attorney’s fees and costs. On September 2, 2008, the federal district court in Philadelphia dismissed the Farina case, finding that the complaint is preempted by federal law. On September 30, 2008, Plaintiffs appealed the decision to the U.S. Court of Appeals for the Third Circuit. No decision on the appeal has been issued to date.

The Murray Cases

During 2001 and 2002, several cases were filed in the Superior Court of the District of Columbia alleging that use of a cellular phone caused a malignant brain tumor : Murray v. Motorola, Inc., et al. , filed November 15, 2001; Agro, et al. v. Motorola, Inc., et al., filed February 26, 2002; Cochran, et al. v. Audiovox Corporation, et al., filed February 26, 2002, and Schofield, et al. v. Matsushita Electric Corporation of America, et al. , filed February 26, 2002 (collectively the “Murray cases”). Each complaint seeks compensatory damages in excess of $25 million, consequential damages in excess of $25 million and punitive and/or exemplary damages in excess of $100 million. After removal to federal court, transfer, consolidation and remand, the defendants moved to dismiss the Murray cases on November 30, 2004. On August 24, 2007, the Superior Court granted the defendants’ motion and dismissed the cases with prejudice on federal preemption grounds. On September 20, 2007, Plaintiffs appealed the dismissal to the District of Columbia Court of Appeals.

On October 30, 2009, the Court of Appeals affirmed the decision in part and reversed the decision in part. The Court affirmed dismissal of claims challenging the adequacy of the FCC’s Standards on conflict preemption grounds. The Court also held that Plaintiffs’ claims may not be preempted to the extent they are based on allegations that their injuries were caused by wireless phones that did not comply with the FCC’s Radio Frequency (“RF”) exposure standards passed in 1996 (regardless of when Plaintiffs purchased their phones). The Court further held that claims asserted under DC Code Section 28-3904 (DC unlawful trade practices act) alleging that defendants provided false and misleading information about cell phones or omitted to disclose material information may not be preempted if Plaintiffs are able to base their claims on allegations that do not challenge the adequacy of the FCC’s safety standards. The Court remanded the cases to the Superior Court.

 

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On May 3, 2010, Plaintiffs filed amended complaints. Plaintiffs’ amended complaints assert the same claims raised in their previous complaints but purport to limit their claims to those involving: (1) phones manufactured before the FCC adopted its Specific Absorption Rate standards in 1996, (2) post-1996 phones that do not comply with the FCC’s standards, and (3) allegedly non-preempted claims sounding in misrepresentation, non-disclosure, and failure to warn. Plaintiffs have not changed their allegations regarding the Motorola phones they allegedly purchased and used, other than to assert that none of the Motorola phones they purportedly purchased was compliant with the FCC’s Specific Absorption Rate standards. Plaintiffs seek the same damages as in the original complaints.

The Marks Case

On May 5, 2010, Alan and Ellen Marks filed suit in the Superior Court of the District of Columbia alleging that use of a cellular phone caused Alan Marks’ malignant brain tumor (“Marks Case”). The complaint is based on the same legal theories and factual allegations as the Murray cases and seeks compensatory damages of $25 million, consequential damages in excess of $25 million and punitive and/or exemplary damages of $100 million.

Dahlgren v. Motorola, Inc., et al.

On September 9, 2002, Dahlgren v. Motorola, Inc., et al. , was filed in the D.C. Superior Court containing class claims alleging deceptive and misleading actions by defendants for failing to disclose the alleged “debate” related to the safety of wireless phones reflected in studies that allegedly show wireless phones can cause harm . On December 9, 2005, Plaintiff filed an amended complaint in Dahlgren. On March 5, 2008, the court stayed Dahlgren pending the outcome of Murray v. Motorola, Inc., et al. After the Murray decision, the Court lifted the stay and the Plaintiff amended the complaint to remove the class allegations and sue in a representative capacity on behalf of the General Public of the District of Columbia. Dahlgren seeks treble damages or statutory damages in the amount of $1,500 per violation, whichever is greater, disgorgement of profits, punitive damages, attorneys’ fees, costs or disbursements. On July 8, 2010, the court granted Defendant’s motion to dismiss in part and denied it in part. The court dismissed claims asserting that Defendants failed to disclose the “safety debate” regarding cellular telephones and certain claims pre-dating October 2000. The court denied Defendants’ argument that federal preemption barred Plaintiff’s claims in their entirety. Plaintiff filed a third amended complaint on September 21, 2010.

Patent Related Cases

Microsoft Corporation v. Motorola, Inc.

On October 1, 2010, Microsoft Corporation filed actions in the International Trade Commission (“ITC”) and the United States District Court for the Western District of Washington (“District Court”) alleging patent infringement against Motorola, Inc. The complaints allege infringement of nine patents based on Motorola, Inc.’s manufacture, use, importation, and offering for sale of Android-based mobile phones. The ITC complaint seeks exclusion and cease and desist orders. The District Court complaint seeks unspecified monetary damages and injunctive relief.

Personalized Media Communications, L.L.C. v. Motorola, Inc. et al.,

On February 19, 2008, Personalized Media Communications, L.L.C. filed an action for patent infringement against Motorola, Inc. and two other defendants in Personalized Media Communications, L.L.C. v. Motorola, Inc. et al. , in the U.S. District Court for the Eastern District of Texas. The amended complaint alleges infringement of five patents by Motorola, Inc. The complaint alleges that Motorola, Inc. directly infringes, contributorily infringes or induces others to infringe the patents-in-suit by marketing, making, using and/or selling broadband transmission products, content origination products, head end products, digital set-top products and software products and services used in conjunction with digital set-tops. The complaint seeks unspecified monetary damages and injunctive relief.

 

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Wi-LAN Inc. v. Research in Motion Corporation. et al. ,

On June 19, 2008, Wi-LAN Inc. filed an action for patent infringement against Motorola, Inc. and other defendants in Wi-LAN Inc. v. Research in Motion Corporation. et al. , in the U.S. District Court for the Eastern District of Texas. The complaint alleges infringement of two patents by Motorola, Inc. The complaint alleges that Motorola, Inc. has been, and is now, infringing, by way of inducement and/or contributory infringement, the patents-in-suit by making, using, offering for sale, importing, and/or selling mobile handsets and/or other products compliant with the IEEE 802.11 and/or CDMA2000 standards that fall within the scope of at least one claim of each of the patents-in-suit. The complaint seeks unspecified monetary damages and injunctive relief. On June 2, 2010, Wi-LAN Inc. filed a second action for patent infringement against Motorola, Inc. and other defendants in Wi-LAN Inc. v. Acer, Inc., et al . in the U.S. District Court for the Eastern District of Texas. The second complaint alleges infringement of two additional patents by Motorola, Inc. The second complaint alleges that Motorola, Inc. is infringing, directly and indirectly by way of inducement and/or contributory infringement the patents-in-suit by making, using, offering for sale, importing, and/or selling products with wireless capability complaint with the Bluetooth standards. The second complaint seeks unspecified monetary damages and injunctive relief.

Panasonic Corporation v. Freescale Semiconductor, Inc. et al.

On April 1, 2010, Panasonic Corporation filed complaints for patent infringement against several Freescale Semiconductor entities and its customers (including Motorola, Inc.) in Certain Large Scale Integrated Circuit Semiconductor Chips and Products Containing Same , in the U.S. International Trade Commission and in Panasonic Corporation v. Freescale Semiconductor, Inc ., in the U.S. District Court for the District of New Jersey. The complaints allege infringement of two patents by Freescale components used in products by Motorola, Inc. The complaints allege that Motorola, Inc. manufactures, uses, offers for sale, sells for importation, imports or sells after importation into the U.S. components that infringe claims of the patents-in-suit, including mobile phones that contain semiconductor chips supplied by Freescale Semiconductor. The ITC complaint seeks exclusion and cease and desist orders. The New Jersey complaint seeks unspecified monetary damages and injunctive relief.

Tax Proceedings in Brazil

Brazilian authorities have proposed tax assessments against the Company’s Brazilian subsidiary relating to technology transfer taxes, duties, value added taxes and certain other taxes related to the subsidiary’s operations. The Brazilian tax authorities have asserted the various claims against the Company’s Brazilian subsidiary for calendar years 1997 through 2010. The various tax assessment matters are progressing through the multiple levels of administrative and judicial review available in Brazil. Due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserted, we do not expect a final judicial determination for several years.

For additional information regarding litigation and its potential impact on the Company, see the section entitled “Risk Factors” included elsewhere in this Information Statement.

The Company is involved in various other lawsuits, claims and investigations arising in the normal course of business and relating to our business, such as intellectual property disputes, contractual disputes, and employment matters. The Company will assume the defense and/or liability for such cases from Motorola, Inc. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on Motorola Mobility’s combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

 

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MANAGEMENT

Executive Officers Following the Distribution

The following table sets forth the information as of October 1, 2010 regarding the individuals who are expected to serve as our executive officers following the distribution and their anticipated titles following the distribution. All of these individuals are currently employees of Motorola, Inc. or its subsidiaries. After the distribution, none of these individuals will continue to be employees of Motorola, Inc. Additional executive officers will be appointed prior to the distribution and information concerning those executive officers will be included in an amendment to this Information Statement.

 

Name

   Age   

Position(s)

Sanjay K. Jha

   47    Chief Executive Officer

Marc E. Rothman

   45    Chief Financial Officer

John R. Bucher

   50    Chief Strategy Officer

Scott A. Crum

   54    Chief People Officer

Daniel M. Moloney

   51    President

D. Scott Offer

   45    General Counsel

William C. Ogle

   43    Chief Marketing Officer

Geoffrey S. Roman

   58    Chief Technology Officer

DR. SANJAY K. JHA , Principal Occupation: Chief Executive Officer

Dr. Jha joined Motorola, Inc. in August 2008 as Co-Chief Executive Officer of Motorola, Inc. and Chief Executive Officer of the Mobile Devices business. In February 2010, Dr. Jha also became the Chief Executive Officer of Motorola, Inc.’s Home business. In connection with the Separation, since June 2010, Dr. Jha has also served as Chief Executive Officer of Motorola Mobility Holdings, Inc. and Motorola Mobility, Inc. Prior to joining Motorola, Inc., Dr. Jha served as Executive Vice President and Chief Operating Officer of Qualcomm, Inc. from December 2006 to August 2008. Dr. Jha also served as Executive Vice President and President of Qualcomm CDMA Technologies (QCT), Qualcomm’s chipset and software division, from January 2003 to December 2006.

MARC E. ROTHMAN , Principal Occupation: Senior Vice President and Chief Financial Officer

Mr. Rothman joined Motorola, Inc. in January 2000, as a part of Motorola, Inc.’s acquisition of General Instrument. Since February 2010, Mr. Rothman has served at Motorola, Inc. as Senior Vice President, Finance, Chief Financial Officer, Mobile Devices and Home business. In connection with the Separation, since June 2010, Mr. Rothman has also served as Senior Vice President and Chief Financial Officer of Motorola Mobility Holdings, Inc. and Motorola Mobility, Inc. From March 2008 to February 2010, Mr. Rothman served as Senior Vice President, Finance, Chief Financial Officer, Mobile Devices business. From June 2007 to March 2008, Mr. Rothman served as Senior Vice President, Finance, Corporate Controller of Motorola, Inc. From March 2006 to May 2007, he served as Senior Vice President, Finance, Networks and Enterprise Mobility Solutions. From June 2003 to March 2006, he served as Senior Vice President, Finance, Government and Public Safety and Networks.

JOHN R. BUCHER , Principal Occupation: Corporate Vice President, Chief Strategy Officer

Mr. Bucher joined Motorola, Inc. in June 2010 as Corporate Vice President, Strategy, Mobile Devices and Home business. In connection with the Separation, since August 2010, Mr. Bucher has also served as Corporate Vice President, Chief Strategy Officer of Motorola Mobility, Inc. From May 2007 to June 2010, Mr. Bucher served as Financial Analyst, PRIMECAP Management Company and from June 2000 to May 2007 he served as a sell-side equity research analyst for BMO Capital Markets where he was also designated a Managing Director.

 

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SCOTT A. CRUM , Principal Occupation: Senior Vice President, Chief People Officer

Mr. Crum joined Motorola, Inc. in July 2010 as Senior Vice President, Human Resources, Mobile Devices and Home business. In connection with the Separation, since July 2010, Mr. Crum has also served as Senior Vice President, Chief People Officer of Motorola Mobility, Inc. Prior to joining Motorola, Mr. Crum served as Senior Vice President and Director, Human Resources ITT Corporation from September 2002 to July 2010. Prior to joining ITT, Mr. Crum was the head of Human Resources for General Instrument Corporation and became Corporate Vice President, Human Resources, when that company was acquired by Motorola, Inc.

DANIEL M. MOLONEY , Principal Occupation: President

Mr. Moloney rejoined Motorola, Inc. in September 2010 as Executive Vice President, Mobile Devices and Home business. In connection with the Separation, since September 2010, Mr. Moloney has also served as President of Motorola Mobility, Inc. Prior to rejoining Motorola, Mr. Moloney served as President and Chief Executive Officer, Technitrol, Inc. from March 2010 to August 2010. From February 2010 to March 2010, Mr. Moloney served at Motorola, Inc. as Executive Vice President, President, Home, and as Executive Vice President, President, Home and Networks Mobility from April 2007 to February 2010. Mr. Moloney also served at Motorola, Inc. as Executive Vice President, President, Connected Home Solutions from January 2005 to April 2007.

D. SCOTT OFFER , Principal Occupation: Senior Vice President and General Counsel

Mr. Offer joined Motorola, Inc. in August 1990. Since May 2010, Mr. Offer has served at Motorola, Inc. as Senior Vice President, Law, Mobile Devices and Home business. In connection with the Separation, Mr. Offer has also served as Senior Vice President and General Counsel of Motorola Mobility, Inc. since July 2010 and as Senior Vice President and General Counsel of Motorola Mobility Holdings, Inc. since August 2010. From April 2006 to February 2010, Mr. Offer served at Motorola, Inc. as Corporate Vice President, Law, Mobile Devices business and Vice President Law, Mobile Devices from March 2004 to April 2006.

WILLIAM C. OGLE , Principal Occupation: Senior Vice President, Chief Marketing Officer

Mr. Ogle joined Motorola, Inc. in July 2009 as Senior Vice President, Chief Marketing Officer, Mobile Devices. In connection with the Separation, since July 2010, Mr. Ogle has also served as Senior Vice President, Chief Marketing Officer of Motorola Mobility, Inc. From October 2007 to June 2009, Mr. Ogle served as Chief Marketing Officer, Samsung Telecommunications America, Inc. Prior to that position, Mr. Ogle served as Chief Marketing Officer, Pizza Hut, Inc. from January 2006 to September 2007 and Chief Concept Development Officer, Pizza Hut, Inc. from November 2003 to January 2006.

GEOFFREY S. ROMAN , Principal Occupation: Senior Vice President, Chief Technology Officer

Mr. Roman joined Motorola, Inc. in January 2000 with the acquisition of General Instrument Corporation. Since June 2010, Mr. Roman has served at Motorola, Inc. as Senior Vice President, Chief Technology Officer, Mobile Devices and Home business. In connection with the Separation, since July 2010, Mr. Roman has also served as Senior Vice President, Chief Technology Officer of Motorola Mobility, Inc. Prior to that position, Mr. Roman served at Motorola, Inc. as Senior Vice President, Strategy, Business Development, Technology, and Quality, Home and Networks Mobility from June 2007 to June 2010 and as Corporate Vice President, Strategy and Business Development, Connected Home Solutions from August 2002 to June 2007.

Board of Directors Following the Distribution

The following table sets forth information with respect to those persons who are expected to serve on our Board of Directors following the distribution. See the section entitled “ Executive Officers Following the Distribution ” for Dr. Jha’s biographical information. We are in the process of identifying the individuals who

 

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will be our directors following the distribution, and we expect to provide details regarding these individuals in an amendment to this Information Statement. The following table sets forth information as of October 1, 2010 regarding individuals who are expected to serve as our directors following the distribution.

 

Name

   Age   

Position(s)

Sanjay K. Jha

   47    Director

William R. Hambrecht

   75    Director

WILLIAM R. HAMBRECHT , Principal Occupation: Chairman and Chief Executive Officer of WR Hambrecht + Co.

Mr. Hambrecht has been Founder, Chairman and Chief Executive Officer of WR Hambrecht + Co., a financial services firm, since December 1997. Mr. Hambrecht co-founded Hambrecht & Quist in 1968. Mr. Hambrecht is a director of Motorola, Inc., AOL Inc., Decision Economics and the Ironstone Group. Mr. Hambrecht serves on the Board of Trustees for The American University of Beirut and he also serves on the Advisory Council to The J. David Gladstone Institutes. In October 2006, Mr. Hambrecht was inducted to the American Academy of Arts and Sciences. Mr. Hambrecht graduated from Princeton University.

Qualifications of Directors

The Company believes the Board should be comprised of individuals with appropriate skills and experiences to meet board governance responsibilities and contribute effectively to the Company. Pursuant to its charter, the Governance and Nominating Committee will carefully consider the skills and experiences of directors and nominee candidates to ensure that they meet the needs of the Company before nominating directors for election to the Board. All of our non-employee directors are expected to serve on Board committees, further supporting the Board by providing expertise to those committees. The needs of the committees will also be reviewed when considering nominees to the Board.

The Board is expected to be comprised of active and former senior executives of major corporations and individuals with experience in various fields. As such, they are expected to have a deep working knowledge of matters common to large companies, generally including experience with financial statement preparation, compensation determinations, regulatory compliance, corporate governance, public affairs and legal matters. Many of our directors are likely to serve on the boards of one or more other publicly traded companies. We believe the Company benefits from the diverse experience and expertise our directors gain from serving on those boards. We also believe for effective board governance and collaboration it is important to have Dr. Jha, our CEO, serve on the Board.

Our directors are qualified to serve as directors and members of the Committees on which they will serve based on the following experience:

Mr. Hambrecht’s experience as the chairman and chief executive officer of an investment banking firm focusing on high-tech companies, together with his experience as a member of the Motorola, Inc. Board of Directors.

Composition of the Board of Directors

We currently expect that, upon the consummation of our separation, our Board of Directors will consist of [ ] members, at least a majority of whom we expect to satisfy the independence standards established by the Sarbanes-Oxley Act and the applicable rules of the SEC and the NYSE.

 

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Committees of the Board of Directors

Our Board of Directors will establish several standing committees in connection with the discharge of its responsibilities. Effective upon distribution, our Board of Directors will have the following committees:

Audit Committee . The functions of the Audit Committee include:

 

   

assisting the Board of Directors in fulfilling its oversight responsibilities as they relate to our Company’s accounting policies, internal controls, disclosure controls and procedures, financial reporting practices, legal and regulatory compliance and overall financial posture, financial risk and capital structure;

 

   

hiring the independent registered public accounting firm and monitoring the qualifications, independence and performance of that firm and the performance of the internal auditors;

 

   

maintaining, through regularly scheduled meetings, a line of communication between the Board and our Company’s financial management, internal auditors and independent registered public accounting firm;

 

   

overseeing compliance with our Company’s policies for conducting business, including ethical business standards; and

 

   

preparing the report of the committee included in any proxy statement.

The Audit Committee will be comprised of three or more members such that it meets the independence requirements set forth in the applicable listing standards of the SEC and the NYSE and in accordance with the Audit Committee charter. Each member of the Audit Committee will be financially literate and have accounting or related financial management expertise as such terms are interpreted by the Board of Directors in its business judgment. None of our Audit Committee members will simultaneously serve on more than two other public company audit committees unless our Board of Directors specifically determines that it would not impair the ability of an existing or prospective member to serve effectively on the Audit Committee. The initial members of the Audit Committee will be determined prior to the distribution.

A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Audit Committee charter, which will be available on the Company’s website: www.[ ].com.

Compensation Committee . The functions of the Compensation Committee include:

 

   

assisting the Board of Directors in overseeing the management of our Company’s human resources including: (1) compensation and benefits programs; (2) CEO performance and compensation; and (3) executive development and succession and diversity efforts;

 

   

overseeing the evaluation of our Company’s senior management;

 

   

reviewing and discussing the Compensation Discussion and Analysis (“CD&A”) with management and making a recommendation to the Board on the inclusion of the CD&A in any proxy statement; and

 

   

preparing the report of the committee included in any proxy statement.

The Compensation Committee will be comprised entirely of independent directors, each of whom will meet the NYSE listing independence standards and our Company’s independence standards.

 

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In carrying out its duties, the Compensation Committee will have direct access to outside advisors, independent compensation consultants and others to assist them. The committee may decide to direct its consultant to conduct market studies, review publicly available market data and be readily available for consultation with this committee and its members regarding such matters.

A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Compensation Committee Charter, which will be available on the Company’s website: www.[ ].com.

Governance and Nominating Committee . The functions of the Governance and Nominating Committee include:

 

   

identifying individuals qualified to become Board members, consistent with the criteria approved by the Board;

 

   

recommending director nominees and individuals to fill vacant positions;

 

   

assisting the Board in interpreting our Company’s Board Governance Guidelines, the Board’s Principles of Conduct and any other similar governance documents adopted by the Board;

 

   

overseeing the evaluation of the Board and its committees; and

 

   

generally overseeing the governance and compensation of the Board.

The Governance and Nominating Committee will be composed entirely of independent directors, each of whom will meet the NYSE listing independence standards and our Company’s independence standards.

A more detailed discussion of the committee’s mission, composition and responsibilities is contained in the Governance and Nominating Committee Charter, which will be available on the Company’s website: www.[ ].com.

Selection of Nominees for Directors

As stated in the Motorola Mobility Holdings, Inc. Board Governance Guidelines, when selecting directors, the Board and the Governance and Nominating Committee will review and consider many factors, including experience in the context of the Board’s needs, leadership qualities, diversity, ability to exercise sound judgment, existing time commitments and independence. It will also consider ethical standards and integrity.

The Governance and Nominating Committee will consider nominees recommended by Motorola Mobility stockholders provided that the recommendation contains sufficient information for the Governance and Nominating Committee to assess the suitability of the candidate, including the candidate’s qualifications. Candidates recommended by stockholders that comply with these procedures will receive the same consideration that candidates recommended by the Committee and management receive.

The Governance and Nominating Committee will consider recommendations from many sources, including members of the Board, management and search firms. From time to time, we expect that Motorola Mobility will hire global search firms to help identify and facilitate the screening and interview process of director nominees. We expect that the search firm will screen candidates based on the Board’s criteria, perform reference checks, prepare a biography for each candidate for the Committee’s review and help set up interviews. The Committee and the Chairman of the Board will conduct interviews with candidates who meet the Board’s criteria.

 

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Decision-Making Process to Determine Director Compensation

The Governance and Nominating Committee of Motorola Mobility will recommend to the Motorola Mobility Board the compensation for non-employee directors, which is to be consistent with market practices of other similarly situated companies and is to take into consideration the impact on non-employee directors’ independence and objectivity. In carrying out its duties, the Governance and Nominating Committee will have direct access to outside advisors, including independent compensation advisors. The charter of the Governance and Nominating Committee will not permit the Committee to delegate director compensation matters to management and management has no role in recommending the amount or form of director compensation.

Decision-Making Process to Determine Executive Compensation

The Board will delegate to the Compensation Committee the responsibility to oversee the programs under which compensation is paid or awarded to Motorola Mobility’s executives and to evaluate the performance of its senior management. The Compensation Committee will be responsible for bringing recommended compensation actions involving the CEO to the Board for its concurrence. The Global Rewards department in Motorola Mobility’s Human Resources organization will support the Compensation Committee in its work and, in some cases, may act pursuant to delegated authority from the Compensation Committee to fulfill various functions in administering its compensation programs.

In carrying out its duties, the Compensation Committee will have direct access to outside advisors, independent compensation consultants and others to assist them. For more information, see the section entitled “ Compensation Discussion and Analysis ”. Further, for a discussion of the role of the Motorola, Inc. Compensation Committee’s independent compensation consultant in determining executive compensation, see the section entitled “ Independent Consultant Review of Dr. Jha’s Compensation ” in the “ Compensation Discussion and Analysis ”. Motorola Mobility expects that its Compensation Committee will similarly employ its own independent compensation consultant to assist in its compensation decisions for its executive officers.

Leadership Structure of the Board

The Board is led by [ ]. The Board will decide the appropriate structure to support the Company in its transition to an independent, publicly traded company. [ ] acts as the presiding director at meetings of the independent directors.

Board’s Role in the Oversight of Risks

The Board of Directors will oversee the business of the Company, including CEO and senior management performance and risk management, to assure that the long-term interests of the stockholders are being served. Each committee of the Board of Directors will also be responsible for reviewing the risk exposure of the Company related to the committee’s areas of responsibility and providing input to management on such risks.

Management will establish a robust process embedded throughout the Company to identify, analyze, manage and report all significant risks facing the Company. Each Board committee will review with management significant risks related to the committee’s area of responsibility and report to the Board on such risks, which includes the Compensation Committee’s review of Company-wide compensation-related risks. The independent Board members also discuss the Company’s significant risks when they meet in executive session without management.

Our Company’s Audit Services department has a very important role in the risk management program. The role of the department is to provide management and the Audit Committee with an overarching and objective view of the risk management activity of the enterprise. The department’s engagements span financial, operational, strategic and

 

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compliance risks and the engagement results assist management in maintaining tolerable risk levels. The director of the department will work directly with the Audit Committee and meet regularly with the committee, including in executive session.

Communications with the Board of Motorola Mobility Holdings, Inc.

All communications to the Board of Directors, Chairman of the Board, the non-management directors or any individual director, must be in writing and addressed to them c/o Secretary, Motorola Mobility Holdings, Inc., 600 North US Highway 45, Libertyville, Illinois 60048 or by email to boardofdirectors@[ ].com.

Compensation of Non-Employee Directors

We will be asking our Board of Directors to approve the following non-employee director compensation. The director compensation recommendation was developed with the assistance of Compensia, an independent compensation consultant that is expected to advise our Board of Directors following the Separation.

Our non-employee director compensation is designed to provide competitive compensation and benefits that will attract and retain high quality directors, target director compensation at a level that is consistent with our compensation objectives and encourage ownership of our stock to further align directors’ interests with those of our stockholders.

Initially, we expect to pay non-employee directors an annual retainer of $75,000. We expect to pay each chair of a committee an additional annual retainer fee, as follows: (1) the chair of the Audit Committee, $25,000; (2) the chair of the Compensation Committee, $15,000; and (3) the chair of the Governance and Nominating Committee, $10,000. Each member of a committee other than the chair will receive an additional annual retainer fee, as follows: (1) member of the Audit Committee, $12,500; (2) member of the Compensation Committee, $7,500; and (3) member of the Governance and Nominating Committee, $5,000. We expect to permit a non-employee director to elect to receive all or a portion of his or her retainer and other fees in the form of restricted stock units (“RSUs”).

Annually, each non-employee director will receive an equity award with an aggregate fair market value on the date of grant of $150,000 (as described below), 50% of which will be in stock options and 50% of which will be in RSUs. These equity awards will fully vest on the first anniversary of the date of grant. The number of RSUs will be determined by dividing $75,000 by the closing price of our common stock on the date of grant. The number of shares of our common stock to be acquired pursuant to a stock option with a value of $75,000 will be determined based upon the Company’s standard method for valuing stock options for financial accounting purposes. The stock options will be granted with an exercise price equal to the closing price of our Company’s stock on the date of grant and will be exercisable for ten years from the date of grant. We intend to allow our non-employee directors to defer settlement of their vested RSUs.

A non-employee director who joins our Board after the annual grant will receive an equity award upon joining our Board which will be pro-rated based on the number of months to be served until the next annual equity award ($12,500 per month) divided by the closing price of our stock on the day of the award. We expect that the annual grant will be made following our annual election of directors. We also expect that non-employee directors joining the Board in connection with the Separation will receive a pro-rata equity award as described above following the Distribution Date. These pro-rata equity awards will fully vest on the first anniversary of the date of grant.

Non-employee directors will not receive any additional fees for attendance at meetings of the Board or its committees or for additional work done on behalf of the Board or a committee. We expect that our non-employee directors will also be covered by business travel and accident insurance, which we expect to maintain for their benefit when they travel on Company business, as well as group life insurance.

 

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Director Compensation Table

The following table sets forth information concerning the 2009 compensation awarded by Motorola, Inc. to non-employee directors of Motorola, Inc. who will be non-employee directors of Motorola Mobility:

 

Name   Fees Earned
or Paid in
Cash ($)(1)
  Stock
Awards
($)(2)(3)(4)
  Option
Awards
($)(3)
  Non-Stock
Incentive
Plan
Compensation
($)
  Nonqualified
Deferred
Compensation
Earnings ($)
  All Other
Compensation
($)(5)
  Total ($)
(a)   (b)   (c)   (d)   (e)   (f)   (g)   (h)

William R. Hambrecht

  $0   $220,003   $0   $0   $0   $0   $220,003

 

(1) As described above, directors may elect to receive a portion of their retainer or other fees in the form of deferred stock units (“DSUs”). The amounts in column (b) are the portion of the annual retainer and any other fees the non-employee director has elected to receive in cash.

 

(2) As described above, certain directors have elected to receive DSUs for a portion of their retainer or other fees. In addition, all non-employee directors received an annual grant of DSUs on May 7, 2009. All amounts in column (c) are the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation (“ASC Topic 718”), including dividend equivalents, as applicable. The number of DSUs received and the value of Motorola, Inc. common stock on each date of grant or purchase are as follows:

 

     March 31 -
$4.23
   May 7 -
$6.22
   June 30 -
$6.63
   September 30 -
$8.59
   December 31 -
$7.76
Director    Deferred
Stock Units
   Annual Grant of
Deferred Stock Units
   Deferred
Stock Units
   Deferred Stock
Units
   Deferred
Stock Units

William R. Hambrecht

   5,910    19,293    3,771    2,910    3,222

 

(3) As of December 31, 2009, the aggregate stock and option awards outstanding for the directors were as set forth below. For each director, the options to purchase Company stock listed below were exercisable at year end.

 

Director   Options   Deferred Stock Units      Restricted Stock/RSUs

William R. Hambrecht

  0   59,805      0

 

(4) Certain de minimis amounts (less than $50) were paid in cash in lieu of fractional shares.

 

(5) The aggregate amount of perquisites and personal benefits, securities or property given to each named director valued on the basis of aggregate incremental cost to the Company was less than $10,000.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Prior to the distribution, Motorola Mobility Holdings, Inc. (“Motorola Mobility” or the “Company”) was a subsidiary of Motorola, Inc. (“Motorola, Inc.”) and each Named Executive Officer (“Named Executive Officer” or “NEO”) was employed by Motorola, Inc. or its subsidiaries. In connection with the distribution, the board of directors of the Company (“Motorola Mobility Board”) will form its own compensation committee. In this Compensation Discussion and Analysis, we refer to the Compensation and Leadership Committee of Motorola, Inc. as the Motorola, Inc. Compensation Committee and the Compensation Committee of our Company as our Compensation Committee. Following the distribution, our Compensation Committee will determine the Company’s executive compensation.

Motorola Mobility Compensation Philosophy After Separation

Motorola Mobility’s general rewards philosophy will provide programs that attract, retain, and motivate employees in a way that aligns to our business and people strategies. Rewards programs will generally target median market practices of the relevant competitor group for the industries and locations we operate in through designs that link to stockholder, company, business unit, and individual performance. Rewards levels will target median levels of the relevant competitor group for the industries and locations we operate in and our Compensation Committee and Dr. Jha will have the discretion to set individuals’ total compensation above or below the median market levels when the value of the individual’s experience, performance and specific skill set justifies variation. Motorola Mobility will strive to provide a total compensation package that is competitive with prevailing practices and allows for significant upside when superior financial performance is achieved, but not encourage unnecessary and excessive risk that could jeopardize the Company. Motorola Mobility has set the following guiding principles that will drive future Motorola Mobility rewards programs:

Market Competitiveness

The direct compensation programs (base, annual and long-term incentives) will be targeted at the median of the relevant competitor group, but may provide long-term incentive opportunities that are above the median for a select group of key talent. The mix of direct and indirect compensation will be competitive with the local labor market, striving to achieve market competitiveness for individual programs as appropriate given cost and complexity. The relevant competitor groups will be defined as Mobile Devices and Home business competitors and Mobile Devices and Home labor competitors.

Pay for Performance

The direct compensation programs (base, annual and long-term incentives) will be strongly linked to performance by (1) measuring performance at the individual, business segment and overall Company level, (2) leveraging performance management strategy, and (3) providing highly differentiated rewards at the individual and business segment level, as warranted by performance.

Additionally, the variable compensation programs (both short- and long-term) will provide for significant upside for superior financial performance, but not encourage unnecessary and excessive risk that could jeopardize the Company.

U.S. Employee Benefits

The benefits will be targeted at the median of the relevant competitor group and Company provided benefit plans will be designed to provide basic income protection security, focusing on (1) emphasizing wellness and prevention, (2) Company and employee cost sharing of health and welfare benefits at market-competitive levels, (3) Company and employee shared responsibility for providing competitive retirement benefits, and (4) may include benefits and perquisites that are reasonably competitive within our competitor group.

 

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International Rewards

In addition to the above guiding principles, Company-provided benefit plans will follow statutory requirements and supplemental programs will be provided based on competitive practice, as appropriate given the cost and complexity of maintaining programs. Additionally, global assignment programs will be provided to support the seamless mobility of talent throughout the world.

Motorola Mobility Compensation Programs and Practices After Separation

Motorola Mobility’s compensation programs and practices that will be implemented in connection with the Separation will support the Motorola Mobility compensation philosophy described above and may differ from the Motorola, Inc. compensation programs and practices. Motorola Mobility’s compensation programs and practices are currently under review and have not been finalized. Motorola Mobility is expected to implement an annual incentive plan for calendar year 2011 in which Motorola Mobility employees will participate.

The Remainder of This Compensation Discussion and Analysis

Our historical compensation strategy has been primarily implemented by the Company’s senior management, in consultation with Motorola, Inc.’s senior management and the Motorola, Inc. Compensation Committee. The remainder of this Compensation Discussion and Analysis covers the 2009 executive compensation provided in the tables that follow for those executives expected to be the most highly compensated Motorola Mobility executive officers based on their 2009 compensation from Motorola, Inc.

Motorola, Inc. General Compensation Philosophy

Motorola, Inc.’s general compensation philosophy is to provide world-class reward strategies and programs that attract, retain and motivate the right people, in the right places, at the right time. Motorola, Inc. strives to provide a total compensation package that is competitive with the prevailing practices for the industries and countries in which it operates, allowing for above average total compensation when justified by business results and individual performance.

Executive Compensation Guiding Principles

Motorola, Inc.’s general compensation philosophy is further guided by the following principles specific to the executives:

 

   

a strong link between pay and performance—both at the company and the individual level;

 

   

the opportunity to receive total compensation above the prevailing market median for outstanding company performance and the correlation of total compensation with the level of success achieved;

 

   

strongly differentiated pay for superior performers that is proportional to their contributions to the company’s success;

 

   

alignment of the executives’ and stockholders’ interests to encourage management of the company from the perspective of owners with a meaningful equity stake;

 

   

a competitive total rewards package that enables Motorola, Inc. to attract, motivate and retain high-performing talent and that is competitive with other large-cap, high-tech companies;

 

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appropriate incentives and compensation plans aligned with the company’s goals that avoid excessive risk taking and risk exposure;

 

   

retention of high performers through meaningful wealth creation opportunities; and

 

   

a simple and cost-efficient program design.

Components of Motorola, Inc.’s Compensation Program

Motorola, Inc.’s compensation program for the Named Executive Officers consists of:

 

   

base salary;

 

   

short-term incentives through the annual Motorola Incentive Plan (“MIP”);

 

   

long-term incentives through the Long-Range Incentive Plans (“LRIP”), other than for Dr. Jha, and equity grants;

 

   

executive benefits and perquisites; and

 

   

broad-based employee benefits.

With each component of the compensation program, Motorola, Inc. strives to align the interests of executives with the interests of stockholders—by attracting and retaining qualified individuals, by focusing on short-term and long-term performance goals, by requiring significant ownership in the company, and by linking individual performance to the company’s performance.

The Role of the Motorola, Inc. Compensation Committee and Executive Officers in Determining Compensation

Design

Motorola, Inc.’s senior leadership team, comprised of the Co-Chief Executive Officers (each, a “Co-CEO” and, together, the “Co-CEOs”) and certain executives designated by the Co-CEOs, provides recommendations regarding the design of the compensation program to the Motorola, Inc. Compensation Committee. Additionally, the Committee’s compensation consultant provides input on these recommendations from time to time. Upon Committee approval, the senior leadership team is responsible for executing the objectives of the approved compensation program. Each member of Motorola, Inc.’s senior leadership team approves all compensation actions for his or her respective part of the organization and is accountable for compliance with established governance procedures.

Actions

For Dr. Jha’s and Mr. Moloney’s specific compensation, the Global Rewards department in Motorola, Inc.’s Human Resources organization, together with the Senior Vice President, Human Resources and the Committee’s independent compensation consultant, prepared recommendations for the Committee. Neither Dr. Jha nor Mr. Moloney was involved in the preparation of recommendations related to his compensation and did not participate in the discussions regarding their compensation at Committee meetings. The Motorola, Inc. Compensation Committee is responsible for bringing recommended compensation actions involving Dr. Jha to the Board for its concurrence. The Motorola, Inc. Compensation Committee cannot unilaterally approve compensation or compensation changes for Dr. Jha without the Board’s concurrence.

 

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For the other Named Executive Officers’ specific compensation, except for Mr. Moloney, Dr. Jha as the Co-Chief Executive Officer of Motorola, Inc. approved the compensation and employment offers, for the Named Executive Officers with input and recommendations from the Global Rewards department in Motorola, Inc.’s Human Resources organization and the Senior Vice President, Human Resources and also within the approval limits on equity that have been delegated by the Motorola, Inc. Compensation Committee. At Motorola, Inc., each member of the Motorola, Inc. senior leadership team is primarily responsible for the compensation determinations for his or her part of the organization. However, if the compensation is for an officer who was a member of Motorola, Inc.’s senior leadership team or any officer subject to Section 16(a) of the Securities Exchange Act of 1934 (a “Section 16 Officer”), Motorola, Inc. Compensation Committee approval would have been required. None of our Named Executive Officers, other than Dr. Jha and Mr. Moloney, were Motorola, Inc. senior leadership team members or Section 16 officers and, therefore, none required Motorola, Inc. Compensation Committee’s approval.

Motorola, Inc.’s Compensation Mix

Motorola, Inc. measures the competitiveness of total direct compensation (base salary + target short-term incentive opportunity + target long-term incentive opportunity) against high-tech market practices. In 2009, total direct compensation levels for each executive position were targeted at the 50 th  percentile of similar positions in our comparator group, consisting of 16 large-cap, high-tech companies or one of the “data cuts” described below. Motorola, Inc. structures compensation mix to be market competitive for each compensation element. Both base salary and incentives (including annual and long-term incentives) are generally targeted at the 50 th  percentile, but the exact percentile may differ by individual.

However, as described in more detail below, the Motorola, Inc. Compensation Committee (for Dr. Jha and Mr. Moloney) and Dr. Jha (for the other NEOs) have the discretion to set total compensation above or below the targeted percentile of similar positions in the comparator group or “data cut” when the value of the individual’s experience, performance and specific skill set justifies variation. As a result, competitively superior pay is awarded to those executives who earn it through performance, and the greatest retention value is invested in the strongest performers.

The cost of the compensation program impacts financial performance. As a result, Motorola, Inc. has been focused on ensuring that its compensation programs are optimized to motivate employees to improve results on a cost-effective basis without encouraging excessive risk taking.

Motorola, Inc. also recognizes the need to balance the components of the compensation program appropriately depending on an individual’s position and ability to impact the company’s results. Accordingly, Motorola, Inc.’s compensation program is generally structured so that approximately two-thirds of our Named Executive Officer’s targeted total compensation is “at risk” (in the form of equity grants and awards under MIP and LRIP) and is dependent upon Motorola, Inc.’s results and stock price.

Annually, at the beginning of each year, the Motorola, Inc. Compensation Committee (for Dr. Jha and Mr. Moloney) and Dr. Jha (for the other NEOs) review salary increases for that year. In January 2009 and January 2010, in response to economic realities, annual salary increases were not provided to employees, including the Named Executive Officers, in the U.S. and most other countries, except when warranted for promotions or where otherwise required by law.

The compensation package for Dr. Jha is an exception to the Company’s general pay mix principle. In 2008, unique circumstances demanded Motorola, Inc. attract a top quality leader for our Mobile Devices business, particularly in light of the planned separation of Motorola, Inc. into two independent, publicly traded companies. The Motorola, Inc. Compensation Committee determined it was necessary to have a competitive and compelling compensation package involving a significant amount of “at-risk” equity awards. Attracting Dr. Jha to Motorola, Inc. required both guaranteeing certain elements of compensation and also providing inducements to take on the additional risk of leading a turnaround, in part by providing Dr. Jha with equity-based compensation that will, after the separation, reflect solely the performance of the business led by Dr. Jha. Motorola, Inc. believes Dr. Jha will successfully lead the Mobile Devices business during its transition and is one of very few industry leaders

 

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qualified to meet this challenge. Due to the weak economic environment, the planned separation of Motorola, Inc. into two independent, publicly traded companies was delayed and Motorola, Inc. announced in February 2010 that the separation was expected to be completed in the first quarter of 2011. These unique circumstances required amendments to the terms of Dr. Jha’s original employment agreement to ensure that economic incentives were aligned to incentivize Dr. Jha to remain at Motorola, Inc. On February 11, 2010, Dr. Jha’s employment agreement was amended to extend the date by which the separation was previously expected to be completed. Dr. Jha also became the Chief Executive Officer of the Home business. For further details, see “ Employment Agreement with Sanjay K. Jha ”.

The Impact of Compensation Amounts Realizable on the Other Elements of Compensation

Motorola, Inc. deliberately designs its compensation program to attract, retain and motivate high-quality talent. In making compensation decisions, the Motorola, Inc. Compensation Committee reviews and benchmarks total compensation against its comparator group. Motorola, Inc. follows a policy of ensuring that total compensation, as well as each element comprising total compensation, is competitive. As a result, it does not specifically limit one element of compensation in response to the amounts potentially realizable under other compensation elements. However, Motorola, Inc. places certain limits on benefits available under life and disability plans and investment plans, including pension plans, while ensuring competitiveness in the marketplace. Motorola, Inc.’s “qualified” plans are also subject to IRS limits.

Compensation Benchmarking

The individual elements, as well as the total direct compensation, of Motorola, Inc.’s rewards program for Dr. Jha and the Named Executive Officers was benchmarked against Motorola, Inc.’s comparator group. Motorola, Inc. strives to award both competitive forms of compensation (base salary, short-term incentive compensation and long-term incentive compensation) and to ensure that the individual elements comprising the compensation are competitively positioned in the marketplace.

Motorola, Inc.’s comparator group consists of 16 large-cap, high-tech companies that, in the aggregate, both Motorola, Inc. management and the Motorola, Inc. Compensation Committee believe best represent the portfolio of businesses and the competition for executive talent. Motorola, Inc. believes using its comparator group for Dr. Jha is an appropriate method to understand the executive talent market in which it must compete to attract and retain top-quality talent. The Motorola, Inc. Compensation Committee reviews the composition of the comparator group annually to determine if any changes are necessary. Since 2000, Motorola, Inc. has sought to more closely align its compensation program with those of its large-cap, high-tech peers.

In 2009, Motorola, Inc.’s comparator group consisted of the following companies: Alcatel-Lucent, Apple, Inc., Cisco Systems, Inc., Dell Inc., EMC Corp., LM Ericsson Telephone Co., Hewlett Packard Co., Intel Corp., International Business Machines Corp., Microsoft Corp., Nokia Corp., Nortel Networks Corp., Oracle Corp., QUALCOMM Inc., Sun Microsystems, Inc. and Texas Instruments Inc. Based upon the markets in which Motorola, Inc. competes for executive talent within its industries, the Motorola, Inc. Compensation Committee approved the comparator group, and Mercer, the Committee’s compensation consultant at the time, confirmed that the companies comprising the comparator group were appropriate.

In addition to comparator group data, Motorola, Inc. also gathers and analyzes supplemental compensation market data from multiple survey sources in order to obtain a more complete picture of the overall compensation environment for the broader executive group. During 2009, Motorola, Inc. utilized supplemental data for Dr. Jha and some of the Named Executive Officers that was gathered from the following survey sources listed below. The individual compensation for the Named Executive Officers, other than Dr. Jha, is benchmarked individually based on comparator group and supplemental data from time to time on an “as needed basis” when job responsibilities change or when employee compensation is reviewed across businesses or functions.

 

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Cash Compensation and Long-Term Incentive Compensation Survey Sources

 

   

CHiPS Executive & Senior Management Total Compensation Survey , published by Pearl Meyer & Partners, a Clark Consulting Practice;

 

   

Towers Perrin Compensation Data Bank ® (“CDB”) Executive Compensation Database ;

 

   

Radford Executive Survey Custom Compensation Report , published by Radford, an Aon company; and

 

   

2009 US Global Premium Executive Remuneration Suite , published by Mercer.

Because these surveys contain competitive compensation market data on a number of companies spanning a number of different industries, Motorola, Inc.’s market analysis involves narrowing the available data to “cuts” that most accurately reflect its competitive labor market.

The “data cuts” for the supplemental data used for 2009 were:

 

   

the 16 large-cap, high-tech companies that comprise Motorola, Inc.’s comparator company group and participate in the above surveys;

 

   

an expanded comparator company group that includes other high-tech companies (e.g., Google Inc., Palm, Inc., Advanced Micro Devices Inc.);

 

   

technology companies generally with annual revenue greater than $1 billion; and

 

   

large-cap companies with annual revenue in the $1 billion to $50 billion range.

Motorola, Inc. strongly believes in engaging the best talent for critical functions, which may require negotiations with individual executives who have significant retention packages in place with other employers. In order to compensate these individuals for the compensation that they would forfeit by terminating their then-current employment, the Motorola, Inc. Compensation Committee, on the recommendation of management, may determine that it is in Motorola, Inc.’s best interest to offer compensation packages that deviate from the general compensation principles in order to recruit executive talent.

The Motorola, Inc. Compensation Committee, on the recommendation of management, and Dr. Jha for the other NEOs, except Mr. Moloney, may determine it is appropriate to provide certain individuals with compensation outside of its normal cycles. The Committee and Dr. Jha make such decisions based on:

 

   

increased responsibilities or job changes related to shifts in our strategic priorities,

 

   

retention of critical talent, and

 

   

strategic investment in individuals identified as candidates for our leadership succession plans.

Accordingly, for some Named Executive Officers, the individual compensation elements are above and below the target of the 50 th  percentile. In determining actual compensation a Named Executive Officer’s role, responsibilities, experience, performance, and skill set are considered in making a judgment of the Named Executive Officer’s value to Motorola, Inc. and in the marketplace. These determinations are generally subjective, and the Motorola, Inc. Compensation Committee and Dr. Jha do not rely on formulaic weighting of these factors in making their compensation decisions. Rather, they use these factors to provide an overall context for their decisions on specific elements of compensation.

 

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Independent Consultant Review of Dr. Jha’s Compensation

The Motorola, Inc. Compensation Committee has the discretion, to the extent deemed necessary and appropriate, to retain and terminate compensation consultants, outside counsel or other advisors, including the sole authority to approve fees and other retention terms for any such consultant, counsel or advisor. The Motorola, Inc. Compensation Committee’s practice is to engage an external independent consultant to complete an evaluation of its compensation program on a periodic basis, typically every one or two years, and to annually review the specific compensation of the Co-CEOs and the Co-CEOs’ senior leadership team, which for our Company only includes Dr. Jha and Mr. Moloney. During 2009, the Committee chose to engage a new compensation consulting firm (discussed further below), a decision solely made by the Motorola, Inc. Compensation Committee without recommendation from management.

The Motorola, Inc. Compensation Committee’s compensation consultant has been Compensation Advisory Partners since September 2009. Compensation Advisory Partners is independent from Motorola, Inc. and reports directly to the Chair of the Motorola, Inc. Compensation Committee. The Motorola, Inc. Compensation Committee’s current compensation consultants from Compensation Advisory Partners also served as the Committee’s consultant as employees of Mercer up until September 2009. The Motorola, Inc. Compensation Committee believes that Compensation Advisory Partners is the appropriate consultant to review and assist in the development of its compensation program. Compensation Advisory Partners does not have any other business relationships with the Company and no additional business relationships are expected in the future. When appropriate, the Motorola, Inc. Compensation Committee has discussions with Compensation Advisory Partners without management present to protect impartiality.

Prior to September 2009, the Motorola, Inc. Compensation Committee’s compensation consultant was Mercer. Motorola, Inc.’s 2009 expenditures with Marsh & McLennan Companies, which includes affiliates of Mercer, were approximately $2.54 million, of which approximately 7% or $170,000 was paid to Mercer for work with the Motorola, Inc. Compensation Committee and 93% or $2.37 million was paid to Marsh & McLennan affiliates for other work.

Motorola, Inc. management reports to the Motorola, Inc. Compensation Committee regarding any fees for unrelated services and products purchased from Mercer, but the Committee does not preapprove such services. The most recent review took place in July 2009. The Motorola, Inc. Compensation Committee reviewed the services Mercer provided Motorola, Inc. and other matters of judgment to ensure Mercer’s objectivity in advising the Committee.

In 2010, the Motorola, Inc. Compensation Committee also engaged Deloitte Consulting LLP to assist in the second amendment of Dr. Jha’s employment agreement. Both Compensation Advisory Partners and Deloitte Consulting LLP were engaged by the Motorola, Inc. Compensation Committee due to both firms’ familiarity with Dr. Jha’s existing agreement. Deloitte Consulting has not been engaged by the Motorola, Inc. Compensation Committee since the engagement on the second amendment to Dr. Jha’s employment agreement and the Committee does not plan on engaging Deloitte Consulting LLP in the future. Motorola, Inc.’s 2010 expenditures with Deloitte Consulting LLP and its affiliates were approximately $31,400 for work with the Motorola, Inc. Compensation Committee. By way of comparison, Motorola, Inc.’s 2009 expenditures with Deloitte Consulting LLP and its affiliates were $12.2 million, none of which was for services provided to the Motorola, Inc. Compensation Committee.

The Compensation Committee will have the discretion, to the extent deemed necessary and appropriate, to retain and terminate compensation consultants, outside counsel or other advisors, including the sole authority to approve fees and other retention terms for any such consultant, counsel or advisor. We anticipate the Compensation Committee will engage an external independent consultant to evaluate its compensation program and review the specific compensation of the executives under the Compensation Committee’s purview.

 

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2010 Executive Compensation Review

In January 2010, the Committee engaged Compensation Advisory Partners to independently review our executive rewards program and the compensation of Motorola, Inc.’s senior leadership team, which included Dr. Jha and Mr. Moloney. Compensation Advisory Partners’ 2010 executive compensation review studied: (1) the relationship between actual 2008 senior executive compensation levels and the company’s performance using available proxy data at that time, (2) the competitiveness of the target executive pay program for 2009 in light of the executive compensation strategy, and (3) the competitiveness of the “pay mix,” long-term incentive compensation (“LTI”) mix, equity grants and LTI performance metrics compared to the market. Compensation Advisory Partners’ review considered annualized values of Dr. Jha’s 2008 sign-on equity awards (excluding make whole awards for compensation forfeited at his prior employer) since his 2009 and 2008 equity grants were not representative of Motorola’s typical core LTI programs and grant practices.

Compensation Advisory Partners reviewed the following compensation components for Dr. Jha and Mr. Moloney in its competitive assessment:

 

   

base salary;

 

   

annual bonus (target annual bonus opportunity);

 

   

total cash compensation (base salary + target annual bonus opportunity);

 

   

LTI (annualized sign-on equity); and

 

   

total direct compensation (total cash compensation + LTI).

Compensation Advisory Partners relied on the peer company proxy data to determine the competitive positioning for Motorola, Inc.’s compensation relative to the market for Motorola, Inc.’s senior leadership team, which for our Company only includes Dr. Jha and Mr. Moloney.

Pay and Performance Relationship

Compensation Advisory Partners’ study found that Motorola, Inc.’s compensation structure is highly leveraged so that strong company performance leads to above-market pay and weak company performance results in below-market pay. Additionally, Dr. Jha’s and Mr. Moloney’s compensation structure is leveraged not only by Motorola, Inc. stock price, but also the success of the separation of Motorola, Inc. into two, publicly traded companies. Compensation Advisory Partners found that, overall, Motorola, Inc.’s business-based performance on select metrics was below the 25 th  percentile of its peers for 2008 based on twelve key financial metrics of success.

Compensation Advisory Partners’ study found the following for Dr. Jha:

 

   

Base salary ($900,000) and target annual cash compensation opportunity ($2,700,000) is below the market median;

 

   

Long-term incentives ($11,419,000; including annualized sign-on equity, excluding make whole awards) approximate the 65 th  percentile;

 

   

Target total compensation ($14,119,000; including annualized sign-on equity, excluding make whole awards) approximates the 65 th  percentile; and

 

   

Dr. Jha’s total target pay mix has a greater emphasis on the LTI component compared to the market.

Compensation Advisory Partners’ study found the following for Mr. Moloney:

 

   

Base salary ($600,000) and target annual cash compensation opportunity ($1,170,000) is below the market median;

 

   

Long-term incentives ($4,920,000) is between the 65 th percentile and 75 th percentile;

 

   

Target total compensation ($6,090,000) is between the 65 th percentile and 75 th percentile; and

 

   

Mr. Moloney’s total target pay mix has a greater emphasis on the LTI component compared to the market.

 

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The Motorola, Inc. Compensation Committee agreed with the conclusions from Compensation Advisory Partners study and relied on the study’s findings in setting the 2010 compensation levels for the Motorola, Inc. senior leadership team, including for Dr. Jha and Mr. Moloney.

Compensation Bands for Named Executive Officers, other than Dr. Jha and Mr. Moloney

The variable compensation targets for Motorola, Inc.’s executives are based on the level of their position as an Executive Vice President, Senior Vice President, Corporate Vice President or Appointed Vice President. Messrs. Rothman, Ogle and Cipolla are Senior Vice Presidents and their compensation is scaled for such position as follows:

 

Officer Level   

Annual

Bonus

Target

  

Long-Range
Incentive Plan

Target

   2009 Equity Budget
Assuming Valued
Performer Ranking

Senior Vice President

   75% of

eligible

earnings

   100% of
salary
   22,000 RSUs of which a portion can be elected in stock options
 

2009 Base Salary

In January 2009 and January 2010, in response to economic realities, annual salary increases were not provided to employees, including the Named Executive Officers, in the U.S. and most other countries, except when warranted for promotions or where otherwise required by law.

Dr. Jha’s Base Salary

Dr. Jha’s base salary is pursuant to his employment agreement. In late 2008, Dr. Jha voluntarily agreed to reduce his base salary for 2009 by 25% from $1,200,000 to $900,000. In January 2010, Dr. Jha voluntarily agreed to have his base salary remain at the reduced level of $900,000 for 2010.

Other Named Executive Officer’s Salaries

The salary of the Named Executive Officers, other than Dr. Jha, are based on such officer’s position as an Executive Vice President or Senior Vice President and the level of experience, knowledge, skills, ability and performance of the incumbent in his role. Each Named Executive Officer’s salary reflects his level of contributions to the company, responsibilities and accountability.

2009 Short-Term Incentives

MIP is a cash-based, pay-for-performance annual incentive plan that was initiated in January 2002 and applies to all regular employees of Motorola, Inc., including the Named Executive Officers, (excluding those employees participating in a sales incentive plan). The Motorola, Inc. Compensation Committee approved target awards in March 2010 for the MIP 2010 plan year (“2010 MIP”) under the 2009 MIP Plan. Awards paid for the calendar-year performance period ending December 31, 2010 to each eligible employee that is an employee of the Company will be the obligation of the Company and paid in accordance with the terms of the 2009 Motorola Incentive Plan. The remainder of this discussion of MIP relates to MIP awards granted in 2009 under the 2009 MIP Plan approved by the Committee in March 2009 (“2009 MIP”). For information regarding the impact of Section 162(m) of the Internal Revenue Code on awards granted under MIP, see the discussion set forth under “ The Impact of Favorable Accounting and Tax Treatment on Compensation Program Design ”.

Similar to many of its competitors, Motorola, Inc. uses the annual incentive plan, MIP, to reward employees for their contributions to strong annual business performance. Through MIP, Motorola, Inc. strives to promote teamwork and strengthen financial performance. Moreover, MIP supports the goals of: attracting and retaining

 

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the talent needed to succeed, focusing employees’ attention on critical business goals, sharing the financial benefits of superior performance, and providing pay that is competitive with comparator companies.

MIP Incentive Formula

The payout value of awards under MIP is based on the following incentive formula:

 

                   

Performance Factors

         
Eligible Earnings    ×    Individual Incentive Target    ×    Business Performance Factor    ×    Individual Performance Factor    =    MIP Award

MIP Individual Incentive Target

The MIP Individual Incentive Targets are based on market-competitive data and are established as a percentage of eligible earnings (generally, base salary). Dr. Jha’s individual incentive target is set forth in his employment agreement as not less than 200% of eligible earnings with a minimum annual bonus of $1,200,000 for 2009. For the other Named Executive Officers, their individual incentive targets are based on their position and set at 75% of eligible earnings for Senior Vice Presidents and 95% of eligible earnings for Executive Vice Presidents as described above in “ Compensation Bands for Named Executive Officers, other than Dr. Jha” .

MIP Business Performance Factor

At the beginning of each year, the Motorola, Inc. Compensation Committee establishes MIP-related Business Performance Factor targets for both Motorola, Inc. as a whole and for specified business units. For 2009, due in large part to the challenging macroeconomic environment and difficult business conditions, the Motorola, Inc. Compensation Committee placed an increased focus on cash conservation by applying a higher weighting (35%) to the Business Performance Factor relating to cash flow than it had in previous years. For 2009, in general, the Business Performance Factor applicable to employees in each of the businesses was based on the performance of their particular business unit against the established performance targets.

The 2009 MIP Business Performance Factors for Dr. Jha had one component based on the performance of the Broadband Mobility Solutions (“BMS”) business, led by the other Motorola, Inc. Co-CEO, and one component based on the performance of the Mobile Devices business (“Mobile Devices business” or “MDb”), led by Dr. Jha. Dr. Jha had a higher weighting (70%) on the performance of the business he leads, reflecting the fact that he had the greatest impact on the results of his own business. Although Dr. Jha had a lower weighting (30%) placed on the performance of the business he does not lead, the performance of that business was included in his Business Performance Factor due to his ability to impact the performance of total Motorola, Inc. Dr. Jha’s actual 2009 MIP award of $1,200,000 reflects the minimum payment he was guaranteed pursuant to the terms of his employment agreement, as amended.

Similarly, as the leader of the Home business, Mr. Moloney’s Business Performance Factor had one component based on the performance of the BMS business, of which Mr. Moloney’s business was a part, and one component based on the performance of the Mobile Devices business. A higher weighting was placed on the BMS business (70%) than the Mobile Devices business (30%), reflecting the fact that he had the greatest impact on the results of his own business. Weight was also given to the Mobile Devices business due to his ability to impact the performance of total Motorola, Inc.

The 2009 MIP Business Performance Factors for Messrs. Rothman, Ogle and Cipolla were based entirely on the performance of the Mobile Devices business. Mr. Moloney’s 2009 Business Performance Factor was based 70% on the Broadband Mobility Solutions business (which included all Motorola, Inc. businesses other than the Mobile Devices business) and 30% on the Mobile Devices business.

In 2009, the MIP Business Performance Factor measures and their relative weights for the NEOs were:

 

   

Operating Earnings (65% weight): which was calculated as operating earnings according to generally accepted accounting principles (“GAAP”), excluding the effect of the following items: (i) reorganization, asset impairment, extraordinary, unusual and/or non-recurring items of gain or loss, separately identified in Motorola, Inc.’s quarterly earnings press releases, (ii) changes in tax or accounting regulations or laws, (iii) the effect of discontinued operations, (iv) the effect of a significant

 

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merger or acquisition, and (v) expenses related to the issuance of employee stock options and MOTshare, intangible amortization, and unallocated incentive and function costs.

 

   

Controllable Free Cash Flow (35% weight): which was calculated as operating cash flow according to GAAP, excluding cash flow related to: (i) income taxes, (ii) non-operating income or expense, and (iii) unallocated incentive and function costs, less capital expenditures, which are defined as the original cost of acquiring property, plant and equipment, as reported in the investing section of the cash flow statement per GAAP.

The following tables set forth the minimum, maximum and target levels for each of the 2009 MIP Business Performance measures that pertain to each of the Named Executive Officers, as well as the actual 2009 performance levels. The 2009 MIP Business Performance levels were set so that if the minimum level of performance was not met, no payout would be made for the respective performance measure. Assuming business performance meets the minimum threshold for a payout, the Business Performance Factor formula allows for a range of 20% of the established target award level (at the minimum level of performance) to 130% of the established target award level (at the maximum level of performance). As described further below, during 2009 the actual MDb Operating earnings and MDb Controllable free cash flow was below the minimum level of performance, but the business performance factor for MDb was adjusted upward from 0% to 10%.

