As filed with the Securities and Exchange Commission on November 12, 2010
Registration No. 001-34805
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
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
(Registrants 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 Managements 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: SummarySelected Financial Data of Motorola Mobility Holdings, Inc., Risk Factors, Capitalization, Unaudited Pro Forma Condensed Combined Financial Statements, and Managements 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: BusinessOther InformationProperties/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 Managements 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: BusinessLegal Proceedings | ||
Item 9. | Market Price of and Dividends on the Registrants 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 Registrants 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 StockLimitation 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 | Amended and Restated Exclusive 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 AgreementMotorola 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 AgreementMotorola 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, Inc. and Dr. Sanjay K. Jha effective as of August 4, 2008, as amended on December 15, 2008 and February 11, 2010. | |
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 | Form of Motorola Mobility Holdings, Inc. Legacy Incentive Plan. | |
10.12 | Mobile Application Distribution Agreement between Motorola, Inc. and Google Inc. dated as of June 8, 2009 (previously filed as Exhibit 10.14).** | |
10.13 | Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc. dated as of December 31, 2003 (previously filed as Exhibit 10.15).** | |
10.14 | Amendment Twenty-Seven to the Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc., effective January 1, 2010 (previously filed as Exhibit 10.16). | |
10.15 | Corporate Supply Agreement between Broadcom Corporation and Motorola, Inc. dated as of November 17, 2008 (previously filed as Exhibit 10.17).** | |
10.16 | Form of SpinCo Contribution Agreement between Motorola, Inc. and Motorola Mobility Holdings, Inc. | |
21 | List of subsidiaries of Motorola Mobility Holdings, Inc. | |
99.1 | Preliminary Information Statement of Motorola Mobility Holdings, Inc., subject to completion, dated November 12, 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.* | |
99.4 | Agreement, dated April 7, 2008, by and among Motorola, Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership, Carl C. Icahn, William R. Hambrecht and Keith A. Meister (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed by Motorola, Inc. on April 8, 2008) (File No. 1-7221)). |
Exhibit No. |
Exhibit Description |
|
99.5 | Letter Agreement, dated [ ], by and among Motorola Mobility Holdings, Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership and Carl C. Icahn.* | |
99.6 | Confidentiality Agreement, dated [ ], by and among Motorola Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership and Carl C. Icahn.* |
* | 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. |
| Previously filed on October 8, 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: November 12, 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 | Amended and Restated Exclusive 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 AgreementMotorola 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 AgreementMotorola 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, Inc. and Dr. Sanjay K. Jha effective as of August 4, 2008, as amended on December 15, 2008 and February 11, 2010. | |
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 | Form of Motorola Mobility Holdings, Inc. Legacy Incentive Plan. | |
10.12 | Mobile Application Distribution Agreement between Motorola, Inc. and Google Inc. dated as of June 8, 2009 (previously filed as Exhibit 10.14).** | |
10.13 | Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc. dated as of December 31, 2003 (previously filed as Exhibit 10.15).** | |
10.14 | Amendment Twenty-Seven to the Term Sheet for Subscriber Units and Services Agreement between Nextel Communications, Inc. and Motorola, Inc., effective January 1, 2010 (previously filed as Exhibit 10.16). | |
10.15 | Corporate Supply Agreement between Broadcom Corporation and Motorola, Inc. dated as of November 17, 2008 (previously filed as Exhibit 10.17).** | |
10.16 | Form of SpinCo Contribution Agreement between Motorola, Inc. and Motorola Mobility Holdings, Inc. | |
21 | List of subsidiaries of Motorola Mobility Holdings, Inc. |
Exhibit No. |
Exhibit Description |
|
99.1 | Preliminary Information Statement of Motorola Mobility Holdings, Inc., subject to completion, dated November 12, 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.* | |
99.4 | Agreement, dated April 7, 2008, by and among Motorola, Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership, Carl C. Icahn, William R. Hambrecht and Keith A. Meister (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed by Motorola, Inc. on April 8, 2008) (File No. 1-7221)). | |
99.5 | Letter Agreement, dated [ ], by and among Motorola Mobility Holdings, Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership and Carl C. Icahn.* | |
99.6 | Confidentiality Agreement, dated [ ], by and among Motorola Inc., Icahn Partners LP, Icahn Partners Master Fund LP, High River Limited Partnership and Carl C. Icahn.* |
* | 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. |
| Previously filed on October 8, 2010. |
EXHIBIT 10.3
EXECUTION COPY
AMENDED AND RESTATED
EXCLUSIVE LICENSE AGREEMENT
Between
Motorola Trademark Holdings, LLC (Licensor)
and
Motorola, Inc., which will change its name to
Motorola Solutions, Inc. (Licensee)
Effective Date: July 30, 2010
TABLE OF CONTENTS
Page | ||||||
ARTICLE 1 |
DEFINITIONS | 2 | ||||
ARTICLE 2 |
LICENSE | 7 | ||||
2.1 |
Scope of License | 7 | ||||
2.2 |
Exclusivity | 8 | ||||
2.3 |
Inadvertent Omissions from Licensees Fields of Use or Licensed Marks | 8 | ||||
2.4 |
Business Environment Uses | 10 | ||||
2.5 |
Changes to Scope of License | 12 | ||||
2.6 |
Scope of Sunset License | 18 | ||||
ARTICLE 3 |
ASSIGNMENT; SUBLICENSING | 18 | ||||
3.1 |
Assignment | 18 | ||||
3.2 |
Further Licensing by Licensor and Sublicensing by Licensee | 19 | ||||
ARTICLE 4 |
TERM AND TERMINATION | 22 | ||||
4.1 |
Term | 22 | ||||
4.2 |
Non-Material Breaches | 22 | ||||
4.3 |
Termination | 22 | ||||
4.4 |
Effect of Termination | 24 | ||||
ARTICLE 5 |
INTELLECTUAL PROPERTY RIGHTS | 26 | ||||
5.1 |
Ownership | 26 | ||||
5.2 |
Procurement and Maintenance of Trademark Registrations | 26 | ||||
5.3 |
Procurement and Maintenance of Domain Names and Trade Names | 28 | ||||
5.4 |
Enforcement | 29 | ||||
5.5 |
Right of First Refusal | 31 | ||||
5.6 |
Motorola.com | 32 | ||||
5.7 |
Management of the Solutions Licensed Marks, Domain Names and Trade Names | 33 | ||||
5.8 |
Motorola Trade Names | 33 | ||||
5.9 |
Motorola Stock Ticker | 34 | ||||
5.10 |
Motorola Toll-Free Numbers | 34 | ||||
ARTICLE 6 |
QUALITY CONTROL | 34 | ||||
6.1 |
Licensees Use Subject to Licensors Quality Control | 34 |
-i-
TABLE OF CONTENTS
(continued)
Page | ||||||
6.2 |
Product and Service Quality |
34 | ||||
6.3 |
Mark Usage |
36 | ||||
6.4 |
Marking |
37 | ||||
6.5 |
Generally |
37 | ||||
6.6 |
Existing Domain Names and Trade Names |
38 | ||||
ARTICLE 7 |
INDEMNIFICATION AND INSURANCE |
38 | ||||
7.1 |
Indemnification |
38 | ||||
7.2 |
Insurance |
39 | ||||
ARTICLE 8 |
REPRESENTATIONS AND WARRANTIES |
40 | ||||
8.1 |
Representations and Warranties |
40 | ||||
8.2 |
Licensors Representations and Warranties |
40 | ||||
8.3 |
Licensees Representations and Warranties |
41 | ||||
ARTICLE 9 |
CONFIDENTIALITY |
41 | ||||
9.1 |
Confidential Information |
41 | ||||
9.2 |
Permitted Disclosure |
41 | ||||
ARTICLE 10 |
DISPUTE RESOLUTION |
42 | ||||
10.1 |
Dispute Resolution |
42 | ||||
ARTICLE 11 |
ARBITRATION |
43 | ||||
11.1 |
Arbitration |
43 | ||||
ARTICLE 12 |
COURT ACTION |
44 | ||||
12.1 |
Court Action |
44 | ||||
ARTICLE 13 |
MISCELLANEOUS |
45 | ||||
13.1 |
Counterparts |
45 | ||||
13.2 |
Days and Quarters |
45 | ||||
13.3 |
Entire Agreement |
45 | ||||
13.4 |
Force Majeure |
45 | ||||
13.5 |
Governing Law |
45 | ||||
13.6 |
Headings |
45 | ||||
13.7 |
Invalidity |
46 |
-ii-
TABLE OF CONTENTS
(continued)
Page | ||||||
13.8 |
Jurisdiction | 46 | ||||
13.9 |
Limitation on Damages | 46 | ||||
13.10 |
No Third-Party Beneficiaries | 46 | ||||
13.11 |
Notices | 46 | ||||
13.12 |
Recordation of Agreements; Cooperation | 47 | ||||
13.13 |
Relationship Created | 47 | ||||
13.14 |
Successors | 47 | ||||
13.15 |
Survival | 47 | ||||
13.16 |
Waiver; Election of Remedies | 47 | ||||
SCHEDULES |
-iii-
EXCLUSIVE LICENSE AGREEMENT
This Amended and Restated license agreement (the Agreement ), effective as of July 30, 2010 (the Effective Date ), is entered into this day of November, 2010 by and between Motorola Trademark Holdings, LLC ( Licensor or Owner ), a Delaware limited liability company with a principal address of 600 North US Highway 45, Libertyville, IL 60048, and Motorola, Inc., which will change its name on or about January 1, 2011, and be known as Motorola Solutions, Inc. ( MINC , Licensee or Solutions ), a Delaware corporation with a principal address of 1303 E. Algonquin Road, Schaumburg, IL 60196 (Licensor and Licensee each a Party and together the Parties ).
WHEREAS, MINC has determined that it would be appropriate, desirable and in the best interests of MINC and MINCs stockholders to separate the Mobile Devices and Home businesses (collectively, the Transferred Businesses ) from MINC;
WHEREAS, in order to effectuate the foregoing, MINC, Motorola SpinCo Holdings Corporation, a Delaware corporation and wholly-owned subsidiary of MINC ( Spinco ), and Motorola Mobility, Inc., a wholly-owned subsidiary of MINC ( Mobility ), are entering into a Master Separation and Distribution Agreement ( MSDA Agreement ), which provides, among other things, subject to the terms and conditions thereof for the contribution or transfer of certain assets and liabilities of the Transferred Businesses to Spinco, Mobility and certain of their Subsidiaries and the Distribution, each of the foregoing terms as more specifically defined in the MSDA Agreement (collectively, the Separation Transactions ), and the execution and delivery of certain other agreements in order to facilitate and provide for the foregoing;
WHEREAS, in connection with the Separation Transactions, MINC is contributing all of its rights, title and interests in, to and under the trademarks, service marks, trade names, logos, slogans, designs, trade dress, domain names and other proprietary designations, including but not limited to the trademark applications and registrations therefor set forth on Schedule A hereto, as it may be amended from time to time, and all other applications and registrations therefor, along with all related common law marks and all appurtenant goodwill (collectively, the Motorola Marks ) to Licensor, a wholly-owned subsidiary of Mobility, except that MINC will have a right to continue to use certain Motorola Marks pursuant to the terms, conditions and limitations of this Agreement;
WHEREAS, upon such contribution, Licensor will own the Motorola Marks;
WHEREAS, Licensor and Licensee, or their predecessors in interest, have previously used the Motorola Marks and variations thereof in association with various fields of commercial activity, including, without limitation, the development, manufacture and sale of high quality communications devices and equipment;
WHEREAS, as a result of their commercial activity under the Motorola Marks and variations thereof, the Motorola Marks are now exclusively and distinctively associated with the
1
products and services made, offered, endorsed, distributed, and/or approved by Licensor and Licensee or their predecessors in interest, and with the high quality of such products and services;
WHEREAS, in connection with the Separation Transactions, the Parties entered into a license agreement on July 30, 2010 (the Prior Agreement) to allow Licensee to continue to use certain Motorola Marks as set forth in the Prior Agreement and to avoid to the extent possible any potential customer or consumer confusion that might otherwise arise as a result of the foregoing described transactions;
WHEREAS, in connection with the Separation Transactions, this Amended and Restated Agreement is to allow Licensee to continue to use certain Motorola Marks as set forth herein and to avoid to the extent possible any potential customer or consumer confusion that might otherwise arise as a result of the foregoing described transactions, and supersedes all prior agreements, including the Prior Agreement, discussions and understandings between the Parties related to its subject matter;
WHEREAS, Licensee wishes to have a right to continue to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in the Solutions Fields of Use in the Territory, all as specifically defined and described herein, in accordance with the terms, conditions and limitations of this Agreement;
WHEREAS, Licensor wishes Solutions to have a license to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in the Solutions Fields of Use in the Territory, subject to the terms, conditions and limitations of this Agreement and all as specifically defined and described herein;
NOW THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
Defined terms, indicated by use of initial capitalization, shall have the meaning ascribed to them in this Article 1, or for the defined terms not defined in this Article 1, shall have the meaning ascribed to them in the context upon their first occurrence in this Agreement.
1.1 Affiliate means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For purposes of this definition, control (including, with correlative meanings, the terms controlling, controlled by and under common control with) means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
2
1.2 Archives means the extensive collection of documents, records and other materials of value and historical interest relating to the activities, business dealings and history of the Motorola Marks.
1.3 Bankruptcy Code means Title 11 of the United States Code.
1.4 Business Environment Uses has the meaning set forth in Section 2.4 hereof.
1.5 Change of Control means the consummation of any transaction or series of related transactions (i) pursuant to which Persons other than those Persons holding equity securities immediately prior to such transaction(s), become the direct or indirect, beneficial or record holders of shares or other equity interests representing more than fifty percent (50%) of the aggregate ordinary voting power of a Party; and (ii) which results in the sale or other transfer of all or substantially all of the assets of a Party.
1.6 Confidential Information means any information, technical data, or know-how (either oral, written, digital or in any other format), including information or documents that are marked or otherwise identified as confidential or are reasonably understood to be of a confidential nature, including but not limited to that which relates to research, product or promotion plans, products, services, sales figures, markets, inventions, processes, procedures, designs, drawings, engineering, software, hardware configuration information, customer data, marketing or finances relating to a Party, including such Partys respective Affiliates that is provided to or otherwise obtained by either Party (including any Affiliates, parent and subsidiary companies, officers, directors, employees, agents or contractors of such Party) from, either directly or indirectly, the other Party (including any Affiliates, parent and subsidiary companies, officers, directors, employees, agents or contractors of such other Party), as the case may be; provided, however, that the term Confidential Information shall not include any information that: (i) is already in the public domain at the time of disclosure or is disclosed in the public domain other than pursuant to a breach of this Agreement; (ii) the receiving Party can reasonably demonstrate was already lawfully in its possession prior to disclosure hereunder or is subsequently disclosed to the receiving Party, provided that such information was not known to be subject to another confidentiality agreement or arrangement, or (iii) is independently developed by the receiving Party without any reference to or use of any Confidential Information of the disclosing Party, in each case, as the case may be.
1.7 Effective Date has the meaning set forth in the recitals hereof.
1.8 Enterprise Customer means those categories and corresponding codes from the 2007 North American Industry Classification System ( NAICS ) identified on Exhibit D .
1.9 Excluded Fields of Use means any Fields of Use for which the Motorola Marks currently may not be used by Licensee pursuant to an agreement in force between Licensor or any of its Affiliates and any third party (e.g., a co-existence agreement), including but not limited to the Fields of Use set forth on Schedule I hereto, as it may be amended from time to time by Licensor, as specifically provided herein.
3
1.10 Field of Use means an identified product and/or service or a group of products and/or services.
1.11 Fundamental Matters means:
(a) a Material Breach by a Party to this Agreement which gives rise to a Termination for Cause (as defined herein), which breach has not or is not capable of being cured pursuant to Section 4.3.1 of this Agreement; or
(b) a decision by the Licensor that a particular product or service is not within the scope of the current Solutions Fields of Use set forth on Schedule D or Schedule E , or a decision by Licensor that a particular mark, domain name or trade name is not one of the current Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names set forth on Schedule B , Schedule C , Schedule F , Schedule G or Schedule H .
1.12 Government, Public Safety and Military Customer means those categories and corresponding codes from the 2007 NAICS identified on Exhibit E .
1.13 Initial Term has the meaning set forth in Section 4.1 hereof.
1.14 Licensee has the meaning set forth in the preamble hereof.
1.15 Licensor has the meaning set forth in the preamble hereof.
1.16 Marketing Materials means all advertising and marketing materials, including but not limited to packaging, tags, labels, advertising, marketing, promotions, displays, display fixtures, instructions, technical sheets, user guides, data sheets, warranties, websites and other materials of any and all types, and in written, digital or any other format, associated with products or services within the Solutions Fields of Use that are marked with any of the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names.
1.17 Master Brand Usage Guidelines means Licensors guidelines, attached as Exhibit A , to be followed by Licensee when using the Motorola Marks, Motorola Trade Names and Motorola Domain Names, as may be amended from time to time, in Licensors sole discretion.
1.18 Material Action means to file any insolvency case or proceeding, to institute proceedings to have either Party be adjudicated bankrupt or insolvent, to institute proceedings under any applicable insolvency law respecting either Party, to seek any relief for either Party under any law relating to relief from debts or the protection of debtors, to consent to the filing or institution of bankruptcy or insolvency proceedings against either Party, to file a petition seeking, or consent to, relief with respect to either Party under any applicable federal or state law relating to bankruptcy or insolvency, to seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian, or any similar official of or for either Party or all or any of the interests of either Party herein, to make any assignment for the benefit of
4
creditors of either Party, to admit in writing the Partys inability to pay its debts generally as they become due, or to take action in furtherance of any of the foregoing. Notwithstanding the foregoing, the commencement of a reorganization proceeding under Chapter 11 of the Bankruptcy Code, or otherwise taking steps to reorganize or restructure that Partys business as a going concern, shall not constitute a Material Action.
1.19 Material Breach has the meaning set forth in Section 4.3.1.
1.20 Mobility Exceptions means those exceptions to Solutions Exclusive Fields of Use as identified on Schedule D .
1.21 Motorola Domain Names means domain names that contain any Motorola Marks, including any Solutions Licensed Domain Names.
1.22 Motorola Marks has the meaning set forth in the recitals hereof, which for purposes of clarification include the Solutions Licensed Marks.
1.23 Motorola Trade Names means trade names that contain any Motorola Marks, including any Solutions Licensed Trade Names.
1.24 New Domain Name has the meaning set forth in Section 2.5.2 hereof.
1.25 New Fields of Use has the meaning set forth in Section 2.5.3 hereof.
1.26 New Mark has the meaning set forth in Section 2.5.1.1 hereof.
1.27 New Trade Name has the meaning set forth in Section 2.5.2 hereof.
1.28 Party and Parties have the meaning set forth in the preamble hereof.
1.29 Person means, any individual, partnership, corporation, trust, estate, limited liability company, individual retirement account, pension plan, foundation or other association or entity.
1.30 Pre-existing Marks has the meaning set forth in Section 2.3.1 hereof.
1.31 Pre-existing Fields of Use has the meaning set forth in
1.32 Promotional Items means items of nominal value designed to promote a specific product within the Solutions Fields of Use or a brand, that bear any of the Solutions Licensed Marks, Solutions Licensed Trade Names or Solutions Licensed Domain Names, including, but not limited to, mugs, key rings and pens, and other items of nominal value.
1.33 Reasonable Efforts means with respect to a given goal, the efforts, consistent with, inter alia, the greater of: (i) the practice that those in that Partys industry, who are very desirous of achieving the goal, would pursue to achieve the goal; or (ii) what a reasonable Person in the position of the Party pursuing that goal, would pursue to achieve it.
1.34 Renewal Term has the meaning set forth in Section 4.1 hereof.
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1.35 Solutions Exclusive Fields of Use means the Fields of Use set forth on Schedule D hereto, as it may be amended from time to time, as specifically provided herein, for which Solutions has the exclusive right to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names.
1.36 Solutions Fields of Use means: (i) the Solutions Exclusive Fields of Use set forth on Schedule D hereto; and (ii) the Non-Exclusive Fields of Use set forth on Schedule E hereto, as they may be amended from time to time, as specifically provided herein.
1.37 Solutions Licensed Domain Names means: (i) all Solutions Domain Names Licensee has registered and/or is using as of the Effective Date set forth on Schedule F hereto, as it may be amended from time to time, as specifically provided herein; and (ii) all New Domain Names.
1.38 Solutions Licensed Marks means: (i) the Solutions Licensed Marks - Exclusive set forth on Schedule B hereto; (ii) the Solutions Licensed Marks - Non-Exclusive set forth on Schedule C hereto, as they may be amended from time to time, as specifically provided herein; and (iii) all New Marks.
1.39 Solutions Licensed Marks - Exclusive means: (i) those Motorola Marks set forth on Schedule B hereto, as it may be amended from time to time, as specifically provided herein, licensed exclusively to Solutions for use in the Solutions Fields of Use; and (ii) all New Marks.
1.40 Solutions Licensed Marks - Non-Exclusive means: (i) those Motorola Marks set forth on Schedule C hereto, as it may be amended from time to time, as specifically provided herein, licensed on a non-exclusive basis to Solutions for use in the Solutions Fields of Use; and (ii) all New Marks.
1.41 Solutions Licensed Trade Names means all Solutions Trade Names that Licensee has registered and/or is using as of the Effective Date set forth on Schedule G hereto (through the effective date of the Distribution Date, as that term is defined in the MSDA Agreement) which shall be replaced with the Solutions Trade Names set forth on Schedule H (from and after the effective date of the Distribution Date, as that term is defined in the MSDA Agreement) in accordance with Section 5.8.1, and as Schedule H may be amended from time to time, as specifically provided herein.
1.42
Solutions Non-Exclusive Fields of Use
means the Fields of
Use set forth on
Schedule E
hereto, as it may be amended from time to time, as specifically provided herein, for which Solutions has the non-exclusive right to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions
1.43 Term has the meaning set forth in Section 4.1 hereof.
1.44 Territory means the world.
1.45 Top-Level Domain means any top-level Internet domain in existence on or after the Effective Date, including but not limited to: .com, .org, .net, .info, biz, .mobi, .jobs, .eu and .asia and all country code top-level domains (e.g., .ch, .us and .uk) and any related sub-domains (e.g., .co.uk), in any characters of any language.
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1.46 Trade Name means a name under which a commercial enterprise operates to identify itself, including but not limited to, a business name, company name, fictitious name or d/b/a (doing business as).
ARTICLE 2
LICENSE
2.1 Scope of License .
2.1.1 License . Subject to the terms, conditions and limitations of this Agreement, and subject to Section 2.1.2 and 2.2 herein, and further subject to any pre-existing trademark licenses or other contractual obligations with third-parties, Licensee has the right to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names including, without limitation, on or in connection with the manufacturing, distributing, selling, reselling, repairing, maintaining, supporting, advertising, promoting and marketing of: (i) products and services within the Solutions Fields of Use; and (ii) Marketing Materials and Promotional Items related to products and services within the Solutions Fields of Use, in the Territory during the Term, with the right to sublicense in accordance with the terms of Sections 2.5.3.1 and 3.2.
2.1.2 Notwithstanding any other provision of this Agreement, Licensee is not permitted to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with any Excluded Fields of Use.
2.1.3 Licensor retains the right to determine, in its sole discretion, whether a particular product or service is within the Solutions Fields of Use, and consequently whether such product or service has been licensed to Licensee.
2.1.4 Licensee acknowledges that all rights not specifically identified as belonging to Licensee hereunder are contributed to Licensor.
2.1.5 Licensee further acknowledges that the scope of Licensees rights hereunder shall be no greater than, or for a longer duration than, any of Licensors rights.
2.1.6. This license shall be deemed paid-up for use of the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names set forth on Schedules B, C, F, G and H in the current Solutions Fields of Use set forth on Schedules D and E as of the Effective Date.
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2.2 Exclusivity .
2.2.1 Solutions Exclusive Fields of Use . Subject to the terms of Sections 2.3.2, 2.4 and 2.5.4, Licensee has the exclusive right to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with the Solutions Exclusive Fields of Use set forth on Schedule D , subject to the Mobility Exceptions set forth on Schedule D . Except for the Mobility Exceptions on Schedule D , Licensor shall not use for itself or grant a right to or otherwise license any third party, to use any Motorola Marks, Motorola Domain Names, Motorola Trade Names and/or confusingly similar imitation, likeness or variation of any Motorola Marks, Motorola Domain Names or Motorola Trade Names, in connection with the Solutions Exclusive Fields of Use, except as otherwise permitted in this Agreement or agreed upon in writing between the Parties.
2.2.2 Solutions Non-Exclusive Fields of Use . As of the Effective Date of this Agreement, Licensee does not have any rights to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with any Solutions Non-Exclusive Fields of Use. Notwithstanding the foregoing, Licensee may hereafter be granted rights, in Licensors sole but reasonable discretion, to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with Solutions Non-Exclusive Fields of Use which shall then be set forth on Schedule E . Licensor may use any Motorola Marks in connection with Solutions Non-Exclusive Fields of Use. Licensor may also authorize third parties to use the Motorola Marks in connection with Solutions Non-Exclusive Fields of Use.
2.2.3 Solutions Licensed Marks - Exclusive . Subject to the terms of Sections 2.3.2, 2.4 and 2.5.5, Licensee has the exclusive right to use the Solutions Licensed Marks set forth on Schedule B that are licensed exclusively to Licensee in connection with the Solutions Fields of Use. Licensor shall not use for itself or grant a right to or otherwise license any third party, to use any Solutions Licensed Marks licensed exclusively to Licensee, or any confusingly similar imitation, likeness or variation of any Solutions Licensed Marks licensed exclusively to Licensee, in connection with any Fields of Use, except as otherwise permitted in this Agreement or agreed upon in writing between the Parties.
2.2.4 Solutions Licensed Marks - Non-Exclusive . Licensee has a non-exclusive right to use the Solutions Licensed Marks set forth on Schedule C that are licensed on a non-exclusive basis to Licensee in connection with Solutions Fields of Use. Licensor may use, and may authorize third parties to use, any Solutions Licensed Marks - Non-Exclusive, in connection with Solutions Non-Exclusive Fields of Use or other Fields of Use, but use by Licensor or its authorized third parties is not permitted in Licensees Exclusive Fields of Use.
2.3 Inadvertent Omissions from Licensees Fields of Use or Licensed Marks .
2.3.1 In the event Licensee becomes aware that since prior to the Effective Date, Licensee and/or its Affiliates have been: (i) using the Solutions Licensed Marks, Solutions Licensed Domain Names and/or Solutions Licensed Trade Names in connection with products and/or services in Fields of Use that were inadvertently omitted from Schedule D and/or Schedule E hereto, and thus are not within Solutions Fields of Use ( Pre-existing Fields of
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Use ); or (ii) using, in connection with Solutions Fields of Use, Motorola Marks that were inadvertently omitted from Schedule B or Schedule C hereto, and thus are not Solutions Licensed Marks ( Pre-existing Marks ), Licensee shall notify Licensor of such use in writing no later than thirty (30) days after discovery. Licensee shall provide Licensor with evidence of such use since prior to the Effective Date. Licensee may request from Licensor the right to continue such use of Pre-existing Fields of Use or Pre-existing Marks, in accordance with this Section 2.3.
2.3.2 Licensors Approval or Denial of Pre-existing Fields of Use or Pre-existing Marks . Licensor shall have thirty (30) days from receipt of notification from Licensee to object to Licensees continued use of the Solutions Licensed Marks in connection with the Pre-existing Fields of Use or Licensees continued use of the Pre-existing Marks in connection with the Solutions Fields of Use. Licensor shall allow such expansion unless it reasonably determines, in its sole but good faith discretion, that such continued use by Licensee is outside the Solutions Fields of Use, would violate existing agreements with third-parties, or was otherwise intentionally excluded by the Parties from the Solutions Licensed Marks or Solutions Fields of Use during the Parties negotiations of this Agreement. If such request is approved by Licensor, the appropriate schedules of this Agreement shall be amended to reflect the expanded scope of the license hereunder. If Licensees request is denied, Licensee and its Affiliates shall end such use as soon as reasonably practicable and in no event later than nine (9) months following written notification of disapproval from Licensor with regard to use for Marketing Materials and Promotional Items, and two (2) years with regard to all use on Licensees products, unless Licensor specifies a longer term. During the time periods identified in this Section 2.3.2, Licensee shall have no right to create, manufacture, produce or use new Marketing Materials, Promotional Items, or products using any Motorola Marks, Motorola Domain Names or Motorola Trade Names. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time periods identified in this Section 2.3.2.
2.3.3 Such approval shall not be contingent upon the payment of any fee or royalties to Licensor; however, the costs and expenses of searching, prosecuting or otherwise obtaining, registering, maintaining and enforcing such Pre-existing Fields of Use or Pre-existing Marks shall be governed by Section 5.2 of this Agreement.
2.3.4 Licensees uses in the Pre-existing Fields of Use or of the Pre-existing Marks made in accordance with the terms of this Section 2.3 shall not be deemed a breach of this Agreement or an infringement of Licensors rights.
2.3.5 Nothing in this Section 2.3 shall be read to guarantee Licensee the right to use Pre-Existing Fields of Use or Pre-existing Marks under this Agreement.
2.3.6 Any Pre-existing Marks or Pre-existing Fields of Use not discovered or reported to Licensor within one (1) year from the Effective Date of this Agreement shall be considered to be New Marks or New Fields of Use and approval of such use shall be subject to Section 2.5.1 or 2.5.3 of this Agreement.
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2.4 Business Environment Uses .
2.4.1 Licensees Business Environment Uses . To preserve Licensors rights in the Motorola Marks and to avoid confusion of the public, Licensee agrees not to associate Licensees products and services that are outside of the Solutions Fields of Use with the Solutions Licensed Marks without Licensors written permission, except as permitted in this Section 2.4. Licensee acknowledges that Sections 2.4.1 through 2.4.4 are not intended to allow and may not be used by Licensee to encroach upon Licensors rights to use the Motorola Marks with products or services outside Licensees Exclusive Fields of Use.
2.4.2 Subject to Licensees compliance with section 2.4.3, Licensor acknowledges and agrees that the following types of uses ( Business Environment Uses ) which may associate Licensees products and services that are outside of the Solutions Fields of Use with the Solutions Licensed Marks, are not breaches of this Agreement or an infringement of Licensors rights, so long as Licensees Business Environment Uses are not causing substantial actual confusion:
2.4.2.1 Tradeshow displays;
2.4.2.2 Marketing Materials that display all or a substantial portion of Licensees product portfolio, such as catalogs or web pages;
2.4.2.3 Corporate-level advertising (i.e. advertising that promotes Licensees entire business, or a substantial portion thereof, rather than a specific product);
2.4.2.4 Use of a Solutions Licensed Trade Name on products, product packaging or product labeling as required by applicable law, regulation or product standards/approval agency; and
2.4.2.5 Use of a Solutions Licensed Trade Name on business cards used by sales associates offering or selling both products within and outside of the Solutions Fields of Use, or in Marketing Materials solely for purposes of informing a customer or consumer that such products and services outside of the Solutions Fields of Use are manufactured or distributed by Licensee.
2.4.3 All Business Environment Uses permitted under Section 2.4.1 through 2.4.3, shall comply with the following requirements:
2.4.3.1 Products and services outside of the Solutions Fields of Use shall not be featured more prominently than the products or services within the Solutions Fields of Use;
2.4.3.2 The brand name and/or logo of the products and services outside of the Solutions Fields of Use shall be featured as prominently as any Solutions Licensed Marks which are featured at the product name/product description level;
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2.4.3.3 Products and services outside of the Solutions Fields of Use shall be separated (either physically or compartmentalized by creative layout) from products or services within the Solutions Fields of Use;
2.4.3.4 With regard to the Solutions Licensed Trade Name use permitted in 2.4.2.4 and 2.4.2.5, the size of such Solutions Licensed Trade Name use shall be limited to the minimum size required by law, or as necessary to communicate the intended message, whichever is smaller; and
2.4.3.5 Products and services outside of the Solutions Fields of Use shall not be portrayed in a manner that is likely to mislead a customer or consumer into believing that such products or services are within the Solutions Fields of Use, or otherwise branded with the Solutions Licensed Marks.
2.4.4 Notwithstanding any other provision of this Section 2.4, Licensee is not permitted to make any Business Environment Uses in connection with any Excluded Fields of Use.
2.4.5 Licensors Business Environment Uses . To preserve Licensees exclusive rights under this Agreement and to avoid confusion of the public, Licensor agrees not to associate Licensors products and services that are within the Solutions Exclusive Fields of Use with the Motorola Marks without Licensees written permission, except as permitted in this Section 2.4. Licensor acknowledges that Sections 2.4.5 through 2.4.7 are not intended to allow and may not be used by Licensor to encroach upon Licensees exclusive rights to use the Solutions Licensed Marks within the Solutions Exclusive Fields of Use.
2.4.6 Subject to Licensors compliance with section 2.4.7, Licensee acknowledges and agrees that the following types of Business Environment Uses which may associate Licensors products and services that are within the Solutions Exclusive Fields of Use with the Motorola Marks, are not breaches of this Agreement or an infringement of Licensees rights, so long as Licensors Business Environment Uses are not causing substantial actual confusion:
2.4.6.1 Tradeshow displays;
2.4.6.2 Marketing Materials that display all or a substantial portion of Licensors product portfolio, such as catalogs or web pages;
2.4.6.3 Corporate-level advertising (i.e. advertising that promotes Licensors entire business, or a substantial portion thereof, rather than a specific product);
2.4.6.4 Use of a Motorola Trade Name on products, product packaging or product labeling as required by applicable law, regulation or product standards/approval agency; and
2.4.6.5 Use of a Motorola Trade Name on business cards used by sales associates offering or selling both products within and outside of the Solutions Exclusive Fields of Use, or in Marketing Materials solely for purposes of informing a customer or consumer that such products and services are manufactured or distributed by Licensor.
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2.4.7 All Business Environment Uses permitted under Sections 2.4.5 through 2.4.7, shall comply with the following requirements:
2.4.7.1 Products and services within the Solutions Exclusive Fields of Use shall not be featured more prominently than Licensors other products or services;
2.4.7.2 The brand name and/or logo of Licensors products and services within the Solutions Exclusive Fields of Use shall be featured as prominently as Licensors other Motorola Marks which are featured at the product name/product description level;
2.4.7.3 Products and services within the Solutions Exclusive Fields of Use shall be separated (either physically or compartmentalized by creative layout) from products or services outside the Solutions Exclusive Fields of Use;
2.4.7.4 With regard to Licensors use of Motorola Trade Names permitted in 2.4.6.4 and 2.4.6.5, the size of such Motorola Trade Name shall be limited to the minimum size required by law, or as necessary to communicate the intended message, whichever is smaller; and
2.4.7.5 Products and services within the Solutions Exclusive Fields of Use shall not be portrayed in a manner that is likely to mislead a customer or consumer into believing that such products or services are sold by Licensor under a Motorola Mark, or otherwise branded with a Motorola Mark.
2.5 Changes to Scope of License .
2.5.1 Proposed Solutions Licensed Marks . Licensee may request an expansion of the scope of the license hereunder to include new trademarks, service marks or other proprietary designations ( Proposed Mark ), in any Solutions Fields of Use; provided, however, that such expansion is approved by the Licensor, in Licensors sole discretion, pursuant to the procedure established in this Section 2.5. If such expansion is approved, Schedule B or Schedule C hereto shall be amended to include such New Marks. Nothing in this Section 2.5.1 shall be read to guarantee Licensee the right to expand the Solutions Licensed Marks it may use under this Agreement.
2.5.1.1 If Licensee has a bona fide intention to use additional Motorola Marks pursuant to this Agreement, Licensee may request that Licensor amend Schedule B or Schedule C of this Agreement to add additional marks that Licensee would thereafter be licensed to use (each such mark, if approved pursuant to Sections 2.5.1.2 and 2.5.1.3, a New Mark ). Licensee shall make the request by giving written notice to Licensor, at least sixty (60) days prior to any proposed use, specifying the Proposed Mark and the Solutions Fields of Use for which it proposes to use the Proposed Mark. Licensee may not use a Proposed Mark unless and until said mark is approved by Licensor as a New Mark in accordance with this Section 2.5.1.
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2.5.1.2 Business Approval . Licensee shall send its written request to Melissa Gardner, Vice-President Marketing-Naming, with a cc: to Dave Carroll, Lead Counsel- Trademarks & Marketing, or other contacts as may be updated from time to time. Licensor shall have twenty (20) days to approve or reject the Proposed Mark, with regard to all reasons except legal reasons, by providing a written response to Licensee. In the event Licensor fails to respond within the allotted time, the Proposed Mark shall be deemed to be rejected. In the event of a rejection due to a non-response by Licensor, Licensee may resubmit such Proposed Mark by sending its written request to Melissa Gardner, Vice-President Marketing-Naming, and Bill Ogle, Chief Marketing Officer, with a cc: to Dave Carroll, Lead Counsel-Trademarks & Marketing, or other contacts as may be updated from time to time. Upon such resubmission, Licensor shall have ten (10) days to approve or reject the Proposed Mark based on business grounds, by providing a written response to Licensee. In the event Licensor fails to respond to such resubmission within the allotted time, the New Mark shall be deemed to be approved from a business, but not necessarily legal, perspective. In the event Licensor rejects a Proposed Mark, in its sole but good faith discretion, Licensor shall specify in writing its reasons for such rejection. Once a Proposed Mark is approved from a business perspective, the Licensee shall proceed with legal searching, pursuant section 2.5.1.3.
2.5.1.3 Legal Approval . Once business approval of a Proposed Mark is obtained, Licensee may send a written request for legal approval of the Proposed Mark by using the Markit.mot.com website, or other electronic submission system designated by Licensor, or in the event an electronic submission system is not available, by sending a written request to Kristen Poggensee, senior trademark paralegal, with a cc: to Dave Carroll, Lead Counsel-Trademarks & Marketing, or other contacts as may be updated from time to time ( Submission Request ) with the following information: the Proposed Mark, countries of use, and the products and/or services within the Solutions Fields of Use that will be used in connection with the Proposed Mark. Upon receipt of such request, Licensor shall conduct a preliminary trademark search and shall provide a copy of any search report to Licensee. In the event Licensor does not identify a perceived substantial risk based on the preliminary trademark search, Licensee may request that Licensor conduct a full trademark search, by making such Submission Request. Upon receipt of such request, Licensor shall conduct a full trademark search and shall provide a copy of the full trademark search report to Licensee. In the event Licensor does not identify a perceived substantial risk based on the full trademark search, Licensee may request that Licensor apply for registration of the New Mark, by making such Submission Request. Licensee acknowledges and agrees that by proceeding with use and/or registration of the New Mark, that it is accepting all risks associated with adopting such New Mark. If, at any time, a Proposed Mark is rejected by Licensor, Licensee may elect to start the search process anew with a different Proposed Mark. In the event that the Parties disagree on whether a Proposed Mark was rightfully rejected by Licensor pursuant to this Section 2.5.1.3, the Parties legal representatives shall discuss in good faith the legal risks presented by use and/or registration of the Proposed Mark, and any proposals for mitigation thereof; provided, however, that Licensor shall, in its sole discretion, determine whether or not to ultimately approve the use and/or registration of a Proposed Mark.
2.5.1.4 In the event that Licensor approves a New Mark, Schedule B or Schedule C hereto shall be amended accordingly to reflect such New Mark. Such New Mark shall be owned by Owner, and Licensees use of such New Mark shall be in accordance with
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the terms of this Agreement. Such approval shall not be contingent upon the payment of any fee or royalties to Licensor; however, the costs and expenses related to Licensors searching, prosecuting or otherwise obtaining, registering, maintaining and enforcing such New Mark shall be governed by Section 5.2 of this Agreement.
2.5.1.5 Licensee must, within two (2) years following such approval, make bona fide commercial use of the New Mark in the Solutions Fields of Use; otherwise, the rights for the New Mark shall revert to Licensor without any compensation or limitation, and Licensee may again apply for such rights.
2.5.1.6 If Licensee has a good faith belief that a product or service is within the Solutions Fields of Use, but said product or service is not, to Licensees knowledge, covered by any of Licensors existing trademark registrations or pending applications of a Solutions Licensed Mark in the Territory, Licensee shall promptly notify Licensor by giving written notice to Licensor, specifying the Solutions Licensed Mark, the countries of use, and the products and/or services within the Solutions Fields of Use for which it is using, or proposes to use, the Solutions Licensed Mark. After such written notification, the provisions of Sections 2.5.1.2 through 2.5.1.5 shall apply.
2.5.1.7 Notwithstanding any provisions of this Section 2.5.1, Licensee is not prohibited from using the Solutions Licensed Marks in connection with one or more generic words, including alphanumeric and model number identifiers, all used in a generic sense and not as trademarks, and is not required to seek permission from Licensor to do so, provided; however, such use shall be otherwise in accordance with the terms, conditions and limitations of this Agreement, and so long as such uses do not result in substantial actual confusion.
2.5.2 Proposed Solutions Licensed Domain Names and Proposed Solutions Licensed Trade Names . Licensee may request an expansion of the scope of the license hereunder to include additional Solutions Licensed Domain Names and Solutions Licensed Trade Names (each, a Proposed Domain Name and Proposed Trade Name and if approved, a New Domain Name and New Trade Name , respectively) to be registered and held by Licensee on an exclusive basis in its name on behalf of and for the benefit of Owner and its Affiliates, for use in connection with products and/or services within any Solutions Fields of Use; provided, however, that such expansion is approved by the Licensor pursuant to the procedure established in this Section 2.5.2. Nothing in this Section 2.5.2 shall be read to guarantee Licensee the right to expand the Solutions Licensed Domain Names and Solutions Licensed Trade Names that it may use under this Agreement.
2.5.2.1 Business Approval . Licensee must request approval from Licensor to use Proposed Domain Names and Proposed Trade Names, including domain names and trade names that it has registered pursuant to Section 2.5.2.3. Licensee shall make the request by giving written notice to Licensor, specifying the Proposed Domain Name or Proposed Trade Name. Licensee shall send its written request to Melissa Gardner, Vice-President Marketing-Naming, with a cc: to Dave Carroll, Lead Counsel-Trademarks & Marketing, or other contacts as may be updated from time to time. Licensor shall have twenty (20) days to approve or reject the Proposed Domain Name or Proposed Trade Name by
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providing a written response to Licensee. In the event Licensor fails to respond within the allotted time, the Proposed Domain Name or Proposed Trade Name shall be deemed to be rejected. In the event of a rejection due to a non-response by Licensor, Licensee may resubmit such Proposed Domain Name or Proposed Trade Name by sending its written request to Melissa Gardner, Vice-President Marketing-Naming, and Bill Ogle, Chief Marketing Officer, with a cc: to Dave Carroll, Lead Counsel-Trademarks & Marketing, or other contacts as may be updated from time to time. Upon such resubmission, Licensor shall have ten (10) days to approve or reject the Proposed Domain Name or Proposed Trade Name, by providing a written response to Licensee. In the event Licensor fails to respond to such resubmission within the allotted time, the Proposed Domain Name or Proposed Trade Name shall be deemed to be approved. In the event Licensor rejects a Proposed Domain Name or Proposed Trade Name, in its sole discretion, Licensor shall specify in writing its reasons for such rejection.
2.5.2.2 If such expansion is approved, Schedule F or Schedule H hereto shall be amended to include such New Domain Name or New Trade Name. Licensees use of such New Domain Name or New Trade Name shall be in accordance with the terms, conditions and limitations of this Agreement.
2.5.2.3 Notwithstanding the foregoing, but subject to Section 2.5.2.4 below, Licensee may register, on behalf of and for Licensor, and begin using a new domain name or new trade name without obtaining Licensors prior approval; provided, however, that said domain name or trade name consists: of (i) a Solutions Licensed Mark or Solutions Licensed Trade Names, plus a Top-Level Domain (in the case of a Domain Name) or indicator of entity type (in the case of a Trade Name); or (ii) a Solutions Licensed Mark or Solutions Licensed Trade Name, plus a geographic term, plus a Top-Level Domain (in the case of a Domain Name) or indicator of entity type (in the case of a Trade Name).
2.5.2.4 Licensee shall provide written notice to Melissa Gardner, Vice-President Marketing-Naming, and Bill Ogle, Chief Marketing Officer, with a cc: to Dave Carroll Lead Counsel-Trademarks & Marketing, or to other contacts as may be updated from time to time, on a quarterly basis on the dates set by Licensor, with a list of all Proposed Domain Names and Proposed Trade Names that it has registered since its last such report (or in the case of the first such report, since the Effective Date), including date of registration, date of expiration (if any), and registrar or registering office (the List ). Licensor shall have thirty (30) days following receipt of the List to object to any of the Proposed Domain Names or Proposed Trade Names on said List that were registered by Licensee pursuant to the terms of Section 2.5.2.3 by giving written notice to Licensee; otherwise, those Proposed Domain Names and Proposed Trade Names shall be deemed approved by Licensor. In the event the Licensor decides that Licensee must cease all use of any Proposed Domain Name or Proposed Trade Name, Licensee shall do so as soon as reasonably practicable, but in no case later than six (6) months following written notification of disapproval from Licensor with regard to use for Marketing Materials and Promotional Items, and one (1) year with regard to all use on Licensees products. Licensee shall also take all reasonably necessary steps to cancel or amend the registration of such Proposed Trade Name and transfer the registration of such Proposed Domain Name to Licensor, without compensation. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time periods identified in this Section 2.5.2.4.
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2.5.2.5 Such approval shall not be contingent upon the payment of any fee or royalties to Licensor; however, the cost of registering and maintaining such New Domain Name or New Trade Name shall be borne solely by Licensee.
2.5.3 Proposed Fields of Use
2.5.3.1 Expansions of the Fields of Use for Products Sold to Government, Public Safety and Military Customers . Licensee may request an expansion of the scope of the license hereunder to include additional exclusive or non-exclusive products designed, marketed and sold to Government, Public Safety and Military Customers (if approved, New Fields of Use ), pursuant to the procedure established in this Section 2.5.3. Licensors approval of any such expansion under this Section 2.5.3.1 shall not be unreasonably withheld. Any approved license expansion for such New Fields of Use under this Section 2.5.3.1 shall be royalty-free. If Licensee sublicenses its approved expanded license rights under this Section 2.5.3.1 to a Non-Affiliate, the Parties shall share equally in any royalty revenue, including any upfront payments or fees, in excess of the Parties reasonable costs incurred in conjunction with such sublicense, which shall first be applied to reimburse Licensor and then to reimburse Licensee. If such expansion is approved, Schedule D or Schedule E hereto shall be amended to include such New Fields of Use. Licensees use of the Solutions Licensed Marks, Solutions Licensed Domain Names and/or Solutions Licensed Trade Names in connection with any such New Fields of Use shall be governed by the terms, conditions and limitations of this Agreement. Nothing in this Section 2.5.3.1 shall be read to guarantee Licensee the right to expand the Fields of Use under this Agreement.
2.5.3.2 Expansions for the Fields of Use for All Other Products . Notwithstanding the provisions of Section 2.5.3.1, Licensee may request an expansion of the scope of the license hereunder to include additional exclusive or non-exclusive Fields of Use for products other than those designed, marketed and sold to Government, Public Safety and Military Customers (if approved, New Fields of Use ), pursuant to the procedure established in this Section 2.5.3. Licensors approval of any such expansion under this Section 2.5.3.2 shall be in its sole discretion. Licensor, in its sole discretion, may impose a reasonable fee or royalty on Licensee for such New Fields of Use. If such expansion is approved, Schedule D or Schedule E hereto shall be amended to include such New Fields of Use. Licensees use of the Solutions Licensed Marks, Solutions Licensed Domain Names and/or Solutions Licensed Trade Names in connection with any such New Fields of Use shall be governed by the terms, conditions and limitations of this Agreement. Nothing in this Section 2.5.3.2 shall be read to guarantee Licensee the right to expand the Fields of Use under this Agreement
2.5.3.3 If Licensee has a bona fide desire to use the Solutions Licensed Marks on products and/or services in a Field of Use outside of the existing Solutions Fields of Use (a Proposed Field of Use ), it shall give notice (an Expansion Notice ) of such Proposed Field of Use to Licensor.
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2.5.3.4 Following Licensors receipt of Licensees Expansion Notice, the Parties shall promptly discuss in good faith such Expansion Notice, and the business and legal issues presented by such Proposed Field of Use. Licensor shall then have sixty (60) days following said discussions, or if no discussion takes place, from receipt of Licensees Expansion Notice, to approve or reject the Proposed Field of Use by giving written notice to Licensee. .
2.5.3.5 Upon Licensors approval of the Proposed Field of Use, Schedule D or Schedule E hereto shall be amended to include the exclusive or non-exclusive rights, as the case may be, to add the New Fields of Use. Licensee shall be solely required to bear all costs and expenses of such expansion into an Exclusive Field of Use, including without limitation, attorneys fees reasonably incurred by Licensor in connection with the expansion of the Solutions Exclusive Fields of Use to include a New Field of Use, and it being further understood that Licensee shall share the cost and expenses equally with Licensor of such expansion into a Non-Exclusive Field of Use, including, without limitation, attorneys fees reasonably incurred by Licensor in connection with the expansion of the Solutions Non-Exclusive Fields of Use to include a New Field of Use.
2.5.3.6 Licensee must, within two (2) years following such approval, make bona fide commercial use of the Solutions Licensed Marks in such New Field of Use; otherwise, the rights for the New Field of Use shall revert to Licensor without any compensation or limitation, and Licensee may again apply for such rights. Nothing in this Agreement precludes Licensee from again applying for such rights.
2.5.3.7 Notwithstanding anything else in this Section 2.5.3, Licensee shall not be permitted to use the Solutions Licensed Marks in connection with any Fields of Use that would conflict with any Excluded Fields of Use.
2.5.4 Inadvertent Overlaps with Solutions Exclusive Fields of Use . In the event that either Party becomes aware: (i) that, due to, for example, differences in nomenclature between Licensee and Licensor, products and/or services in any of the Solutions Exclusive Fields of Use potentially overlap or conflict with Licensors rights or its products or services; or (ii) of any substantial actual confusion between the Parties use of their respective Motorola Marks in their respective Fields of Use, that Party shall provide written notice of such potential overlap or conflict to the other Party. In either case, Licensor shall promptly investigate and evaluate the potential overlap or conflict. If Licensor, in its sole discretion, determines that the relevant products and/or services do in fact overlap or conflict, Schedule D of this Agreement shall be amended to move the relevant products or services from the Solutions Exclusive Fields of Use to Schedule E for the Solutions Non-Exclusive Fields of Use, and use thereof shall be subject to all applicable terms, conditions and limitations of this Agreement.