2009 MIP Business Performance Factors:

 

Sanjay K. Jha

MIP Business Performance
Measure

  Minimum
Threshold
for
Any Payout
  Performance
Level for
Maximum
Payout
  Target   Actual Fiscal
Year 2009
Performance
  Resulting
Performance
Factor
  Performance
Measure
Weight
  Weighted
Performance
Factor
  Business
Weight
  Weighted
Contributing
Result
  Adjusted
Weighted
Contributing
Result

MDb Operating earnings

  ($750 million)   $225 million     $0   ($904 million)   0%   65%        
              0%   70%   0%   7%

MDb Controllable free cash flow

  ($1.110 billion)   $325 million     $0   ($1.257 billion)   0%   35%        

BMS Operating earnings

  $1.547 billion   $2.652 billion   $ 2.210 billion   $1.833 billion   41%   65%        
              59%   30%   18%   17%

BMS Controllable free cash flow

  $1.526 billion   $2.616 billion   $ 2.180 billion   $2.147 billion   93%   35%        

Total Sanjay K. Jha MIP Business Performance Factor

  24%
 

 

Messrs. Rothman,

Ogle and Cipolla

MIP Business Performance
Measure

  Minimum
Threshold for
Any Payout
  Performance
Level for
Maximum
Payout
  Target   Actual Fiscal
Year 2009
Performance
  Resulting
Performance
Factor
  Performance
Measure
Weight
  Weighted
Performance
Factor
  Business
Weight
  Weighted
Contributing
Result
  Adjusted
Weighted
Contributing
Result

MDb Operating earnings

  ($750 million)   $225 million   $0   ($904 million)   0%   65%   0%   100%   0%  
                    10%

MDb Controllable free cash flow

  ($1.110 billion)   $325 million   $0   ($1.257 billion)   0%   35%   0%   100%   0%  

Total Messrs. Rothman, Ogle and Cipolla MIP Business Performance Factor

  10%
 

 

Daniel M. Moloney

MIP Business Performance

Measure

  Minimum
Threshold for
Any Payout
  Performance
Level for
Maximum
Payout
  Target     Actual Fiscal
Year 2009
Performance
  Resulting
Performance
Factor
  Performance
Measure
Weight
  Weighted
Performance
Factor
  Business
Weight
  Weighted
Contributing
Result
  Adjusted
Weighted
Contributing
Result

BMS Operating earnings

  $1.547 billion   $2.652 billion   $2.210 billion      $1.833 billion   41%   65%        
              59%   70%   41%   39%

BMS Controllable free cash flow

  $1.526 billion   $2.616 billion   $2.180 billion      $2.147 billion   93%   35%        

MDb Operating earnings

  ($975 million)   ($600 million)   ($750 million   ($904 million)   37%   65%        
              40%   30%   12%   11%

MDb Controllable free cash flow

  ($1.443 billion)   ($888 million)   ($1.110 billion   ($1.257 billion)   46%   35%        

Total Daniel M. Moloney MIP Business Performance Factor

  50%
 

The BMS actual 2009 performance with relation to the Operating Earnings measure fell below target performance but above the minimum performance threshold and, accordingly, contributed to a below-target payout. The BMS actual 2009 performance with relation to the Controllable Free Cash Flow measure also fell below the target performance but above the minimum performance threshold and, accordingly, contributed to a below-target payout.

The MDb actual 2009 performance with relation to the Operating Earnings measure fell below the minimum performance threshold, except under the measures for Mr. Moloney. The MDb actual 2009 performance with relation to the Controllable Free Cash Flow measure also fell below the minimum performance threshold, except under the measures for Mr. Moloney. For Mr. Moloney, the MDb actual 2009 performance with relation to the Operating Earnings and the Controllable Free Cash Flow fell below target performance but above the minimum performance threshold and, accordingly, contributed to a below-target payout.

 

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Given the improved performance of MDb, management recommended and the Motorola, Inc. Compensation Committee of the Board acted to exercise discretion in determining the final MIP Business Performance Factors for all businesses. Although the financial performance of MDb in 2009 was below the levels required to generate a payout, management and the Motorola, Inc. Compensation Committee felt it was appropriate to recognize the efforts of MDb employees to improve cost structure, strengthen operations, reduce product platforms, simplify processes and deliver two Android TM -based smartphones on time and with high levels of customer satisfaction. As a result, the business performance factor for MDb was adjusted upward from 0% to 10% for MDb employees, including our Named Executive Officers and Motorola, Inc.’s Co-CEOs.

MIP Individual Performance Factor

The MIP Individual Performance Factor gives the Motorola, Inc. Compensation Committee and Dr. Jha (for the other NEOs except for Mr. Moloney) the ability to adjust the awards, which are formula-driven based on business results, according to an individual’s contribution to Motorola, Inc.’s success. Motorola, Inc. believes that the most effective performance management process establishes a tight and clear link between individual and organizational goals and performance. Motorola, Inc. strives to establish a clear line of sight between the performance management process and the business strategy. Individual performance is measured by both what an individual accomplishes (goal achievement) and how the individual accomplishes those goals (behaviors).

Since not all employees perform at the same level, nor contribute equally to the metrics used to determine the MIP Business Performance Factors, the Committee (for Dr. Jha and Mr. Moloney) and Dr. Jha (for the other NEOs) has the discretion to adjust awards to account for these differences in individual contribution and performance. Motorola, Inc. believes that this discretion results in a stronger pay-for-performance culture. Individual Performance adjustments are made by the Committee or Dr. Jha based on their determination of how much to differentiate among individual participants. Individual Performance multipliers for our Named Executive Officers could range from 0% (no award paid) for poor performance to 130% (130% of the formula-driven award) for exceptional performance, demonstrating a commitment to strongly differentiate rewards for superior performers.

The 2009 MIP payouts for Dr. Jha and Mr. Ogle were guaranteed pursuant to their employment agreement and employment offer, respectively, and the Individual Performance Factor was set at 1.0 or 100% of their award pursuant to their employment offer. For Messrs. Rothman, Moloney and Cipolla, their Individual Performance Factors ranged from 100% to 124% of the resulting Business Performance Factor to reflect their contributions during 2009.

Based on the 2009 Business Performance Factors and the 2009 Individual Performance multiplier, the actual 2009 MIP award and the target 2009 MIP award for each of our Named Executive Officers are set forth in the following table:

 

Named Executive Officer    Target 2009
MIP Award
    Actual 2009
MIP
Award
 

Dr. Jha

   $ 1,811,538      $ 1,200,000 (1)  

Mr. Rothman

   $ 322,500      $ 40,000   

Mr. Moloney

   $ 570,000      $ 285,000   

Mr. Ogle

     n/a (2)     $ 273,000 (2)  

Mr. Cipolla

   $ 337,500      $ 37,000   
                  

 

(1) Pursuant to Dr. Jha’s employment agreement, his annual bonus target is 200% of base salary with a 2009 minimum bonus of $1,200,000.

 

(2) Pursuant to the terms of his employment offer, Mr. Ogle was entitled to a minimum 2009 MIP award of $273,000.

2009 Long-Term Incentives

Motorola, Inc.’s LTI programs are designed to encourage creation of long-term value for stockholders, promote employee retention and encourage stock ownership. These programs include: (1) the LRIP, (2) grants of stock options, and (3) grants of restricted stock units (“RSUs”) or other equity.

 

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Many of Motorola, Inc.’s employees participate in one or more of the LTI programs, which Motorola, Inc. believes promote a focus on long-term results and align employee and stockholder interests. In designing and refining the programs, Motorola, Inc. carefully considered the impact of equity expensing, actions taken by the comparator group to reduce the use of stock options, and dilution and overhang levels. As a result, the equity programs were redeveloped in 2008 in the interest of achieving the appropriate balance between cost competitiveness and maintaining employee incentive, by replacing stock options with RSUs for the annual equity grant to those below the vice president level. In 2009, a one-time stock option exchange program was implemented to provide improved employee retention and engagement. The exchange program restored economic value to certain stock options held by certain employees at an insignificant cost to Motorola, Inc.

For 2009, LTI levels for our Named Executive Officers, other than Dr. Jha, were developed after considering the 50 th  percentile of the comparator group and the supplemental data, share usage, and expense associated with offering LTI. The 2009 LTI levels resulted in an LRIP target of 100% of base salary for all Senior Vice Presidents, including the Named Executive Officers that are Senior Vice Presidents, and 185% of base salary for Mr. Moloney and equity grant guidelines which were denominated in full value shares and varied based on 2008 performance ratings. The full value shares were converted into a mix of stock options and RSUs based on the elections of the Named Executive Officers other than Dr. Jha and Mr. Moloney from Motorola, Inc.’s Equity Choice Program. Motorola, Inc.’s Equity Choice Program allows Appointed Vice Presidents and above, including the Named Executive Officers other than Dr. Jha and Mr. Moloney, to elect the mix of stock options and RSUs of the full value shares their manager recommends for them, if any.

Our Named Executive Officers receive a large proportion of their overall targeted compensation (approximately one-half) in the form of LTI in order to align their interests with those of stockholders and to promote a focus on long-term results. In 2009, the LTI mix focused on LTI vehicles that incentivize either absolute stock price performance or relative total shareholder return performance over a three-year period. The 2009 LRIP (discussed below) was designed to pay for Motorola, Inc.’s three-year total shareholder return versus the peer group, which emphasizes the importance of winning in the marketplace. Stock options and RSUs pay for absolute stock price performance. The wealth creation of these vehicles are only maximized when absolute stock price growth is combined with best-in-class performance against the Company’s peers.

Long-Range Incentive Plan

The LRIP is a pay-for-performance, multi-year incentive plan. A three-year cycle started on January 1, 2008 and will conclude on December 31, 2010 (2008-2010 LRIP), a three-year cycle started on January 1, 2009 and was originally designed to conclude on December 31, 2011 (2009-2011 LRIP), and a three-year cycle started on January 1, 2010 and was originally designed to conclude on December 31, 2012 (2010-2012 LRIP). On July 26, 2010, the Motorola, Inc. Compensation Committee approved amendments to reflect the planned separation of the Mobile Devices and Home businesses from Motorola, Inc. as described in the following paragraph.

The July 26, 2010 amendments to the LRIP provide that, if the date of the planned separation occurs prior to December 31, 2011, each outstanding performance cycle will terminate for all participants effective upon the Distribution Date. Earned awards for each such performance cycle will be determined based on Motorola, Inc.’s performance through the planned separation. In addition, each participant’s awards for such performance cycles will be pro rated based on the participant’s number of completed months of employment as a participant within the performance cycle through the Distribution Date, divided by 36. Notwithstanding the foregoing, the earned award of each “covered employee” (for purposes of Section 162(m) of the Internal Revenue Code) will be equal to the lesser of (a) the amount of the award as calculated at the end of the original performance cycle without giving effect to the pro ration described in the preceding sentence and (b) the amount of the award giving effect to the pro ration described in the preceding sentence. There are no “covered employees” in the Mobile Devices and Home business that participate in LRIP. The amendments to the LRIP also provide that all earned awards will be paid in cash. Payments will be made as soon as administratively practicable during the calendar year immediately following the last calendar year in the original, three-year performance cycle. Awards paid to each participant that is an employee of the Company will be the obligation of the Company.

On April 21, 2008, the Motorola, Inc. Compensation Committee approved the cancellation of the January 1, 2007 to December 31, 2009 (2007-2009) performance cycle under Motorola, Inc.’s Long-Range Incentive Plan

 

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of 2006 without the payment of awards for such performance cycle. This cycle, together with a previous cycle, was cancelled due to the poor performance of the company versus the established plan goals and metrics and there were no new awards granted in their place. As a result, there were no LRIP payouts in 2009.

Participation in the LRIP is limited to elected officers—including corporate, senior and executive vice presidents and all our Named Executive Officers, except Dr. Jha pursuant to his employment agreement (approximately 40 participants in total at Motorola Mobility).

LRIP Individual Incentive Targets

The LRIP Individual Incentive Targets are based on market-competitive data and are established as a percentage of base salary at the start of a performance cycle. The Motorola, Inc. Compensation Committee designates target levels for all LRIP participants. Pursuant to the terms of his amended employment agreement, Dr. Jha was not eligible to participate in the 2009-2011 LRIP cycle or the 2010-2012 LRIP cycle. The other Senior Vice President Named Executive Officers’ individual incentive target is based on their position and set by the Motorola, Inc. Compensation Committee at 100% of eligible earnings for Senior Vice Presidents, as described above in “ Compensation Bands for Named Executive Officers, other than Dr. Jha” . As described above, the July 26, 2010 amendments to LRIP provide that, if the date of the planned separation occurs prior to December 31, 2011, each participant’s individual incentive award for such performance cycles will be pro rated based on the participant’s number of completed months of employment within the performance cycle through the Distribution Date, divided by 36.

2009-2011 LRIP and 2010-2012 LRIP

The 2009-2011 LRIP program was redesigned to solely focus on Motorola, Inc.’s three-year total shareholder return relative to the three-year total shareholder return of the peer group. The relative total shareholder performance that is incentivised by this plan is one component of the portfolio of LTI vehicles discussed above. In March 2010, the Motorola, Inc. Compensation Committee approved the 2010-2012 LRIP program with the same metrics as described below for the 2009-2011 LRIP program with the exception of a revised peer group for the 2010-2012 LRIP.

2009-2011 LRIP and 2010-2012 LRIP Incentive Formula

The payout value of awards under the LRIP is based on the following incentive formula:

 

Base Salary at Cycle Start    ×    Individual Incentive Target    ×    TSR Rank Payout Factor    =    LRIP Award

TSR Rank Payout Factor

The TSR Rank Payout Factor is calculated in a two step process:

Step 1 : Measure the three-year total shareholder return (“TSR”) for Motorola, Inc. and each of the companies in the peer group to determine the Relative TSR Payout Factor to be used for the LRIP cycle.

 

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For 2009-2011 LRIP and 2010-2012 LRIP purposes, TSR is calculated as follows:

 

   Ending share price
   (Daily average during the final three months of the Performance Cycle)

+

  

Value of reinvested dividends

=

  

Total ending value

   Beginning share price

  

(Daily average during the three months preceding the Performance Cycle)

=

  

Total value created

÷

   Beginning share price

=

  

Total shareholder return

For 2009 LRIP purposes, the peer group is as follows:

 

Alcatel-Lucent (ALU)

Apple Inc. (AAPL)

Cisco Systems, Inc. (CSCO)

Dell Inc. (DELL)

EMC Corporation (EMC)

Hewlett-Packard Company (HPQ)

Intel Corporation (INTC)

International Business Machines Corp. (IBM)

 

LM Ericsson Telephone Co. (ERIC)

Microsoft Corporation (MSFT)

Nokia Corp. (NOK)

Nortel Networks Corp. (NRTLQ.PK)

Oracle Corp. (ORCL)

QUALCOMM Inc. (QCOM)

Sun Microsystems Inc. (JAVA)

Texas Instruments Inc. (TXN)

For 2010 LRIP purposes, the peer group was revised to represent similarly sized technology companies. Ebay, Inc. (EBAY), Google, Inc. (GOOG), Harris Corp. (HRS), LG Electronics (LGERF.PK) and Tyco Electronics LTD (TEL) were added to the peer group. Dell Inc. (DELL), Hewlett-Packard Company (HPQ), International Business Machines Corp. (IBM), Nortel Networks Corp. (NRTLQ.PK) and Sun Microsystems Inc. (JAVA) were removed from the peer group.

Step 2 : Rank the total shareholder return for Motorola, Inc. and each of the companies in the peer group to determine Relative TSR Payout.

 

TSR Rank    Relative TSR
Payout Factor
  TSR Rank    Relative TSR
Payout Factor

1

   200%   10    75%

2

   200%   11    50%

3

   190%   12    25%

4

   170%   13    0%

5

   150%   14    0%

6

   140%   15    0%

7

   125%   16    0%

8

   110%   17    0%

9

   100%     
 

2008-2010 LRIP

The 2008-2010 LRIP program was designed to focus on creating shareholder value through stock price goals and a “haircut” reduction if total shareholder return relative to peers is below the 55 th  percentile.

 

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2008-2010 LRIP Incentive Formula

The payout value of awards under the LRIP is based on the following incentive formula:

 

Base Salary at Cycle Start    ×    Individual Incentive Target    ×    LRIP Business Performance Factor    =    LRIP Award

LRIP Business Performance Factor

The LRIP Business Performance Factor is calculated in a two-step process.

Step 1 : Calculate Motorola, Inc.’s 20-day average stock price at the end of the 2008-2010 LRIP cycle.

Motorola, Inc.’s 20-day average stock price at the end of the 2008-2010 LRIP cycle will determine the potential size of the 2008-2010 cycle award, as illustrated in the following performance table.

 

December 31, 2010
20-day Average Stock Price
   Performance Factor

$27.00

   2.00x

$18.00

   1.00x

$16.00

   0.25x

<$16.00

   0.00x
 

If Motorola, Inc.’s 20-day average stock price at the end of the cycle is less than $16.00, then no payout shall be made for the 2008-2010 LRIP cycle and Step 2 measures (below) will not be calculated.

Step 2 : Measure Motorola, Inc.’s three-year TSR compared with its comparator group to determine the final Business Performance Factor to be used for the LRIP cycle.

For LRIP purposes, TSR is calculated as follows:

 

   Ending share price
   (20-day average through last day of cycle, e.g., December 31, 2010)

+

  

Value of reinvested dividends

=

  

Total ending value

   Beginning share price

  

(20-day average through day preceding first day of cycle, e.g., December 31, 2007)

=

  

Total value created

÷

   Beginning share price

=

  

Total shareholder return

For the 2008-2010 LRIP cycle, in order for a full LRIP award to be paid: (1) Motorola, Inc.’s three-year TSR must exceed the 55 th  percentile of its comparator group, and (2) Motorola, Inc.’s “absolute” three-year TSR must be positive (i.e., greater than 0%).

If Motorola, Inc.’s three-year TSR is equal to or above the 55 th  percentile of our comparator group, then the full LRIP Business Performance Factor is applied. If Motorola, Inc.’s three-year TSR is below the 55 th  percentile but above the 25 th  percentile of our comparator group, then a “haircut” reduction is applied to the LRIP Business

 

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Performance Factor. The “haircut” is linear between performance at the 55 th  percentile (no reduction) and the 25 th  percentile (50% reduction). If Motorola, Inc.’s three-year TSR is below the 25 th  percentile of its comparator group, then the Motorola, Inc. Compensation Committee will use its discretion to determine if any 2008-2010 LRIP cycle awards are paid.

Impact of Individual Performance on 2008 and 2009 LRIP Awards

As Co-CEO of Motorola, Inc., Dr. Jha may recommend adjustment to the amount of the LRIP award to any participant (other than a member of Motorola, Inc.’s senior leadership team for whose adjustment the Motorola, Inc. Compensation Committee must provide approval) at any time prior to payment as a result of the participant’s performance during the performance cycle; provided, however, that any such adjustment may not result in a payment to the participant in excess of the participant’s maximum award under the LRIP.

Equity Awards

Equity awards are the other component of Motorola, Inc.’s long-term incentive program. To reward, retain and motivate employees, in 2009 and 2010, the Motorola, Inc. Compensation Committee, on the recommendation of management, awarded stock options and restricted stock units (“RSUs”) to a wide range of employees, including the Named Executive Officers. Stock options provide economic value to the holder if the price of Motorola, Inc.’s common stock increases from the grant date to the time the option or right is exercised. In contrast, RSUs convert to shares of Motorola, Inc.’s common stock when they vest, so they have a gross value at the time of vesting equal to the then-current market value of Motorola, Inc.’s common stock. While stock options motivate employees by providing more potential upside, RSUs assist the company in retaining employees because RSUs have value even if stock price does not increase.

Only the Motorola, Inc. Compensation Committee may grant equity awards to Dr. Jha and Mr. Moloney. Motorola, Inc. does not structure the timing of equity award grants to precede or coincide with the disclosure of material non-public information. Since 2002, the grant date for the annual equity award has always been within a few days of the annual stockholders meeting in early May.

A wide range of employees participate in Motorola, Inc.’s equity plans. On May 7, 2009, the Motorola, Inc. Compensation Committee granted equity to approximately 9,000 employees of Motorola Mobility, including the Named Executive Officers, other than Dr. Jha, as part of Motorola, Inc.’s 2009 annual equity awards. The 2009 annual equity grants generally vest and become exercisable in four equal annual installments, with the first installment vesting on May 7, 2010. The per share exercise price for the 2009 annual stock option grant is $6.22, the Fair Market Value of Motorola, Inc.’s common stock on the date of the grant. The stock options expire on May 7, 2019. Approximately 96% of the Motorola, Inc. equity awards covered by the May 7, 2009 general grant were granted to Motorola Mobility employees other than the Motorola Mobility Named Executive Officers.

Motorola, Inc. also grants stock options and/or RSUs: (1) to help make new employees “whole” for the compensation that they forfeit by terminating their previous employment, (2) to attract new critical talent, (3) to encourage retention of critical talent, (4) as a strategic investment in individuals deemed critical to Motorola, Inc.’s leadership succession plans, and (5) to reward strong performance. In 2009, approximately 250 of the approximately 20,000 Motorola Mobility employees received a grant of stock options or RSUs outside of the May annual award of equity and the June stock option exchange program.

Outstanding stock options, stock appreciation rights (“SARs”) and unvested RSUs granted or awarded under Motorola, Inc.’s equity incentive plans to Motorola, Inc. employees who will be Motorola Mobility employees will generally be converted, with appropriate adjustments, into stock options, SARs and unvested RSUs of Motorola Mobility on the same terms and conditions (including vesting restrictions, if any) as were applicable to the employees’ Motorola, Inc. stock options, SARs and unvested RSUs immediately prior to the distribution. Outstanding stock options, SARs and unvested RSUs will be adjusted in a manner such that the “fair value” and

 

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the “intrinsic value” of such awards immediately prior to the distribution is generally preserved immediately after the distribution. By converting our employees’ equity into equity of Motorola Mobility, we are able to align our equity compensation to the performance of Motorola Mobility while creating an additional retention incentive.

2009 One-Time Stock Option Exchange Program

In 2009, Motorola, Inc. stockholders approved a one-time stock option exchange program that was designed to restore economic value to certain stock options held by certain employees, while not creating material additional expense to Motorola, Inc. While Dr. Jha, Mr. Moloney and Motorola, Inc.’s senior leadership team were not eligible for the stock option exchange program, our other NEOs were eligible and participated. Additional objectives of the program included improved employee retention and engagement. The program allowed for certain stock options with an exercise price above market prices (out-of-the-money) to be exchanged for a smaller number of stock options with an exercise price set as the Fair Market Value of our common stock on the date the replacement options were issued. Replacement stock options were granted on June 12, 2009 in exchange for eligible out-of-the-money stock options that were elected to be exchanged. The replacement stock options vest in two equal annual installments, with the first installment vesting on June 12, 2010. The per share exercise price for the replacement options issued in the stock option exchange is $6.73. The replacement options expire on June 12, 2014. Approximately 82% of the employees that were eligible for the program chose to participate in the program and 87% of Motorola, Inc. eligible options were exchanged for replacement options.

Fair Market Value Definition

Until March 1, 2007, “Grant Date Fair Market Value” was defined as the closing price for a share of Motorola, Inc.’s common stock on the last trading day before the date of grant for equity awards. For equity award grants on or after March 1, 2007, “Grant Date Fair Market Value” (also termed “Fair Market Value”) is defined as the closing price for a share of Motorola, Inc. common stock on the date of grant. The official source for the closing price is the New York Stock Exchange Composite Transactions in the Wall Street Journal at www.online.wsj.com.

Dr. Jha’s 2009 Equity Grants

In 2008, Dr. Jha was granted a significant number of stock options and RSUs in connection with his employment agreement. Under the terms of his employment agreement, Motorola, Inc. has no obligation to grant additional equity until at least twelve months following a separation of the Mobile Devices business into an independent, publicly traded company. In 2009, the Motorola, Inc. Compensation Committee determined no additional equity grants were necessary in 2009 to further incentivize Dr. Jha. In 2008, Dr. Jha voluntarily decided to forego any 2008 bonus under MIP. At that time, the Motorola, Inc. Compensation Committee agreed to make a grant of RSUs to Dr. Jha in the first quarter of 2009 with a value equal to: $2,400,000 less the amount of cash that would have been payable to the other Co-CEO under MIP had he not also foregone his 2008 bonus under MIP. The total cash value of the RSU award was determined on February 11, 2009 to be $1,334,000. On February 11, 2009, based on the closing price of Motorola, Inc.’s common stock, 344,615 RSUs were granted to Dr. Jha. These RSUs vest in two equal installments on February 11, 2010 and October 31, 2010. For a discussion of the post-separation equity award to be granted pursuant to Dr. Jha’s employment agreement, see the section entitled “ Employment Contracts, Termination of Employment and Change in Control Arrangements—Employment Agreement with Sanjay K. Jha ” included elsewhere in this Information Statement.

Mr. Rothman’s 2009 Equity Grants

In January 2009, in connection with a program to retain key Mobile Devices employees, Mr. Rothman was granted options to acquire 250,000 shares of Motorola, Inc. common stock. The stock options vest in two equal annual installments beginning on January 21, 2010.

 

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In May 2009, as part of the annual award of equity grants, Mr. Rothman was granted options to acquire 49,500 shares of Motorola, Inc. common stock. Additionally, Mr. Rothman was granted 16,500 RSUs. The stock options and RSUs vest in four equal annual installments beginning on May 7, 2010.

In June 2009, as part of the stock option exchange program, Mr. Rothman chose to exchange certain out-of-the-money stock options for an option to acquire 123,279 shares of Motorola, Inc. common stock. The stock options vest in two equal annual installments beginning on June 12, 2010 and have a five-year term.

Mr. Moloney’s 2009 Equity Grants

In May 2009, as part of the annual award of equity grants, the Motorola, Inc. Compensation Committee granted Mr. Moloney options to acquire 681,200 shares of Common Stock and 226,800 RSUs. The stock options and RSUs would have vested in three equal annual installments beginning on May 7, 2010.

The Motorola, Inc. Compensation Committee determined that the grants of stock options and RSUs appropriately rewarded Mr. Moloney for his strong leadership of the Home and Networks Mobility business, further aligned his interests with stockholders’ interests to create long-term value, and were necessary to provide a level of equity awards appropriate for the competitive market.

On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options and RSUs. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

Mr. Ogle’s 2009 Equity Grants

In August 2009, in connection with his commencement of employment at Motorola, Inc., Mr. Ogle was granted options to acquire 350,000 shares of Motorola, Inc. common stock. Additionally, Mr. Ogle was granted 50,000 RSUs. The stock options vest in four equal annual installments beginning on August 3, 2010. The RSUs vest in two equal annual installments beginning on August 3, 2010. The equity grants were made under his employment offer in order to induce him to accept the position,

Mr. Cipolla’s 2009 Equity Grants

In January 2009, in connection with a program to retain key Mobile Devices employees, Mr. Cipolla was granted options to acquire 200,000 shares of Motorola, Inc. common stock. The stock options vest in two equal annual installments beginning on January 21, 2010.

In May 2009, as part of the annual award of equity grants, Mr. Cipolla was granted options to acquire 27,000 shares of Motorola, Inc. common stock. Additionally, Mr. Cipolla was granted 27,000 RSUs. The stock options and RSUs vest in four equal annual installments beginning on May 7, 2010.

In June 2009, as part of the stock option exchange program, Mr. Cipolla chose to exchange certain out-of-the-money stock options for an option to acquire 44,434 shares of Motorola, Inc. common stock. The stock options vest in two equal annual installments beginning on June 12, 2010 and have a five-year term.

In December 2009, in recognition for delivering successful key product launches, Mr. Cipolla was granted 90,000 RSUs. The RSUs vest in two equal annual installments on December 1, 2011 and December 1, 2012.

Recoupment of Incentive Compensation Awards Upon Restatement of Financial Results

Effective January 1, 2008, if, in the opinion of the independent directors of the Motorola, Inc. Board, Motorola, Inc.’s financial results are restated due to intentional misconduct by one or more of Motorola, Inc.’s executive officers, the independent directors have the discretion to use their best efforts to remedy the misconduct and prevent its recurrence. The independent directors may, based upon the facts and circumstances surrounding the restatement, direct that Motorola, Inc. recover all or a portion of any bonus or incentive

 

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compensation paid, or cancel the stock-based awards granted, to an executive officer on or after January 1, 2008. In addition, the independent directors may also seek to recoup any gains realized after January 1, 2008 with respect to equity-based awards, including stock options and RSUs, regardless of when issued.

The remedies that may be sought by the independent directors are subject to a number of conditions, including, that: (1) the bonus or incentive compensation to be recouped was calculated based upon the financial results that were restated, (2) the executive officer in question engaged in the intentional misconduct, and (3) the bonus or incentive compensation calculated under the restated financial results is less than the amount actually paid or awarded.

In addition, the independent directors may take other disciplinary action, including, without limitation: (1) adjustment of future compensation of the executive officer, (2) termination of the executive officer’s employment, (3) pursuit of any and all remedies available in law and/or equity in any country, and (4) pursuit of such other action as may fit the circumstances of the particular case. The independent directors may take into account penalties or punishments imposed by third-parties, such as law enforcement agencies, regulators or other authorities. The independent directors’ power to determine the appropriate punishment for the wrongdoers is in addition to, and not in replacement of, remedies imposed by such entities and is in addition to any right of recoupment against the Co-CEOs or CFO under Section 304 of the Sarbanes-Oxley Act of 2002.

Executive Benefits and Perquisites

The Motorola, Inc. Compensation Committee and management continue to seek to more closely align its total executive rewards programs with that of its comparator group. Motorola, Inc.’s philosophy is to pay at the 50 th  percentile for total rewards for executive positions in its comparator group given average business performance. These rewards are supplemented by additional performance-based compensation that is substantially leveraged. As a result, Motorola, Inc. provides few executive-only benefits and perquisites. Motorola, Inc.’s executive benefits and perquisites are described below.

 

   

Motorola, Inc. Executive Financial Planning Program. The Motorola, Inc. Executive Financial Planning Program provides elected officers, including each of our Named Executive Officers, with comprehensive financial planning assistance, designed to help them achieve the highest value from their compensation package. For senior executives, including our Named Executive Officers, the annual allowance ranges from $10,000 to $16,500 in the first or last year of receiving the benefit and ranges from $7,000 to $13,500 in subsequent years of receiving the benefit.

 

   

Change in Control Protection. The Motorola, Inc. Board considers the maintenance of a sound management team to be essential to protecting and enhancing the company’s best interests and the best interests of its stockholders. To that end, Motorola, Inc. recognizes that the possibility of a change in control may exist from time to time, and that this possibility, and the uncertainty and questions it may raise among management, may result in the departure or distraction of management personnel to the detriment of the company and its stockholders. Accordingly, the Board has determined that appropriate steps should be taken to encourage the continued attention and dedication of members of Motorola, Inc. management to their assigned duties without the distraction that may arise from the possibility of a change in control. As a result, Motorola, Inc. has established the Senior Officer Change in Control Severance Plan. The Senior Officer Change in Control Severance Plan uses a “double trigger”. In other words, in order for severance benefits to be “triggered” both: (1) a change in control must occur, and (2) an executive must be involuntarily terminated for a reason other than “cause” or must leave for “good reason” within 24 months of the change in control. For a description of benefits provided under our Senior Officer Change in Control Severance Plan, see the information under “ Change in Control Arrangements ”.

 

   

Personal Aircraft Use. Dr. Jha as Motorola, Inc.’s Co-CEO is active in professional and civic communities, has significant amounts of private and personal information readily available about him on the Internet, has strong visibility and travels extensively as Co-CEO. As a result, while serving as

 

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Co-CEO, Dr. Jha is required to use Motorola, Inc. aircraft for personal travel in connection with the overall security program. From time to time and on a limited basis, Motorola, Inc. permits other executives to use its aircraft for personal travel.

 

   

Motorola, Inc. Management Deferred Compensation Plan. Effective January 1, 2008, because of low participation in the plan, Motorola, Inc. temporarily closed the Motorola, Inc. Management Deferred Compensation Plan to new deferrals. The Motorola, Inc. Management Deferred Compensation Plan is a non-qualified deferred compensation plan that is unfunded and unsecured and allows eligible elected officers, including our Named Executive Officers, the opportunity to defer taxes on their base salary and cash incentive compensation. Motorola, Inc. does not contribute to this plan. The plan is not intended to provide above-market or preferential earnings (as these terms are defined under SEC regulations) on compensation deferred under the plan.

 

   

Relocation Benefits. Motorola, Inc. provides relocation benefits under its Relocation Policy to employees, including the Named Executive Officers, who meet the criteria outlined in the policy. From time to time, in order to attract a particular employee and/or pursuant to an employment agreement, arrangements may be made that offer enhanced benefits beyond the terms of the Relocation Policy, such as an extended duration of temporary housing as in the case of Dr. Jha.

 

   

Commuting Benefits. Motorola, Inc. provides commuting benefits under its Commuting Assignment Policy to employees, including the Named Executive Officers, who meet the criteria outlined in the policy. From time to time, in order to attract a particular employee and/or pursuant to an employment agreement, arrangements may be made that offer enhanced benefits beyond the terms of the Commuting Assignment Policy, such as an extended duration of commuting benefits or allowances.

 

   

Expatriation Benefits. Motorola, Inc. provides expatriate benefits to employees, including the Named Executive Officers, who transfer from a home to a host country on an assignment in excess of one year, up to three years, with a clear intention to return to the home country at the conclusion of the assignment under its relocation and assignment policies. The expatriate benefits that are typically provided include relocation assistance, housing subsidy and hypothetical housing deductions, cost of living adjustments, family assistance, cultural/language assistance, and income tax equalization and filing services, among other benefits.

Motorola, Inc. Broad-based Employee Benefits

As U.S. employees, the Named Executive Officers have the opportunity to participate in a number of benefits programs that are generally available to all regular U.S. employees. These benefits include: (1) healthcare plans (medical and dental benefits, health coaching, and onsite wellness programs and wellness centers/fitness centers), (2) life and disability plans (group life insurance, business travel accident insurance and short-term and long-term disability income plans), (3) investment plans (the 401(k) Plan, the MOTshare Plan (Employee Stock Purchase Plan)) and previously existing pension plans that were available to employees who began employment prior to January 1, 2005, and (4) work/life plans (programs that assist with daily needs such as childcare, adoption assistance, dependent care account and long-term care insurance).

Pension Plans

Pension plans were offered to pension-eligible employees hired before January 1, 2005. Motorola, Inc. offers two different qualified pension plans, the Portable Pension Plan and the Traditional Pension Plan. Motorola, Inc. also offers a non-qualified plan, the MSPP, to highly-compensated employees whose qualified pension plan benefits are limited by annual salary compensation caps imposed by the IRS.

On December 15, 2008, the Motorola, Inc. Board of Directors authorized amendments to both the Motorola, Inc. Pension Plan (“Pension Plan”) and the MSPP. On this date, the Motorola, Inc. Board determined that,

 

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effective March 1, 2009, all future benefit accruals and compensation increases used to compute benefit accruals would automatically cease for all individuals who were participants under the Pension Plan and/or MSPP as of February 28, 2009, but allowing such participants to continue to earn vesting credit towards their Pension Plan benefit on and after March 1, 2009, if not already fully vested. Additionally, the MSPP was further amended to freeze any future participation in the MSPP after January 1, 2009, unless such participation was due to a prior contractual entitlement.

Both Pension Plan formulas use “average earnings” to calculate the relevant pension benefit. Prior to January 1, 2008, a participant’s “final average earnings” were used to calculate the relevant pension benefit, with final average earnings (base salary and lump-sum merit pay, excluding incentive plan awards) being the five years of highest pay during the last ten calendar years ending December 31, 2007. On and after January 1, 2008, a participant’s “modified average earnings” are used to calculate the relevant pension benefit, with modified average earnings starting with the participant’s final average earnings as of December 31, 2007 and additionally including in the numerator and denominator the earnings from each and every subsequent year of employment after January 1, 2008 and up to March 1, 2009 (unless earlier terminated). Further, when computing pension benefits, annual compensation used to calculate a participant’s benefit may not exceed certain limits set by the IRS ($245,000 in 2009) and hence is limited to this number, if required. The benefit payable to plan participants eligible for MSPP is the amount by which their pension plan benefit is reduced by the applicable IRS limits or as a result of their participation in the Motorola, Inc. Management Deferred Compensation Plan. A participant’s pension benefit and MSPP benefit together cannot exceed 70% of their modified average earnings at retirement.

The Impact of Favorable Accounting and Tax Treatment on Compensation Program Design

Favorable accounting and tax treatment of the various elements of Motorola, Inc.’s compensation program is an important, but not the sole, consideration in its design. Section 162(m) of the Internal Revenue Code limits the deductibility of certain items of compensation paid to the Co-CEOs of Motorola, Inc. and certain other highly compensated executive officers (“covered officers”) to $1,000,000 annually. Motorola, Inc.’s short-term and long-term incentive programs have been designed to provide for the deductibility of compensation paid to the covered officers under our incentive plans. In particular, in order to satisfy the Section 162(m) qualification requirements, under Motorola, Inc.’s 2006 Omnibus Incentive Plan, each year the Motorola, Inc. Compensation Committee allocates an incentive pool, equal to 5% of Motorola, Inc.’s consolidated operating earnings, among the covered officers under MIP. Once the amount of the pool and the allocations are determined at the end of the year, the Motorola, Inc. Compensation Committee retains “negative discretion” to reduce (but not increase) the amount of any award payable from the incentive pool to the covered officers to the amounts payable based on the MIP performance criteria using the actual minimum, target and maximum awards by position. For 2009, Dr. Jha was the only Named Executive Officer subject to Section 162(m). Notwithstanding the above, the Motorola, Inc. Compensation Committee reserves the right to provide for compensation to executive officers that may not be deductible pursuant to Section 162(m).

In the first quarter of 2006, Motorola, Inc. began expensing equity awards in accordance with FAS 123R (now ASC Topic 718). This results in significantly higher accounting expenses for stock option awards. Like many of the companies within its comparator group, Motorola, Inc. has taken measures to ensure its equity grant practices remain competitive but also cost-effective (e.g., by generally lowering grant guidelines and participation rates). In 2009, stockholders approved a one-time stock option exchange program that was designed to restore economic value to certain stock options held by certain employees, while not creating significant additional expense to Motorola, Inc. All of the Named Executive Officers, other than Dr. Jha and Mr. Moloney, were eligible for the stock option exchange program for qualifying awards.

 

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Stock Ownership Requirements

In order to align the interests of senior management with the interests of stockholders, the Motorola, Inc. Board requires its senior leadership team and all other senior and executive vice presidents (approximately 30 executives), to maintain prescribed ownership levels of Stock (as defined below). During 2009, the Motorola, Inc. Compensation Committee reviewed and approved revised stock ownership requirements that set minimum levels of ownership, as follows:

 

Executive Level    Minimum
Stock
Ownership
Required

Co-Chief Executive Officer

   6 times base salary

Executive Vice Presidents and Motorola, Inc. Senior Leadership Team members

   3 times base salary

Senior Vice Presidents (other than members of the Motorola, Inc. Senior Leadership Team)

   2 times base salary
 

For purposes of these stock ownership requirements, “Stock” means shares of common stock of Motorola, Inc. owned outright, restricted stock, RSUs and stock owned in benefit plans such as the 401(k) Plan and the MOTshare Plan, each of which count toward fulfilling the ownership guidelines. New senior executives are given five years from the date of hire, promotion or elevation to meet the ownership requirements.

Securities Trading Policy

Executives and other employees, including our Named Executive Officers, may not engage in any transaction in which they may profit from short-term speculative swings in the value of our securities. This includes “short sales” (selling borrowed securities that the seller hopes can be purchased at a lower price in the future) or “short sales against the box” (selling owned, but not delivered securities), “put” and “call” options (publicly available rights to sell or buy securities within a certain period of time at a specified price) and hedging transactions, such as zero-cost collars and forward sale contracts. The securities trading policy is designed to ensure compliance with applicable insider trading rules.

 

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NAMED EXECUTIVE OFFICER COMPENSATION

The following table sets forth information concerning the cash and non-cash compensation awarded to our named executive officers by Motorola, Inc. These amounts are based on the compensation received by these officers while employed by Motorola, Inc. for 2009. We were not a reporting company under the Securities Exchange Act for previous years. Therefore, pursuant to the executive compensation rules adopted by the Securities and Exchange Commission (“SEC”), only the compensation of Dr. Jha and Mr. Moloney are shown for prior years when each was a named executive officer of Motorola, Inc.

2009 Summary Compensation Table

 

Name and Principal

Position (a)

   Year
(b)
  

Salary
($) (1)

(c)

   

Bonus

($)

(d)

   

Stock

Awards

($) (2)

(e)

   

Option

Awards

($) (2)

(f)

   

Non-Equity
Incentive
Plan
Compensation
($) (3)

(g)

   

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings

($)

(h)

 

All Other
Compensation
($)

(i)

   

Total

($)

(j)

Sanjay K. Jha

   2009    $ 905,769 (4)     $ 1,750 (5)     $ 1,344,000 (6)     $ 0      $ 1,200,000 (7)     $0         $ 334,376 (8)     $ 3,785,895

Chief Executive Officer

   2008      484,615        0        33,850,305 (9)       69,698,513 (9)       0 (4)        0           412,096        104,445,529

Marc E. Rothman

   2009      430,000        0        102,630        742,847        40,000         0 (10)     10,405 (11)       1,325,882

Senior Vice President,

Chief Financial Officer

                   

Daniel M. Moloney

   2009      600,000        0        1,410,696 (12)       2,397,824 (12)       285,000      25,283 (13)     10,405 (14)       4,729,208

President

   2008      600,000        0        1,810,050        2,136,550        228,000      38,840 (13)     16,900        4,830,340
   2007      575,000        100,000 (15)       3,404,000        1,152,000        305,550      0 (13)     26,396        5,562,946

William C. Ogle

   2009      181,346 (16 )       0        362,500 (17)       1,354,500 (17)       273,000 (18)        0           375,000 (19)       2,477,154

Senior Vice President,

Chief Marketing Officer

                   

John P. Cipolla

   2009      450,000        0        907,740        549,452        37,000         0 (20)     12,000 (21)       1,956,192

Senior Vice President,

Product Development

                   
 

 

(1) Salary includes amounts deferred pursuant to salary reduction arrangements under the 401(k) Plan. Effective January 1, 2009, Motorola, Inc. suspended its matching contributions to the 401(k) Plan. The matching contributions are reinstated as of July 2010.

 

(2) The amounts in columns (e) and (f) reflect the aggregate grant date fair value of the stock and option awards granted in the respective fiscal year as computed in accordance with ASC Topic 718, excluding the effect of estimated forfeitures. Assumptions used in the calculation of these amounts are included in Note 8, “ Share-Based Compensation Plans and Other Incentive Plans ” in Motorola, Inc.’s Form 10-K for the fiscal year ended December 31, 2009. These amounts reflect the valuation method recently adopted by the SEC, which is the aggregate grant date fair value of the equity awards, rather than the dollar amounts recognized that year for financial statement reporting purposes, as previously required. The new aggregate grant date fair value method applies to previous years in the table as well. As such, in the year of a grant, the full aggregate grant date fair value appears, rather than the portion being expensed for financial statement reporting purposes in that year.

 

(3) The amounts in column (g) are the awards earned under the Motorola, Inc. Incentive Plan (“MIP”). There were no payments under the Motorola, Inc. Long-Range Incentive Plan (“LRIP”) cycle ending in 2009

 

(4) Dr. Jha voluntarily elected to take a 25% decrease in base salary for 2009 and forego any 2008 bonuses under MIP, including Dr. Jha’s contractually guaranteed cash bonus of $2,400,000.

 

(5) This amount consists of two awards under Motorola, Inc.’s patent award program.

 

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(6) This amount is the aggregate grant date fair value of restricted stock units (“RSUs”) granted to Dr. Jha on February 11, 2009. When Dr. Jha decided to voluntarily forego his 2008 contractually guaranteed cash bonus, the Motorola, Inc. Compensation and Leadership Committee decided to make a grant of RSUs to Dr. Jha with a value equal to: $2,400,000, less the amount of cash that would have been payable to the other Co-Chief Executive Officer had he not also foregone his 2008 bonus under MIP. The total cash value of the award was determined on February 11, 2009 to be $1,334,000. On February 11, 2009, based on the closing price of Motorola, Inc.’s common stock, 344,615 RSUs were granted to Dr. Jha. The RSUs vest in two equal installments on February 11, 2010 and on October 31, 2010.

 

(7) This amount reflects the cash bonus guaranteed to Dr. Jha for 2009 pursuant to his employment agreement.

 

(8) This amount consists of Motorola, Inc. perquisite costs for Dr. Jha of $334,376, including costs for personal use of company aircraft of $219,589, relocation benefits of $66,769, personal use of car and driver of $34,906 and security system monitoring. The incremental cost to Motorola, Inc. for Dr. Jha’s personal use of company aircraft is calculated by multiplying the number of hours Dr. Jha’s travels in a particular plane by the direct cost per flight hour per plane. Direct costs include fuel, maintenance, labor, parts, loading and parking fees, catering and crew. The incremental cost to Motorola, Inc. for Dr. Jha’s personal use of a car and driver is calculated by adding the costs for the driver, including salary and benefits, on a pro rata basis to the cost of fuel for driving to and from work and company events. The amount reported for personal use of company aircraft is net of a reimbursement made by Dr. Jha pursuant to the Aircraft Time Sharing Agreement dated May 4, 2009 between Motorola, Inc. and Dr. Jha, as previously disclosed in Motorola, Inc.’s quarterly report on Form 10-Q filed on May 6, 2009.

 

(9) These amounts are the aggregate grant date fair value of equity awards granted on August 4, 2008 in connection with Dr. Jha’s employment agreement. He was granted 2,304,653 “make-whole” RSUs and 10,211,226 “make-whole” options to replace awards of equivalent value that Dr. Jha forfeited at his prior employer upon joining Motorola, Inc. Also in connection with Dr. Jha’s employment agreement, he was granted 1,362,769 “inducement” RSUs and 6,383,658 “inducement” options. These grants were made to Dr. Jha in order to attract and retain an executive of his unique caliber and experience. The stock options will not have value unless the price of Motorola, Inc.’s stock increases from the grant date price of $9.82.

 

(10) For 2009, the aggregate change in present value from December 31, 2008 to December 31, 2009 of Mr. Rothman’s benefits under all pension plans, including benefits under the General Instrument Pension Plan and the General Instrument SERP Plan (“GI SERP”) was negative and is therefore reflected as $0. During that period, the change in present value of his benefit under the Motorola Pension Plan was $33,600 and under the Motorola Supplemental Pension Plan (“MSPP”) was ($49,770). The change in present value of his benefit under the General Instrument Pension Plan was $7,651 and under the GI SERP was $803. The negative change in MSPP present value is a result of Motorola, Inc. freezing all future benefit accruals and compensation increases under the MSPP, effective March 1, 2009, when calculated with the assumptions under SEC rules.

 

(11) This amount is Motorola, Inc. perquisite costs for Mr. Rothman for financial planning.

 

(12) On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options and RSUs. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(13)

For 2009, this amount consists of $25,283 in earnings on nonqualified deferred compensation in excess of the threshold for 2009 “above-market earnings” established pursuant to SEC rules. The aggregate change in present value from December 31, 2008 to December 31, 2009 of Mr. Moloney’s benefits under all pension plans, including benefits under the General Instrument Pension Plan and the General Instrument SERP plan (“GI SERP”) was negative and therefore is reflected as $0. During 2009, the change in the present value of his benefits under the Motorola Pension Plan was $46,849 and under the MSPP was ($142,336). The change

 

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in present value of his benefit under the General Instrument Pension Plan was $32,799 and under the General Instrument SERP plan (“GI SERP”) was $14,655. The negative change in MSPP present value is a result of the Company freezing all future benefit accruals and compensation increases under the MSPP, effective March 1, 2009, when calculated with the assumptions under SEC rules. For 2008, the aggregate change in present value from December 31, 2007 to December 31, 2008 of Mr. Moloney’s benefits under the Motorola Pension Plan was $8,763, under the MSPP was $13,953, under the General Instrument Pension Plan was $11,145 and under the GI SERP was $4,979. For 2007, the aggregate change in present value from December 31, 2006 to December 31, 2007 of Mr. Moloney’s benefits under all pension plans, including benefits under the General Instrument Pension Plan and the GI SERP was negative and therefore is reflected as $0. During 2007, the change in the present value of his benefit under the Motorola Pension Plan and the MSPP were $410 and $2,069, respectively. In 2007, there was a negative change in the present value of his benefit under the General Instrument Pension Plan and the GI SERP of ($14,055) and ($6,279), respectively. In connection with the Company’s acquisition of General Instrument Corporation in January of 2000, the value of Mr. Moloney’s benefits under the General Instrument Pension Plan and the GI SERP were frozen as of December 31, 2000.

 

(14) This amount is Company perquisite costs for Mr. Moloney for financial planning.

 

(15) In April 2007, Mr. Moloney received a one-time discretionary cash bonus in recognition of his efforts and to promote his retention.

 

(16) Mr. Ogle joined Motorola, Inc. on August 3, 2009. His annual base salary is $410,000 pursuant to his employment offer dated June 29, 2009. This amount reflects the portion of his annual salary earned in 2009.

 

(17) These equity awards were made pursuant to Mr. Ogle’s employment offer dated June 29, 2009.

 

(18) This amount reflects the cash bonus guaranteed to Mr. Ogle for 2009 pursuant to his employment offer.

 

(19) This amount consists of Motorola, Inc. perquisite costs for Mr. Ogle of $375,000, including commuting allowance of $175,000, legal fees of $110,998, a tax gross up of $69,193 and costs for relocation benefits.

 

(20) For 2009, the aggregate change in present value from December 31, 2008 to December 31, 2009 of Mr. Cipolla’s benefits under all pension plans was negative and is therefore reflected as $0. During that period, the change in present value of his benefit under the Motorola Pension Plan was $126,643 and under the MSPP was ($206,618). The negative change in MSPP present value is a result of Motorola, Inc. freezing all future benefit accruals and compensation increases under the MSPP, effective March 1, 2009, when calculated with the assumptions under SEC rules.

 

(21) This amount is Motorola, Inc. perquisite costs for Mr. Cipolla for financial planning.

Compensation Proportion

Motorola, Inc.’s executive compensation program is structured so that more than two-thirds of its senior executives’ targeted total compensation is “at risk” (in the form of equity grants, awards under LRIP and awards under MIP) and is therefore dependent upon Motorola, Inc.’s results. In determining the “at risk” proportion between cash and equity among the total mix of compensation, Motorola, Inc. considers the employee’s position and responsibilities, the employee’s ability to impact Motorola, Inc.’s results, and the competitive market for executive talent in our industry. Motorola, Inc. strives to balance the components of its compensation program appropriately in light of these factors. For a further discussion of Motorola, Inc.’s or our compensation methodology, see the “ Compensation Discussion and Analysis ”. For a discussion of the material terms of employment agreements with our Named Executive Officers, see “ Employment Contracts” . For a discussion of the material terms of the 2009 grants of plan based awards, see the footnotes to the “ Grants of Plan-Based Awards in 2009 ” table and the “ Compensation Discussion and Analysis ”.

 

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Grants of Plan-Based Awards in 2009

 

             

Estimated Future
Payouts Under

Non-Equity Incentive Plan Award

 

Estimated Future
Payouts Under

Equity Incentive Plan Awards

        All Other Stock
Awards: Number
of Shares of
Stock or Units
(#) (1)
(i)
   

All Other
Option Awards:
Number of
Securities
Underlying

Options (#) (2)
(j)

   

Exercise
or Base
Price of
Option

Awards
($/Sh) (3)
(k)

 

Grant
Date Fair
Value of
Stock and

Option
Awards($)
(l)

Name

(a)

  Grant
Type
 

Grant
Date

(b)

   

Threshold

($)

(c)

   

Target

($)

(d)

 

Maximum

($)

(e)

 

Threshold

(#)

(f)

 

Target

(#)

(g)

 

Maximum

(#)

(h)

             
                                                                       

Sanjay K. Jha

  MIP   01/01/2009 (4)     $ 1,200,000 (5)     $ 1,811,538   $ 3,061,499                            
  Equity   02/11/2009                               344,615 (7)              $ 1,344,000
 

Marc E. Rothman

  MIP   01/01/2009 (4)       0        322,500     545,025                            
  LRIP   01/01/2009 (6)       107,500        430,000     860,000                            
  Equity   01/21/2009                                    250,000 (8)     $ 4.51     567,500
  Equity   05/07/2009                               16,500 (9)     49,500 (10)       6.22     276,870
  Equity   06/12/2009                                    123,279 (11)       6.73     1,107
 

Daniel M. Moloney

  MIP   01/01/2009 (4)       0        569,999     963,298                            
  LRIP   01/01/2009 (6)       277,500        1,110,000     2,220,000                            
  Equity   05/07/2009                               226,800 (9)     681,200 (10)       6.22     3,808,520
 

William C. Ogle

  MIP   01/01/2009 (4)       273,000        273,000     273,000                            
  LRIP   01/01/2009 (6)       85,413        341,653     683,306                            
  Equity   08/03/2009                               50,000 (12)     350,000 (13)       7.25     1,717,000
 

John P. Cipolla

  MIP   01/01/2009 (4)       0        337,500     570,375                            
  LRIP   01/01/2009 (6)       112,500        450,000     900,000                            
  Equity   01/21/2009                                    200,000 (8)       4.51     454,000
  Equity   05/07/2009                               27,000 (9)     27,000 (10)       6.22     262,980
  Equity   06/12/2009                                    44,434 (11)       6.73     412
    Equity   12/01/2009                               90,000 (14)                739,800

 

(1) In the aggregate, the RSUs described in this table represent approximately 0.027% of the total shares of Motorola, Inc. common stock outstanding on January 31, 2010. RSUs granted on or after May 1, 2006 are not eligible for dividend equivalent rights. Each of these RSU awards were granted under the Motorola, Inc. Omnibus Incentive Plan of 2006. All RSUs entitle the holder to acquire shares of common stock and were valued at the fair market value at the time of the grant, as defined in the “ Fair Market Value Definition ” section of “ Compensation Discussion and Analysis ”.

 

(2) In the aggregate, the options described in this table are exercisable for approximately 0.055% of the total shares of Motorola, Inc. common stock outstanding on January 31, 2010. Each of these option awards were granted under the Motorola, Inc. Omnibus Incentive Plan of 2006. All options entitle the holder to acquire shares of common stock. The options carry with them the right to elect to have shares withheld upon exercise and/or to deliver previously-acquired shares of common stock to satisfy tax-withholding requirements. For Dr. Jha, options may be transferred to family members or certain entities in which family members have an interest. Unvested options are generally forfeited upon retirement. These options could expire earlier in certain situations.

 

(3) The exercise price of option awards is based on the fair market value of Motorola, Inc. common stock at the time of grant. See the “ Fair Market Value Definition ” section of “ Compensation Discussion and Analysis ” for further details.

 

(4) These 2009 awards are made pursuant to the 2009 Motorola Incentive Plan (“MIP”), and are payable in cash. MIP is Motorola, Inc.’s annual pay-for-performance bonus plan that is based upon a formula that combines business performance and individual performance. Awards may be $0 under the formula. Targets assume individual and business performance factors of 1.0. Awards under MIP are determined using a participant’s “eligible earnings” (generally, base salary) for the plan year. Maximum assumes individual and business performance factors of 1.3.

 

(5) Pursuant to Dr. Jha’s employment agreement, he was entitled to a 2009 cash bonus of not less than $1,200,000.

 

(6)

These grants are for the 2009-2011 cycle under the Motorola Long-Range Incentive Plan of 2009 (“LRIP”). Awards under the 2009-2011 LRIP cycle are determined in dollars but, at the discretion of the Motorola, Inc. Compensation and Leadership Committee, may be paid in cash or common stock. The measure/metric used is relative total shareholder return. For a discussion of the LRIP, including the targets and plan mechanics, see “ Compensation Discussion and

 

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Analysis ”. The amounts in the table represent 2009 performance which may be reduced to $0 at the end of the three-year cycle based upon total cycle performance. The amounts under “Threshold” assume the performance level necessary to generate an award was achieved. The amounts under “Target” assume performance factors of 1.0 based on a median three-year total shareholder return, which equates to a payout of 100% of target. The amounts under “Maximum” will be payable if Motorola, Inc.’s three-year total shareholder return ranks first or second amongst the peer companies, which would be a significant accomplishment, the probability of which is remote though possible.

 

(7) As previously disclosed on December 17, 2008, Dr. Jha voluntarily decided to forego his 2008 contractually guaranteed cash bonus of $2,400,000. At that time, the Motorola, Inc. Compensation and Leadership Committee agreed to make a grant of RSUs to Dr. Jha in the first quarter of 2009 with a value equal to: $2,400,000 less the amount of cash that would have been payable to the other Co-Chief Executive Officer under MIP had he also not foregone his 2008 bonus under MIP. The total cash value of the award was determined on February 11, 2009 to be $1,334,000. On February 11, 2009, based on the closing price of Motorola, Inc.’s common stock, 344,615 RSUs were granted to Dr. Jha. The RSUs vest in two equal installments on February 11, 2010 and October 31, 2010.

 

(8) On January 21, 2009, Mr. Rothman was granted 250,000 options and Mr. Cipolla was granted 200,000 options. The options vest and become exercisable in two equal annual installments on January 21, 2010 and January 21, 2011. The options expire on January 21, 2014, five years from the date of grant.

 

(9) On May 7, 2009, as part of Motorola, Inc.’s annual broad-based employee equity grants, Mr. Rothman was granted 16,500 RSUs, Mr. Moloney was granted 226,800 RSUs and Mr. Cipolla was granted 27,000 RSUs. The restrictions on these RSUs lapse in four equal annual installments beginning on May 7, 2010. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options and RSUs. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(10) On May 7, 2009, as part of the Motorola, Inc.’s annual broad-based employee equity grants, Mr. Rothman was granted 49,500 options, Mr. Moloney was granted 681,200 options and Mr. Cipolla was granted 27,000 options. The options vest and become exercisable in four equal annual installments beginning on May 7, 2010. The options expire on May 7, 2019, 10 years from the date of grant. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options and RSUs. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(11) On June 12, 2009, Mr. Rothman and Mr. Cipolla participated in Motorola, Inc.’s voluntary one-time stock option exchange program under which employees (other than certain executives of Motorola, Inc.) exchanged certain outstanding equity awards without creating significant compensation expense. The grant date fair value represents the expense that was incremental to the expense of the original option grant. In connection with their exchange, on June 12, 2009, Mr. Rothman was granted 123,279 options and Mr. Cipolla was granted 44,434 options. The options vest and become exercisable in two equal annual installments beginning on June 12, 2010. The options expire on June 12, 2014, five years from the date of grant.

 

(12) On August 3, 2009, Mr. Ogle was granted 50,000 RSUs. The restrictions on the grant lapse in two equal annual installments on August 3, 2010 and August 3, 2011.

 

(13) On August 3, 2009, Mr. Ogle was granted 350,000 options. The options vest and become exercisable in four equal annual installments beginning on August 3, 2010. The options expire on August 3, 2019, 10 years from the date of grant.

 

(14) On December 1, 2009, Mr. Cipolla was granted 90,000 RSUs. The restrictions on the grant lapse in two equal annual installments on December 1, 2011 and December 1, 2012.

 

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Outstanding Equity Awards at 2009 Fiscal Year-End

 

    Option Awards         Stock Awards

Name

(a)

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(Vested)
(b)
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(Unvested)
(c)
   

Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)

(d)

 

Option
Exercise
Price ($)

(e)

  Option
Expiration
Date
(f)
       

Number of
Shares or
Units of
Stock That
Have Not
Vested (#) (1)

(g)

    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($) (1)
(h)
  Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested (#)
(i)
 

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($) (1)

(j)

Sanjay K. Jha

  5,531,621 (2)     11,063,263 (2)       $ 9.82   08/04/2018       2,789,566 (3)     $ 21,647,032    
 

Marc E. Rothman

  44,704 (4)     0          7.2745   05/06/2013       211,295 (5)       1,637,166    
  12,937 (6)     38,813 (6)         10.26   05/06/2018            
  0      250,000 (7)         4.51   01/21/2014            
  0      49,500 (8)         6.22   05/07/2019            
  0      123,279 (9)         6.73   06/12/2014            
 

Daniel M. Moloney

  335,280 (10)     0          40.5154   01/12/2015       552,866 (11)       4,290,240    
  111,760 (12)     0          12.8937   03/16/2011                 
  26,760 (13)     0          11.99   02/14/2012                 
  15,880 (14)     0          13.1979   06/07/2012                 
  307,340 (15)     0          16.3028   05/04/2014                 
  225,000 (16)     0          15.47   05/03/2015                 
  100,000 (17)     100,000 (17)         17.80   07/05/2017                 
  50,000 (6)     150,000 (6)         10.26   05/06/2018                 
  0      349,000 (18)         9.99   08/22/2018                 
  0      681,200 (8)         6.22   05/07/2019                 
 

William C. Ogle

  0      350,000 (19)         7.25   08/03/2019       50,000 (20)       388,000    
 

John P. Cipolla

  5,625 (6)     16,875 (6)         10.26   05/06/2018       211,507 (21)       1,641,294    
  0      200,000 (7)         4.51   01/21/2014            
  0      27,000 (8)         6.22   05/07/2019            
    0      44,434 (9)           6.73   06/12/2014                        

 

(1) Awards of RSUs prior to May 1, 2006 are entitled to dividend equivalent rights. RSUs grants awarded on or after May 1, 2006 are not entitled to dividend equivalent rights. Dividend equivalent rights accrued until January 15, 2009 are included in the outstanding awards for the purposes of this table. Market value in column (h) is determined using the closing price of Motorola, Inc. common stock on December 31, 2009 of $7.76.

 

(2) These stock options were granted to Dr. Jha on August 4, 2008. 10,211,226 of these stock options were granted in connection with the make-whole provisions of Dr. Jha’s employment agreement. 6,383,658 of these stock options were granted in connection with the inducement provisions of Dr. Jha’s employment agreement. The original grants of options vest and become exercisable in three equal annual installments with the first installment having vested on July 31, 2009.

 

(3) 1,536,437 of these RSUs were granted to Dr. Jha on August 4, 2008 in connection with the make-whole provisions of his employment agreement. 908,514 of these RSUs were granted on August 4, 2008 in connection with the inducement provisions of his employment agreement. The restrictions on the original grants lapse in three equal annual installments with restrictions on the first installment having lapsed on July 31, 2009.

 

(4) These stock options were granted on May 6, 2003 as part of Motorola, Inc.’s annual broad-based employee equity grant. The original grant of options vested and became exercisable in four equal annual installments with the first installment having vested on May 6, 2004 and the final installment having vested on May 6, 2007.

 

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(5) This includes: (i) 7,982 RSUs remaining from Mr. Rothman’s October 14, 2005 grant including dividend reinvestment shares. The restrictions on these RSUs lapse on October 14, 2010; (ii) 12,500 RSUs remaining from Mr. Rothman’s May 3, 2006 grant with restrictions lapsing on May 3, 2010; (iii) 10,000 RSUs granted on July 25, 2007 with restrictions lapsing on July 25, 2012; (iv) 4,313 RSUs remaining from Mr. Rothman’s May 6, 2008 grant with restrictions lapsing on 1,437 RSUs on May 6, 2010, 1,437 RSUs on May 6, 2011 and 1,439 RSUs on May 6, 2012; (v) 160,000 RSUs granted on June 17, 2008 with restrictions lapsing equally on June 17, 2010 and June 17, 2011; and (vi) 16,500 RSUs granted on May 7, 2009 with restrictions lapsing in four equal annual installments beginning on May 7, 2010.

 

(6) These stock options were granted on May 6, 2008 as part of Motorola, Inc.’s annual broad-based employee equity grant. The original grant of options vests and became exercisable in four equal annual installments with the first installment having vested on May 6, 2009. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(7) These stock options were granted on January 21, 2009. These options vest and become exercisable in two equal installments on January 21, 2010 and January 21, 2011.