2.5.5 Inadvertent Overlaps with Solutions Licensed Marks - Exclusive . In the event that either Party becomes aware that any Solutions Licensed Marks, licensed exclusively to Solutions, potentially overlaps or conflicts with Licensors use of, or rights to, the Motorola Marks, that Party shall provide written notice of such potential overlap or conflict to the other Party. In either case, Licensor shall promptly investigate and evaluate the potential overlap or conflict. If Licensor, in its sole discretion, determines that the relevant Motorola Mark does in
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fact overlap or conflict, Schedule B of this Agreement shall be amended to move the relevant Solutions Licensed Mark from the Solutions Licensed Marks - Exclusive schedule to Schedule C for the Solutions Licensed Marks - Non-Exclusive schedule, and use thereof
2.5.6 Inadvertent Inclusion of Motorola Marks on Solutions Licensed Mark Schedules . In the event that either Party becomes aware that any Solutions Licensed Mark, currently licensed to Licensee as of the Effective Date, was potentially mistakenly included on Schedule B or Schedule C for the Solutions Licensed Marks, and should not have originally been licensed to Licensee, that Party shall provide written notice of such potential mistake to the other Party. Licensor shall promptly investigate and evaluate the potential mistake. If Licensor, in its sole but good faith discretion, determines that the relevant Motorola Mark should in fact not have been licensed to Licensee, Schedule B or Schedule C of this Agreement shall be amended to remove that Solutions Licensed Mark from the relevant Solutions Licensed Marks schedule. Upon written notice from Licensor to Licensee, Licensees rights to use such Motorola Mark under this Agreement shall thereafter terminate.
2.6 Scope of Sunset License . Subject to the terms, conditions and limitations of this Agreement, Licensee has the right to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names including, without limitation, on or in connection with the manufacturing, distributing, selling, reselling, repairing, maintaining, supporting, advertising, promoting and marketing of: (i) wireless modules, including consumer WiMAX access points, wireless cards and dongles, and installed car phones sold by Motorola Israel Limited (collectively the Sunset Fields of Use ); and (ii) Marketing Materials and Promotional Items related to the Sunset Fields of Use, in the Territory, for two (2) years from the Effective Date. After the expiration of the time period identified in this Section 2.6, Licensee shall have no further right to use, or permit any sublicensee to use, any of the Motorola Marks, Motorola Domain Names or Motorola Trade Names for the Sunset Fields of Use. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time period identified in this Section 2.6.
ARTICLE 3
ASSIGNMENT; SUBLICENSING
3.1 Assignment .
3.1.1 Assignment by Licensor . Licensor may assign its rights under this Agreement to: (i) any other Person in connection with a Change of Control; (ii) a wholly-owned subsidiary of Licensor; (iii) Mobility; and (iv) Spinco. In the event that Licensor is subject to a Change of Control to or with an acquirer or third party, Licensor shall notify Licensee no later than thirty (30) days following the execution of a definitive agreement providing for a proposed Change of Control, or, if no such agreement is executed, the consummation of the Change of Control. If Licensor so assigns this Agreement to a wholly-owned subsidiary, then Licensor shall guarantee the performance of the subsidiary with respect to the obligations hereunder. If such wholly-owned subsidiary of Licensor ceases to be wholly-owned by Licensor, this
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Agreement and rights hereunder revert to the assigning Licensor. Any assignment pursuant to this Section 3.1.1 shall not be effective unless and until the assignee agrees in writing to be bound by all terms, conditions and limitations of this Agreement.
3.1.2 Assignment by Licensee . Licensee may assign this Agreement or any rights hereunder to: (i) any other Person in connection with a Change of Control; provided, however, that Licensee has conducted an assessment of, and provides Licensor with adequate assurances for, such Persons ability to perform its obligations pursuant to this Agreement. Such adequate assurances shall include, but are not limited to, such Persons stability, financial strength, quality controls and sales capabilities; and (ii) a wholly-owned subsidiary of Licensee; provided, however, that Licensee shall guarantee the performance of the subsidiary with respect to the obligations hereunder. If such wholly-owned subsidiary of Licensee ceases to be wholly-owned by Licensee, this Agreement and rights hereunder revert to the assigning Licensee. Any assignment pursuant to this Section 3.1.2 shall not be effective unless and until the assignee agrees in writing to be bound by all terms, conditions and limitations of this Agreement.
3.2 Further Licensing by Licensor and Sublicensing by Licensee .
3.2.1 Further Licensing by Licensor.
3.2.1.1 Licensor shall be free to use and license others to use the Motorola Marks outside of the Solutions Exclusive Fields of Use. Notwithstanding the foregoing, Licensor shall not license third-parties to use any Motorola Marks for any products designed, marketed and sold to Government, Public Safety or Military Customers outside the scope of Solutions current Fields of Use for Government, Public Safety and Military Communication Products without prior written approval from Licensee, which shall not be unreasonably withheld. If Licensee approves of Licensors licensing requiring such approval pursuant to this Section 3.2.1.1, the Parties shall share equally in any royalty revenue, including any upfront payments or fees, in excess of the Parties reasonable costs incurred in conjunction with such sublicense, which shall first be applied to reimburse Licensor and then to reimburse Licensee.
3.2.2 Sublicensing by Licensee .
3.2.2.1 To an Affiliate . Licensee may sublicense an Affiliate to use the Solutions Licensed Marks and to register and use the Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with the Solutions Fields of Use for the furtherance of Licensees or its Affiliates business or operations; provided, however, that such Affiliate shall be subject to the terms, conditions and limitations of this Agreement, and provided that such Affiliate shall not be entitled to further sublicense its rights.
3.2.2.2 To a Non-Affiliate .
3.2.2.2.1 Subject to Section 2.5.3.1, and to Licensors right of pre-approval, in its sole but good faith discretion, Licensee may sublicense a party who is not an Affiliate to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with the Solutions Fields of Use for the furtherance
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of Licensees or its Affiliates business or operations, only as necessary to allow such sublicensee to manufacture, market, distribute and/or sell Licensees products or services bearing the Solutions Licensed Marks, provided that: (i) Licensee provides Licensor with prior written notice of each such sublicense; (ii) Licensee has conducted an assessment of, and provides Licensor with adequate assurances for, such sublicensees ability to perform its obligations pursuant to this Agreement. Such adequate assurances shall include, but are not limited to, such sublicensees stability, financial strength, quality controls and sales capabilities; (iii) each such sublicense shall be subject to the terms, conditions and limitations of this Agreement; and (iv) each such sublicensee shall not be entitled to further sublicense its rights. Such sublicensee may not register any Motorola Marks and may not register any Motorola Domain Names or Motorola Trade Names. Such sublicensee may not use the Solutions Licensed Marks in connection with any products or services that are not within Solutions Fields of Use.
3.2.2.2.2 If at any time Licensee divests any part of its business to any Person ( Divested Entity ), subject to Licensors right of pre-approval, in its sole but good faith discretion, Licensee may sublicense that Divested Entity to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with the divested Solutions Fields of Use ( Divested Fields of Use ), provided that: (i) Licensee provides Licensor with prior written notice of each such Divested Entity; (ii) Licensee has conducted an assessment of, and provides Licensor with adequate assurances for, each such Divested Entitys ability to perform its obligations pursuant to this Agreement (such adequate assurances shall include, but are not limited to, such Divested Entitys stability, financial strength, quality controls and sales capabilities); (iii) each such Divested Entity shall be subject to the terms, conditions and limitations of this Agreement; and (iv) each such Divested Entity shall not be entitled to further sublicense its rights. Such Divested Entity may not register any Motorola Marks and may not register any Motorola Domain Names or Motorola Trade Names. Such Divested Entity may not use the Solutions Licensed Marks in connection with any products or services that are not within the Divested Fields of Use. In order to avoid abandonment of the Solutions Licensed Marks in any Solutions Field of Use, if, in connection with such divestiture: (i) such Divested Entity does not enter into a sublicense, other than a wind down license, with Licensee to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names; and (ii) Licensee intends to, after expiration of any wind down licensed entered into with such Divested Entity, cease all use of, and has no intention to resume use of, the Solutions Licensed Marks in such Divested Fields of Use, or fails to resume use of the Solutions Licensed Marks in such Divested Fields of Use within a reasonable period of time after expiration of any wind down licensed
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entered into with such Divested Entity, Licensees rights under this Agreement to use such Solutions Licensed Marks in the Divested Fields of Use shall revert to Licensor without any compensation or limitation, and Licensee may again apply for such rights pursuant to Section 2.5. In the event that Licensee intends to cease all use of any Solutions Licensed Marks in a Divested Field of Use pursuant to this section 3.2.2.2, Licensee shall provide Licensor with three (3) months prior written notice of such intention. Nothing in this Agreement precludes Licensee from again applying for such rights. Notwithstanding the foregoing, Licensee shall have the right to grant a wind down license to a Divested Entity, for a transition period not to exceed one hundred eighty (180) days, to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with products or services that are within the Divested Fields of Use solely for the operation of the divested business.
3.2.2.2.3 If at any time Licensee acquires a business whose products and/or services are within the Solutions Fields of Use, Licensee may sublicense that business to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with the Solutions Fields of Use, provided that such sublicense shall be subject to the terms, conditions and limitations of this Agreement, and provided that such entity shall not be entitled to further sublicense its rights.
3.2.2.2.4 If at any time Licensee acquires a business or product line that is not within the Solutions Fields of Use, Licensee may request an expansion of the scope of the license hereunder to include additional Fields of Use, pursuant to the procedure established Section 2.5.3 of this Agreement. Unless and until such Proposed Fields of Use are approved, Licensee may not sublicense, or otherwise permit that business to use the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names.
3.2.2.2.5 Licensee shall enter into a written sublicense agreement with any permitted sublicensee, which sublicense agreement shall be in substantially the same form as attached in Exhibit B and the scope of rights and manner in which any licensed marks or property are used or set forth in any permitted sublicense shall be no greater than, nor for a longer duration than, any such rights hereunder. Any breach by a sublicensee of this Agreement or the sublicense agreement shall, for all purposes, be considered a breach by Licensee of this Agreement.
3.2.3 Acknowledgement . Except as otherwise provided in this Agreement, neither Party may assign or sublicense this Agreement or any rights hereunder to any Person. Licensee acknowledges and agrees that: (i) this Agreement is in the nature of a personal service arrangement; (ii) under applicable trademark law, the Licensor would be excused from accepting
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performance from or rendering service to an assignee of the contract; and (iii) any restrictions on assignment under this Agreement are valid and enforceable under Bankruptcy Code Section 365(c)(1).
ARTICLE 4
TERM AND TERMINATION
4.1 Term . The term of this Agreement shall begin on the Effective Date and shall continue for a period of ten (10) years from such date (the Initial Term ). Thereafter, this Agreement shall automatically renew for successive terms of ten (10) years (each, a Renewal Term ). Together, the Initial Term and any Renewal Terms shall constitute the Term of the License, unless this Agreement is earlier terminated in accordance with the provisions of Section 4.3 below, in which case the Term shall end on the effective date of termination.
4.2 Non-Material Breaches .
4.2.1 Either Party may provide written notice to the other Party alleging such Party has failed to comply with their respective material duties or obligations hereunder, or has otherwise breached a term of this Agreement, but which failure does not rise to the level of a Material Breach ( Non-Material Breach ). Written notices shall set forth with sufficient particularity a description of the asserted breach, and proposed actions to be taken, if any, in order to remedy the breach. For the avoidance of doubt, breaches of Section 6.2 (Product Quality) shall be governed by the breach and cure provisions contained in Section 6.2.
4.2.2 Upon receipt of such notice, the breaching Party shall have thirty (30) days from the date of such notice to cure such Non-Material Breach. In the event that the Non-Material Breach is impossible to cure within thirty (30) days, the breaching Party shall have an additional thirty (30) days to cure such Non-Material Breach. For the avoidance of doubt, the breaching Party shall act in good faith, using Reasonable Efforts to cure any Non-Material Breach as soon as possible, but the breach must be cured within sixty (60) days from the initial notice.
4.3 Termination . Notwithstanding Section 4.1 above and subject to the applicable time periods set forth in Section 4.4 below, this Agreement and the rights hereunder may be terminated upon the occurrence of any of the following events:
4.3.1 Termination for Cause . Either Party may terminate this Agreement as a result of a Material Breach (as defined herein) of this Agreement by the other Party following written notice by the Party to the other Party of such breach, and which breach has remained uncured or otherwise unresolved for a period of one-hundred twenty (120) days or more following that Partys receipt of such written notice. Written notices shall set forth with sufficient particularity a description of the asserted breach, and proposed actions to be taken, if any, in order to remedy the breach. For the avoidance of doubt, the breaching Party shall use Reasonable Efforts to cure or otherwise resolve any Material Breach as soon as possible, but the
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breach must be cured within one-hundred twenty (120) days from written notice. For the purpose of this Section 4.3.1, only the following types of breaches shall constitute a Material Breach of this Agreement:
(a) Licensees intentional disregard for, or chronic failure to comply with, its obligations under Article 6 (Quality Control), which failure materially and adversely impacts the Motorola Marks or the associated goodwill;
(b) Licensees intentional disregard for, or chronic failure to comply with, its obligations to use the Motorola Marks as required in the Master Brand Usage Guidelines attached as Exhibit A , which failure materially and adversely impacts the Motorola Marks or the associated goodwill;
(c) Licensees intentional disregard for, or chronic failure to comply with, its obligation to remedy Non-Material Breaches;
(d) Licensees egregious misconduct which materially and adversely impacts the Motorola Marks or the associated goodwill;
(e) Licensees knowing use of any Solutions Licensed Mark, Solutions Licensed Domain Name or Solutions Licensed Trade Name in any Field of Use other than the Solutions Fields of Use, or Licensees knowing use of any Motorola Marks other than the Solutions Licensed Marks, or Licensees knowing use of any other marks owned by Owner, except as expressly permitted under this Agreement; or
(f) Licensees challenge to Owners title to or in the Motorola Marks, the validity of the Motorola Marks, or any registration thereof, including any breach of Section 5.1.
(g) Licensors intentional disregard for, or chronic failure to comply with, its obligation to remedy Non-Material Breaches; or
(h) Licensors egregious misconduct which materially and adversely impacts the Motorola Marks or the associated goodwill.
4.3.2 Upon Licensees Cessation of Use of All of the Solutions Licensed Marks . Except as specifically provided in Section 3.2.2.2 and Section 5.2.4 regarding Licensees intention to cease some, but not all, use of a Solutions Licensed Mark in a Solutions Fields of Use, in the event that Licensee intends to cease use of all of the Solutions Licensed Marks, without an intention to resume such use, e.g., global rebrand, Licensee shall provide Licensor with prior written notice, at least three (3) months in advance of such cessation and this Agreement may thereafter be terminated by Licensor by written notice to Licensee. For purposes of this section, Licensees public announcement of its intention to globally rebrand shall be deemed notice to Licensor.
4.3.3 Upon Consent . This Agreement may be terminated upon mutual, written consent of authorized officers of both Parties, or upon written notification by an authorized officer of Licensee.
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4.3.4 Upon the Occurrence of a Material Action . This Agreement shall automatically terminate without the need for any other or ratifying act if and when a Material Action takes place with respect to Licensee. If Licensor becomes subject to a Material Action, Licensee may, in its sole discretion: (i) terminate this Agreement by providing written notice to Licensor of its intent to terminate; or (ii) take action under the Right of First Refusal provisions pursuant to Section 5.5.
4.4 Effect of Termination . Except as otherwise expressly provided in this Agreement, upon termination of this Agreement, all of Licensees rights hereunder shall forthwith revert to Owner, who shall be free to use and license or permit others to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names without limitation. Licensee and its sublicensees shall promptly undertake steps to end their use of the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names and shall end such use by the time periods indicated below. As long as Licensee and its sublicensees continue to use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names, they shall comply with all provisions of this Agreement, including but not limited to Article 6 hereof (Quality Control).
4.4.1 Termination by Licensor for Cause . In case of termination based on Section 4.3.1 of this Agreement, Licensee shall end all use of the Solutions Licensed Marks as soon as reasonably practicable and in no event later than six (6) months after termination with regard to use for Marketing Materials and Promotional Items, and one (1) year with regard to all use on Licensees products. During the time periods identified in this Section 4.4.1, Licensee shall have no right to create, manufacture, produce or use new Marketing Materials, Promotional Items, or products using any Motorola Marks, Motorola Domain Names or Motorola Trade Names. After the expiration of the time periods identified in this Section 4.4.1, Licensee shall have no further right to use, or permit any sublicensee to use, any Motorola Marks, Motorola Domain Names or Motorola Trade Names in any manner whatsoever.
4.4.2 Termination by Licensee for Cause . If Licensee exercises its right to terminate under Section 4.3.1(g) or 4.3.1(h) of this Agreement, Licensee shall end its use of all Solutions Licensed Marks as soon as reasonably practicable, and in no event later than three (3) years from written termination notice to Licensor with regard to use for Marketing Materials, Promotional Items and all use on Licensees products; provided, however, that Licensor shall not use, or authorize others to use, the Solutions Licensed Marks in the Solutions Fields of Use earlier than: (i) the expiration of the time periods identified in this Section 4.4.2; or (ii) Licensees actual cessation of such use, whichever occurs first. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time period identified in this Section 4.4.2.
4.4.3 Upon Licensees Cessation of Use of All of the Solutions Licensed Marks . If Licensor exercises its right to terminate under Section 4.3.2, Licensee shall end its use of all Solutions Licensed Marks as soon as reasonably practicable, and in no event later than three (3) years from written termination notice by Licensor with regard to use for Marketing Materials, Promotional Items and all use on Licensees products; provided, however, that Licensor shall not use, or authorize others to use, the Solutions Licensed Marks in the Solutions Fields of Use
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earlier than: (i) the expiration of the time periods identified in this Section 4.4.3; or (ii) Licensees actual cessation of such use, whichever occurs first. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time period identified in this Section 4.4.3.
4.4.4 Other . In any other case of termination of this Agreement, the Parties shall in good faith negotiate a reasonable time period for Licensee to cease all use of the Solutions Licensed Marks. If they cannot reach an agreement, the period shall be twelve (12) months from the effective date of termination, for the purpose of Marketing Materials and Promotional Items, and two (2) years from the effective date of termination for removing the Solutions Licensed Marks from all Licensees products. During the periods identified in this Section 4.4.4, Licensee shall have no right to create, manufacture, produce or use new Marketing Materials, Promotional Items, or products using any Motorola Marks, Motorola Domain Names or Motorola Trade Names. After the expiration of the time periods identified in this Section 4.4.4, Licensee shall have no further right to use, or permit any sublicensee to use, any of the Motorola Marks, Motorola Domain Names or Motorola Trade Names in any manner whatsoever. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time periods identified in this Section 4.4.4.
4.4.5 Transfer of Domain Names . Upon termination of this Agreement for any reason, Licensee shall, and shall cause its sublicensees to, take all necessary steps to transfer to Owner the registrations for all Solutions Licensed Domain Names registered to them or otherwise in their power, possession or control. Until transfer of the registrations to Owner, Licensee shall or shall cause its sublicensees to maintain said registrations, including, but not limited to, paying all associated renewal fees, at Licensees or its sublicensees sole cost and expense.
4.4.6 Transfer of Trade Names . Upon termination of this Agreement for any reason, Licensee shall, and shall cause its sublicensees to, take all necessary steps to cancel or amend all registrations of Solutions Licensed Trade Names so as to remove the Motorola Marks therefrom.
4.4.7 No Goodwill Redundancy upon Termination . Any and all goodwill which accrues or which has accrued as a consequence of the implementation of this Agreement will have accrued and shall accrue for the benefit of Owner. Consequently, upon the proper termination of this Agreement for any reason whatsoever, Licensee shall not acquire any right not expressly mentioned herein and in particular shall not be entitled to receive from Licensor any kind of compensation, redundancy fee or whatever payment on the basis of any goodwill which might have arisen out of the implementation of this Agreement. Insofar as Licensee might have been regarded for the purposes of any applicable law to be entitled to any goodwill arising out of this Agreement or out of Licensees use of the Motorola Marks, Licensee hereby assigns and transfers to Owner its ownership in that goodwill, without further consideration.
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ARTICLE 5
INTELLECTUAL PROPERTY RIGHTS
5.1 Ownership . The Parties agree and acknowledge that, as of the Effective Date of this Agreement, Owner shall be the sole and exclusive owner of all right, title and interest in and to the Motorola Marks, Motorola Domain Names and Motorola Trade Names and all the goodwill associated therewith, notwithstanding Licensees right to register New Domain Names and New Trade Names in its own name for the benefit of Owner. Licensee understands, accepts and agrees that its usage of the Motorola Marks, Motorola Domain Names and Motorola Trade Names, including all goodwill and any additional value created by such usage of the Motorola Marks, Motorola Domain Names and Motorola Trade Names, shall inure solely to the benefit of Owner. Nothing in this Agreement shall be construed as granting to Licensee, nor shall Licensee be construed as retaining, any rights, title or interests in or to the Motorola Marks, Motorola Domain Names and Motorola Trade Names, other than Licensees rights, as identified herein, to use the Solutions Licensed Marks and to register and use the Solutions Licensed Domain Names and Solutions Licensed Trade Names in accordance with this Agreement. During the Term and thereafter, Licensee, its Affiliates and sublicensees shall not: (i) use the Motorola Marks, Motorola Domain Names or Motorola Trade Names except as permitted hereunder; (ii) apply to register or cooperate in any effort by any third party to register the Motorola Marks, Motorola Domain Names or Motorola Trade Names or any trademarks, service marks, domain names or trade names containing the Motorola Marks or that are confusingly similar to the Motorola Marks anywhere in the world in connection with any products or services, except as specifically permitted under this Agreement during the Term; (iii) challenge or participate in any challenge of Owners exclusive rights in the Motorola Marks, Motorola Domain Names or Motorola Trade Names; (iv) do anything else inconsistent with Owners ownership of the Motorola Marks, Motorola Domain Names or Motorola Trade Names; (v) license, authorize, or otherwise permit, its Affiliates, sublicensees or third parties to use the Motorola Marks, Motorola Domain Names and Motorola Trade Names except as permitted hereunder; or (vi) use, assert, pledge or rely upon the Motorola Marks, Motorola Domain Names or Motorola Trade Names or this Agreement to incur, secure or perfect any obligation or indebtedness.
5.2 Procurement and Maintenance of Trademark Registrations . Except for Licensees right to register New Domain Names and New Trade Names under this Agreement, Licensor shall be responsible for all searches, prosecution or other procurement, registration and maintenance of the Motorola Marks. Licensor shall be the sole and exclusive Party entitled to procure and/or register the Motorola Marks, including any New Marks, on behalf of and for the benefit of Owner. Subject to Section 2.5 and this Section 5.2, Licensee may request that Licensor procure or register the Solutions Licensed Marks, including New Marks, in Owners name at anytime and anywhere in the Territory, and Licensor shall use Reasonable Efforts to procure or register such Solutions Licensed Marks, including New Marks. Owner shall be the sole and exclusive owner of the Motorola Marks, including the New Marks and the registrations and applications to register therefor.
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5.2.1 Solutions Licensed Marks - Exclusive . All costs and expenses related to Licensors searching, prosecuting or otherwise obtaining, registering and maintaining the Solutions Licensed Marks licensed exclusively to Licensee as set forth on Exhibit B shall be borne by Licensee.
5.2.2 Solutions Licensed Marks - Non-Exclusive . All costs and expenses related to Licensors searching, prosecuting or otherwise obtaining, registering and maintaining the Solutions Licensed Marks licensed on a non-exclusive basis to License as set forth on Exhibit C shall be borne equally by Licensee and Licensor.
5.2.3 Archives . The Parties shall work together in good faith to preserve and protect the materials contained in the Archives. The Archives shall be co-managed by the Parties, and, subject to Section 5.2.3.3, shall remain located on the Solutions campus in the Galvin Center, 1295 East Algonquin Road, Schaumburg, Illinois 60196 ( Archive Facility ).
5.2.3.1 Ownership and Access Rights . The Parties or their designees shall have equal access to all materials existing in the Archives as of the Effective Date of this Agreement ( Legacy Collection ). The Legacy Collection includes: (i) materials relating to the history of Mobility, which are owned by Licensor ( Legacy Mobility Collection ); (ii) materials relating to the history of Solutions, which are owned by Licensee ( Legacy Solutions Collection ); and (iii) materials relating to the history of Motorola generally or materials which are not easily identified as belonging to either Licensee or Licensor, which are owned by jointly by Licensor and Licensee ( Legacy Shared Collection ). All materials created on or before the Effective Date of this Agreement that are contributed to the Archives after the Effective Date of this Agreement shall be considered part of the Legacy Collection and shall be designated as Legacy Mobility Collection, Legacy Solutions Collection or Legacy Shared Collection based on the subject matter of such materials. All materials created after the Effective Date of this Agreement that are contributed to the Archives by Licensee after the Effective Date of this Agreement shall be owned by Licensee ( New Solutions Collection ). All materials created after the Effective Date of this Agreement that are contributed to the Archives by Licensor after the Effective Date of this Agreement shall be owned by Licensor ( New Mobility Collection ). Licensee shall arrange for any personnel designated by Licensor to be granted reasonable access to the Archive Facility. Unless otherwise agreed to by Licensee, Licensor shall have no access to the New Solutions Collection. Unless otherwise agreed to by the Licensor, Licensee shall have no access to the New Mobility Collection. Both Licensee and Licensor shall have secured, separate and private workspaces, and secure and private access to Legacy Collection databases and systems.
5.2.3.2 Costs and Expenses . The Parties or their designees shall each employ, at their sole cost and expense, an archivist. All operational costs and expenses to manage the Archives, including IT expenses, Archive Facility costs, and any other costs necessary to operate and manage the Archives shall be shared pro-rata between the Parties, based on the percentage of space occupied by each Partys respective physical collections in the Archives Facility. The cost ratio will be re-calculated annually on or about January 1, and shall be budgeted and paid pursuant to Section 5.2.5. As of the Effective Date of this Agreement, the current cost ratio is forty-three (43) percent for Licensor and fifty-seven (57) percent for Licensee.
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5.2.3.3 Disposition of Collections . Either Party may elect to remove any of its respective collections from the Archive Facility, on a temporary or permanent basis; provided, however, that in the event that Licensor seeks to sell, donate, destroy, transfer, assign, give, bequeath or otherwise dispose of any materials in the Legacy Mobility Collection, it shall first offer such materials to Licensee on upon terms not materially different; and in the event that Licensee seeks to sell, donate, destroy, transfer, assign, give, bequeath or otherwise dispose of any materials in the Legacy Solutions Collection, it shall first offer such materials to Licensor upon terms not materially different. The Parties or their designees shall co-manage the materials contained in the Legacy Shared Collection, and shall mutually agree on the sale, donation, destruction or other disposition of any materials contained in the Legacy Shared Collection. Both Licensee and Licensor shall be free to sell, donate, destroy, or otherwise dispose of any materials in the New Solutions Collection or New Mobility Collection, respectively, without accounting to the other.
5.2.4 Cessation of Use of Solutions Licensed Marks . Notwithstanding Section 4.3.2 which governs Solutions intention to cease all use of the Solutions Licensed Marks under this Agreement, to avoid abandonment of any Solutions Licensed Marks in any Solutions Fields of Use, in the event that Licensee intends to cease use of a Solutions Licensed Marks in any Solutions Fields of Use, and has no intention to resume such use, or fails to use the Solutions Licensed Marks in any Solutions Fields of Use for a period of three (3) or more years, Licensees rights under this Agreement to use such Solutions Licensed Marks in such Solutions Fields of Use shall revert to Licensor without any compensation or limitation, and Licensee may again apply for such rights pursuant to Section 2.5. Licensee shall provide Licensor with prior written notice, at least three (3) months before it intends to cease use of any Solutions Licensed Marks in any of the Solutions Fields of Use, anywhere in the Territory, i.e., in one or more categories of products or services set forth in the Solutions Fields of Use on Schedule D or Schedule E .
5.2.5 Budgeting for Procurement, Maintenance, Enforcement and Archives . The Parties or their designees shall meet annually and in good faith to discuss and agree upon the budget forecasts for the procurement, maintenance and enforcement of the Solutions Licensed Marks and the Archives for the coming year. If the Parties cannot reach an agreement on an annual budget, the Parties shall budget for the actual amount spent in the previous year plus a five (5) percent budget increase. Once an annual budget has been set, Licensee shall pay Licensor, on a quarterly basis, a dollar amount equal to one-quarter (1/4) of the total annual budget for that year. At the end of each year, Licensor shall provide Licensee with a detailed accounting of the monies spent by Licensor in accordance with this Article 5, in connection with procurement, maintenance and enforcement of the Solutions Licensed Marks and the Archives, and shall either credit Licensee into the next budgeted year for any Licensee payments in excess of that amount, or provide Licensee with a statement detailing the additional amounts owed by Licensee that exceed the amount budgeted and previously paid by Licensee for that budgeted year.
5.3 Procurement and Maintenance of Domain Names and Trade Names . Licensee shall be responsible, at Licensees sole cost and expense, for all procurement and maintenance of all Solutions Licensed Domain Names and Solutions Licensed Trade Names, including New Domain Names and New Trade Names, on behalf of and for the benefit of Owner. In the event that Licensee decides not to renew a Domain Name or Trade Name that it
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has registered, it shall notify Licensor in writing no later than ninety (90) days prior to expiration of the registration for said domain name or trade name. Licensor shall have the right to require Licensee to transfer said domain name or trade name registration to Owner, at Owners sole cost and expense. Owner or Licensor thereafter shall maintain any such transferred domain names or trade names at its sole discretion, cost and expense.
5.4 Enforcement . Licensee acknowledges that appropriate policing and enforcement of all Motorola Marks is critical to maintaining the value of the Motorola Marks, including the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names, and that, therefore, Licensee is benefited by enforcement of all the Motorola Marks, Motorola Domain Names and Motorola Trade Names in all Fields of Use. Licensee shall inform Licensor of any infringement of the Motorola Marks, Motorola Domain Names and Motorola Trade Names that comes to its attention at any time; such information shall also state whether the Licensee considers such infringement to be material.
5.4.1 Enforcement by Licensor . Subject to Section 5.4.2 hereof, Licensor shall, in its sole discretion, have the exclusive right to sue in its own name for any infringement of the Motorola Marks, including the Solutions Licensed Marks, or take any other enforcement action it deems necessary or appropriate under the circumstances.
5.4.1.1 Solutions Licensed Marks - Exclusive . All costs and expenses related to Licensors enforcement of the Solutions Licensed Marks licensed exclusively to Licensee shall be borne by Licensee. Licensee shall retain any monetary proceeds from such enforcement.
5.4.1.2 Solutions Licensed Marks - Non-Exclusive . All costs and expenses related to Licensors enforcement of the Solutions Licensed Marks licensed on a non-exclusive basis to Licensee shall be borne equally by Licensee and Licensor. Licensee and Licensor shall share equally in any monetary proceeds from such enforcement.
5.4.2 Enforcement by Licensee . In the event Licensor elects not to take action pursuant to Section 5.4.1 hereof within thirty (30) days after Licensor has been given notice of infringement of the Solutions Licensed Marks in any Solutions Fields of Use, Licensee may request approval from Licensor to initiate a suit or other enforcement action, at its sole cost and expense. Within fifteen (15) days of Licensees request for approval from Licensor, the Parties legal representatives shall discuss in good faith the merits and legal risks of any such suit or other enforcement action; provided, however, that Licensor shall, in its sole but good faith discretion, determine whether or not to ultimately approve such action. In the event Licensor does not respond to Licensee, the suit or other enforcement action shall be deemed to be disapproved by Licensor. If approved, Licensor shall participate as a co-plaintiff in any suit or action if needed to provide standing and shall otherwise cooperate with Licensee with regard to such suit or action, at Licensees sole cost and expense, and subject to appropriate indemnification as reasonably required by Licensor. Licensee shall indemnify Licensor against any and all judgments entered against Licensor or any other payments Licensor is required to make as a result of such suit or other enforcement action. Licensee may not settle such suit or enter into any other agreement affecting the Motorola Marks and/or Licensors rights in them without Licensors written approval. Licensee shall retain any monetary proceeds from such suit.
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5.4.3 Enforcement by Licensee - Anti-Counterfeiting . All costs and expenses pertaining to Licensees enforcement actions related to counterfeit products that fall within the Solutions Fields of Use shall be borne by Licensee. Licensee shall retain any monetary proceeds from such anti-counterfeiting actions. Licensee must notify Licensor of all relevant information regarding the counterfeits and Licensees enforcement efforts, after which the provisions of Section 5.4.2 hereof shall apply. Licensor, at Licensees cost and expense, shall cooperate and provide all assistance required by Licensee in connection with such action.
5.4.4 Enforcement by Licensor - Anti-Counterfeiting . Licensor may, at Licensees sole cost and expense, initiate anti-counterfeiting actions related to the Motorola Marks in any Solutions Fields of Use. Licensee shall retain any monetary proceeds from such anti-counterfeiting actions. Licensee, at its cost and expense, shall cooperate and provide all assistance required by Licensor in connection with such action.
5.4.5 Right to Prevent Litigation . Notwithstanding Sections 5.4.2 and 5.4.3 above, in the event Licensor reasonably believes that taking an enforcement action in any particular matter would create a significant and serious risk to its business interests or to the Motorola Marks, Licensor shall advise Licensee of this determination within the thirty (30) days from Licensees request for permission to initiate a suit or enforcement action, and Licensee shall take no action with respect to such matter.
5.4.6 Routine Preliminary Enforcement . Notwithstanding any other provision of Section 5.4, Licensee is not required to give Licensor prior notification of routine enforcement actions, not rising to the level of litigation, which Licensee takes with respect to the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names. For purposes of this Section 5.4.6, administrative procedures (e.g., a proceeding under the ICANN Uniform Domain Name Dispute Resolution Policy or customs or police actions) and service of letters or other notification to third parties that would not confer declaratory judgment jurisdiction on those third-parties, shall not be considered to be litigation. In the event Licensee wishes to file suit or make infringement allegations against a third party, Licensee must notify Licensor of all relevant information regarding the infringement and Licensees enforcement efforts, after which the provisions of Sections 5.4.1 through 5.4.5 hereof shall apply. Licensee must also notify Licensor if litigation otherwise results from enforcement action pursuant to this Section 5.4.6, e.g., if the third-party files suit. Licensee shall be liable for all litigation costs and expenses, and subject to appropriate indemnification as reasonably required by Licensor.
5.4.7 Third-party infringement claims or lawsuits . Licensee shall report to Licensor within five (5) business days all information in its possession relative to any actual or threatened suit or claim or other proceeding relating to the Solutions Licensed Marks brought or threatened to be brought against Licensee, or any of its Affiliates or sublicensees. Licensor shall have the right to control the defense of such suit, including any settlement or resolution thereof. Licensee shall have the right, at its sole cost and expense, to participate in the defense of any such suit or to take any other appropriate action relative thereto in cooperation with Licensor and otherwise subject to the terms, conditions and limitations of this Agreement. Licensee shall
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notify the carrier of insurance required under Section 7.2 of this Agreement promptly upon learning of any such actual or threatened claim, suit or other proceeding, in full compliance with all terms, conditions and requirements for coverage under said insurance policy.
5.4.8 Excluded Fields Of Use or Prohibited Use of Motorola Marks . If during the Term of this Agreement, either Party or any of its Affiliates contemplates entering into an agreement with a third party to resolve or otherwise dispose of litigation or other dispute, including routine preliminary enforcement pursuant to Section 5.4.6, involving use of the Motorola Marks, Motorola Domain Names or Motorola Trade Names in the Territory that would prohibit use of a Solutions Licensed Mark, Solutions Licensed Domain Name or Solutions Licensed Trade Name in a Solutions Field of Use anywhere in the Territory, that Party shall promptly provide written notice to the other Party of its intent to enter into such agreement. The Parties legal representatives shall thereafter discuss in good faith the legal risks presented by such dispute. If the Party contemplating entering into such an agreement subsequently enters into such an agreement, it shall promptly provide written notice to the other Party, the schedules of this Agreement shall be amended accordingly, and the Parties shall in good faith negotiate Licensees reasonable phase-out period(s). Notwithstanding the foregoing, Licensee shall be required to notify, and receive approval from, Licensor prior to resolving or otherwise disposing of any dispute that would prohibit use of any of the Motorola Marks, including the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in any Field of Use, including Solutions Fields of Use, anywhere in the Territory.
5.5 Right of First Refusal .
5.5.1 During the Term of this Agreement, in the event that: (a) (i) Licensor, (ii) a trustee, assignee or receiver acting on Licensors behalf, or (iii) a secured party, seeks to sell, transfer, assign, give, bequeath or otherwise dispose of (each a Transfer ) the Motorola Marks, or any portion thereof, as an independent stand-alone asset together with the goodwill pertaining thereto (a ROFR Transaction ); or (b) if Licensor becomes subject to a Material Action, Licensor hereby unconditionally and irrevocably offers Licensee an exclusive right of first refusal to acquire the Motorola Marks, or any portion thereof, at then-fair market value, subject to the terms, conditions and limitations of this Agreement. For purposes of clarification, this right of first refusal does not apply to any Transfer in the absence of a Material Action that combines the Motorola Marks with the Transfer of all, or substantially all, of the assets of Licensor (such as, for instance, the sale or merger of Licensors business that includes, as part of such transaction, the Transfer of the Motorola Marks).
5.5.2 In the event Licensor desires to Transfer the Motorola Marks, or any portion thereof or interest therein, to a third party (a Third-Party Offeror ) in a ROFR Transaction, then Licensor shall require such Third-Party Offeror to submit a bona fide , written purchase offer tendered at arms length, binding on the Third-Party Offeror, for the Motorola Marks or any portion thereof or interest therein (the Third-Party Offer ). The Third-Party Offer shall set forth all of the terms of the proposed Transfer and shall not include any property other than the Motorola Marks or the relevant portion thereof or interest therein.
5.5.3 Upon receipt of the Third-Party Offer, Licensor shall notify Licensee of its desire to accept the Third-Party Offer, shall provide Licensee with a complete and accurate copy
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of the Third-Party Offer, and shall simultaneously deliver a written offer to Licensee, binding on Licensor, to Transfer the Motorola Marks, or the applicable portion thereof or interest therein, to Licensee upon terms not materially different from those set forth in the Third-Party Offer plus an additional 3% topping fee over the Third-Party Offers price (collectively, the Motorola Marks Offer Notice ).
5.5.4 Within five (5) days of Licensees receipt of the Motorola Marks Offer Notice ( Initial Interest Period ), Licensee shall respond to Licensor to indicate whether Licensee may be interested in exercising its right of first refusal offered herein. Within fifteen (15) days of Licensee receipt of the Motorola Marks Offer Notice (the Exercise Period ), Licensee may exercise its right of first refusal offered herein by providing written notice to Licensor. If Licensee so exercises its right of first refusal, then the Parties shall work together in good faith, and use their Reasonable Efforts, to: (i) prepare and negotiate definitive agreements to consummate the Transfer of the Motorola Marks, or the applicable portion thereof or interest therein, to Licensee; (ii) prepare and file any regulatory filings in an expedited manner, and take all actions reasonably necessary to apply for early termination of any applicable waiting periods under any federal laws (including antitrust laws); and (iii) close the Transfer of the Motorola Marks, or the applicable portion thereof or interest therein, to Licensee, upon the terms and conditions contained in the Motorola Marks Offer Notice, as soon as reasonably practicable but in any event by the later of: (a) sixty (60) days from the date Licensee notifies Licensor that it is exercising its right of first refusal hereunder; or (b) the date first allowed by law. If Licensee exercises its right of first refusal pursuant to this Section 5.5.4, but Licensee fails to close the Transfer of the Motorola Marks with the time periods identified in this Section 5.5.4, Licensor is free to Transfer the Motorola Marks, or the applicable portion thereof or interest therein, to any third party.
5.5.5 If Licensee either: (a) indicates within the Initial Interest Period that it is not interested in exercising its right of first refusal offered herein; or (b) fails to exercise its right of first refusal during the Exercise Period, then, and only then, shall Licensor be free to Transfer the Motorola Marks, or the applicable portion thereof or interest therein, to either the Third-Party Offeror or any other third party at a price that is at least as high as the price set forth in the Third-Party Offer and upon terms not materially different from the terms set forth in the Third-Party Offer. If Licensor and the Third-Party Offeror or any other third party fail to consummate the Transfer as contemplated in this Section 5.5 within the later of: (a) one-hundred eighty (180) days after the expiration of the Exercise Period; or (b) the date first allowed by law, then Licensor shall not be permitted to Transfer the Motorola Marks, or any portion thereof or interest therein, to any other third party (including the Third-Party Offeror), without first offering Licensee the right of first refusal set forth herein.
5.6 Motorola.com . Licensee acknowledges that as of the Effective Date of this Agreement, Licensor owns and controls all rights and interest in and to the domain name registration for, and homepage located at, motorola.com. Notwithstanding any other provision of this Agreement, the Parties agree that: (i) Licensee is permitted to use, and shall share use with Licensor of, the homepage located at motorola.com; and (ii) Licensee is permitted to use Licensees subpages, e.g., motorola.com/government, for thirty (30) months from the effective date of the Distribution Date, as that term is defined in the MSDA Agreement. Such use will allow the Parties to avoid to the extent possible any potential customer or consumer confusion
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that might arise as a result of, and educate their respective consumers about, the Separation Transactions. All costs and expenses directly related to registration, maintenance, and operation of the motorola.com homepage, and all costs related to the operation of the Motorola.com website incurred by Licensor but which benefits both Licensee and Licensor as a result of the foregoing sharing arrangement, during this period shall be borne equally by Licensee and Licensor. Licensee shall bear all costs related to the maintenance and operation of Licensees subpages.
5.7 Management of the Solutions Licensed Marks, Domain Names and Trade Names . In order to protect and preserve the Motorola Marks, Motorola Domain Names and Motorola Trade Names, Licensee agrees to cooperate and comply with all reasonable measures undertaken by Licensor to review and evaluate the portfolio of Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names, including but not limited to, a quarterly review, on the dates set by Licensor, of the current and future planned use, or planned cessation of use, of any Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names anywhere in the Territory, and to otherwise reasonably cooperate and provide assistance with the administrative activities related thereto.
5.8 Motorola Trade Names .
5.8.1 Prior to the Separation Transactions on or about January 1, 2011, the Parties shall use their respective and collective Reasonable Efforts to review and agree upon Solutions Proposed Trade Names to be used by Licensee from and after the effective date of the Distribution Date, as that term is defined in the MSDA Agreement and included on Schedule H .
5.8.2 As of January 1, 2011, Licensee and its Affiliates shall not use Motorola Corporation, Motorola Corp., Motorola, Incorporated, Motorola, Inc., Motorola Enterprises, Motorola Technologies, Motorola Telecommunications, Motorola Electronics, Motorola Mobile, Motorola Mobility, or any colorable imitations or foreign equivalents of same for any of its businesses in any Fields of Use as a trademark or trade name; provided that Licensee and its Affiliates may make limited, non-prominent and nominative uses of Motorola, Inc. as reasonably necessary for historic or factual reference. In the event Licensee wishes to change its name from Motorola Solutions, Inc. after the effective date of the Distribution Date, as that term is defined in the MSDA Agreement, and the new name utilizes the Motorola Marks, or colorable imitations or foreign equivalents of same, the provisions of Section 2.5.2 shall apply.
5.8.3 For thirty (30) months from the effective date of the Distribution Date, as that term is defined in the MSDA Agreement, and without forming any intent not to thereafter resume use, Licensor and its Affiliates shall not use (i) Motorola Corporation, Motorola Corp., Motorola, Incorporated, Motorola, Inc., Motorola Enterprises, Motorola Technologies, Motorola Telecommunications, Motorola Electronics, Motorola Systems, Motorola Solutions, or any colorable imitations or foreign equivalents of same for any of its businesses in any Fields of Use; or (ii) any name or designation that would indicate that Licensor is the company formerly known as Motorola, Inc. as a trademark or trade name; provided that Licensor and its Affiliates may make limited, non-prominent and nominative uses of Motorola, Inc. as reasonably necessary for historic or factual reference.
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5.9 Motorola Stock Tickers . Licensee shall use the stock ticker symbol MSI. In the event Licensee wishes to change its stock ticker symbol to a new stock ticker utilizing the Motorola Marks or any abbreviations or derivatives containing the Motorola Marks, the new ticker symbol shall be treated as a request for a Proposed Trade Name, and the provisions of Section 2.5 shall apply. For two and a half (2.5) years from the effective date of the Distribution Date, as that term is defined in the MSDA Agreement, Licensor and its Affiliates shall not use any stock ticker symbol containing the sequence of letters mot, either alone or in conjunction with other letters.
5.10 Motorola Toll-Free Number(s) . Licensor shall own all toll-free numbers, including without limitation, 800, 866, 877, and 888 extensions, which contain numbers that in sequence spell out any of the Motorola Marks. The Parties will work together to determine which toll-free numbers containing the Motorola Marks or Solutions Licensed Marks, each party will operate, provided that in the event the Parties can not agree, Licensor shall make such determination in its sole, good faith discretion. The Parties will work together to implement a plan to transfer misdirected calls, at the other partys expense, in order to minimize disruptions. Licensees use of toll-free numbers containing the Solutions Licensed Marks shall be deemed a trademark use under this Agreement, and the terms and conditions of this Agreement shall apply to such use.
ARTICLE 6
QUALITY CONTROL
6.1 Licensees Use Subject to Licensors Quality Control . Licensee acknowledges that the Motorola Marks are extremely valuable and must continue to be associated only with high-quality products and services in order to maintain their value. Licensee agrees that its use of the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names is subject to the terms and requirements of this Article 6 regarding product and service quality and mark usage, and subject to Licensors Master Brand Usage Guidelines attached as Exhibit A . Licensee further agrees to cooperate and comply in good faith with all commercially reasonable quality control measures undertaken by or at the request of Licensor in order to preserve or protect the integrity of the Motorola Marks, including the Solutions Licensed Marks, and shall not intentionally produce poor quality product or services in order to damage the Motorola Marks.
6.2 Product and Service Quality .
6.2.1 Licensee shall only use the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in connection with high-quality products and services that comply with all applicable laws and regulations in the respective jurisdictions in which such products and services are advertised, marketed, sold, distributed or manufactured. Products and services that are at least of equal quality to Licensees products and services as of the Effective Date shall generally be considered to comply with this Section 6.2, subject to changing market conditions or expectations.
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6.2.2 Notice of non-compliance . If Licensor determines that Licensee, or any of its Affiliates or sublicensees, is not in compliance with this Section 6.2, then Licensor may notify Licensee of such non-compliance ( Notice of Non-Compliance ). A Notice of Non-Compliance from Licensor shall be in writing and shall set forth with sufficient particularity a description of the nature of the non-compliance, and any requested action for curing such non-compliance. Additionally, Licensee shall promptly notify Licensor of any Material Incident, as that term is defined in the attached Exhibit C ( Quality Control Reporting Protocols ) that comes to its attention. Upon Licensees receipt of a Notice of Non-Compliance, or Licensors receipt of notification of a Material Incident, Licensee shall promptly correct the issues identified therein ( Quality Issues ), by enacting the cure mechanisms contained in 6.2.2.1 through 6.2.2.4.
6.2.2.1 Cure Plan . Licensee shall use Reasonable Efforts to cure or otherwise resolve all Quality Issues as soon as possible. In the event that the Quality Issues identified in a Notice of Non-Compliance cannot be cured or otherwise resolved within thirty (30) days from receipt of such notice, Licensee shall submit to Licensor a written plan to correct such Quality Issues ( Cure Plan ) within sixty (60) days after receipt of such Notice of Non-Compliance. For Quality Issues identified in a notification of Material Incident, such Cure Plan shall accompany Licensees notification of the Material Incident to Licensor.
6.2.2.2 Cure Plan Approval . After Licensee submits its Cure Plan to Licensor, the Parties shall each appoint a representative to promptly review and discuss in good faith the proposed Cure Plan.
6.2.2.3 Initial Cure Period . Once Licensor, in its sole but good faith discretion, has approved the Cure Plan ( Cure Plan Approval ), Licensee shall have a one-hundred twenty (120) day cure period, or a longer period as approved by Licensor on a case-by-case basis in its sole but good faith discretion ( Initial Cure Period ) from Cure Plan Approval to correct the Quality Issues. For the avoidance of doubt, Licensee shall act in good faith, using Reasonable Efforts, to correct the Quality Issues as soon as possible.
6.2.2.4 Additional Cure Period . If the Quality Issues are not capable of being cured, or the Cure Plan is not capable of being completely executed, within the Initial Cure Period (e.g., an EPA-related incident) or the Quality Issues otherwise remain uncured after the expiration of the Initial Cure Period, then Licensor and Licensee shall each appoint a representative to promptly negotiate in good faith additional or other cure plans ( Additional Cure Plan ) for a different or additional cure period ( Additional Cure Period ) that may be reasonably necessary to correct such Quality Issues. Provided, however, that if the Parties are unable to agree on an Additional Cure Plan or Additional Cure Period, Licensor shall, in its sole but good faith discretion, determine such Additional Cure Plan or Additional Cure Period.
6.2.2.5 Effect of Noncompliance . If the Quality Issues have not been cured to the satisfaction of Licensor or the Quality Issues remain otherwise uncured after the time period provided for in the Initial Cure Period and any Additional Cure Period(s), then such
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Quality Issues shall be deemed uncured ( Uncured Quality Issues ). In that case, Licensee shall cease use of the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names on or in connection with the products, services or activities that are the subject of the Uncured Quality Issues as soon as reasonably practicable but in no event later than six (6) months after such Quality Issues are determined to be Uncured Quality Issues with regard to use for Marketing Materials and Promotional Items, and one (1) year with regard to all use on Licensees products. During the time periods identified in this Section 6.2.2.5, Licensee shall have no right to create, manufacture, produce, distribute or otherwise use any new Marketing Materials, Promotional Items, or products or services using any Motorola Marks, Motorola Domain Names or Motorola Trade Names, which are the subject of the Uncured Quality Issues.
6.2.3 Licensor recognizes that Licensee has used the Solutions Licensed Marks in connection with the Solutions Fields of Use for many years, and during that period has used the Solutions Licensed Marks in connection with products and services found to be of acceptable quality. Licensor further recognizes that Licensee has in place, and Licensee agrees that it shall maintain throughout the Term of this Agreement, an effective system for evaluating, monitoring and ensuring the continuing quality of products and services Licensee sells in connection with the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names.
6.2.4 Licensee shall submit yearly reports to Licensor, on the dates set by Licensor, in substantially the same form as Exhibit C attached hereto. Licensor, in its sole discretion, reserves the right to modify Exhibit C from time to time (if modified, Amended Exhibit C ), but Licensor shall reasonably consult with Licensee prior to modifying such exhibit. Upon receipt by Licensee of such Amended Exhibit C, this Agreement shall immediately become modified to include only the most recent Amended Exhibit C.
6.2.5 Notwithstanding any other provision of this Section 6.2, Licensor or its authorized designee may, in Licensors sole discretion, conduct quality control audits to inspect plants, facilities, products or services bearing or associated with the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names. In addition, Licensor shall have the right to conduct additional quality control audits: (i) as the result of any Material Incident; (ii) of a sublicensee, upon Licensees sublicense of any of its rights hereunder; (iii) upon a Licensee Change of Control; or (iv) as reasonably necessary to ensure compliance with this Section 6.2. A request for audit shall be made at least ten (10) business days prior to the commencement of such audit. Any audit shall be conducted during regular business hours, and in a manner designed to minimize disruption to Licensees normal business activities.