 

(8) These stock options were granted on May 7, 2009 as part of Motorola, Inc.’s annual broad-based employee equity grant. The original grant of options vests and became exercisable in four equal annual installments with the first installment vesting on May 7, 2010. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(9) These stock options were granted on June 12, 2009. These options vest and become exercisable in two equal installments on June 12, 2010 and June 12, 2011.

 

(10) These stock options were granted to Mr. Moloney on January 12, 2000. These options vested in four equal annual installments with the first installment having vested on January 12, 2001 and the final installment having vested on January 12, 2004.

 

(11) 50,000 of these RSUs were granted to Mr. Moloney on March 6, 2006 and the restrictions would have lapsed on March 6, 2011. 100,000 of these RSUs were granted on July 5, 2007 and the restrictions would have lapsed on July 5, 2011. 56,250 of these RSUs were granted on May 6, 2008, and the restrictions would have lapsed on 18,750 on May 6 of each of 2010, 2011 and 2012. 117,000 of these RSUs were granted on August 22, 2008 and the restrictions would have lapsed on 58,500 on August 22, 2010 and 2011. 226,800 of these RSUs were granted on May 7, 2009 and the restrictions would have lapsed in three equal annual installments beginning on May 7, 2010. The other 2,816 RSUs represent accrued dividend equivalent rights. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested RSUs. Mr. Moloney returned to Motorola, Inc. as an executive officer on September 1, 2010.

 

(12) These stock options were granted to Mr. Moloney on March 16, 2001 and vested in four equal annual installments with the first installment having vested on March 16, 2002 and the final installment having vested on March 16, 2005.

 

(13) These stock options were granted to Mr. Moloney on February 14, 2002. These options vested in four equal annual installments with the first installment having vested on February 14, 2003 and the final installment having vested on February 14, 2006.

 

(14) These stock options were granted to Mr. Moloney on June 7, 2002. These options vested in four equal annual installments with the first installment having vested on June 7, 2003 and the final installment having vested on June 7, 2006.

 

(15) These stock options were granted on May 4, 2004 as part of the Company’s annual broad-based employee equity grant. The options vested and became exercisable in four equal annual installments with the first installment having vested on May 4, 2005 and the final installment having vested on May 4, 2008.

 

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(16) These stock options were granted on May 3, 2005 as part of the Company’s annual broad-based employee equity grant. The options vested and became exercisable in four equal annual installments with the first installment having vested on May 3, 2006 and the final installment having vested on May 3, 2009.

 

(17) These stock options were granted to Mr. Moloney on July 5, 2007. These options vest and become exercisable in four equal annual installments with the first installment having vested on July 5, 2008. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options.

 

(18) These stock options were granted to Mr. Moloney on August 22, 2008. These options would have vested and become exercisable in two equal annual installments on August 22, 2010 and 2011. On March 5, 2010, as a result of his decision to leave the Company, Mr. Moloney forfeited all unvested stock options.

 

(19) These stock options were granted on August 3, 2009. These options vest and become exercisable in four equal annual installments beginning on August 3, 2010.

 

(20) These RSUs were granted on August 3, 2009. The restrictions on these RSUs lapse equally on August 3, 2010 and August 3, 2011.

 

(21) This includes: (i) 1,587 RSUs remaining from Mr. Cipolla’s March 3, 2006 grant including dividend reinvestment shares. The restrictions on these RSUs lapse on March 3, 2011, (ii) 2,500 RSUs remaining from Mr. Cipolla’s May 8, 2006 grant with restrictions lapsing on May 8, 2010, (iii) 5,625 remaining from Mr. Cipolla’s May 6, 2008 grant with restrictions lapsing equally on May 6, 2010, 2011 and 2012, (iv) 84,795 RSUs granted on May 6, 2008 with restrictions lapsing on 42,437 RSUs on May 6, 2010, and 42,438 RSUs on May 6, 2011, (vi) 27,000 RSUs granted on May 7, 2009 with restrictions lapsing in four equal annual installments beginning on May 7, 2010, and (vii) 90,000 RSUs granted on December 1, 2009 with restrictions lapsing in two equal annual installments on December 1, 2011 and December 1, 2012.

Option Exercises and Stock Vested in 2009

 

     Option Awards    Stock Awards (1)
Name (a)    Number of
Shares
Acquired
on Exercise
(#) (b)
  

Value Realized
on Exercise

$ (c) (2)

   Number of
Shares
Acquired
on Vesting
(#) (d)
   Value Realized
on Vesting
($)   (e) (3)

Sanjay K. Jha

   0    $ 0    1,222,471    $ 8,752,892

Marc E. Rothman

   0      0    1,437      9,067

Daniel M. Moloney

   0      0    118,750      731,313

William C. Ogle

   0      0    0      0

John P. Cipolla

   0      0    41,875      136,631

 

(1) Includes RSUs accrued pursuant to dividend equivalent rights.

 

(2) The “Value Realized on Exercise” represents the difference between the base (or exercise) price of the option shares and the market price of the option shares at exercise. The value realized was determined without considering any taxes that may have been owed.

 

(3) The “Value Realized on Vesting” is computed by multiplying the number of shares of stock or units by the market value of the underlying shares on the vesting date. When an award vests on a non-trading day the most recent previous market closing price is used for the purpose of this calculation.

 

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Nonqualified Deferred Compensation in 2009

The Motorola, Inc. Management Deferred Compensation Plan allows eligible executive participants, the opportunity to defer portions of their base salary and annual cash incentive compensation and thereby defer taxes. Motorola does not contribute to this plan. The Motorola Management Deferred Compensation Plan is not intended to provide for the payment of above-market or preferential earnings on compensation deferred under the plan, however, as described below and pursuant to SEC rules, all earnings on nonqualified deferred compensation in 2009 in excess of 4.9% would have been deemed “above-market earnings”. Of the Named Executive Officers, only Mr. Moloney participated in the plan. Effective January 1, 2008, because of low participation, the Motorola Deferred Compensation Plan was temporarily closed to new deferrals.

 

Name (a)    Executive
Contributions in
Last FY
($)
(b)
   Registrant
Contributions in
Last FY
($)
(c)
   Aggregate
Earnings
in Last  FY
($) (1)
(d)
   Aggregate
Withdrawals/
Distributions
($)
(e)
   Aggregate
Balance
at Last FYE
($)
(f)

Sanjay K. Jha

   —      —        —      —        —  

Marc E. Rothman

   —      —        —      —        —  

Daniel M. Moloney

   —      —      $ 38,380    —      $ 305,216

William C. Ogle

   —      —        —      —        —  

John P. Cipolla

   —      —        —      —        —  

 

(1) Pursuant to SEC rules, all earnings on nonqualified deferred compensation in 2009 in excess of 4.9% are deemed “above-market earnings”. Based on the performance of the funds elected in advance by the participant (as described below), for “above-market earnings” on nonqualified deferred compensation see the “ Change in Pension Value and Nonqualified Deferred Compensation Earnings ” column of the “ Summary Compensation Table ”.

The Motorola Management Deferred Compensation Plan uses the following funds as the index for calculating investment returns on a participant’s deferrals. The participant’s deferrals are deemed to be invested in these funds as per the participant’s election. The participant does not actually own any share of the investment options he/she selects. The investment fund choices mirror the fund choices available in the Motorola 401(k) plan (with the exception of the Motorola stock fund). The funds are available only through variable universal life insurance products and are not publicly traded mutual funds.

 

Fund Offering    Investment
Classification
   1-Year Annualized Average  

* Short-Term Investment Fund

   Money Market    0.40

* Short-Term Bond Fund

   Short-Term Bond    6.35

* Long-Term Bond Fund

   Long-Term Bond    6.55

* Balanced Fund I

   Moderate Allocation    20.31

* Balanced Fund II

   Moderate Allocation    23.32

* Large Company Equity Fund

   Large Blend    27.03

* Mid-Sized Company Equity Fund

   Mid-Cap Blend    38.03

* Small Company Equity Fund

   Small Blend    28.03

* International Equity Fund

   Foreign Large Blend    32.19

Deferral elections can be changed only during the open enrollment period prior to each plan (calendar) year. Changes to distribution elections must be filed at least 12 months in advance. Any change will require that the payment start date be at least five years later than the previous payment start date. A participant may postpone or change his/her termination payment distribution election once per plan (calendar) year. Hardship withdrawals are

 

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available, but no other nonscheduled withdrawals are available. Termination payments cannot be earlier than six months after separation from service, except in the event of disability, death or, possibly, a change in control of the Company. The amounts reported in the “Aggregate Earnings in Last FY” column represent all earnings on nonqualified deferred compensation in 2009. The portion of earnings reported as “above-market earnings” in the Summary Compensation Table in the “ Change in Pension Value and Non-Qualified Deferred Compensation Earnings ” column would have represented the amount in excess of the 4.9% threshold established for 2009 pursuant to SEC rules.

RETIREMENT PLANS

The Motorola Pension Plan (“Pension Plan”) and the Motorola Supplemental Pension Plan (“MSPP”) are intended to provide pension benefits to the Named Executive Officers in the future. Prior to January 1, 2005, most regular U.S. employees who had completed one year of employment with Motorola, Inc. or certain of its subsidiaries were eligible to participate in the pension plans. Those employees become vested after five years of service. Effective January 1, 2005, newly-hired employees were no longer eligible to participate in the Pension Plan or the MSPP. Effective January 1, 2008, employees in the Pension Plan not yet vested, became vested after three years of service. Normal retirement is at age 65.

Effective March 1, 2009, all future benefit accruals and compensation increases under the Pension Plan and MSPP automatically ceased for all individuals who were participants under the Pension Plan as of February 28, 2009. However, active participants continue to earn vesting credit towards their Pension Plan benefit on and after March 1, 2009 if not already fully vested.

Traditional and Portable Plan

The Pension Plan contains two benefit formulas, referred to as the Traditional Plan and the Portable Plan. The Traditional Plan provides an annual pension annuity benefit based on the participant’s average earnings and the participant’s benefit service, offset by the participant’s estimated Social Security benefit at age 65. The Traditional Plan formula consists of (1) for service from 1978 through 1987, (a)  the sum of (i) 40% of the first $20,000 of final average earnings, plus (ii) 35% of final average earnings in excess of $20,000, multiplied by (b) a fraction whose numerator is the number of months of service during that period and whose denominator is 420, plus (2) for service after 1987, 75% of final average earnings, multiplied by a fraction whose numerator is the number of months of service after 1987 (not exceeding 420) and whose denominator is 420, minus (3) 50% of the participant’s projected primary annual Social Security benefit at age 65 (or the participant’s later retirement age (including any delayed retirement credits or similar adjustments)) multiplied by a fraction whose numerator is the number of months of benefit service after 1977 (not exceeding 420) and whose denominator is 420.

The Portable Plan provides a lump-sum pension benefit based on the participant’s average earnings, and a “benefit percentage” determined by the participant’s vesting service and the participant’s benefit service. The Portable Plan formula consists of (1) average earnings multiplied by the participant’s cumulative benefit percentage, which cumulative benefit percentage is based on benefit service earned on or after July 1, 2000 and vesting service (where a participant’s benefit percentage is determined as follows: 4% for each year of benefit service earned while the participant has five or fewer years of vesting service, plus 5% for each year of benefit service earned while the participant has more than five but less than ten years of vesting service, plus 6% for each year of benefit service earned while the participant has more than ten but less than 15 years of vesting service, plus 7% for each year of benefit service earned while the participant has more than 15 years of vesting service), plus (2) the participant’s Traditional Plan benefit as of June 30, 2000 (if applicable) converted to a lump-sum based on the participant’s age and the interest rate in effect for the year of payment.

Both Pension Plan formulas use “average earnings” to calculate the relevant pension benefit. Prior to January 1, 2008, a participant’s “final average earnings” were used to calculate the relevant pension benefit, while the participant’s “modified average earnings” are used to calculate the relevant pension benefit beginning on and after January 1, 2008.

 

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A participant’s “final average earnings” are his/her average earnings for the five years of his/her highest pay during the last ten calendar years (including years he/she did not work a complete year) of the participant’s Motorola, Inc. employment. A participant’s “modified average earnings” are: (1)  the sum of (a) his/her average earnings for the five (or fewer if hired after 2002) years of his/her highest pay during the ten calendar years before January 1, 2008, plus (b) his/her earnings during all years after 2007 in which he/she participated in the pension plan, divided by (2)  the sum of (a) the number of years of the participant’s benefit service under the Pension Plan prior to January 1, 2008, up to a maximum of five years (or fewer, if less than five); plus (b) the participant’s total years of participation in the Pension Plan for all years after 2007. Eligible earnings include regular earnings, commissions, overtime, lump-sum merit pay, participant contributions to the Motorola, Inc. 401(k) Plan and other pre-tax plans and incentive pay with respect to the period January 1, 2000 to February 3, 2002. After February 3, 2002, incentive pay was excluded from the definition of eligible compensation.

401(k) Plan

On December 15, 2008, the Motorola, Inc. Board of Directors authorized amendments to the Motorola, Inc. 401(k) Plan. On this date, the Board determined that, effective January 1, 2009, Motorola, Inc.’s match of employee contributions to the 401(k) Plan was suspended until subsequent Board action in the future reactivates contributions, if any, made by Motorola, Inc. to the 401(k) Plan. On March 16, 2010, the Motorola, Inc. Compensation and Leadership Committee recommended the Board reinstate the 401(k) matching contributions as of July 1, 2010 and approved an amendment to permit after-tax contributions by employees. Matching contributions were reinstated as of July 1, 2010 at a rate of 4% on the first 4% of employee contributions. The maximum matching contribution for the 2010 Plan year is pro-rated to account for the number of months remaining in the year.

Motorola, Inc. Supplemental Pension Plan

The MSPP provides benefits for highly compensated individuals whose tax-qualified Pension Plan benefits are limited by certain IRS limits or by participation in the Motorola, Inc. Management Deferred Compensation Plan. The IRS annual salary limitation (Section 401(a)(17) of the Internal Revenue Code, as amended (the “Code”)) and certain other IRS requirements reduce pension benefits from tax-qualified Pension Plans for certain highly compensated individuals. The MSPP is designed to offset these limitations. The MSPP is a non-qualified plan, which means benefits are not subject to certain nondiscrimination testing and reporting requirements of the Employment Retirement Income Security Act of 1974 (“ERISA”); however, these amounts are unsecured, leaving the participants in the status of a general creditor of Motorola, Inc.

On December 15, 2008, the Motorola, Inc. Board of Directors authorized amendments to the MSPP. On this date, commensurate with the Board of Director’s decision to freeze the Motorola Pension Plan, the Board of Directors also authorized the amendment of the MSPP, effective March 1, 2009, to freeze all future benefit accruals and compensation increases under this plan for all individuals who were participants under this plan as of February 28, 2009. Additionally, the MSPP was further amended to freeze any future participation in the MSPP after January 1, 2009 unless such participation was due to a prior contractual entitlement.

General Instrument Corporation Pension Plan and Supplemental Executive Retirement Plan

The Company acquired General Instrument Corporation in January of 2000. The General Instrument Corporation Pension Plan (the “GI Pension”), frozen on December 31, 2000, provides a pension annuity benefit based on the participant’s benefit service, average monthly compensation and excess monthly compensation. Mr. Moloney and Mr. Rothman are the only Named Executive Officers who participated in the GI Pension.

The General Instrument Corporation Supplemental Executive Retirement Plan (“GI SERP”), frozen on December 31, 2000, provides benefits for highly compensated individuals whose tax qualified pension plan benefits are reduced by certain IRS limits, similar to the MSPP. Mr. Rothman and Mr. Moloney are the only Named Executive Officers who participated in the GI SERP.

 

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Pension Benefits in 2009

Assumptions described in Note 7, “Retirement Benefits” in Motorola, Inc.’s Form 10-K for the fiscal year ended December 31, 2009 are also used below and incorporated by reference. As stated above, effective March 1, 2009, all future benefit accruals and compensation increases under the Pension Plan and MSPP automatically ceased for all individuals who were participants under the Pension Plan as of February 28, 2009.

 

Name

(a)

  

Plan Name

(b)

  

Number of

Years Credited

Service (#)(1)

(c)

  

Present Value

of Accumulated

Benefit ($)

(d)

  

Payments

During Last

Fiscal Year ($)

(e)

Sanjay K. Jha

   Pension Plan (2)    0         0
   Supplemental Pension Plan (2)    0         0

Marc E. Rothman

   Pension Plan (3)    14 yrs 1 mth    $ 130,018    0
   Supplemental Pension Plan (4)(5)    14 yrs 1 mth      3,465    0

Daniel M. Moloney

   Pension Plan (3)    25 Yrs 8 Mths      294,972    0
   Supplemental Pension Plan (4)    25 Yrs 8 Mths      72,526    0

William C. Ogle

   Pension Plan (2)    0         0
   Supplemental Pension Plan (2)    0         0

John P. Cipolla

   Pension Plan    30 yrs 8 mths      601,718    0
   Supplemental Pension Plan (5)    30 yrs 8 mths      0    0

 

(1) When Motorola, Inc. acquires a company, it does not credit or negotiate crediting years of service for the purpose of benefit accruals or augmentation. In certain circumstances, prior service may count toward eligibility and vesting service.

 

(2) Dr. Jha and Mr. Ogle were hired after January 1, 2005 and therefore are not eligible to participate in either the Pension Plan or the MSPP.

 

(3) In connection with Motorola, Inc.’s acquisition of General Instrument Corporation in January of 2000, Mr. Rothman’s and Mr. Moloney’s benefits under the General Instrument Pension Plan were frozen as of December 31, 2000 at $9,867 and $35,413, respectively, and are included in the amounts listed in column (d).

 

(4) In connection with Motorola, Inc.’s acquisition of General Instrument Corporation in January of 2000, Mr. Rothman’s and Mr. Moloney’s benefit under the GI SERP was frozen as of December 31, 2000 at $1,037 and $15,822, respectively, and is included in the amount listed in column (d).

 

(5) Messrs. Rothman and Cipolla are not eligible to participate in the MSPP because they had not met the eligibility requirements to receive the MSPP benefit when the plan was frozen, effective March 1, 2009.

 

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EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS

Employment Agreement with Sanjay K. Jha

On August 4, 2008, Dr. Sanjay K. Jha became Co-Chief Executive Officer of Motorola, Inc., Chief Executive Officer of the Mobile Devices business (the “Mobile Devices business”) of Motorola, Inc. and a member of the Board of Directors of Motorola, Inc. On this same date, Motorola, Inc. and Dr. Jha entered into an employment agreement (the “original employment agreement”) providing Dr. Jha with an annual base salary of $1,200,000 and a guaranteed annual bonus of $2,400,000 for 2008 and $1,200,000 for 2009 and a target annual bonus of not less than 200% of base salary thereafter. The agreement was subsequently amended on December 15, 2008 and February 11, 2010 (collectively, the “amended employment agreement”).

On February 11, 2010, Dr. Jha’s title changed to Co-Chief Executive Officer of Motorola, Inc. and Chief Executive Officer of Motorola, Inc.’s Mobile Devices and Home business. Motorola, Inc. announced that it plans to separate into two independent, publicly traded companies in the first quarter of 2011. The separation will result in one public company comprised of Motorola, Inc.’s Mobile Devices and Home businesses, led by Dr. Jha, and one public company comprised of Motorola, Inc.’s other businesses. On this date, Motorola, Inc. and Dr. Jha also entered into the Second Amendment (the “Second Amendment”) to Dr. Jha’s amended employment agreement.

As previously disclosed on December 17, 2008, Dr. Jha voluntarily decided to forego any 2008 bonus under MIP. At that time, the Motorola, Inc. Compensation and Leadership Committee agreed to make a grant of RSUs to Dr. Jha in the first quarter of 2009 with a value equal to: $2,400,000 less the amount of cash that would have been payable to the other Co-Chief Executive Officer of Motorola, Inc. under MIP had he not also foregone his 2008 bonus under MIP. The total cash value of the RSU award was determined on February 11, 2009 to be $1,334,000. On February 11, 2009, based on the closing price of Motorola, Inc.’s common stock, 344,615 RSUs were granted to Dr. Jha. The RSUs vest in two equal installments on February 11, 2010 and October 31, 2010.

Pursuant to make-whole awards under his original employment agreement, Dr. Jha was granted 2,304,653 RSUs and 10,211,226 options to purchase shares of Motorola, Inc. common stock. Pursuant to inducement awards (“Inducement Awards”) under his original employment agreement, Dr. Jha was granted 1,362,769 RSUs and 6,383,658 options to purchase shares of Motorola, Inc. common stock. Each of the above equity awards vest or restrictions lapse in three equal annual installments with the first installment having vested on July 31, 2009.

Pursuant to the amended employment agreement, in the event the Mobile Devices business becomes a separate, publicly traded company (the “new Mobile Devices entity” or “new MDb”), all of Dr. Jha’s outstanding equity awards that relate to Motorola, Inc. common stock would convert into equity awards that relate to the stock of the new Mobile Devices entity. The new Mobile Devices entity will grant Dr. Jha a post-separation equity award (the “Post-Separation Equity Award”) in an amount that, together with his Inducement Awards, represent between 1.8% and 3% ownership of the new Mobile Devices entity, depending on the entity’s initial market capitalization. If the market capitalization of the new Mobile Devices entity is equal to or less than $6.0 billion, the Post-Separation Equity Award, together with the Inducement Awards, will represent 3% of the new Mobile Devices entity’s total equity immediately following the separation. If the market capitalization is greater than $6.0 billion, the Post-Separation Equity Award, together with the Inducement Awards, will be reduced on a linear basis, calculated as the quotient obtained by dividing $6.0 billion by the market capitalization and finding the product of that ratio times 3%. The market capitalization calculation is based on an average of the closing price of Company stock on the first fifteen trading days and the Company expects to make the Post-Separation Equity Award on or after the fifteenth trading day following the Distribution. 90% of the award will be stock options and 10% will be restricted stock and each will vest, subject to continued employment, in three installments, each vesting date to be the later of (a) the date on which the average closing price of new MDb

 

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common stock over a fifteen-day trading period is 10% greater than the average closing price of new MDb common stock over the fifteen-day trading period immediately following the date that new MDb becomes a separate, publicly traded company, and (b) the first, second and third anniversary of the grant date, as applicable.

In the event the Mobile Devices business does not become a separate, publicly traded company on or prior to June 30, 2011 (a “Separation Event”) (as extended from October 31, 2010 by the Second Amendment to Dr. Jha’s employment agreement) or if the Mobile Devices business is disposed of in a manner where it is not at least 50% owned by Motorola, Inc. on or prior to June 30, 2011 (a “Disposition Event”), Dr. Jha will be entitled, by July 15, 2011, to a lump sum cash payment from Motorola or a successor equal to $38 million (the “Contingent Payment”) (increased from $30 million by the Second Amendment to Dr. Jha’s employment agreement) and will not be entitled to the Post-Separation Equity Award. Moreover, if a Separation Event does not occur or if a Disposition Event does occur by June 30, 2011 and Dr. Jha is terminated or resigns, the Contingent Payment is in addition to other entitlements discussed below because such a termination would be deemed “without cause” or for “good reason” under the amended employment agreement. Further, if any successor to the Mobile Devices business does not assume the employment agreement, that also constitutes “good reason” for Dr. Jha to terminate and receive the other entitlements discussed below. If the Separation Event does not occur, Dr. Jha’s employment with Motorola, Inc. will automatically terminate “without cause” on August 31, 2011.

In the event of Dr. Jha’s termination of employment “without cause” or by Dr. Jha for “good reason”, Dr. Jha is entitled to lump sum payments consisting of: (1) accrued and unpaid obligations (including base salary, vacation pay and undistributed bonuses), (2) severance equal to two times (prior to a change of control) or three times (on or after a change of control) the sum of Dr. Jha’s base salary and target annual bonus, (3) a pro rata annual bonus based on actual performance during the year in which termination has occurred, (4) in the event that the Mobile Devices business does not become a separate, publicly traded company and Dr. Jha’s employment is terminated on or prior to June 30, 2011, the Contingent Payment, to the extent not previously paid, (5) two years (prior to a change of control) or three years (following a change of control), of medical insurance continuation, and (6) prior to a change of control, accelerated vesting of the make-whole award RSUs and options, inducement award RSUs and options and two years continued vesting of all other equity awards; and, following a change of control, accelerated vesting of all equity awards. In the event Motorola, Inc. terminates Dr. Jha’s employment “for cause” or Dr. Jha terminates employment “without good reason”, he is entitled only to accrued and unpaid base salary and vacation pay. In the event of a termination of employment due to death or disability, Dr. Jha is entitled to accrued and unpaid obligations (including base salary, vacation pay and undistributed bonuses) and vesting of all then unvested equity awards that are outstanding as of the date of termination.

“Good reason” for Dr. Jha to terminate his employment and receive the above generally includes: (1) a Separation Event has not occurred on or prior to June 30, 2011 or a Disposition Event has occurred by June 30, 2011, (2) a reduction in salary, bonus targets or benefits, (3) a failure to continue on the Board of Directors or negative change in reporting structure, (4) Motorola, Inc. requires the principal location of employment be more than 50 miles from Libertyville, Illinois, (other than to the extent agreed to or requested by Dr. Jha), (5) the failure of the successor to the Mobile Devices business to assume the employment agreement, or (6) any other breach of the agreement.

Dr. Jha was eligible to receive a long-term incentive award commensurate with his position in May 2010 when annual equity awards were made.

During his employment term, Dr. Jha is eligible to participate in the health and welfare, perquisite, fringe benefits and other arrangements generally available to other senior executives. Dr. Jha is entitled to the use of the company’s aircraft for business and personal travel pursuant to the Motorola, Inc.’s security policy. Dr. Jha is entitled to relocation expenses, including temporary housing, until the Separation Event or June 30, 2011, whichever is earlier. Dr. Jha is not covered by the Senior Officer Change in Control Severance Plan, as defined below, and did not participate in LRIP in 2008 or 2009. Dr. Jha is entitled to a gross-up for excise taxes on excess parachute payments, subject to a 10% “cut-back” (i.e., change of control payments will be reduced below the 280G safe harbor if the total payments are less than 10% in excess of the 280G safe harbor).

 

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Dr. Jha’s employment agreement and certain of his equity awards contain customary restrictive covenants, including perpetual confidentiality obligations and employee non-solicitation and business non-compete provisions relating to Motorola, Inc. and the new Mobile Devices entity that apply during the employment period and the two-year period following termination of employment.

Other Arrangements

Mr. Moloney

Pursuant to Mr. Moloney’s employment offer, among other standard provisions, (1) he will be granted equity compensation awards in Motorola Mobility in the amount of $6.5 million subject to and upon consummation of the separation by June 30, 2011, in such form and on such terms and conditions as equity grants are made to similarly situated employees of Motorola Mobility generally at such time; (2) he was granted a one-time cash sign-on bonus of $325,000, of which $162,500 was paid within 30 days from Mr. Moloney’s start date with Motorola, Inc. and, subject to his continued employment with Motorola, Inc. (or, if applicable, Motorola Mobility), $162,500 will be paid immediately following the six-month anniversary of his start date. Mr. Moloney shall forfeit and repay to the Company (or, if applicable, Motorola Mobility) any such amounts paid to him if, within 12 months following any such payment, he is terminated for “cause” (as defined under the Motorola, Inc. Executive Severance Plan) or his employment is terminated on his own initiative for any reason; (3) in addition if (a) Mr. Moloney’s employment is terminated by Motorola, Inc. (or if applicable Motorola Mobility) without “cause” before the first anniversary of his employment date, he will be eligible for a total cash severance allowance of 18 months’ base salary plus other benefits that are prescribed under the Motorola, Inc. Executive Severance Plan (or if applicable, a Motorola Mobility executive severance plan); (b) if his employment is terminated by Motorola, Inc. (or if applicable, Motorola Mobility) without “cause” on or after the first anniversary of his employment date, he will be eligible for a total cash severance allowance of 12 months’ base salary plus other benefits that are prescribed under the Motorola, Inc. Executive Severance Plan (or if applicable, a Motorola Mobility executive severance plan); and (c) in no event will he be eligible for benefits under the Motorola, Inc. Executive Severance Plan as a result of his ceasing to be an employee of Motorola, Inc. as of and following the separation.

Mr. Ogle

Pursuant to Mr. Ogle’s employment offer, among other standard provisions, he would also be entitled to severance eligibility if the separation of Motorola, Inc. into two independent, publicly traded companies did not occur by January 20, 2011. He was also awarded a one-time sign-on bonus of $250,000 which was paid in January 2010.

Change in Control Arrangements

Motorola, Inc. has Change in Control Severance Plans (the “Plans”) for its elected officers. The Plan applicable to the Named Executive Officers, other than Dr. Jha, is the Motorola, Inc. Senior Officer Change in Control Severance Plan (the “Senior Officer Plan”). The Senior Officer Plan provides for the payment of benefits in the event that: (1) an executive officer terminates his or her employment for “Good Reason” (as defined) within two years of a “Change in Control” (as defined), or (2) the executive officer’s employment is involuntarily terminated for any reason other than termination for “Cause” (as defined), disability, death or normal retirement within two years of a change in control of Motorola, Inc. In addition to unpaid salary for accrued vacation days and accrued salary through the termination date, the lump sum payable to an executive officer entitled thereto would be equal to the sum of:

 

  (1) three times the greater of the executive officer’s highest annual base salary in effect during the three years immediately preceding the Change in Control and the annual base salary in effect on the termination date; plus

 

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  (2) three times the highest annual bonus received by the executive officer during the immediately preceding five fiscal years ending on or before the termination date; plus

 

  (3) a pro rata target bonus for the performance period (year, quarter or month) in which the termination occurs.

The executive officer would also receive continued medical and insurance benefits for three years, and three years of age and service credit for retiree medical eligibility. In the event the executive officer is subject to the excise tax under Section 4999 of the Code, Motorola, Inc. will make a tax reimbursement payment to the executive officer to offset the impact of such excise tax. The Senior Officer Plan’s term is for three years, subject to automatic one-year extensions unless Motorola, Inc. gives 90 days prior notice that it does not wish to extend. In addition, if a Change in Control occurs during the term, the Plans continue for an additional two years. These Plans replaced individual agreements that Motorola, Inc. began providing in 1988. In addition to plans covering all of Motorola, Inc.’s officers, there are change in control protections for the general employee population in the Motorola, Inc. Involuntary Severance Plan. A previous stand-alone change in control severance plan for the general employee population was terminated in 2008.

In addition, except as otherwise determined by the Motorola, Inc. Compensation and Leadership Committee at the time of the grant of an award, under the 2006 Omnibus Incentive Plan, upon a change in control of Motorola, Inc.: all equity-based awards granted to an executive officer become fully vested and exercisable; all performance goals are deemed achieved at target levels and all other terms and conditions met; all performance stock would be delivered as promptly as practicable; all performance units, RSUs and other units would be paid out as promptly as practicable; all annual management incentive awards would be paid out at target levels (or earned levels, if greater) and all other terms and conditions deemed met; and all other stock or cash awards would be delivered and paid. Such treatment (referred to herein as “Accelerated Treatment”) does not apply if and to the extent that such awards are assumed by the successor corporation (or parent thereof) or are replaced with awards that preserve the existing value of such awards at the time of the change in control and provide for subsequent payout in accordance with the same vesting schedule applicable to the original awards. With respect to any awards that are so assumed or replaced, such assumed or replaced awards shall provide for the Accelerated Treatment with respect to any executive officer that is involuntarily terminated (for a reason other than “Cause”) (as defined) or quits for “Good Reason” (as defined) within 24 months of the change in control. Such equity awards contain customary restrictive covenants, including perpetual confidentially obligations, and business non-compete provisions and employee non-solicitation relating to Motorola, Inc. and its successors that apply during the employment period and the one- or two-year periods following termination of employment.

Executive Severance Plan

Motorola, Inc. adopted an Executive Severance Plan (“ExSP”) for all elected officers and appointed vice presidents, effective October 1, 2008. The ExSP is applicable to Named Executive Officers in the Summary Compensation Table, other than Dr, Jha. The ExSP provides for the payment of benefits in the event that an executive officer’s employment is terminated by Motorola, Inc. other than: (a) for total and permanent disability, (b) for Cause (as defined therein), (c) due to death, (d) if the executive officer is offered employment at a substantially similar direct compensation level with another company in connection with a sale, lease, outsourcing arrangement or other asset transfer or transfer of any portion of a facility or all or any portion of a discrete organizational unit or business segment of Motorola, Inc. or remains employed by an affiliate or subsidiary that is sold or spun off, (e) if the termination of employment is followed by immediate or continued employment by Motorola, Inc. or an affiliate or subsidiary, or (f) if the executive terminates voluntarily for any reason. In addition to accrued salary through the separation date, the lump sums payable to an executive officer who signs a prescribed separation agreement and general release of claims against Motorola, Inc., and complies with the restrictive covenants described below, would be equal to the sum of:

 

  (1) 12 months of base salary; and

 

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  (2) Pro rata alternate annual bonus or pro rata alternate sales incentive, whichever is applicable, for the performance period (year, month or quarter, as applicable) in which separation occurs.

In addition, the executive officer would receive (a) 12 months of continued medical plan coverage at the active employee premium rate, offset against the COBRA amount, (b) up to 12 months outplacement services, and (c) financial planning services. Any severance pay and benefits paid under the ExSP are to be offset against any severance pay and benefits payable under the Senior Officer Change in Control Plan and/or other individual severance arrangements. If an executive officer receives an alternate annual bonus or alternate sales incentive under the ExSP, the executive officer is not to receive an annual bonus or sales incentive under any applicable plan for the same performance period. All equity grants and other benefits are to be administered in accord with their prescribed terms. Such equity awards contain customary restrictive covenants, including perpetual confidentially obligations, and business non-compete provisions and employee non-solicitation relating to Motorola, Inc. and its successors that apply during the employment period and the one- or two-year periods following termination of employment. The Compensation and Leadership Committee of the Motorola, Inc. Board of Directors, or in some circumstances its delegate, may, in its sole discretion, reduce, eliminate or otherwise adjust the amount of an executive officer’s severance pay and benefits, including any bonus or incentive.

Termination and Change in Control Table for 2009

The tables below outline the potential payments to our Chief Executive Officer and other Named Executive Officers upon the occurrence of certain termination triggering events. For the purposes of the table, below are the standard definitions for the various types of termination, although exact definitions may vary by agreement and by person.

“Voluntary termination” means a termination initiated by the officer.

“Voluntary termination for Good Reason” occurs when, other than in connection with a Change in Control, employment is terminated by an officer for Good Reason.

“Good Reason” means (1) an officer is assigned duties materially inconsistent with his position, duties, responsibilities and status, or his duties are materially diminished, during the 90-day period immediately preceding a Change in Control, (2) his position, authority, duties or responsibilities are materially diminished from those in effect during the 90-day period immediately preceding a Change in Control, (3) his annual base salary or total annual compensation opportunity are materially reduced, (4) Motorola, Inc. requires the principal location of employment be more than 50 miles from the officer’s current location (other than to the extent agreed to or requested by the officer), (5) Motorola, Inc. fails to obtain a satisfactory agreement from any successor to assume and perform the relevant plan, or (6) any other material breach of the relevant plan. In the case of Dr. Jha, “Good Reason” also means (1) a failure to continue on the Board of Directors or a negative change in reporting structure, (2) a Separation Event has not occurred on or prior to June 30, 2011 or a Disposition Event has occurred by June 30, 2011, or (3) the failure of the successor to the Mobile Devices business to assume his employment agreement.

“Voluntary termination—Retirement” means, apart from any pension plan or MIP, for purposes of the 2006 Omnibus Incentive Plan and the 2006 and 2009 Long-Range Incentive Plans, retirement after reaching age 55 with at least 20 years of service, or age 60 with at least 10 years of service, or age 65; for purposes of the Motorola Incentive Plans, retirement after reaching age 55 with three years of service; and for purposes of the Motorola Elected Officer Supplementary Retirement Plan, retirement after reaching age 60 (early retirement age for an unreduced benefit) or age 57 for a reduced benefit retirement, if applicable.

“Involuntary Termination—Total and Permanent Disability” means termination of employment following entitlement to long-term disability benefits under the Motorola, Inc. Disability Income Plan, as amended and any successor plan, or a determination of a permanent and total disability under a state workers compensation statute.

 

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“Involuntary Termination—For Cause” means termination of employment following any misconduct identified as a ground for termination in the Motorola, Inc. Code of Business Conduct, or the human resources policies, or other written policies or procedures, including among other things, conviction for any criminal violation involving dishonesty, fraud or breach of trust or willful engagement in gross misconduct in the performance of the officer’s duties that materially injures Motorola, Inc.

“Involuntary Termination—Not for Cause” means termination of employment for reasons other than “For Cause”, Change in Control as defined below, death, Retirement or Total and Permanent Disability as defined above.

“Involuntary Termination for Change in Control” occurs when, at any time: (1) following a Change in Control and, assuming equity awards are not suitably replaced by a successor, prior to the second anniversary of a Change in Control, or (2) during the 12 months prior to a Change in Control but after such time as negotiations or discussions that ultimately lead to a Change in Control have commenced, employment is terminated (a) involuntarily for any reason other than Cause, death, Disability or retirement under a mandatory retirement policy of Motorola, Inc. or any of its Subsidiaries or (b) by the officer after the occurrence of an event giving rise to Good Reason. For purposes of this definition, “Cause” means: (1) conviction of any criminal violation involving dishonesty, fraud or breach of trust, or (2) willful engagement in gross misconduct in the performance of the officer’s duties that materially injures Motorola, Inc., and “Disability” means a condition such that the officer by reason of physical or mental disability becomes unable to perform his normal duties for more than 180 days in the aggregate (excluding infrequent or temporary absence due to ordinary transitory illness) during any 12 month period.

“Change in Control” (as used in the prior definition of “Involuntary Termination for a Change in Control”) shall be deemed to have occurred if (1) any “person” or “group” (as such terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934 (“Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Motorola, Inc. representing 20% or more of the combined voting power of Motorola, Inc.’s then outstanding securities (other than the company or any employee benefit plan of the company, and no Change in Control shall be deemed to have occurred as a result of the “beneficial ownership,” or changes therein, of the company’s securities by either of the foregoing), (2) there shall be consummated (a) any consolidation or merger of Motorola, Inc. in which the company is not the surviving or continuing corporation or pursuant to which shares of common stock would be converted into or exchanged for cash, securities or other property, other than a merger of the company in which the holders of common stock immediately prior to the merger have, directly or indirectly, at least a 65% ownership interest in the outstanding common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of Motorola, Inc. other than any such transaction with entities in which the holder of the Motorola, Inc.’s common stock, directly or indirectly, have at least 65% ownership interest, (3) the stockholders of the company approve any plan or proposal for the liquidation or dissolution of the company, or (4) as the result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets, proxy or consent solicitation (other than by the Board), contested election or substantial stock accumulation (a “Control Transaction”), the members of the Board immediately prior to first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board.

 

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As required, the amounts included in the following tables reflect theoretical potential payouts based on the assumption that the applicable triggering event occurred on December 31, 2009. For each officer, the columns included reflect the triggering events that were theoretically possible on December 31, 2009.

 

Sanjay K. Jha

Chief Executive Officer

Executive Benefits and Payments

Upon Termination (1)

  Voluntary
Termination
          
 

Good

Reason

    Retirement   

Total and

Permanent

Disability

or Death

 
         Involuntary Termination  
         For
Cause
  Not For
Cause
    Change in
Control (10)
 

Compensation

            

Severance (2)

  $ 5,400,000      $ 0    $ 0   $ 0   $ 5,400,000      $ 8,100,000   

Short-term Incentive (3)

    1,800,000        0      1,800,000     0     1,800,000        1,800,000   

Long-term Incentives

            

•  2008-2010 LRIP (11)

    0        0      0     0     0        0   

•  2009-2011 LRIP (11)

    0        0      0     0     0        0   

•  Stock Options (Unvested and Accelerated) (5)

    0        0      0     0     0        0   

•  Restricted Stock Units (Unvested and Accelerated) (5)

    21,647,032        0      21,647,032     0     21,647,032        21,647,032   

Contingent Payment

    30,000,000 (12)       0      0     0     30,000,000 (12)       30,000,000 (12)  

Benefits and Perquisites (6)(9)

            

Health and Welfare Benefits Continuation (7)

    30,830        0      0     0     30,830        46,245   

280G Tax Gross-up (8)

    0        0      0     0     0        19,521,138   
   

TOTAL

  $ 58,877,862      $ 0    $ 23,447,032   $ 0   $ 58,877,862      $ 81,114,415   
   

 

Marc E. Rothman

Chief Financial Officer

Executive Benefits and Payments

Upon Termination (1)

  

Voluntary

Termination

  

Total and

Permanent

Disability

or Death

      
        
  

Good

Reason or

Retirement

     
         Involuntary Termination  
         For Cause    Not For Cause   

Change in

Control (10)

 

Compensation

              

Severance (2)

   $ 0    $ 0    $ 0    $ 430,000    $ 2,828,730   

Short-term Incentive (3)

     0      322,500      0      322,500      322,500   

Long-term Incentives (4)

              

•  2008-2010 LRIP (3)

     0      266,667      0      0      400,000      

•  2009-2011 LRIP (3)

     0      143,333      0      0      430,000   

•  Stock Options (Unvested and Accelerated) (5)

     0      1,015,707      0      30,820      1,015,707   

•  Restricted Stock Units (Unvested and Accelerated) (5)

     0      1,713,505      0      530,264      1,713,505   

Benefits and Perquisites (6)(9)

              

Health and Welfare Benefits Continuation (7)

     0      0      0      12,125      36,375   

280G Tax Gross-up (8)

     0      0      0      0      0   
   

TOTAL

   $ 0    $ 3,461,712    $ 0    $ 1,325,709    $ 6,746,817   
   

 

Daniel M. Moloney

President

Executive Benefits and Payments

Upon Termination (1)

   Voluntary
Termination
  

Total and
Permanent
Disability
or Death

    
        
   Good
Reason or
Retirement
     
         Involuntary Termination
         For Cause    Not For Cause    Change in
Control (10)

Compensation

              

Severance (2)

   $ 0    $ 0    $ 0    $ 600,000    $ 3,708,959

Short-term Incentive (3)

     0      570,000      0      570,000      570,000

Long-term Incentives (4)

              

•  2008-2010 LRIP (3)

     0      720,000      0      0      1,080,000

•  2009-2011 LRIP (3)

     0      370,000      0      0      1,110,000

•  Stock Options (Unvested and Accelerated) (5)

     0      1,049,048      0      0      1,049,048

•  Restricted Stock Units (Unvested and Accelerated) (5)

     0      4,268,388      0      496,640      4,268,388

Benefits and Perquisites (6)(9)

              

Health and Welfare Benefits Continuation (7)

     0      0      0      13,315      39,945

280G Tax Gross-up (8)

     0      0      0      0      0
 

TOTAL

   $ 0    $ 6,977,436    $ 0    $ 1,679,955    $ 11,826,340
 

 

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William C. Ogle

Chief Marketing Officer

Executive Benefits and Payments

Upon Termination (1)

  

Voluntary

Termination

  

Total and

Permanent

Disability

or Death

   
       
  

Good

Reason or

Retirement

    
        Involuntary Termination
        For Cause    Not For Cause   

Change in

Control (10)

Compensation

             

Severance (2)

   $ 0    $ 0   $ 0    $ 410,000    $ 2,049,000

Short-term Incentive (3)

     0      307,500     0      307,500      307,500

Long-term Incentives (4)

             

•  2008-2010 LRIP (3)

     0      136,667     0      0      205,000

•  2009-2011 LRIP (3)

     0      113,884     0      0      341,653

•  Stock Options (Unvested and Accelerated) (5)

     0      178,500     0      29,167      178,500

•  Restricted Stock Units (Unvested and Accelerated) (5)

     0      388,000     0      64,664      388,000

Benefits and Perquisites (6)(9)

             

Health and Welfare Benefits Continuation (7)

     0      0     0      11,985      35,955

280G Tax Gross-up (8)

     0      0     0      0      1,016,468
 

TOTAL

   $ 0    $ 1,124,551   $ 0    $ 823,316    $ 4,522,076
 

 

John P. Cipolla

Senior Vice President, Product Development

Executive Benefits and Payments

Upon Termination (1)

  

Voluntary

Termination

  

Total and

Permanent

Disability

or Death

   
       
  

Good

Reason or

Retirement

    
        Involuntary Termination
        For Cause    Not For Cause   

Change in

Control (10)

Compensation

             

Severance (2)

   $ 0    $ 0   $ 0    $ 450,000    $ 1,916,305

Short-term Incentive (3)

     0      337,500     0      337,500      337,500

Long-term Incentives (4)

             

•  2008-2010 LRIP (3)

     0      193,333     0      0      290,000

•  2009-2011 LRIP (3)

     0      150,000     0      0      450,000

•  Stock Options (Unvested and Accelerated) (5)

     0      737,347     0      11,109      737,347

•  Restricted Stock Units (Unvested and Accelerated) (5)

     0      1,803,579     0      308,576      1,803,579

Benefits and Perquisites (6)(9)

             

Health and Welfare Benefits Continuation (7)

     0      0     0      12,265      36,795

280G Tax Gross-up (8)

     0      0     0      0      1,274,015
 

TOTAL

   $ 0    $ 3,221,760   $ 0    $ 1,119,450    $ 6,845,542
 
(1) For purposes of this analysis, we assumed the Named Executive Officers’ compensation is as follows: Dr. Jha’s base salary is equal to $900,000, and his short-term incentive target opportunity under MIP is equal to 200% of base salary. Per his employment agreement, Dr. Jha is not eligible to participate in the 2008-2010 or 2009-2011 LRIP cycle. Mr. Rothman’s base salary is equal to $430,000, his short-term incentive target opportunity under MIP is equal to 75% of base salary, and his long-term incentive target opportunity under the 2008-2010 LRIP cycle is equal to 100% of cycle salary, and long-term incentive compensation target opportunity under the 2009-2011 LRIP cycle is equal to 100% of cycle salary. Mr. Moloney’s base salary was equal to $600,000, his short-term incentive target opportunity under MIP was equal to 95% of base salary, and his long-term incentive target opportunity under the 2008-2010 LRIP cycle was equal to 180% of cycle salary and under the 2009-2011 LRIP cycle was equal to 185% of cycle salary. Mr. Ogle’s base salary is equal to $410,000, his short-term incentive target opportunity under MIP was equal to 75% of base salary, and his long-term incentive target opportunity under the 2008-2010 LRIP cycle is equal to 50% of cycle salary, and long-term incentive compensation target opportunity under the 2009-2011 LRIP cycle is equal to 83.33% of cycle salary. Mr. Cipolla’s base salary is equal to $450,000, his short-term incentive target opportunity under MIP is equal to 75% of base salary, and his long-term incentive target opportunity under the 2008-2010 LRIP cycle is equal to 100% of cycle salary and under the 2009-2011 LRIP cycle is equal to 100% of cycle salary.

 

(2)

Under Involuntary Termination—Not for Cause , severance is generally calculated as 12 months of base salary pursuant to the Executive Severance Plan. For Dr. Jha, severance is calculated 2x base salary plus 2x target MIP award, as further discussed in “ Employment Agreement with Sanjay K. Jha ”. Under Involuntary

 

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Termination—Change in Control , severance is calculated as 3x base salary + 3x highest bonus during the five full years preceding the termination date pursuant to the Senior Officer Change in Control Severance Plan and pursuant to Dr. Jha’s employment agreement is calculated as 3x base salary + 3x target bonus in the year of termination. Actual severance payments may vary. See “ Executive Severance Plan ” for further details.

 

(3) Assumes the effective date of termination is December 31, 2009 and that the payment under the short-term incentive plan is equal to the full target award; the pro rata payment under 2008-2010 LRIP cycle is equal to two-thirds of the target award and under 2009-2011 LRIP cycle is equal to one-third of the target award if the Named Executive Officer meets the rule of retirement described below. If the Named Executive Officer does not meet the rule of retirement under the 2009 Motorola Incentive Plan (age 55 + 3 years service) or under the Long-Range Incentive Plans (either age 55 + 20 years service, age 60 + 10 years service or age 65) on the effective date of termination, zeroes are entered under Voluntary Termination—Retirement and Involuntary Termination – Not For Cause . If a Named Executive Officer has not met the applicable rule of retirement, they are not automatically entitled to a pro rata payment under Motorola, Inc.’s long-term incentive plans in the event of an Involuntary Termination—Not for Cause unless the LRIP cycle is in its final year at the time of termination. Therefore, Dr. Jha and Messrs. Rothman, Moloney, Ogle and Cipolla reflect no pro rata LRIP payment for the 2008-2010 cycle and 2009-2011 cycle in the event of an Involuntary Termination—Not for Cause . Amounts under Involuntary Termination—Change in Control assume that target awards are paid under LRIP and the awards are not assumed or replaced by the successor corporation.

 

(4) On April 21, 2008, the Compensation and Leadership Committee of the Board of Directors of Motorola, Inc. approved the cancellation of the 2007-2009 performance cycle under Motorola, Inc.’s Long-Range Incentive Plan of 2006 without the payment of awards for such performance cycle.

 

(5) Assumes the effective date of termination is December 31, 2009 and the price per share of Motorola, Inc.’s common stock on the date of termination is $7.76 per share, the closing price on December 31, 2009. If the Named Executive Officer does not meet the rule of retirement, if applicable, under the equity plans (either age 55 + 20 years service, age 60 + 10 years service or age 65) on the effective date of termination, zeroes are entered under Voluntary Termination—Retirement . For Involuntary Termination—Not For Cause , the vesting for unvested RSUs granted on or after May 3, 2006 is pro rata accelerated for full years of service from the grant date to the termination date. For the vesting of unvested options granted June 12, 2009 or after August 1, 2009 is pro rata accelerated for full months of service from the grant date to the termination date. For Dr. Jha, under Voluntary Termination—Good Reason and Involuntary Termination—Not For Cause , the unvested equity granted under his employment agreement accelerates with all other equity continuing to vest for a period of two years following terminations. The value of dividend equivalent shares on awards granted prior to May 1, 2006 until dividends were suspended on February 3, 2009 are not included.

 

(6) Payments associated with Benefits and Perquisites are limited to the items listed. No other benefits or perquisite continuation occurs under the termination scenarios listed that are not otherwise available to all regular U.S. employees.

 

(7) Health and Welfare Benefits Continuation is calculated as 12 months (except Dr. Jha is calculated as 24 months per his employment agreement) as provided in the Executive Severance Plan under Involuntary Termination—Not for Cause and as 36 months under Involuntary Termination—Change in Control .

 

(8)

If the “parachute payment” (severance + value of accelerated equity) is greater than three times the average W-2 reported compensation for the preceding five years, then an “excise tax” is imposed on the portion of the parachute payment that exceeds 1x the average W-2 reported compensation for the preceding years. Per Motorola, Inc.’s Change In Control Severance Plan, an additional “gross up payment” equal to the value of

 

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the excise tax imposed will be paid. These estimates do not take into account mitigation tax payments made in consideration of non-competition agreements or as reasonable compensation. The determination to whether and when a “gross up payment” is required, the amount of the “gross up payment” and the assumptions to be utilized in arriving at such determination, will be made by Motorola, Inc.’s independent registered public accounting firm, currently KPMG LLP.

 

(9) See “ Named Executive Officer Compensation—2009 Summary Compensation Table ” for nonqualified deferred compensation. There would be no further enhancement or acceleration upon a termination or change in control.

 

(10) Motorola, Inc.’s Senior Officer Change in Control Severance Plan uses a “double trigger”. In other words, in order for severance benefits to be “triggered”, (1) a change in control must occur and (2) an executive must be involuntarily terminated for a reason other than “cause” or must leave for “good reason” within 24 months of the change in control.

 

(11) Dr. Jha is not eligible to participate in LRIP for the 2008-2010 and 2009-2011 cycles pursuant to the terms of his employment agreement.

 

(12) Under his employment agreement in effect at December 31, 2009, Dr. Jha was entitled only to the $30 million if: (1) the separation of the Mobile Devices business does not occur on or prior to October 31, 2010, (2) Motorola, Inc. disposes of the Mobile Devices business resulting in Motorola, Inc. owning less than 50% of the business on or prior to October 31, 2010, (3) terminates Dr. Jha without cause as defined in his employment agreement, or (4) Dr. Jha terminates for good reason as defined in his employment agreement. On February 11, 2010, the Second Amendment to Dr. Jha’s employment agreement increased the contingent payment to $38 million and extended the date for the completion of the separation or disposition from October 31, 2010 to June 30, 2011. See “Employment Agreement with Sanjay K. Jha” for further details.

 

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SECURITY OWNERSHIP OF MANAGEMENT, DIRECTORS AND PRINCIPAL STOCKHOLDERS

As of the date of this Information Statement, all of the outstanding shares of Motorola Mobility’s common stock are owned by Motorola, Inc. After the distribution, Motorola, Inc. will not directly or indirectly own any of our common stock. The following tables provides information with respect to the expected beneficial ownership of Motorola Mobility common stock by (1) each of Motorola Mobility’s directors, (2) each officer named in the Summary Compensation Table, (3) all of Motorola Mobility’s executive officers and directors nominees as a group, and (4) each of our stockholders who we believe will be a beneficial owner of more than 5% of Motorola Mobility outstanding common stock based on current publicly available information. We based the share amounts on each person’s beneficial ownership of Motorola, Inc. common stock as of [ ], 2010, and applying the distribution ratio of [ ] shares of our common stock for every share of Motorola, Inc. common stock, unless we indicate some other date or basis for the share amounts in the applicable footnotes.

Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. Following the distribution, Motorola Mobility will have outstanding an aggregate of approximately [ ] million shares of common stock based upon approximately [ ] shares of Motorola, Inc. common stock outstanding on [ ], 2010, excluding treasury shares and assuming no exercise of Motorola, Inc. options, and applying the distribution ratio of [ ] share of our common stock for every share of Motorola, Inc. common stock held as of the record date.

To the extent our directors and executive officers own Motorola, Inc. common stock at the record date for the distribution, they will participate in the distribution on the same terms as other holders of Motorola, Inc. common stock.

 

     Total Shares to Be Beneficially Owned
Director or Named Executive Officer    # of Shares  (1)    % of Class

Sanjay K. Jha

   [ ]    (2)

William R. Hambrecht

   [ ]   

Marc E. Rothman

   [ ]   

Daniel M. Moloney

   [ ]   

William C. Ogle

   [ ]   

John P. Cipolla

   [ ]   

All directors, named executive officers and current executive officers as a group ([ ] persons)

         

 

(1) Includes shares under options exercisable on [ ] and options which become exercisable within 60 days thereafter. Also includes stock units which are deemed to be beneficially owned on [ ] or 60 days thereafter. Stock units are not deemed beneficially owned until the restrictions on the units have lapsed. Each stock unit is intended to be the economic equivalent of a share of Motorola Mobility common stock. Also includes interests, if any, in shares held in the Motorola, Inc. Stock Fund of the Company’s 401(k) Plan, which is subject to certain investment restrictions. Unless otherwise indicated, each person has sole voting and investment power over the shares reported.

 

(2)

Pursuant to Dr. Jha’s amended employment agreement dated February 11, 2010, in the event the Mobile Devices business becomes an independent, publicly traded company (“Motorola Mobility Holdings, Inc.”), all of Dr. Jha’s outstanding equity awards that relate to Motorola, Inc. common stock would convert into equity awards that relate to the stock of Motorola Mobility Holdings, Inc., Motorola Mobility Holdings, Inc. will grant Dr. Jha a post-separation equity award (“Post-Separation Equity Award”) in an amount that, together with his inducement awards, represent between 1.8% and 3% ownership of Motorola Mobility Holdings, Inc., depending on the entity’s initial market capitalization. If the market capitalization of Motorola Mobility Holdings, Inc. is equal to or less than $6.0 billion, the Post-Separation Equity Award,

 

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together with the Inducement Awards, will represent 3% of the entity’s total equity immediately following the separation. If the market capitalization is greater than $6.0 billion, the Post-Separation Equity Award, together with the Inducement Awards, will be reduced on a linear basis, calculated as the quotient obtained by dividing $6.0 billion by the market capitalization and finding the product of that ratio times 3%. The market capitalization calculation is based on an average of the closing price of Company stock on the first fifteen trading days and the Company expects to make the Post-Separation Equity Award on or after the fifteenth trading day following the Distribution. 90% of the award will be stock options and 10% will be restricted stock and each will vest, subject to continued employment, in three installments, each vesting date to be the later of (a) the date on which the average closing price of Motorola Mobility Holdings, Inc. common stock over a fifteen day trading period is 10% greater than the average closing price of Motorola Mobility Holdings, Inc. common stock over the fifteen day trading period immediately following the date that Motorola Mobility Holdings, Inc. becomes an independent, publicly traded company, and (b) the first, second and third anniversary of the grant date, as applicable.

 

    

Total Shares to Be Beneficially Owned

 
Principal Stockholders and Address    # of Shares    % of Class  

Carl C. Icahn and related entities,

  

[ ] (2)

shares of common stock

   10.73

767 Fifth Avenue,

47th Flr.,

New York, NY 10153 (1)

     

Dodge & Cox,

  

[ ] (3)

shares of common stock

   9.9

555 California Street,

40th Floor,

San Francisco, CA 94104

     

BlackRock, Inc.

  

[ ] (4)

shares of common stock

   5.33

40 East 52nd Street

New York, NY 10022

     

 

(1)

A Statement of Changes in Beneficial Ownership on Form 4 was filed by Carl C. Icahn on August 31, 2010 (the “Icahn Form 4”). The information below is solely based on information in the Icahn Form 4. The Icahn Form 4 indicates that, as of the date of the Icahn Form 4, High River Limited Partnership (“High River”) directly beneficially owns 50,085,430 shares; Icahn Partners LP (“Icahn Partners”) directly beneficially owns 76,677,683 shares; Icahn Partners Master Fund LP (“Icahn Master”) directly beneficially owns 85,840,852 shares; Icahn Partners Master Fund II L.P. (“Icahn Master II”) directly beneficially owns 26,685,838 shares; and Icahn Partners Master Fund III L.P. (“Icahn Master III”) directly beneficially owns 12,137,356 shares. Barberry Corp. (“Barberry”), is the sole member of Hopper Investments LLC (“Hopper”), which is the general partner of High River. Beckton Corp. (“Beckton”) is the sole stockholder of Icahn Enterprises G.P. Inc. (“Icahn Enterprises GP”), which is the general partner of Icahn Enterprises Holdings L.P. (“Icahn Enterprises Holdings”). Icahn Enterprises Holdings is the sole member of IPH GP LLC (“IPH”), which is the general partner of Icahn Capital LP (“Icahn Capital”). Icahn Capital is the general partner of each of Icahn Onshore LP (“Icahn Onshore”) and Icahn Offshore LP (“Icahn Offshore”). Icahn Onshore is the general partner of Icahn Partners. Icahn Offshore is the general partner of each of Icahn Master, Icahn Master II and Icahn Master III. Each of Barberry and Beckton is 100 percent owned by Carl C. Icahn. As such, Mr. Icahn is in a position indirectly to determine the investment and voting decisions made by each of High River, Icahn Partners, Icahn Master, Icahn Master II and Icahn Master III. The foregoing entities, together with Mr. Icahn are collectively referred to as the Reporting Persons. Each of Hopper, Barberry and Mr. Icahn may be deemed to indirectly beneficially own (as that term is defined in Rule 13d-3 under the Act) the shares which High River owns. Each of Hopper, Barberry and Mr. Icahn disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. Each of Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn may be deemed to indirectly beneficially own (as that term is defined in Rule 13d-3 under the Act) the

 

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shares which Icahn Partners owns. Each of Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn disclaims beneficial ownership of such shares except to the extent of their pecuniary interest therein. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn may be deemed to indirectly beneficially own (as that term is defined in Rule 13d-3 under the Act) the shares which each of Icahn Master, Icahn Master II and Icahn Master III owns. Each of Icahn Offshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises GP, Beckton and Mr. Icahn disclaims beneficial ownership of such Shares except to the extent of their pecuniary interest therein. Based on a Schedule 13D/A filed with the SEC on August 4, 2010, amending a Schedule 13D previously filed on February 6, 2008 and amended on March 5, 2008, May 7, 2008 and May 7, 2010, filed jointly by Carl C. Icahn and the related entities described above, the address for each of High River, Hopper, Barberry, Icahn Offshore, Icahn Partners, Icahn Onshore, Icahn Capital, IPH, Icahn Enterprises Holdings, Icahn Enterprises G.P, and Beckton is White Plains Plaza, 445 Hamilton Avenue-Suite 1210, White Plains, NY 10601, and the address for each of Icahn Master, Icahn Master II, and Icahn Master III is c/o Walkers SPV Limited, P.O. Box 908GT, 87 Mary Street, George Town, Grand Cayman, Cayman Islands.

 

(2) Solely based on information in the Icahn Form 4, as of the date of the Icahn Form 4.

 

(3) Solely based on information in a Schedule 13G/A dated February 12, 2010 filed with the SEC by Dodge & Cox. The Schedule 13G/A indicates that as of December 31, 2009, Dodge & Cox was the beneficial owner with sole dispositive power as to 228,748,896 shares, with sole voting power as to 217,355,459 of such shares and shared voting power as to 462,300 of such shares.

 

(4) Solely based on information in the Schedule 13G dated January 29, 2010 filed with the SEC by BlackRock, Inc. The Schedule 13G indicates that as of December 31, 2009, BlackRock, Inc., through its acquisition of Barclays Global Investors and certain of its affiliates from Barclays Bank PLC, was the beneficial owner with sole voting and dispositive power as to 123,135,072 shares.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The Separation from Motorola, Inc.

The distribution will be accomplished by Motorola, Inc.’s distributing all of its shares of Motorola Mobility common stock to holders of Motorola, Inc. common stock entitled to such distribution, as described in the section entitled “The Separation” included elsewhere in this Information Statement. Completion of the distribution will be subject to satisfaction or waiver by Motorola, Inc. of the conditions to the separation and distribution described under the caption entitled “ The Separation—Conditions to the Distribution ”.

Related Party Transactions

Motorola Mobility’s Governance and Nominating Committee or Audit Committee as described below will be responsible for determining whether any conflicts of interest exist and for the review and approval of each related party transaction. Motorola Mobility’s Board of Directors has established written policies and procedures (“Related Person Transaction Policy” or the “Policy”) to assist it in reviewing transactions in excess of $120,000 (“Transactions”) involving Motorola Mobility and its subsidiaries and Related Persons (as defined below).

The Policy supplements Motorola Mobility’s other conflict of interest policies set forth in the Principles of Conduct for Members of the Motorola Mobility Holdings, Inc. Board of Directors and the Motorola Mobility Code of Business Conduct for employees and its other internal procedures. A summary description of the Related Person Transaction Policy is set forth below.