6.2.6 Nothing in this Section 6.2 shall be deemed to expand the rights of Licensee herein, to limit Licensees obligations hereunder, or to preclude Licensor from pursuing any other rights or remedies
6.3 Mark Usage .
6.3.1 Licensee shall use the Solutions Licensed Marks in accordance with Licensors standards for mark usage. Mark usage that complies with Licensors Master Brand
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Usage Guidelines shall be considered to comply with this Section 6.3. Upon Licensors reasonable request and at Licensees cost and expense, Licensee shall submit samples of its use of the Solutions Licensed Marks to Licensor and shall promptly correct any material mark usage deficiencies identified by Licensor. Use by Licensee of the Motorola Marks shall qualify as valid use by the Licensor, and Licensee shall take any actions or do anything, including signing any document, application, filing or agreement, or providing usage specimens reasonably necessary or desired to establish the use of Motorola Marks by Licensee, its Affiliates and sublicensees under license from Licensor.
6.3.2 Licensor, in its sole discretion, reserves the right to modify the Master Brand Usage Guidelines from time to time (if modified, Amended Exhibit A ). Licensor shall reasonably consult with Licensee prior to modifying the Master Brand Usage Guidelines; however, the right to modify remains in Licensors sole discretion. Licensor shall only include, and require Licensee to comply with, modifications to the Master Brand Usage Guidelines that it also intends to adopt in connection with its use of the Motorola Marks in its business operations. In the event of such modification(s), Licensor shall promptly provide Licensee with one or more Amended Exhibits A. Upon receipt by Licensee of such Amended Exhibit A, this Agreement shall immediately become modified to include only the Master Brand Usage Guidelines identified on the most recent Amended Exhibit A. Licensee shall conform all uses of the Solutions Licensed Marks, Solutions Licensed Domain Names and Solutions Licensed Trade Names in accordance with Amended Exhibit A as soon as reasonably practicable and in no event later than four (4) years after Licensor provides Licensee with the Amended Exhibit A with regard to use for Marketing Materials, Promotional Items and all use on Licensees products. For the avoidance of doubt, Licensee shall not be required to recall, destroy, rebrand or otherwise dispose of any of its Marketing Materials, Promotional Items or products distributed or sold before or prior to expiration of the time period identified in this Section 6.3.2.
6.4 Marking .
6.4.1 Licensee shall use the following notice, as may be amended from time to time by Licensor, on the Marketing Materials and, to the extent commercially reasonable, on Promotional Items, in the Solutions Fields of Use to identify licensed uses under this Agreement and the proprietary rights of Licensor:
MOTOROLA, MOTO, MOTOROLA SOLUTIONS and the Stylized M Logo are trademarks or registered trademarks of Motorola Trademark Holdings, LLC and are used under license. All other trademarks are the property of their respective owners. © (insert year of publication) Motorola Solutions, Inc. All rights reserved.
6.4.2 Licensees ownership of any copyrighted materials incorporating the Solutions Licensed Marks is subject to the rights granted by Licensor hereunder.
6.5 Generally . Licensee shall, at all times, conduct its business and operations to enhance and support the value and prestige of the Motorola Marks and Licensor, and so as not to bring disrepute upon the Motorola Marks or Licensor. Further, at all times, Licensee shall comply with the requirements of Licensors Master Brand Usage Guidelines.
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6.6 Existing Domain Names and Trade Names . Licensee shall compile and provide to Licensor a list of all Motorola Domain Names and Motorola Trade Names that it has registered and/or is using as of the Effective Date in due course following the execution of this Agreement.
ARTICLE 7
INDEMNIFICATION AND INSURANCE
7.1 Indemnification .
7.1.1 Licensee agrees to defend, indemnify and hold harmless Licensor and its current and future Affiliates, successors, legal representatives or assigns, and their respective officers, agents or employees (collectively, Licensor Entities ), with legal counsel reasonably acceptable to Licensor which acceptance shall not be unreasonably withheld, conditioned or delayed, from any and all third party lawsuits, actions, claims, damages, liabilities, costs and expenses, including reasonable attorneys fees, court costs and other legal expenses, through all levels of appeal (collectively, Claim ) arising out of or related to: (i) Licensees use of the Motorola Marks outside the scope of Licensees rights hereunder; (ii) any claims related to the manufacturing (including under any theory of product liability, tort or otherwise), sale, distribution, marketing or advertising of Licensees products or services which use the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names, except for claims related to Licensors trademark infringement indemnification obligation contained in 7.1.2; (ii) any claims related to New Marks, New Domain Names or New Trade Names used by Licensee; and (iv) any breaches of this Agreement by the Licensee Entities.
7.1.2 Licensor agrees to defend, indemnify and hold harmless Licensee and its current and future Affiliates, successors, sublicensees, legal representatives or assigns, and their respective officers, agents or employees (collectively, Licensee Entities ), with legal counsel reasonably acceptable to Licensee which acceptance shall not be unreasonably withheld, conditioned or delayed, from any and all Claims arising out of or in connection with: (i) any claim that Licensees use of the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names (excluding any New Marks, New Domain Names or Trade Names) as permitted under this Agreement violates the trademark rights of a third party; and (ii) any breaches of this Agreement by the Licensor Entities.
7.1.3 A Party entitled to indemnification under this Agreement (the Indemnified Party ) shall tender within seven (7) business days a claim to the other Party (the Indemnifying Party ) by notifying the Indemnifying Party of the relevant Claim after first receiving written notice thereof; provided, however, that a failure to provide written notice of the Claim within seven (7) business days shall not affect the Indemnified Partys right to indemnification except to the extent that the delay materially prejudices the Indemnifying Partys
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ability to respond to the Claim. The Indemnifying Party shall promptly assume the defense of the suit or proceeding at its own expense, and shall pay all costs associated with the defense, including attorneys fees. The Indemnifying Party shall inform and consult with the Indemnified Party on a regular basis regarding the progress of such Claim, including any proposed settlements thereof. The Indemnifying Party shall have full control over such defense, including any settlement discussions; provided, however, that the Indemnified Party: (a) may participate, at its own expense, in the defense and any settlement discussions using counsel of its choosing; (b) shall cooperate with the Indemnifying Party as reasonably requested by, and at the expense of, the Indemnifying Party; and (c) shall have the right to approve any settlement, such approval not to be unreasonably withheld, conditioned or delayed; provided, however, that such approval shall be at the Indemnified Partys sole discretion in the event that the settlement: (i) binds or purports to bind the Indemnified Party; (ii) involves a criminal Claim; or (iii) contains a stipulation to, or admission or acknowledgement of, any liability or wrongdoing (whether in contract, tort, or otherwise) on the part of the Indemnified Party.
7.2 Insurance .
7.2.1 As of the effective date of Licensees separation from the Transferred Businesses, Licensee shall maintain during the term of this Agreement, with insurance companies with a Bests rating of A- or above, the following insurance coverage:
7.2.1.1 Workers Compensation and occupational disease, in compliance with the statutory requirements of the state, province or other jurisdiction in which the work is performed, and employers liability insurance with an insured limit of not less than one million U.S. dollars (U.S. $1,000,000) per accident. Licensee shall arrange for its Workers Compensation and Employers Liability insurers to waive all subrogation rights against Licensor; and
7.2.1.2 Commercial General Liability insurance on an occurrence basis in an amount not less than five million U.S. dollars (U.S. $5,000,000) per occurrence for bodily injury including death, personal injury, and property damage including loss of use and also covering products/completed operations liability, broad form property damage, independent contractor coverage, and contractual liability.
7.2.2 Any deductible or self-insured retention in such insurance shall be at the sole cost of Licensee.
7.2.3 The required insured limits under commercial general liability and employers liability insurance can be composed of any combination of primary and excess (umbrella) insurance policies.
7.2.4 Such policy(ies) must provide Licensor with at least thirty (30) days written notice in the event of a material alteration or cancellation of any such policy.
7.2.5 Such policy(ies) must provide coverage for Licensee and its Affiliates.
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7.2.6 Licensee shall provide a Certificate of Insurance to Licensor demonstrating such coverage, within thirty (30) days of the effective date of Licensees separation from the Transferred Businesses.
7.2.7 The maintenance of insurance does not relieve Licensee of any obligation for which it would otherwise be responsible, including without limitation Licensees indemnification obligations hereunder.
7.2.8 Licensee shall ensure that any sublicense permitted under Sections 2.5.3.1 and 3.2 shall be bound to the same terms to which Licensee is bound under this Section. Licensee agrees that it shall not sublicense its rights until it has confirmed that such sublicense has in force insurance in the forms and types specified in this insurance provision. Appropriate Certificates of Insurance or other evidence of such insurance coverage shall be provided to Licensor, as reasonably requested by Licensor.
7.2.9 Licensee shall list Licensor as an additional insured with respect to each insurance policy required pursuant to this Section 7.2, and the insurance shall be designated as primary with respect to, and not contributing to or in excess of, any other similar insurance maintained by Licensor.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties . Each Party makes the following representations and warranties that:
8.1.1 The Party has the full legal right, title, interest, power and authority to enter into this Agreement and to perform its legal obligations hereunder, and has taken all necessary action to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder. This Agreement has been duly executed and delivered on behalf of the Party, and constitutes a legal, valid, binding obligation, enforceable against the Party in accordance with its terms; and
8.1.2 To the best of the Partys knowledge and belief, the execution and delivery of this Agreement and the performance of the Partys obligations hereunder do not conflict with or violate any requirement of applicable laws or regulations and do not conflict with, or constitute a default under, any contractual obligation of the Party.
8.2 Licensors Representations and Warranties . Licensor warrants to Licensee that as of the Effective Date of this Agreement:
8.2.1 Licensor is aware of no other party that owns superior rights to Owner in and to the Solutions Licensed Marks in the Territory, except as specifically set forth on Schedule I , attached hereto and made a part hereof;
8.2.2 The Solutions Licensed Marks are valid, subsisting and, as to registered marks, are in full force and effect;
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8.2.3 Each of the Solutions Licensed Marks is registered in the name of Owner or its Affiliates, in the Territory as set forth on Schedule A , or, if not duly registered in any country in the Territory where such registration is necessary or desirable for the use by Licensee of the Solutions Licensed Marks therein, Licensor, upon Licensees request, shall promptly apply for registration of same, although there is no representation or warranty that any such application will result in an issued registration;
8.2.4 To the best of Licensors knowledge and belief, neither the Solutions Licensed Marks nor the use of them in accordance with this Agreement violates or infringes any trademark, service mark or other proprietary designation of a third-party, and there are no pending, or, to the knowledge of Licensor, threatened claims alleging that the Solutions Licensed Marks infringe the intellectual property rights of any third party; and
8.2.5 None of the Solutions Licensed Marks contains any material which Licensor is not duly authorized to use in connection with such Solutions Licensed Marks.
8.3 Licensees Representations and Warranties . Licensee warrants to Licensor that as of the Effective Date of this Agreement, all products and services in the Solutions Fields of Use and the manufacture, production, marketing, promotion, advertising and sale of the products and services in the Solutions Fields of Use shall comply in all material respects with all applicable laws, rules and regulations and all other terms, conditions and limitations set forth in this Agreement.
ARTICLE 9
CONFIDENTIALITY
9.1 Confidential Information . During the course of performance of this Agreement, a Party may disclose to the other Party certain Confidential Information. Each Party shall hold such Confidential Information in confidence and shall take reasonable measures to protect it from public disclosure, such measures in no event to be less than the highest degree of care taken by each Party to protect its own Confidential Information at a comparable level of protection for similar types of Confidential Information. Neither Party shall disclose the other Partys Confidential Information in violation of this Agreement, and shall use it solely for the purpose of securing its rights and performing its obligations under this Agreement. At the conclusion of this Agreement, the receiving Party shall either return to the disclosing Party any Confidential Information of the other Party in its possession (including all copies thereof or materials based on or incorporating such Confidential Information) or shall, at the disclosing Partys direction, destroy such Confidential Information and certify as to such destruction to the disclosing Party; provided, however, that the receiving Party shall be allowed to retain one copy of the Confidential Information for archival purposes only.
9.2 Permitted Disclosure . Notwithstanding anything set forth herein to the contrary, either Party may disclose the other Partys Confidential Information upon the order of any competent court or government agency, or as required by applicable law or regulation or the rules and requirements of any exchange on which a Party has its securities listed; provided,
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however, that prior to any such disclosure, the receiving Party shall provide the disclosing Party with reasonable notice of such order or requirement, and the opportunity to obtain protective relief. Either Party shall be permitted to disclose the terms of this Agreement and the other Partys Confidential Information, as reasonably necessary, to its agents, legal representatives, and other third parties as required to prosecute or otherwise obtain, register, maintain and enforce the Solutions Licensed Marks, Solutions Licensed Domain Names or Solutions Licensed Trade Names.
ARTICLE 10
DISPUTE RESOLUTION
10.1 Dispute Resolution . It is the intention of the Parties to use their respective and collective Reasonable Efforts to resolve expeditiously and on a mutually acceptable negotiated basis any dispute, controversy or claim arising under, out of or relating to this Agreement that may arise from time to time. Any dispute between the Parties related to this Agreement shall be resolved in accordance with this Article 10, which shall be the exclusive remedy for any dispute hereunder; provided, however, that if the dispute is not resolved to the satisfaction of a Party in accordance with this Section 10.1, either Party may elect to take the dispute to arbitration pursuant to Article 11, and if the dispute involves a Fundamental Matter and is not resolved to the satisfaction of a Party in accordance with this Section 10.1, either Party may elect to take such dispute to a court of competent jurisdiction pursuant to Article 12 of this Agreement. Nothing in this Agreement shall limit the nature or scope of remedies available to the arbitrators in connection with the resolution of a dispute.
10.1.1 In the event of a dispute between the Parties, such dispute shall be resolved by way of the following process:
10.1.1.1 A Party shall provide notice to the other Party of such dispute.
10.1.1.2 The Parties shall meet to discuss the basis for such dispute and shall use their Reasonable Efforts to negotiate in good faith to reach a reasonable resolution to such dispute.
10.1.1.3 If the Parties fail to resolve such dispute within thirty (30) days of notice of such dispute, the matter in dispute shall be brought to the attention of Senior Management of each Party. The Senior Management of each Party shall meet in person to negotiate a good faith resolution to such dispute within thirty (30) days of their receipt of written notice that the Parties have failed to resolve such dispute. If the Senior Management of the Parties are unable to resolve such dispute within such thirty (30) day period, then the Chief Executive Officers of the Parties shall meet in person to negotiate a good faith resolution to such dispute within sixty (60) days of their receipt of written notice that the Senior Management of the Parties has failed to resolve such dispute.
10.1.1.4 If the negotiations as outlined in the preceding subsections have failed to resolve such dispute, either Party may seek binding arbitration in accordance with Article 11. The Parties shall comply with any final determination of the arbitrators that are engaged pursuant this Section 10.1.1.4.
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10.1.1.5 If either Party does not act in accordance with this Article 10, then the other Party may seek any and all remedies available at law or in equity to enforce this Article 10.
ARTICLE 11
ARBITRATION
11.1 Arbitration . Except as otherwise provided in Section 10.1 for resolution of Fundamental Matters, any dispute, controversy or claim arising under, out of or relating to this Agreement, including any dispute not resolved as outlined in Article 10, shall be exclusively referred to and finally determined by arbitration in accordance with the Rules of Arbitration of the American Arbitration Association ( AAA ) for large or complex commercial disputes in force at the time when the arbitration is initiated. The place of arbitration shall be Chicago, Illinois. The arbitration shall be conducted in the English language before three (3) arbitrators appointed in accordance with the AAA Rules; whereby each Party is entitled to nominate one (1) arbitrator who each must have had, by the time of the actual arbitration, at least ten (10) years of experience as an attorney and experienced in trademark matters so as to better understand the legal and business issues addressed in the arbitration, and who does not have any conflict of interest in serving as an arbitrator. The Parties shall have thirty (30) days from the commencement of an arbitration to appoint their arbitrator, and the third arbitrator shall be appointed within ten (10) days of the appointment of the Parties arbitrators.
11.1.1 The Parties understand and acknowledge that such arbitration will go beyond the resolution of issues of law in the strict sense but also relate to the future business conduct of either or both Parties, including, but not limited to, disputes which relate to and will affect the future rights and duties of the Parties.
11.1.2 This agreement to arbitrate shall, with the exception of disputes involving Fundamental Matters, be the exclusive remedy for the resolution of all disputes under this Agreement and shall be specifically enforceable. Judgment upon any award rendered by the arbitration may be entered by any State or Federal court having jurisdiction. Any controversy concerning whether a dispute is an arbitrable dispute shall be determined by the arbitrators.
11.1.3 The Licensor and Licensee intend that this agreement to arbitrate be valid, specifically enforceable and irrevocable. The designation of a site or a governing law for this Agreement or the arbitration shall not be deemed an election to preclude application of the Federal Arbitration Act, if it would be applicable. The decision of the arbitrators shall be binding and shall not be subject to judicial review.
11.1.4 Injunctive Relief; Other Actions. Notwithstanding the other provisions of Article 10 or Article 11, both Licensor and Licensee may request a court of competent jurisdiction to grant provisional injunctive relief solely for the purpose of maintaining the status quo until the arbitrators can render an award on the matter in question, or in the case of a
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Fundamental Matter, until a court can rule on the matter in question. The Parties acknowledge and agree that any delays in seeking preliminary or permanent injunctive relief, as a result of following the procedures of Article 10 or otherwise seeking in good faith to amicably resolve any disputes, shall not be a basis for denial of such relief. It is understood and agreed that Licensor may seek injunctive relief in matters involving use of the Solutions Licensed Marks, Solutions Licensed Domain Names, Solutions Licensed Trade Names or other Motorola Marks, and either Party may seek injunctive relief in matters involving the disclosure of that Partys Confidential Information or to prevent the use of the Solutions Licensed Marks or other Motorola Marks in violation of a Partys exclusive rights. It is further understood and agreed that nothing in this Section 11.1 shall in any way limit either Parties rights under Section 4.3.1 to terminate this Agreement upon the occurrence of a Material Breach by the other Party.
11.1.5 The arbitrators shall have continuing jurisdiction to implement their decision. Each Party shall initially be responsible for its own costs and attorneys fees, and shall share the expenses of the arbitration equally; provided, however, that in the event the losing Party has been found to have engaged in bad faith in its dealings with the prevailing Party, the arbitrators shall award all expenses of the arbitration, costs and reasonable attorneys fees to the prevailing Party. Expeditious adjudication of the dispute is important to the Parties. Unless otherwise provided by the Rules of Arbitration of the AAA, established by the arbitrators or agreed to by the Parties, the Parties shall have sixty (60) days from the appointment of the last of the three arbitrators to present and/or submit their positions to the arbitrators, and the Parties shall have a hearing before the arbitrators within thirty (30) days after the last submission. The arbitrators shall hear evidence by each Party and resolve each of the issues identified by the Parties. The Parties shall use all Reasonable Efforts to make witnesses available for the proceedings. The arbitrators shall be instructed and required to render a written, binding, non-appealable resolution and award on each issue which clearly states the basis upon which such resolution and award is made (and which may include injunctive relief, enforceable in a court of law with competent jurisdiction in the Territory). The written resolution and award shall be delivered to the Parties as expeditiously as possible, but in no event later than thirty (30) days after conclusion of the hearing, unless otherwise agreed to by the Parties. No information concerning an arbitration, beyond the names of the Parties and the relief requested, may be unilaterally disclosed to a third party by either Party unless required to do so by law or by a competent regulatory body, provided that the arbitrators are furnished with details of the disclosure and an explanation of the reasons for it.
ARTICLE 12
COURT ACTION
12.1 Court Action . In the event that either Party does not act in accordance with Article 10 or Article 11 of this Agreement, then the other Party may seek any and all remedies available at law or in equity to enforce the provisions of Article 10 or Article 11 by pursuing such breach in a court of competent jurisdiction.
12.1.1 In the event that the dispute involves a Fundamental Matter that is not resolved to the satisfaction of a Party in accordance with Article 10, then such Party may seek any and all remedies available at law or in equity to enforce the terms and conditions of this Agreement by pursuing such dispute involving the Fundamental Matter in a court of competent jurisdiction.
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12.1.2 It is understood and agreed that all court costs, e.g., filing fees, but not attorneys fees, of the prevailing Party related to a court action brought pursuant to this Article 12, and finally disposed of by such court, shall be borne by the losing Party, whether or not such court enters an order relating to such court costs.
ARTICLE 13
MISCELLANEOUS
13.1 Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be an original with the same effect as if the signatures thereto and hereto were upon the same instrument.
13.2 Days and Quarters . Unless otherwise expressly stated in a particular Section, Schedule or Exhibit of this Agreement, references to days means calendar, not business, days, and references to quarter means calendar quarters.
13.3 Entire Agreement . This Agreement and the attached Schedules and Exhibits, as may be amended from time to time, constitute the entire agreement between the Parties related to the subject matter of the Agreement and supersede all prior agreements, discussions and understandings between the Parties related to its subject matter. The whereas recitals are incorporated herein as operative provisions of this Agreement. No provision of this Agreement may be modified, amended or waived except by a written agreement between the Parties entered into after the date of this Agreements execution.
13.4 Force Majeure . Neither Party shall be liable for any failure of or delay in the performance of its obligations under this Agreement for the period that the failure or delay is due to acts of God, public enemy, war, strikes or labor disputes, or any other cause beyond that Partys reasonable control, it being understood that lack of financial resources shall not be deemed a cause beyond that Partys control. Each Party shall promptly notify the other Party of the occurrence of any such cause and carry out the affected performance as promptly as practicable after the cause of the problem is alleviated.
13.5 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 Schedules and Exhibits hereto (whether arising in contract, tort, equity or otherwise).
13.6 Headings . The headings appearing in this Agreement are inserted only as a matter of convenience for reference only. In the event of a conflict between the headings and the content of an Article, Section, Schedule or Exhibit, the content of the Article, Section, Schedule or Exhibit shall control.
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13.7 Invalidity . If any provision or provisions of this Agreement shall be held to be invalid or unenforceable, such holdings shall not be deemed to terminate, cancel or otherwise invalidate this Agreement, but the remainder thereof shall be given effect.
13.8 Jurisdiction . If any dispute arises out of or in connection with this Agreement, except as expressly contemplated by another provision of this Agreement, the Parties irrevocably: (a) consent and submit to the exclusive jurisdiction of federal and state courts located in Delaware; (b) waive any objection to that choice of forum based on venue or to the effect that the forum is not convenient; and (c) WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO TRIAL OR ADJUDICATION BY JURY.
13.9 Limitation on Damages . NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, IN NO EVENT WILL EITHER PARTY 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 GOODWILL, 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 ANOTHER PERSON IN CONNECTION WITH A THIRD PARTY CLAIM PURSUANT TO SECTION 7.1, SUCH DAMAGES WILL CONSTITUTE DIRECT DAMAGES NOT SUBJECT TO THE LIMITATION SET FORTH IN THIS SECTION 13.9. THIS SECTION SURVIVES THE TERMINATION OF THIS AGREEMENT.
13.10 No Third-Party Beneficiaries . Nothing in this Agreement, either express or implied, is intended to or shall confer upon any third party any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
13.11 Notices . Except as otherwise specifically provided in Section 2.5.1.2, 2.5.1.3, and 2.5.2.1 herein, any notice, demand, consent, election, offer, approval, request, or other communication (collectively, a Notice ) required or permitted under this Agreement must be in writing and shall be delivered in person, by facsimile with confirmation or by overnight delivery service with receipt, or shall be deposited in the United States Mail, postage prepaid, by certified or registered mail, return receipt requested, to the addresses set forth on the attached Schedule J for Licensee and Licensor. Notice shall be deemed received: (i) if by personal delivery, on the date delivered; (ii) if by telecopy, on the date confirmed; (iii) if by overnight delivery service, on the date delivered; and (iv) if by mail, five (5) days after mailing. Any Party may designate, by Notice to the other Party, substitute addresses or addressees for Notices; and, thereafter, Notices are to be directed to those substitute addresses or addressees.
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13.12 Recordation of Agreements; Cooperation . The Parties recognize that in some countries in the Territory, it may be necessary or desirable to record or register this Agreement or some form of short form license, sublicense, registered user or other agreement or documentation ( Registered User Documents ); and the Parties shall cooperate with each other to prepare and execute any such Registered User Documents and to file for and obtain registration or recordation of such Registered User Documents, in the Territory (to be determined in Licensors sole discretion). Licensor shall also execute all documents and take all such other necessary steps reasonably required for Licensee to otherwise record its rights under this Agreement. The costs and expenses associated with this Section 13.13 shall be shared equally between the Parties. The Parties shall not record or otherwise disseminate or distribute this Agreement without prior written notice to the other Party pursuant to Article 9.
13.13 Relationship Created . Nothing contained in this Agreement shall be deemed or construed to create any partnership or joint venture or principal/agent or agency relationship between Licensor and Licensee, nor shall the execution, completion and implementation of this Agreement confer on either Party any power to bind or impose any obligations on the other Party or any third parties or to pledge the credit of the other Party.
13.14 Successors . This Agreement shall be deemed to inure to the benefit of the Parties and bind the Parties hereto and their respective current and future permitted successors, assigns and sublicensees.
13.15 Survival . The terms and conditions set forth in Sections 3.1, 4.4, 5.1 and 13.9, and Articles 6, 7, 9 and 13, including the related definitions set forth in Article 1, shall survive any termination of this Agreement.
13.16 Waiver; Election of Remedies . No waiver by a Party of any default or breach of covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default or breach of covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent occurrence. No failure or delay by a Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege, nor be deemed an election among available remedies. Except as otherwise expressly provided herein, the rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties, intending to be legally bound, have executed this Amended and Restated Agreement.
LICENSOR | LICENSEE | |
Motorola, Trademark Holdings, LLC | Motorola, Inc. | |
By: /s/ Scott Offer | By: /s/ Gregory Q. Brown | |
Name: Scott Offer | Name: Gregory Q. Brown | |
Title: Sr. Vice President & Assistant Secretary Date: November 11, 2010 |
Title: Co-CEO, Motorola, Inc., CEO Motorola Solutions | |
Date: November 10, 2010 |
STATE OF ILLINOIS | ) | |||||||||
) | ss.: | |||||||||
COUNTY OF LAKE | ) |
ACKNOWLEDGMENT
On this 11th day of November, 2010, before me came Scott Offer, who stated that he/she is the Sr. Vice President & Assistant Secretary of Motorola, Trademark Holdings, LLC and acknowledged that he/she executed the above instrument as the act and deed of Motorola, Trademark Holdings, LLC with full authority to do so.
/s/ Mary B. Krein |
Notary Public <seal> |
STATE OF ILLINOIS | ) | |||||||||
) | ss.: | |||||||||
COUNTY OF COOK | ) |
ACKNOWLEDGMENT
On this 10th day of November, 2010, before me came Gregory Q. Brown, who stated that he/she is the Co-CEO and CEO of Motorola, Inc. and Motorola Solutions and acknowledged that he/she executed the above instrument as the act and deed of CEO/Co-CEO with full authority to do so.
/s/ Helen Holowka |
Notary Public <seal> |
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
AGREEMENT by and between Motorola, Inc. ( Motorola ), and Sanjay K. Jha (the Executive ), dated as of the 4 th day of August 2008 (the Effective Date ).
WHEREAS , the Board of Directors of Motorola (the Motorola Board ) has determined that it is in the best interests of Motorola and its stockholders to employ the Executive as the Co-Chief Executive Officer of Motorola and the Chief Executive Officer of Motorolas Mobile Devices Business ( MDB );
WHEREAS , Motorola has announced a plan to create two independent publicly traded companies, one of which would consist of MDB (the Separation Event );
WHEREAS , it is possible that a different transaction could occur involving a sale, joint venture or other disposition of MDB as a result of which (a) MDB is not a separate publicly traded company and (b) is not at least 50% owned or controlled by Motorola or one of its subsidiaries ( Other Transaction Event );
WHEREAS , for purposes of this Agreement, (a) prior to the Separation Event or an Other Transaction Event, all references to the Company shall mean
Motorola, (b) from and after the Separation Event, all references to the Company shall mean the publicly traded corporation ( MDB Public ) that then owns or controls MDB, whether it is the spun-off entity or the surviving entity, and (c) from and after any Other Transaction Event, all references to the Company shall mean the ultimate parent entity ( MDB Other ) of the corporation or other legal entity that then owns or controls MDB;
WHEREAS , the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment; and
WHEREAS , the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement;
NOW, THEREFORE , in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a Party and together the Parties ) agree as follows:
1. Effective Date; Commencement Date . This Agreement shall be effective as of the Effective Date. Commencement Date shall mean the date the Executive commences employment with the Company which shall not be later than August 4, 2008.
2. Employment Period . The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Commencement Date and ending on the third anniversary thereof (the Initial Term ); provided that, on the third anniversary and each anniversary of the Commencement Date thereafter, the employment period shall be extended by one year unless at least sixty (60) days prior to such anniversary, the Company or the Executive delivers a written notice (a Notice of Non-Renewal ) to the other Party that the employment period shall not be extended (the Initial Term as so extended, the Employment Period ).
3. Terms of Employment . (a) Position and Duties .
(i) During the Employment Period and prior to the occurrence of the Separation Event or any Other Transaction Event (the Motorola Service Period ): (A) the Executive shall serve as the Chief Executive Officer of MDB and the Co-Chief Executive Officer of Motorola in the Office of the Chief Executive Officer (the OC ), with such duties, responsibilities and authority as are commensurate with such positions, reporting directly to the Motorola Board, (B) (1) Motorolas General Counsel, (2) Motorolas Chief Financial Officer, (3) the head of Motorolas Supply Chain, (4) the head of Motorolas Public Affairs/Communications Department and (5) the head of Motorolas Human Resources Department (clauses (1) through (5), the Dual Reporting Group ) shall report directly to the OC; provided , however , that (x) employees of MDB shall have direct line reporting relationships to the Executive or his designees (including any applicable member of the Dual Reporting Group) and (y) employees of Motorolas business segments other than MDB shall have direct line reporting relationships to Motorolas other Co-Chief Executive Officer or his designees (including any applicable member of the Dual Reporting Group) (items (x) and (y), together, the Reporting Rules ), (C) Motorola shall cause the Executive to be elected to the Motorola Board as of the Commencement Date, and thereafter, subject to Section 4(g), the Executive shall be nominated by Motorola to remain on the Motorola Board, (D) Executive shall devote substantially all of his business time, energies and talents to serving as Motorolas Co-Chief Executive Officer and MDBs Chief Executive Officer, perform his duties subject to the lawful directions of the Motorola Board, and in accordance with Motorolas corporate governance and ethics guidelines, conflict of interests policies, code of conduct and other written policies (collectively, the Motorola Policies ), (E) the Motorola Board (or such committee of the Motorola Board as the Motorola Board shall duly designate) shall resolve any disagreement between Executive and Motorolas other Co-Chief Executive Officer, (F) in the event that Executive becomes the sole Chief Executive Officer of Motorola, (1) he shall continue to report directly to the Motorola Board, with such duties, responsibilities and authority as are commensurate with such position, (2) the Reporting Rules shall cease to apply, and (3) he shall devote substantially all of his business time, energies and talents to serving as Motorolas Chief Executive Officer and shall perform his duties in accordance with the Motorola Policies and (G) in the event that the Separation Event or an Other Transaction Event does not occur on or prior to December 31, 2010, unless the Parties agree otherwise in writing, (1) Executives employment with the Company shall terminate, (2) such termination shall be treated as a termination without Cause and (3) the other Co-Chief Executive Officer shall become the sole Chief Executive Officer.
(ii) During the Employment Period and following the Separation Event (the MDB Public Service Period ), the Executive shall serve as the Chief Executive Officer of MDB Public, with such duties, responsibilities and authority as are commensurate with the position of chief executive officer of a company similar to the size and type of MDB Public (as it may evolve over time), reporting directly to the Board of Directors of MDB Public (the MDB Public Board ). During the MDB Public Service Period, subject to applicable law and regulation, (A) the Executive shall be appointed to the MDB Public Board simultaneously with the appointment of outside directors to the MDB Public Board, and (B) thereafter during the MDB Public Service Period, subject to Section 4(g), the Executive shall be nominated by MDB Public to remain on the MDB Public Board. During the MDB Public Service Period, Executive shall devote substantially all of his business time, energies and talents to serving as MDB Publics Chief Executive Officer and perform his duties subject to the lawful directions of the MDB Public Board and in accordance with MDB Publics corporate governance and ethics guidelines, conflict of interests policies, code of conduct and other written policies (collectively, the MDB Public Policies ).
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(iii) During the Employment Period and following an Other Transaction Event (the MDB Other Service Period ), the Executive shall serve as the Chief Executive Officer of MDB Other, with such duties, responsibilities and authority as are commensurate with the position of chief executive officer of a company similar to the size and type of MDB Other (as it may evolve over time), reporting directly to the Board of Directors of MDB Other (the MDB Other Board ). In addition, during the MDB Other Service Period, (A) MDB Other shall cause the Executive to be elected to the MDB Other Board as soon as reasonably practicable following the completion of an Other Transaction Event, and (B) thereafter during the MDB Other Service Period, subject to Section 4(g), the Executive shall be nominated by MDB Other to remain on the MDB Other Board, and shall perform his duties as a director of MDB Other. During the MDB Other Service Period, Executive shall devote substantially all of his business time, energies and talents to serving as MDB Others Chief Executive Officer and perform his duties subject to the lawful directions of the MDB Other Board and in accordance with MDB Others corporate governance and ethics guidelines, conflict of interests policies, code of conduct and other written policies (collectively, the MDB Other Policies ).
(iv) The Executives principal location of employment shall be at the principal headquarters of MDB; provided , that the Executive may be required under reasonable business circumstances to travel outside of such location in connection with performing his duties under this Agreement.
(v) During the Employment Period, it shall not be a violation of this Agreement for the Executive, subject to the requirements of Section 7, to (A) serve on civic or charitable boards or committees and, with the consent of the Company Board (as defined below) (such consent not to be unreasonably withheld or denied), no more than one corporate board unrelated to the Company, (B) deliver lectures or fulfill speaking engagements and (C) manage personal investments, so long as such activities (individually or in the aggregate) do not significantly interfere with the performance of the Executives responsibilities as set forth in this Section 3(a) or the Executives fiduciary duties to the Company. For purposes of this Agreement, Company Board shall mean (x) the Motorola Board prior to the occurrence of the Separation Event or an Other Transaction Event, (y) the MDB Public Board on and after the occurrence of the Separation Event and (z) the MDB Other Board on and after the occurrence of an Other Transaction Event.
(b)Compensation.
(i) Base Salary . During the Employment Period, the Executive shall receive an annualized base salary ( Annual Base Salary ) of not less than $1,200,000, payable pursuant to the Companys normal payroll practices. During the Employment Period, the current Annual Base Salary shall be reviewed for increase only at such time as the salaries of senior officers of the Company are reviewed generally; provided that the Executives first such review shall occur no earlier than calendar year 2009.
(ii) Annual Bonus . For each fiscal year completed during the Employment Period, the Executive shall be eligible to receive an annual cash bonus ( Annual Bonus ) based upon performance targets that are established by the Company Committee (as defined below); provided , however , that the Executives target Annual Bonus (the Target Bonus ) shall be not less than 200% of his Annual Base Salary, subject to pro ration for any partial year; provided , further , however , that with respect to fiscal year 2008, Executives Annual Bonus shall be $2,400,000 and shall not be subject to pro ration and with respect to fiscal year 2009, Executive shall be entitled to a minimum Annual Bonus of $1,200,000. To the extent earned and payable, the Annual Bonus shall be paid in the
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calendar year following the calendar year in which such bonus is earned. For purposes of this Agreement, Company Committee shall mean (x) the Compensation and Leadership Committee of the Motorola Board prior to the occurrence of the Separation Event or an Other Transaction Event, (y) the Compensation and Leadership Committee (or committee performing similar functions) of the MDB Public Board on and after the occurrence of the Separation Event and (z) the Compensation and Leadership Committee (or committee performing similar functions) of the MDB Other Board on and after the occurrence of an Other Transaction Event.
(iii) Equity Awards .
(A) Generally . As determined by the Company Committee, the Executive shall be eligible for grants of equity compensation awards under the Companys long term incentive compensation arrangements in accordance with the Companys policies, as in effect from time to time at levels commensurate with other senior executives of the Company (with due regard for his position); provided , however , that the Company shall have no obligation to grant any additional equity compensation awards under this Agreement (other than the awards specifically contemplated by this Agreement) until at least twelve months following the Separation Event.
(B) Make-Whole Restricted Stock Units . On the Commencement Date, the Executive shall be granted an award of 2,304,653 restricted stock units corresponding to shares of common stock of Motorola (the Motorola Common Stock ) (the Make-Whole Restricted Stock Units ). The Make-Whole Restricted Stock Units shall vest in equal annual installments on July 31, 2009, July 31, 2010 and July 31, 2011, subject, in each case, to Executives continued employment with the Company through the applicable vesting date. Except as specifically provided herein, the terms and conditions of the Make-Whole Restricted Stock Units shall be subject to the terms of Motorolas Omnibus Incentive Plan of 2006 (the Motorola Omnibus Plan ) and the award agreement evidencing the grant of the Make-Whole Restricted Stock Units, a copy of the form of which is attached as Exhibit A to this Agreement.
(C) Make-Whole Stock Option . On the Commencement Date, the Executive shall be granted an option (the Make-Whole Stock Option ) to purchase 10,211,226 shares of Motorola Common Stock. The Make-Whole Stock Option shall have a per share exercise price equal to the closing price of a share of Motorola Common Stock on the date of grant as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com (the Fair Market Value ), a ten-year term and a vesting schedule such that the Make-Whole Stock Option will become exercisable in equal annual installments on July 31, 2009, July 31, 2010 and July 31, 2011; provided that the Executive remains in the employ of the Company through each such vesting date. Except as specifically provided herein, the terms and conditions of the Make-Whole Stock Option shall be subject to the terms of the Motorola Omnibus Plan, the award agreement evidencing the grant of the Make-Whole Stock Option, a copy of the form of which is attached as Exhibit B to this Agreement and the related stock option consideration agreement, a copy of the form of which is attached as Exhibit C to this Agreement.
(D) Inducement Restricted Stock Units . On the Commencement Date, the Executive shall be granted an award of 1,362,769 restricted stock units corresponding to shares of Motorola Common Stock (the Inducement Restricted
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Stock Units ). The Inducement Restricted Stock Units shall vest in equal annual installments on July 31, 2009, July 31, 2010 and July 31, 2011, subject to Executives continued employment with the Company through each such vesting date. Except as specifically provided herein, the terms and conditions of the Inducement Restricted Stock Units shall be subject to the terms of the Motorola Omnibus Plan and the award agreement evidencing the grant of the Inducement Restricted Stock Units, a copy of the form of which is attached as Exhibit A to this Agreement.
(E) Inducement Stock Option . On the Commencement Date, the Executive shall be granted an option (the Inducement Stock Option ) to purchase 6,383,658 shares of Motorola Common Stock. The Inducement Stock Option shall have a per share exercise price equal to the Fair Market Value, a ten-year term and a vesting schedule such that the Inducement Stock Option shall become exercisable in equal annual installments on July 31, 2009, July 31, 2010 and July 31, 2011; provided that the Executive remains in the employ of the Company through each such vesting date. Except as specifically provided herein, the terms and conditions of the Inducement Stock Option shall be subject to the terms of the Motorola Omnibus Plan, the award agreement evidencing the grant of the Inducement Stock Option, a copy of the form of which is attached as Exhibit B to this Agreement and the related stock option consideration agreement, a copy of the form of which is attached as Exhibit C to this Agreement.
(F) Registration . With respect to equity grants under this Agreement made pursuant to the New York Stock Exchange inducement grant exception, the Company will use its commercially reasonable best efforts to register all shares covered by such grants as soon as administratively practicable following the applicable grant date.
(G) Equity Treatment in the Event of the Separation Event . Upon the occurrence of the Separation Event, all of Executives outstanding equity awards that relate to Motorola Common Stock will be adjusted to take into account the Separation Event such that following the Separation Event such awards relate solely to shares of common stock of MDB Public ( MDB Public Common Stock ), such adjustment to be made based on the methodology determined by the Motorola Board in accordance with the terms of the Motorola Omnibus Plan and applicable legal requirements, including compliance with Section 409A of the Internal Code of 1986, as amended (the Code ) and the regulations thereunder ( Section 409A ); it being understood that if equity awards that relate to Motorola Common Stock held by other MDB executive officers are generally adjusted into awards that relate solely to MDB Public Common Stock, the adjustment methodology applicable to Executive shall be no less favorable than the adjustment methodology applicable to such other MDB executive officers; provided that such requirement shall apply solely with respect to the applicable type of equity ( e.g. , options or restricted stock units) with respect to which any such adjustment methodology applies.
(H) Certain Change of Control Transactions . In the event of a Change of Control of Motorola or an Other Transaction Event (subject to the limitation that Executives Motorola stock options shall not (without Executives consent) be cashed out in connection with an Other Transaction Event occurring prior to October 31, 2010), if Executives Motorola equity awards are not cashed out in connection with such transaction or are not converted into (or remain) awards with respect to shares that are traded on a national or international securities
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exchange, then, subject to consummation of such transaction: (1) each of Executives outstanding vested (and unexercised) and unvested Motorola stock options shall be cancelled in consideration of a lump-sum payment (less applicable withholdings) equal to the product of (x) the difference, if any, between the closing price of a share of Motorola Common Stock on the last trading day prior to the completion of such transaction (as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com), and the per share exercise price of such Motorola stock option, and (y) the number of shares of Motorola Common Stock subject to such stock option, such payment to be made as soon as reasonably practicable (but in no event more than ten (10) days) following completion of such transaction; provided , however , that if an Other Transaction Event occurs prior to October 31, 2010, Executives unvested Motorola stock options shall immediately vest and thereafter Executives vested Motorola stock options shall remain outstanding and exercisable for two years following the Other Transaction Event (and thereafter shall be forfeited), notwithstanding any termination of Executives employment hereunder upon or following such Other Transaction Event, and (2) each of Executives Motorola restricted stock units shall be converted into the right to receive a cash payment (subject to the immediately following sentence), less applicable withholdings, equal to the closing price of a share of Motorola Common Stock on the last trading day prior to the completion of such transaction (as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com) (each, an RSU Cash-Out Payment ), it being understood that in no event shall Executives Motorola restricted stock units be cashed out in connection with a Change of Control of Motorola or an Other Transaction Event unless such Change of Control of Motorola or Other Transaction Event constitutes a change in control event within the meaning of Section 409A for the Executive and such cash-out is permitted under Section 409A. The RSU Cash-Out Payment will vest and be paid out in installments on the same vesting dates that applied to each Motorola restricted stock unit underlying the RSU Cash-Out Payment immediately prior to the Change of Control of Motorola or Other Transaction Event, subject to the Executives continued employment through the applicable vesting dates and other applicable terms and conditions, including but not limited to those relating to Executives termination of employment with the Company. Each RSU Cash-Out Payment shall bear interest from the date of the Change of Control of Motorola or Other Transaction Event until the date of payment at a rate equal to the average of the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code and the prime rate as published in the Wall Street Journal (the Blended Rate ), each such rate as in effect on the last business day prior to completion of the Change of Control of Motorola or Other Transaction Event.
(I) MDB Public Stock Option . If Executive has not become entitled to the Additional Payment (as defined below), subject to (1) the occurrence of the Separation Event and (2) Executives employment with MDB Public on the date of the occurrence of the Separation Event, as soon as reasonably practicable following the occurrence of the Separation Event, MDB Public will grant to the Executive an option (the MDB Public Stock Option ) to purchase a number of shares of MDB Public Common Stock (rounded to the nearest whole share) calculated in accordance with Exhibit D . The MDB Public Stock Option shall have a per share exercise price equal to the closing price of a share of MDB Public Common Stock on the date of grant as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com, a ten-year term and a vesting schedule such that the MDB Stock Option will become exercisable as set forth below; provided that the Executive remains in the employ of the Company through each such vesting date:
Vesting Date |
Percentage of MDB Public Stock Option that Vests |
|
The later to occur of (x) the Milestone Date and (y) the one year anniversary of the grant date. |
33 1 / 3 % (rounded to the nearest whole share) |
|
The later to occur of (x) the Milestone Date and (y) the two year anniversary of the grant date. |
33 1 / 3 % (rounded to the nearest whole share) |
|
The later to occur of (x) the Milestone Date and (y) the three year anniversary of the grant date. |
Remainder |
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For purposes of this Agreement, Milestone Date shall mean the date on which the average closing price of MDB Public Common Stock for any fifteen consecutive trading days is 110% or greater than the average closing price of MDB Public Common Stock for the first fifteen trading days following the Separation Event (including the closing price of MDB Public Common Stock on the date of the Separation Event if the stock trades on that date). Except as specifically provided herein, the terms and conditions of the MDB Public Stock Option shall be subject to the terms of MDB Publics equity plan and the award agreement evidencing the grant of the MDB Public Stock Option; provided that the terms of the MDB Public Stock Option to the extent not otherwise specifically provided for in this Agreement shall be no less favorable to Executive than the terms applicable to the Make-Whole Stock Option (other than with respect to clawback and recoupment provisions which the MDB Public Stock Option shall be subject to on a basis no less favorable to Executive than the provisions set forth in Sections 2 and 3 of the stock option consideration agreement, a copy of the form of which is attached as Exhibit C to this Agreement). Executive acknowledges that (1) he shall not be entitled to the grant of the MDB Public Stock Option unless and until the Separation Event occurs and subject to Executives employment with MDB Public on the date of the occurrence of the Separation Event and (2) he shall not be entitled to the grant of the MDB Public Stock Option if he has become entitled to the Additional Payment. For purposes of this paragraph (I), closing prices of MDB Public Common Stock will be as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com.
(J) MDB Public Restricted Shares . If Executive has not become entitled to the Additional Payment, subject to (1) the occurrence of the Separation Event and (2) Executives employment with MDB Public on the date of the occurrence of the Separation Event, as soon as reasonably practicable following the occurrence of the Separation Event, MDB Public will grant to the Executive a number of shares of restricted MDB Public Common Stock (the MDB Public Restricted Shares ) calculated in accordance with Exhibit E . The MDB Public Restricted Shares will become exercisable as set forth below; provided that the Executive remains in the employ of the Company through each such vesting date:
Vesting Date |
Percentage of MDB Public Restricted Shares that Vest |
|
The later to occur of (x) the Milestone Date and (y) the one year anniversary of the grant date. |
33 1 / 3 % (rounded to the nearest whole share) |
|
The later to occur of (x) the Milestone Date and (y) the two year anniversary of the grant date. |
33 1 / 3 % (rounded to the nearest whole share) |
|
The later to occur of (x) the Milestone Date and (y) the three year anniversary of the grant date. |
Remainder |
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Except as specifically provided herein, the terms and conditions of the MDB Public Restricted Shares shall be subject to the terms of MDB Publics equity plan and the award agreement evidencing the grant of the MDB Public Restricted Shares; provided that the terms of the MDB Public Restricted Shares to the extent not otherwise specifically provided for in this Agreement shall be no less favorable to Executive than the terms applicable to the Make-Whole Restricted Stock Units (other than with respect to clawback and recoupment provisions which the MDB Public Restricted Shares shall be subject to on a basis no less favorable to Executive than the provisions set forth in Sections 2(c) and (d) of the form of award agreement attached as Exhibit A to this Agreement), with appropriate adjustments to take into account the fact that the MDB Public Restricted Shares are restricted stock rather than restricted stock units. Executive acknowledges that (1) he shall not be entitled to the grant of the MDB Public Restricted Shares unless and until the Separation Event occurs and subject to Executives employment with MDB Public on the date of the occurrence of the Separation Event and (2) he shall not be entitled to the grant of the MDB Public Restricted Shares if he has become entitled to the Additional Payment. For purposes of this paragraph (J), closing prices of MDB Public Common Stock will be as reported for the New York Stock Exchange-Composite Transactions in the Wall Street Journal at www.online.wsj.com.
(iv) Other Benefits . During the Employment Period, the Executive shall be eligible for participation in the welfare, perquisites, fringe benefit, and other benefit plans, practices, policies and programs, as may be in effect from time to time, for senior executives of the Company generally; provided , that this Agreement alone shall govern Executives rights to severance payments or benefits to be received upon a termination of Executives employment. For the avoidance of doubt, notwithstanding anything to the contrary contained in this Agreement, Executive shall not participate in the Motorola, Inc. Senior Officer Change in Control Severance Plan, as amended from time to time, and Executive shall not participate in any Motorola Long-Range Incentive Plan.
(v) Expenses . During the Employment Period, the Executive shall be eligible for prompt reimbursement of business expenses reasonably incurred by the Executive in accordance with the Companys policies, as may be in effect from time to time, for its senior executives generally. All taxable payments and reimbursements related to business expenses paid pursuant to this Section 3(b)(v), shall be paid in accordance with Section 14(c) hereof.
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(vi) Vacation . During the Employment Period, the Executive shall be eligible for paid vacation in accordance with the Companys policies, as may be in effect from time to time, for its senior executives generally but no less than four weeks per year.
(vii) Relocation . Executive shall maintain a residence in the greater Chicago, Illinois area following the Commencement Date, and thereafter, during the Employment Period. In connection with the Executives commencement of employment with Motorola and the Executives relocation to Illinois from California, Motorola will reimburse the Executive in accordance with Motorolas relocation policy (without regard to the limitations contained therein with respect to reimbursable amounts thereunder) for all of the normal, customary and documented relocation expenses the Executive incurs (including full tax gross-up so the Executive shall have no after-tax cost); provided , that Executive shall not be entitled to any loans available under Motorolas relocation policy. Relocation expenses shall include without limitation temporary housing through the earlier of (A) the date on which the Separation Event occurs and (B) October 31, 2010, and coverage for any loss on the sale of his current home in San Diego, California. Any tax gross-up payment pursuant to the immediately preceding sentence shall be made promptly, but in any event no later than the end of the Executives taxable year next following the Executives taxable year in which the Executive remits the related taxes.
(viii) Additional Payment . Subject to Executives continued employment with the Company through October 31, 2010, if (A) the Separation Event has not occurred on or prior to October 31, 2010 or (B) the Company consummates an Other Transaction Event on or prior to October 31, 2010, the Company shall pay to Executive $30 million (the Additional Payment ) on November 15, 2010, to the extent not theretofore paid.
(ix)The Company shall provide to Executive use of the Companys aircraft for security purposes for business and personal travel and Executive shall be entitled to a tax gross-up with respect to income tax (if any) attributable to the difference between (A) the imputed income actually imputed to Executive as a result of such personal usage absent a qualifying security analysis and individualized security plan approved by the Company Board and (B) the imputed income that would have been imputed to Executive as a result of such personal usage if the Company had in effect a qualifying security analysis and individualized security plan approved by the Company Board. Any tax gross-up payment pursuant to the immediately preceding sentence shall be made promptly, but in any event no later than the end of the Executives taxable year next following the Executives taxable year in which the Executive remits the related taxes.
(c) Other Entities . As used in this Agreement, the term affiliate shall include any entity controlled by, controlling, or under common control with the Company. The Executive agrees to serve, without additional compensation, as an officer and director for each of the Companys subsidiaries, partnerships, joint ventures, limited liability companies and other affiliates, so long as such service is covered by Sections 11 and 12 hereof (collectively, the Company and such entities, the Affiliated Group ), as determined by the Company Board.