For purposes of the Related Person Transaction Policy, a Related Person includes our company’s directors, director nominees and executive officers since the beginning of our company’s last fiscal year, beneficial owners of 5% or more of any class of our company’s voting securities (“5% Holder”) and members of their respective immediate family (as defined in the Policy).

The Policy provides that any Transaction since the beginning of the last fiscal year is to be promptly reported to our General Counsel. The General Counsel will assist with gathering important information about the Transaction and present the information to the applicable Board committee responsible for reviewing the Transaction. The appropriate Board committee will determine if the Transaction is a Related Person Transaction and approve, ratify or reject the Related Person Transaction. In approving, ratifying or rejecting a Related Person Transaction, the applicable committee will consider such information as it deems important to conclude if the transaction is fair to our company. The Governance and Nominating Committee will make all determinations regarding transactions involving a director or director nominee. The Audit Committee will make all determinations involving an executive officer or 5% Holder.

During 2009, Motorola, Inc. paid $200,000 to the United Football League (“UFL”) in sponsorship fees in connection with the UFL’s 2009 premiere season. Motorola, Inc., primarily the Mobile Devices business, received marketing opportunities with the UFL. William R. Hambrecht, a director of the Motorola, Inc. at the time and now a director of Motorola Mobility Holdings, Inc., is a founder of, and has a controlling interest in, the UFL. Mr. Hambrecht did not participate in the negotiations between Motorola, Inc. and the UFL with respect to the sponsorship and the arrangement was negotiated on an arm’s length basis. Pursuant to the Related Person Transaction Policy, the arrangement was pre-approved by the Motorola, Inc. Governance and Nominating Committee. Mr. Hambrecht’s independence was not impaired by the transaction pursuant to the criteria set forth in the Motorola, Inc. Director Independence Guidelines. The Company had no other Related Person Transactions in 2009.

 

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Agreements with Motorola, Inc.

As part of our separation from Motorola, Inc., we have entered into a Master Separation and Distribution Agreement and several other agreements with Motorola, Inc. to effect the separation and provide a framework for our relationships with Motorola, Inc. after the separation. These agreements provide for the allocation between us and Motorola, Inc. of the assets, liabilities and obligations of Motorola, Inc. and its subsidiaries, and will govern the relationships between Motorola Mobility and Motorola, Inc. after the separation (including with respect to employee benefits, intellectual property rights, trademark licenses and tax matters). Shortly before our separation from Motorola, Inc. we will also enter into transition services agreements and several commercial agreements which will provide for, among other things, the provision of transition services and cooperation with respect to iDEN mobile devices and infrastructure products and services, as well as the ongoing sale and support of various other products and services.

In addition to the Master Separation and Distribution Agreement (which contains many of the key provisions related to our separation from Motorola, Inc. and the distribution of our shares of common stock to Motorola, Inc. stockholders), the other principal agreements entered into, or to be entered into, with Motorola, Inc. include:

 

  Intellectual Property Assignment Agreement;

 

  Intellectual Property License Agreement;

 

  Trademark License Agreement;

 

  Tax Sharing Agreement;

 

  Transition Services Agreements;

 

  Employee Matters Agreement; and

 

  Other Commercial Agreements.

The forms of certain of the principal agreements described below have been filed as exhibits in the first amendment to the registration statement on Form 10 of which this Information Statement is a part. The remaining agreements will be filed as exhibits in a later amendment to the registration statement on Form 10 of which this Information Statement is a part. The summaries below of each of these agreements set forth the terms that we believe are material. These summaries are qualified in their entirety by reference to the full text of the applicable agreements, which are incorporated by reference into this Information Statement.

The terms of certain of the agreements described below that will be in effect following our separation have not yet been finalized. Changes, some of which may be material, may be made prior to our separation from Motorola, Inc. No changes may be made after our separation from Motorola, Inc. without our consent.

Master Separation and Distribution Agreement

The Master Separation and Distribution Agreement contains the key provisions relating to the separation of our businesses from Motorola, Inc.’s other businesses. It sets forth other agreements that govern certain aspects of our relationship with Motorola, Inc. (whose name Motorola, Inc. intends to change to Motorola Solutions, Inc. on the Distribution Date) that will continue after the completion of the separation.

Transfer of Assets and Assumption of Liabilities. The Master Separation and Distribution Agreement identifies assets and rights to be transferred, liabilities to be assumed and contracts to be assigned to us as part of our separation from Motorola, Inc. In particular, the Master Separation and Distribution Agreement generally provides that, subject to the terms and conditions contained therein:

 

   

Certain assets will be retained by or transferred to us or one of our affiliates, including (1) any and all assets that are exclusively used or held for use exclusively in our businesses, (2) any other assets

 

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specifically identified in the Master Separation and Distribution Agreement or in the ancillary agreements or the schedules thereto, and (3) a specified amount of cash as contemplated by the pro forma balance sheet included in this Information Statement.

 

   

Certain liabilities will be retained by or transferred to us or one of our affiliates, including (1) any and all liabilities to the extent arising out of or relating to our businesses or the transferred assets, (2) any other liabilities specifically identified in the Master Separation and Distribution Agreement or in the ancillary agreements or the schedules thereto, (3) certain employee-related liabilities as specified in the Employee Matters Agreement, and (4) certain tax-related liabilities as specified in the Tax Sharing Agreement.

Neither Motorola, Inc. nor any of its affiliates has represented or warranted, or will represent or warrant, to us as to the condition or quality of any assets to be transferred to us, the liabilities to be assumed by us, or any other matters relating to our businesses. We will receive all assets on an “as is, where is” basis.

Motorola, Inc. will cooperate with us to effect any transfers or contributions of assets and liabilities. Until these transfers can be completed, Motorola, Inc. and we will take such actions as may be reasonably requested by the other in order to place us in the same economic position as if the assets or liabilities had been transferred, including passing along all benefits derived from such assets and paying and performing and discharging all obligations with respect thereto.

The Distribution. The Master Separation and Distribution Agreement also governs the rights and obligations of the parties regarding the proposed distribution. Prior to the distribution, the number of our shares of common stock held by Motorola, Inc. will be increased to the number of shares of our common stock distributable in the distribution. Motorola, Inc. will cause its agent to distribute all of the issued and outstanding shares of our common stock to Motorola, Inc. stockholders who hold Motorola, Inc. shares as of the record date.

Additionally, the Master Separation and Distribution Agreement provides that the distribution is subject to several conditions that must be satisfied or waived by Motorola, Inc. in its sole discretion. For further information regarding these conditions, see the section entitled “ The Separation—Conditions to the Distribution ” included elsewhere in this Information Statement. Motorola, Inc. may, in its sole discretion and acting through its Board of Directors, determine the Distribution Date and the terms of the distribution, and may at any time until completion of the distribution decide to abandon or modify the distribution.

Termination. The Master Separation and Distribution Agreement provides that it may be terminated at any time prior to the Distribution Date by Motorola, Inc.

Indemnification. We will indemnify Motorola, Inc. and its affiliates and their directors, officers and employees against damages incurred by such parties arising out of or in connection with any of the following:

 

   

The operation of our business;

 

   

Our failure to pay, perform or otherwise properly discharge any liabilities assumed by us, including liabilities arising out of or relating to our businesses or assets whether such liabilities arise or accrue prior to, on or after the Distribution Date, including certain specified litigation matters;

 

   

Any breach by us or our affiliates of the Master Separation and Distribution Agreement or any of the ancillary agreements referred to in the Master Separation and Distribution Agreement (such as the Intellectual Property Agreements, the Trademark License Agreement, the Tax Sharing Agreement, and the Employee Matters Agreement); and

 

   

Any untrue statement or alleged untrue statement of a material fact contained in the Form 10, any amendment thereof or this Information Statement or any omission or alleged omission to state a material fact necessary to make the statements in the Form 10, any amendment thereof or this Information Statement, in light of the circumstances under which they were made, not misleading (other than damages due to the Form 10 Information described below).

 

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Motorola, Inc. will indemnify us and our affiliates, directors, officers and employees against damages incurred by parties arising out of or in connection with any of the following:

 

   

Failure to pay, perform or otherwise properly discharge any liabilities of Motorola, Inc. and its affiliates other than liabilities allocated to us;

 

   

The business of Motorola, Inc. and any liabilities of Motorola, Inc. which are not allocated to us;

 

   

Any breach by Motorola, Inc. or its affiliates of the Master Separation and Distribution Agreement or any of the ancillary agreements; and

 

   

Any untrue statement or alleged untrue statement of a material fact contained in the Form 10, any amendment thereof or this Information Statement or any omission or alleged omission to state a material fact necessary to make the statements in the Form 10, any amendment thereof or this Information Statement, in light of the circumstances under which they were made, not misleading, but only to the extent that such damages are caused by any such untrue statement or omission or alleged untrue statement or omission that arises out of certain specified information.

The Master Separation and Distribution Agreement also specifies procedures with respect to claims subject to indemnification and related matters.

Access to Information. The Master Separation and Distribution Agreement provides that the parties will exchange certain information reasonably required to comply with requirements imposed on the requesting party by a governmental authority, for use in any proceeding or to satisfy audit, accounting or similar requirements, or to comply with its obligations under the Master Separation and Distribution Agreement or any ancillary agreement. In addition, the parties will use commercially reasonable efforts to make available to each other past and present directors, officers, other employees and agents as witnesses in any legal, administrative or other proceeding in which the other party may become involved, to retain information in accordance with Motorola, Inc.’s Record Retention Policy, and to continue to maintain strict confidence over all confidential and proprietary information concerning or belonging to the other for a period of five years.

Intellectual Property Agreements

Motorola Mobility and the other businesses of Motorola, Inc. use patents, trademarks, copyrights and other types of intellectual property. As part of the separation, such intellectual property is being retained by Motorola, Inc. or allocated to Motorola Mobility. In most cases, the intellectual property was cross-licensed between Motorola, Inc. and Motorola Mobility. The two companies have entered into an Intellectual Property Assignment Agreement and Intellectual Property License Agreement.

Generally, patents were transferred to Motorola Mobility if they were more relevant to the Motorola Mobility business than the other businesses of Motorola, Inc. All patents not allocated to Motorola Mobility or its subsidiaries were retained by Motorola, Inc. Under this approach, Motorola Mobility received approximately 16,500 granted patents and 8,000 pending patent applications worldwide.

As part of the Intellectual Property License Agreement, Motorola, Inc. and Motorola Mobility entered into a cross-licensing arrangement with each other in respect of their respective patents. Under the cross-license arrangement, Motorola, Inc. and its subsidiaries are entitled to use the patents transferred to Motorola Mobility, and Motorola Mobility is entitled to use the patents retained by Motorola, Inc. No royalty or balancing payments will be made under the cross-licenses. The cross-licenses are perpetual and apply to all existing patents and patent applications, as well as patents filed within a specified period from the from the date of the Intellectual Property License Agreement. Generally, the licensee (Motorola, Inc. or Motorola Mobility, as the case may be) has no right to sub-license the patents or otherwise collect royalties in respect of the patents licensed to it .

 

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Motorola, Inc. has existing patent licensing and cross-licensing agreements with many third-parties. Most of these license agreements with third-parties are being retained by Motorola, Inc. In a limited number of third-party patent license agreements, Motorola Mobility received ongoing rights to these patents in accordance with the terms of the third-party patent license agreement.

Copyrights relating to Motorola Mobility’s businesses are transferred to Motorola Mobility. In general, copyrights are not jointly owned. Other forms of intellectual property (such as know-how, trade secrets and technology) are being allocated to the entity to which they are most relevant, subject to joint ownership of certain jointly used technology. These types of intellectual property are subject to a royalty-free perpetual cross-licensing arrangement between Motorola, Inc. and Motorola Mobility, similar to the cross-licensing arrangement between Motorola, Inc. and Motorola Mobility described for patents. The technology cross-licensing arrangement is subject to certain product exclusions for a limited term.

Trademark License Agreement

Motorola Trademark Holdings, LLC, a wholly owned subsidiary of Motorola Mobility, will own the “MOTOROLA” trademark, and the Stylized M logo, and all formatives and derivatives such as “MOTO” and any other trademarks currently used by both Motorola Mobility and Motorola, Inc. (“Motorola Marks”). Motorola, Inc. will retain the exclusive right, pursuant to a trademark license agreement (“Trademark License Agreement”), to use certain Motorola Marks in connection with the products and services that fall within its licensed field of use (“Licensed FOU”), and in connection with domain names, and trade names used in the operation of its business. Motorola, Inc.’s Licensed FOU generally encompasses commercial-grade communication products, wireless network infrastructure equipment, and related software, services and accessories. Motorola Mobility will have the right to use, and the right to license others to use, the Motorola Marks outside of Motorola Inc.’s Licensed FOU.

The territory covered by the Trademark License Agreement will be worldwide. The initial term of the Trademark License Agreement will be ten years; the agreement will renew at the end of the initial term and every ten years thereafter. Motorola Mobility will have the right to terminate the Trademark License Agreement as a result of an uncured material breach by Motorola, Inc. Upon termination for cause, Motorola, Inc. will be permitted to wind-down its use of the Motorola Marks over time.

The Trademark License Agreement is assignable to either party’s wholly owned subsidiary or to a third-party that acquires all or substantially all of the assets of a party. In the event of a sale by Motorola Mobility of all or substantially all of the Motorola Marks separate and apart from the other assets of Motorola Mobility (i.e., a sale of the Motorola Marks as a stand-alone asset), Motorola, Inc. will have a right of first refusal to purchase the Motorola Marks for a price equal to the best third-party offer received by Motorola Mobility, plus three percent of such offer (“Right to Acquire”).

In the event that Motorola, Inc. becomes insolvent, files for bankruptcy (excluding the commencement of a proceeding under Chapter 11 of the Bankruptcy Code, or other reorganization or restructuring of its business) or otherwise begins proceedings to liquidate its business operations (a “Material Action”), the Trademark License Agreement will automatically terminate. In the event that Motorola Mobility becomes subject to a Material Action, Motorola, Inc. may either terminate the Trademark License Agreement, or seek to enforce its Right to Acquire.

Motorola, Inc. will have the right to sublicense its rights to use the licensed Motorola Marks within its Licensed FOU to its affiliates, entities who acquire a divested portion of its business, or to third-parties manufacturing products within its Licensed FOU, without payment to Motorola Mobility. Motorola, Inc. will have the right to use the licensed Motorola Marks with companies and/or product lines it acquires, provided such products are within Motorola, Inc.’s Licensed FOU, or in the event they are not, Motorola Mobility approves such expansion of Motorola, Inc.’s Licensed FOU. Motorola Mobility has no obligation to approve an expansion of Motorola, Inc.’s Licensed FOU.

 

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Disputes arising out of the Trademark License Agreement will be resolved using a dispute resolution process designed to encourage resolution, including negotiation and binding arbitration. Matters involving termination of the Trademark License Agreement or the scope of Motorola, Inc.’s Licensed FOU are eligible to proceed to litigation.

Motorola Mobility will have the overall responsibility for quality control, procurement, maintenance and enforcement of the Motorola Trademarks. Motorola Inc. will be required to comply with brand guidelines developed by Motorola Mobility.

Under the Trademark License Agreement, it is currently estimated that over the next three years cumulatively, total payments to Motorola, Inc. will be approximately $1.5 million relating to the maintenance of certain corporate archives and total payments received from Motorola, Inc. will be approximately $4 million relating to trademark maintenance, clearance and anti-counterfeiting costs, as well as Motorola.com operating costs and trademark assignment, name change and recording costs.

Tax Sharing Agreement

Motorola Mobility, Motorola Mobility, Inc. and Motorola, Inc. have entered into a Tax Sharing Agreement. The Tax Sharing Agreement governs the respective rights, responsibilities and obligations of Motorola, Inc. and Motorola Mobility, with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. In general, under the Tax Sharing Agreement:

 

   

Motorola, Inc. will be responsible for any U.S. federal income taxes of the affiliated group for U.S. federal income tax purposes of which Motorola, Inc. is the common parent. With respect to any periods beginning after the distribution, the Company will be responsible for any U.S. federal income taxes of itself or its subsidiaries.

 

   

Motorola, Inc. will be responsible for any U.S. state or local or foreign income taxes reportable on a consolidated, combined or unitary or other joint return that includes Motorola, Inc. or one of its subsidiaries and Motorola Mobility or one of its subsidiaries. Motorola, Inc. will be responsible for any U.S. state or local or foreign income taxes reportable on returns that include only Motorola, Inc. and its subsidiaries (excluding Motorola Mobility and its subsidiaries), and Motorola Mobility will be responsible for any U.S. state or local or foreign income taxes filed on returns that include only Motorola Mobility or its subsidiaries.

 

   

Motorola, Inc. and Motorola Mobility will each be responsible for any non-income taxes attributable to each company and its respective subsidiaries for all periods.

The Tax Sharing Agreement imposes certain restrictions on our ability to pursue strategic or other transactions that may maximize the value of our business. The Tax Sharing Agreement provides special rules allocating tax liabilities in the event that the distribution, together with certain related transactions, were not tax-free. In general:

 

   

If any of the following events (among others) prevents the distribution and related transactions from being tax-free, we will be liable for the resulting taxes:

 

   

Any acquisition of all or a portion of our stock or assets, whether by merger or otherwise;

 

   

Any negotiations, understandings, agreements or arrangements with respect to transactions or events that cause the distribution to be treated as part of a plan pursuant to which one or more persons acquire, directly or indirectly, stock representing 50% or greater interest in Motorola Mobility;

 

   

We cease to actively conduct the Mobile Devices business during the two-year period following the distribution;

 

   

We take or fail to take any other action that prevents the distribution and related transactions from being tax-free; or

 

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Any breach by Motorola Mobility of certain of its undertakings and representations.

 

   

To preserve the tax-free treatment to Motorola, Inc. of the distribution, Motorola Mobility is prohibited from taking or failing to take any action that prevents the distribution and related transactions from being tax-free. Further, during the two-year period following the distribution, among other restrictions, we may not, subject to certain exceptions, enter into or authorize: (1) any transaction resulting in the acquisition of 40% or more of our stock or 60% or more of our assets; (2) any merger, consolidation or liquidation; (3) any issuance of equity securities beyond certain thresholds; or (4) any repurchase of Motorola Mobility common stock unless, in each case, (a) we deliver to Motorola, Inc. a “will”-level legal opinion, satisfactory to Motorola, Inc., stating that the intended transaction will not prevent the distribution and related transactions from being tax-free or (b) Motorola, Inc. obtains a letter ruling, satisfactory to Motorola, Inc., in its sole discretion from the IRS to this effect.

 

   

During the two-year period following the distribution, if we enter into, or authorize, a transaction resulting in the acquisition of 25% or more (but less than 40%) of our stock, our Board of Directors must provide Motorola, Inc. with a certificate describing the transaction and stating that the transaction is not subject to the opinion/ruling procedure described above.

 

   

The fact that Motorola, Inc. receives a board certificate, legal opinion or letter ruling will not, in itself, exonerate us from liability for taxes in the event that the distribution and related transactions were not tax-free as a result of our actions or as a result of an acquisition of our stock or assets.

These covenants and indemnity obligations may discourage, delay or prevent a change of control that you may consider favorable. Though valid as between the parties, the Tax Sharing Agreement is not binding on the IRS.

Transition Services Agreements

Motorola, Inc., Motorola Mobility, Inc. and Motorola Mobility plan to enter into Transition Services Agreements, which will provide for the provision of certain transitional services by Motorola, Inc. and its subsidiaries to Motorola Mobility and its subsidiaries, and vice versa. The services may include the provision of administrative and other services identified by the parties. The Transition Services Agreements will generally provide for a term of up to 12 months. The charge for these interim services is expected to be based on actual costs incurred by the party rendering the services without profit. It is estimated that total payments to Motorola, Inc. during this 12 month period will be approximately $12 million and total payments received from Motorola, Inc. will be approximately $1 million under the Transition Services Agreements.

 

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The transition services agreements govern the provision of support services, on an interim or transitional basis, including:

 

Motorola, Inc. to Motorola Mobility                  Motorola Mobility to Motorola, Inc.

Financial audit support

          

Information technology systems

 

Financial transaction support (support in resolution of existing transactions in financial systems)

          

Legal support services

 

Data processing

 

Other general administrative functions

 

Resolution of required prior period tax submissions

          
 

Resolution of misdirected cash from both collection and payable transactions

          
 

Human resources and benefits administration

          
 

Environmental health and safety

          
 

Information technology systems

          
 

Data processing

          
 

Aviation services

          
 

Other general administrative functions

                

Motorola, Inc. and Motorola Mobility will perform these transition services in the manner and at the level of service substantially similar to that immediately prior to the distribution, and either company’s use of these services will not be substantially greater than the level of use required by either company immediately prior to the distribution. The companies will use all commercially reasonable efforts to end their respective use of the transition services as soon as is reasonably possible and no later than the applicable service termination date specified in the agreements. Both companies have the right to terminate any transition service upon 30 days notice.

Employee Matters Agreement

Motorola, Inc., Motorola Mobility, Inc. and Motorola Mobility have entered into an Employee Matters Agreement, which allocates responsibilities and liabilities relating to certain employee compensation and benefit plans and programs and labor-related matters in connection with the Separation.

Pursuant to the Employee Matters Agreement, the employees of Motorola, Inc.’s Mobile Devices and/or Home businesses (including related corporate and shared services employees) were transferred to Motorola Mobility or one of its subsidiaries on July 31, 2010 (except certain non-U.S. employees for whom such transfer on such date was not possible and whose transfer will be effected on a subsequent transfer date agreed to, or to be agreed to, by Motorola, Inc. and Motorola Mobility). Such employees generally were credited or will be credited for their years of service with Motorola, Inc. for benefits purposes (other than specified exceptions for non-U.S. employees).

U.S. Employee Benefits . Subject to the applicable transition periods with respect to certain benefit plans or programs, after the Distribution, employees of Motorola Mobility will no longer participate in Motorola, Inc.’s employee benefit plans or programs and Motorola Mobility will establish comparable plans or programs for Motorola Mobility employees, except with respect to pension benefits, deferred compensation, post-employment health benefits and certain other programs.

For the period from July 31, 2010 through December 31, 2010, each of Motorola Mobility and Motorola Mobility, Inc. has adopted the Motorola 401(k) Plan for the benefit of eligible U.S. employees. Effective January 1, 2011, Motorola Mobility will establish a 401(k) plan that is comparable to the Motorola 401(k) Plan and Motorola, Inc. and Motorola Mobility will cause a trust-to-trust transfer of all account balances (including any

 

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outstanding loans) for Motorola Mobility employees from the Motorola 401(k) Plan to the 401(k) plan established by Motorola Mobility. Motorola Mobility employees who hold shares of Motorola, Inc. common stock in their Motorola 401(k) Plan account as of the record date for the Distribution will have their account credited with shares of Motorola Mobility common stock resulting from the Distribution. See the section entitled “ The Separation—Treatment of 401(k) Shares for Current and Former Employees .”

In addition, through December 31, 2010, Motorola Mobility and Motorola Mobility, Inc. will be participating employers in Motorola, Inc.’s U.S. medical and dental, pre-tax contributions and flexible benefits, dependent care, disability, life insurance, business travel accident insurance and adoption assistance plans or programs. Effective January 1, 2011, Motorola Mobility will adopt certain comparable benefit plans and programs for its current and former employees.

Eligible Motorola Mobility employees will continue to participate through the day preceding the Distribution Date in the Motorola Pension Plan, the Motorola Post-Employment Health Benefits Plan, the Motorola Supplemental Pension Plan, and the Motorola Management Deferred Compensation Plan. On and after the Distribution Date, the rights of Motorola Mobility employees under these plans will be determined by the applicable plan documents and the Employee Matters Agreement.

Motorola Mobility employees also will continue to participate until the Distribution Date in Motorola, Inc.’s Involuntary Severance Plan and its Paid Time Off Policy. After the Distribution Date, Motorola Mobility will create a U.S. severance program that will be no less favorable to its U.S. employees than the Motorola, Inc. Involuntary Severance Plan in effect on the date of reorganization and Motorola Mobility employees will be covered by Motorola Mobility’s own paid time off or vacation policy.

Non-U.S. Employee Benefits . Motorola Mobility will establish or maintain employee benefit plans outside of the U.S. as may be required under applicable law or necessary to ensure the transfer of employees without triggering severance obligations. As of the day preceding the Distribution Date, Motorola, Inc. and its affiliates will cease responsibility under their employee benefit plans for coverage of non-U.S. transferred employees. Motorola Mobility and its subsidiaries will assume all of the accrued liabilities of the non-U.S. transferred employees relating to vacation, annual leave, and holiday policies.

Equity Awards. The Employee Matters Agreement provides the mechanics for the conversion and adjustment or replacement on the Distribution Date of equity awards (including stock options, stock appreciation rights, and restricted stock units) granted under Motorola, Inc.’s equity plans into awards based on Motorola, Inc. common shares and/or Motorola Mobility common stock, as applicable. The Distribution will not constitute a “change of control” for purposes of Motorola, Inc.’s equity plans and awards that are outstanding as of that date. For a description of the treatment of outstanding Motorola, Inc. equity awards pursuant to the Employee Matters Agreement, see the section entitled “ The Separation—Treatment of Equity-Based Compensation .”

In addition, the Employee Matters Agreement also provides the mechanics for adjustments to be made with respect to Motorola, Inc. common stock held by participating employees in the Motorola Employee Stock Purchase Plan (“MOTshare Plan”). Motorola, Inc. will adjust the closing price of shares of Motorola, Inc. common stock at the beginning of the MOTshare Plan offering period in effect on the Distribution Date. If the Distribution Date is within three months of the end of the offering period, amounts previously contributed and not withdrawn by Motorola Mobility participants will be used to purchase Motorola, Inc. common stock on behalf of Motorola Mobility participants. If the Distribution is not within three months of the end of the offering period, amounts previously contributed by Motorola Mobility participants will be refunded, without interest.

Incentive Compensation . The Motorola Incentive Plan awards for the year ending December 31, 2010 will be paid to eligible employees in accordance with the Motorola Incentive Plan. Motorola, Inc. and Motorola Mobility are each expected to implement annual incentive plans for calendar year 2011 following the Distribution Date.

Eligible employees of Motorola, Inc. and its affiliates, including transferred employees, will continue to participate through the Distribution Date in the Motorola Long-Range Incentive Plan of 2009 (“LRIP”) for the performance cycles ending December 31, 2011 and December 31, 2012. Each outstanding performance cycle

 

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under the LRIP will terminate on the Distribution Date and each eligible employee will be paid a pro-rated portion of the award earned under the LRIP, if any, based on performance through the Distribution Date for each performance cycle. Motorola Mobility will pay any such cash awards to the transferred employees and Motorola, Inc. will pay any such cash awards to all other employees.

Non-Solicitation and No-Hire. The Employee Matters Agreement also provides that Motorola Mobility and Motorola, Inc. will be subject to mutual non-solicitation and no-hire restrictions, with certain exceptions, for a limited term after the Distribution Date.

Employee Liabilities . Motorola Mobility will be responsible for all employment liabilities relating to current and former employees and contractors of Motorola Mobility and its constituent businesses and certain former shared services employees, subject to specified exceptions relating to: (1) severance obligations in China, Vietnam, and Peru, (2) retiree health plan liabilities in the U.S., (3) pension liabilities in the U.S., and (4) certain pension liabilities in the United Kingdom. Motorola, Inc. will be responsible for all employment liabilities relating to current and former employees and contractors of Motorola, Inc. and its constituent businesses (other than Motorola Mobility) and certain former shared services employees.

The Employee Matters Agreement also contains certain indemnification provisions pursuant to which Motorola, Inc. has agreed to indemnify Motorola Mobility for certain liabilities arising from actions for benefits under, or alleging breach of fiduciary duty in connection with, any employee benefit plan of Motorola, Inc. that involve pre-Distribution acts or omissions. Motorola, Inc. and Motorola Mobility will be responsible for their respective liabilities associated with such post-Distribution acts or omissions, subject to the specified exceptions noted above.

Damages, including the costs of litigation, incurred by the parties or their subsidiaries or their employee benefit plans relating in general to employees or benefits will be paid to the maximum extent available under applicable insurance, and neither the parties nor their plan fiduciaries will be deemed to indemnify, assume, or share such insured losses. To the extent any damages are not fully indemnified or reimbursed by applicable insurance, then each party will be responsible for payment of amounts in proportion to and in accordance with that party’s responsibilities under the terms of the Employee Matters Agreement.

Other Commercial Agreements

Motorola Mobility and Motorola, Inc. are also entering into certain commercial agreements in connection with the separation which are intended to ensure minimal disruption to ongoing sales and support of various products and services that Motorola, Inc. and Motorola Mobility provide to customers. Payments to be made under these commercial agreements are based on arms-length commercial pricing and will vary based on the amount of products, services and software provided.

The iDEN Cooperation Agreement will establish a framework for the parties to provide services to each other that will enable the continuity of the iDEN business and to support existing and new iDEN customers. Its initial term runs for five years and such term will extend automatically thereafter for additional terms of one year each unless either party provides the other with 12 months advance notice of non-renewal. The iDEN Cooperation Agreement will provide, among other things, that a party exiting the iDEN business will grant a license under its intellectual property rights to the other party to enable the other party to provide the same services to its iDEN customers as were provided by the exiting party. In addition, if a party decides to stop providing a particular type of iDEN product or service to its customers, that party must first supply such products and services for a specified period and provide a license under its intellectual property rights to enable the other party to continue the supply of such iDEN products or services to such customers.

In addition, Motorola, Inc. and Motorola Mobility, Inc. will enter into a Master Commercial Agreement which will set forth the terms and conditions for the distribution of products, provision of services and licensing of software between the parties that are currently either sold, provided or shared by the parties in their normal course of business. Its initial term runs for five years and such term will extend automatically thereafter for additional terms of two years each unless either party provides the other with at least ninety days of advance notice of non-renewal.

 

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DESCRIPTION OF CAPITAL STOCK

General

The following is a summary of information concerning our capital stock. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of our certificate of incorporation or of our bylaws. The summary is qualified in its entirety by reference to these documents, which you must read for complete information on our capital stock. Our certificate of incorporation and bylaws are included as exhibits to our registration statement on Form 10 of which this Information Statement is a part.

Distributions of Securities

In the past three years, Motorola Mobility has not sold any securities, including sales of reacquired securities, new issues, securities issued in exchange for property, services or other securities, and new securities resulting from the modification of outstanding securities.

Common Stock

Immediately following the distribution, our authorized common stock will consist of [ ] million shares of common stock, par value $0.01 per share.

Shares Outstanding. Immediately following the distribution, we expect that approximately [ ] million shares of our common stock will be issued and outstanding based upon approximately [ ] shares of Motorola, Inc. common stock outstanding as of [ ], and assuming no exercise of Motorola, Inc. options or SARs, vesting of Motorola, Inc. RSUs and settlement of Motorola, Inc. DSUs in shares of Motorola, Inc. common stock and applying the distribution ratio of [ ] share of our common stock for each share of Motorola, Inc. common stock held as of the record date.

Voting Rights. Each share of common stock is entitled to one vote on all matters submitted to a vote of stockholders. To be elected in an uncontested election for Board members, a director nominee must receive more votes “for” than “against” by shares present in person or by proxy and entitled to vote. In a contested election for Board members, the Board members are elected by a plurality of shares present in person or by proxy and entitled to vote.

Holders of shares of our common stock do not have cumulative voting rights. In other words, a holder of a single share of common stock cannot cast more than one vote for each position to be filled on our Board. A consequence of not having cumulative voting rights is that the holders of a majority of the shares of common stock entitled to vote in the election of directors can elect all directors standing for election, which means that the holders of the remaining shares will not be able to elect any directors.

Other Rights. In the event of any liquidation, dissolution or winding up of our Company, after the satisfaction in full of the liquidation preferences of holders of any preferred shares, holders of shares of our common stock are entitled to ratable distribution of the remaining assets available for distribution to stockholders. The shares of our common stock are not subject to redemption by operation of a sinking fund or otherwise. Holders of shares of our common stock are not entitled to preemptive rights.

Fully Paid. The issued and outstanding shares of our common stock are fully paid and non-assessable. This means the full purchase price for the outstanding shares of our common stock has been paid and the holders of such shares will not be assessed any additional amounts for such shares. Any additional shares of common stock that we may issue in the future will also be fully paid and non-assessable.

 

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Preferred Stock

We are authorized to issue up to [ ] million shares of preferred stock, par value $0.01 per share. Our Board, without further action by the holders of our common stock, except as discussed below, may issue shares of our preferred stock. Our Board is vested with the authority to fix by resolution the designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions thereof, including, without limitation, redemption rights, dividend rights, liquidation preferences and conversion or exchange rights of any class or series of preferred stock, and to fix the number of classes or series of preferred stock, the number of shares constituting any such class or series and the voting powers for each class or series.

Our Board may not adopt a stockholder rights plan (also known as a poison pill) without the prior approval of the holders of a majority of our outstanding shares of common stock. Notwithstanding the above, in the event our Company receives an acquisition proposal in the form of the (i) commencement of a tender offer to acquire our shares of common stock or (ii) delivery of a “bear hug” letter to the Company, the Board may adopt a stockholder rights plan without such prior approval, if such plan by its express terms will expire and terminate within 135 days after its adoption unless approved prior to such 135 day period by the holders of a majority of our outstanding shares of common stock.

Our Board’s authority to issue preferred stock could potentially be used to discourage attempts by third-parties to obtain control of our Company through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. Our Board may issue preferred stock with voting rights or conversion rights that, if exercised, could adversely affect the voting power of the holders of common stock. There are no current agreements or understandings with respect to the issuance of preferred stock and our Board has no present intention to issue any shares of preferred stock.

Restrictions on Payment of Dividends

We are incorporated in Delaware and are governed by Delaware law. Holders of shares of our common stock are entitled to receive dividends, subject to prior dividend rights of the holders of any preferred shares, when, as and if declared by our Board out of funds legally available for that purpose. Future dividends are dependent on our earnings, financial condition, cash flow and business requirements, as determined by our Board. We do not anticipate paying any dividends for the foreseeable future. All decisions regarding the payment of dividends by us will be made by our Board from time to time in accordance with applicable law.

Size of Board and Vacancies; Removal

Our certificate of incorporation and bylaws provide that the number of members of the Board shall be fixed exclusively by a resolution adopted by the affirmative vote of a majority of the entire Board, subject to the rights of the holders of preferred stock, if any. Subject to the terms of any one or more classes or series of preferred stock, any vacancy on the Board that results from an increase in the number of directors may be filled by a majority of the Board then in office, provided that a quorum is present, and any other vacancy occurring on the Board may be filled by a majority of the Board then in office for the term of such vacancy, even if less than a quorum, or by a sole remaining director.

Stockholder Action by Written Consent

Stockholders may take action without a meeting with the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

Stockholder Meetings

Under our proposed amended and restated bylaws, only our Chairman of the Board, Board of Directors or any record holders of shares of our common stock representing in the aggregate not less than twenty percent (20%) of the total number of votes entitled to be cast on the matter or matters to be brought before the proposed

 

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special meeting will be able to call a special meeting of stockholders. For a stockholder to call a special meeting, the stockholders(s) must comply with the requirements set forth in our amended and restated bylaws, including giving notice to our secretary which notice must include the information described in “ Requirements for Advance Notification of Stockholder Nomination and Proposals ” below.

Requirements for Advance Notification of Stockholder Nominations and Proposals

Our bylaws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for the election of directors other than nominations made by or at the direction of our Board or a committee of our Board. Proper notice must be timely, generally between 90 and 120 days prior to the relevant meeting (or, in the case of annual meetings, prior to the first anniversary of the prior year’s annual meeting), and must include, among other information, the name and address of the stockholder giving the notice, a representation that such stockholder is a holder of record of our common stock as of the date of the notice, certain information relating to each person whom such stockholder proposes to nominate for election as a director (including a statement as to whether such nominee intends to tender, following their election as a director, an irrevocable offer of resignation effective upon such nominee’s failure to be re-elected and upon acceptance of such resignation by our board of directors), a brief description of any other business and the text of any proposal such stockholder proposes to bring before the meeting and the reason for bringing such proposal, and the name of each person with whom the stockholder is acting in concert with respect to Motorola Mobility or with whom such stockholder has any agreement, arrangement or understanding (whether written or oral) for the purpose of acquiring, holding, voting or disposing of our common stock, or to cooperate in influencing the control of Motorola Mobility, including details of any such agreement, arrangement or understanding, all shares of our common stock that are beneficially owned or owned of record by such persons, any derivative securities owned by such persons or other similar arrangements with respect to shares of our common stock (including all economic terms), and any other information requested in our bylaws, including any update or supplement described in our bylaws.

No Cumulative Voting

Our certificate of incorporation and bylaws do not provide for cumulative voting in the election of directors.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be BNY Mellon Shareowner Services.

NYSE Listing

We intend to apply to list our shares of common stock on the NYSE and expect to list under the ticker symbol “MMI”.

Limitation on Liability of Directors and Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law (“DGCL”) provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, in which such person is made a party by reason of the fact that the person is or was a director, officer, employee or agent of the corporation (other than an action by or in the right of the corporation—a “derivative action”), if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys’ fees) incurred in connection with the defense or settlement of such action, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation’s bylaws, disinterested director vote, stockholder vote, agreement or otherwise.

 

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Our certificate of incorporation provides that no director shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation on liability is not permitted under the DGCL, as now in effect or as amended. Currently, Section 102(b)(7) of the DGCL requires that liability be imposed for the following:

 

   

any breach of the director’s duty of loyalty to our Company or our stockholders;

 

   

any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law;

 

   

unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; and

 

   

any transaction from which the director derived an improper personal benefit.

Our bylaws provide that, to the fullest extent authorized or permitted by the DGCL, as now in effect or as amended, we will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person, or a person of whom he or she is the legal representative, is or was our director or officer, or by reason of the fact that our director or officer is or was serving, at our request, as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by us. We will indemnify such persons against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action if such person acted in good faith and in a manner reasonably believed to be in our best interests and, with respect to any criminal proceeding, had no reason to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys’ fees) incurred in connection with the defense or settlement of such actions, and court approval is required before there can be any indemnification where the person seeking indemnification has been found liable to us. Any amendment of this provision will not reduce our indemnification obligations relating to actions taken before an amendment.

We intend to obtain policies that insure our directors and officers and those of our subsidiaries against certain liabilities they may incur in their capacity as directors and officers. Under these policies, the insurer, on our behalf, may also pay amounts for which we have granted indemnification to the directors or officers.

 

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WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form 10 with the SEC with respect to the shares of our common stock that Motorola, Inc. stockholders will receive in the distribution. This Information Statement is a part of that registration statement and, as allowed by SEC rules, does not include all of the information you can find in the registration statement or the exhibits to the registration statement. For additional information relating to our Company and the distribution, reference is made to the registration statement and the exhibits to the registration statement. Statements contained in this Information Statement as to the contents of any contract or document referred to are not necessarily complete and in each instance, if the contract or document is filed as an exhibit to the registration statement, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to the applicable document.

Following the distribution, we will file annual, quarterly and special reports, proxy statements and other information with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by an independent registered public accounting firm. The registration statement is, and any of these future filings with the SEC will be, available to the public over the Internet on the SEC’s website at http://www.sec.gov. You may read and copy any filed document at the SEC’s public reference rooms in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549, at the SEC’s regional offices in New York at 233 Broadway, New York, New York 10279, and in Chicago at Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms.

We maintain an Internet site at http://www.[ ].com. Our website and the information contained on that site, or connected to that site, are not incorporated into this Information Statement or the registration statement on Form 10.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements should be read in conjunction with the section entitled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and our historical combined annual and condensed combined interim financial statements and accompanying notes included elsewhere within this Information Statement.

The unaudited pro forma condensed combined financial statements set forth below are based on and have been derived from the Company’s historical combined annual and condensed combined interim financial statements, including the unaudited condensed combined balance sheet as of July 3, 2010, the unaudited condensed combined statement of operations for the six months ended July 3, 2010, and the audited combined statement of operations for the year ended December 31, 2009, which are included elsewhere within this Information Statement. The historical financial statements of Motorola Mobility include allocations of certain expenses from Motorola, Inc. These costs may not be representative of our future costs to be incurred as an independent, publicly traded company.

The unaudited pro forma condensed combined statements of operations give effect to the separation and distribution as if they had occurred on January 1, 2009. The unaudited pro forma condensed combined balance sheet gives effect to the separation and distribution as if they had occurred on July 3, 2010. In management’s opinion, the unaudited pro forma condensed combined financial statements have been developed on a reasonable and rational basis and reflect certain adjustments that, in the opinion of management, are necessary to present fairly the unaudited pro forma condensed combined results of operations and the unaudited condensed combined financial position of the Company as of and for the periods indicated. The pro forma adjustments are based on the best information available and assumptions that management believes are reasonable given the information currently available.

The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the transactions contemplated by the Master Separation and Distribution Agreement occurred on the dates indicated. The unaudited pro forma condensed combined financial statements also should not be considered indicative of our future results of operations or financial position as an independent, publicly traded company.

The following unaudited pro forma condensed combined statements of operations and unaudited pro forma condensed combined balance sheet give pro forma effect to the following:

 

   

the anticipated completion of the separation in the first quarter of 2011;

 

   

the funding of $3.5 billion of cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) from Motorola, Inc. to capitalize Motorola Mobility at the time of the separation (with the $3.5 billion being only an estimate at this time with the amount ultimately funded to Motorola Mobility by Motorola, Inc. to be determined by the Motorola, Inc. Board of Directors prior to the separation); and

 

   

the recapitalization of the Company, which will be completed prior to the completion of the separation and distribution, in which our common stock held by Motorola, Inc. will be converted into approximately [ ] million shares of common stock of Motorola Mobility Holdings, Inc.

Since the beginning of the second quarter of 2008 through the second quarter of 2010, Motorola, Inc. has incurred approximately $258 million of non-recurring pre-tax separation costs, approximately $14 million of which has been capitalized. The Company expects to incur approximately an additional $200 million of non-recurring pre-tax separation costs through the Distribution Date, approximately $23 million of which is expected to be capitalized, in connection with the consummation of the separation with the possibility that such costs could be higher. These costs are expected to consist of, among other things: financial, legal, tax, accounting and other advisory fees; costs to create independent information technology environments; statutory severance costs related

 

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to foreign legal entity employment transfers; costs to realign manufacturing and distribution facilities; and non-income tax costs and regulatory fees incurred as part of the separation. The vast majority of these costs will be incurred by Motorola, Inc. prior to the distribution. To the extent that additional separation costs are incurred by Motorola Mobility after the distribution, such costs will be the responsibility of Motorola Mobility. In addition, Motorola Mobility expects that certain incremental costs may be incurred on a going-forward basis in connection with operating as an independent, publicly traded company.

Motorola Mobility may incur certain incremental costs as an independent, publicly traded company as compared to the costs incurred historically. For example, Motorola, Inc. currently provides many corporate functions on Motorola Mobility’s behalf. As an independent, publicly traded company, Motorola Mobility’s total costs related to functions such as treasury, tax, accounting, legal, internal audit, human resources, public and investor relations, general management, real estate, shared information technology systems, procurement, corporate governance activities and centrally managed employee benefit arrangements, may differ from the costs for such functions that were historically allocated to Motorola Mobility from Motorola, Inc. The Company expects these costs to be immaterially different than the amounts historically allocated to the Company from Motorola, Inc.; however, there can be no assurance that such costs will be immaterially different.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Statements of Operations

(in millions, except per share amounts)

Six Months Ended July 3, 2010

 

(Dollars in millions, except per share data)   Historical     Adjustments     Pro Forma  

Net revenues

  $ 5,089        $ 5,089   

Costs of sales

    3,830          3,830   
                 

Gross margin

    1,259          1,259   
                 

Selling, general and administrative expenses

    756      $ (24 ) (A)      732   

Research and development expenditures

    739          739   

Other charges

    (180       (180
                       

Operating loss

    (56     24        (32
                       

Other income (expense):

     

Interest expense, net

    (29     29   (B)        

Gains (losses) on sales of investments and business, net

               

Other, net

    (22       (22
                       

Total other income (expense)

    (51     29        (22
                       

Loss before income taxes

    (107     53        (54

Income tax expense

    27          (C)      27   
                       

Net loss

    (134     53        (81

Less: Loss attributable to non-controlling interests

    (2       (2
                       

Net loss attributable to Motorola Mobility Holdings, Inc.

  $ (132   $ 53      $ (79
                       

Loss per share

  $        [ ]   (D)    $ [ ]   

Year Ended December 31, 2009

 

(Dollars in millions, except per share data)   Historical     Adjustments     Pro Forma  

Net revenues

  $ 11,050        $ 11,050   

Costs of sales

    8,897          8,897   
                 

Gross margin

    2,153          2,153   
                 

Selling, general and administrative expenses

    1,486      $ (24 ) (A)      1,462   

Research and development expenditures

    1,591          1,591   

Other charges

    287          287   
                       

Operating loss

    (1,211     24        (1,187
                       

Other income (expense):

     

Interest expense, net

    (41     41   (B)        

Gains (losses) on sales of investments and business, net

    (34       (34

Other, net

    (49       (49
                       

Total other income (expense)

    (124     41        (83
                       

Loss before income taxes

    (1,335     65        (1,270

Income tax expense

             (C)        
                       

Net loss

    (1,335     65        (1,270

Less: Earnings attributable to non-controlling interests

    7          7   
                       

Net loss attributable to Motorola Mobility Holdings, Inc.

  $ (1,342   $ 65      $ (1,277
                       

Loss per share

  $        [ ] (D)    $ [ ]   

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

July 3, 2010

 

(In millions)    Historical     Adjustments     Pro Forma  
ASSETS       

Cash and cash equivalents

   $      $ 3,500  (E)    $ 3,500   

Accounts receivable, net

     1,281          1,281   

Inventories, net

     629          629   

Deferred income taxes

     119          119   

Other current assets

     599          599   
                        

Total current assets

     2,628        3,500        6,128   
                        

Property, plant and equipment, net

     743          743   

Investments

     127          127   

Deferred income taxes

     50          50   

Goodwill

     1,292          1,292   

Other assets

     783          783   
                        

Total assets

   $ 5,623      $ 3,500      $ 9,123   
   
LIABILITIES AND BUSINESS EQUITY       

Accounts payable

   $ 1,323        $ 1,323   

Accrued liabilities

     1,803          1,803   
                  

Total current liabilities

     3,126          3,126   
                  

Other liabilities

     495      $ 65  (F)      560   

Business equity:

      

Additional paid-in capital

            3,500  (E)      3,500   
       [ ]  (G)   

Owner’s net investment

     2,305        (65 )(F)      2,240   
       [ ]  (G)   

Accumulated other comprehensive loss

     (328       (328
                        

Total Motorola Mobility Holdings, Inc. equity

     1,977        3,435        5,412   

Non-controlling interests

     25          25   
                        

Total business equity

     2,002        3,435        5,437   
                        

Total liabilities and business equity

   $ 5,623      $ 3,500      $ 9,123   
   

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

(in millions)

 

(A) The adjustment to Selling, general and administrative expenses reflects reductions of $24 million for both the six months ended July 3, 2010, and the year ended December 31, 2009, respectively, related to the Company’s portion of the cost of Motorola, Inc.’s U.S. defined benefit pension plan allocated to the Company and included in our combined statements of operations. Following the separation and distribution, the U.S. defined benefit plan will continue to be administered by Motorola, Inc. and the related obligation will be retained by Motorola, Inc. It has been determined that the Company will have no U.S. defined benefit pension plan following the separation and distribution; accordingly, no U.S. pension cost is expected to be incurred by Motorola Mobility following the separation and distribution.

 

(B) The adjustment to Interest expense, net represents the elimination of all net interest expense, $29 million and $41 million for the six months ended July 3, 2010, and the year ended December 31, 2009, respectively, primarily related to the Company’s portion of Motorola, Inc.’s net interest expense allocated to the Company and included in our combined statements of operations. This allocation was based on the Company’s Total assets as a percentage of Motorola, Inc.’s Total assets less Cash and cash equivalents and Sigma Fund included in Motorola, Inc.’s consolidated balance sheets. Following the separation and distribution, the Company currently anticipates it will not carry a significant amount of debt or incur a significant amount of interest expense. Additionally, the Company will no longer be allocated a portion of Motorola, Inc.’s interest income. Accordingly, net interest expense, comprised of interest expense less interest income, both allocated by Motorola, Inc. to the Company, has been eliminated from the pro forma condensed combined statements of operations. We have not included a pro forma adjustment for potential future interest income on the Company’s cash and cash equivalents as the capitalization of the Company has not yet been finalized by the Motorola, Inc. Board of Directors, nor can we anticipate the interest rate that might be earned on such cash and cash equivalents.

 

(C) The adjustment to Income tax expense represents the tax effect of the pro forma adjustments impacting Loss before income taxes discussed in (A) and (B) above, calculated using the U.S. effective tax rate of 35%, and adjusted after the utilization of valuation allowances to 0%, for the six months ended July 3, 2010, and for the year ended December 31, 2009.

 

(D) The computation of pro forma loss per share is based upon the anticipated [ ] million common shares outstanding following the distribution. Prior to the distribution, there will be no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding. At the date of the planned distribution of our common stock by Motorola, Inc. to its stockholders, stock options and unvested restricted stock units outstanding under Motorola, Inc.’s stock-based compensation plans that are held by our employees are currently expected to be converted to options to purchase shares of common stock or unvested restricted stock units of our Company. The number of options to purchase shares of our Company and unvested restricted stock units resulting from this conversion will be based on the exercise price of the Motorola, Inc. stock options and/or the market value of both Motorola, Inc. and the Company at that date.

 

(E) The adjustments to Cash and cash equivalents and to Additional paid-in capital represent an estimate of the cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) that Motorola, Inc. is expected to fund Motorola Mobility with at the time of the separation. The amount to be funded is only an estimate at this time. The actual amount ultimately funded to Motorola Mobility by Motorola, Inc. will be determined by the Motorola, Inc. Board of Directors prior to the separation.

 

(F) The adjustment to Other liabilities represents the net obligation of certain non-U.S. defined benefit pension plans which will be transferred to the Company.

 

(G) The adjustments to Additional paid-in capital and to Owner’s net investment represent the recapitalization of our Company in which our common stock held by Motorola, Inc. will be converted into approximately [ ] million shares of common stock. In connection with this recapitalization of our company, the amount of Motorola, Inc.’s net investment in our Company, including intercompany debt which was recorded in business equity as Owner’s net investment in our combined balance sheet, was reclassified to Additional paid-in capital.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial position and results of operations for the six months ended July 3, 2010 and July 4, 2009 and each of the three years in the period ended December 31, 2009. This commentary should be read in conjunction with our combined and condensed combined financial statements and the notes thereto which appear beginning under “ Financial Statements and Supplementary Data .”

Introduction

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying combined and condensed combined financial statements and provides additional information on Motorola Mobility’s business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:

 

   

Separation from Motorola, Inc. – This section provides a general discussion of our separation from Motorola, Inc.

 

   

Executive Overview – This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends.

 

   

Looking Forward – The section provides a discussion of management’s general outlook about market demand, our competitive position and product development.

 

   

Basis of Presentation – This section provides a discussion of the basis on which our combined and condensed combined financial statements were prepared, including our historical results of operations and adjustments thereto, primarily allocations of general corporate expenses from Motorola, Inc.

 

   

Results of Operations – This section provides an analysis of our results of operations for the six months ended July 3, 2010 and July 4, 2009 and the three years ended December 31, 2009.

 

   

Liquidity and Capital Resources – This section provides a discussion of our current financial condition and an analysis of our cash flows for the six months ended July 3, 2010 and July 4, 2009 and the three years ended December 31, 2009. This section also provides a discussion of our contractual obligations, other purchase commitments and customer credit risk that existed at December 31, 2009, as well as a discussion of the amount of financial capacity available to fund our future commitments and ongoing operating activities. We do not have any off-balance sheet arrangements, as defined by the SEC.

 

   

Critical Accounting Policies – This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.

 

   

Quantitative and Qualitative Disclosures About Market Risk – This section discusses how we monitor and manage exposure to potential gains and losses arising from changes in market rates and prices, which, for us, is primarily associated with changes in foreign currency exchange rates.

Separation from Motorola, Inc.

Motorola, Inc.’s Board of Directors has preliminarily approved the separation of Motorola, Inc. into two independent, publicly traded companies. Prior to the completion of the distribution, Motorola, Inc. will transfer to the Company and its subsidiaries substantially all of the assets and liabilities of the Mobile Devices and Home businesses. On the Distribution Date, Motorola, Inc. will distribute all of the shares of the Company’s stock that

 

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it then owns through a special dividend to the common stockholders of Motorola, Inc. as of the record date, that is expected to be tax-free for U.S. federal income tax purposes. Immediately following the distribution, Motorola, Inc.’s stockholders as of the record date will own 100% of the outstanding equity in both companies. The separation will not require a vote by Motorola, Inc. stockholders. The Motorola Mobility businesses discussed herein represent the historical operating results and financial condition of Motorola Mobility. Any references to “we,” “us,” “Motorola Mobility Holdings, Inc.,” “Motorola Mobility” or the “Company” in this MD&A refer to the Mobile Devices and Home businesses as operated as a part of Motorola, Inc. prior to the distribution.

Historically, Motorola Mobility has used the corporate functions of Motorola, Inc. for a variety of services including treasury, accounting, tax, legal, internal audit, human resources, public and investor relations, general management, real estate, shared information technology systems, procurement, corporate governance activities and centrally managed employee benefit arrangements, which include the costs of salaries, benefits and other related costs. Motorola Mobility was allocated $1.0 billion in 2009, $1.3 billion in 2008 and $1.3 billion in 2007 of costs incurred by Motorola, Inc. for these functions. Management believes the assumptions and methodologies underlying the allocation of these expenses from Motorola, Inc. are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been or will be incurred by Motorola Mobility if it were to operate as an independent, publicly traded company. We expect to enter into agreements with Motorola, Inc. for continuation of some of these services, but the terms and prices on which such services are rendered may be different than the terms and prices in effect prior to the distribution. Such differences are expected to be minimal. In addition, the costs of some services previously allocated to the Company from Motorola, Inc. may differ from those costs associated with being an independent, publicly traded company. Such incremental costs, which are described in more detail in this Information Statement in the section entitled “ Unaudited Pro Forma Condensed Combined Financial Statements ,” are not reflected in our historical combined and condensed combined financial statements.

Executive Overview

The Company

Motorola Mobility Holdings, Inc. is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline digital communication, information and entertainment experiences. The Company’s integrated products and platforms deliver rich multimedia content, such as video, voice, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers. Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.

We have two business segments. The Mobile Devices segment is focused on mobile wireless devices and related products and services. This segment’s net revenues were $7.1 billion in 2009 and $3.4 billion in the first half of 2010, representing 65% and 66%, respectively, of Motorola Mobility’s combined net revenues. The Home segment is focused on technologies to provide video entertainment services to consumers by enabling subscribers to access a variety of interactive digital television (“TV”) services. This segment’s net revenues were $3.9 billion in 2009 and $1.7 billion in the first half of 2010, representing 35% and 34%, respectively, of Motorola Mobility’s combined net revenues.

Motorola Mobility’s financial results for the first half of 2010

 

   

Net Revenues:   Our net revenues were $5.1 billion in the first half of 2010, down 10% compared to net revenues of $5.7 billion in the first half of 2009. Net revenues decreased 7% in the Mobile Devices segment and decreased 15% in the Home segment.

 

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Operating Loss:   We had an operating loss of $56 million in the first half of 2010, compared to an operating loss of $811 million in the first half of 2009.

 

   

Net Loss:   We had a net loss of $132 million in the first half of 2010, compared to a net loss of $885 million in the first half of 2009.

 

   

Operating Cash Flows:   We generated $57 million of net cash from operating activities in the first half of 2010, compared to using $1.3 billion of net cash for operating activities in the first half of 2009.

Motorola Mobility’s financial results for the year ended December 31, 2009

 

   

Net Revenues :  Our net revenues were $11.1 billion in 2009, down 35% compared to net revenues of $17.1 billion in 2008. Net revenues decreased 41% in the Mobile Devices segment and decreased 21% in the Home segment.

 

   

Operating Loss :  We incurred an operating loss of $1.2 billion in 2009, compared to an operating loss of $2.0 billion in 2008. The operating loss in 2009 was smaller than in 2008 primarily due to a $1.5 billion decrease in operating expenses, reflecting savings from cost-reduction initiatives, partially offset by a $666 million decrease in gross margin, reflecting the decline in net revenues.

 

   

Net Loss :  We incurred a loss of $1.3 billion in 2009, compared to a loss of $3.0 billion in 2008. The net loss in 2009 was smaller than in 2008 primarily due to a $1.5 billion decrease in operating expenses, reflecting savings from cost-reduction initiatives, partially offset by a $666 million decrease in gross margin, reflecting the decline in net revenues.

 

   

2009 Annual Mobile Device Shipments of 55.1 Million Units :  We shipped 55.1 million mobile devices in 2009, a 45% decrease compared to shipments of 100.1 million mobile devices in 2008. During the fourth quarter of 2009, we launched our first Android TM -based smartphones and shipped approximately 2.0 million Android-based mobile devices.

 

   

Operating Cash Flows :  We used $1.1 billion of net cash for operating activities in 2009, compared to using $1.2 billion of net cash for operating activities in 2008.

Financial results for our two business segments for the first half of 2010

 

   

In Our Mobile Devices Business: Net revenues were $3.4 billion in the first half of 2010, a decrease of 7% compared to net revenues of $3.6 billion in the first half of 2009. On a geographic basis, net revenues decreased in Latin America and Asia, partially offset by: (i) an increase in net revenues in North America, and (ii) a slight increase in net revenues in Europe, Middle East and Africa Region (“EMEA”). The 7% decrease in net revenues was primarily driven by a 43% decrease in unit shipments, partially offset by a 61% increase in average selling price (“ASP”). We shipped 16.9 million handsets in the first half of 2010, a 43% decrease compared to shipments of 29.5 million units in the first half of 2009. We shipped 5.0 million smartphones in the first half of 2010.

The segment incurred an operating loss of $105 million in the first half of 2010, compared to an operating loss of $832 million in the first half of 2009. The decrease in the operating loss was primarily due to an increase in gross margin driven by: (i) a favorable product mix, specifically due to increased revenues from smartphones and (ii) lower excess inventory and other related charges in 2010 than in 2009, partially offset by the 7% decrease in net revenues. Also contributing to the decrease in the operating loss were: (i) a $228 million gain related to a legal settlement, (ii) lower reorganization of business charges, and (iii) lower research and development (“R&D”) expenditures, reflecting savings from cost-reduction initiatives, partially offset by higher selling, general and administrative (“SG&A”) expenses.

 

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In Our Home Business: Net revenues were $1.7 billion in the first half of 2010, a decrease of 15% compared to net revenues of $2.0 billion in the first half of 2009. On a geographic basis, net revenues decreased in North America and Asia and increased in Latin America and EMEA. The 15% decrease in net revenues in the Home segment is primarily attributable to a 28% decrease in net revenues from set-top boxes, reflecting: (i) a 20% decrease in shipments of set-top boxes to 6.4 million units, and (ii) a lower ASP due to a product mix shift within our set-top box product lines and competitive pricing pressures. The decrease in net revenues from set-top boxes was partially offset by higher net revenues from video and access infrastructure equipment.

The segment had operating earnings of $49 million in the first half of 2010, compared to operating earnings of $21 million in the first half of 2009. The increase in operating earnings was primarily due to (i) a decrease in R&D expenditures, reflecting savings from cost-reduction initiatives, and (ii) lower reorganization of business charges, partially offset by a slight decrease in gross margin, driven by the decrease in net revenues.

Financial results for our two business segments for the year ended December 31, 2009

 

   

In Our Mobile Devices Business: Net revenues were $7.1 billion in 2009, a decrease of 41% compared to net revenues of $12.2 billion in 2008. The decrease in net revenues was primarily driven by a 45% decrease in unit shipments, partially offset by an 8% increase in ASP. On a geographic basis, net revenues decreased substantially in Latin America, EMEA and Asia and, to a lesser extent, decreased in North America.

The segment incurred an operating loss of $1.2 billion in 2009, an improvement of 49% compared to an operating loss of $2.4 billion in 2008. The decrease in the operating loss was primarily due to: (i) lower SG&A expenses, primarily due to lower marketing expenses and savings from cost-reduction initiatives; (ii) lower R&D expenditures, reflecting savings from cost-reduction initiatives; (iii) supply chain efficiencies, primarily including lower excess inventory charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms; and (iv) the absence in 2009 of a charge comparable to the $150 million charge in 2008 related to settlement of a silicon purchase commitment. These amounts were partially offset by a decrease in gross margin, driven by the 41% decrease in net revenues.

 

   

In Our Home Business: Net revenues were $3.9 billion, a decrease of 21% compared to net revenues of $4.9 billion in 2008. The 21% decrease in net revenues in the Home business was primarily driven by: (i) an 18% decrease in shipments of set-top boxes, primarily due to lower shipments to large cable and telecommunications operators in North America as a result of macroeconomic conditions, and (ii) a lower ASP due to an unfavorable shift in product mix. On a geographic basis, net revenues decreased in North America and Latin America and increased in EMEA and Asia.

The segment had operating earnings of $11 million in 2009 compared to operating earnings of $351 million in 2008. The decrease in operating earnings was primarily due to a decrease in gross margin, driven by the 21% decrease in net revenues. Also contributing to the decrease in operating earnings were: (i) a $75 million charge related to a legal settlement, and (ii) an increase in SG&A expenses, reflecting an increase in administrative costs. These factors were partially offset by decreases in R&D expenditures, reflecting savings from cost-reduction initiatives.

Recent developments and accomplishments in the first half of 2010

 

   

In the first half of 2010, we continued to build momentum in the Mobile Devices business, and remained focused on extending our video leadership position in the Home business. In the first quarter, we announced a target separation date in the first quarter of 2011 for the completion of the planned separation from Motorola, Inc. into an independent, publicly traded company.

 

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During the first half of 2010, the wireless handset market continued to grow, driven by improving economic conditions across many regions and greater demand for smartphones as a result of consumers’ desire for data-centric mobile experiences and supporting operator activities, including tiered-data plans, strong subsidy support and expanded network capacity. These market changes continued to drive increased smartphone sales and, as a result, the level of competition. During the first half of 2010, the Mobile Devices business launched 19 new devices, including eight Android-based smartphones. These new products have contributed favorably to our operating results and have strengthened our overall product portfolio. From a financial perspective, the decrease in our operating loss year-over-year reflects an improvement in gross margin and reduced R&D expenditures primarily due to savings from continued cost-reduction initiatives, partially offset by higher SG&A expenses driven by an increase in marketing expenses.