4. Termination of Employment . (a) Death or Disability . The Executives employment shall terminate automatically upon the Executives death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may provide the Executive with written notice in accordance with Section 10(b) of this Agreement of its intention to terminate the Executives
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employment. In such event, the Executives employment with the Company shall terminate effective on the 30 th day after receipt of such notice by the Executive (the Disability Effective Date ), provided that, within the 30-day period after such receipt, the Executive shall not have returned to full time performance of the Executives duties. For purposes of this Agreement, Disability shall mean the Executive having not performed his duties with the Company on a full-time basis for 180 consecutive or intermittent days in any one-year period as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a licensed physician selected by the Company or its insurers and reasonably acceptable to the Executive or the Executives legal representative. If the Parties cannot agree on a licensed physician, each Party shall select a licensed physician and the two physicians shall select a third who shall be the approved licensed physician for this purpose. Notwithstanding the foregoing, in the event that as a result of absence because of mental or physical incapacity the Executive incurs a separation from service within the meaning of such term under Section 409A, the Executive shall on such date automatically be terminated from employment because of Disability.
(b) Cause . The Company may terminate the Executives employment during the Employment Period with or without Cause. For purposes of this Agreement, Cause shall mean:
(i) the Executives willful and continued failure to substantially perform his duties under this Agreement, other than any such failure resulting from incapacity due to physical or mental illness, which failure has continued for a period of at least 30 days following delivery to the Executive of a written demand for substantial performance specifying the manner in which the Executive has willfully and continuously failed to substantially perform;
(ii) the Executives willful engagement in any malfeasance, dishonesty, fraud or gross misconduct that is intended to or does result in a material detrimental effect on the Companys reputation or business;
(iii) the Executives indictment for, or plea of guilty or nolo contendere to a felony in the United States or outside the United States (excluding cases based solely on Executives vicarious liability for the conduct of the Company or others), which, regardless of where such felony occurs, has had or will have a detrimental effect on the Companys reputation or business or the Executives reputation; or
(iv) the Executives material breach of Section 7 or Section 13 of this Agreement.
A termination of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Company Board (not including the Executive) at a meeting of the Company Board called and held for such purpose (after at least ten days written notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Company Board), finding that, in the good faith opinion of the Company Board, the Executive is guilty of the conduct described in one or more of the clauses of Section 4(b) above, and specifying the particulars thereof in detail. Notwithstanding the foregoing, if the Executive challenges a termination of employment for Cause under this Section 4(b) in a court of competent jurisdiction, the Company Boards decision shall be reviewed de novo by the court and no deference shall be given towards such decision.
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(c) Good Reason . The Executives employment may be terminated by the Executive for Good Reason (including Safe Harbor Good Reason, as defined below) if (x) an event or circumstance set forth in the clauses of this Section 4(c) below (or in the definition of Safe Harbor Good Reason) shall have occurred and the Executive provides the Company with written notice thereof within 45 days (5 days in the case of clause (vii) below) after the Executive has knowledge of the occurrence or existence of such event or circumstance, which notice shall specifically identify the event or circumstance that the Executive believes constitutes Good Reason (or Safe Harbor Good Reason), (y) the Company fails to correct the circumstance or event so identified within 30 days after the receipt of such notice, and (z) the Executive resigns effective within 90 days after the date of delivery of the notice referred to in clause (x) above. For purposes of this Agreement, Good Reason shall mean, in the absence of the Executives written consent (and except in consequence of a prior termination of the Executives employment), the occurrence of any of the following:
(i) a material reduction by the Company in the Executives Annual Base Salary or a material reduction in the Executives aggregate annual cash compensation opportunity, which for this purpose shall include, without limitation, Annual Base Salary and target bonus opportunities;
(ii) a material reduction in the aggregate level of employee benefits made available to the Executive under this Agreement, unless, prior to a Change of Control, such reduction is applicable to senior executives of the Company generally;
(iii) any diminution in the Executives title or a material diminution in the Executives position, authority, duties or responsibilities (other than as required by applicable law or regulation or as a result of the Executives physical or mental incapacity which impairs his ability to materially perform his duties or responsibilities as confirmed by a doctor reasonably acceptable to the Executive or his representative and such diminution lasts only for so long as such doctor determines such incapacity impairs the Executives ability to materially perform his duties or responsibilities);
(iv) the failure to appoint, elect or reelect the Executive to the Company Board or removal of the Executive from the Company Board (other than pursuant to a termination of Executives employment for death, Disability or Cause);
(v) a material change in the Executives reporting relationship that is inconsistent with the terms of this Agreement;
(vi) the Company requiring the Executives principal location of employment to be at any office or location more than 50 miles from Libertyville, Illinois (other than to the extent agreed to or requested by the Executive in writing);
(vii) the Separation Event or an Other Transaction Event has not occurred on or prior to October 31, 2010;
(viii) the failure of a successor of MDB to assume this Agreement in writing and to deliver such assumption to the Executive; or
(ix) any other action or inaction that constitutes a material breach by the Company of this Agreement.
For purposes of this Agreement Safe Harbor Good Reason means, unless otherwise agreed to in writing by the Executive (and except in consequence of a prior termination of
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the Executives employment), (A) a material diminution in Executives Base Salary; (B) a material diminution in Executives authority, duties, or responsibilities, (C) a requirement that Executive report to a corporate officer or employee of the Company instead of reporting directly to the Company Board, (D) a material change in the geographic location at which Executive must perform the services or (E) any other action or inaction that constitutes a material breach by the Company of this Agreement.
(d) Voluntary Termination . The Executive may voluntarily terminate his employment without Good Reason (other than due to death, Disability or retirement) on written notice to the Company, and such termination shall not be deemed to be a breach of this Agreement.
(e) Notice of Termination . Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other Party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a Notice of Termination means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executives employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executives or the Companys rights hereunder.
(f) Date of Termination . Date of Termination means (i) if the Executives employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, as the case may be, (ii) if the Executives employment is terminated by the Company other than for Cause or Disability, or if the Executive voluntarily resigns without Good Reason, the date on which the terminating Party notifies the other Party that such termination shall be effective, provided that on a voluntary resignation without Good Reason, the Company may, in its sole discretion, make such termination effective on any date, it elects in writing, between the date of the notice and the proposed date of termination specified in the notice, (iii) if the Executives employment is terminated by reason of death, the date of death of the Executive, (iv) if the Executives employment is terminated by the Company due to Disability, the Disability Effective Date, or (v) if the Executives employment is terminated by the Executive or the Company as a result of a Notice of Non-Renewal, the end of the applicable Employment Period.
(g) Resignation from All Positions . Notwithstanding any other provision of this Agreement, upon the termination of the Executives employment for any reason, unless otherwise requested by the Company Board, the Executive shall immediately resign as of the Date of Termination from all positions that he holds with the Company and any other member of the Affiliated Group (and with any other entities with respect to which the Company has requested the Executive to perform services), including, without limitation, the Company Board and all boards of directors of any member of the Affiliated Group. The Executive hereby agrees to execute any and all documentation to effectuate such resignations upon request by the Company, but he shall be treated for all purposes as having so resigned upon termination of his employment, regardless of when or whether he executes any such documentation.
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5. Obligations of the Company upon Termination . (a) Good Reason orOther than for Cause Outside of the Change of Control Protection Period . If, during the Employment Period (other than during the Change of Control Protection Period (as defined below)), (x) the Company shall terminate the Executives employment other than for Cause, death or Disability, or (y) the Executive shall terminate employment for Good Reason:
(i)the Company shall pay to the Executive in a lump sum in cash within 60 days (except as specifically provided in Section 5(a)(i)(A)(3) and Section 5(a)(i)(C)) after the Date of Termination the aggregate of the following amounts:
(A)the sum of (1) the Executives Annual Base Salary and any accrued vacation pay through the Date of Termination, (2) the Executives business expenses that are reimbursable pursuant to Section 3(b)(v) but have not been reimbursed by the Company as of the Date of Termination, and (3) the Executives Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs if the relevant measurement period has concluded as of the Date of Termination but the bonus has not been paid as of the Date of Termination (payable at the time such Annual Bonus would otherwise have been paid); and
(B)the amount equal to the product of (1) two and (2) the sum of (x) Executives Annual Base Salary and (y) the Target Bonus for the year of termination; and
(C)a pro-rata Annual Bonus based on actual performance during the year in which termination has occurred and based on the number of days of employment during such year relative to 365 days (payable at the time such Annual Bonus would otherwise have been paid); and
(D)if (1) the Separation Event has not yet occurred, (2) Executives Date of Termination is on or prior to October 31, 2010 and (3) (x) the Company has terminated Executive without Cause or (y) Executive has terminated employment for Safe Harbor Good Reason, the Additional Payment, to the extent not theretofore paid; and
(ii)for two years after the Executives Date of Termination, the Company shall continue medical benefits to the Executive and, if applicable, the Executives family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies of the Company if the Executives employment had not been terminated; provided , however , that the Executive continues to make all required contributions; provided , further , however , that, the medical benefits provided during such period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executives income for federal income tax purposes and, if providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided , further , however , that, if the Executive becomes re-employed with another employer and is eligible to receive substantially equivalent health benefits under another employer-provided plan, the health benefits described herein shall no longer be provided by the Company; and
(iii)(A) the Make-Whole Restricted Stock Units (including RSU Cash-Out Payments in respect of the Make-Whole Restricted Stock Units), the Make-Whole
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Stock Option, the Inducement Restricted Stock Units (including RSU Cash-Out Payments in respect of the Inducement Restricted Stock Units) and the Inducement Stock Options immediately shall vest, (B) for two years after the Executives Date of Termination, all other outstanding equity-based awards granted to the Executive on or after the Effective Date (including RSU Cash-Out Payments in respect of Motorola restricted stock units granted to the Executive prior to the Separation Event or an Other Transaction Event, but excluding MDB Public Restricted Shares) shall continue to vest and, with respect to stock options and other awards that are not immediately exercisable, become exercisable pursuant to their respective terms on the applicable scheduled vesting dates, so long as the Executive complies with the provisions of Section 7 of this Agreement and any other applicable provisions of the applicable award agreement and the applicable incentive plan, including satisfaction of applicable performance goals, but excluding any continued service requirements; all such awards shall remain exercisable by the Executive following vesting until the earlier of (I) eighteen months following the later to occur of (x) the applicable vesting date of such award or (y) the Executives Date of Termination or (II) the expiration of the scheduled term of such award, as applicable; (C) if the MDB Public Restricted Shares are granted and outstanding, and (1) the Company has terminated Executive without Cause or (2) Executive has terminated employment for Safe Harbor Good Reason, for two years after the Executives Date of Termination, all MDB Public Restricted Shares shall continue to vest in accordance with their terms, so long as the Executive complies with the provisions of Section 7 of this Agreement and any other applicable provisions of the applicable award agreement and the applicable incentive plan, including satisfaction of applicable performance goals, but excluding any continued service requirements; provided , however , that a number of MDB Public Restricted Shares shall vest proportionately upon such termination solely to the extent necessary to satisfy any tax payable by Executive under the Federal Insurance Contributions Act (the FICA Amount ) and applicable income tax on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local or foreign tax laws as a result of the payment of the FICA Amount, and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes as a result of treatment of the MDB Public Restricted Shares upon such termination; and (D) all other equity awards shall be forfeited; and
(iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement (other than any severance plan, program, policy or practice or contract or agreement) of the Company and its affiliates (such amounts and benefits, the Other Benefits ) in accordance with the terms and normal procedures of each such plan, program, policy or practice, based on accrued benefits through the Date of Termination.
Except with respect to payments and benefits under Sections 5(a)(i)(A)(1), 5(a)(i)(A)(2) and 5(a)(iv), all payments and benefits to be provided under this Section 5(a) shall be subject to the Executives execution and non-revocation of a release substantially in the form attached hereto as Exhibit F . Any amounts due under this Section 5(a) which are conditioned on the foregoing release shall not be paid prior to the sixtieth (60th) day after the Date of Termination notwithstanding when the release is executed and delivered (but in all cases subject to the execution, delivery and non-revocation of the release) and any amounts otherwise due prior thereto shall be paid on such sixtieth (60th) day (but in all cases subject to the execution, delivery and non-revocation of the release). Notwithstanding the immediately preceding sentence or Section 5(a)(i), in the event that the Executive is a specified employee within the meaning of Section 409A (a Specified Employee ), amounts that are non-qualified deferred compensation under Section 409A
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that would otherwise be payable, restricted stock units that would otherwise have been settled, RSU Cash-Out Payments that would otherwise have been made and benefits that would otherwise be provided under Section 5(a)(i) during the six-month period immediately following the Date of Termination shall instead be paid, with interest on any delayed payment at the Blended Rate based on the rates in effect on the Date of Termination ( Interest ), or settled, or made, or provided, on the first business day after the earlier of the date that is six months following the Executives separation from service within the meaning of Section 409A and the date of the Executives death (the Delayed Payment Date ). Delivery by the Company of a Notice of Non-Renewal shall constitute a termination of Executives employment without Cause effective at the end of the then current Employment Period.
(b) Good Reason or Other than for Cause During the Change of ControlProtection Period . If, during the Employment Period and during the Change of Control Protection Period (as defined below), (x) the Company shall terminate the Executives employment other than for Cause, death or Disability, or (y) the Executive shall terminate employment for Good Reason:
(i)the Company shall pay to the Executive in a lump sum in cash within 60 days (except as specifically provided in Section 5(b)(i)(A)(3) and Section 5(b)(i)(C)) after the Date of Termination the aggregate of the following amounts:
(A)the sum of (1) the Executives Annual Base Salary and any accrued vacation pay through the Date of Termination, (2) the Executives business expenses that are reimbursable pursuant to Section 3(b)(v) but have not been reimbursed by the Company as of the Date of Termination, and (3) the Executives Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs if the relevant measurement period has concluded as of the Date of Termination but the bonus has not been paid as of the Date of Termination (payable at the time such Annual Bonus would otherwise have been paid); and
(B)the amount equal to the product of (1) three and (2) the sum of (x) Executives Annual Base Salary and (y) the Target Bonus for the year of termination; and
(C)a pro-rata Annual Bonus based on actual performance during the year in which termination has occurred and based on the number of days of employment during such year relative to 365 days (payable at the time such Annual Bonus would otherwise have been paid); and
(D)if (1) the Separation Event has not yet occurred, (2) Executives Date of Termination is on or prior to October 31, 2010 and (3) (x) the Company has terminated Executive without Cause or (y) Executive has terminated employment for Safe Harbor Good Reason, the Additional Payment, to the extent not theretofore paid; and
(ii)for three years after the Executives Date of Termination, the Company shall continue medical benefits to the Executive and, if applicable, the Executives family at least equal to those that would have been provided to them in accordance with the plans, programs, practices and policies of the Company if the Executives employment had not been terminated; provided , however , that the Executive continues to make all required contributions; provided , further , however , that, the medical benefits provided during such
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period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executives income for federal income tax purposes and, if providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided , further , however , that, if the Executive becomes re-employed with another employer and is eligible to receive substantially equivalent health benefits under another employer-provided plan, the health benefits described herein shall no longer be provided by the Company;
(iii) (A) all outstanding equity-based awards of the Company granted to the Executive on or after the Commencement Date (including RSU Cash-Out Payments in respect of Motorola restricted stock units granted to the Executive prior to the Separation Event, but excluding MDB Restricted Shares) shall become immediately vested and exercisable (any such awards with respect to which the number of shares underlying the award depends upon performance shall vest at target unless the measurement period for such awards has ended on or prior to the Date of Termination, in which case such awards shall vest based on actual results; provided , however , that the MDB Public Stock Option, to the extent then granted and outstanding, shall vest without regard to the occurrence of the Milestone Date or any other vesting conditions); vested stock options shall remain exercisable by the Executive following vesting until the earlier of (1) eighteen months following the Date of Termination and (2) the expiration of the scheduled term of such award, as applicable; and (B) if the MDB Public Restricted Shares are granted and outstanding and (1) the Company has terminated Executive without Cause or (2) Executive has terminated employment for Safe Harbor Good Reason, all MDB Public Restricted Shares shall become immediately vested without regard to the occurrence of the Milestone Date or any other vesting conditions;
(iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive the Other Benefits in accordance with the terms and normal procedures of each such plan, program, policy or practice, based on accrued benefits through the Date of Termination.
Except with respect to payments and benefits under Sections 5(b)(i)(A)(1), 5(b)(i)(A)(2) and 5(b)(iv), all payments and benefits to be provided under this Section 5(b) shall be subject to the Executives execution and non-revocation of a release substantially in the form attached hereto as Exhibit F . Any amounts due under this Section 5(b) which are conditioned on the foregoing release shall not be paid prior to the sixtieth (60th) day after the Date of Termination notwithstanding when the release is executed and delivered (but in all cases subject to the execution, delivery and non-revocation of the release) and any amounts otherwise due prior thereto shall be paid on such sixtieth (60th) day (but in all cases subject to the execution, delivery and non-revocation of the release). Notwithstanding the immediately preceding sentence or Section 5(b)(i), in the event that the Executive is a Specified Employee, amounts that are non-qualified deferred compensation under Section 409A that would otherwise be payable, restricted stock units that would otherwise have been settled, RSU Cash-Out Payments that would otherwise have been made and benefits that would otherwise be provided under Section 5(b)(i) during the six-month period immediately following the Date of Termination shall instead be paid, with Interest, settled, or made or provided on the Delayed Payment Date. Delivery by the Company of a Notice of Non-Renewal shall constitute a termination of Executives employment without Cause effective at the end of the then current Employment Period.
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(c) Cause; Other than for Good Reason . If the Executives employment shall be terminated for Cause or the Executive terminates his employment without Good Reason during the Employment Period, or the Executives employment terminates by reason of the Executive providing to the Company a Notice of Non-Renewal, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay or provide to the Executive an amount equal to the amount set forth in clauses (1) and (2) of Section 5(a)(i)(A) above, and the timely payment or provision of the Other Benefits, in each case to the extent theretofore unpaid. For the avoidance of doubt, (i) upon a termination of Executives employment for Cause, Executive immediately shall forfeit all Company equity awards (including RSU Cash-Out Payments) and (ii) upon a termination of Executives employment by the Executive pursuant to this Section 5(c), Executive immediately shall forfeit all unvested Company equity awards (including RSU Cash-Out Payments); pursuant to this clause (ii), vested stock options shall remain exercisable until the earlier of (A) 180 days following the Date of Termination and (B) the expiration of the scheduled term of such stock options, as applicable, immediately following which time any such unexercised stock options shall be cancelled.
(d) Death . If the Executives employment is terminated by reason of the Executives death during the Employment Period, this Agreement shall terminate without further obligations to the Executives legal representatives under this Agreement, other than (i) the obligation to pay or provide to the Executives beneficiaries an amount equal to the amount set forth in clauses (1), (2) and (3) of Section 5(a)(i)(A) above, and (ii) the vesting of each stock option, restricted share, restricted stock unit award, and RSU Cash-Out Payment that is outstanding as of the Date of Termination (any such awards with respect to which the number of shares underlying the award depends upon performance shall vest at target unless the measurement period for such awards has ended on or prior to the Date of Termination, in which case such awards shall vest based on actual results) and continued exercisability of each stock option by the Executives beneficiaries until the earlier of (A) one year after the Date of Termination or (B) the end of the scheduled term of such option (the Stock Benefits ).
(e) Disability . If the Executives employment is terminated by reason of the Executives Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than (i) the obligation to pay or provide to the Executive an amount equal to the amount set forth in clauses (1), (2) and (3) of Section 5(a)(i)(A) above, (ii) the provision of the Stock Benefits, and (iii) the timely payment or provision of Other Benefits, including any applicable disability benefits. In the event that the Executive is a Specified Employee, the settlement of any restricted stock units or payment of any RSU Cash-Out Payments that would otherwise have been settled or made during the six-month period immediately following the Date of Termination shall instead be settled or made on the Delayed Payment Date.
(f) Certain Definitions .
(i) Change of Control means (A) any person or group (as such terms are used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Companys then outstanding securities (other than the Company or any employee benefit plan of the Company; and, for purposes of this Agreement, no Change of Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of the Companys securities by either of the foregoing), or (B) there shall be consummated (1) any consolidation or merger of the Company in which the Company is not
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the surviving or continuing corporation or pursuant to which shares of the Companys 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 the Companys 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 (2) 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 the Company other than any such transaction with entities in which the holders of the Companys common stock, directly or indirectly, have at least a 65% ownership interest, or (C) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (D) 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 Company Board), contested election or substantial stock accumulation (a Control Transaction ), the members of the Company Board immediately prior to the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Company Board or (E) the consummation of an Other Transaction Event. For the avoidance of doubt, the Separation Event shall not constitute a Change of Control.
(ii) Change of Control Protection Period means the period beginning upon the occurrence of a Change of Control through and until the two-year anniversary of the occurrence of the Change of Control.
(g) Contemplation . If, at a time outside of the Change of Control Protection Period, the Company terminates the Executives employment other than for Cause, death or Disability, or the Executive terminates employment for Good Reason, Section 5(a) shall apply; provided that if (i) within six (6) months after the Date of Termination a Change of Control occurs and (ii) it is reasonably demonstrated by the Executive that such termination of employment (including a termination of employment by Executive for Good Reason) arose in connection with, or in anticipation of a Change of Control, the amounts due under Section 5(a) shall remain due in the form and at the time specified therein and, in addition to such amounts, upon the Change of Control, the Executive shall also receive a payment equal to the sum of his Annual Base Salary and Target Bonus as in effect on the Date of Termination, Section 5(b)(ii) shall apply in lieu of Section 5(a)(ii) and Section 5(b)(iii) shall apply in lieu of Sections 5(a)(iii). The equity awards that would otherwise have been forfeited upon the termination of employment shall not be forfeited until it is determined if a Change of Control occurs within six (6) months thereafter; provided , however , that no such awards shall be exercisable or settled during such six (6) month period and all such awards immediately shall be forfeited on the six (6) month anniversary of the Date of Termination if clauses (i) and (ii) of this Section 5(g) are not satisfied).
(h) Change of Control Equity Vesting . To the extent any Company equity-based awards generally vest for executive officers of the Company upon a Change of Control, the Executives Company equity-based awards shall also vest.
6. Full Settlement . In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced as a result of a mitigation duty whether or not the Executive obtains other employment. In addition, the Companys obligation to make any severance payment provided for herein shall not be subject to set-off, counterclaim or recoupment of amounts owed by the Executive to the Company or its Affiliates under this Agreement or otherwise. To the extent permitted by applicable law, the Company shall pay directly to the Executive
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all reasonable legal fees and expenses reasonably incurred by the Executive in connection with the negotiation and preparation of this Agreement, and the Company shall promptly reimburse the Executive for all legal costs and expenses reasonably incurred (and documented in invoices) in connection with any dispute under this Agreement; provided , however , that Executive shall be obligated to repay any such reimbursements unless the Executive prevails in such dispute on at least one material issue. In order to comply with Section 409A, in no event shall the payments by the Company under this Section 6 be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred, provided , that the Executive shall not be entitled to reimbursement unless he has submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Executives right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit. In addition, the Company shall indemnify and hold the Executive, harmless on an after-tax basis, for any income tax, and all other applicable taxes imposed as a result of the Companys payment of any legal fees contemplated herein in connection with the preparation and negotiation of this Agreement. Any tax gross-up payment pursuant to the immediately preceding sentence shall be made by the end of the Executives taxable year next following the Executives taxable year in which the Executive remits the related taxes.
7. Covenants . For purposes of this Section 7, Motorola shall mean Motorola and its subsidiaries, MDB Public shall mean MDB Public and its subsidiaries, and MDB Other shall mean MDB Other and its subsidiaries. For purposes of this Section 7, subsidiary of Motorola, MDB Public or MDB Other, as applicable, means any corporation or other entity in which Motorola, MDB Public or MDB Other, as applicable, holds, directly or indirectly, a 50 percent or greater interest (economic or voting). For purposes of this Section 7, Applicable Service Period shall mean the Motorola Service Period, the MDB Public Service Period or the MDB Other Service Period, as applicable.
(a) Confidential Information . During the Motorola Service Period and thereafter, Executive shall not use or disclose any Motorola Confidential Information, except on behalf of Motorola in furtherance of the Executives good faith performance of his duties during the Motorola Service Period and with due regard to Executives fiduciary duties to Motorola. During the MDB Public Service Period and thereafter, Executive shall not use or disclose any MDB Public Confidential Information, except on behalf of MDB Public in furtherance of Executives good faith performance of his duties during the MDB Public Service Period and with due regard to Executives fiduciary duties to MDB Public. During the MDB Other Service Period and thereafter, Executive shall not use or disclose any MDB Other Confidential Information, except on behalf of MDB Other in furtherance of the Executives good faith performance of his duties during the MDB Other Service Period and with due regard to Executives fiduciary duties to MDB Other. With respect to each of Motorola, MDB Public and MDB Other (each, solely for purposes of this Section 7, Such Company ), Confidential Information means information concerning Such Company and its business that is not generally known outside of Such Company, and includes (i) trade secrets; (ii) intellectual property; (iii) Such Companys methods of operation and processes of Such Company; (iv) information regarding Such Companys present and/or future products, developments, processes and systems, including invention disclosures and patent applications; (v) information on customers or potential customers, including customers names, sales records, prices, and other terms of sales and Such Companys cost information; (vi) Such Companys personnel data; (vii) Such Companys business plans,
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marketing plans, financial data and projections; and (viii) information received in confidence by Such Company from third parties. The foregoing shall not apply to information that (A) was known to the public prior to its disclosure to the Executive; (B) becomes generally known to the public subsequent to disclosure to the Executive through no wrongful act of the Executive or any representative of the Executive; or (C) the Executive is required to disclose by applicable law, regulation or legal process. Information regarding products, services or technological innovations in development, in test marketing or being marketed or promoted in a discrete geographic region, which information Such Company or one of its affiliates is considering for broader use, shall not be deemed generally known until such broader use is actually commercially implemented.