 

   

The Home business continues to focus on developing solutions to support our customers’ needs to deliver content and advance services for consumers. In the first half of 2010, we introduced new 3D set-top boxes for cable, significantly enhancing the 3D experience for consumers. We announced Medios, a suite of software solutions that evolve with current network elements to allow operators to receive, store and distribute content across a multi-screen environment. We expanded our portfolio with an all digital set-top that serves as a multi-media IP hub that gives consumers more control and access to content anywhere in the home. From a financial perspective, while we continue to be impacted by economic conditions in the U.S. and revenues have declined year-over-year, we have improved operating income by reducing our cost structure and have benefited from sequential sales increases of video and access infrastructure equipment as operators begin to reinvest in their networks.

Major challenges and accomplishments in 2009

 

   

In 2009, we navigated through very challenging global economic conditions that impacted our businesses and customers. In response to the global reduction in capital and consumer spending, we focused on our customers, developing innovative products, and significantly reducing our cost structure. We also had unique challenges in our Mobile Devices business as we transitioned our product portfolio. Despite these challenges, we reduced our operating loss, primarily by reducing our operating expenses.

 

   

Execution of our smartphone strategy showed tangible results with the launch of CLIQ TM /DEXT TM with MOTOBLUR TM and DROID TM by Motorola/MILESTONE TM , our first Android-based smartphones. We also reduced the number of feature phone devices in the portfolio. During this period of change, we increased our focus in priority markets for wireless mobile devices, including North America and China. Demand for our wireless mobile devices declined in 2009, primarily due to limited product offerings in feature phones and smartphones as Mobile Devices implemented its strategy to transition its product portfolio. During the year, the Mobile Devices business reduced its cost structure by over $1.5 billion, including reductions in research and development expenditures and selling, general and administrative expenses. Reductions were the result of eliminating product platforms, focusing on key markets and other efficiencies. In addition, operational improvements were made in the supply chain, resulting in improved inventory management and reduced levels of excess and obsolete inventory.

 

   

Our new products began to address consumer demand for smartphones with higher quality displays, broadband connectivity everywhere, over-the-air update capability, and enhanced mobile experiences enabled by a multi-tasking, graphical operating system. Consumer reception of our first smartphones was very strong, resulting in shipments of two million smartphones in the fourth quarter of 2009. From a financial perspective, the Mobile Devices segment significantly reduced its operating loss and

 

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operating cash outflow in 2009 compared to 2008. This improvement was due primarily to the reduction in its cost structure, improvement in operating and supply chain efficiencies, and implementation of its portfolio transition, including the launch of new smartphones.

 

   

The Home business was impacted by a decline largely attributable to economic conditions in the U.S., which negatively impacted consumer and operator spending and housing. During 2009, the business remained a leading provider of set-top boxes, shipped its 100 millionth set-top box and generated positive operating cash flow.

Looking Forward

In our Mobile Devices business, while we expect the overall global mobile device market to remain intensely competitive, we expect annual growth in total industry mobile device demand over the next several years, particularly in smartphones. Our strategy is focused on developing and marketing a comprehensive smartphone portfolio and strengthening our position in priority markets. We plan to launch a significant number of new smartphone devices in 2010 and 2011 with particular focus on: (i) differentiating our products using MOTOBLUR™, our proprietary applications and services suite, (ii) enhancing the ecosystem using our Motorola developer network (“MotoDEV”) application development program, and (iii) providing a smartphone portfolio across multiple price points for a broad array of carrier, distributor and retail customers. Our initial market priorities are primarily North America, China, and Latin America, followed by Western Europe and other strategic markets. Our mid- to high-tier feature phone portfolio will be more limited than in the past as we shift resources to the smartphone segment of the market. Feature phone unit volumes, including integrated digital enhanced network (“iDEN”) devices, are expected to be lower in 2010 than in 2009. For lower-priced, voice-centric mobile devices, we will partner with third-party original device manufacturers, primarily in Asia, to deliver a portfolio to meet certain customer requirements and extend our brand. With growth in the mobile device market, particularly in smartphones, and by accelerating our speed to market, providing rich consumer experiences and building our brand, we expect to continue to improve our financial performance.

In our Home business, we expect demand for set-top boxes to contract in 2010 compared to 2009 due to market conditions, particularly in the U.S. Longer term, growth drivers for the Home business remain intact, as digital households are expected to experience annual growth over the next several years, driven by demand for high definition TV, whole-home network solutions, 3D-TV and advanced interactive services. Analog to digital transitions are still underway, particularly outside North America, and consumer demand is expected to drive infrastructure needs for more bandwidth, optimized networks and storage, and services. We will leverage our position in set-top boxes and video delivery systems and prioritize our research and development efforts to ensure that we are well positioned for growth when demand levels recover.

We believe we are well positioned to enable the evolving digital lifestyle by delivering multi-screen experiences across multiple types of devices. Previously separate industries like wireless, media, the Internet and computing industries are increasingly interacting with each other, creating consumer demand for new devices, applications and services. We offer devices that support these new applications and services, like the DROID by MOTOROLA family of smartphones. MOTOBLUR, our cloud-based service platform, manages and aggregates, automatically delivers (referred to as “push”) and uploads personalized digital content such as photos, videos and social networking updates. We are also a leading provider of products and services for the delivery of video, voice and data to the home. Cloud-based refers to a computing environment where applications and content are shared and delivered over the network using resources that might be located in a single data center, distributed across a number of data centers or spread throughout the entire network. Our businesses have complementary core strengths and synergies in intellectual property, technology, design, distribution and operator and carrier relationships, which together with a global brand uniquely position us to capitalize on emerging opportunities.

Due to increased demand for products, many electronic manufacturers are experiencing shortages for certain components. We continue to work closely with our customers and suppliers to secure adequate supply. In the second half of this year, if demand for our products increases from our current expectations, we could experience shortages.

 

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We conduct our business in highly competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, changing consumer trends, short product life cycles and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, consolidations among our customers and competitors, and changes in regulatory requirements, among other matters, can introduce volatility into our businesses. We face challenging, but stabilizing, global economic conditions with more limited visibility than historical norms. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers around the world. As we execute on meeting these objectives, we remain focused on taking the necessary action to design and deliver differentiated and innovative products and services that will advance the way the world connects by simplifying and personalizing communications and enhancing mobility.

For more information, about our strategy and the risk related to our strategy and our future performance, see the sections under “ Business—Business Segments ” entitled Mobile Devices Segment— Our Strategy and “ Home Segment—Our Strategy and Risk Factors included elsewhere in this Information Statement.

We will operate our business differently as a new public company following the separation from Motorola, Inc. For more information on the challenges and risks related to our separation from Motorola, Inc., see the sections entitled “ Risk Factors—Risks Relating to the Separation and The Separation in this Information Statement.

Basis of Presentation

The combined financial statements have been derived from the consolidated financial statements and accounting records of Motorola, Inc., principally representing the Mobile Devices and Home business segments, using the historical results of operations, and historical basis of assets and liabilities of the Mobile Devices and Home business segments. The historical financial statements include allocations of certain Motorola, Inc. general corporate expenses. Management believes the assumptions and methodologies underlying the allocation of general corporate expenses from Motorola, Inc. are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by the Company if it had operated as an independent company or of the costs expected to be incurred in the future. As such, the combined financial statements included herein may not necessarily reflect the Company’s results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented. Because a direct ownership relationship did not exist among all the various worldwide entities comprising the Company, Motorola, Inc.’s net investment in the Company, including intercompany debt, is shown as Business Equity in lieu of stockholders’ equity in the combined financial statements. Transactions between Motorola Mobility and other Motorola, Inc. operations have been identified in the combined financial statements as transactions between related parties.

 

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Results of Operations

Six Months Ended July 3, 2010 and July 4, 2009

Combined Business Results

    Six Months Ended  
(Dollars in millions)  

July 3,

2010

   

% of

Revenues

   

July 4,

2009

   

% of

Revenues

 

Net revenues

  $ 5,089        $ 5,668     

Costs of sales

    3,830      75.3     4,748      83.8
                   

Gross margin

    1,259      24.7     920      16.2
                   

Selling, general and administrative expenses

    756      14.8     744      13.1

Research and development expenditures

    739      14.5     821      14.5

Other charges (income)

    (180 )     (3.5 )%      166      2.9
                   

Operating loss

    (56 )     (1.1 )%      (811   (14.3 )% 
                   

Other income (expense):

       

Interest expense, net

    (29 )     (0.6 )%      (17   (0.3 )% 

Losses on sales of investments and businesses, net

             (32   (0.6 )% 

Other

    (22 )     (0.4 )%      (19   (0.3 )% 
                   

Total other income (expense)

    (51 )     (1.0 )%      (68   (1.2
                   

Loss before income taxes

    (107 )     (2.1 )%      (879   (15.5 )% 

Income tax expense

    27      0.5     2      0.0
                   

Net loss

    (134 )     (2.6 )%      (881   (15.5 )% 

Less: Earnings (loss) attributable to non-controlling interests

    (2 )     (0.0 )%      4      0.1
                   

Net loss attributable to Motorola Mobility Holdings, Inc.

  $ (132 )     (2.6 )%    $ (885   (15.6 )% 
   

Six months ended July 3, 2010 compared to six months ended July 4, 2009

Net Revenues

Net revenues were $5.1 billion in the first half of 2010, down 10% compared to net revenues of $5.7 billion in the first half of 2009. The decrease in net revenues reflects: (i) a $314 million, or 15%, decrease in net revenues in the Home segment, and (ii) a $265 million, or 7%, decrease in net revenues in the Mobile Devices segment. The 15% decrease in net revenues in the Home segment reflects a 28% decrease in net revenues of set-top boxes, primarily due to: (i) a 20% decrease in shipments of set-top boxes to 6.4 million units, and (ii) a lower average selling price (“ASP”) due to a product mix shift within our set-top box product lines and competitive pricing pressures. The 7% decrease in net revenues in the Mobile Devices segment was primarily driven by a 43% decrease in unit shipments, partially offset by a 61% increase in ASP.

Gross Margin

Gross margin was $1.3 billion, or 24.7% of net revenues, in the first half of 2010, compared to $920 million, or 16.2% of net revenues, in the first half of 2009. The increase in gross margin reflects: (i) a significant increase in the Mobile Devices segment, partially offset by a slight decrease in the Home segment. The increase in gross margin in the Mobile Devices segment was primarily driven by: (i) a favorable product mix, specifically due to increased volume of smartphones, and (ii) lower excess inventory and other related charges in 2010 than in 2009, partially offset by the 7% decrease in net revenues. The slight decrease in gross margin in the Home segment was due to the 15% decrease in net revenues partially offset by a favorable product margin mix across product lines. The increase in gross margin as a percentage of net revenues in the first half of 2010 compared to the first

 

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half of 2009 reflects an increase in gross margin percentage in both segments. The Company’s overall gross margin as a percentage of net revenues is impacted by the proportion of overall net revenues generated by its various businesses.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased 2% to $756 million, or 14.8% of net revenues, in the first half of 2010, compared to $744 million, or 13.1% of net revenues, in the first half of 2009. The increase in SG&A expenses reflects higher SG&A expenses in both segments. The increase in the Mobile Devices segment was primarily driven by an increase in marketing expenses. The increase in the Home segment was primarily due to increased expenditures on information technology upgrades. SG&A expenses as a percentage of net revenues increased in both segments.

Research and Development Expenditures

Research and development (“R&D”) expenditures decreased 10% to $739 million, or 14.5% of net revenues, in the first half of 2010, compared to $821 million, or 14.5% of net revenues, in the first half of 2009. The decrease in R&D expenditures reflects lower R&D expenditures in both segments, primarily due to savings from cost-reduction initiatives. R&D expenditures as a percentage of net revenues decreased in the Mobile Devices segment and increased in the Home segment. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

Other Charges (Income)

The Company recorded net other income of $180 million in Other charges (income) in the first half of 2010, compared to net other charges of $166 million in the first half of 2009. The net other income in the first half of 2010 included a $228 million gain related to a legal settlement, partially offset by: (i) $27 million of charges relating to the amortization of intangible assets, and (ii) $21 million of net reorganization of business charges included in Other charges (income). The charges in the first half of 2009 include: (i) $138 million of net reorganization of business charges included in Other charges (income), and (ii) $28 million of charges relating to the amortization of intangible assets. The net reorganization of business charges are discussed in further detail in the section entitled “ Reorganization of Businesses ” included elsewhere within this Information Statement.

Interest Expense, Net

Net interest expense was $29 million in the first half of 2010, compared to net interest expense of $17 million in the first half of 2009. Net interest expense in the first half of 2010 includes interest expense of $41 million, partially offset by interest income of $12 million. Net interest expense in the first half of 2009 included interest expense of $36 million, partially offset by interest income of $19 million. Our net interest expense primarily represents the amount allocated from Motorola, Inc. This allocation is based on the Company’s Total assets as a percentage of the respective Motorola, Inc. Total assets, less Cash and cash equivalents and Sigma Fund included in Motorola, Inc.’s consolidated balance sheets. Our interest expense as an independent, publicly traded company may differ from the amounts reflected above.

Losses on Sales of Investments and Business, Net

The Company had no gains (losses) on sales of investments and businesses during the first half of 2010, compared to a loss of $32 million in the first half of 2009. In the first half of 2009, the net loss primarily relates to the sale of a business.

Other

Net expense classified as Other, as presented in Other income (expense), was $22 million in the first half of 2010, compared to $19 million in the first half of 2009. The net expense in the first half of 2010 was primarily

 

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comprised of: (i) $19 million of foreign currency losses, and (ii) $8 million of investment impairment charges. The net expense in the first half of 2009 was primarily comprised of $26 million of foreign currency losses.

Effective Tax Rate

The Company recorded $27 million of net tax expense in the first half of 2010, resulting in a negative effective tax rate of 25%, compared to $2 million of net tax expense in the first half of 2009, resulting in an effective tax rate of 0%. The Company’s effective tax rates for the first half of 2010 and 2009 were less than the U.S. statutory tax rate of 35%, primarily due to no net U.S. tax benefits being recorded on the Company’s U.S. losses, as a result of the Company’s inability to recognize additional deferred tax assets.

The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors, including changes in the geographic mix of income before taxes, the level of pre-tax income or losses and effects of various global income tax strategies.

Net Loss

The Company incurred a loss before income taxes of $107 million in the first half of 2010, compared with a loss before income taxes of $879 million in the first half of 2009. After taxes, and excluding Earnings (loss) attributable to non-controlling interests, the Company incurred a net loss of $132 million in the first half of 2010, compared to a net loss of $885 million in the first half of 2009.

The decrease in the loss before income taxes in the first half of 2010 compared to the first half of 2009 was primarily attributable to: (i) a $346 million improvement in Other charges (income), primarily due to a $228 million gain related to a legal settlement and a $117 million decrease in net reorganization of business charges included in Other charges (income), (ii) a $339 million increase in gross margin, primarily due to a favorable product mix, partially offset by a decrease in net revenues, and (iii) an $82 million decrease in R&D expenditures.

Segment Results

The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 11, “ Segment Information ,” to the Company’s condensed combined financial statements as of and for the six months ended July 3, 2010. Net revenues and operating results for the Company’s two operating business segments for the six months ended July 3, 2010 and July 4, 2009, are presented below.

Mobile Devices Segment

The Mobile Devices segment designs, manufactures, sells and services wireless mobile devices, including smartphones, with integrated software and accessory products, and licenses intellectual property. For the first half of 2010, the segment’s net revenues represented 66% of the Company’s consolidated net revenues, compared to 64% in the first half of 2009.

 

Six Months Ended    July 3,
2010
    July 4,
2009
    %
Change
 

Segment net revenues

   $ 3,365      $ 3,630      (7 )% 

Operating loss

     (105 )       (832   (87 )% 
   

 

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Six months ended July 3, 2010 compared to six months ended July 4, 2009

In the first half of 2010, the segment’s net revenues were $3.4 billion, a decrease of 7% compared to net revenues of $3.6 billion in the first half of 2009. On a geographic basis, net revenues decreased in Latin America and Asia, partially offset by: (i) an increase in net revenues in North America, and (ii) a slight increase in net revenues in Europe, Middle East and Africa region (“EMEA”). The 7% decrease in net revenues was primarily driven by a 43% decrease in unit shipments, partially offset by a 61% increase in average selling price (“ASP”). The segment’s net revenues were negatively impacted by a decreased focus on the feature phone portfolio and limited product offerings in the very low-tier, partially offset by higher revenues from smartphones.

The segment incurred an operating loss of $105 million in the first half of 2010, compared to an operating loss of $832 million in the first half of 2009. The decrease in the operating loss was primarily due to an increase in gross margin driven by: (i) a favorable product mix, specifically due to increased revenues from smartphone devices, and (ii) lower excess inventory and other related charges in 2010 than in 2009, partially offset by the 7% decrease in net revenues. Also contributing to the decrease in the operating loss were: (i) a $228 million gain related to a legal settlement with another company, (ii) lower reorganization of business charges, and (iii) lower R&D expenditures, reflecting savings from cost-reduction initiatives, partially offset by higher selling, general and administrative (“SG&A”) expenses. As a percentage of net revenues in the first half of 2010 as compared to the first half of 2009, gross margin and SG&A expenses increased and research and development (“R&D”) expenditures decreased.

The segment’s industry typically experiences short life cycles for new products. Therefore, it is vital to the segment’s success that new, compelling products are continually introduced. Accordingly, a strong commitment to R&D is required and, even amidst challenging global economic conditions, the segment expects to continue to make the appropriate investments to develop a differentiated product portfolio and fuel long-term growth.

Unit shipments in the first half of 2010 were 16.9 million units, a 43% decrease compared to shipments of 29.5 million units in the first half of 2009. Smartphone shipments in the first half of 2010 were 5.0 million. In the first half of 2010, ASP increased approximately 61% compared to the first half of 2009 driven by favorable product mix towards smartphones. ASP is impacted by numerous factors, including product mix, market conditions and competitive product offerings, and ASP trends often vary over time.

Home Segment

The Home segment designs, manufactures, sells, installs and services set-top boxes for digital video, Internet protocol (“IP”) video, satellite and terrestrial broadcast networks, end-to-end digital video and Internet protocol television (“IPTV”) distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable TV and telecommunication service providers. For the first half of 2010, the segment’s net revenues represented 34% of the Company’s combined net revenues, compared to 36% for the first half of 2009.

 

Six Months Ended

   July 3,
2010
   July 4,
2009
   %
Change
 

Segment net revenues

   $ 1,724    $ 2,038    (15 )% 

Operating earnings

     49      21    133
   

Six months ended July 3, 2010 compared to six months ended July 4, 2009

In the first half of 2010, the segment’s net revenues were $1.7 billion, a decrease of 15% compared to net revenues of $2.0 billion in the first half of 2009. The 15% decrease in net revenues in the Home segment is

 

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primarily attributable to a 28% decrease in net revenues from set-top boxes, reflecting: (i) a 20% decrease in shipments of set-top boxes to 6.4 million units, and (ii) a lower ASP due to a product mix shift within our set-top box product lines and competitive pricing pressures. The decrease in net revenues from set-top boxes was partially offset by higher net revenues from video and access infrastructure equipment.

Shipments of standard definition (“SD”) and high definition (“HD”) set-top boxes decreased significantly, primarily due to lower shipments to large telecommunication and cable operators in North America as a result of lower demand. The decrease in unit shipments of SD and HD set-top boxes was partially offset by an increase in HD/digital video recording (“DVR”) unit shipments due to increased demand for DVR capabilities.

On a geographic basis, net revenues decreased in North America and Asia and increased in Latin America and EMEA. Net revenues in North America continued to comprise a significant portion of the segment’s business, accounting for approximately 71% of the segment’s net revenues in the first half of 2010, compared to approximately 77% in the first half of 2009.

The segment had operating earnings of $49 million in the first half of 2010, compared to operating earnings of $21 million in the first half of 2009. The increase in operating earnings was primarily due to (i) a decrease in R&D expenditures, reflecting savings from cost-reduction initiatives, and (ii) lower reorganization of business charges, partially offset by a slight decrease in gross margin, driven by the decrease in net revenues. As a percentage of net revenues in the first half of 2010 as compared to the first half of 2009, gross margin, SG&A expenses and R&D expenditures increased.

Reorganization of Businesses

Motorola, Inc. maintains a formal Involuntary Severance Plan (“Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, the Company amended and restated the Severance Plan. Under the amended Severance Plan, severance benefits will be paid in bi-weekly installments to impacted employees rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the condensed combined statements of operations where the original charges were recorded when it is determined they are no longer needed. Motorola Mobility expects to have a similar involuntary Severance Plan after separation.

2010 Charges

During the first half of 2010, the Company continued to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans. The employees affected were located in all regions.

During the first half of 2010, the Company recorded net reorganization of business charges of $27 million, including $6 million of charges in Costs of sales and $21 million of charges under Other charges in the Company’s condensed combined statements of operations. Included in the aggregate $27 million are charges of $36 million for employee separation costs, partially offset by $9 million of reversals for accruals no longer needed.

 

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The following table displays the net charges incurred by business segment:

 

July 3, 2010    Six Months Ended

Mobile Devices

   $ 17

Home

     10
      
   $ 27
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2010 to July 3, 2010:

 

       Accruals at
January 1,
2010
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
July 3,
2010

Exit costs

   $ 39    $    $ (3   $ (15   $ 21

Employee separation costs

     33      36      (8     (35     26
      
   $ 72    $ 36    $ (11   $ (50   $ 47
 

Exit Costs

At January 1, 2010, the Company had an accrual of $39 million for exit costs attributable to lease terminations. There were no material additional charges related to exit costs during the first half of 2010. The adjustments of $3 million reflect: (i) $2 million of reversals of accruals no longer needed, and (ii) $1 million of foreign currency translation adjustments. The $15 million used reflects cash payments. The remaining accrual of $21 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 3, 2010, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2010, the Company had an accrual of $33 million for employee separation costs, representing the severance costs for approximately 400 employees. The additional charges of $36 million during the first half of 2010 represent severance costs for approximately an additional 1,000 employees, of which 400 are direct employees and 600 are indirect employees.

The adjustments of $8 million reflect: (i) $7 million of reversals of accruals no longer needed and (ii) $1 million of foreign currency translation adjustments.

During the six months ended July 3, 2010, approximately 700 employees, of which 200 were direct employees and 500 were indirect employees, were separated from the Company. The $35 million used reflects cash payments to these separated employees. The remaining accrual of $26 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 3, 2010, is expected to be paid, generally, within one year to: (i) severed employees who have already begun to receive payments, and (ii) approximately 700 employees to be separated in 2010.

2009 Charges

During the first half of 2009, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected were located in all regions.

 

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During the first half of 2009, the Company recorded net reorganization of business charges of $176 million, including $38 million of charges in Costs of sales and $138 million of charges under Other charges in the Company’s condensed combined statements of operations. Included in the aggregate $176 million are charges of $162 million for employee separation costs, $22 million for exit costs and $18 million for fixed asset impairment charges, partially offset by $26 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

July 4, 2009    Six Months
Ended

Mobile Devices

   $ 160

Home

     16
      
   $ 176
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to July 4, 2009:

 

      

Accruals at

January 1,

2009

  

Additional

Charges

   Adjustments   

Amount

Used

  

Accruals at

July 4,

2009

Exit costs

   $ 63    $ 22    $ (6)    $ (36)    $ 43

Employee separation costs

     103      162      (18)      (178)      69
      
   $ 166    $ 184    $ (24)    $ (214)    $ 112
 

Exit Costs

At January 1, 2009, the Company had an accrual of $63 million for exit costs attributable to lease terminations. The additional charges of $22 million during the first half of 2009 are primarily related to the exit of leased facilities and contractual termination costs, both within the Mobile Devices segment. The adjustments of $6 million reflect $7 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $36 million used reflects cash payments. The remaining accrual of $43 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 4, 2009, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2009, the Company had an accrual of $103 million for employee separation costs, representing the severance costs for approximately 1,600 employees. The additional charges of $162 million during the first half of 2009 represent severance costs for approximately an additional 4,700 employees, of which 1,700 are direct employees and 3,000 are indirect employees.

The adjustments of $18 million reflect $19 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments.

During the six months ended July 4, 2009, approximately 5,800 employees, of which 2,600 were direct employees and 3,200 were indirect employees, were separated from the Company. The $178 million used reflects cash payments to these separated employees. The remaining accrual of $69 million, which was included in Accrued liabilities in the Company’s condensed combined balance sheet at July 4, 2009, was expected to be paid to approximately 400 separated employees.

 

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Liquidity and Capital Resources

Overview of Liquidity

Motorola, Inc. expects to fund Motorola Mobility at the time of the distribution with $3.5 billion of cash and cash equivalents. The amount to be funded is only an estimate at this time. The actual amount ultimately funded to Motorola Mobility by Motorola, Inc. will be determined by the Motorola, Inc. Board of Directors prior to the separation. Of the amount of the expected capitalization, approximately $[ ] billion is expected to be held in the U.S. and approximately $[ ] billion is expected to be held by the Company or its subsidiaries in other countries. Following the separation, we expect to fund our ongoing operations, working capital, capital expenditures and strategic investments through cash flow from operations, and our available cash and cash equivalents. Following the separation, Motorola Mobility expects to invest its cash primarily in short-term government, agency and government-sponsored enterprise obligations, diversified short-term bank deposits and money market funds.

Our ability to obtain standby letters of credit, performance bonds, surety bonds (collectively referred to as “Letters of Credit”), credit facilities, and foreign exchange lines primarily depends upon our capitalization, working capital, past performance, management expertise and reputation, and certain external factors, including the overall capacity of Letters of Credit and foreign exchange markets. Financial institutions providing these instruments consider such factors in relationship to their underwriting/credit standards, which may change from time to time. As a standalone company it may be more difficult and more costly for us to obtain such instruments.

Cash and Cash Equivalents

Motorola, Inc. primarily uses a worldwide, centralized approach to cash management in which cash accounts are principally consolidated on a daily basis. The financing of the Company’s operations and the related activity between the Company and Motorola, Inc. is reflected as business equity transactions in Owner’s net investment in our condensed combined balance sheets. Therefore, the Company has recorded no cash or cash equivalents on its combined balance sheet.

As highlighted in the combined statements of cash flows, the Company’s liquidity and available capital resources are impacted by three key components: (i) operating activities, (ii) investing activities, and (iii) financing activities.

Operating Activities

The net cash generated from operating activities in the first half of 2010 was $57 million, compared to $1.3 billion of cash used for operating activities in the first half of 2009. The primary contributors to the net cash generation in the first half of 2010 were: (i) a $79 million decrease in other current assets, (ii) a $60 million decrease in net inventories, (iii) net earnings (adjusted for non-cash items) of $53 million, which included the receipt of $175 million in cash related to a legal settlement, and (iv) a $51 million decrease in net accounts receivable, partially offset by: (i) a $97 million net increase in other assets and liabilities, and (ii) an $89 million decrease in accounts payable and accrued liabilities. The primary contributors to the net cash used in the first half of 2009 were: (i) a $1.3 billion decrease in accounts payable and accrued liabilities, (ii) the net loss (adjusted for non-cash items) of $674 million, and (iii) a $171 million increase in net accounts receivable, partially offset by an $806 million decrease in net inventories.

Accounts Receivable: The Company’s net accounts receivable were $1.3 billion at both July 3, 2010 and December 31, 2009. Compared to December 31, 2009, net accounts receivable at July 3, 2010 were lower for the Mobile Devices segment and higher for the Home segment. The Company’s businesses sell their products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of net accounts receivable can be impacted by the timing and level of sales that are made by its various businesses and by the geographic locations in which those sales are made.

 

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As further described below under “Sales of Receivables,” from time to time, Motorola, Inc. elects to sell accounts receivable to third-parties, and the Company’s accounts receivable are sold in this program. The Company’s levels of net accounts receivable can be impacted by the timing and amount of such sales, which can vary by period and can be impacted by numerous factors.

Inventories: The Company’s net inventories were $629 million at July 3, 2010, compared to $688 million at December 31, 2009. The decrease in the Company’s net inventories was reflective of a substantial decrease in net inventory in the Mobile Devices segment, partially offset by increased net inventory in the Home segment. The substantial decrease in net inventory in the Mobile Devices segment was due to supply-chain efficiencies and lower revenues. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure delivery to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer demand.

Accounts Payable: The Company’s accounts payable were $1.3 billion at July 3, 2010, compared to $1.4 billion at December 31, 2009. Accounts payable decreased in both segments. The Company buys products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of accounts payable can be impacted by the timing and level of purchases made by its various businesses and by the geographic locations in which those purchases are made.

Reorganization of Businesses: The Company has implemented reorganization of businesses plans. Cash payments for exit costs and employee separations in connection with a number of these plans were $50 million in the first half of 2010, as compared to $214 million in the first half of 2009. Of the $47 million reorganization of businesses accrual at July 3, 2010, $26 million relates to employee separation costs and is expected to be paid over the remainder of 2010. The remaining $21 million in accruals relate to lease termination obligations that are expected to be paid over a number of years.

Investing Activities

Net cash used for investing activities was $56 million in the first half of 2010, compared to net cash used of $44 million in the first half of 2009. The $12 million increase in net cash used for investing activities was primarily due to the absence of net cash received from the sales of short-term investments in the first half of 2010, compared to receiving $15 million during the first half of 2009.

Strategic Acquisitions and Investments: The Company used $20 million of net cash for acquisitions and new investment activities in the first half of 2010, compared to net cash used of $13 million in the first half of 2009. The cash used in the first half of both 2010 and 2009 was for small strategic acquisitions and investments across the Company.

Capital Expenditures: Capital expenditures were $42 million in the first half of 2010, compared to $33 million in the first half of 2009. The Company’s emphasis in making capital expenditures is to focus on strategic investments driven by customer demand, new design capability and process improvements, including IT systems.

Sales of Investments and Business: The Company received $5 million of net cash from the sales of investments and business in the first half of 2010, compared to using net cash of $16 million in the first half of 2009. The $5 million in proceeds in the first half of 2010 was primarily comprised of net proceeds received in connection with the sales of certain equity investments. The $16 million in net cash used in the first half of 2009 was primarily related to a business which was sold net of cash included in the business, partially offset by net proceeds received in connection with the sale of certain equity investments.

Investments: The Company views its investments as an additional source of liquidity. The majority of these securities are available-for-sale and cost-method investments in technology companies. The fair market values of these securities are subject to substantial price volatility. In addition, the realizable values of these securities are subject to market and other conditions. At July 3, 2010, the Company’s available-for-sale equity securities

 

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portfolio had an approximate fair market value of $22 million, comprised of a cost basis of $7 million and a net unrealized gain of $15 million. At December 31, 2009, the Company’s available-for-sale equity securities portfolio had an approximate fair market value of $21 million, comprised of a cost basis of $7 million and a net unrealized gain of $14 million. The Company’s available-for-sale investments are included in Investments in the Company’s condensed combined balance sheets.

Financing Activities

Net cash used for financing activities was $28 million in the first half of 2010, compared to $1.4 billion of net cash provided in the first half of 2009. Cash used for financing activities in the first half of 2010 and cash provided by financing activities in the first half of 2009 were due to the net cash transfers to/from Motorola, Inc.

Motorola, Inc. primarily uses a worldwide centralized approach to cash management and the financing of its operations with all related activity between the Company and Motorola, Inc. reflected as equity transactions in Owner’s net investment in the Company’s condensed combined balance sheets. When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Company’s funds in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Company’s operations and Motorola, Inc. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Company’s businesses which are transferred to Motorola, Inc. on a regular basis, (ii) cash borrowings from Motorola, Inc. used to fund operations, capital expenditures or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of Motorola, Inc.’s corporate expenses described elsewhere in this Information Statement. For purposes of the condensed combined statements of cash flows, the Company reflects intercompany activity as a financing activity. The net cash transferred to Motorola, Inc. was $28 million in the first half of 2010, compared to receiving net cash of $1.4 billion in the first half of 2009.

Sales of Receivables

Motorola, Inc. sells accounts receivable generated from its business units to third-parties in transactions that qualify as “true-sales.” The Company’s businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc. For the first half of both 2010 and 2009, total accounts receivable sold by the Company were $230 million and $407 million, respectively. As of July 3, 2010 and December 31, 2009, there were $24 million and $71 million, respectively, of receivables outstanding under these programs for which Motorola, Inc. retained servicing obligations.

Future Financing Activities

Our primary future cash needs on a recurring basis will be cash for general corporate purposes, including operations, working capital, capital expenditures and strategic investments. Our ability to fund these needs will depend in part on our ability to generate or raise cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.

For at least the next 12 months, the Company expects to have sufficient liquidity and capital resources arising from the cash generated by the Company’s ongoing operations and from the cash and cash equivalents to be transferred to the Company from Motorola, Inc. at separation in order to meet its cash needs. Thereafter, the Company expects to have sufficient liquidity and capital resources arising from the cash generated by the Company’s ongoing operations. At this time, the Company and Motorola, Inc. have estimated $3.5 billion of cash and cash equivalents will be transferred to the Company at separation.

If our cash flows from operations are less than we expect, we may need to incur debt or issue equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we believe that the arrangements in place at the time of the distribution will permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including: (i) our credit ratings or absence of a credit

 

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rating, (ii) the liquidity of the overall capital markets, and (iii) the current state of the economy, including the telecommunications and cable industries. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us. We cannot assure that such financing will be available to us on acceptable terms or that such financing will be available at all.

Other Contingencies

Potential Contractual Damage Claims in Excess of Underlying Contract Value: In certain circumstances, our businesses may enter into contracts with customers pursuant to which the damages that could be claimed by the other party for failed performance might exceed the revenue Motorola Mobility receives from the contract. Contracts with these types of uncapped damage provisions are not common practice, but individual contracts could still represent meaningful risk. There is a possibility that a damage claim by a counterparty to one of these contracts could result in expenses to Motorola Mobility that are far in excess of the revenue received from the counterparty in connection with the contract.

Indemnification Provisions: In addition, Motorola Mobility may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial, intellectual property and divestiture agreements. Historically, Motorola Mobility has not made significant payments under these agreements, nor have there been significant claims asserted against Motorola Mobility. However, there is an increasing risk in relation to intellectual property indemnities given the current legal climate. In indemnification cases, payment by Motorola Mobility is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow Motorola Mobility to challenge the other party’s claims. Further, Motorola Mobility’s obligations under these agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, typically not more than 24 months, and for amounts not in excess of the contract value, except with respect to certain intellectual property infringement claims and in some instances Motorola Mobility may have recourse against third-parties for certain payments made by Motorola Mobility.

Under the Master Separation and Distribution Agreement, our Company and each of our subsidiaries that receives assets or assumes liabilities in connection with the contribution and separation will indemnify Motorola, Inc. and its representatives and affiliates from all losses (other than losses relating to tax matters, certain employment matters and certain intellectual property matters, such matters being addressed in other agreements referenced in the Master Separation and Distribution Agreement), whether such losses arise or occur prior to, on or after the Distribution, suffered by Motorola, Inc. or its representatives or affiliates arising out of or due to any of the following:

 

   

The operation of our business;

 

   

Our failure to pay, perform or otherwise properly discharge any liabilities assumed by us, including liabilities arising out of or relating to our businesses or assets whether such liabilities arise or accrue prior to, on or after the Distribution Date, including certain specified litigation matters;

 

   

Any breach by us or our affiliates of the Master Separation and Distribution Agreement or any of the ancillary agreements referred to in the Master Separation and Distribution Agreement (such as the Intellectual Property Agreements, the Trademark License Agreement, the Tax Sharing Agreement, and the Employee Matters Agreement); and

 

   

Any untrue statement or alleged untrue statement of a material fact contained in the Form 10, any amendment thereof or this Information Statement or any omission or alleged omission to state a material fact necessary to make the statements in the Form 10, any amendment thereof or this Information Statement, in light of the circumstances under which they were made, not misleading (other than damages due to the Form 10 Information described below).

 

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Motorola, Inc. and each of Motorola, Inc.’s affiliates that transfers assets to us in connection with the contribution and separation will indemnify our company and our representatives and affiliates from any and all losses (other than losses relating to tax matters, certain employment matters, and certain intellectual property matters, such matters being addressed in other agreements referenced in the Master Separation and Distribution Agreement) suffered by our company or our representatives or affiliates arising out of or due to any of the following:

 

   

Failure to pay, perform or otherwise properly discharge any liabilities of Motorola, Inc. and its affiliates other than liabilities allocated to us;

 

   

The business of Motorola, Inc. and any liabilities of Motorola, Inc. which are not allocated to us;

 

   

Any breach by Motorola, Inc. or its affiliates of the Master Separation and Distribution Agreement or any of the ancillary agreements; and

 

   

Any untrue statement or alleged untrue statement of a material fact contained in the Form 10, any amendment thereof or this Information Statement or any omission or alleged omission to state a material fact necessary to make the statements in the Form 10, any amendment thereof or this Information Statement, in light of the circumstances under which they were made, not misleading, but only to the extent that such damages are caused by any such untrue statement or omission or alleged untrue statement or omission that arises out of certain specified information.

All indemnification amounts will be reduced by any insurance proceeds and other offsetting amounts recovered by the party entitled to indemnification, and no party will be liable to any other party for any special, incidental, indirect, consequential or punitive damages or lost profits other than as a reimbursement for such amounts paid to an unrelated party.

Legal Matters: The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to our business. The Company will assume the defense and/or liability for such cases from Motorola, Inc. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on Motorola Mobility’s combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved. See “Business—Legal Proceedings” for more details.

 

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Years Ended December 31, 2009, 2008 and 2007

Combined Business Results

 

     Years Ended December 31  

(Dollars in millions)

   2009     % of
Revenue
    2008     % of
Revenues
    2007     % of
Revenues
 

Net revenues

   $ 11,050        $ 17,099        $ 23,373     

Costs of sales

     8,897      80.5     14,280      83.5     18,890      80.8
                              

Gross margin

     2,153      19.5     2,819      16.5     4,483      19.2
                              

Selling, general and administrative expenses

     1,486      13.4     2,218      12.9     2,753      11.8

Research and development expenditures

     1,591      14.4     2,358      13.8     2,550      10.9

Other charges

     287      2.6     283      1.7     311      1.3
                              

Operating loss

     (1,211   (10.9 )%      (2,040   (11.9 )%      (1,131   (4.8 )% 
                              

Other income (expense):

            

Interest income (expense), net

     (41   (0.4 )%      28      0.2     32      0.1

Gains (losses) on sales of investments and business, net

     (34   (0.3 )%      11      0.1     2      0.0

Other, net

     (49   (0.5 )%      64      0.3     18      0.1
                              

Total other income (expense)

     (124   (1.2 )%      103      0.6     52      0.2
                              

Loss before income taxes

     (1,335   (12.1 )%      (1,937   (11.3 )%      (1,079   (4.6 )% 

Income tax expense (benefit)

          0.0     1,035      6.1     (431   (1.8 )% 
                              

Net loss

     (1,335   (12.1 )%      (2,972   (17.4 )%      (648   (2.8 )% 

Less: Earnings (loss) attributable to non-controlling interests

     7      0.0     (3   (0.0 )%      8      0.0
                              

Net loss attributable to Motorola Mobility Holdings, Inc.

   $ (1,342   (12.1 )%    $ (2,969   (17.4 )%    $ (656   (2.8 )% 

Geographic market revenues measured by the locale of the end customer as a percent of total net revenues for 2009, 2008 and 2007 are as follows:

Geographic Market Revenues by Locale of End Customer

 

       2009     2008     2007  

United States

   63   53   53

Latin America

   16      21      16   

Asia, excluding China

   6      7      8   

China

   6      5      6   

Europe

   5      8      11   

Other markets

   4      6      6   
      
     100   100   100

Year ended December 31, 2009 compared to year ended December 31, 2008

Net Revenues

Net revenues were $11.1 billion in 2009, down 35% compared to net revenues of $17.1 billion in 2008. The decrease in net revenues reflects: (i) a $5.0 billion, or 41%, decrease in net revenues in the Mobile Devices segment, and (ii) a $1.0 billion, or 21%, decrease in net revenues in the Home segment. The 41% decrease in net revenues in the Mobile Devices segment was primarily driven by a 45% decrease in unit shipments, partially

 

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offset by an 8% increase in ASP. The 21% decrease in net revenues in the Home segment was primarily driven by a 24% decrease in net revenues of set-top boxes, reflecting: (i) an 18% decrease in unit shipments of set-top boxes, primarily due to lower shipments to large cable and telecommunications operators in North America as a result of macroeconomic conditions, and (ii) a lower ASP due to an unfavorable shift in product mix.

Gross Margin

Gross margin was $2.2 billion, or 19.5% of net revenues, in 2009, compared to $2.8 billion, or 16.5% of net revenues, in 2008. Gross margin decreased in both segments. The decrease in gross margin in the Mobile Devices segment was primarily driven by the 41% decrease in net revenues, partially offset by: (i) supply chain efficiencies, primarily including lower excess inventory charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms, and (ii) the absence in 2009 of a comparable $150 million charge in 2008 related to settlement of a silicon purchase commitment. The decrease in gross margin in the Home segment was primarily driven by the 21% decrease in net revenues, as there was only a slight decline in margin percentage.

The increase in gross margin as a percentage of net revenues in 2009 compared to 2008 was primarily driven by an increase in gross margin percentage in the Mobile Devices segment, partially offset by a slight decrease in gross margin percentage in the Home segment. The Company’s overall gross margin as a percentage of net revenues can be impacted by the proportion of overall net revenues generated by its various businesses. In 2009, the proportion of overall revenues by our Mobile Devices business was smaller than in previous years. Since Mobile Devices generally has the lower gross margin percentage of the Company’s businesses, this positively impacted overall gross margin percentage in 2009.

Selling, General and Administrative Expenses

SG&A expenses decreased 33% to $1.5 billion, or 13.4% of net revenues, in 2009, compared to $2.2 billion, or 12.9% of net revenues, in 2008. SG&A expenses decreased in the Mobile Devices segment and increased in the Home segment. The decrease in SG&A expenses in the Mobile Devices segment was primarily driven by lower marketing expenses and savings from cost-reduction initiatives. The slight increase in SG&A expenses in the Home segment was primarily due to increased administrative expenses, partially offset by savings from cost-reduction initiatives. SG&A expenses as a percentage of net revenues increased in both segments.

Research and Development Expenditures

R&D expenditures decreased 32% to $1.6 billion, or 14.4% of net revenues, in 2009, compared to $2.4 billion, or 13.8% of net revenues, in 2008. R&D expenditures decreased in both segments, primarily due to savings from cost-reduction initiatives. R&D expenditures as a percentage of net revenues increased in both segments. The Company participates in very competitive industries with constant changes in technology and, accordingly, the Company continues to believe that a strong commitment to R&D is required to drive long-term growth.

Other Charges

The Company recorded net charges of $287 million in Other charges in 2009, compared to net charges of $283 million in 2008. The net charges in 2009 included: (i) $155 million of net reorganization of business charges included in Other charges, (ii) a $75 million charge related to a legal settlement, and (iii) $57 million of charges relating to the amortization of intangibles. The net charges in 2008 included: (i) $151 million of net reorganization of business charges included in Other charges, (ii) $64 million of charges relating to the amortization of intangible assets, and (iii) $68 million of goodwill and other asset impairment charges. The net reorganization of business charges are discussed in further detail in the “Reorganization of Businesses” section included elsewhere within this Information Statement. The goodwill and other asset impairment charges are discussed in further detail in the “ Valuation and Recoverability of Goodwill ” and “ Valuation and Recoverability of Long-Lived Assets ” sections included elsewhere within this Information Statement.

 

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Interest Income (Expense), Net

Net interest expense was $41 million in 2009, compared to net interest income of $28 million in 2008. Net interest expense in 2009 includes interest expense of $70 million, partially offset by interest income of $29 million. Net interest income in 2008 included interest income of $99 million, partially offset by interest expense of $71 million. Our interest expense primarily represents the amount allocated from Motorola, Inc. This allocation is based on the Company’s Total assets as a percentage of the respective Motorola, Inc. Total assets, less Cash and cash equivalents and Sigma Fund included in Motorola, Inc.’s consolidated balance sheets. Our interest expense as an independent, stand-alone company may be higher or lower than the amounts reflected above.

Gains (Losses) on Sales of Investments and Business, Net

Losses on sales of investments and business were $34 million in 2009, compared to gains of $11 million in 2008. In 2009, the net losses primarily relate to the sale of a business. In 2008, the net gains primarily related to sales of a number of the Company’s equity investments.

Other, net

Net expense classified as Other, as presented in Other income (expense), was $49 million in 2009, compared to net income of $64 million in 2008. The net expense in 2009 was primarily comprised of: (i) $45 million of foreign currency losses and (ii) $11 million of investment impairment charges. The net income in 2008 was primarily comprised of: (i) a $99 million curtailment gain associated with the decision to freeze benefit accruals for U.S. pension plans, and (ii) $56 million of gains related to the extinguishment of a liability, partially offset by: (i) $67 million of foreign currency losses, and (ii) $36 million of investment impairment charges.

Effective Tax Rate

The Company recorded a de minimis net tax expense in 2009, resulting in an effective tax rate of 0%, compared to $1.0 billion of net tax expense, resulting in a negative effective tax rate of 53%, in 2008. The Company’s effective tax rate in 2009 was less than the U.S. statutory tax rate of 35% primarily due to no net U.S. tax benefits being recorded on the Company’s U.S. losses due to the inability to recognize additional deferred tax assets. The Company’s effective tax rate in 2008 was less than the U.S. statutory tax rate of 35% primarily due to the recording of a $2.0 billion non-cash tax charge to establish full valuation allowances against the Company’s U.S., Brazil and China deferred tax assets, partially offset by a net reduction in unrecognized tax benefits.

The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes, the level of pre-tax income or losses and effects of various global income tax strategies.

Net Loss

The Company incurred a loss before income taxes of $1.3 billion in 2009, compared with a loss before income taxes of $1.9 billion in 2008. After taxes, and excluding Earnings (losses) attributable to non-controlling interests, the Company incurred a net loss of $1.3 billion in 2009, compared to a net loss of $3.0 billion in 2008.

The improvement in the loss before income taxes in 2009 compared to 2008 was primarily attributable to: (i) a $767 million decrease in R&D expenditures, and (ii) a $732 million decrease in SG&A expenses. These factors were partially offset by a $666 million decrease in gross margin.

 

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Year ended December 31, 2008 compared to year ended December 31, 2007

Net Revenues

Net revenues were $17.1 billion in 2008, down 27% compared to net revenues of $23.4 billion in 2007. The decrease in net revenues reflected a $7.0 billion, or 36%, decrease in net revenues in the Mobile Devices segment, partially offset by a $681 million, or 16%, increase in net revenues in the Home segment. The 36% decrease in net revenues in the Mobile Devices segment was primarily driven by a 37% decrease in unit shipments. The 16% increase in net revenues in the Home segment was primarily driven by a 19% increase in unit shipments, partially offset by lower ASP due to product mix shift and pricing pressure.

Gross Margin

Gross margin was $2.8 billion, or 16.5% of net revenues, in 2008, compared to $4.5 billion, or 19.2% of net revenues, in 2007. The decrease in gross margin reflected lower gross margin in the Mobile Devices segment, partially offset by higher gross margin in the Home segment. The decrease in gross margin in the Mobile Devices segment was primarily driven by: (i) the 36% decrease in net revenues, (ii) supply chain inefficiencies, primarily including excess inventory charges of $370 million recorded in 2008 due to a decision to consolidate software and silicon platforms, and (iii) a $150 million charge recorded in 2008 related to the settlement of a silicon purchase commitment, partially offset by: (i) the absence in 2008 of a $277 million charge for a legal settlement recorded in 2007, and (ii) savings from supply chain cost-reduction activities. The increase in gross margin in the Home segment was primarily driven by the 16% increase in net revenues, partially offset by a lower margin percentage due to product mix shift and pricing pressures. Gross margin as a percentage of net revenues decreased in both segments.

Selling, General and Administrative Expenses

SG&A expenses decreased 19% to $2.2 billion, or 12.9% of net revenues, in 2008, compared to $2.8 billion, or 11.8% of net revenues, in 2007. SG&A expenses decreased in both segments. The decrease in SG&A expenses in the Mobile Devices segment was primarily driven by lower marketing expenses and savings from cost-reduction initiatives. The decrease in SG&A expenses in the Home segment were primarily due to savings from cost-reduction initiatives. SG&A expenses as a percentage of net revenues increased in the Mobile Devices segment and decreased in the Home segment.

Research and Development Expenditures

R&D expenditures decreased 7% to $2.4 billion, or 13.8% of net revenues, in 2008, compared to $2.6 billion, or 10.9% of net revenues, in 2007. R&D expenditures decreased in the Mobile Devices segment and increased in the Home segment. The decreases in R&D expenditures in the Mobile Devices segment were primarily due to savings from cost-reduction initiatives. The increases in R&D expenditures in the Home segment were primarily due to research and developmental engineering expenditures for new product development and investment in next-generation technologies. R&D expenditures as a percentage of net revenues increased in both segments.

Other Charges

The Company recorded net charges of $283 million in Other charges in 2008, compared to net charges of $311 million in 2007. The net charges in 2008 included: (i) $151 million of net reorganization of business charges included in Other charges, (ii) $64 million of charges relating to the amortization of intangible assets, and (iii) $68 million of goodwill and other asset impairment charges. The net charges in 2007 included: (i) $135 million of net reorganization of business charges included in Other charges, (ii) $88 million of charges relating to the amortization of intangibles, and (iii) $88 million of asset impairment charges. The goodwill and other asset impairment charges are discussed in further detail in the “ Valuation and Recoverability of Goodwill

 

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and “ Valuation and Recoverability of Long-Lived Assets ” sections included elsewhere within this Information Statement. The net reorganization of business charges are discussed in further detail in the “ Reorganization of Businesses ” section included elsewhere within this Information Statement.

Interest Income, Net

Net interest income was $28 million in 2008, compared to net interest income of $32 million in 2007. Net interest income in 2008 included interest income of $99 million, partially offset by interest expense of $71 million. Net interest income in 2007 included interest income of $182 million, partially offset by interest expense of $150 million. Our interest expense primarily represents the amount allocated from Motorola, Inc. This allocation is based on the Company’s Total assets as a percentage of the respective Motorola, Inc. Total assets, less Cash and cash equivalents and Sigma Fund included in Motorola, Inc.’s consolidated balance sheets. Our interest expense as an independent, stand-alone company may be higher or lower than the amounts reflected above.

Gains (Losses) on Sales of Investments and Business, Net

Gains on sales of investments and business were $11 million in 2008, compared to $2 million in 2007. In both 2008 and 2007, the gains primarily related to sales of a number of the Company’s equity investments.

Other, net

Net income classified as Other, presented in Other income (expense), was $64 million in 2008, compared to net income of $18 million in 2007. The net income in 2008 was primarily comprised of: (i) a $99 million curtailment gain associated with the decision to freeze benefit accruals for U.S. pension plans, and (ii) $56 million of gains related to the extinguishment of a liability, partially offset by: (i) $67 million of foreign currency losses, and (ii) $36 million of investment impairment charges. The net income in 2007 was primarily comprised of $13 million of foreign currency gains.

Effective Tax Rate

The Company recorded $1.0 billion of net tax expense in 2008, resulting in a negative effective tax rate of 53%, compared to $431 million of net tax benefits, resulting in an effective tax rate of 40%, in 2007. The Company’s effective tax rate in 2008 was less than the U.S. statutory tax rate of 35% primarily due to the recording of a $2.0 billion non-cash tax charge to establish full valuation allowances against the Company’s U.S., Brazil and China deferred tax assets, partially offset by a net reduction in unrecognized tax benefits. The Company’s effective tax rate in 2007 was greater than the U.S. statutory tax rate of 35% primarily due to research credits and state tax benefits recorded upon the U.S. losses.

The Company’s effective tax rate will change from period to period based on non-recurring events, such as the settlement of tax audits, changes in valuation allowances and the tax impact of significant unusual or extraordinary items, as well as recurring factors including changes in the geographic mix of income before taxes, the level of pre-tax income or losses and effects of various global income tax strategies.

Net Loss

The Company incurred a loss before income taxes of $1.9 billion in 2008, compared with a loss before income taxes of $1.1 billion in 2007. After taxes, and excluding Earnings (losses) attributable to non-controlling interests, the Company incurred a net loss of $3.0 billion in 2008, compared to a net loss of $656 million in 2007. The increase in the after-tax loss is primarily attributable to the above items, as well as the establishment of a $2.0 billion deferred tax valuation allowance in 2008.

The increase in the loss before income taxes in 2008 compared to 2007 was primarily attributable to a $1.7 billion decrease in gross margin, partially offset by: (i) a $535 million decrease in SG&A expenses, and (ii) a $192 million decrease in R&D expenditures.

 

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Segment Results

The following commentary should be read in conjunction with the financial results of each operating business segment as detailed in Note 12, “ Information by Segment and Geographic Region ,” to the Company’s combined financial statements as of and for the year ended December 31, 2009. Net revenues and operating results for the Company’s two operating business segments for 2009, 2008 and 2007 are presented below.

Mobile Devices Segment

The Mobile Devices segment designs, manufactures, sells and services wireless mobile devices, including smartphones, with integrated software and accessory products, and licenses intellectual property. In 2009, the segment’s net revenues represented 65% of the Company’s combined net revenues, compared to 71% in 2008 and 82% in 2007.

 

     Years Ended December 31     Percent Change  
(Dollars in millions)    2009     2008     2007     2009—2008     2008—2007  

Segment net revenues

   $ 7,146      $ 12,187      $ 19,142      (41 )%    (36 )% 

Operating loss

     (1,222     (2,391     (1,451   (49 )%    65

Year ended December 31, 2009 compared to year ended December 31, 2008

In 2009, the segment’s net revenues were $7.1 billion, a decrease of 41% compared to net revenues of $12.2 billion in 2008. The segment’s net revenues were negatively impacted by reduced product offerings in large market segments, particularly 3G products, including smartphones, and the segment’s limited product offerings in very low-tier products. The 41% decrease in net revenues was primarily driven by a 45% decrease in unit shipments, partially offset by an 8% increase in ASP. On a geographic basis, net revenues decreased substantially in Latin America, EMEA and Asia and, to a lesser extent, decreased in North America.

The segment incurred an operating loss of $1.2 billion in 2009, an improvement of 49% compared to an operating loss of $2.4 billion in 2008. The decrease in the operating loss was primarily due to decreases in: (i) SG&A expenses, primarily due to lower marketing expenses and savings from cost-reduction initiatives, (ii) R&D expenditures, reflecting savings from cost-reduction initiatives, (iii) supply chain efficiencies, primarily including lower excess inventory charges in 2009 than in 2008, when the charges included a $370 million charge due to a decision to consolidate software and silicon platforms, and (iv) the absence in 2009 of a comparable $150 million charge in 2008 related to settlement of a silicon purchase commitment, partially offset by a decrease in gross margin, driven by the 41% decrease in net revenues. As a percentage of net revenues in 2009 as compared to 2008, gross margin, SG&A expenses and R&D expenditures all increased.

The segment’s industry typically experiences short life cycles for new products. Therefore, it is vital to the segment’s success that new, compelling products are continually introduced. Accordingly, a strong commitment to R&D is required and, even amidst challenging global economic conditions, the segment expects to continue to make the appropriate investments to develop a differentiated product portfolio and fuel long-term growth.

The segment’s backlog (excluding any deferred revenue) was $409 million at December 31, 2009, compared to $290 million at December 31, 2008. This increase in backlog is primarily due to an increase in orders in North America, particularly for 3G products, including smartphones.

Unit shipments in 2009 were 55.1 million units, a 45% decrease compared to shipments of 100.1 million units in 2008. For the full year 2009, unit shipments decreased substantially in Latin America, EMEA and Asia and, to a lesser extent, decreased in North America. While the total unit shipments in the worldwide mobile device market decreased by approximately 6% in 2009, unit shipments by the segment decreased by a significantly higher percentage than the overall market.

 

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In 2009, ASP increased approximately 8% compared to 2008. The overall increase in ASP was driven primarily by changes in the product tier and geographic mix of revenues, particularly in the fourth quarter of 2009 when the segment shipped approximately two million Android-powered smartphones. By comparison, ASP was flat in 2008. ASP is impacted by numerous factors, including product mix, geographic mix, market conditions and competitive product offerings, and ASP trends often vary over time.

The segment has several large customers located throughout the world. In 2009, aggregate net revenues to the segment’s five largest customers accounted for approximately 54% of the segment’s net revenues. Besides selling directly to carriers and operators, the segment also sells products through a variety of third-party distributors and retailers, which account for approximately 21% of the segment’s net revenues in 2009. The loss of any of the segment’s key customers could have a significant impact on the segment’s business.

Although the U.S. market continued to be the segment’s largest individual market, many of our customers, and 42% of the segment’s 2009 net revenues, were outside the U.S. In 2009, the largest of these international markets were Brazil, China, Mexico and Korea.

Year ended December 31, 2008 compared to year ended December 31, 2007

In 2008, the segment’s net revenues were $12.2 billion, a decrease of 36% compared to net revenues of $19.1 billion in 2007. The 36% decrease in net revenues was primarily driven by a 37% decrease in unit shipments. The segment’s net revenues were negatively impacted by the segment’s limited product offerings in critical market segments, particularly 3G products, including smartphones, as well as very low-tier products. In addition, the segment’s net revenues were impacted by the global economic downturn in the second half of 2008, which resulted in the slowing of end-user demand. On a geographic basis, net revenues decreased substantially in North America, EMEA and Asia and, to a lesser extent, decreased in Latin America.

The segment incurred an operating loss of $2.4 billion in 2008, compared to an operating loss of $1.5 billion in 2007. The increase in the operating loss was primarily due to a decrease in gross margin, driven by: (i) a 36% decrease in net revenues, (ii) supply chain inefficiencies, primarily including excess inventory charges of $370 million in 2008 due to a decision to consolidate software and silicon platforms, and (iii) a $150 million charge in 2008 related to the settlement of a silicon purchase commitment, partially offset by: (i) the absence in 2008 of a $277 million charge for a legal settlement recorded in 2007, and (ii) savings from supply chain cost-reduction initiatives. The decrease in gross margin was partially offset by decreases in: (i) SG&A expenses, primarily due to lower marketing expenses and savings from cost-reduction initiatives, and (ii) R&D expenditures, reflecting savings from cost-reduction initiatives. As a percentage of net revenues in 2008 as compared to 2007, R&D and SG&A expenses increased and gross margin decreased.

The segment’s backlog (excluding deferred revenues) was $290 million at December 31, 2008, compared to $647 million at December 31, 2007. This decrease in backlog is primarily due to a decline in customer demand, primarily driven by the segment’s limited product portfolio, as well as the global economic downturn.

Unit shipments in 2008 were 100.1 million units, a 37% decrease compared to shipments of 159.1 million units in 2007. For the full year 2008, unit shipments decreased substantially in North America, EMEA and Asia and, to a lesser extent, decreased in Latin America. Although unit shipments by the segment decreased in 2008, total unit shipments in the worldwide mobile device market increased by approximately 5%.

In 2008, ASP was flat compared to 2007. By comparison, ASP decreased approximately 9% in 2007.

The segment has several large customers located throughout the world. In 2008, aggregate net revenues to the segment’s five largest customers accounted for approximately 40% of the segment’s net revenues. Besides selling directly to carriers and operators, the segment also sells products through a variety of third-party distributors and retailers, which accounted for approximately 24% of the segment’s net revenues in 2008.

 

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Although the U.S. market continued to be the segment’s largest individual market, many of our customers, and 56% of the segment’s 2008 net revenues, were outside the U.S. In 2008, the largest of these international markets were Brazil, China and Mexico.

As the segment’s revenue transactions are largely denominated in local currencies, we are impacted by the weakening in the value of these local currencies against the U.S. dollar. A number of our more significant international markets, particularly in Latin America, were impacted by this trend in late 2008.

Home Segment

The Home segment designs, manufactures, sells, installs and services set-top boxes for digital video, IP video, satellite and terrestrial broadcast networks, end-to-end digital video and IPTV distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable TV and telecommunication service providers. In 2009, the segment’s net revenues represented 35% of the Company’s combined net revenues, compared to 29% in 2008 and 18% in 2007.

 

     Years Ended December 31    Percent Change  
(Dollars in millions)      2009        2008        2007      2009—2008     2008—2007  

Segment net revenues

   $ 3,904    $ 4,912    $ 4,231    (21)   16

Operating earnings

     11      351      320    (97)   10

Year ended December 31, 2009 compared to December 31, 2008

In 2009, the segment’s net revenues were $3.9 billion, a decrease of 21% compared to net revenues of $4.9 billion in 2008. The 21% decrease in net revenues in the Home business was primarily driven by: (i) an 18% decrease in shipments of set-top boxes, primarily due to lower shipments to large cable and telecommunications operators in North America as a result of macroeconomic conditions, and (ii) a lower ASP due to an unfavorable shift in product mix.

Net revenues from SD set-top boxes and HD set-top boxes decreased significantly, primarily due to lower shipments to large telecommunication and cable operators in North America as a result of lower demand. The decrease in unit shipments of SD and HD set-top boxes was partially offset by (i) an increase in HD/digital video recording (together, “HD/DVR”) unit shipments due to increased demand for DVR capabilities, and (ii) an increase in IP based set-top boxes.

On a geographic basis, the 21% decrease in net revenues was primarily driven by lower net revenues in North America and Latin America, and higher net revenues in EMEA and Asia. Net revenues in North America accounted for approximately 78% of the segment’s total net revenues in 2009, compared to approximately 81% of the segment’s total net revenues in 2008.

The segment had operating earnings of $11 million in 2009, a decrease of 97% compared to operating earnings of $351 million in 2008. The decrease in operating earnings was primarily due to: (i) a decrease in gross margin, driven by the 21% decrease in net revenues, and (ii) a $75 million charge related to a legal settlement. These factors were partially offset by a decrease in R&D expenditures, reflecting savings from cost-reduction initiatives. As a percentage of net revenues in 2009 as compared to 2008, gross margin decreased slightly and SG&A expenses and R&D expenditures increased.

The segment is dependent upon a small number of customers for a significant portion of its revenues. In 2009, revenues to the segment’s top five customers represented approximately 54% of the segment’s net revenues. The loss of one of these major customers could have a significant impact on the segment’s business. The segment’s backlog was $378 million at December 31, 2009, compared to $431 million at December 31, 2008.

 

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In the Home business, demand for the segment’s products depends primarily on the level of capital spending by cable and telecommunication customers for constructing, rebuilding or upgrading their communications systems, and for offering advanced services. In 2009, our digital video customers in North America decreased their purchases of the segment’s products and services, primarily driven by the difficult macroeconomic conditions that forced them to reduce their capital expenditures. The reduction in purchases was also driven by the introduction of low-end digital adapters by us and our competitors.

Year ended December 31, 2008 compared to year ended December 31, 2007

In 2008, the segment’s net revenues were $4.9 billion, an increase of 16% compared to net revenues of $4.2 billion in 2007. The 16% increase in net revenues in the Home business was primarily driven by a 17% increase in net revenues of set-top boxes, reflecting a 19% increase in unit shipments, partially offset by lower ASP due to product mix shift and pricing pressure. Also contributing to the increase in revenue was higher net revenues from video infrastructure equipment.

Net revenues from IP set-top boxes and HD/DVR set-top boxes increased significantly, primarily due to higher shipments to several large telecommunication and cable operators in North America as a result of increased demand. The increase in unit shipments of IP and HD/DVR set-top boxes was partially offset by a decrease in SD set-top boxes.

On a geographic basis, the 16% increase in net revenues was driven by higher net revenues in all regions. Net revenues in North America accounted for approximately 81% of the segment’s total net revenues in 2008, compared to approximately 83% of the segment’s total net revenues in 2007.

The segment had operating earnings of $351 million in 2008, an increase of 10% compared to operating earnings of $320 million in 2007. The increase in operating earnings was primarily due to an increase in gross margin, driven by the 16% increase in net revenues, partially offset by an increase in R&D expenditures due to higher spending on new product development and investment in next-generation technologies. As a percentage of net revenues in 2008 as compared to 2007, gross margin and SG&A expenses decreased and R&D expenditures increased.

In 2008, revenues to the segment’s top five customers represented approximately 58% of the segment’s net revenues. The segment’s backlog was $431 million at December 31, 2008, compared to $515 million at December  31, 2007.

Reorganization of Businesses

Motorola, Inc. maintains a formal Involuntary Severance Plan (the “Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, Motorola, Inc. amended and restated the Severance Plan. Under the amended Severance Plan, severance benefits will be paid in bi-weekly installments to impacted employees rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the combined statements of operations where the original charges were recorded when it is determined they are no longer needed. Motorola Mobility expects to have a similar involuntary Severance Plan after separation.

 

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2009 Charges

During 2009, in light of the macroeconomic decline that adversely affected revenues, the Company continued to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments are impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected are located in all geographic regions.

During 2009, the Company recorded net reorganization of business charges of $210 million, including $55 million of charges in Costs of sales and $155 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $210 million are charges of $206 million for employee separation costs, $28 million for exit costs and $20 million for fixed asset impairment charges, partially offset by $44 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

(Dollars in millions)    Year Ended
December 31, 2009

Mobile Devices

   $ 192

Home

     18
      
   $ 210
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to December 31, 2009:

 

(Dollars in millions)    Accruals at
January 1, 2009
   Additional
Charges
   Adjustments    Amount
Used
   Accruals at
December 31, 2009

Exit costs

   $ 63    $ 28    $ (8)    $ (44)    $ 39

Employee separation costs

     103      206      (32)      (244)      33
      
     $ 166    $ 234    $ (40)    $ (288)    $ 72

Exit Costs

At January 1, 2009, the Company had an accrual of $63 million for exit costs attributable to lease terminations. The additional 2009 charges of $28 million are primarily related to the exit of leased facilities and contractual termination costs. The adjustments of $8 million reflect $9 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $44 million used in 2009 reflects cash payments. The remaining accrual of $39 million, which is included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2009, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2009, the Company had an accrual of $103 million for employee separation costs, representing the severance costs for approximately 1,600 employees. The additional 2009 charges of $206 million represent severance costs for approximately an additional 6,300 employees, of which 2,600 are direct employees and 3,700 are indirect employees.

The adjustments of $32 million reflect $35 million of reversals of accruals no longer needed, partially offset by $3 million of foreign currency translation adjustments.

 

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During 2009, approximately 7,600 employees, of which 3,500 were direct employees and 4,100 were indirect employees, were separated from the Company. The $244 million used in 2009 reflects cash payments to these separated employees. The remaining accrual of $33 million, which is included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2009, is expected to be paid in 2010 to: (i) severed employees who began receiving payments in 2009, and (ii) approximately 300 employees who will begin receiving payments in 2010.

2008 Charges

During 2008, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected were located in all regions.

During 2008, the Company recorded net reorganization of business charges of $229 million, including $78 million of charges in Costs of sales and $151 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $229 million were charges of $195 million for employee separation costs, $65 million for exit costs and $3 million for fixed asset impairment charges, partially offset by $34 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

(Dollars in millions)    Year Ended
December 31, 2008

Mobile Devices

   $ 208

Home

     21
      
   $ 229
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2008 to December 31, 2008:

 

(Dollars in millions)    Accruals at
January 1, 2008
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
December 31, 2008

Exit costs

   $ 1    $ 65    $ 2      $ (5   $ 63

Employee separation costs

     102      195      (33     (161   $ 103
      
   $ 103    $ 260    $ (31   $ (166   $ 166
 

Exit Costs

At January 1, 2008, the Company had an accrual of $1 million for exit costs attributable to lease terminations. The 2008 additional charges of $65 million were primarily related to: (i) the exit of leased facilities in the United Kingdom by the Mobile Devices segment, and (ii) the exit of leased facilities in Mexico by the Home segment. The adjustments of $2 million primarily reflect foreign currency translation adjustments. The $5 million used in 2008 reflects cash payments. The remaining accrual of $63 million, which was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2008, represents future cash payments, primarily for lease termination obligations, that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2008, the Company had an accrual of $102 million for employee separation costs, representing the severance costs for approximately 1,400 employees. The additional 2008 charges of $195 million represent severance costs for approximately an additional 4,600 employees, of which 2,200 were direct employees and 2,400 were indirect employees.

 

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The adjustments of $33 million reflect $34 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $34 million of reversals represent previously accrued costs for approximately 300 employees.

During 2008, approximately 4,100 employees, of which 2,200 were direct employees and 1,900 were indirect employees, were separated from the Company. The $161 million used in 2008 reflects cash payments to these separated employees. The remaining accrual of $103 million was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2008.

2007 Charges

During 2007, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans, with the majority of the impact in the Mobile Devices segment.

During 2007, the Company recorded net reorganization of business charges of $202 million, including $67 million of charges in Costs of sales and $135 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $202 million were charges of $200 million for employee separation costs, $39 million for fixed asset impairment charges and $1 million for exit costs, partially offset by $38 million of reversals for accruals no longer needed.

The following table displays the net reorganization of business charges by segment:

 

(Dollars in millions)    Year Ended
December 31, 2007
 

Mobile Devices

   $ 229   

Home

     (27
        
   $ 202   
   

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2007 to December 31, 2007:

 

(Dollars in millions)    Accruals at
January 1, 2007
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
December 31, 2007

Exit costs

   $  —    $ 1    $      $      $ 1

Employee separation costs

     38      200      (38     (98     102
      
   $ 38    $ 201    $ (38   $ (98   $ 103
 

Exit Costs

At January 1, 2007, the Company had no material accruals for exit costs attributable to lease terminations. The 2007 charges of $1 million were primarily related to the exit of certain activities and leased facilities. No material accruals were used in 2007 for cash payments. The remaining accrual of $1 million, which was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2007, represents future cash payments for lease termination obligations, that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2007, the Company had an accrual of $38 million for employee separation costs, representing the severance costs for approximately 1,700 employees. The additional 2007 charges of $200 million represent severance costs for approximately 3,500 employees, of which 2,100 were direct employees and 1,400 were indirect employees.

 

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The adjustments of $38 million reflect reversals of accruals no longer needed. The reversals represent previously accrued costs for 900 employees, and primarily relates to a strategic change regarding a plant closure and specific employees previously identified for separation who resigned from the Company and did not receive severance or who were redeployed due to circumstances not foreseen when the original plans were approved.

During 2007, approximately 2,900 employees, of which 1,300 were direct employees and 1,600 were indirect employees, were separated from the Company. The $98 million used in 2007 reflects cash payments to these separated employees. The remaining accrual of $102 million was included in Accrued liabilities in the Company’s combined balance sheet at December  31, 2007.

Liquidity and Capital Resources

Cash and Cash Equivalents

Motorola, Inc. primarily uses a worldwide, centralized approach to cash management in which cash accounts are principally consolidated on a daily basis. The financing of the Company’s operations and the related activity between the Company and Motorola, Inc. is reflected as business equity transactions in Owner’s net investment in the combined balance sheets. Therefore, the Company has recorded no cash or cash equivalents on its combined balance sheets.

Operating Activities

The net cash used for operating activities in 2009 was $1.1 billion, compared to $1.2 billion used in 2008, and $57 million provided in 2007. The primary contributors to net cash used for operating activities in 2009 were: (i) a $1.4 billion decrease in accounts payable and accrued liabilities, and (ii) the net loss (adjusted for non-cash items) of $933 million, partially offset by: (i) a $1.2 billion decrease in net inventories, and (ii) a $102 million net decrease in other assets and liabilities. The primary contributors to the net cash used in 2008 were: (i) a $1.9 billion decrease in accounts payable and accrued liabilities, (ii) the net loss (adjusted for non-cash items) of $987 million, and (iii) a $658 million net increase in other assets and liabilities, partially offset by: (i) a $1.7 billion decrease in net accounts receivable, and (ii) a $686 million decrease in other current assets.

Accounts Receivable: The Company’s net accounts receivable were $1.3 billion at both December 31, 2009 and 2008. Despite a 35% reduction in net revenues in 2009 compared to 2008, the accounts receivable balance remained flat due to lower volumes of accounts receivable sold in 2009 compared to 2008. Compared to December 31, 2008, net accounts receivable at December 31, 2009 were higher for the Mobile Devices segment and lower for the Home segment. The Company’s businesses sell their products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of net accounts receivable can be impacted by the timing and level of revenues that are made by its various businesses and by the geographic locations in which those sales are made.

As further described below under “Sales of Receivables,” from time to time, Motorola, Inc. elects to sell accounts receivable to third-parties, and the Company’s accounts receivable are sold in this program. The Company’s levels of net accounts receivable can be impacted by the timing and amount of such sales, which can vary by period and can be impacted by numerous factors.

Inventories: The Company’s net inventories were $688 million at December 31, 2009, compared to $1.8 billion at December 31, 2008. Net inventories decreased in both segments and decreased substantially in the Mobile Devices segment, primarily due to the Company’s focus on balancing its need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer spending requirements. Inventory management continues to be an area of focus as the Company balances the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer spending requirements.

 

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Accounts Payable: The Company’s accounts payable were $1.4 billion at December 31, 2009, compared to $2.1 billion at December 31, 2008. Accounts payable decreased in both segments. The Company buys products in a variety of markets throughout the world and payment terms can vary by market type and geographic location. Accordingly, the Company’s levels of accounts payable can be impacted by the timing and level of purchases made by its various businesses and by the geographic locations in which those purchases are made.

Reorganization of Businesses: The Company has implemented reorganization of businesses plans. Cash payments for exit costs and employee separations in connection with a number of these plans were $288 million in 2009, as compared to $166 million in 2008. Of the $72 million reorganization of businesses accrual at December 31, 2009, $33 million relates to employee separation costs and is expected to be paid in 2010. The remaining $39 million in accruals relate to lease termination obligations that are expected to be paid over a number of years.

Investing Activities

Net cash used for investing activities was $66 million in 2009, compared to net cash used of $143 million in 2008 and net cash used of $677 million in 2007. The $77 million decrease in net cash used for investing activities from 2008 to 2009 was primarily due to: (i) an $84 million decrease in cash used for capital expenditures, (ii) a $44 million reduction in net proceeds from sales of short-term investments, and (iii) a $52 million decrease in cash used for acquisitions and investments, partially offset by the absence of distributions from investments, of which the Company received $92 million in 2008.

Strategic Acquisitions and Investments: The Company used $21 million of net cash for acquisitions and new investment activities in 2009, compared to net cash used of $73 million in 2008 and net cash used of $519 million in 2007. The cash used in 2009 was for small strategic investments across the Company. During 2008, the Company: (i) acquired the assets related to digital cable set-top box products of Zhejiang Dahua Digital Technology Co., LTD. and Hangzhou Image Silicon, known collectively as Dahua Digital (part of the Home segment), and (ii) completed the acquisition of Soundbuzz Pte. Ltd. (part of the Mobile Devices segment). During 2007, the Company completed the acquisition of: (i) Netopia, Inc. for $183 million (part of the Home segment), (ii) Terayon Communications Systems for $137 million (part of the Home segment), (iii) Modulus Video, Inc. for $95 million (part of the Home segment), (iv) Leapstone Systems, Inc. for $82 million (part of the Home segment) and (v) Tut Systems, Inc. (part of the Home segment).

Capital Expenditures: Capital expenditures were $67 million in 2009, compared to $151 million in 2008 and $195 million in 2007. The Company’s emphasis in making capital expenditures is to focus on strategic investments driven by customer demand and new design capability. The decline in the capital expenditures from 2007 is reflective of the decline in the level of the business over the time period.

Sales of Investments and Business: The Company distributed $14 million of net cash from the sales of investments and business in 2009, compared to receiving net cash proceeds of $7 million in 2008 and $5 million in 2007. The $14 million in net cash distributed in 2009 was primarily related to a business which was sold at a loss, partially offset by net proceeds received in connection with the sale of certain equity investments. The $7 million and $5 million in net cash proceeds in 2008 and 2007, respectively, were primarily comprised of net proceeds received in connection with the sale of certain equity investments.

Short-Term Investments: At December 31, 2009, the Company had no short-term investments (which are highly-liquid fixed-income investments with an original maturity greater than three months but less than one year), compared to $29 million of short-term investments at December 31, 2008.

Investments: The Company views its investments as an additional source of liquidity. The majority of these securities are available-for-sale and cost-method investments in technology companies. The fair market values of these securities are subject to substantial price volatility. In addition, the realizable values of these securities are subject to market and other conditions. At December 31, 2009, the Company’s available-for-sale equity securities portfolio had an approximate fair market value of $21 million, comprised of a cost basis of $7 million

 

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and a net unrealized gain of $14 million. At December 31, 2008, the Company’s available-for-sale equity securities portfolio had an approximate fair market value of $19 million, comprised of a cost basis of $14 million and a net unrealized gain of $5 million. The Company’s available-for-sale investments are included in Investments in the Company’s combined balance sheets.

Financing Activities

Net cash provided by financing activities was $1.2 billion in 2009, compared to $1.3 billion in 2008 and $726 million in 2007. Cash provided by financing activities in 2009 and 2008 was due to the net cash provided by transfers from Motorola, Inc. Net cash provided by financing activities in 2007 was primarily due to the $764 million of net cash provided by transfers from Motorola, Inc., partially offset by $38 million of cash used for the repayment of debt acquired through certain acquisitions and the repayment of short-term borrowings.

Motorola, Inc. primarily uses a worldwide centralized approach to cash management and the financing of its operations with all related activity between the Company and Motorola, Inc. reflected as equity transactions in Owner’s net investment in the Company’s combined balance sheets. When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Company’s cash in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Company’s operations and Motorola, Inc. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Company’s businesses which are transferred to Motorola, Inc. on a regular basis, (ii) cash borrowings from Motorola, Inc. used to fund operations, capital expenditures, or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of Motorola, Inc.’s corporate expenses described elsewhere in this Information Statement. For purposes of the combined statements of cash flows, the Company reflects intercompany activity as a financing activity. The net cash provided by Motorola, Inc. was $1.2 billion in 2009, compared to $1.3 billion of net cash provided in 2008 and $764 million of net cash provided in 2007.

Contractual Obligations and Other Purchase Commitments

Summarized in the table below are the Company’s obligations and commitments to make future payments under lease obligations, purchase obligations and tax obligations as of December 31, 2009.

 

     Payments Due by Period
(Dollars in millions)    Total    2010    2011    2012    2013    2014    Thereafter

Lease obligations

   $ 245    $ 62    $ 52    $ 37    $ 21    $ 16    $ 57

Purchase obligations

     373      316      30      19      8          

Tax obligations

     236      80                          156
      

Total contractual obligations

   $ 854    $ 458    $ 82    $ 56    $ 29    $ 16    $ 213
 

Amounts included represent firm, non-cancelable commitments.

Lease obligations: Motorola, Inc. owns many of its major facilities and leases certain office, factory and warehouse space, land, and information technology and other equipment under principally non-cancelable operating leases. Motorola, Inc. identifies a landlord for each facility based on the primary resident of the facility. Motorola, Inc. allocates a portion of its facility and lease expenses to the Company based on the square footage occupied by employees of the Company; such allocation is included in the Company’s combined statements of operations. At December 31, 2009, future minimum lease obligations, primarily comprised of obligations for facilities in which the Company was deemed to be the primary resident, net of minimum sublease rentals, totaled $245 million. Total rental expense, primarily comprised of facilities rental expense, net of sublease income, was $62 million in 2009, $72 million in 2008 and $71 million in 2007. After Separation, the Company will occupy facilities where Motorola, Inc. is the landlord, and Motorola, Inc. will occupy facilities where the Company is the landlord. The Company does not expect the incremental lease expense, net of sublease income, to be materially different from the amounts recorded in the historical combined financial statements, which include amounts allocated to the Company from Motorola, Inc.

 

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Purchase obligations: The Company has entered into agreements for the purchase of inventory, license of software, promotional activities, and research and development, which are firm commitments and are not cancelable. At December 31, 2009, the Company’s obligations in connection with these agreements run through 2014, and the total payments expected to be made under these agreements total $373 million during that period.

The Company enters into a number of arrangements for the sourcing of supplies and materials with take-or-pay obligations. The Company’s obligations with these suppliers run through 2013 and total a minimum purchase obligation of $43 million during that period. The Company does not anticipate the cancellation of any of these agreements in the future and estimates that purchases from these suppliers will exceed the minimum obligations during the agreement periods.

Tax obligations: The Company has approximately $236 million of unrecognized tax benefits relating to multiple tax jurisdictions and tax years. Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the effective tax rate, exclusive of valuation allowances changes, is estimated to be in the range of a $40 million tax charge to a $125 million tax benefit, with cash payments in the range of $0 to $80 million.

Off-Balance Sheet Arrangements: Under the definition in Item 303(a)(4) of Regulation S-K, the Company does not have any off-balance sheet arrangements.

Sales of Receivables

Motorola, Inc. sells accounts receivable generated from its business units to third-parties in transactions that qualify as “true-sales.” The Company’s businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc. Following the separation, Motorola Mobility may sell a portion of its accounts receivable to third-parties.

Total accounts receivable sold by the Company were $803 million for the year ended December 31, 2009, compared to $2.6 billion for the year ended December 31, 2008 and $3.8 billion for the year ended December 31, 2007. As of December 31, 2009, there were $71 million of accounts receivables outstanding under these programs for which Motorola, Inc. retained servicing obligations, compared to $386 million at December 31, 2008.

Other Contingencies

Potential Contractual Damage Claims in Excess of Underlying Contract Value: In certain circumstances, our businesses may enter into contracts with customers pursuant to which the damages that could be claimed by the other party for failed performance might exceed the revenue Motorola Mobility receives from the contract. Contracts with these types of uncapped damage provisions are fairly rare, but individual contracts could still represent meaningful risk. There is a possibility that a damage claim by a counterparty to one of these contracts could result in expenses to Motorola Mobility that are far in excess of the revenue received from the counterparty in connection with the contract.

Indemnification Provisions: In addition, Motorola Mobility may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial, intellectual property and divestiture agreements. Historically, Motorola Mobility has not made significant payments under these agreements, nor have there been significant claims asserted against Motorola Mobility. However, there is an increasing risk in relation to intellectual property indemnities given the current legal climate. In indemnification cases, payment by Motorola Mobility is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow Motorola Mobility to challenge the other party’s claims. Further, Motorola Mobility’s obligations under these agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, typically not more than 24 months, and for amounts not in excess of the contract value, except with respect to certain intellectual property infringement claims, and in some instances Motorola Mobility may have recourse against third-parties for certain payments made by Motorola Mobility.

 

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Legal Matters: The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to our business. The Company will assume the defense and/or liability for such cases from Motorola, Inc. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on Motorola Mobility’s combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved. See “ Business—Legal Proceedings ” for more details.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s combined financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.

Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following significant accounting policies require significant judgment and estimates:

 

  Revenue recognition

 

  Inventory valuation

 

  Income taxes

 

  Restructuring activities

 

  Valuation and recoverability of goodwill

 

  Valuation and recoverability of long-lived assets

Revenue Recognition

For the six months ended July 3, 2010

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which amended the accounting standards for revenue arrangements with multiple deliverables. The new guidance changes the criteria required to separate deliverables into separate units of accounting when they are sold in a bundled arrangement and requires an entity to allocate an arrangement’s consideration using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”). The new guidance also eliminates the use of the residual method to allocate an arrangement’s consideration.

In October 2009, the FASB also issued new guidance to remove from the scope of software revenue recognition guidance tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality.

The new accounting guidance is effective for revenue arrangements entered into or materially modified after June 15, 2010. The standards permit prospective or retrospective adoption as well as early adoption. The Company elected to early adopt this guidance at the beginning of the first quarter of 2010 on a prospective basis for applicable arrangements that were entered into or materially modified after January 1, 2010.

 

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The Company’s material revenue streams are the result of a wide range of activities, from the delivery of stand-alone equipment to custom design and installation over a period of time to bundled sales of devices, equipment, software and services. The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. Additionally, many of the Company’s products have both software and non-software components that function together to deliver the product’s essential functionality. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability of the sales price is reasonably assured. In addition to these general revenue recognition criteria, the following specific revenue recognition policies are followed:

Products and Equipment —For product and equipment sales, revenue recognition generally occurs when products or equipment have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reasonably and reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of transaction specific in each arrangement. Where customer incentives cannot be reasonably and reliably estimated, the Company recognizes revenue at the time the product sells through the distribution channel to the end customer.

Services —Revenue for services is generally recognized ratably over the contract term as services are performed.

Software and Licenses —Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period that the licensee uses the license. Revenue from software maintenance, technical support and unspecified upgrades is generally recognized over the period that these services are delivered.

Multiple-Element Arrangements —Arrangements with customers may include multiple deliverables, including any combination of products, equipment, services and software. These multiple element arrangements could also include an element accounted for as a long-term contract coupled with other products, equipment, services and software. For the Company’s multiple-element arrangements where at least one of the deliverables is not subject to existing software revenue recognition guidance, deliverables are separated into more than one unit of accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis, and (ii) delivery of the undelivered element(s) is probable and substantially in the control of the Company. Based on the new accounting guidance adopted January 1, 2010, revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on VSOE if it exists, based next on TPE if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on ESP.

 

   

VSOE—In many instances, products are sold separately in stand-alone arrangements as customers may support the products themselves or purchase support on a time and materials basis. Additionally, advanced services such as general consulting, network management or advisory projects are often sold in stand-alone engagements. Technical support services are also often sold separately through renewals of annual contracts. The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by the pricing rates of approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the median rate. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups, customer classification, and other environmental or marketing variables in determining VSOE.

 

   

TPE—VSOE generally exists only when the Company sells the deliverable separately. When VSOE does not exist, the Company attempts to determine TPE based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy for many of its

 

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products differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality sold by other companies cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE.

 

   

ESP—The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. When both VSOE and TPE do not exist, the Company determines ESP for the arrangement element by first collecting all reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on the Company’s normal pricing practices. Second, the Company makes any reasonably required adjustments to the data based on market and Company-specific factors. Third, the Company stratifies the data points, when appropriate, based on customer, magnitude of the transaction and sales volume.

Once elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each separate unit of accounting based on the nature of the revenue as described above.

The Company’s arrangements with multiple deliverables may also contain a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverable(s) based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purpose of allocating the arrangement consideration.

The Company’s arrangements with multiple deliverables may be comprised entirely of deliverables that are all still subject to the existing software revenue recognition guidance. For these arrangements, revenue is allocated to the deliverables based on VSOE. Should VSOE not exist for the undelivered software element, revenue is deferred until either the undelivered element is delivered or VSOE is established for the element, whichever occurs first. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and is recognized as revenue.

Based on the Company’s current sales strategies, the newly adopted accounting guidance for revenue recognition is not expected to have a significant effect on the timing and pattern of revenue recognition for sales in periods after the initial adoption when applied to multiple-element arrangements, except for the continued impact on smartphone revenue recognition.

For the years ended December 31, 2009, December 31, 2008 and December 31, 2007

The Company’s arrangements with customers may differ in nature and complexity and may contain multiple deliverables, including products, equipment, services and software that may be essential to the functionality of the other deliverables, requiring the Company to make judgments and estimates in recognizing revenues.

Product and equipment sales may contain discounts, price protection, return provisions and other customer incentives. The Company’s recorded revenues are reduced by allowances for these items at the time the sales are recorded. The allowances are based on management’s best estimate of the amount of allowances that the customer will ultimately earn based on historical experience and taking into account the type of products sold, the type of customer and the type of transaction specific to each arrangement. Where customer incentives cannot be reasonably and reliably estimated, the Company recognizes revenue at the time the product sells through the distribution channel to the end customer.

 

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Generally, multiple element arrangements are separated into specific accounting units when: (i) delivered elements have value to the customer on a stand-alone basis, (ii) objective and reliable evidence of fair value exists for the undelivered element(s), and (iii) delivery of the undelivered element(s) is probable and substantially within the control of the Company. Total arrangement consideration is allocated to the separate accounting units based on their relative fair values (if the fair value of each accounting unit is known) or using the residual method (if the fair value of the undelivered element(s) is known). Revenue is recognized for a separate accounting unit when the revenue recognition criteria are met for that unit. In certain situations, judgment is required in determining both the number of accounting units and fair value of the elements, although generally the fair value of an element can be objectively determined if the Company sells the element on a stand-alone basis. Multiple element arrangements that include software are separated into more than one unit of accounting when the following criteria are met: (i) the functionality of the delivered element(s) is not dependent on the undelivered element(s), (ii) there is vendor-specific objective evidence of the fair value of the undelivered element(s), and (iii) general revenue recognition criteria related to the delivered element(s) have been met.

Changes in cost estimates and the fair values of certain deliverables could negatively impact the Company’s operating results. In addition, unforeseen conditions could arise over the contract term that may have a significant impact on operating results.

Inventory Valuation

The Company records valuation reserves on its inventory for estimated excess or obsolescence. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management in each segment performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, the Company adjusts the carrying value of inventory if the current market value of that inventory is below its cost.

At December 31, 2009 and 2008, Inventories consisted of the following:

 

     December 31  

(Dollars in millions)

   2009     2008  

Finished goods

   $ 542      $ 1,112   

Work-in-process and production materials

     680        1,206   
        
     1,222        2,318   

Less inventory reserves

     (534     (472
        
   $ 688      $ 1,846   
   

The Company balances the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory obsolescence due to rapidly changing technology and customer requirements. The Company has inventory reserves for excess inventory, pending cancellations of product lines due to technology changes, long-life cycle products, lifetime buys at the end of supplier production runs, business exits, and a shift of production to outsourcing. As reflected above, the Company’s inventory reserves represented 44% of the gross inventory balance at December 31, 2009, compared to 20% of the gross inventory balance at December 31, 2008. The increase in the percentage of inventory reserves to the gross inventory balance from 2008 to 2009 was primarily due to a reduction in the gross inventory balance. Net inventory decreased in both segments and decreased substantially in the Mobile Devices segment, primarily due to the Company’s focus on balancing the need to maintain strategic inventory levels to ensure competitive delivery performance to its customers against the risk of inventory excess and obsolescence due to rapidly changing technology and customer spending requirements.

 

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If future demand or market conditions are less favorable than those projected by management, additional inventory writedowns may be required.

Income Taxes

For purposes of the Company’s combined financial statements, income tax expense and deferred tax balances have been recorded as if it filed tax returns on a stand-alone basis separate from Motorola, Inc. The calculation of income taxes for the Company on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. Historically, the Company has largely been operated as two divisions within Motorola, Inc.’s group of legal entities, including a U.S. consolidated group and non-U.S. subsidiaries. In most cases, the tax losses and tax credits generated by the Company, while divisions within Motorola, Inc.’s legal entities and included in these financial statements, have either been utilized by Motorola, Inc.’s other businesses or will remain with Motorola, Inc. after the Separation. Additionally, as part of the Separation, Motorola, Inc. may enter into taxable transactions when separating the Company’s non-U.S. assets and liabilities into separate non-U.S. subsidiaries of the Company. As a result of taxable separation transactions the deferred tax balances as calculated on a separate return basis may differ from the deferred tax balances of the Company once legally separated.

Motorola, Inc. manages its tax position for the benefit of its entire portfolio of businesses. Motorola, Inc.’s tax strategies are not necessarily reflective of the tax strategies the Company would have followed or will follow as a stand-alone company, or were they necessarily strategies that optimized the Company’s stand-alone position. As a result, the Company’s deferred tax balances and effective tax rate as a stand-alone entity will likely differ significantly from those prevailing in historical periods.

The Company’s effective tax rate is based on pre-tax income and the tax rates applicable to that income in the various jurisdictions in which the Company operates. An estimated effective tax rate for a year is applied to the Company’s quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in the Company’s quarterly operating results, the tax attributable to that item would be separately calculated and recorded at the same time as the unusual or discrete item. The Company considers the resolution of prior-year tax matters to be such items. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of the position. The Company adjusts these reserves in light of changing facts and circumstances.

Tax regulations may require items of income and expense to be included in a tax return in different periods than the items are reflected in the combined financial statements. As a result, the effective tax rate reflected in the combined financial statements may be different than the tax rate reported in the income tax return. Some of these differences are permanent, such as expenses that are not deductible on the tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the tax return in future years for which the Company has already recorded the tax benefit in the combined financial statements. Deferred tax liabilities generally represent tax expense recognized in the combined financial statements for which payment has been deferred or expense for which the Company has already taken a deduction on an income tax return, but has not yet been recognized in the combined financial statements.

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of the temporary differences between the book and tax basis of recorded assets and liabilities. The Company makes estimates and judgments with regard to the calculation of certain income tax assets and liabilities. FASB ASC 740 requires that deferred tax assets be reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified.

 

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The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence, including historical and projected taxable income and tax planning strategies that are both prudent and feasible. As of December 31, 2009, the Company’s U.S operations had generated three consecutive years of pre-tax losses. Because of the Company’s 2007 and 2008 losses and forecasted losses in the near-term the Company believed that the weight of negative historic evidence precludes it from considering any forecasted income from its analysis of the recoverability of its U.S., Brazil and certain China deferred tax assets. The Company also considered in its analysis tax planning strategies that are prudent and can be reasonably implemented. Based on all available positive and negative evidence, we concluded that a full valuation allowance should be recorded against the net deferred tax assets of our U.S, Brazil and certain China operations. During the year ended December 31, 2008, we recorded a valuation allowance of $2.0 billion. The establishment of the valuation allowance was a non-cash expense.

The Company has a total deferred tax asset valuation allowance of approximately $2.9 billion against net deferred tax assets of approximately $3.0 billion as of December 31, 2009, compared to a total deferred tax asset valuation allowance of $2.5 billion against net deferred tax assets of $2.6 billion as of December 31, 2008.

The tax carryforwards reflected in the Company’s combined financial statements are based on a hypothetical stand-alone income tax return basis. The tax carryforwards include U.S. tax carryforwards for federal and state net operating losses, capital losses, general business credits and foreign tax credits, and non-U.S. tax carryforwards for net operating losses and tax credits. The tax carryforwards are not representative of the tax carryforwards the Company will have available for use after being spun-off from Motorola, Inc. The Company’s post spin-off tax carryforwards will be significantly lower than those reflected in the combined financial statements and the related valuation allowances will also be correspondingly lower.

The Company estimates that post-spin-off it will have tax carryforwards in the U.S., Brazil and the United Kingdom totaling approximately $900 million in net operating losses ($310 million tax effected) and approximately $90 million in tax credits. The U.S. tax carryforwards are comprised of federal tax credits, IRC Section 382 limited net operating losses and Separate Return Limitation Year (“SRLY”) limited net operating losses. The Section 382 limited net operating losses may be utilized between years 2011 through 2025 and the SRLY limited net operating losses are scheduled to expire between 2018 and 2020. In addition to the U.S. tax carryforwards, the Company will have approximately $2.6 billion of capitalized costs ($1.0 billion tax effected) that will be amortizable for U.S. tax purposes between years 2011 through 2019.

The Company anticipates that as it returns to profitability in the U.S. it will be able to reduce its income tax burden by utilizing the tax carryforwards and amortizable costs.

Tax Sharing Agreement: The Company, Motorola Mobility, Inc. and Motorola, Inc. have entered into a Tax Sharing Agreement. The Tax Sharing Agreement governs the respective rights, responsibilities and obligations of Motorola, Inc. and the Company, with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding income taxes, non-income taxes and related tax returns. In general, under the Tax Sharing Agreement:

 

   

Motorola, Inc. will be responsible for any U.S. federal income taxes of the affiliated group for U.S. federal income tax purposes of which Motorola, Inc. is the common parent. With respect to any periods beginning after the distribution, the Company will be responsible for any U.S. federal income taxes of itself or its subsidiaries.

 

   

Motorola, Inc. will be responsible for any U.S. state or local or foreign income taxes reportable on a consolidated, combined or unitary or other joint return that includes Motorola, Inc. or one of its subsidiaries and the Company or one of its subsidiaries. Motorola, Inc. will be responsible for any U.S. state or local or foreign income taxes reportable on returns that include only Motorola, Inc. and its subsidiaries (excluding the Company and its subsidiaries), and the Company will be responsible for any U.S. state or local or foreign income taxes filed on returns that include only the Company or its subsidiaries.

 

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Motorola, Inc. and the Company will each be responsible for any non-income taxes attributable to each company and its respective subsidiaries for all periods.

The Tax Sharing Agreement imposes certain restrictions on our ability to pursue strategic or other transactions that may maximize the value of our business. The Tax Sharing Agreement provides special rules allocating tax liabilities in the event that the distribution, together with certain related transactions, were not tax-free. In general:

 

   

If any of the following events (among others) prevents the distribution and related transactions from being tax-free, we will be liable for the resulting taxes:

 

   

Any acquisition of all or a portion of our stock or assets, whether by merger or otherwise;

 

   

Any negotiations, understandings, agreements or arrangements with respect to transactions or events that cause the distribution to be treated as part of a plan pursuant to which one or more persons acquire, directly or indirectly, stock representing 50% or greater interest in Motorola Mobility;

 

   

We cease to actively conduct the Mobile Devices business during the two-year period following the distribution;

 

   

We take or fail to take any other action that prevents the distribution and related transactions from being tax-free; or

 

   

Any breach by Motorola Mobility of certain of its undertakings and representations.

 

   

To preserve the tax-free treatment to Motorola, Inc. of the distribution, Motorola Mobility is prohibited from taking or failing to take any action that prevents the distribution and related transactions from being tax-free. Further, during the two-year period following the distribution, among other restrictions, we may not, subject to certain exceptions, enter into or authorize: (1) any transaction resulting in the acquisition of 40% or more of our stock or 60% or more of our assets; (2) any merger, consolidation or liquidation, (3) any issuance of equity securities beyond certain thresholds; or (4) any repurchase of Motorola Mobility common stock unless, in each case, (a) we deliver to Motorola, Inc. a “will”-level legal opinion, satisfactory to Motorola, Inc., stating that the intended transaction will not prevent the distribution and related transactions from being tax-free or (b) Motorola, Inc. obtains a letter ruling, satisfactory to Motorola, Inc., in its sole discretion from the IRS to this effect.

 

   

During the two-year period following the distribution, if we enter into, or authorize, a transaction resulting in the acquisition of 25% or more (but less than 40%) of our stock, our Board of Directors must provide Motorola, Inc. with a certificate describing the transaction and stating that the transaction is not subject to the opinion/ruling procedure described above.

 

   

The fact that Motorola, Inc. receives a board certificate, legal opinion or letter ruling will not, in itself, exonerate us from liability for taxes in the event that the distribution and related transactions were not tax-free as a result of our actions or as a result of an acquisition of our stock or assets.

These covenants and indemnity obligations may discourage, delay or prevent a change of control that you may consider favorable. Though valid as between the parties, the Tax Sharing Agreement is not binding on the IRS.

Restructuring Activities

Motorola, Inc. maintains a formal Involuntary Severance Plan (the “Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, Motorola, Inc. amended and restated the Severance Plan. Under the amended Severance Plan, severance benefits will be paid in bi-weekly installments to impacted employees rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at

 

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the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the combined statements of operations where the original charges were recorded when it is determined they are no longer required.

Valuation and Recoverability of Goodwill

Motorola, Inc. tests the recorded amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year. Goodwill is tested more frequently if indicators of impairment exist. Motorola, Inc. continually assesses whether any indicators of impairment exist, which requires a significant amount of judgment. Such indicators may include: a sustained significant decline in its share price and market capitalization; a decline in its expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; or slower growth rates, among others. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our combined financial statements.

The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components shall be aggregated and deemed a single reporting unit. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. As such, the Company has determined that the Mobile Devices segment meets the requirement of a reporting unit. For the Home segment, the Company has identified two reporting units, the Broadband Home Solutions reporting unit and the Access Networks reporting unit.

During the first quarter of 2010, the Company determined that there was an indicator of impairment at its Access Networks reporting unit due to changes in the forecasted financial performance at the reporting unit. As a result, a goodwill impairment test was performed for the Access Networks reporting unit during the first quarter of 2010. No indicators of potential impairment were identified for the Broadband Home Solutions reporting unit and, accordingly, the goodwill recorded at that reporting unit was not tested for impairment. There is no goodwill recorded at the Mobile Devices reporting unit as a result of the write-off of the remaining goodwill in 2008.

The goodwill impairment test is a two step analysis. In Step One, the fair value of each reporting unit is compared to its book value. Management must apply judgment in determining the estimated fair value of these reporting units. Fair value is determined using a combination of present value techniques and quoted market prices of comparable businesses. If the fair value of the reporting unit exceeds its book value, goodwill is not deemed to be impaired for that reporting unit, and no further testing would be necessary. If the fair value of the reporting unit is less than its book value, the Company performs Step Two. Step Two uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in Step One and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit’s goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit’s goodwill is greater than its implied fair value.

 

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The following describes the valuation methodologies used to derive the fair value of the reporting units:

 

   

Income Approach:  To determine fair value, the Company discounts the expected future cash flows of the reporting units. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of our model, the Company uses a terminal value approach. Under this approach, the Company uses estimated operating income before interest, taxes, depreciation and amortization in the final year of its model, adjusts it to estimate a normalized cash flow, applies a perpetuity growth assumption and discounts it by a perpetuity discount factor to determine the terminal value. The Company incorporates the present value of the resulting terminal value into its estimate of fair value.

 

   

Market-Based Approach:  To corroborate the results of the income approach described above, the Company estimated the fair value of its reporting units using several market-based approaches, including the value that is derived based on Motorola, Inc.’s consolidated stock price as described above. The Company also uses the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded companies.

The determination of fair value of the reporting units and assets and liabilities within the reporting units requires Motorola Mobility to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. For the goodwill impairment test performed in the first quarter of 2010 on the Access Networks reporting unit, Motorola Mobility assigned a discount rate of 14.5% and a terminal growth rate of 3%, both of which the Company believes to be reasonable based upon the risk profile and long-term growth prospects of this reporting unit in light of industry market data. Motorola Mobility evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting unit, as well as the fair values of the corresponding assets and liabilities within the reporting unit, and concluded they are reasonable.

Motorola Mobility has weighted the valuation of its reporting units at 75% based on the income approach and 25% based on the market-based approach, consistent with prior periods. Motorola Mobility believes that this weighting is appropriate since it is often difficult to find other appropriate companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units. If a heavier weighting had been placed on the market-based approach, a higher fair value would have been determined for the Access Networks reporting unit.

As a result of the valuation work described above, the fair value of the Access Networks reporting unit exceeded its book value by a significant margin, indicating that there was no impairment of goodwill in the first quarter of 2010. No indicators of potential impairments were identified for the Broadband Home Solutions and Access Networks reporting units during the second quarter of 2010.

Based on the results of our 2007 and 2009 annual assessments of the recoverability of goodwill, the fair values of all reporting units exceeded their book values, indicating that there was no impairment of goodwill.

Following is a discussion of the goodwill impairment charges recorded for the year ended December 31, 2008.

Based on the results of Step One of the 2008 annual assessment of the recoverability of goodwill, the fair values of the Broadband Home Solutions and the Access Networks reporting units exceeded their book value, indicating that there was no impairment of goodwill at these reporting units.

However, the fair value of the Mobile Devices reporting unit was below its book value, indicating a potential impairment of goodwill and the requirement to perform Step Two of the analysis for the reporting unit.

 

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The decline in the fair value of the Mobile Devices reporting unit below its book value was a result of the deteriorating macroeconomic environment, lower than expected sales and cash flows as a result of the decision to consolidate platforms announced in the fourth quarter of 2008, and the uncertainty around the reporting unit’s future cash flow.

The allocation of the fair value of the reporting units to individual assets and liabilities within the reporting units also requires us to make significant estimates and assumptions. The allocation requires several analyses to determine fair value of assets and liabilities including, among others, definite-lived intangible assets, pre-paid assets, deferred taxes and current replacement costs for certain property, plant and equipment.

For the year ended December 31, 2008, the Company determined that the goodwill relating to the Mobile Devices reporting unit was impaired, resulting in charges of $55 million in the Mobile Devices reportable segment.

Differences in the Company’s actual future cash flows, operating results, growth rates, capital expenditures, cost of capital and discount rates as compared to the estimates utilized for the purpose of calculating the fair value of each reporting unit, as well as a decline in Motorola, Inc.’s stock price and related market capitalization, could affect the results of our annual goodwill assessment and, accordingly, potentially lead to future goodwill impairment charges.

Motorola Mobility is not a publicly traded company, but in performing the test of goodwill, the Company considered the market capitalization of Motorola, Inc., and the implied control premiums at Motorola, Inc. to determine if the Company’s fair value of our reporting units were reasonable. The accounting principles regarding goodwill acknowledge that the observed market prices of individual trades of Motorola, Inc.’s stock (and thus its computed market capitalization) may not be representative of the fair value of the company as a whole. Additional value may arise from the ability to take advantage of synergies and other benefits that flow from control over another entity. Consequently, measuring the fair value of a collection of assets and liabilities that operate together in a controlled entity is different from measuring the fair value of that entity’s individual common stock. In most industries, including ours, an acquiring entity typically is willing to pay more for equity securities that give it a controlling interest than an investor would pay for a number of equity securities representing less than a controlling interest.

For the purpose of determining the implied control premium calculation in the overall goodwill analysis, Motorola, Inc. applied assumptions for determining the fair value of corporate assets. Corporate assets primarily consist of cash and cash equivalents, Sigma Fund balances, short-term investments, investments, deferred tax assets and corporate facilities. Judgments about the fair value of corporate assets include, among others, an assumption that deferred tax assets should be discounted to reflect their economic lives, that a significant portion of the corporate assets are required to pay off debt, meet the near-term cash requirements of the Mobile Devices reporting unit, and market participants’ perceptions of the likely restructuring costs, including severance and exit costs, that might be incurred if the Company’s strategy is not successful. The results of the Company’s impairment analysis result in an implied control premium commensurate with historical transactions observed in our industry.

Valuation and Recoverability of Long-Lived Assets

Long-lived assets include property, plant and equipment, intangible assets, long-term prepaid assets and other non-current assets. The Company reviews long-lived assets held for use for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events which may indicate long-lived assets held for use may not be recoverable include, but are not limited to, a significant decrease in the market price of long-lived assets, a significant adverse change in the manner in which the Company utilizes a long-lived asset, a significant adverse change in the business climate, a recent history of operating or cash flow losses, or a current expectation that it is more likely than not that a long-lived asset will be sold or disposed of in the future. For impairment testing purposes, the Company groups its long-lived assets at the lowest level, for

 

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which, identifiable cash flows are largely independent of the cash flows from other groups of assets and liabilities (the asset group).

If the Company determines that a long-lived asset or asset group may not be recoverable, it compares the sum of the expected undiscounted future cash flows that the asset or asset group is expected to generate over the estimated remaining useful life of the asset or asset group to the asset or asset group’s carrying value. If the sum of the expected undiscounted future cash flows exceeds the carrying amount of the asset or asset group, the asset or asset group is not considered impaired. However, if the sum of the undiscounted future cash flows is less than the carrying amount of the asset or asset group, a loss is recognized for the difference between the fair value of the asset or asset group and the carrying value of the asset or asset group. The fair value of the asset or asset group is generally determined by discounting the expected future cash flows using a discount rate that is commensurate with the risk associated with the amount and timing of the expected future cash flows. Market-based or cost-based approaches to determining fair value may also be considered.

No long-lived assets or asset groups held and used were tested for impairment during 2009. During 2008, the Company tested one asset group for impairment. During the fourth quarter of 2008, due to the continued operating losses of the Mobile Devices segment, the Company tested the long-lived assets of the Mobile Devices segment for impairment. The long-lived assets of the Mobile Devices segment consisted primarily of property, plant and equipment and long-term pre-paid licenses. The asset group also included elements of working capital, including inventory and accounts receivable. The Company considered future cash flows expected to be generated by the business and weighted them according to management’s view of their probability-weighted outcomes. The sum of these probability-weighted undiscounted future cash flows indicated that the asset group was recoverable. As a result, no impairment of long-lived assets was recorded at the Mobile Devices segment. A significant assumption in the expected future cash flow forecast was that it was more likely than not that management would be successful in its plans to turn around the Mobile Devices business. The plan to turn around Mobile Devices included a successful execution of the segment’s software platform strategy and the Company’s ability to execute its cost savings initiatives. Expectations of future cash flows could change if the Company determines it will not be successful in executing its plans to turn around the Mobile Devices business. Impairment charges of the long-lived assets of Mobile Devices could be required in future periods if the Company’s expectations of future cash flows changes.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued new guidance related to fair value disclosure requirements. Under the new guidance, companies will be required to make additional disclosures concerning significant transfers of amounts between the Level 1 and Level 2 fair value disclosures, as well as further disaggregation of the types of activity that were previously disclosed in the roll forward of Level 3 fair value disclosures. Further, the guidance requires a lower level of groupings from major categories of assets and liabilities to classes of assets and liabilities. This guidance is effective for interim periods beginning after December 15, 2009. The Company has adopted this guidance effective January 1, 2010.

In June 2009, the FASB issued new authoritative guidance amending the accounting for transfers of financial assets. Key provisions of this amended guidance include: (i) the removal of the concept of qualifying special purpose entities, (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred, and (iii) the requirement that to qualify for sale accounting the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. Additionally, this guidance requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether consolidation is required for variable interest entities (“VIEs”). The model for determining whether an

 

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enterprise has a controlling financial interest and is the primary beneficiary of a VIE has changed significantly under the new guidance. Previously, variable interest holders had to determine whether they had a controlling financial interest in a VIE based on a quantitative analysis of the expected gains and/or losses of the entity. In contrast, the new guidance requires an enterprise with a variable interest in a VIE to qualitatively assess whether it has a controlling financial interest in the entity and, if so, whether it is the primary beneficiary. Furthermore, this guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing VIEs based only upon the occurrence of triggering events. This guidance also requires enhanced disclosures about how a company’s involvement with a VIE affects its financial statements and exposure to risks. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In May 2009, the FASB issued guidance establishing general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. In February 2010, new guidance was issued which removes the requirement for public companies to disclose the date through which subsequent events were reviewed. This guidance was effective upon issuance and has been adopted by the Company.

Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. All hedge transactions are executed by Motorola, Inc. but at Separation, all hedges are expected to be executed by the Company. Historically, the Company had its exposures managed by Motorola, Inc., and Motorola, Inc.’s program viewed the consolidation exposures of all of the businesses of Motorola, Inc. The Company expects to have arrangements in place with counterparties at the time of Separation to allow for stand-alone execution of derivative instruments. The Company’s policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company typically uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.

At December 31, 2009, the Company had outstanding foreign exchange contracts totaling $622 million, compared to $907 million outstanding at December 31, 2008. Management believes that these financial

 

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instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other, net within Other income (expense) in the Company’s combined statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of December 31, 2009 and the corresponding positions as of December 31, 2008:

 

     Notional Amount  
(Dollars in millions)    December 31,
2009
    December 31,
2008
 

Net buy (sell) by currency:

    

Brazilian Real

   $ (348   $ (305

Chinese Renminbi

     63        205   

Singapore Dollar

     44        54   

Canadian Dollar

     43        32   

Korean Won

     (38     (47
   

Foreign exchange financial instruments that are subject to the effects of currency fluctuations, which may affect reported earnings, include derivative financial instruments and other financial instruments denominated in a currency other than the functional currency of the legal entity holding the instrument. Derivative financial instruments consist primarily of forward contracts and currency options. Other financial instruments denominated in a currency other than the functional currency of the legal entity holding the instrument consist primarily of short-term investments, as well as accounts payable and receivable. Accounts payable and receivable are reflected at fair value in the financial statements. The fair value of the foreign exchange financial instruments would hypothetically decrease by $65 million as of December 31, 2009 if the foreign currency rates were to change unfavorably by 10% from current levels. This hypothetical amount is suggestive of the effect on future cash flows under the following conditions: (i) all current payables and receivables that are hedged were not realized, (ii) all hedged commitments and anticipated transactions were not realized or canceled, and (iii) hedges of these amounts were not canceled or offset. The Company does not expect that any of these conditions will occur. The Company expects that gains and losses on the derivative financial instruments should offset gains and losses on the assets, liabilities and future transactions being hedged. If the hedged transactions were included in the sensitivity analysis, the hypothetical change in fair value would be immaterial. The foreign exchange financial instruments are held for purposes other than trading.

The Company did not have any fair value hedge activity during 2009. For each of the three years ended December 31, 2009, 2008 and 2007, income (loss) representing the ineffective portion of changes in the fair value of cash flow hedge positions was de minimis . These amounts are included in Other within Other income (expense) in the Company’s combined statements of operations. The above amounts include the change in the fair value of derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to cash flow hedges that were discontinued for the years ended December 31, 2009, 2008 and 2007 are included in the amounts noted above.

During the years ended December 31, 2009, 2008 and 2007, on a pre-tax basis, income (expense) of $(8) million, $7 million and $(19) million, respectively, was reclassified from equity to earnings in the Company’s combined statements of operations.

At December 31, 2009, the maximum term of derivative instruments that hedge forecasted transactions was six months. The weighted average duration of the Company’s derivative instruments that hedge forecasted transactions was four months.

 

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Interest Rate Risk

At December 31, 2009 and 2008, the Company did not have any interest rate agreements in place.

Counterparty Risk

The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of nonperformance by counterparties. However, the risk is limited to the fair value of the instruments when the derivative is in an asset position. Motorola, Inc. actively monitors its exposure to credit risk. At the present time, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty.

Net Investment in Foreign Operations Hedge

At December 31, 2009 and 2008, the Company did not have any hedges of foreign currency exposure of net investments in foreign operations.

Fair Value of Financial Instruments

The Company’s financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Company’s available-for-sale investment portfolios and derivative financial instruments are recorded in the Company’s combined balance sheets at fair value. All other financial instruments are carried at cost, which is not materially different than the instruments’ fair values.

Equity Price Market Risk

At December 31, 2009, the Company’s available-for-sale securities portfolio had an approximate fair market value of $21 million, which represented a cost basis of $7 million and a net unrealized gain of $14 million. The value of the available-for-sale equity securities would change by $2 million as of December 31, 2009 if the price of the stock in each of the publicly traded companies were to change by 10%. These equity securities are held for purposes other than trading.

 

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INDEX TO FINANCIAL STATEMENTS

Motorola Mobility Holdings, Inc. and Subsidiaries

 

     Page

Combined Financial Statements as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007:

  

Report of Independent Registered Public Accounting Firm

   F-2

Combined Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   F-3

Combined Balance Sheets as of December 31, 2009 and 2008

   F-4

Combined Statements of Business Equity for the years ended December 31, 2009, 2008 and 2007

   F-5

Combined Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   F-6

Notes to Combined Financial Statements

   F-7

Condensed Combined Financial Statements as of July 3, 2010 (Unaudited) and December 31, 2009 and for the six months ended July 3, 2010 and July 4, 2009 (Unaudited):

  

Condensed Combined Statements of Operations for the six months ended July 3, 2010 and July  4, 2009 (Unaudited)

   F-41

Condensed Combined Balance Sheets as of July 3, 2010 (Unaudited) and December 31, 2009

   F-42

Condensed Combined Statement of Business Equity for the six months ended July 3, 2010 (Unaudited)

   F-43

Condensed Combined Statements of Cash Flows for the six months ended July 3, 2010 and July  4, 2009 (Unaudited)

   F-44

Notes to Condensed Combined Financial Statements (Unaudited)

   F-45

 

* As described in the section entitled “ Risk Factors ” and elsewhere in the Information Statement, these financial statements should not be relied upon as an indication of Motorola Mobility Holdings, Inc.’s future financial performance or expense structure.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

When the transaction referred to in Note 1 of the Notes to the Combined Financial Statements has been consummated, we will be in a position to render the following report.

LOGO

The Board of Directors and Stockholders

Motorola, Inc.:

We have audited the accompanying combined balance sheets of Motorola Mobility Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related combined statements of operations, business equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Motorola Mobility Holdings, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

Chicago, Illinois

July 1, 2010, except for Note 1 and

Note 17, which are as of [ ], 2010

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Combined Statements of Operations

 

     Years Ended December 31  
(Dollars in millions)    2009     2008     2007  

Net revenues

   $ 11,050      $ 17,099      $ 23,373   

Costs of sales

     8,897        14,280        18,890   
        

Gross margin

     2,153        2,819        4,483   
        

Selling, general and administrative expenses

     1,486        2,218        2,753   

Research and development expenditures

     1,591        2,358        2,550   

Other charges

     287        283        311   
        

Operating loss

     (1,211     (2,040     (1,131
        

Other income (expense):

      

Interest income (expense), net

     (41     28        32   

Gains (losses) on sales of investments and business, net

     (34     11        2   

Other, net

     (49     64        18   
        

Total other income (expense)

     (124     103        52   
        

Loss before income taxes

     (1,335     (1,937     (1,079

Income tax expense (benefit)

            1,035        (431
        

Net loss

     (1,335     (2,972     (648

Less: Earnings (losses) attributable to non-controlling interests

     7        (3     8   
        

Net loss attributable to Motorola Mobility Holdings, Inc.

   $ (1,342   $ (2,969   $ (656

See accompanying Notes to Combined Financial Statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Combined Balance Sheets

 

     December 31  
(Dollars in millions)    2009     2008  
ASSETS     

Short-term investments

   $      $ 29   

Accounts receivable, net

     1,341        1,269   

Inventories, net

     688        1,846   

Deferred income taxes

     114        125   

Other current assets

     685        673   
        

Total current assets

     2,828        3,942   
        

Property, plant and equipment, net

     807        974   

Investments

     57        67   

Deferred income taxes

     48        43   

Goodwill

     1,285        1,288   

Other assets

     833        853   
        

Total assets

   $ 5,858      $ 7,167   
LIABILITIES AND BUSINESS EQUITY     

Accounts payable

   $ 1,430      $ 2,099   

Accrued liabilities

     1,862        2,801   
        

Total current liabilities

     3,292        4,900   
        

Other liabilities

     627        621   
Business equity:     

Owner’s net investment

     2,348        2,045   

Accumulated other comprehensive loss

     (444     (421
        

Total Motorola Mobility Holdings, Inc. equity

     1,904        1,624   

Non-controlling interests

     35        22   
        

Total business equity

     1,939        1,646   
        

Total liabilities and business equity

   $ 5,858      $ 7,167   

See accompanying Notes to Combined Financial Statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Combined Statements of Business Equity

 

(Dollars in millions)  

Owner’s

Net

Investment

    Accumulated Other Comprehensive Income (Loss)    

Non-controlling

Interests

   

Comprehensive

Earnings (Loss)

 
   

Fair Value

Adjustment

To Available

For Sale

Securities,
Net of Tax

   

Foreign

Currency

Translation

Adjustments,
Net of Tax

   

Retirement

Benefits

Adjustments,
Net of Tax

   

Other

Items,
Net of Tax

     

Balances at January 1, 2007

  $ 3,184      $ 38      $ (463   $ (6   $ 9      $ 10     
         

Net earnings (loss)

    (656             8      $ (648

Net transfers from Motorola, Inc.

    1,384               

Retirement benefits adjustment (net of tax of $1)

          3            3   

Net unrealized loss on securities (net of tax of $23)

      (18             (18

Net loss on derivative instruments (net of tax of $5)

            (9       (9

Foreign currency translation adjustments (net of tax of $0)

        (53           (53

Purchase of non-controlling interest

              17     
       

Balances at December 31, 2007

    3,912        20        (516     (3            35        (725
       

Net loss

    (2,969             (3     (2,972

Net transfers from Motorola, Inc.

    1,102               

Net unrealized losses on securities (net of tax of $0)

      (15             (15

Net loss on derivative instruments (net of tax of $0)

            (1       (1

Dividends paid to noncontrolling interest on subsidiary common stock

              (10  

Foreign currency translation adjustments (net of tax of $0)

        94              94   
       

Balances at December 31, 2008

    2,045        5        (422     (3     (1     22        (2,894
       

Net earnings (loss)

    (1,342             7        (1,335

Net transfers from Motorola, Inc.

    1,645                6     

Retirement benefits adjustment (net of tax of $0)

          (2         (2

Net unrealized gain on securities (net of tax of $0)

      9                9   

Net gain on derivative instruments (net of tax of $0)

            1          1   

Foreign currency translation adjustments (net of tax of $0)

        (31           (31
       

Balances at December 31, 2009

  $ 2,348      $ 14      $ (453   $ (5   $      $ 35      $ (1,358

See accompanying Notes to Combined Financial Statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Combined Statements of Cash Flows

 

     Years Ended December 31  
(Dollars in millions)    2009     2008     2007  

Operating

      

Net loss attributable to Motorola Mobility Holdings, Inc.

   $ (1,342   $ (2,969   $ (656

Less: Earnings (losses) attributable to non-controlling interests

     7        (3     8   
        

Net loss

     (1,335     (2,972     (648

Adjustments to reconcile net loss to net cash provided by (used for) operating activities:

      

Depreciation and amortization

     211        227        274   

Non-cash other charges

     30        309        92   

Share-based compensation expense

     166        147        157   

Losses (gains) on sales of investments and business, net

     34        (11     (2

Deferred income taxes

     (39     1,313        (327

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

      

Accounts receivable

     (67     1,684        1,983   

Inventories

     1,155        (65     405   

Other current assets

     7        686        109   

Accounts payable and accrued liabilities

     (1,368     (1,896     (2,137

Other assets and liabilities

     102        (658     151   
        

Net cash provided by (used for) operating activities

     (1,104     (1,236     57   
   

Investing

      

Acquisitions and investments, net

     (21     (73     (519

Proceeds from (payments related to) sales of investments and business, net

     (14     7        5   

Distributions from investments

            92        14   

Capital expenditures

     (67     (151     (195

Proceeds from sales of property, plant and equipment

     21        11        18   

Proceeds from sales of short-term investments, net

     15        (29       
        

Net cash used for investing activities

     (66     (143     (677
   

Financing

      

Net transfers from Motorola, Inc.

     1,186        1,298        764   

Repayment of debt and short-term borrowings, net

                   (38
        

Net cash provided by financing activities

     1,186        1,298        726   
   

Effect of exchange rate changes on cash and cash equivalents

     (16     81        (106
   

Net increase (decrease) in cash and cash equivalents

                     

Cash and cash equivalents, beginning of year

                     
   

Cash and cash equivalents, end of year

   $      $      $   

See accompanying Notes to Combined Financial Statements.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Notes to Combined Financial Statements

(Dollars in millions, except as noted)

 

1. Background and Basis of Presentation

Background

Motorola Mobility Holdings, Inc. (“Motorola Mobility” or “the Company”) is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline, digital communication, information and entertainment experiences. The Company’s integrated products and platforms deliver rich multimedia content, such as video, voice, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers (“multi screens”). Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.

Motorola Mobility is currently comprised of two business units of Motorola, Inc. (“Motorola, Inc.”). On March 26, 2008, Motorola, Inc. announced its intention to separate into two independent, publicly traded companies. On February 11, 2010, Motorola, Inc. announced that Motorola, Inc. is targeting the first quarter of 2011 for the completion of its planned separation. Motorola, Inc. currently expects that, upon separation, the Company will be comprised of Motorola, Inc.’s Mobile Devices and Home businesses.

Motorola, Inc. will transfer to the Company and its subsidiaries substantially all of the assets and liabilities of the Company’s Mobile Devices and Home businesses prior to the completion of the distribution (the “Separation”). On the date of the distribution, Motorola, Inc. will distribute all of the shares of the Company’s stock that it then owns through a special dividend to the common stockholders of Motorola, Inc. (the “Distribution”). The Distribution is subject to certain conditions, including receipt of a favorable tax opinion and regulatory approvals.

Basis of Presentation

The combined financial statements have been derived from the consolidated financial statements and accounting records of Motorola, Inc., principally representing the Mobile Devices and Home business segments, using the historical results of operations, and historical basis of assets and liabilities of the Company’s businesses. The historical financial statements also include allocations of certain Motorola, Inc. general corporate expenses. Management believes the assumptions and methodologies underlying the allocation of general corporate expenses from Motorola, Inc. are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by the Company if it had operated as an independent, publicly traded company or of the costs expected to be incurred in the future. As such, the combined financial statements included herein may not necessarily reflect the Company’s results of operations, financial position or cash flows in the future or what its results of operations, financial position or cash flows would have been had the Company been a stand-alone company during the periods presented. Because a direct ownership relationship did not exist among all the various worldwide entities comprising the Company, Motorola, Inc.’s net investment in the Company is presented as Owner’s net investment, rather than stockholders’ equity, in the combined balance sheets. Transactions between Mobile Devices and Home and other Motorola, Inc. operations have been identified in the combined statements as transactions between related parties (see Note 3, “ Relationship with Motorola, Inc. ”).

 

2. Summary of Significant Accounting Policies

Principles of Combination:   The combined financial statements include the assets and liabilities of the Company’s businesses that will be transferred from Motorola, Inc., as well as certain allocations discussed above. All significant intercompany transactions and balances between and among the Mobile Devices and Home businesses have been eliminated in consolidation.

 

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Revenue Recognition: The Company’s material revenue streams are the result of a wide range of activities, from the delivery of stand-alone equipment to custom design and installation over a period of time to bundled sales of equipment, software and services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability of the sales price is reasonably assured. In addition to these general revenue recognition criteria, the following specific revenue recognition policies are followed:

Products and Equipment —For product and equipment sales, revenue recognition generally occurs when products or equipment have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reasonably and reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer and the type of transaction specific in each arrangement. Where customer incentives cannot be reasonably and reliably estimated, the Company recognizes revenue at the time the product sells through the distribution channel to the end customer.

Services —Revenue for services is generally recognized ratably over the contract term as services are performed.

Software and Licenses —Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period that the licensee uses the license. Revenue from software maintenance, technical support and unspecified upgrades is generally recognized over the period that these services are delivered.

Multiple Element Arrangements —Arrangements with customers may include multiple deliverables, including any combination of products, equipment, services and software. For multiple element arrangements including software or software-related elements, the Company applies the applicable authoritative accounting guidance to determine separate units of accounting and the amount of the arrangement fee to be allocated to those separate units of accounting. Multiple element arrangements that include software are separated into more than one unit of accounting when the following criteria are met: (i) the functionality of the delivered element(s) is not dependent on the undelivered element(s), (ii) there is vendor-specific objective evidence of the fair value of the undelivered element(s), and (iii) general revenue recognition criteria related to the delivered element(s) have been met. If any of these criteria are not met, revenue is deferred until the criteria are met or the last element has been delivered.

For all other multiple element arrangements, deliverables are separated into more than one unit of accounting when the following criteria are met: (i) the delivered element(s) have value to the customer on a stand-alone basis, (ii) objective and reliable evidence of fair value exists for the undelivered element(s), and (iii) delivery of the undelivered element(s) is probable and substantially in the control of the Company. Revenue is allocated to each unit of accounting based on the relative fair value of each accounting unit or using the residual method if objective evidence of fair value does not exist for the delivered element(s). If any of these criteria are not met, revenue is deferred until the criteria are met or the last element has been delivered.

When elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each separate unit of accounting based on the nature of the revenue as described above.

Sales and Use Taxes —The Company records taxes imposed on revenue-producing transactions, including sales, use, value added and excise taxes, on a net basis with such taxes excluded from revenue.

Investments: Investments in equity classified as available-for-sale are carried at fair value. Equity securities that are restricted for more than one year or that are not publicly traded are carried at cost. Certain investments are accounted for using the equity method if the Company has significant influence over the issuing entity. The

 

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Company assesses declines in the fair value of investments to determine whether such declines are other-than-temporary. This assessment is made considering all available evidence, including changes in general market conditions, specific industry and individual company data, the length of time and the extent to which the fair value has been less than cost, the financial condition and the near-term prospects of the entity issuing the security, and the Company’s ability and intent to hold the investment until recovery. Other-than-temporary impairments of investments are recorded to Other within Other income (expense) in the Company’s combined statements of operations in the period in which they become impaired.

Inventories: Inventories are valued at the lower of average cost (which approximates cost on a first-in, first-out basis) or market (net realizable value or replacement cost).

Property, Plant and Equipment: Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded primarily using a straight-line method, based on the estimated useful lives of the assets (buildings and building equipment, 5-40 years; machinery and equipment, 2-10 years) and commences once the assets are ready for their intended use.

Goodwill and Intangible Assets: Goodwill is tested for impairment at least annually. The Company performs the goodwill impairment test at the reporting unit level through a two-step analysis. First, the fair value of each reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book value, Motorola, Inc. performs a hypothetical purchase price allocation based on the reporting unit’s fair value to determine the fair value of the reporting unit’s goodwill. Fair value is determined using a combination of present value techniques and market prices of comparable businesses. Intangible assets are generally amortized on a straight line basis over their respective estimated useful lives ranging from two to 14 years. The Company has no intangible assets with indefinite useful lives.

Impairment of Long-Lived Assets: Long-lived assets, which include intangible assets, held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The Company evaluates recoverability of assets to be held and used by comparing the carrying amount of an asset or asset group to future net undiscounted cash flows to be generated by the asset or asset group. If an asset is considered to be impaired, the impairment to be recognized is equal to the amount by which the carrying amount of the asset exceeds the asset’s fair value calculated using a discounted future cash flow analysis or market comparables. Assets held for sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell.

Income Taxes: For purposes of the combined financial statements, the Company’s income tax expense and deferred tax balances have been recorded as if it filed tax returns on a stand-alone basis separate from Motorola, Inc. The calculation of income taxes for the Company on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. Historically, the Company has operated as divisions within Motorola, Inc.’s group of legal entities, including a U.S. consolidated group and non-U.S. subsidiaries. In most cases, the tax losses and tax credits generated by the Company, while divisions within Motorola, Inc.’s legal entities and included in these financial statements, have been available for use by Motorola, Inc.’s other businesses and will remain with Motorola, Inc. after the Separation. Additionally, as part of the Separation, Motorola, Inc. may enter into taxable transactions when separating the Company’s non-U.S. assets and liabilities into separate non-U.S. subsidiaries of the Company. As a result of taxable separation transactions the deferred tax balances as calculated on a separate return basis may differ from the deferred tax balances of the Company once legally separated.

Motorola, Inc. manages its tax position for the benefit of its entire portfolio of businesses. Motorola, Inc.’s tax strategies are not necessarily reflective of the tax strategies the Company would have followed or will follow as a stand-alone company, or were they necessarily strategies that optimized the Company’s stand-alone position. As a result, the Company’s deferred tax balances and effective tax rate as a stand-alone entity will likely differ significantly from those prevailing in historical periods.

 

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The Company reflected deferred tax assets and liabilities on a separate return basis to recognize the expected future tax benefits or cost of events that have been reported in different years for financial statement purposes than for tax purposes and operating losses and tax credit carry forwards. Deferred tax assets and liabilities are determined based on the difference between the combined financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which these items are expected to reverse.

Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence. Deferred tax assets are realized by having sufficient future taxable income to allow the related tax benefits to reduce taxes otherwise payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry-back years and tax planning strategies that are both prudent and feasible.

Foreign Currency: Certain of the Company’s non-U.S. operations use their respective local currency as their functional currency. Those operations that do not have the U.S. dollar as their functional currency translate assets and liabilities at current rates of exchange in effect at the balance sheet date and revenues and expenses using rates that approximate those in effect during the period. The resulting translation adjustments are included as a component of Accumulated other comprehensive income (loss) in the Company’s combined balance sheets. For those operations that have the U.S. dollar as their functional currency, transactions denominated in the local currency are measured in U.S. dollars using the current rates of exchange for monetary assets and liabilities and historical rates of exchange for nonmonetary assets. Gains and losses from remeasurement of monetary assets and liabilities are included in Other within Other income (expense) within the Company’s combined statements of operations.

Derivative Instruments: Motorola, Inc. primarily uses a worldwide centralized approach to manage financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows.

Historically, the Company had its exposures managed by Motorola, Inc., and Motorola, Inc.’s program viewed the combined exposures of all of the businesses of Motorola, Inc. Motorola, Inc. enters into a hedge based upon a net position of the currency. The gains and losses on the hedges of existing assets or liabilities are marked-to-market at a combined basis. Gains and losses on financial instruments that qualify for hedge accounting and are used to hedge firm future commitments or forecasted transactions are deferred until such time as the underlying transactions are recognized or recorded immediately when the transaction is no longer expected to occur. Gains or losses on financial instruments that do not qualify as hedges are recognized immediately as income or expense.

For the purposes of the Company’s combined financial statements, the Company allocated hedges transacted by Motorola, Inc. through normal business practices of the Company on a net position as of the balance sheet dates. Then, the gains and losses on the allocated hedges of existing assets or liabilities are marked-to-market and the result is included in Other within Other income (expense) within the Company’s combined statements of operations.

Share-Based Compensation Costs: The Company’s employees participate in Motorola, Inc.’s incentive compensation plans that reward employees with stock options, stock appreciation rights (“SARs”), restricted stock and restricted stock units (“RSUs”), as well as an employee stock purchase plan (together, “Motorola’s Incentive Plans”). The Company’s combined statements of operations include expenses related to the Company’s employees’ participation in Motorola’s Incentive Plans, as well as an allocation of expenses related to Motorola, Inc.’s corporate employees who participate in Motorola’s Incentive Plans. These expenses are allocated based on awards granted to the Company’s employees and based on a three-part formula that averages the relative percentage of the Company’s net revenues, payroll, and net property, plant and equipment/inventory to the

 

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respective total Motorola, Inc. amounts for awards granted to Motorola, Inc.’s corporate employees. The amount of compensation cost for these share-based awards is measured based on the fair value of the awards, as of the date that the share-based awards are issued and adjusted to the estimated number of awards that are expected to vest. The fair value of stock options, SARs and the employee stock purchase plan is generally determined using a Black-Scholes option pricing model which incorporates assumptions about expected volatility, risk free rate, dividend yield, and expected life. The fair value of restricted stock and RSUs represents the number of awards granted multiplied by the closing market price of the stock on the date the awards are issued. Compensation cost for share-based awards is recognized on a straight-line basis over the vesting period.

Retirement Benefits: Motorola, Inc. records annual expenses relating to its pension benefit and postretirement plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, turnover rates and health care cost trend rates. Motorola, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The effects of the gains, losses, and prior service costs and credits are amortized over future service periods. A portion of these expenses have been allocated to the Company’s combined statements of operations.

Advertising Expense: Advertising expenses, which are the external costs of marketing the Company’s products, are expensed as incurred and are included in Selling, general and administrative expenses. Advertising expenses were $264 million, $569 million and $875 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Use of Estimates: The preparation of the accompanying combined financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, investments, goodwill, intangible and other long-lived assets, legal contingencies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, retirement and other post-employment benefits and allowances for discounts, price protection, product returns, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic and competitive environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, energy markets and declines in consumer demand or spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Recent Accounting Pronouncements: In January 2010, the Financial Accounting Standards Board (“FASB”) issued new guidance related to fair value disclosure requirements. Under the new guidance, companies will be required to make additional disclosures concerning significant transfers of amounts between the Level 1 and Level 2 fair value disclosures, as well as further disaggregation of the types of activity that were previously disclosed in the roll forward of Level 3 fair value disclosures. Further, the guidance requires a lower level of groupings from major categories of asset and liabilities to classes of assets and liabilities. This guidance is effective for interim periods beginning after December 15, 2009. The Company has adopted this guidance effective January 1, 2010.

In October 2009, the FASB issued new guidance which amended the accounting standards for revenue arrangements with multiple deliverables. The new guidance changes the criteria required to separate deliverables into separate units of accounting when they are sold in a bundled arrangement and requires an entity to allocate an arrangement’s consideration using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”).

 

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The new guidance also eliminates the use of the residual method to allocate an arrangement’s consideration. In October 2009, the FASB also issued new guidance to remove from the scope of software revenue recognition guidance tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality. The new accounting guidance is effective for revenue arrangements entered into or materially modified after June 15, 2010. The standards permit prospective or retrospective adoption as well as early adoption. The Company elected to early adopt this guidance at the beginning of the first quarter of 2010 on a prospective basis for applicable arrangements that were entered into or materially modified after January 1, 2010.

In June 2009, the FASB issued new authoritative guidance amending the accounting for transfers of financial assets. Key provisions of this amended guidance include: (i) the removal of the concept of qualifying special purpose entities, (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred, and (iii) the requirement that to qualify for sale accounting the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. Additionally, this guidance requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether consolidation is required for variable interest entities (“VIEs”). The model for determining whether an enterprise has a controlling financial interest and is the primary beneficiary of a VIE has changed significantly under the new guidance. Previously, variable interest holders had to determine whether they had a controlling financial interest in a VIE based on a quantitative analysis of the expected gains and/or losses of the entity. In contrast, the new guidance requires an enterprise with a variable interest in a VIE to qualitatively assess whether it has a controlling financial interest in the entity and, if so, whether it is the primary beneficiary. Furthermore, this guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing VIEs based only upon the occurrence of triggering events. This guidance also requires enhanced disclosures about how a company’s involvement with a VIE affects its financial statements and exposure to risks. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In May 2009, the Financial Accounting Standards Board (“FASB”) issued guidance establishing general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. In February 2010, new guidance was issued which removes the requirement for public companies to disclose the date through which subsequent events were reviewed. This guidance was effective upon issuance and has been adopted by the Company.

 

3. Relationship with Motorola, Inc.

The Company designs, manufactures, sells and services wireless mobile devices with integrated software and accessory products to other Motorola, Inc. businesses. The Company’s net revenues generated from sales to other Motorola, Inc. businesses included in net revenues in the Company’s combined statement of operations were $45 million, $53 million and $56 million for the years ended December 31, 2009, 2008 and 2007, respectively. Accounts receivable from sales to other Motorola, Inc. businesses were $6 million and $8 million as of December 31, 2009 and 2008, respectively, and are included in Accounts receivable in the Company’s combined balance sheets. Accounts payable from purchases from other Motorola, Inc. businesses were $1 million as of both December 31, 2009 and 2008, and are included in Accounts payable in the Company’s combined balance sheets.

 

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The combined statements of operations include expense allocations for certain corporate functions historically provided by Motorola, Inc., including:

Leveraged services expenses: Represents costs related to corporate functions such as information technology (“IT”), real estate, accounting, treasury, tax, legal, human resources and other services. The allocation is based on the level of services received by the Company in proportion to the total services provided by each functional area. These allocations are reflected in Costs of sales, Selling, general and administrative expenses and Research and development expenditures in the Company’s combined statements of operations.

The allocation of IT costs is primarily based on the number of system users, the allocation of real estate costs is based on the amount of square footage occupied, and the allocation of human resources costs is based on employee headcount. The allocation of the cost of all other services is based on the specific level of effort or a three-part formula that averages the relative percentage of the Company’s net revenues, payroll and net property, plant and equipment/inventory to the respective Motorola, Inc. totals.

Employee benefits and incentives: Represents fringe benefit costs and other employee benefits and incentives. Fringe benefits include 401(k) match and profit sharing, pension plan, retiree health care and group healthcare costs. Such costs are allocated to the Company as follows:

 

   

401(k) and other defined contribution plans based on contributions made by Motorola, Inc. to plan participants employed at the Company

 

   

Defined benefit pension plans based on eligible compensation of plan participants employed at the Company

 

   

Retiree health care based on eligible years of service

 

   

Group health care benefits based on employee headcount

Such amounts are reflected in Costs of sales, Selling, general and administrative expenses and Research and development expenditures within the Company’s combined statements of operations. Other employee benefits and incentives include officers and supplemental pension, share-based compensation and incentive program costs. These costs are allocated on a specific employee identification basis with a proportional allocation of corporate employee related costs. These costs are reflected in Costs of sales, Selling, general and administrative expenses, and Research and development expenditures in the Company’s combined statements of operations.

Basic research: Represents costs of basic long-term research conducted by certain engineers in Motorola, Inc.’s corporate functions. The allocation is based on a three-part formula that averages the relative percentage of the Company’s net revenues, payroll, and net property, plant and equipment/inventory to the respective total Motorola, Inc. amounts. These amounts are reflected in Research and development expenditures in the Company’s combined statements of operations. Beginning in 2008 and continuing in 2009, certain engineers in Motorola, Inc.’s corporate functions were transferred to the Company’s businesses.

Interest expense (income): Represents the interest income primarily earned by Motorola, Inc. from the consolidated cash and cash equivalent balances and the investment returns held in Motorola Inc.’s Sigma Fund, as well as the interest expense primarily recognized by Motorola, Inc. for its outstanding long-term debt. The allocation is based on the Company’s total assets as a percentage of the respective Motorola, Inc. total assets, less cash and cash equivalents and Sigma Fund included in Motorola, Inc.’s consolidated balance sheets. These amounts are reflected in Interest income (expense), net within Other income (expense), in the Company’s combined statements of operations.

The following table presents the expense (income) allocations reflected in the Company’s combined statements of operations:

 

Years Ended December 31    2009    2008     2007  

Leveraged services expenses

   $ 615    $ 952      $ 718   

Employee benefits and incentives

     372      382        458   

Basic research

     11      38        92   

Interest expense (income)

     43      (24     (15
        
     $ 1,041    $ 1,348      $ 1,253   

 

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The Company and Motorola, Inc. consider these leveraged services expenses, employee benefits and incentives, basic research and interest expense (income) allocations to be a reasonable reflection of the utilization of services provided.

Motorola, Inc. primarily uses a worldwide centralized approach to cash management and the financing of its operations with all related activity between the Company and Motorola, Inc. reflected as equity transactions in Owner’s net investment in the Company’s combined balance sheets. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Company’s businesses which are transferred to Motorola, Inc. on a regular basis, (ii) cash borrowings from Motorola, Inc. used to fund operations, capital expenditures, or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of Motorola, Inc.’s corporate expenses identified above.

Motorola, Inc. owns many of its major facilities and identifies a landlord for each facility based on the primary resident of the facility. At December 31, 2009 and 2008, $163 million and $167 million, respectively, were allocated to the Company’s combined balance sheets for certain facility assets where the Company occupies space within the facility, but is not the landlord of the facility. The allocation is based on the estimated square footage occupied by the Company’s employees as a percentage of the total square footage of the facility.

When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Company’s funds in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Company’s operations and Motorola, Inc. For purposes of the combined statements of cash flows, the Company reflects intercompany activity as a financing activity.

In conjunction with the Separation, as of July 31, 2010 the Company entered into a series of agreements with Motorola, Inc. which are intended to govern the relationship between the Company and Motorola, Inc. going forward. These agreements include a Master Separation and Distribution Agreement, intellectual property agreements, a trademark license agreement, a tax sharing agreement and an employee matters agreement. The Company also intends to enter into other related agreements with Motorola, Inc., including transition services agreements.

The terms of the Master Separation and Distribution Agreement with Motorola, Inc., provide that the net amount due from the Company to Motorola, Inc. at the closing date of the Separation, will remain classified as equity forming a part of the continuing equity of the Company. Amounts due from/to Motorola, Inc. arising from transactions subsequent to the Separation, will be recorded within due to/from Motorola, Inc., net, as these amounts will be settled in cash.

The following is a reconciliation of the amounts presented as Net transfers from Motorola, Inc. on the combined statements of business equity to the corresponding amounts presented on the combined statements of cash flows:

 

Year Ended December 31,    2009     2008     2007  

Net transfers from Motorola, Inc. per combined statements of business equity

   $ 1,645      $ 1,102      $ 1,384   

Allocation of stock compensation expense from Motorola, Inc.

     (166     (147     (157

Non-cash transfers of assets and liabilities to (from) Motorola, Inc., net*

     (293     343        (463
        

Net transfers from Motorola, Inc. per combined statements of cash flows

   $ 1,186      $ 1,298      $ 764   

 

* Non-cash transfers consists primarily of changes in allocated income tax balances and other Corporate assets and liabilities.

 

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4. Other Financial Data

Statements of Operations Information

Other Charges

Other charges included in Operating loss consist of the following:

 

Years Ended December 31    2009    2008    2007

Other charges:

        

Reorganization of businesses

   $ 155    $ 151    $ 135

Intangible asset amortization

     57      64      88

Goodwill impairment

          55     

Intangible asset impairments

          13      88

Legal settlements

     75          
      
     $ 287    $ 283    $ 311

Other Income (Expense)

Interest income (expense), net, and Other, net, both included in Other income (expense), consist of the following:

 

Years Ended December 31    2009     2008     2007  

Interest income (expense), net:

      

Interest expense

   $ (70   $ (71   $ (150

Interest income

     29        99        182   
        
   $ (41   $ 28      $ 32   
        

Other, net:

      

Investment impairments

   $ (11   $ (36   $ (2

Foreign currency gain (loss)

     (45     (67     13   

U.S. pension plan freeze curtailment gain

            99          

Liability extinguishment gain

            56          

Other

     7        12        7   
        
     $ (49   $ 64      $ 18   

Balance Sheet Information

Investments

Investments consist of the following:

 

     Recorded Value    Less   

Cost
Basis

December 31, 2009    Short-term
Investments
   Investments    Unrealized
Gains
   Unrealized
Losses
  

Available-for-sale securities:

              

Common stock and equivalents

   $    $ 21    $ 14    $    $ 7

Other securities, at cost

          10                10

Equity method investments

          26                26
      
     $    $ 57    $ 14    $    $ 43

 

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     Recorded Value    Less   

Cost
Basis

December 31, 2008    Short-term
Investments
   Investments    Unrealized
Gains
   Unrealized
Losses
  

Certificates of deposit

   $ 29    $    $    $    $ 29

Available-for-sale securities:

              

Common stock and equivalents

          19      5           14

Other securities, at cost

          21                21

Equity method investments

          27                27
      
     $ 29    $ 67    $ 5    $    $ 91

At December 31, 2009, the Company had no short-term investments (which are highly-liquid fixed-income investments with an original maturity greater than three months but less than one year), compared to $29 million at December 31, 2008.

At December 31, 2009, the Company’s available-for-sale securities portfolio had an approximate fair market value of $21 million, which represented a cost basis of $7 million and a net unrealized gain of $14 million. At December 31, 2008, the Company’s available-for-sale securities portfolio had an approximate fair market value of $19 million, which represented a cost basis of $14 million and a net unrealized gain of $5 million.

During the years ended December 31, 2009, 2008 and 2007, the Company recorded investment impairment charges of $11 million, $36 million and $2 million, respectively, representing other-than-temporary declines in the value of the Company’s available-for-sale investment portfolio. Investment impairment charges are included in Other, net, within Other income (expense) in the Company’s combined statements of operations.

Gains (losses) on sales of investments and business, net, included in other income (expense), consists of the following:

 

Years Ended December 31    2009    2008    2007

Gains (losses) on sales of investments, net

   $ (1)    $ 11    $ 2

Loss on sale of business, net

     (33)          
      
     $ (34)    $ 11    $ 2

During the year ended December 31, 2009, the $34 million of net loss primarily relates to sales of a specific business in the Mobile Device business. During the year ended December 31, 2008 and 2007, the $11 million and $2 million, respectively, of net gains primarily related to sales of a number of the Company’s equity investments.

Accounts Receivable

Accounts receivable, net, consists of the following:

 

December 31    2009     2008  

Accounts receivable

   $ 1,400      $ 1,366   

Less allowance for doubtful accounts

     (59     (97
        
     $ 1,341      $ 1,269   

 

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Inventories

Inventories, net, consists of the following:

 

December 31    2009     2008  

Finished goods

   $ 542      $ 1,112   

Work-in-process and production materials

     680        1,206   
        
     1,222        2,318   

Less inventory reserves

     (534     (472
        
     $ 688      $ 1,846   

During the year ended December 31, 2008, the Company recorded a charge of $291 million to costs of sales for excess inventory due to a decision to consolidate software and silicon platforms in the Mobile Devices business.

Other Current Assets

Other current assets consists of the following:

 

December 31    2009    2008

Contractor receivables

   $ 308    $ 346

Deferred costs

     164      113

Tax refunds receivable

     87      68

Royalty license arrangements

     48      58

Value-added tax refunds receivable

     26      48

Other

     52      40
      
     $ 685    $ 673

Property, Plant and Equipment

Property, plant and equipment, net, consists of the following:

 

December 31    2009     2008  

Land

   $ 37      $ 47   

Buildings

     627        714   

Machinery and equipment

     1,615        1,940   
        
     2,279        2,701   

Less accumulated depreciation

     (1,472     (1,727
        
     $ 807      $ 974   

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $154 million, $163 million and $186 million, respectively.

Other Assets

Other assets consists of the following:

 

December 31    2009    2008

Deferred costs

   $ 285    $ 222

Royalty license arrangements

     250      289

Intangible assets, net of accumulated amortization of $554 and $506

     138      196

Value-added tax refunds receivable

     118      113

Other

     42      33
      
     $ 833    $ 853

 

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Accrued Liabilities

Accrued liabilities consists of the following:

 

December 31    2009    2008

Deferred revenue

   $ 303    $ 229

Contractor payables

     226      300

Customer reserves

     224      377

Compensation

     169      196

Warranty reserves

     156      215

Royalty license arrangements

     133      332

Exit cost and employee separation accruals

     72      166

Tax liabilities

     115      279

Purchase commitment payable

          150

Other

     464      557
      
     $ 1,862    $ 2,801

Other Liabilities

Other liabilities consists of the following:

 

December 31    2009    2008

Deferred revenue

   $ 327    $ 227

Deferred income taxes

     74      115

Capital lease obligation

     56      57

Unrecognized tax benefits

     35      99

Other

     135      123
      
     $ 627    $ 621

 

5. Risk Management

Derivative Financial Instruments

Foreign Currency Risk

The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. All hedge transactions are executed by Motorola, Inc. Historically, the Company had its exposures managed by Motorola, Inc., and Motorola, Inc.’s program viewed the consolidated exposures of all of the businesses of Motorola, Inc. The Company’s policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major

 

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currencies that can be traded on open markets. The Company typically uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.

At December 31, 2009, the Company had outstanding foreign exchange contracts totaling $622 million, compared to $907 million outstanding at December 31, 2008. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other, net within Other income (expense) in the Company’s combined statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of December 31, 2009 and the corresponding positions as of December 31, 2008:

 

     Notional Amount  
Net Buy (Sell) by Currency    December 31,
2009
    December 31,
2008
 

Brazilian Real

   $ (348   $ (305

Chinese Renminbi

     63        205   

Singapore Dollar

     44        54   

Canadian Dollar

     43        32   

Korean Won

     (38     (47

The Company did not have any fair value hedge activity during 2009. For each of the three years ended December 31, 2009, 2008 and 2007, income (loss) representing the ineffective portion of changes in the fair value of cash flow hedge positions was de minimis . These amounts are included in Other, net within Other income (expense) in the Company’s combined statements of operations. The above amounts include the change in the fair value of derivative contracts related to the changes in the difference between the spot price and the forward price. These amounts are excluded from the measure of effectiveness. Expense (income) related to cash flow hedges that were discontinued for the years ended December 31, 2009, 2008 and 2007 are included in the amounts noted above.

During the years ended December 31, 2009, 2008 and 2007, income (expense) of $(8) million, $7 million and $(19) million, respectively, was reclassified from equity to earnings in the Company’s combined statements of operations.

At December 31, 2009, the maximum term of derivative instruments that hedge forecasted transactions was six months. The weighted-average duration of the Company’s derivative instruments that hedge forecasted transactions was four months.

Counterparty Risk

The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of nonperformance by counterparties. However, the risk is limited to the fair value of the instruments when the derivative is in an asset position. Motorola, Inc. actively monitors its exposure to credit risk. At the present time, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty.

 

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The following table summarizes the effect of derivative instruments in our combined statements of operations:

 

Year Ended December 31, 2009    Loss on Derivative
Instruments
    Statement of
Operations Location

Derivatives designated as hedging instruments:

    

Foreign exchange contracts

   $      Foreign currency income (expense)

Derivatives not designated as hedging instruments:

    

Foreign exchange contracts

     (76   Other income (expense)
          

Total derivatives not designated as hedging instruments

   $ (76    

The following table summarizes the losses recognized in the combined financial statements:

 

Year Ended December 31, 2009    Foreign Exchange
Contracts
    Financial Statement
Location

Derivatives in cash flow hedging relationships:

    

Loss recognized in Accumulated other comprehensive income (loss) (effective portion)

   $ (7   Accumulated other comprehensive loss

Loss reclassified from Accumulated other comprehensive income (loss) into Net earnings (loss) (effective portion)

     (8   Cost of sales/Revenues

Gain (loss) recognized in Net earnings (loss) on derivative (ineffective portion and amount excluded from effectiveness testing)

          Other income (expense)

Business Equity

Derivative instruments activity, net of tax, included in Accumulated other comprehensive income (loss) within the combined statements of business equity for the years ended December 31, 2009, 2008 and 2007 is as follows:

 

       2009     2008     2007  

Balance at January 1

   $ (1   $      $ 9   

Increase (decrease) in fair value

     (7     6        (28

Reclassifications to earnings

     8        (7     19   
        

Balance at December 31

   $      $ (1   $   

Fair Value of Financial Instruments

The Company’s financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Company’s available-for-sale investment portfolios and derivative financial instruments are recorded in the Company’s combined balance sheets at fair value. All other financial instruments are carried at cost, which is not materially different than the instruments’ fair values.

 

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Equity Price Market Risk

At December 31, 2009, the Company’s available-for-sale equity securities portfolio had an approximate fair market value of $21 million, comprised of a cost basis of $7 million and a net unrealized gain of $14 million. These equity securities are held for purposes other than trading.

 

6. Income Taxes

Components of earnings (loss) before income taxes are as follows:

 

Years Ended December 31    2009     2008     2007  

United States

   $ (1,504   $ (2,301   $ (2,322

Other nations

     169        364        1,243   
        
     $ (1,335   $ (1,937   $ (1,079

Components of income tax expense (benefit) are as follows:

 

Years Ended December 31    2009     2008     2007  

United States

   $ (42   $ (449   $ (357

Other nations

     70        154        244   

States (U.S.)

     11        17        9   
        

Current income tax expense (benefit)

     39        (278     (104
        

United States

     11        977        (221

Other nations

     (47     210        (51

States (U.S.)

     (3     126        (55
        

Deferred income tax expense (benefit)

     (39     1,313        (327
        

Total income tax expense (benefit)

   $      $ 1,035      $ (431

The Company’s operating results have been included in Motorola, Inc.’s consolidated U.S. federal and state income tax returns, as well as included in many of Motorola, Inc.’s tax filings for non-U.S. jurisdictions. The Company’s non-U.S. operations are primarily conducted within Motorola, Inc.’s non-U.S. subsidiaries which share operations with Motorola, Inc.’s other businesses. The provision for income taxes in these combined financial statements has been determined on a separate return basis. The Company’s contribution to Motorola, Inc.’s tax losses and tax credits on a separate return basis has been included in these financial statements. The Company’s separate return basis tax loss and tax credit carry backs may not reflect the tax positions taken or to be taken by Motorola, Inc. In many cases tax losses and tax credits generated by the Company have been available for use by Motorola, Inc. and will largely remain with Motorola, Inc. after the Separation.

The deferred tax assets and related valuation allowances in these combined financial statements have been determined on a separate return basis. The assessment of the valuation allowances requires considerable judgment on the part of management, with respect to benefits that could be realized from future taxable income, as well as other positive and negative factors. As the Company incurred cumulative taxable losses in the United States over a three year period commencing in 2008, the Company recorded in 2008 a $1.8 billion valuation allowance against the Company’s U.S. deferred tax assets, net of reversing taxable temporary differences. During 2008, the Company also recorded a $208 million valuation allowance against the deferred tax assets of certain foreign operations, based on losses incurred during 2008 and 2007.

In several non-U.S. tax jurisdictions, Motorola, Inc. and the Company have benefited from certain income tax incentives. In some instances Motorola, Inc. has qualified for income tax incentives on a legal entity level and in other instances on a business level. The Company has reviewed whether it likely would have qualified for similar tax incentives on a separate return basis and concluded that, in most cases, the Company would have

 

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qualified for the incentives. In one instance, the Company concluded that it would not have qualified for an income tax incentive based on the minimal activity the Company conducted within the entity in relation to the other Motorola, Inc. businesses. The Company reflected no tax benefit for this income tax incentive in its separate return basis tax provisions, resulting in incremental tax cost of $0 million, $2 million and $12 million for the 2009, 2008 and 2007 tax years, respectively.

Differences between income tax expense (benefit) computed at the U.S. federal statutory tax rate of 35% and income tax expense (benefit) are as follows:

 

Years Ended December 31    2009     2008     2007  

Income taxes at statutory rate

   $ (467   $ (678   $ (378

Taxes on non-U.S. earnings

     (26     42        (35

State income taxes

     (24     (36     (30

Valuation allowances

     489        1,976        5   

Goodwill impairment

            7          

Tax on undistributed non-U.S. earnings

     3        4        21   

Other provisions

     17        (260       

Research credits

     (11     (16     (20

Other

     19        (4     6   
        
     $      $ 1,035      $ (431

Significant components of deferred tax assets (liabilities) are as follows:

 

December 31    2009     2008  

Inventory

   $ 216      $ 205   

Accrued liabilities and allowances

     151        235   

Employee benefits

     195        141   

Capitalized items

     696        266   

Tax basis differences on investments

     27        27   

Depreciation tax basis differences on fixed assets

     19        23   

Undistributed non-U.S. earnings

     (131     (137

Tax carry forwards

     1,637        1,529   

Available-for-sale securities

     (5     (2

Business reorganization

     22        35   

Warranty and customer reserves

     101        140   

Deferred revenue and costs

     46        52   

Valuation allowances

     (2,896     (2,496

Deferred charges

     9        (11

Other

     1        46   
        
     $ 88      $ 53   

Gross deferred tax assets were $3.4 billion and $3.0 billion at December 31, 2009 and 2008, respectively. Deferred tax assets, net of valuation allowances, were $478 million and $468 million at December 2009 and 2008, respectively. Gross deferred tax liabilities were $390 million and $415 million at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008 the Company had deferred tax assets for U.S. tax carry forwards, calculated on a separate return basis, of $1.5 billion and $1.4 billion, respectively. The U.S. tax carry forwards are comprised of federal and state tax loss carry forwards, capital loss carry forwards, foreign tax credit and general business tax credit carry forwards. In 2008, the Company recorded a $1.8 billion valuation allowance against its U.S. net deferred tax assets, including deferred tax assets for tax carry forwards, based on the Company’s cumulative U.S. loss position. The increase in the Company’s valuation allowance during 2009, as compared to 2008, is primarily attributable to tax losses and other deferred tax assets being generated in the U.S., where the Company maintains a full valuation allowance. At December 31, 2009 and 2008 certain of the Company’s non-U.S. operations had deferred tax assets from tax loss carry forwards, calculated on a separate

 

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return basis, of $172 million and $134 million, respectively. The tax losses primarily relate to operations in China, Brazil and Singapore. In 2008, the Company recorded valuation allowances of $208 million against its net deferred tax assets for its Brazil and China operations, based on the Company’s recent losses and China’s relatively short five year tax loss carry forward period. The Company feels that it is more likely than not that the remaining net deferred tax assets are recoverable.

Motorola, Inc. adopted FIN 48 on January 1, 2007. The Company’s unrecognized tax benefits have been determined on a separate return basis. The Company records interest and penalties associated with unrecognized tax benefits as a component of interest expense and other expenses, respectively. The Company’s interest accrual on unrecognized tax benefits was determined based on an allocation of Motorola, Inc.’s interest accrual on unrecognized tax benefits.

A roll forward of unrecognized tax benefits is as follows:

 

       2009     2008  

Balance at January 1

   $ 467      $ 746   

Additions based on tax positions related to current year

     15        25   

Additions for tax positions of prior years

     39        92   

Reductions for tax positions of prior years

     (53     (391

Settlements

     (232     (5
        

Balance at December 31

   $ 236      $ 467   

Included in the balance of total unrecognized tax benefits at December 31, 2009 are potential tax benefits of approximately $100 million, net of federal tax benefits and changes to valuation allowances, that if recognized would affect the effective tax rate.

Based on the potential outcome of Motorola, Inc.’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits allocated to the Company will change within the next 12 months. The associated net tax impact on the effective tax rate, exclusive of valuation allowances changes, is estimated to be in the range of a $40 million tax charge to a $125 million tax benefit, with cash payments in the range of $0 to $80 million.

The Company’s U.S. operations are included in Motorola, Inc.’s U.S. Federal consolidated income tax returns which are examined by the Internal Revenue Service (“IRS”). During the second quarter of 2009, Motorola, Inc. concluded its IRS audits for the tax years 1996-2003. As a result of the foregoing and resolution of certain non-U.S. audits, the Company reduced its unrecognized tax benefits by $232 million. In the fourth quarter of 2009, the Company recognized $16 million of previously unrecognized tax benefits, which resulted from the favorable resolution of a matter with non-U.S. tax authorities.

Management expects the terms of the tax sharing agreement to be entered into with Motorola, Inc. to provide that the Company will not be responsible for any unrecognized tax benefits and related interest and penalties that are attributable to the Company while the Company shared in income tax filings with Motorola, Inc. The Company will be responsible for unrecognized tax benefits and related interest and penalties for periods it did not share in income tax filings with Motorola, Inc. or in cases where the Company will take existing Motorola, Inc. entities upon Separation. Substantially all of the Company’s unrecognized tax benefits and related interest and penalties are expected to remain with Motorola, Inc.

 

7. Employee Benefits

The combined statements of operations include expense allocations for certain fringe benefit costs and other employee benefits historically provided by Motorola, Inc., including costs related to the defined benefit and

 

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defined contribution pension plan, the postretirement health care plan, 401(k) match and profit sharing, group health care benefits, restricted stock compensation and other incentive programs. Such costs are allocated to the Company as follows:

 

   

401(k) and other defined contribution plans based on contributions made by Motorola, Inc. to participants employed at the Company

 

   

Defined benefit pension plans based on eligible compensation of plan participants employed at the Company

 

   

Retiree health care based on eligible years of service

 

   

Group health care benefits based on employee headcount

These costs are reflected in Costs of sales, Selling, general and administrative expenses, and Research and development expenditures in the Company’s combined statements of operations. Total employee benefit costs allocated to the Company were $328 million, $351 million and $395 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Retirement Benefit Plans

Defined Benefit Pension Plans

The Company’s employees participate in various Motorola, Inc. retirement benefit plans, including: (i) the noncontributory pension (“Regular Pension Plan”), covering U.S. employees; (ii) the noncontributory supplemental Officers’ Plan (“Officers’ Plan”), covering U.S. employees; (iii) the noncontributory Motorola Supplemental Pension Plan (“MSPP”), covering U.S. employees; and (iv) various non-U.S. pension benefit plans.

The Officers’ Plan contains provisions for vesting and funding the participants’ expected retirement benefits when the participants meet the minimum age and years of service requirements. Elected officers who were not yet vested in the Officers’ Plan as of December 31, 1999 had the option to remain in the Officers’ Plan or elect to have their benefit bought out in RSUs. Effective January 1, 2000, newly elected officers are not eligible to participate in the Officers’ Plan. Effective June 30, 2005, salaries were frozen for this plan.

Motorola, Inc. has an additional noncontributory supplemental retirement benefit plan, the MSPP, which provides supplemental benefits to individuals by replacing the Regular Pension Plan benefits that are lost by such individuals under the retirement formula due to application of the limitations imposed by the Internal Revenue Code. Elected officers who are covered under the Officers’ Plan or who participated in the restricted stock buy-out are not eligible to participate in the MSPP. Effective January 1, 2007, eligible compensation was capped at the IRS limit plus $175,000 (the “Cap”) or, for those already in excess of the Cap as of January 1, 2007, the eligible compensation used to compute such employee’s MSPP benefit for all future years will be the greater of: (i) such employee’s eligible compensation as of January 1, 2007 (frozen at that amount), or (ii) the relevant Cap for the given year. Additionally, effective January 1, 2009, the MSPP was frozen to new participants unless such participation was due to a prior contractual entitlement.

In February 2007, Motorola, Inc. amended the Regular Pension Plan and the MSPP, modifying the definition of average earnings. For the years ended prior to and including December 31, 2007, benefits were calculated using the rolling average of the highest annual earnings in any five years within the previous ten calendar year period. Beginning in January 2008, the benefit calculation was based on the set of the five highest years of earnings within the ten calendar years prior to December 31, 2007, averaged with earnings from each year after 2007. Also, effective January 2008, Motorola, Inc. amended the Regular Pension Plan, modifying the vesting period from five years to three years.

 

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In December 2008, Motorola, Inc. amended the Regular Pension Plan, the Officers’ Plan and the MSPP. Effective March 1, 2009, (i) no participant shall accrue any benefit or additional benefit on and after March 1, 2009, and (ii) no compensation increases earned by a participant on and after March 1, 2009 shall be used to compute any accrued benefit. Additionally, no service performed on and after March 1, 2009, shall be considered service for any purpose under the MSPP. Motorola, Inc. allocated $99 million to the Company for the curtailment gain associated with this plan amendment. The amount of the curtailment gain allocated to the Company was based on the amount of pension expense allocated to the Company during 2008.

Various pension benefit plans are offered by Motorola, Inc. subsidiaries to non-U.S. employees. The Company’s non-U.S. employees participate in several of these plans.

Motorola, Inc. manages its worldwide pension benefit plans on a consolidated basis and separate Company information is not readily available. Therefore, the Company’s share of the Motorola, Inc. plans’ assets and liabilities are not included in the Company’s combined balance sheet. The combined statements of operations include an allocation of Motorola, Inc.’s costs of these employee benefit plans of $46 million, $40 million, and $103 million for the years ended December 31, 2009, 2008 and 2007, respectively. These costs were allocated to the Company based on the proportionate share of eligible compensation of the Company’s participants as well as an allocation of corporate employees’ eligible compensation.

In addition to Motorola, Inc.’s non-U.S. pension plans, the Company has a pension plan in Taiwan acquired through a prior acquisition. The Company’s combined balance sheet includes a liability related to this plan of $20 million and $18 million as of December 31, 2009 and December 31, 2008, respectively. The Company’s combined statements of operations include expense of $2 million in each of the years ended December 31, 2009, December 31, 2008 and December 31, 2007.

Postretirement Health Care Benefits Plan

Certain retiree medical benefits are available to eligible U.S. employees meeting certain age and service requirements upon termination of employment through the Motorola, Inc. Postretirement Health Care Benefits Plan.

Motorola, Inc. manages its Postretirement Health Care Benefits Plan on a consolidated basis and separate Company information is not readily available. Therefore, the Company’s share of the Motorola, Inc. Postretirement Health Care Benefits Plan’s assets and liabilities are not included in the Company’s combined balance sheet. The combined statements of operations include an allocation of postretirement health care costs of $6 million, $4 million and $5 million for the years ended December 31, 2009, 2008 and 2007, respectively, related to this plan. These costs were allocated to the Company based on the Company’s participants’ eligible years of service and a proportionate share of the cost of corporate employees.

Defined Contribution Plans

Motorola, Inc. and certain of its subsidiaries have various defined contribution plans, in which all eligible employees participate. In the U.S., the 401(k) plan is a contributory plan. Matching contributions are based upon the amount of the employees’ contributions. Effective January 1, 2005, newly hired employees had a higher maximum matching contribution at 4% on the first 5% of employee contributions, compared to 3% on the first 6% of employee contributions for employees hired prior to January 2005. Effective January 1, 2009, Motorola, Inc. temporarily suspended all matching contributions to the Motorola 401(k) plan. Matching contributions were reinstated as of July 1, 2010 at a rate of 4% on the first 4% of employee contributions. The maximum matching contributions for 2010 will be pro-rated to account for the number of months remaining in the year.

The Company’s expenses, primarily relating to the employer match, for all defined contribution plans, for the years ended December 31, 2009, 2008 and 2007 were $5 million, $38 million and $34 million, respectively. These costs were allocated to the Company based on contributions made by the Company’s participants as well as a proportionate share of corporate employee contributions.

 

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8. Share-Based Compensation Plans and Other Incentive Plans

Motorola, Inc. maintains several incentive plans for the benefit of its officers, directors and employees, including the Company’s employees. The following disclosures represent the Company’s portion of the plans maintained by Motorola, Inc., in which the Company’s employees participated. All awards granted under the plans consist of Motorola, Inc. common shares. As such, all related equity account balances are reflected in Motorola, Inc.’s consolidated statements of stockholders’ equity and have not been reflected in the Company’s combined financial statements. Accordingly, the amounts presented are not necessarily indicative of future performance and do not necessarily reflect the results that the Company would have experienced as an independent, publicly traded company for the periods presented.

Stock Options, Stock Appreciation Rights and Employee Stock Purchase Plan

Under the Motorola, Inc. employee stock purchase plan, eligible participants have been allowed to purchase shares of Motorola, Inc.’s common stock through payroll deductions of up to 10% of compensation on an after-tax basis. The price an employee pays per share is 85% of the lower of the fair market value of Motorola, Inc.’s stock on the close of the first trading day or last trading day of the purchase period. The plan has two purchase periods, the first one from October 1 through March 31 and the second one from April 1 through September 30. For the years ended December 31, 2009, 2008 and 2007, the Company’s employees purchased 8.6 million, 4.4 million and 2.1 million shares of Motorola, Inc. common stock, respectively, at purchase prices of $3.60 and $3.68, $7.91 and $6.07, and $14.93 and $15.02, respectively.

Under Motorola, Inc.’s stock option plans, options or SARs to acquire shares of Motorola, Inc. common stock have been made available for grant to certain employees. Each option or SAR granted has an exercise price of 100% of the market value of the common stock on the date of grant. Option or SAR awards have a contractual life of five to ten years and vest over two to four years. Stock options and stock appreciation rights assumed or replaced with comparable stock options or stock appreciation rights in conjunction with a change in control only become exercisable due to the change in control if the holder is also involuntarily terminated (for a reason other than cause) or quits for good reason within 24 months of a change in control.

Motorola, Inc. calculates the fair value of each employee stock option, estimated on the date of grant, using the Black-Scholes option pricing model. The weighted-average estimated fair value of employee stock options granted during 2009, 2008 and 2007 was $2.78, $3.47 and $5.95, respectively, using the following weighted-average assumptions:

 

       2009     2008     2007  

Expected volatility

   57.1   56.4   28.3

Risk-free interest rate

   1.9   2.4   4.5

Dividend yield

   0.0   2.7   1.1

Expected life (years)

   3.9      5.5      6.5   

Motorola, Inc. uses the implied volatility for traded options on Motorola, Inc.’s stock as the expected volatility assumption required in the Black-Scholes model. The selection of the implied volatility approach was based upon the availability of actively traded options on Motorola, Inc.’s stock and its assessment that implied volatility is more representative of future stock price trends than historical volatility.

The risk-free interest rate assumption is based upon the average daily closing rates during the year for U.S. treasury notes that have a life which approximates the expected life of the option. The dividend yield assumption is based on Motorola, Inc.’s future expectation of dividend payouts. The expected life of employee stock options represents the average of the contractual term of the options and the weighted-average vesting period for all option tranches.

Motorola, Inc. has applied a forfeiture rate, estimated based on historical data, of 13%–45% to the option fair value calculated by the Black-Scholes option pricing model. This estimated forfeiture rate is applied to grants based on their remaining vesting term and may be revised in subsequent periods if actual forfeitures differ from this estimate.

 

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Stock option activity for 2009 for the Company’s employees was as follows (in thousands, except exercise price and employee data):

 

       Shares
Subject to
Options
    Wtd. Avg.
Exercise
Price

Options outstanding at January 1, 2009

   74,120      $ 16

Options granted

   25,970        6

Options exercised

   (284     6

Options terminated, canceled or expired

   (41,115     19
        

Options outstanding at December 31, 2009

   58,691        9
        

Options exercisable at December 31, 2009

   19,465        12

Number of employees granted options

   7,847         

At December 31, 2009, Motorola, Inc. had $104 million of total unrecognized compensation expense, net of estimated forfeitures, related to the Company’s employees under Motorola, Inc.’s stock option and employee stock purchase plan which will be recognized over the weighted average period of approximately two years. For the year ended December 31, 2009, the total intrinsic value of options exercised by the Company’s employees was de minimis compared to $1 million and $33 million for the years ended December 31, 2008 and 2007, respectively. The aggregate intrinsic value for options outstanding and exercisable by the Company’s employees as of December 31, 2009 was $52 million and $7 million, respectively, based on a December 31, 2009 stock price of $7.76 per share. Cash received from stock option exercises by the Company’s employees is reflected in the financial statements of Motorola, Inc. and has no impact on the combined financial statements of the Company.

On May 14, 2009, Motorola, Inc. initiated a tender offer for certain eligible employees (excluding executive officers and directors) to exchange certain out-of-the-money options for new options with an exercise price equal to the fair market value of Motorola, Inc.’s stock as of the grant date. In order to be eligible for the exchange, the options had to have been granted prior to June 1, 2007, expire after December 31, 2009 and have an exercise price equal to or greater than $12.00. The offering period closed on June 12, 2009. On that date, 34 million options were tendered by the Company’s employees and exchanged for 15 million new options with an exercise price of $6.73 and a ratable annual vesting period over two years. The exchange program was designed so that the fair market value of the new options would not be greater than the fair market value of the options exchanged. The resulting incremental compensation expense was not material to the Company’s combined financial statements.

The following table summarizes information about stock options held by the Company’s employees that were outstanding and exercisable by the Company’s employees at December 31, 2009 (in thousands, except exercise price and years):

 

     Options Outstanding    Options
Exercisable
Exercise price range    No. of
options
   Wtd. avg.
Exercise
Price
   Wtd. avg.
contractual
life (in yrs.)
   No. of
options
   Wtd. avg.
Exercise
Price

Under $7

   26,677    $ 6    8    1,651    $ 5

$7-$13

   26,165      10    7    12,742      9

$14-$20

   4,143      17    5    3,477      16

$21-$27

   571      21    6    460      21

$28-$34

   50      32    0    50      32

$35-$41

   1,083      40    5    1,083      40

$42-$49

   2      49    0    2      49
                  
     58,691                19,465       

 

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The weighted-average contractual life for options outstanding and exercisable as of December 31, 2009 was seven years and five years, respectively.

Restricted Stock Units

RSU grants consist of shares or the rights to shares of Motorola, Inc.’s common stock which were awarded to the Company’s employees. The grants are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer by the employee. Shares of RSUs held by the Company’s employees that are assumed or replaced with comparable shares of RSUs in conjunction with a change in control will only have the lapse of restrictions accelerated if the holder is also involuntarily terminated (for a reason other than cause) or quits for good reason within 24 months of a change in control.

RSU activity for the Company’s employees during 2009 was as follows (in thousands, except fair value and employee data):

 

       RSUs     Wtd. Avg.
Grant Date
Fair Value

RSUs outstanding at January 1, 2009

   14,266      $ 11

Granted

   13,710        6

Vested

   (3,556     11

Terminated or canceled

   (2,540     9
        

RSUs outstanding at December 31, 2009

   21,880        8

Number of employees granted RSUs

   9,999         

At December 31, 2009, $112 million of total unrecognized compensation expense, net of estimated forfeitures, related to the Company’s employees will be recognized over the weighted average period of approximately three years. The total fair value of RSU shares vested during the years ended December 31, 2009, 2008 and 2007 was $22 million, $4 million and $2 million, respectively. The aggregate fair value of outstanding RSUs as of December 31, 2009 was $170 million.

Total Share-Based Compensation Expense

Compensation expense for Motorola, Inc.’s employee stock options, SARs, employee stock purchase plans, restricted stock and RSUs related to the Company’s employees, as well as allocated compensation expense from Motorola, Inc.’s corporate functions, was as follows:

 

Years Ended December 31    2009    2008    2007

Share-based compensation expense included in:

        

Costs of sales

   $ 15    $ 14    $ 14

Selling, general and administrative expenses

     99      87      101

Research and development expenditures

     52      46      42
      

Share-based compensation expense included in Operating loss

     166      147      157

Tax benefit

          43      52
      

Share-based compensation expense, net of tax

   $ 166    $ 104    $ 105

A portion of Motorola, Inc.’s share-based compensation expense has been allocated to the Company based on the awards granted to the Company’s employees and based on a three-part formula that averages the relative percentage of the Company’s net revenues, payroll and net property, plant and equipment/inventory to the respective total Motorola, Inc. amounts for awards granted to Motorola, Inc.’s corporate employees.

 

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Motorola Incentive Plan

The Motorola Incentive Plan provides eligible employees with an annual payment, calculated as a percentage of an employee’s eligible earnings, in the year after the close of the current calendar year if specified goals are met. The Company’s provisions for awards under these incentive plans for the years ended December 31, 2009, 2008 and 2007 were $57 million, $53 million and $38 million, respectively.

Long-Range Incentive Plan

The Long-Range Incentive Plan (“LRIP”) rewards participating elected officers for Motorola, Inc.’s achievement of specified business goals during the period, based on performance objectives measured over three-year cycles. The combined statements of operations include an allocation of the costs of the LRIP with such amounts allocated to the Company based on specific identification of the Company’s employees. The provision for LRIP (net of the reversals of previously recognized reserves) for the years ended December 31, 2009, 2008 and 2007 was $5 million, $(8) million and $(5) million, respectively.

On April 21, 2008, the Compensation and Leadership Committee of the Board of Directors of Motorola, Inc. approved the cancellation of the 2006-2008 performance cycle and the 2007-2009 performance cycle under Motorola’s Long-Range Incentive Plan of 2006 without the payment of awards for such performance cycles, as reported on Motorola, Inc.’s Form 8-K, filed April 25, 2008.

 

9. Fair Value Measurements

Motorola, Inc. adopted new accounting guidance on measuring fair value on January 1, 2008 for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. This does not change the accounting for those instruments that were, under previous U.S. GAAP, accounted for at cost or contract value. The Company had no non-financial assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2009.

The guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about current market conditions. The prescribed fair value hierarchy and related valuation methodologies are as follows:

Level 1 —Quoted prices for identical instruments in active markets.

Level 2 —Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3 —Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The fair values of the Company’s financial assets and liabilities by level in the fair value hierarchy as of December 31, 2009 and 2008 were as follows:

 

       Level 1    Level 2    Level 3    Total

Common stock and equivalents:

           

December 31, 2009

   $ 21    $    $    $ 21

December 31, 2008

     19                19

 

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Valuation Methodologies

Level 1 —Quoted market prices in active markets are available for investments in common stock and equivalents. As such, these investments are classified within Level 1.

 

10. Sales of Receivables

Motorola, Inc. sells accounts receivable generated from its business units to third-parties in transactions that qualify as “true-sales.” The Company’s businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc.

Total accounts receivable sold by the Company were $803 million for the year ended December 31, 2009, compared to $2.6 billion for the year ended December 31, 2008 and $3.8 billion for the year ended December 31, 2007. As of December 31, 2009, there were $71 million of accounts receivable outstanding under these programs for which the Company retained servicing obligations, compared to $386 million at December 31, 2008.

 

11. Commitments and Contingencies

Legal

The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to the Company’s business. The Company will assume the defense and/or liability for such cases from Motorola, Inc. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

Other

Leases: Motorola, Inc. owns many of its major facilities and leases certain office, factory and warehouse space, land, and information technology and other equipment under principally non-cancelable operating leases. Motorola, Inc. identifies a landlord for each facility based on the primary resident of the facility. Motorola, Inc. allocates a portion of its facility and lease expenses to the Company based on the square footage occupied by employees of the Company; such allocation is included in the Company’s combined statements of operations. Total rental expense, primarily comprised of facilities rental expense, net of sublease income, for the years ended December 31, 2009, 2008 and 2007 was $62 million, $72 million and $71 million, respectively.

At December 31, 2009, future minimum lease obligations, primarily comprised of obligations for facilities in which the Company was deemed to be the primary resident, net of minimum sublease rentals, for the next five years and beyond are as follows: 2010—$62 million; 2011—$52 million; 2012—$37 million; 2013—$21 million; 2014—$16 million; beyond—$57 million. Actual results may differ significantly from these estimates.

Indemnifications: In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these indemnifications. However, there is an increasing risk in relation to patent indemnities given the current legal climate.

In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements for indemnification based on breach of representations and warranties are generally limited in terms of duration, and are for amounts not in excess of the contract value over the life of the contract, except with respect to certain intellectual property infringement claims. In some instances, the Company may have recourse against third-parties for certain payments made by the Company.

 

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The Company (and its subsidiaries and businesses) is also a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. Some of these obligations arise as a result of divestitures of the Company’s assets or businesses and require the Company to hold the other party harmless against losses arising from the settlement of these pending obligations. The total amount of indemnification under these types of provisions is $6 million, of which the amount accrued by the Company as of December 31, 2009 for potential claims under these provisions was de minimis .

Other: During 2009, the Company recorded a $75 million charge for a legal settlement. During 2008, the Company recorded a $150 million charge related to the settlement of a purchase commitment. During 2007, the Company recorded a $277 million charge for a legal settlement.

 

12. Information by Segment and Geographic Region

The Company reports financial results for the following business segments:

 

   

The Mobile Devices segment designs, manufactures, sells and services wireless mobile devices, including smartphones, with integrated software and accessory products, and licenses intellectual property.

 

   

The Home segment designs, manufactures, sells, installs and services set-top boxes for digital video, Internet Protocol (“IP”) video, satellite and terrestrial broadcast networks, end-to-end digital video and Internet protocol television (“IPTV”) distribution systems, broadband access network infrastructure platforms, and associated data and voice customer premises equipment and associated software solutions to cable television (“TV”) and telecommunication service providers.

Segment operating results are measured based on operating earnings adjusted, if necessary, for certain segment-specific items and Motorola, Inc. corporate function allocations. Intersegment and intergeographic revenues are accounted for on an arm’s-length pricing basis. The Company had no intersegment revenues for the years ended December 31, 2009, 2008 and 2007. Net revenues to other Motorola, Inc. businesses were $45 million, $53 million and $56 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Identifiable assets (excluding intersegment receivables) are the Company’s assets that are identified with classes of similar products or operations in each geographic region.

For the year ended December 31, 2009, approximately 17% of net revenues were from Verizon Communications Inc. (including Verizon Wireless) and approximately 13% of the net revenues were from Sprint Nextel Corporation. For the years ended December 31, 2008 and 2007, approximately 13% and 10%, respectively, of net revenues were from Verizon Communications Inc. (including Verizon Wireless) and approximately 7% and 9%, respectively, of net revenues were from Sprint Nextel Corporation.

Segment information

 

     Net Revenues    Operating Earnings (Loss)  
Years Ended December 31    2009    2008    2007    2009     2008     2007  

Mobile Devices

   $ 7,146    $ 12,187    $ 19,142    $ (1,222   $ (2,391   $ (1,451

Home

     3,904      4,912      4,231      11        351        320   
        
   $ 11,050    $ 17,099    $ 23,373       
             

Operating loss

              (1,211     (2,040     (1,131

Total other income (expense)

              (124     103        52   
                 

Loss before income taxes

                        $ (1,335   $ (1,937   $ (1,079

 

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     Assets    Capital
Expenditures
   Depreciation
Expense
Years Ended December 31    2009    2008    2007    2009    2008    2007    2009    2008    2007

Mobile Devices

   $ 2,815    $ 3,625    $ 7,462    $ 35    $ 84    $ 132    $ 104    $ 117    $ 146

Home

     3,043      3,542      3,634      32      67      63      50      46      40
      
     $ 5,858    $ 7,167    $ 11,096    $ 67    $ 151    $ 195    $ 154    $ 163    $ 186

Geographic area information

 

    Net Revenues   Assets   Property, Plant
and
Equipment, net
Years Ended December 31   2009   2008   2007   2009   2008   2007   2009   2008   2007

United States

  $ 7,039   $ 9,267   $ 12,338   $ 4,244   $ 4,329   $ 6,968   $ 450   $ 499   $ 519

China

    648     976     1,556     586     920     718     149     182     197

Brazil

    661     1,341     1,484     640     731     919     90     98     92

Singapore

    27     40     61     330     703     1,500     17     25     31

Other nations, net of eliminations

    2,675     5,475     7,934     58     484     991     101     170     192
     
    $ 11,050   $ 17,099   $ 23,373   $ 5,858   $ 7,167   $ 11,096   $ 807   $ 974   $ 1,031

Net revenues by geographic region are measured by the locale of the end customer.

 

13. Reorganization of Businesses

Motorola, Inc. maintains a formal Involuntary Severance Plan (“Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, Motorola, Inc. amended and restated the Severance Plan. Under the amended Severance Plan, severance benefits will be paid in biweekly installments to impacted employees rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the combined statements of operations where the original charges were recorded when it is determined they are no longer needed.

2009 Charges

During the year ended December 31, 2009, in light of the macroeconomic decline that adversely affected revenues, the Company continued to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans. The employees affected were located in all geographic regions.

During the year ended December 31, 2009, the Company recorded net reorganization of business charges of $210 million, including $55 million of charges in Costs of sales and $155 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $210 million are charges of $206 million for employee separation costs, $28 million for exit costs and $20 million for fixed asset impairment charges, partially offset by $44 million of reversals for accruals no longer needed.

 

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The following table displays the net charges incurred by business segment:

 

Year Ended December 31    2009

Mobile Devices

   $ 192

Home

     18
      
     $ 210

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to December 31, 2009:

 

2009    Accruals at
January 1
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
December 31

Exit costs

   $ 63    $ 28    $ (8   $ (44   $ 39

Employee separation costs

     103      206      (32     (244     33
     $ 166    $ 234    $ (40   $ (288   $ 72

Exit Costs

At January 1, 2009, the Company had an accrual of $63 million for exit costs attributable to lease terminations. The additional 2009 charges of $28 million were primarily related to the exit of leased facilities and contractual termination costs. The adjustments of $8 million reflect $9 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $44 million used in 2009 reflects cash payments. The remaining accrual of $39 million, which is included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2009, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2009, the Company had an accrual of $103 million for employee separation costs, representing the severance costs for approximately 1,600 employees. The additional 2009 charges of $206 million represent severance costs for approximately an additional 6,300 employees, of which 2,600 are direct employees and 3,700 are indirect employees.

The adjustments of $32 million reflect $35 million of reversals of accruals no longer needed, partially offset by $3 million of foreign currency translation adjustments.

During the year ended December 31, 2009, approximately 7,600 employees, of which 3,500 were direct employees and 4,100 were indirect employees, were separated from the Company. The $244 million used in 2009 reflects cash payments to these separated employees. The remaining accrual of $33 million, which is included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2009, is expected to be paid in 2010 to: (i) severed employees who began receiving payments in 2009, and (ii) approximately 300 employees who will begin receiving payments in 2010.

2008 Charges

During the year ended December 31, 2008, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected were located in all regions.

During the year ended December 31, 2008, the Company recorded net reorganization of business charges of $229 million, including $78 million of charges in Costs of sales and $151 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $229 million are charges of

 

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$195 million for employee separation costs, $65 million for exit costs and $3 million for fixed asset impairment charges, partially offset by $34 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

Year Ended December 31    2008

Mobile Devices

   $ 208

Home

     21
      
     $ 229

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2008 to December 31, 2008:

 

2008    Accruals at
January 1
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
December 31

Exit costs

   $ 1    $ 65    $ 2      $ (5   $ 63

Employee separation costs

     102      195      (33     (161     103
     $ 103    $ 260    $ (31   $ (166   $ 166

Exit Costs

At January 1, 2008, the Company had an accrual of $1 million for exit costs attributable to lease terminations. The 2008 additional charges of $65 million were primarily related to: (i) the exit of leased facilities in the United Kingdom by the Mobile Devices segment, and (ii) the exit of leased facilities in Mexico by the Home segment. The adjustments of $2 million primarily reflect foreign currency translation adjustments. The $5 million used in 2008 reflects cash payments. The remaining accrual of $63 million, which was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2008, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2008, the Company had an accrual of $102 million for employee separation costs, representing the severance costs for approximately 1,400 employees. The additional 2008 charges of $195 million represent severance costs for approximately an additional 4,600 employees, of which 2,200 were direct employees and 2,400 were indirect employees.

The adjustments of $33 million reflect $34 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $34 million of reversals represent previously accrued costs for approximately 300 employees.

During the year ended December 31, 2008, approximately 4,100 employees, of which 2,200 were direct employees and 1,900 were indirect employees, were separated from the Company. The $161 million used in 2008 reflects cash payments to these separated employees. The remaining accrual of $103 million was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2008.

2007 Charges

During the year ended December 31, 2007, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans. The employees affected were located in all regions.

 

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During the year ended December 31, 2007, the Company recorded net reorganization of business charges of $202 million, including $67 million of charges in Costs of sales and $135 million of charges under Other charges in the Company’s combined statements of operations. Included in the aggregate $202 million are charges of $200 million for employee separation costs, $39 million for fixed asset impairment charges and $1 million for exit costs, partially offset by $38 million of reversals for accruals no longer needed.

The following table displays the net reorganization of business charges by segment:

 

Year Ended December 31    2007  

Mobile Devices

   $ 229   

Home

     (27
        
     $ 202   

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2007 to December 31, 2007:

 

2007    Accruals at
January 1
   Additional
Charges
   Adjustments     Amount
Used
    Accruals at
December 31

Exit costs

   $    $ 1    $      $      $ 1

Employee separation costs

     38      200      (38     (98     102
     $ 38    $ 201    $ (38   $ (98   $ 103

Exit Costs

At January 1, 2007, the Company had no material accruals for exit costs attributable to lease terminations. The 2007 charges of $1 million were primarily related to the exit of certain activities and leased facilities. The remaining accrual of $1 million, which was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2007, represents future cash payments for lease termination obligations.

Employee Separation Costs

At January 1, 2007, the Company had an accrual of $38 million for employee separation costs, representing the severance costs for approximately 1,700 employees. The additional 2007 charges of $200 million represent severance costs for approximately 3,500 employees, of which 2,100 were direct employees and 1,400 were indirect employees.

The adjustments of $38 million reflect reversals of accruals no longer needed. The reversals represent previously accrued costs for 900 employees, and primarily relates to a strategic change regarding a plant closure and specific employees previously identified for separation who resigned from the Company and did not receive severance or who were redeployed due to circumstances not foreseen when the original plans were approved.

During 2007, approximately 2,900 employees, of which 1,300 were direct employees and 1,600 were indirect employees, were separated from the Company. The $98 million used in 2007 reflects cash payments to these separated employees. The remaining accrual of $102 million was included in Accrued liabilities in the Company’s combined balance sheet at December 31, 2007.

 

14. Acquisitions, Intangible Assets and Goodwill

Acquisitions

The Company accounts for acquisitions using purchase accounting with the results of operations for each acquiree included in the Company’s combined financial statements for the period subsequent to the date of acquisition. The pro forma effects of these acquisitions on the Company’s combined financial statements were not significant individually or in the aggregate.

 

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The allocation of value to in-process research and development was determined using expected future cash flows discounted at average risk adjusted rates reflecting both technological and market risk as well as the time value of money. Historical pricing, margins and expense levels, where applicable, were used in the valuation of the in-process products. The in-process research and development acquired will have no alternative future uses if the products are not feasible. Charges related to the write-off of such items were not significant during the years ended December 31, 2009, 2008 or 2007.

The developmental products for the companies acquired have varying degrees of timing, technology, costs-to-complete and market risks throughout final development. If the products fail to become viable, the Company will unlikely be able to realize any value from the sale of incomplete technology to another party or through internal re-use. The risks of market acceptance for the products under development and potential reductions in projected revenues volumes and related profits in the event of delayed market availability for any of the products exist. Efforts to complete all developmental products continue and there are no known delays to forecasted plans except as disclosed.

The Company did not have any significant acquisitions during the years ended December 31, 2009 and 2008. The following is a summary of significant acquisitions during the year ended December 31, 2007 and the consideration paid:

 

       Quarter
Acquired
   Consideration, net    Form of
Consideration

Netopia, Inc.

   Q1    $ 183    Cash

Modulus Video, Inc.

   Q2      95    Cash

Terayon Communication Systems, Inc.

   Q3      137    Cash

Leapstone Systems, Inc.

   Q3      82    Cash

The following table summarizes net tangible and intangible assets acquired and the consideration paid for the acquisitions identified above:

 

Year Ended December 31    2007  

Tangible net assets, primarily deferred tax liabilities

   $ (69

Goodwill

     386   

Other intangible assets

     180   
        
     $ 497   

Netopia, Inc.

In February 2007, the Company acquired Netopia, Inc. (“Netopia”), a broadband equipment provider for DSL customers, which allows for phone, TV and fast Internet connections, for $183 million in net cash. The Company recorded $122 million in goodwill, none of which was expected to be deductible for tax purposes, and $100 million in identifiable intangible assets. Intangible assets are included in Other assets in the Company’s combined balance sheets. The intangible assets are being amortized over a period of seven years on a straight-line basis.

The results of operations of Netopia have been included in the Home segment in the Company’s combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Company’s combined financial statements were not significant.

Modulus Video, Inc.

In June 2007, the Company acquired Modulus Video, Inc. (“Modulus”), a provider of MPEG-4 Advanced Coding compression systems designed for delivery of high-value video content in Internet protocol (“IP”) set-top box devices for the digital video, broadcast and satellite marketplaces, for $95 million in net cash. The Company

 

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recorded $85 million in goodwill, none of which was expected to be deductible for tax purposes, and $13 million in identifiable intangible assets. Intangible assets are included in Other assets in the Company’s combined balance sheets. The intangible assets are being amortized over periods ranging from three to four years on a straight-line basis.

The results of operations of Modulus have been included in the Home segment in the Company’s combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Company’s combined financial statements were not significant.

Terayon Communication Systems, Inc.

In July 2007, the Company acquired Terayon Communication Systems, Inc. (“Terayon”), a provider of real-time digital video networking applications to cable, satellite and telecommunication service providers worldwide, for $137 million in net cash. The Company recorded $102 million in goodwill, none of which is expected to be deductible for tax purposes, and $52 million in identifiable intangible assets. Intangible assets are included in Other assets in the Company’s combined balance sheets. The intangible assets are being amortized over periods ranging from 4 to 6 years on a straight-line basis.

The results of operations of Terayon have been included in the Home segment in the Company’s combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Company’s combined financial statements were not significant.

Leapstone Systems, Inc.

In August 2007, the Company acquired Leapstone Systems, Inc. (“Leapstone”), a provider of intelligent multimedia service delivery and content management solutions to network operators, for $82 million in net cash. The Company recorded $77 million in goodwill, none of which was expected to be deductible for tax purposes, and $15 million in identifiable intangible assets. Intangible assets are included in Other assets in the Company’s combined balance sheets. The intangible assets are being amortized over periods ranging from four to five years on a straight-line basis.

The results of operations of Leapstone have been included in the Home segment in the Company’s combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Company’s combined financial statements were not significant.

Intangible Assets

Intangible assets and accumulated amortization, excluding goodwill, consists of the following:

 

     2009    2008
December 31    Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Intangible assets:

           

Completed technology

   $ 489    $ 374    $ 496    $ 333

Patents

     12      9      14      9

Customer-related

     49      29      49      21

Licensed technology

     105      105      105      105

Other intangibles

     37      37      38      38
                           
     $ 692    $ 554    $ 702    $ 506

Amortization expense on intangible assets, which is included within Other charges in the combined statements of operations, was $57 million, $64 million and $88 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, future amortization expense is estimated to be $49 million in 2010, $42 million in 2011, $25 million in 2012, $19 million in 2013 and $2 million in 2014.

 

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Intangible assets and accumulated amortization, excluding goodwill, by business segment were as follows:

 

     2009    2008
December 31    Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Mobile Devices

   $ 45    $ 45    $ 45    $ 45

Home

     647      509      657      461
                           
     $ 692    $ 554    $ 702    $ 506

During the year ended December 31, 2007, due to a change in software platform strategy, the Company recorded an impairment of intangible assets of $88 million, primarily related to completed technology and other intangible assets, in the Mobile Devices segment, to Other charges within the Company’s combined statements of operations.

Goodwill

The following table displays a roll forward of the carrying amount of goodwill by reportable segment from January 1, 2007 to December 31, 2009:

 

       Mobile Devices     Home     Total  

Balance as of January 1, 2007:

      

Aggregate goodwill acquired

   $ 69      $ 1,099      $ 1,168   

Accumulated impairment losses

            (73     (73

Goodwill, net of impairment losses

     69        1,026        1,095   

Goodwill acquired

            427        427   

Adjustments

     (50     2        (48

Balance as of December 31, 2007:

      

Aggregate goodwill acquired

     19        1,528        1,547   

Accumulated impairment losses

            (73     (73

Goodwill, net of impairment losses

     19        1,455        1,474   

Goodwill acquired

     15        12        27   

Impairment losses

     (55            (55

Adjustments

     21        (179     (158

Balance as of December 31, 2008:

      

Aggregate goodwill acquired

     55        1,361        1,416   

Accumulated impairment losses

     (55     (73     (128

Goodwill, net of impairment losses

            1,288        1,288   

Goodwill acquired

                     

Impairment losses

                     

Adjustments

            (3     (3

Balance as of December 31, 2009:

      

Aggregate goodwill acquired

     55        1,358        1,413   

Accumulated impairment losses

     (55     (73     (128

Goodwill, net of impairment losses

   $      $ 1,285      $ 1,285   

During the year ended December 31, 2008, the Company finalized its assessment of the Internal Revenue Code Section 382 Limitations (“IRC Section 382”) relating to the pre-acquisition tax loss carry forwards of its 2007 acquisitions. As a result of the IRC Section 382 studies, the Company recorded additional deferred tax assets and a corresponding reduction in goodwill, which is reflected in the adjustment line above.

 

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The Company conducts its annual assessment of goodwill for impairment in the fourth quarter of each year. The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. The Company has determined that the Mobile Devices segment meets the requirement of a reporting unit. For the Home segment, the Company has identified two reporting units, the Broadband Home Solutions reporting unit and the Access Networks reporting unit. The Company performs extensive valuation analyses, utilizing both income and market-based approaches, in its goodwill assessment process. The determination of the fair value of the reporting units and other assets and liabilities within the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rate, earnings before depreciation and amortization, and capital expenditures forecasts specific to each reporting unit. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.

The Company has weighted the valuation of its reporting units at 75% based on the income approach and 25% based on the market-based approach, consistent with prior periods. The Company believes that this weighting is appropriate since it is often difficult to find other appropriate market participants that are similar to our reporting units and it is the Company’s view that future discounted cash flows are more reflective of the value of the reporting units.

Based on the results of our 2007 and 2009 annual assessments of the recoverability of goodwill, the fair values of all reporting units exceeded their book values, indicating that there was no impairment of goodwill.

Following is a discussion of the goodwill impairment charge recorded for the year ended December 31, 2008.

Based on the results of Step One of the 2008 annual assessment of the recoverability goodwill, the fair values of the Broadband Home Solutions and the Access Networks reporting units exceeded their book values, indicating that there was no impairment of goodwill at these reporting units.

However, the fair value of the Mobile Devices reporting unit was below its book value, indicating a potential impairment of goodwill and the requirement to perform Step Two of the analysis for the reporting unit. The decline in the fair value of the Mobile Devices reporting unit below its book value was a result of the deteriorating macroeconomic environment, lower than expected revenues and cash flows as a result of the decision to consolidate platforms announced in the fourth quarter of 2008, and the uncertainty around the reporting unit’s future cash flow. For the year ended December 31, 2008, the Company determined that the goodwill relating to the Mobile Devices reporting unit was impaired, resulting in a charge of $55 million in the Mobile Devices reportable segment.

 

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15. Valuation and Qualifying Accounts

The following table presents the valuation and qualifying account activity for the years ended December 31, 2009, 2008 and 2007:

 

       Balance at
January 1
   Charged to
Earnings
   Used     Adjustments     Balance at
December 31

2009

            

Reorganization of Businesses

   $ 166    $ 234    $ (288   $ (40   $ 72

Allowance for Doubtful Accounts

     97      18      (41     (15     59

Inventory Reserves

     472      80      (34     16        534

Warranty Reserves

     215      209      (219     (49     156

Customer Reserves

     377      694      (699     (148     224

2008

            

Reorganization of Businesses

   $ 103    $ 260    $ (166   $ (31   $ 166

Allowance for Doubtful Accounts

     73      37      (7     (6     97

Inventory Reserves

     124      610      (283     21        472

Warranty Reserves

     325      369      (405     (74     215

Customer Reserves

     654      1,302      (1,239     (340     377

2007

            

Reorganization of Businesses

   $ 38    $ 201    $ (98   $ (38   $ 103

Allowance for Doubtful Accounts

     48      41      (2     (14     73

Inventory Reserves

     142      337      (329     (26     124

Warranty Reserves

     483      621      (627     (152     325

Customer Reserves

     959      2,403      (2,109     (599     654

Adjustments include foreign currency translation adjustments.

 

16. Quarterly and Other Financial Data (unaudited)

 

    2009     2008  
      1st     2nd     3rd     4th     1st     2nd     3rd     4th  

Operating Results

               

Net revenues

  $ 2,826      $ 2,842      $ 2,559      $ 2,823      $ 4,478      $ 4,738      $ 4,279      $ 3,604   

Costs of sales

    2,431        2,317        2,032        2,117        3,568        3,799        3,919        2,994   
       

Gross margin

    395        525        527        706        910        939        360        610   
       

Selling, general and administrative expenses

    383        361        332        410        624        565        545        484   

Research and development expenditures

    437        384        377        393        619        610        575        554   

Other charges

    117        49        23        98        58        22        43        160   
       

Operating loss

    (542     (269     (205     (195     (391     (258     (803     (588
       

Net loss attributable to Motorola Mobility Holdings, Inc.

  $ (614   $ (271   $ (253   $ (204   $ (306   $ (195   $ (537   $ (1,931
   

Operating results for the fourth quarter of 2008 include: (i) a $1.8 billion charge related to increase the U.S. deferred tax asset valuation allowance, as described in Note 6, “ Income Taxes ,” and (ii) a $55 million charge related to the impairment of goodwill, as described in Note 14, “ Acquisitions, Intangible Assets and Goodwill .”

 

17. Subsequent Event

In June 2010, Motorola, Inc. announced that it had entered into a settlement and license agreement with another company, which resolves all outstanding litigation between the two companies. The agreement includes provisions for an upfront payment of $175 million from the other company to Motorola, Inc., future royalties to be paid by the other company to Motorola, Inc. for the license of certain intellectual property, and the transfer of certain patents between the companies. As a result of this agreement and the valuation of the patents exchanged, the Company recorded a pre-tax gain of $228 million during the three months ended July 3, 2010, related to the settlement of the outstanding litigation between the parties.

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Condensed Combined Statements of Operations

(Unaudited)

 

     Six Months Ended  
(Dollars in million)    July 3,
2010
    July 4,
2009
 

Net revenues

   $ 5,089      $ 5,668   

Costs of sales

     3,830        4,748   
        

Gross margin

     1,259        920   
        

Selling, general and administrative expenses

     756        744   

Research and development expenditures

     739        821   

Other charges (income)

     (180 )       166   
        

Operating loss

     (56 )       (811
        

Other income (expense):

    

Interest expense, net

     (29 )       (17

Loss on sales of investments and businesses, net

            (32

Other

     (22 )       (19
        

Total other income (expense)

     (51 )       (68
        

Loss before income taxes

     (107 )       (879

Income tax expense

     27        2   
        

Net loss

     (134 )       (881
        

Less: Earnings (loss) attributable to non-controlling interests

     (2 )       4   
        

Net loss attributable to Motorola Mobility Holdings, Inc.

   $ (132 )     $ (885
   

See accompanying notes to condensed combined financial statements (unaudited).

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Condensed Combined Balance Sheets

 

(Dollars in millions)   

July 3,

2010

   

December 31,

2009

 
     (Unaudited)        
ASSETS     

Accounts receivable, net

   $ 1,281      $ 1,341   

Inventories, net

     629        688   

Deferred income taxes

     119        114   

Other current assets

     599        685   
        

Total current assets

     2,628        2,828   
        

Property, plant and equipment, net

     743        807   

Investments

     127        57   

Deferred income taxes

     50        48   

Goodwill

     1,292        1,285   

Other assets

     783        833   
        

Total assets

   $ 5,623      $ 5,858   
   
LIABILITIES AND BUSINESS EQUITY     

Accounts payable

   $ 1,323      $ 1,430   

Accrued liabilities

     1,803        1,862   
        

Total current liabilities

     3,126        3,292   
        

Other liabilities

     495        627   
Business equity:     

Owner’s net investment

     2,305        2,348   

Accumulated other comprehensive loss

     (328     (444
        

Total Motorola Mobility Holdings, Inc. equity

     1,977        1,904   

Non-controlling interests

     25        35   
        

Total business equity

     2,002        1,939   
        

Total liabilities and business equity

   $ 5,623      $ 5,858   
   

See accompanying notes to condensed combined financial statements (unaudited).

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Condensed Combined Statement of Business Equity

(Unaudited)

 

          Accumulated Other Comprehensive
Income (Loss)
                 
(Dollars in millions)   Owner’s
Net
Investment
    Fair Value
Adjustment
To Available
For Sale
Securities,
Net of Tax
  Foreign
Currency
Translation
Adjustments,
Net of Tax
    Retirement
Benefits
Adjustments,
Net of Tax
    Other Items,
Net of Tax
  Non-controlling
Interests
    Comprehensive
Earnings (Loss)
 

Balances at December 31, 2009

  $ 2,348      $ 14   $ (453   $ (5   $   —     $ 35     
         

Net loss

    (132             (2   $ (134

Net transfers from Motorola, Inc.

    89               

Net unrealized gain on securities
(net of tax of $0)

      1             1   

Dividends paid to noncontrolling interest on subsidiary common stock

              (8  

Net gain on derivative instruments

(net of tax of $0)

            1       1   

Foreign currency translation adjustments

(net of tax of $0)

        114              114   
       

Balances at July 3, 2010

  $ 2,305      $ 15   $ (339   $ (5   $ 1   $ 25      $ (18
   

 

See accompanying notes to condensed combined financial statements (unaudited).

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Condensed Combined Statements of Cash Flows

(Unaudited)

 

     Six Months Ended  
(Dollars in millions)   

July 3,

2010

   

July 4,

2009

 

Operating

    

Net loss attributable to Motorola Mobility Holdings, Inc.

   $ (132   $ (885

Less: Earnings (loss) attributable to non-controlling interests

     (2     4   
        

Net loss

     (134     (881

Adjustments to reconcile net loss to net cash provided by (used for) operating activities:

    

Depreciation and amortization

     111        111   

Non-cash other charges

     1        16   

Share-based compensation expense

     78        84   

Losses on sales of investments and business, net

            32   

Deferred income taxes

     (3     (36

Changes in assets and liabilities, net of effects of acquisitions and dispositions:

    

Accounts receivable

     51        (171

Inventories

     60        806   

Other current assets

     79        (19

Accounts payable and accrued liabilities

     (89     (1,323

Other assets and liabilities

     (97     41   
        

Net cash provided by (used for) operating activities

     57        (1,340
   

Investing

    

Acquisitions and investments, net

     (20     (13

Proceeds from (payments related to) sales of investments and business, net

     5        (16

Capital expenditures

     (42     (33

Proceeds from sales of property, plant and equipment

     1        3   

Proceeds from sales of short-term investments, net

            15   
        

Net cash used for investing activities

     (56     (44
   

Financing

    

Net transfers from (to) Motorola, Inc.

     (28     1,419   
        

Net cash provided by (used for) financing activities

     (28     1,419   
   

Effect of exchange rate changes on cash and cash equivalents

     27        (35
   

Net increase (decrease) in cash and cash equivalents

              

Cash and cash equivalents, beginning of period

              
   

Cash and cash equivalents, end of period

   $      $   
   

See accompanying notes to condensed combined financial statements (unaudited).

 

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Motorola Mobility Holdings, Inc. and Subsidiaries

Notes to Condensed Combined Financial Statements

(Dollars in millions, except as noted)

(Unaudited)

1. Background and Basis of Presentation

Background

Motorola Mobility Holdings, Inc. (“Motorola Mobility” or “the Company”) is a provider of innovative technologies, products and services that enable a broad range of mobile and wireline, digital communication, information and entertainment experiences. The Company’s integrated products and platforms deliver rich multimedia content, such as video, voice, messaging and Internet-based applications and services to multiple screens, such as mobile devices, televisions and personal computers. Our product portfolio primarily includes mobile devices, wireless accessories, set-top boxes and video distribution systems, and wireline broadband infrastructure products and associated customer premises equipment. We are focused on developing differentiated, innovative products to meet the expanding needs of consumers to communicate, to collaborate and to discover, consume, create and share content at a time and place of their choosing on multiple devices.

Motorola Mobility is currently comprised of two business units of Motorola, Inc. (“Motorola, Inc.”). On March 26, 2008, Motorola, Inc. announced its intention to separate into two independent, publicly traded companies. On February 11, 2010, Motorola, Inc. announced that Motorola, Inc. is targeting the first quarter of 2011 for the completion of its planned separation. Motorola, Inc. currently expects that, upon separation, the Company will be comprised of Motorola, Inc.’s Mobile Devices and Home businesses.

Motorola, Inc. will transfer to the Company and its subsidiaries substantially all of the assets and liabilities of the Company’s Mobile Devices and Home businesses prior to the completion of the distribution (the “Separation”). On the date of the distribution, Motorola, Inc. will distribute all of the shares of the Company’s stock that it then owns through a special dividend to the common stockholders of Motorola, Inc. (the “Distribution”). The Distribution is subject to certain conditions, including receipt of a favorable tax opinion and regulatory approvals.

Basis of Presentation

The condensed combined financial statements have been derived from the consolidated financial statements and accounting records of Motorola, Inc., principally representing the Mobile Devices and Home business segments, using the historical results of operations, and historical basis of assets and liabilities of the Company’s businesses. The historical financial statements include allocations of certain Motorola, Inc. general corporate expenses. Management believes the assumptions and methodologies underlying the allocation of general corporate expenses from Motorola, Inc. are reasonable. However, such expenses may not be indicative of the actual level of expense that would have been incurred by the Company if it had operated as an independent, publicly traded company or of the costs expected to be incurred in the future. As such, the condensed combined financial statements included herein may not necessarily reflect the Company’s results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented. Because a direct ownership relationship did not exist among all the various worldwide entities comprising the Company, Motorola, Inc.’s net investment in the Company is presented as Owner’s net investment, rather than stockholders’ equity, in the condensed combined balance sheets. Transactions between Mobile Devices and Home and other Motorola, Inc. operations have been identified in the combined statements as transactions between related parties (see Note 2, “ Relationship with Motorola, Inc. ”).

The accompanying condensed combined financial statements as of July 3, 2010 and for the six months ended July 3, 2010 and July 4, 2009 are unaudited, with the December 31, 2009 amounts included herein derived from the audited combined financial statements. In the opinion of management, these unaudited condensed

 

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combined financial statements include all adjustments (consisting of normal recurring adjustments and reclassifications) necessary to present fairly the financial position, results of operations and cash flows as of July 3, 2010 and for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These condensed combined financial statements should be read in conjunction with the audited combined financial statements and notes thereto as of and for the year ended December 31, 2009. The results of operations for the six months ended July 3, 2010 are not necessarily indicative of the operating results to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Recently Adopted New Accounting Guidance

Revenue Recognition

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which amended the accounting standards for revenue arrangements with multiple deliverables. The new guidance changes the criteria required to separate deliverables into separate units of accounting when they are sold in a bundled arrangement and requires an entity to allocate an arrangement’s consideration using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”). The new guidance also eliminates the use of the residual method to allocate an arrangement’s consideration.

In October 2009, the FASB also issued new guidance to remove from the scope of software revenue recognition guidance tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality.

The new accounting guidance is effective for revenue arrangements entered into or materially modified after June 15, 2010. The standards permit prospective or retrospective adoption as well as early adoption. Motorola, Inc. elected to early adopt this guidance at the beginning of the first quarter of 2010 on a prospective basis for applicable arrangements that were entered into or materially modified after January 1, 2010.

The Company’s material revenue streams are the result of a wide range of activities, from the delivery of stand-alone equipment to custom design and installation over a period of time to bundled sales of devices, equipment, software and services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility of the sales price is reasonably assured. In addition to these general revenue recognition criteria, the following specific revenue recognition policies are followed:

Products and Equipment —For product and equipment sales, revenue recognition generally occurs when products or equipment have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reasonably and reliably estimated. Recorded revenues are reduced by these allowances. The Company bases its estimates of these allowances on historical experience taking into consideration the type of products sold, the type of customer, and the specific type of transaction in each arrangement. Where customer incentives cannot be reasonably and reliably estimated, the Company recognizes revenue at the time the product sells through the distribution channel to the end customer.

 

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Services —Revenue for services is generally recognized ratably over the contract term as services are performed.

Software and Licenses —Revenue from pre-paid perpetual licenses is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Revenue from non-perpetual licenses or term licenses is recognized ratably over the period that the licensee uses the license. Revenue from software maintenance, technical support and unspecified upgrades is generally recognized over the period that these services are delivered.

Multiple-Element Arrangements —Arrangements with customers may include multiple deliverables, including any combination of products, equipment, services and software. These multiple element arrangements could also include an element accounted for as a long-term contract coupled with other products, equipment, services and software. For the Company’s multiple-element arrangements where at least one of the deliverables is not subject to existing software revenue recognition guidance, deliverables are separated into more than one unit of accounting when (i) the delivered element(s) have value to the customer on a stand-alone basis, and (ii) delivery of the undelivered element(s) is probable and substantially in the control of the Company. Based on the new accounting guidance adopted January 1, 2010, revenue is then allocated to each unit of accounting based on the relative selling price of each unit of accounting based first on VSOE if it exists, based next on TPE if VSOE does not exist, and, finally, if both VSOE and TPE do not exist, based on ESP.

 

   

VSOE—In many instances, products are sold separately in stand-alone arrangements as customers may support the products themselves or purchase support on a time and materials basis. Additionally, advanced services such as general consulting, network management or advisory projects are often sold in stand-alone engagements. Technical support services are also often sold separately through renewals of annual contracts. The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by the pricing rates of approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the median rate. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups, customer classification, and other environmental or marketing variables in determining VSOE.

 

   

TPE—VSOE generally exists only when the Company sells the deliverable separately. When VSOE does not exist, the Company attempts to determine TPE based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy for many of its products differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality sold by other companies cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE.

 

   

ESP—The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. When both VSOE and TPE do not exist, the Company determines ESP for the arrangement element by first collecting all reasonably available data points including sales, cost and margin analysis of the product, and other inputs based on the Company’s normal pricing practices. Second, the Company makes any reasonably required adjustments to the data based on market and Company-specific factors. Third, the Company stratifies the data points, when appropriate, based on customer, magnitude of the transaction and sales volume.

Once elements of an arrangement are separated into more than one unit of accounting, revenue is recognized for each separate unit of accounting based on the nature of the revenue as described above.

 

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The Company’s arrangements with multiple deliverables may also contain a stand-alone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverable(s) based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purpose of allocating the arrangement consideration.

The Company’s arrangements with multiple deliverables may be comprised entirely of deliverables that are all still subject to the existing software revenue recognition guidance. For these arrangements, revenue is allocated to the deliverables based on VSOE. Should VSOE not exist for the undelivered software element, revenue is deferred until either the undelivered element is delivered or VSOE is established for the element, whichever occurs first. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement consideration is allocated to the delivered elements and is recognized as revenue.

Net revenues as reported and pro forma net revenues that would have been reported during the six months ended July 3, 2010 if the transactions entered into or materially modified after January 1, 2010 were still subject to the previous accounting guidance are shown in the following table:

 

Six Months Ended July 3, 2010    As Reported    Pro Forma Basis

Net revenues

   $ 5,089    $ 4,258
 

For the six months ended July 3, 2010, the difference between the amount of revenue recorded under the new accounting guidance for revenue recognition as compared to the pro forma amount that would have been recorded under the prior accounting guidance relates primarily to sales of smartphones by the Company’s Mobile Devices segment. The individual impact to the Company’s other business was not material. The pro forma basis revenue reflects the recognition of revenue related to smartphones that contain a service element and unspecified software upgrade rights under a subscription-based model under which revenue is recognized ratably over the estimated expected life of the smartphone as the Company was unable to determine VSOE for the undelivered element in the transaction. The as reported revenue reflects the allocation of revenue related to smartphones shipped under arrangements executed during the six months ended July 3, 2010 using ESP for the device, the service and the unspecified software upgrade rights, resulting in a lower deferral of revenue than under prior accounting guidance. Both the as reported revenue and the pro forma basis revenue contain the revenue recognized under the subscription-based revenue recognition model related to smartphones that contain a service element and unspecified software that shipped under arrangements executed during the year ended December 31, 2009.

Based on the Company’s current sales strategies, the newly adopted accounting guidance for revenue recognition is not expected to have a significant effect on the timing and pattern of revenue recognition for sales in periods after the initial adoption when applied to multiple-element arrangements, except for the continued impact on smartphone revenue recognition.

Sales and Use Taxes —The Company records taxes imposed on revenue-producing transactions, including sales, use, value added and excise taxes, on a net basis with such taxes excluded from revenue.

Other Recently Adopted Guidance

In January 2010, FASB issued new guidance related to fair value disclosure requirements. Under the new guidance, companies will be required to make additional disclosures concerning significant transfers of amounts

 

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between the Level 1 and Level 2 fair value disclosures, as well as further disaggregation of the types of activity that were previously disclosed in the roll forward of Level 3 fair value disclosures. Further, the guidance requires a lower level of grouping from major categories of assets and liabilities to classes of assets and liabilities. This guidance is effective for interim periods beginning after December 15, 2009. The Company has adopted this guidance effective January 1, 2010. The disclosures required by this adoption are included in Note 8, “ Fair Value Measurements .”

In June 2009, the FASB issued new authoritative guidance amending the accounting for transfers of financial assets. Key provisions of this amended guidance include: (i) the removal of the concept of qualifying special purpose entities, (ii) the introduction of the concept of a participating interest, in circumstances in which a portion of a financial asset has been transferred, and (iii) the requirement that to qualify for sale accounting the transferor must evaluate whether it maintains effective control over transferred financial assets either directly or indirectly. Additionally, this guidance requires enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether consolidation is required for variable interest entities (“VIEs”). The model for determining whether an enterprise has a controlling financial interest and is the primary beneficiary of a VIE has changed significantly under the new guidance. Previously, variable interest holders had to determine whether they had a controlling financial interest in a VIE based on a quantitative analysis of the expected gains and/or losses of the entity. In contrast, the new guidance requires an enterprise with a variable interest in a VIE to qualitatively assess whether it has a controlling financial interest in the entity and, if so, whether it is the primary beneficiary. Furthermore, this guidance requires that companies continually evaluate VIEs for consolidation, rather than assessing VIEs based only upon the occurrence of triggering events. This guidance also requires enhanced disclosures about how a company’s involvement with a VIE affects its financial statements and exposure to risks. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Company’s combined financial statements.

In May 2009, the FASB issued guidance establishing general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance, among other things, sets forth the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures an entity should make about events or transactions that occurred after the balance sheet date. In February 2010, new guidance was issued which removes the requirement for public companies to disclose the date through which subsequent events were reviewed. This guidance was effective upon issuance and has been adopted by the Company. The Company has evaluated subsequent events after July 3, 2010, through the date the financial statements were issued.

2. Relationship with Motorola, Inc.

The Company designs, manufactures, sells and services wireless mobile devices with integrated software and accessory products to other Motorola, Inc. businesses. The Company’s net revenues generated from sales to other Motorola, Inc. businesses included in Net revenues in the Company’s condensed combined statement of operations were $15 million and $24 million for the six months ended July 3, 2010 and July 4, 2009, respectively. Accounts receivable from sales to other Motorola, Inc. businesses were $1 million and $6 million as of July 3, 2010 and December 31, 2009, respectively, and are included in Accounts receivable in the Company’s condensed combined balance sheets. Accounts payable from the purchases from other Motorola, Inc. businesses were $2 million and $1 million as of July 3, 2010 and December 31, 2009, respectively, and are included in Accounts payable in the Company’s condensed combined balance sheets.

 

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The condensed combined statements of operations include expense allocations for certain corporate functions historically provided by Motorola, Inc., including leveraged services expenses, employee benefits and incentives, basic research and interest expense (income). These allocations were made on a specifically identifiable basis, using relative percentages based on the Company’s net revenues, payroll and property, plant and equipment/inventory, as compared to the relative Motorola, Inc. amounts, or other reasonable methods. The following table presents the expense allocations reflected in the Company’s condensed combined statements of operations:

 

Six Months Ended   

July 3,

2010

  

July 4,

2009

Leveraged services expenses

   $ 267    $ 313

Employee benefits and incentives

     208      170

Basic research

     5      6

Interest expense, net

     26      20
      
     $ 506    $ 509

The Company and Motorola, Inc. consider these leveraged services expenses, employee benefits and incentives, basic research, and interest expense allocations to be a reasonable reflection of the utilization of services provided.

Motorola, Inc. primarily uses a worldwide centralized approach to cash management and the financing of its operations with all related activity between the Company and Motorola, Inc. reflected as equity transactions in Owner’s net investment in the Company’s condensed combined balance sheets. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Company’s businesses which are transferred to Motorola, Inc. on a regular basis, (ii) cash borrowings from Motorola, Inc. used to fund operations, capital expenditures, or acquisitions, (iii) charges (benefits) for income taxes, and (iv) allocations of Motorola Inc.’s corporate expenses identified above.

Motorola, Inc. owns many of its major facilities and identifies a landlord for each facility based on the primary resident of the facility. At July 3, 2010 and December 31, 2009, $57 million and $163 million, respectively, were allocated to the Company’s condensed combined balance sheets for certain facility assets where the Company occupies space within the facility, but is not the landlord of the facility. The allocation is based on the estimated square footage occupied by the Company’s employees as a percentage of the total square footage of the facility. The decrease in the allocated amount at July 3, 2010 compared to December 31, 2009 was due to the transfer of certain facility assets from Motorola, Inc. to the Company during the second quarter of 2010 in preparation for separation. The transfer of these assets eliminated the need for the related allocation.

When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Company’s excess funds in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Company’s operations and Motorola, Inc. For purposes of the condensed combined statements of cash flows, the Company reflects intercompany activity as a financing activity.

In conjunction with the Separation, as of July 31, 2010 the Company entered into a series of agreements with Motorola, Inc. which are intended to govern the relationship between the Company and Motorola, Inc. going forward. These agreements include a Master Separation and Distribution Agreement, intellectual property agreements, a trademark license agreement, a tax sharing agreement and an employee matters agreement. The Company also intends to enter into other related agreements with Motorola, Inc., including transition services agreements.

The terms of the Master Separation and Distribution Agreement with Motorola, Inc., provide that the net amount due from the Company to Motorola, Inc. at the closing date of the Separation will remain classified as equity forming a part of the continuing equity of the Company. Amounts due from/to Motorola, Inc. arising from transactions subsequent to the Separation will be recorded within due to/from Motorola, Inc., net as these amounts will be settled in cash.

 

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The following is a reconciliation of the amount presented as Net transfers from Motorola, Inc. on the statement of business equity to the corresponding amount presented on the statement of cash flows:

 

       Six Months Ended
July 3, 2010
 

Net transfers from Motorola, Inc. per statement of business equity

   $ 89   

Allocation of stock compensation expense from Motorola, Inc.

     (78

Non-cash transfers of assets and liabilities from Motorola, Inc., net*

     (39
        

Net transfers to Motorola, Inc. per statement of cash flows

   $ (28

 

* Non-cash transfers consists primarily of changes in allocated income tax balances and other Corporate assets and liabilities.

3. Other Financial Data

Statements of Operations Information

Other Charges (Income)

Other charges (income) included in Operating loss consist of the following:

 

Six Months Ended

  

July 3,

2010

   

July 4,

2009

Other charges (income):

    

Amortization of intangible assets

   $ 27      $ 28

Reorganization of businesses

     21        138

Legal settlement

     (228    
      
     $ (180   $ 166

In June 2010, Motorola, Inc. announced that it had entered into a settlement and license agreement with another company, which resolves all outstanding litigation between the two companies. The agreement includes provisions for an upfront payment of $175 million from the other company to Motorola, Inc., future royalties to be paid by the other company to Motorola, Inc. for the license of certain intellectual property, and the transfer of certain patents between the companies. As a result of this agreement and the valuation of the patents exchanged, the Company recorded a pre-tax gain of $228 million during the six months ended July 3, 2010, related to the settlement of the outstanding litigation between the parties.

Other Income (Expense)

Interest expense, net, and Other, net, both included in Other income (expense), consist of the following:

 

Six Months Ended   

July 3,

2010

   

July 4,

2009

 

Interest expense, net:

    

Interest expense

   $ (41   $ (36

Interest income

     12        19   
        
   $ (29   $ (17
        

Other:

    

Foreign currency loss

     (19     (26

Investment impairments

     (8     (1

Other

     5        8   
        
   $  (22   $   (19
   

 

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Balance Sheet Information

Accounts Receivable

Accounts receivable, net, consists of the following:

 

       July 3,
2010
    December 31,
2009
 

Accounts receivable

   $  1,331      $  1,400   

Less allowance for doubtful accounts

     (50     (59
        
   $  1,281      $  1,341   
   

Inventories

Inventories, net, consists of the following:

 

       July 3,
2010
    December 31,
2009
 

Work-in-process and production materials

   $     705      $     680   

Finished goods

     376        542   
        
     1,081        1,222   

Less inventory reserves

     (452     (534
        
   $     629      $     688   
   

Other Current Assets

Other current assets consists of the following:

 

       July 3,
2010
   December 31,
2009

Contractor receivables

   $     225    $     308

Deferred costs

     188      164

Tax refunds receivable

     74      87

Royalty license arrangements

     49      48

Other

     63      78
      
   $     599    $     685
 

Property, Plant and Equipment

Property, plant and equipment, net, consists of the following:

 

       July 3,
2010
    December 31,
2009
 

Land

   $       44      $       37   

Buildings

     661        627   

Machinery and equipment

     1,556        1,615   
        
     2,261        2,279   

Less accumulated depreciation

     (1,518     (1,472
        
   $     743      $     807   
   

 

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Depreciation expense for the six months ended July 3, 2010 and July 4, 2009 was $84 million and $83 million, respectively.

Investments

Investments consists of the following:

 

     Recorded
Value
   Less     
July 3, 2010       Unrealized
Gains
   Unrealized
Losses
   Cost
Basis

Available-for-sale securities:

           

Common stock and equivalents

   $       22    $       15    $       —    $         7

Other securities, at cost

     78                78

Equity method investments

     27                27
      
   $     127    $       15    $       —    $     112
 
     Recorded
Value
   Less     
December 31, 2009       Unrealized
Gains
   Unrealized
Losses
   Cost
Basis

Available-for-sale securities:

           

Common stock and equivalents

   $       21    $       14    $       —    $         7

Other securities, at cost

     10                10

Equity method investments

     26                26
      
   $       57    $       14    $       —    $       43
 

The increase in other securities, at cost within Investments at July 3, 2010 compared to December 31, 2009 was due to the transfer of certain investments from Motorola, Inc. to the Company during the second quarter of 2010 in preparation for the separation.

The Company recorded investment impairment charges of $8 million and $1 million for the six months ended July 3, 2010 and July 4, 2009, respectively, representing other-than-temporary declines in the value of the Company’s available-for-sale investment portfolio. Investment impairment charges are included in Other, net, within Other income (expense) in the Company’s condensed combined statements of operations.

Other Assets

Other assets consists of the following:

 

       July 3,
2010
   December 31,
2009

Royalty license arrangements

   $     256    $     250

Deferred costs

     239      285

Intangible assets, net of accumulated amortization of $581 and $554

     172      138

Value-added tax refunds receivable

     98      118

Other

     18      42
      
   $     783    $     833
 

 

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Accrued Liabilities

Accrued liabilities consists of the following:

 

       July 3,
2010
   December 31,
2009

Deferred revenue

   $     365    $     303

Customer reserves

     214      224

Contractor payables

     190      226

Warranty reserves

     169      156

Compensation

     129      169

Tax liabilities

     121      115

Royalty license arrangements

     114      133

Other

     501      536
      
   $  1,803    $  1,862
 

Other Liabilities

Other liabilities consists of the following:

 

       July 3,
2010
   December 31,
2009

Deferred revenue

   $     276    $     327

Deferred income taxes

     77      74

Capital lease obligation

     55      56

Unrecognized tax benefits

     17      35

Other

     70      135
      
   $     495    $     627
 

4. Risk Management

Derivative Financial Instruments

Foreign Currency Risk

The Company uses financial instruments to reduce its overall exposure to the effects of currency fluctuations on cash flows. All hedge transactions are executed by Motorola, Inc. Historically, the Company had its exposures managed by Motorola, Inc., and Motorola, Inc.’s program viewed the consolidation exposures of all of the businesses of Motorola, Inc. The Company’s policy prohibits speculation in financial instruments for profit on exchange rate price fluctuations, trading in currencies for which there are no underlying exposures, or entering into transactions for any currency to intentionally increase the underlying exposure. Instruments that are designated as part of a hedging relationship must be effective at reducing the risk associated with the exposure being hedged and are designated as part of a hedging relationship at the inception of the contract. Accordingly, changes in the market values of hedge instruments must be highly correlated with changes in market values of the underlying hedged items both at the inception of the hedge and over the life of the hedge contract.

The Company’s strategy related to foreign exchange exposure management is to offset the gains or losses on the financial instruments against losses or gains on the underlying operational cash flows or investments based on the operating business units’ assessment of risk. The Company enters into derivative contracts for some of the Company’s non-functional currency receivables and payables, which are primarily denominated in major currencies that can be traded on open markets. The Company typically uses forward contracts and options to hedge these currency exposures. In addition, the Company enters into derivative contracts for some firm commitments and some forecasted transactions, which are designated as part of a hedging relationship if it is

 

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determined that the transaction qualifies for hedge accounting under the provisions of the authoritative accounting guidance for derivative instruments and hedging activities. A portion of the Company’s exposure is from currencies that are not traded in liquid markets and these are addressed, to the extent reasonably possible, by managing net asset positions, product pricing and component sourcing.

At July 3, 2010 and December 31, 2009, the Company had outstanding foreign exchange contracts totaling $438 million and $622 million, respectively. Management believes that these financial instruments should not subject the Company to undue risk due to foreign exchange movements because gains and losses on these contracts should generally offset losses and gains on the underlying assets, liabilities and transactions, except for the ineffective portion of the instruments, which are charged to Other, net within Other income (expense) in the Company’s condensed combined statements of operations.

The following table shows the five largest net notional amounts of the positions to buy or sell foreign currency as of July 3, 2010 and the corresponding positions as of December 31, 2009:

 

     Notional Amount  
Net Buy (Sell) by Currency   

July 3,

2010

   

December 31,

2009

 

Brazilian Real

   $ (220   $ (348

Euro

     (47     (9

Taiwan Dollar

     40        31   

Chinese Renminbi

     26        63   

Mexican Peso

     (25     (21
   

Counterparty Risk

The use of derivative financial instruments exposes the Company to counterparty credit risk in the event of nonperformance by counterparties. However, the risk is limited to the fair value of the instruments when the derivative is in an asset position. Motorola, Inc. actively monitors its exposure to credit risk. At the present time, all of the counterparties have investment grade credit ratings. The Company is not exposed to material credit risk with any single counterparty.

The following table summarizes the effect of derivative instruments in our condensed combined statements of operations for the six months ended July 3, 2010 and July 4, 2009:

 

     Six Months Ended     
Losses on Derivative Instrument   

July 3,

2010

   July 4,
2009
   Statement of
Operations Location

Derivatives designated as hedging instruments:

        

Foreign exchange contracts

   $    $    Foreign currency
income (expense)

Derivatives not designated as hedging instruments:

        

Foreign exchange contracts

     (17)      (44)    Other income
(expense)
                

Total derivatives not designated as hedging instruments

   $ (17)    $ (44)   
 

 

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The following table summarizes the gains and losses recognized in the condensed combined financial statements for the six months ended July 3, 2010 and July 4, 2009:

 

     Six Months Ended      
Foreign Exchange Contracts    July 3,
2010
   July 4,
2009
   

Financial Statement

Location

Derivatives in cash flow hedging relationships:

       

Gain (loss) recognized in Accumulated other comprehensive loss (effective portion)

   $ 2    $ (1   Accumulated other comprehensive income
(loss)

Gain reclassified from Accumulated other comprehensive loss into Net earnings (loss) (effective portion)

     1           Cost of sales/Revenues

Gain (loss) recognized in Net earnings (loss) on derivative (ineffective portion and amount excluded from effectiveness testing)

               Other income (expense)

Fair Value of Financial Instruments

The Company’s financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Company’s available-for-sale investment portfolios and derivative financial instruments are recorded in the Company’s condensed combined balance sheets at fair value. All other financial instruments are carried at cost, which is not materially different than the instruments’ fair values.

5. Income Taxes

At July 3, 2010 and December 31, 2009, the Company had valuation allowances of $3.0 billion and $2.9 billion, respectively, including $266 million and $255 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. During the six months ended July 3, 2010, the U.S. valuation allowance increased by $130 million, offset by an increase in deferred tax assets primarily relating to U.S. losses incurred and the recognition of previously unrecognized tax benefits.

The Company had unrecognized tax benefits of $140 million and $236 million, at July 3, 2010 and December 31, 2009, respectively, of which approximately $100 million if recognized would affect the effective tax rate, net of resulting changes in valuation allowances. During the six months ended July 3, 2010, the Company reduced its unrecognized tax benefits by $100 million for settlements with tax authorities and facts that now indicate the extent to which certain tax positions are more-likely-than not of being sustained, of which $10 million was recognized as a tax benefit net of valuation allowance adjustments, and $25 million as a reduction of tax carry forwards.

Based on the potential outcome of the Company’s global tax examinations, the expiration of the statute of limitations for specific jurisdictions, or the continued ability to satisfy tax incentive obligations, it is reasonably possible that the unrecognized tax benefits will change within the next 12 months. The associated net tax impact on the effective tax rate, exclusive of valuation allowance changes, is estimated to be in the range of a $50 million tax charge to a $70 million tax benefit, with cash payments in the range of $0 to $100 million.

The Company’s U.S. operations are included in Motorola, Inc.’s U.S. Federal consolidated income tax returns which are examined by the Internal Revenue Service (“IRS”). During the first half of 2010, the IRS concluded its audit of Motorola, Inc.’s 2004 through 2007 tax years. The Company also has audits pending in several tax jurisdictions as part of Motorola, Inc.’s operations. Although the final resolution of the Company’s global tax disputes is uncertain, based on current information, in the opinion of the Company’s management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s combined financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

 

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Pursuant to the provisions of the tax sharing agreement, for periods prior to the Separation, Motorola, Inc. will assume U.S. federal, state and non-U.S. income tax liabilities associated with returns that include Motorola, Inc. and its subsidiaries, including the Company and its subsidiaries, when consolidated, combined, unitary or other joint income tax returns are filed. The Company will remain responsible for any U.S. federal, state and foreign income tax liabilities for returns filed that include only the Company and its subsidiaries.

6. Retirement Benefits

Defined Benefit Pension Plans

During the six months ended July 3, 2010 and July 4, 2009, net periodic pension costs for the noncontributory pension (“Regular Pension Plan”), the noncontributory Supplemental Officers’ Plan (“Officers’ Plan”), the noncontributory Motorola Supplemental Pension Plan (“MSPP”) and non-U.S. plans of $29 million and $14 million, respectively, were allocated to the Company and are included in its condensed combined statements of operations.

Postretirement Health Care Benefits Plan

During the six months ended July 3, 2010 and July 4, 2009, net postretirement health care expenses for Motorola, Inc.’s Postretirement Health Care Benefits Plan of $4 million and $3 million, respectively, were allocated in each period to the Company and are included in its condensed combined statements of operations.

7. Share-Based Compensation Plans

Compensation expense for Motorola, Inc.’s employee stock options, stock appreciation rights (“SARs”), employee stock purchase plans, restricted stock and restricted stock units (“RSUs”) related to the Company’s employees, as well as allocated compensation expense from Motorola, Inc.’s corporate functions, was as follows:

 

Six Months Ended   July 3,
2010
  July 4,
2009

Share-based compensation expense included in:

   

Costs of sales

      $  7       $  8

Selling, general and administrative expenses

  46   49

Research and development expenditures

  25   27
   

Share-based compensation expense included in Operating earnings (loss)

  78   84

Tax benefit

   
   

Share-based compensation expense, net of tax

  $78   $84
 

8. Fair Value Measurements

Motorola, Inc. adopted new accounting guidance on measuring fair value on January 1, 2008 for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. This does not change the accounting for those instruments that were, under previous U.S. generally accepted accounting principles (“GAAP”), accounted for at cost or contract value. The Company has no non-financial assets and liabilities that are required to be measured at fair value on a recurring basis as of July 3, 2010.

The guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about current market conditions. The prescribed fair value hierarchy and related valuation methodologies are as follows:

Level 1 —Quoted prices for identical instruments in active markets.

 

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Level 2 —Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3 —Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The fair values of the Company’s financial assets by level in the fair value hierarchy as of July 3, 2010 and December 31, 2009, were as follows:

 

       Level 1    Level 2    Level 3    Total

Common stock and equivalents:

           

July 3, 2010

   $ 22    $    $    $ 22

December 31, 2009

     21                21

Valuation Methodologies

Level 1 —Quoted market prices in active markets are available for investments in common stock and equivalents. As such, these investments are classified within Level 1.

9. Sales of Receivables

Motorola, Inc. sells accounts receivable generated from its business units to third-parties in transactions that qualify as “true-sales.” The Company’s businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc.

For the six months ended July 3, 2010 and July 4, 2009, total accounts receivable sold by the Company were $230 million and $407 million, respectively. As of July 3, 2010 and December 31, 2009, there were $24 million and $71 million, respectively, of receivables outstanding under these programs for which Motorola, Inc. retained servicing obligations.

10. Commitments and Contingencies

Legal

The Company is involved in various lawsuits, claims and investigations arising in the normal course of business and relating to the Company’s business. The Company will assume the defense and/or liability for such cases from Motorola, Inc. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Company’s combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.

Indemnifications

In addition, the Company may provide indemnifications for losses that result from the breach of general warranties contained in certain commercial and intellectual property agreements. Historically, the Company has not made significant payments under these indemnifications. However, there is an increasing risk in relation to patent indemnities given the current legal climate.

In indemnification cases, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements for

 

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indemnification based on breach of representations and warranties are generally limited in terms of duration, and for amounts not in excess of the contract value, except with respect to certain intellectual property claims. In some instances, the Company may have recourse against third-parties for certain payments made by the Company.

The Company is also a party to a variety of agreements pursuant to which it is obligated to indemnify the other party with respect to certain matters. Some of these obligations arise as a result of divestitures of the Company’s assets or businesses and require the Company to hold the other party harmless against losses arising from the settlement of pending obligations. The total amount of indemnification under these types of divestiture provisions is $6 million, of which the amount accrued by the Company as of July 3, 2010 for potential claims under these provisions was de minimis .

11. Segment Information

Summarized below are the Company’s segment net revenues and operating earnings (loss) for the six months ended July 3, 2010 and July 4, 2009:

 

     Net Revenues    Operating Earnings (Loss)  
Six Months Ended    July 3,
2010
  

July 4,

2009

  

July 3,

2010

   

July 4,

2009

 

Mobile Devices

   $ 3,365    $  3,630    $ (105   $ (832

Home

     1,724      2,038      49        21   
        
   $ 5,089    $ 5,668     
           

Operating loss

           (56     (811

Total other income (expense)

           (51     (68
              

Loss before income taxes

         $ (107   $ (879
   

12. Reorganization of Businesses

Motorola, Inc. maintains a formal Involuntary Severance Plan (“Severance Plan”), which permits the Company to offer eligible employees severance benefits based on years of service and employment grade level in the event that employment is involuntarily terminated as a result of a reduction-in-force or restructuring. Effective August 1, 2009, the Company amended and restated the Severance Plan. Under the amended Severance Plan, severance benefits will be paid in bi-weekly installments to impacted employees rather than in lump sum payments. The Company recognizes termination benefits based on formulas per the Severance Plan at the point in time that future settlement is probable and can be reasonably estimated based on estimates prepared at the time a restructuring plan is approved by management. Exit costs consist of future minimum lease payments on vacated facilities and other contractual terminations. At each reporting date, the Company evaluates its accruals for employee separation and exit costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer needed because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. In these cases, the Company reverses accruals through the condensed combined statements of operations where the original charges were recorded when it is determined they are no longer needed.

2010 Charges

During the six months ended July 3, 2010, the Company continued to implement various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans. The employees affected were located in all regions.

 

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During the six months ended July 3, 2010, the Company recorded net reorganization of business charges of $27 million, including $6 million of charges in Costs of sales and $21 million of charges in Other charges in the Company’s condensed combined statements of operations. Included in the aggregate $27 million are charges of $36 million for employee separation costs, partially offset by $9 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

July 3, 2010    Six Months
Ended

Mobile Devices

   $ 17

Home

     10
      
   $ 27
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2010 to July 3, 2010:

 

      

Accruals at

January 1,

2010

  

Additional

Charges

   Adjustments   

Amount

Used

  

Accruals at

July 3,

2010

Exit costs

   $ 39    $    $ (3)    $ (15)    $ 21

Employee separation costs

     33      36      (8)      (35)      26
      
   $ 72    $ 36    $ (11)    $ (50)    $ 47
 

Exit Costs

At January 1, 2010, the Company had an accrual of $39 million for exit costs attributable to lease terminations. There were no material additional charges related to exit costs during the six months ended July 3, 2010. The adjustments of $3 million reflect: (i) $2 million of reversals of accruals no longer needed, and (ii) $1 million of foreign currency translation adjustments. The $15 million used reflects cash payments. The remaining accrual of $21 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 3, 2010, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2010, the Company had an accrual of $33 million for employee separation costs, representing the severance costs for approximately 400 employees. The additional charges of $36 million during the six months ended July 3, 2010 represent severance costs for approximately an additional 1,000 employees, of which 400 are direct employees and 600 are indirect employees.

The adjustments of $8 million reflect: (i) $7 million of reversals of accruals no longer needed and (ii) $1 million of foreign currency translation adjustments.

During the six months ended July 3, 2010, approximately 700 employees, of which 200 were direct employees and 500 were indirect employees, were separated from the Company. The $35 million used reflects cash payments to these separated employees. The remaining accrual of $26 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 3, 2010, is expected to be paid, generally, within one year to: (i) severed employees who have already begun to receive payments, and (ii) approximately 700 employees to be separated in 2010.

2009 Charges

During the six months ended July 4, 2009, the Company implemented various productivity improvement plans aimed at achieving long-term, sustainable profitability by driving efficiencies and reducing operating costs. Both of the Company’s business segments were impacted by these plans, with the majority of the impact in the Mobile Devices segment. The employees affected were located in all regions.

 

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During the six months ended July 4, 2009, the Company recorded net reorganization of business charges of $176 million, including $38 million of charges in Costs of sales and $138 million of charges in Other charges in the Company’s condensed combined statements of operations. Included in the aggregate $176 million are charges of $162 million for employee separation costs, $22 million for exit costs and $18 million for fixed asset impairment charges, partially offset by $26 million of reversals for accruals no longer needed.

The following table displays the net charges incurred by business segment:

 

July 4, 2009    Six Months
Ended

Mobile Devices

   $ 160

Home

     16
      
   $ 176
 

The following table displays a roll forward of the reorganization of businesses accruals established for exit costs and employee separation costs from January 1, 2009 to July 4, 2009:

 

      

Accruals at

January 1,

2009

  

Additional

Charges

   Adjustments   

Amount

Used

  

Accruals at

July 4,

2009

Exit costs

   $ 63    $ 22    $ (6)    $ (36)    $ 43

Employee separation costs

     103      162      (18)      (178)      69
      
   $ 166    $ 184    $ (24)    $ (214)    $ 112
 

Exit Costs

At January 1, 2009, the Company had an accrual of $63 million for exit costs attributable to lease terminations. The additional charges of $22 million during the six months ended July 4, 2009 are primarily related to the exit of leased facilities and contractual termination costs, both within the Mobile Devices segment. The adjustments of $6 million reflect $7 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $36 million used reflects cash payments. The remaining accrual of $43 million, which is included in Accrued liabilities in the Company’s condensed combined balance sheet at July 4, 2009, represents future cash payments, primarily for lease termination obligations that are expected to be paid over a number of years.

Employee Separation Costs

At January 1, 2009, the Company had an accrual of $103 million for employee separation costs, representing the severance costs for approximately 1,600 employees. The additional charges of $162 million during the six months ended July 4, 2009 represent severance costs for approximately an additional 4,700 employees, of which 1,700 are direct employees and 3,000 are indirect employees.

The adjustments of $18 million reflect $19 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments.

During the six months ended July 4, 2009, approximately 5,800 employees, of which 2,600 were direct employees and 3,200 were indirect employees, were separated from the Company. The $178 million used reflects cash payments to these separated employees. The remaining accrual of $69 million, which was included in Accrued liabilities in the Company’s condensed combined balance sheet at July 4, 2009, was expected to be paid to approximately 400 separated employees.

 

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13. Intangible Assets and Goodwill

Intangible Assets

Intangible assets and accumulated amortization, excluding goodwill, consists of the following:

 

     July 3, 2010    December 31, 2009
       Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Intangible assets:

           

Completed technology

   $ 493    $ 396    $ 489    $ 374

Patents

     64      9      12      9

Customer-related

     50      33      49      29

Licensed technology

     105      105      105      105

Other intangibles

     41      38      37      37
      
   $ 753    $ 581    $ 692    $ 554
 

Amortization expense on intangible assets, which is included within Other charges in the condensed combined statements of operations, was $27 million and $28 million for the six months ended July 3, 2010 and July 4, 2009, respectively. As of July 3, 2010, annual amortization expense is estimated to be $54 million in 2010, $50 million in 2011, $32 million in 2012, $25 million in 2013 and $8 million in 2014.

Intangible assets and accumulated amortization, excluding goodwill, by business segment were as follows:

 

     July 3, 2010    December 31, 2009
       Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Mobile Devices

   $ 99    $ 45    $ 45    $ 45

Home

     654      536      647      509
      
   $ 753    $ 581    $ 692    $ 554
 

Goodwill

The following table displays a roll forward of the carrying amount of goodwill by reportable segment from January 1, 2010 to July 3, 2010:

 

       Mobile
Devices
    Home     Total  

Balance as of January 1, 2010:

      

Aggregate goodwill acquired

   $ 55      $ 1,358      $ 1,413   

Accumulated impairment losses

     (55     (73     (128
   

Goodwill, net of impairment losses

            1,285        1,285   
   

Goodwill acquired

            7        7   
   

Balance as of July 3, 2010:

      

Aggregate goodwill acquired

     55        1,365        1,420   

Accumulated impairment losses

     (55     (73     (128
   

Goodwill, net of impairment losses

   $      $ 1,292      $ 1,292   
   

 

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The Company tests the recorded amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year. Goodwill is tested more frequently if indicators of impairment exist. The Company continually assesses whether any indicators of impairment exist, which requires a significant amount of judgment. Such indicators may include: a sustained significant decline in Motorola, Inc.’s share price and market capitalization; a decline in our expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; or slower growth rates, among others. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our condensed combined financial statements.

The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a “component”). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components shall be aggregated and deemed a single reporting unit. An operating segment shall be deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component. As such, the Company has determined that the Mobile Devices segment meets the requirement of a reporting unit. For the Home segment, the Company has identified two reporting units, the Broadband Home Solutions reporting unit and the Access Networks reporting unit.

The Company determined that there was an indicator of impairment at its Access Networks reporting unit due to changes in the forecasted financial performance at the reporting unit. As a result, a goodwill impairment test was performed for the Access Networks reporting unit during the first quarter of 2010. No indicators of potential impairment were identified for the Broadband Home Solutions reporting unit and, accordingly, the goodwill recorded at that reporting unit was not tested for impairment. There is no goodwill recorded at the Mobile Devices reporting unit as a result of the write-off of the remaining goodwill in 2008.

The goodwill impairment test is a two step analysis. In Step One, the fair value of each reporting unit is compared to its book value. Management must apply judgment in determining the estimated fair value of these reporting units. Fair value is determined using a combination of present value techniques and quoted market prices of comparable businesses. If the fair value of the reporting unit exceeds its book value, goodwill is not deemed to be impaired for that reporting unit, and no further testing would be necessary. If the fair value of the reporting unit is less than its book value, the Company performs Step Two. Step Two uses the calculated fair value of the reporting unit to perform a hypothetical purchase price allocation to the fair value of the assets and liabilities of the reporting unit. The difference between the fair value of the reporting unit calculated in Step One and the fair value of the underlying assets and liabilities of the reporting unit is the implied fair value of the reporting unit’s goodwill. A charge is recorded in the financial statements if the carrying value of the reporting unit’s goodwill is greater than its implied fair value.

The following describes the valuation methodologies used to derive the fair value of the reporting units.

 

   

Income Approach: To determine fair value, the Company discounts the expected future cash flows of the reporting units. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and the rate of return a market participant would expect to earn. To estimate cash flows beyond the final year of our model, the Company uses a terminal value approach. Under this approach, the Company uses estimated operating income before interest, taxes, depreciation and amortization in the final year of its model, adjusts it to estimate a normalized cash flow, applies a perpetuity growth assumption and discounts it by a perpetuity discount factor to determine the terminal value. The Company incorporates the present value of the resulting terminal value into its estimate of fair value.

 

   

Market-Based Approach: To corroborate the results of the income approach described above, the Company estimated the fair value of its reporting units using several market-based approaches,

 

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including the value that is derived based on Motorola, Inc.’s consolidated stock price as described above. The Company also uses the guideline company method, which focuses on comparing our risk profile and growth prospects to select reasonably similar/guideline publicly traded companies.

The determination of fair value of the reporting units and assets and liabilities within the reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, earnings before depreciation and amortization, and capital expenditures forecasts. Due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates. For the Access Networks reporting unit, the Company assigned a discount rate of 14.5% and a terminal growth rate of 3%, both of which the Company believes to be reasonable based upon the risk profile and long-term growth prospects of this reporting unit in light of industry market data. The Company evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting units, as well as the fair values of the corresponding assets and liabilities within the reporting units, and concluded they are reasonable.

The Company has weighted the valuation of its reporting units at 75% based on the income approach and 25% based on the market-based approach, consistent with prior periods. The Company believes that this weighting is appropriate since it is often difficult to find other appropriate companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units. If a heavier weighting was placed on the market-based approach, a higher fair value would have been determined for the Access Networks reporting unit.

As a result of the valuation work described above, the fair value of the Access Networks reporting unit exceeded its book value by a significant margin, indicating that there was no impairment of goodwill. No indicators of potential impairment were identified for the Broadband Home Solutions and Access Networks reporting units during the second quarter of 2010.

 

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