(b) Non-Recruitment of Affiliated Group Employees . During the periods specified below, the Executive shall not (i) hire, recruit, solicit, induce, or cause, or (ii) aid others to hire, recruit, solicit, induce, or cause or (iii) be involved in hiring, recruiting, soliciting, inducing, or causing, with respect to each of clauses (i), (ii) and (iii) of this sentence, any employee of Such Company to terminate his/her employment with Such Company and/or to seek employment with Executives new or prospective employer, or any other company. This Section 7(b) shall apply to employees of Motorola during the Motorola Service Period and the two years following Executives termination of employment with Motorola for any reason and Motorola shall have the right to enforce this Section 7(b) with respect to employees of Motorola during such periods. This Section 7(b) shall apply to employees of MDB Public during the MDB Public Service Period and the two years following Executives termination of employment with MDB Public for any reason and MDB Public shall have the right to enforce this Section 7(b) with respect to employees of MDB Public during such periods. This Section 7(b) shall apply to employees of MDB Other during the MDB Other Service Period and the two years following Executives termination of employment with MDB Other for any reason and MDB Other shall have the right to enforce this Section 7(b) with respect to employees of MDB Other during such periods. This Section 7(b) shall not apply to (x) the Executives personal administrative staff who perform secretarial-type functions or (y) the soliciting or hiring of any Company employee (1) during the MDB Public Service Period, to become employed by MDB Public or (2) during the MDB Other Service Period, to become employed by MDB Other, in the case of clauses (1) and (2), in accordance with any written agreement between Motorola on the one hand and MDB Public or MDB Other, as applicable, on the other hand. Additionally, neither a general employment advertisement by an entity of which the Executive is a part, nor Executive providing a reference on behalf of a former employee at such employees request and with respect to an employer unaffiliated with Executive, will constitute a violation of this Section 7(b). Furthermore, during the Employment Period, absent any other conduct by Executive in violation of this Section 7(b), this Section 7(b) shall not be violated by the Executives termination of employment (whether actual or suggested) of any employee of the Company so long as such termination of employment (whether actual or suggested) is in furtherance of Executives good faith performance of his duties with the Company.
(c) No Competition .
(i) During the Applicable Service Period, Executive shall not, on behalf of any business, person or entity, compete with Such Company or its subsidiaries by directly or indirectly engaging in any business or activity, whether as an employee, consultant, partner, principal, agent, representative or stockholder or in any other individual, corporate or representative capacity, or render any services or provide any advice or substantial assistance to any business, person or entity, if such business, person or entity, directly or indirectly, competes with Such Company or its subsidiaries. During the two-year period following the Date of Termination, Executive shall not, on behalf of any
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Listed Company, directly or indirectly, engage in any business or activity, whether as an employee, consultant, partner, principal, agent, representative or stockholder or in any other individual, corporate or representative capacity, or render any services or provide any advice or substantial assistance to any Listed Company. This paragraph applies in countries in which Executive has physically been present performing work for Such Company at any time during the two years preceding termination of Executives employment. Motorola may enforce this Section 7(c)(i) during the Motorola Service Period and the two years following Executives termination of employment with Motorola for any reason; provided , however , that Motorola may no longer enforce this Section 7(c)(i) if Executive becomes an employee of MDB Public by virtue of the Separation Event or an employee of MDB Other by virtue of an Other Transaction Event. MDB Public may enforce this Section 7(c)(i) during the MDB Public Service Period and the two years following Executives termination of employment with MDB Public for any reason. MDB Other may enforce this Section 7(c)(i) during the MDB Other Service Period and the two years following Executives termination of employment with MDB Other for any reason.
(ii) For purposes of this Agreement, Listed Company shall mean any company identified by the Company as a Listed Company (including the Listed Companys subsidiaries and any successor to such Listed Company or to all or substantially all of such Listed Companys handheld mobile or smart phone devices business, which successor shall replace such Listed Company); provided , however , that (1) there shall be no more than seventeen (17) Listed Companies at any one time, (2) until December 31, 2010, the Company may unilaterally replace one Listed Company per calendar year based on its good faith belief that any new Listed Company engages in the handheld mobile or smart phone device business (but there will be no replacement pursuant to this clause (2) during calendar year 2008), (3) after December 31, 2010, the Company may unilaterally replace up to three Listed Companies per calendar year based on its good faith belief that any new Listed Company engages in the handheld mobile or smart phone device business, (4) the addition of any Listed Company by the Company shall not be effective until sixty (60) days after it is so listed and (5) the Company may not revise the list of Listed Companies on or after the Date of Termination (and no change made during the sixty (60) day period preceding termination of Executives employment shall be effective). The Chief Human Resources Officer shall maintain and make available to Executive the current list of Listed Companies. The initial list of Listed Companies is set forth as Schedule A to this Agreement.
(iii) Notwithstanding anything herein to the contrary, this Section 7(c) shall not prevent Executive from: acquiring securities representing not more than 3% of the outstanding voting securities of any entity the securities of which are traded on a national securities exchange or in the over the counter market or an interest of more than 3% of a private company owned through any pooled investment fund, mutual fund or hedge fund, in each case, so long as the Executive has no active participation in any such investment.
(d) Assistance . The Executive agrees that during and after his employment by Such Company, the Executive will reasonably assist Such Company in the defense of any claims, or potential claims that may be made or threatened to be made against Such Company in any action, suit or proceeding, whether civil, criminal, administrative, investigative or otherwise (a Proceeding ), and will reasonably assist Such Company in the prosecution of any claims that may be made by Such Company in any Proceeding, to the extent that such claims may relate to the Executives employment or the period of the Executives employment by Such Company. The Executive agrees, unless precluded by law, to promptly inform Such Company if the Executive is asked to participate
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(or otherwise become involved) in any Proceeding involving such claims or potential claims. The Executive also agrees, unless precluded by law, to promptly inform Such Company if the Executive is asked to reasonably assist in any investigation (whether governmental or otherwise) of Such Company (or its actions), regardless of whether a lawsuit has then been filed against Such Company with respect to such investigation. The Company agrees to reimburse the Executive for all of the Executives reasonable out-of-pocket expenses associated with such reasonable assistance, including travel expenses and any attorneys fees and shall pay a reasonable per diem fee for the Executives service. In addition, the Executive agrees to provide such services as are reasonably requested by Such Company to assist any successor to the Executive in the transition of duties and responsibilities to such successor. Any services or assistance contemplated in this Section 7(d) shall be at mutually agreed to and convenient times.
(e) Remedies . The Executive acknowledges and agrees that the terms of Section 7: (i) are reasonable in geographic and temporal scope, (ii) are necessary to protect legitimate proprietary and business interests of Motorola, MDB Public and MDB Other, as applicable in, inter alia , near permanent customer relationships and confidential information. The Executive further acknowledges and agrees that (x) the Executives breach of the provisions of Section 7 will cause Motorola, MDB Public or MDB Other, as applicable, irreparable harm, which cannot be adequately compensated by money damages, and (y) if Motorola, MDB Public, or MDB Other, as applicable, elects to prevent the Executive from breaching such provisions by obtaining an injunction against the Executive, there is a reasonable probability of Such Companys eventual success on the merits. The Executive consents and agrees that if the Executive commits any such breach or threatens to commit any breach, Such Company shall be entitled to temporary and permanent injunctive relief from a court of competent jurisdiction, in addition to, and not in lieu of, such other remedies as may be available to Such Company for such breach, including the recovery of money damages. In addition, the Executive acknowledges and agrees that the Company equity award agreements (other than award agreements with respect to the Make-Whole Restricted Stock Units, Make-Whole Stock Option, the Inducement Restricted Stock Units and the Inducement Stock Options) may contain clawback and recoupment provisions in the form included in the documents attached hereto as Exhibit A and Exhibit C . The Parties further acknowledge and agree that the provisions of Section 10(a) below are accurate and necessary because (A) this Agreement is entered into in the State of Illinois, (B) as of the Effective Date, Illinois will have a substantial relationship to the Parties and to this transaction, (C) as of the Effective Date, Illinois will be the headquarters state of the Company, which has operations nationwide and has a compelling interest in having its employees treated uniformly within the United States, (D) the use of Illinois law provides certainty to the Parties in any covenant litigation in the United States, and (E) enforcement of the provision of this Section 7 would not violate any fundamental public policy of Illinois or any other jurisdiction. If any of the provisions of Section 7 are determined to be wholly or partially unenforceable, the Executive hereby agrees that this Agreement or any provision hereof may be reformed so that it is enforceable to the maximum extent permitted by law. If any of the provisions of this Section 7 are determined to be wholly or partially unenforceable in any jurisdiction, such determination shall not be a bar to or in any way diminish Such Companys right to enforce any such covenant in any other jurisdiction.
(f) Agreement Following Termination of Employment . Executive agrees that upon termination of employment with the Company and during the two year period immediately following the Date of Termination, Executive will immediately inform the Company of (i) the identity of any new employer (or the nature of any start-up business or self-employment), (ii) Executives new title, and (iii) Executives job duties and responsibilities. Executive hereby authorizes the Company or a subsidiary to provide a copy of this Agreement to Executives new employer. Executive further agrees to provide information to the Company or a subsidiary as may from time to time be requested in order to determine his/her compliance with the terms hereof.
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(g) Other Provisions . No grant, award or benefit to be provided to the Executive during the Initial Term shall require the Executive to agree to any restrictive covenants or forfeiture provisions broader than those provided herein and in Exhibit A, Exhibit B and Exhibit C.
8. Certain Additional Payments by the Company
(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then Executive shall be entitled to receive an additional payment (the Gross-Up Payment ) in an amount such that, after payment by Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, but excluding any income taxes and penalties imposed pursuant to Section 409A, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 8(a), if it shall be determined that Executive is entitled to the Gross-Up Payment, but that the Parachute Value of all Payments does not exceed 110% of the Safe Harbor Amount, then no Gross-Up Payment shall be made to Executive and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (i) Section 5(b)(i)(B), (ii) Section 5(b)(i)(C) and Section 5(b)(ii). For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 8(a) and the Executive shall be treated hereunder as if the Parachute Value is in excess of 110% of the Safe Harbor Amount. The Companys obligation to make Gross-Up Payments under this Section 8 shall not be conditioned upon Executives termination of employment.
(b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG LLP, or such other nationally recognized certified public accounting firm as may be designated by Executive (the Accounting Firm ), provided that for purposes of determining the amount of the Gross-Up Payment, Executives marginal blended actual rates of federal, state and local income taxation in the calendar year in which the change in ownership or effective control that subjects Executive to the Excise Tax occurs shall be used. The Accounting Firm shall provide detailed supporting calculations both to the Company and Executive within fifteen (15) business days of the receipt of notice from Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon
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the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the Underpayment ), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. If Section 280G of the Code requires a calculation of the Excise Tax and/or the Gross-Up Payment at more than one point in time, each such calculation shall be made by the Accounting Firm on an aggregate basis and this Section 8, properly adjusted, shall reapply.
(c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than ten (10) business days after Executive is informed in writing of such claim. Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that the Company desires to contest such claim, Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim; and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided , however , that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of Executive and direct Executive to sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided , however , that, if the Company pays such claim and directs Executive to sue for a refund, the Company shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with
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respect to any imputed income in connection with such payment; and provided , further , that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. Notwithstanding the foregoing, any payment or reimbursement made pursuant to Section 8 shall be paid to the Executive promptly and in no event later than the end of the calendar year next following the calendar year in which the related tax is paid by the Executive or as otherwise provided under Treasury Regulation §1.409A-3(i)(1)(v).
(d) If, after the receipt by Executive of a Gross-Up Payment or payment by the Company of an amount on Executives behalf pursuant to Section 8(c), Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, Executive shall (subject to the Companys complying with the requirements of Section 8(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on Executives behalf pursuant to Section 8(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid; provided , however , that no offset shall apply to any amounts subject to Section 409A.
(e) Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to Executive within five (5) days of the receipt of the Accounting Firms determination; provided that the Gross-Up Payment shall in all events be paid no later than the end of Executives taxable year next following Executives taxable year in which the Excise Tax (and any income or other related taxes or interest or penalties thereon) on a Payment are remitted to the Internal Revenue Service or any other applicable taxing authority or, in the case of amounts relating to a claim described in Section 8(c) that does not result in the remittance of any federal, state, local and foreign income, excise, social security and other taxes, the calendar year in which the claim is finally settled or otherwise resolved. Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of Executive, all or any portion of any Gross-Up Payment, and Executive hereby consents to such withholding.
(f) Definitions . The following terms shall have the following meanings for purposes of this Section 8.
(i) Excise Tax shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(ii) Parachute Value of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a parachute payment under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
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(iii) Payment shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of Executive, whether paid or payable pursuant to this Agreement or otherwise.
(iv) Safe Harbor Amount means 2.99 times Executives base amount, within the meaning of Section 280G(b)(3) of the Code.
9. Successors . (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executives legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. For the avoidance of doubt, Motorola may unilaterally assign this Agreement to MDB Public or MDB Other. In the event that Motorola assigns this Agreement to MDB Public or MDB Other, Motorola shall become a third party beneficiary of this Agreement with respect to the enforcement of Executives obligations to Motorola under the Agreement pursuant to Section 7 of the Agreement.
(b) The Company shall cause any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all or a substantial portion of the MDB business and/or assets to assume expressly in writing (and deliver a copy to the Executive) and agree to perform this Agreement immediately upon such succession in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
10. Miscellaneous . (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to principles of conflict of laws. The Parties hereto irrevocably agree to submit to the jurisdiction and venue of the courts of the State of Illinois, in any action or proceeding brought with respect to or in connection with this Agreement. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the Parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other Party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
At the most recent address on file for the Executive at the Company.
If to the Company :
Motorola, Inc.
1030 East Algonquin Road
Schaumburg, Illinois 60196
Attention: General Counsel
or to such other address as either Party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
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(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) Notwithstanding any other provision of this Agreement, the Company may withhold from any amounts payable or benefits provided under this Agreement any Federal, state, and local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) Subject to the provisions of Section 4(c), the Executives or the Companys failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) From and after the Effective Date, this Agreement shall supersede any other employment agreement or understanding between the Parties with respect to the subject matter hereof.
(g) Nothing in this Agreement or any Motorola Policy shall prevent Executive from retaining and exercising the stock options with respect to shares of common stock of Qualcomm Incorporated that Executive holds on the date of this Agreement or from holding the shares of Qualcomm Incorporated common stock that Executive receives upon exercise of such stock options, subject in all events to the 3% limit set forth in Section 7(c)(iii) of this Agreement
11. Directors and Officers Insurance . The Company shall provide the Executive with reasonable Directors and Officers insurance coverage that is at least as favorable as the coverage provided to other directors and officers of the Company on the date of this Agreement or at any time thereafter. Such insurance coverage shall continue in effect both during the Employment Period and, while potential liability exists, thereafter (it being understood for the avoidance of doubt that Motorola shall maintain such coverage following the Motorola Service Period if and to the extent liability exists following the Motorola Service Period).
12. Indemnification . The Company shall indemnify the Executive and hold him harmless to the fullest extent permitted by law and under the charter and by-laws of the Company (including the advancement of expenses) against, and with respect to, any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorney fees), losses and damages resulting from the Executives good faith performance of his duties and obligations with the Company. This Section 12 shall survive any termination of employment and shall apply with respect to each of Motorola, MDB Public and MDB Other, if and to the extent that Executive is employed by any such entity at any time.
13. Representations . The Executive hereby represents and warrants to the Company that the Executive is not party to any contract, understanding, agreement or policy, whether or not written, with his current employer (or any other previous employer) or otherwise, that would be breached by the Executives entering into, or performing services under, this Agreement; provided that the Company hereby acknowledges that it is aware of Executives obligations under Executives Employee Agreement with Qualcomm Incorporated, dated June 13, 1994 and the obligations under the draft Letter Agreement expected to be entered into by Executive and Qualcomm Incorporated promptly following the execution of this Agreement, in the form provided to Motorola immediately prior to the
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execution of this Agreement, and that Executive may also have statutory or common law confidentiality obligations with regard to Qualcomm Incorporated. The Executive further represents that he has disclosed to the Company in writing all material threatened, pending, or actual claims that are unresolved and still outstanding as of the Effective Date, in each case, against the Executive of which he is aware, if any, as a result of his employment with his current employer (or any other previous employer) or his membership on any boards of directors. In the event of a breach of this Section 13 that prevents Executive from satisfying the requirements of Section 3(a), any amounts or awards due to Executive under this Agreement immediately shall be terminated and forfeited by Executive and Executive immediately shall repay to the Company any amounts previously paid to Executive under this Agreement.
14. Section 409A .
(a) The intent of the Parties is that payments and benefits under this Agreement comply with Section 409A or are exempt therefrom and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. If the Executive notifies the Company (with specificity as to the reason therefor) that the Executive believes that any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Section 409A and the Company concurs with such belief or the Company (without any obligation whatsoever to do so) independently makes such determination, the Company shall, after consulting with the Executive, reform such provision in a manner that is economically neutral to the Company to attempt to comply with Section 409A through good faith modifications to the minimum extent reasonably appropriate to conform with Section 409A.
(b) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits (including Company equity awards) subject to Section 409A upon or following a termination of employment unless such termination is also a separation from service within the meaning of Section 409A and Executive is no longer providing services (at a level that would preclude the occurrence of a separation from service within the meaning of Section 409A) to any of Motorola, MDB Public or MDB Other as an employee or consultant, and for purposes of any such provision of this Agreement, references to a termination, termination of employment or like terms shall mean separation from service within the meaning of Section 409A. If the Executive is deemed on the Date of Termination to be a Specified Employee, then with regard to any payment or the provision of any benefit that is considered deferred compensation under Section 409A payable on account of a separation from service, such payment or benefit shall be made or provided on the Delayed Payment Date.
(c) With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Internal Revenue Code Section 105(b) solely because such expenses are subject to a limit related to the period the arrangement is in effect and (iii) such payments shall be made on or before the last day of Executives taxable year following the taxable year in which the expense occurred.
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(d) Whenever a payment under this Agreement specifies a payment period with reference to a number of days ( e.g. , payment shall be made within thirty (30) days following the date of termination), the actual date of payment within the specified period shall be within the sole discretion of the Company.
(e) For purposes of Section 409A, the Executives right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the Executive has hereunto set the Executives hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name and on its behalf, all as of the day and year first above written.
SANJAY K. JHA
/s/ Sanjay K. Jha |
||||
MOTOROLA, INC.
/s/ Greg A. Lee |
||||
Name: |
Greg A. Lee | |||
Title: |
Senior Vice President, | |||
Human Resources |
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EXHIBIT A
RESTRICTED STOCK UNIT AWARD AGREEMENT (Agreement)
This Restricted Stock Unit Award ( Award ) is awarded on [ ], 2008 ( Dateof Grant ), by Motorola, Inc. (the Company or Motorola ) to [ ] (the Grantee ).
WHEREAS, Grantee is receiving the Award [ under the Motorola Omnibus Incentive Plan of 2006, as amended (the 2006 Incentive Plan or the Plan ) ] ;
WHEREAS, Grantee is the Chief Executive Officer of the mobile devices business of Motorola;
WHEREAS, Grantee and Motorola entered into an employment agreement (the Employment Agreement ), dated as of the [ ] day of [ ] 2008;
WHEREAS, the Award is a grant of Motorola restricted stock units authorized by the Board of Directors and the Boards Compensation and Leadership Committee (the Compensation Committee ); and
WHEREAS, it is a condition to Grantee receiving the Award that Grantee electronically accept the terms, conditions and Restrictions applicable to the restricted stock units as set forth in this agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the Company hereby awards restricted stock units to Grantee on the following terms and conditions:
1. | Award of Restricted Stock Units . The Company hereby grants to Grantee a total of [ ] Motorola restricted stock units (the Units ) subject to the terms and conditions set forth below. All Awards shall be paid in whole shares of Motorola Common Stock ( Common Stock ); no fractional shares shall be credited or delivered to Grantee. For purposes of this Award, Units will include any rights into which the Units may be converted (including cash accounts). |
2. | Restrictions . The Units are being awarded to Grantee subject to the transfer and forfeiture conditions set forth below (the Restrictions ) which shall lapse, if at all, as described in Section 3 below. For purposes of this Award, the term Units includes any additional Units granted to the Grantee with respect to Units, still subject to the Restrictions. |
a. | Grantee may not directly or indirectly, by operation of law or otherwise, voluntarily or involuntarily, sell, assign, pledge, encumber, charge or otherwise transfer any of the Units still subject to Restrictions. The Units shall be forfeited if Grantee violates or attempts to violate these transfer Restrictions. Motorola shall have the right to assign this Agreement, which shall not affect the validity or enforceability of this Agreement, subject to the limitations on assignment contained in the Employment Agreement. This Agreement shall inure to the benefit of assigns and successors of Motorolas mobile devices business and references to Motorola or the Company shall include any such assigns and successors. For the avoidance of doubt, Motorola may unilaterally assign this Agreement to MDB Public (as defined in the Employment Agreement) or MDB Other (as defined in the Employment Agreement). |
b. | Any Units still subject to the Restrictions shall be automatically forfeited upon Grantees termination of employment pursuant to Section 5(c) of the Employment Agreement. |
c. | Sections 7(a), (b) and (c) (together, the Restrictive Covenants ) of the Employment Agreement are hereby incorporated by reference into this Award and shall apply as if fully set forth herein mutatis mutandis and any capitalized terms used in such Sections 7(a), (b) and (c) shall have the meanings ascribed to such terms in the Employment Agreement. [ If Grantee breaches the Restrictive Covenants, in addition to all remedies in law and/or equity available to the Company or any Subsidiary, Grantee shall forfeit all Units under the Award whose Restrictions have not lapsed, and, for all restricted stock units under the Award whose Restrictions have lapsed, Grantee shall immediately pay to the Company the Fair Market Value (as defined in paragraph 7 below) of Motorola Common Stock ( Common Stock ) on the date(s) such Restrictions lapsed, without regard to any taxes that may have been deducted from such amount. ] [Note: Bracketed text not included in make-whole or inducement award documents.] |
d. | [The Units are subject to the terms and conditions of the Companys Policy Regarding Recoupment of Incentive Payments upon Financial Restatement, as such policy is in effect on the Date of Grant (such policy, being the Recoupment Policy ). The Recoupment Policy provides for determinations by the Companys independent directors that, as a result of intentional misconduct by Grantee, the Companys financial results were restated (a Policy Restatement ). In the event of a Policy Restatement, the Companys independent directors may require, among other things (a) cancellation of any of the Units that remain outstanding; and/or (b) reimbursement of any gains in respect of the Units, if and to the extent the conditions set forth in the Recoupment Policy apply. Any determinations made by the independent directors in accordance with the Recoupment Policy shall be binding upon Grantee. The Recoupment Policy is in addition to any other remedies which may be otherwise available at law, in equity or under contract, to the Company. ] [Note: Bracketed text not included in make-whole award documents; Recoupment Policy shall not apply to make-whole awards.] |
The Company will not be obligated to pay Grantee any consideration whatsoever for forfeited Units.
3. | Lapse of Restrictions . |
a. | The Restrictions applicable to the Units shall lapse, as long as the Units have not been forfeited as described in Section 2 above, as follows: |
(i) |
Vesting Percentage |
Date | ||||
|
||||||
|
A-2
For purposes of this Agreement, the Restriction Period applicable to a Unit shall refer to the period of time beginning on the Date of Grant and ending on the date that the Restrictions applicable to such Unit shall lapse, as set forth in the table above.
(ii) In addition, the Restrictions applicable to the Units shall lapse in accordance with the terms of Section 5 of the Employment Agreement if and to the extent applicable provisions under Section 5 of the Employment Agreement are triggered.
b. | If, during the Restriction Period, the Grantee takes a Leave of Absence from Motorola or a Subsidiary, the Units will continue to be subject to this Agreement. If the Restriction Period expires while the Grantee is on a Leave of Absence the Grantee will be entitled to the Units even if the Grantee has not returned to active employment. Leave of Absence means an approved leave of absence from Motorola or a Subsidiary that is not a termination of employment, as determined by Motorola. |
c. | To the extent the Restrictions lapse under this Section 3 with respect to the Units, they will be free of the terms and conditions of this Award (other than 2(c)). |
4. | Adjustments . If the number of outstanding shares of Common Stock is changed as a result of a stock split or the like without additional consideration to the Company, the number of Units subject to this Award shall be adjusted to correspond to the change in the outstanding shares of Common Stock. |
5. | Dividends . No dividends (or dividend equivalents) shall be paid with respect to Units credited to the Grantees account. |
6. | Delivery of Certificates or Equivalent . Upon the lapse of Restrictions applicable to the Units, the Company shall, at its election, either (i) deliver to the Grantee a certificate representing a number of shares of Common Stock equal to the number of Units upon which such Restrictions have lapsed, or (ii) establish a brokerage account for the Grantee and credit to that account the number of shares of Common Stock of the Company equal to the number of Units upon which such Restrictions have lapsed; provided that if the Units convert into cash accounts they shall be settled in cash. |
7. | Withholding Taxes . The Company is entitled to withhold applicable taxes for the respective tax jurisdiction attributable to this Award or any payment made in connection with the Units. Grantee may satisfy any minimum withholding obligation in whole or in part by electing to have the plan administrator retain |
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shares of Common Stock deliverable in connection with the Units having a Fair Market Value on the date the Restrictions applicable to the Units lapse equal to the amount to be withheld. Fair Market Value for this purpose shall be the closing price for a share of Common Stock on the date the Restrictions applicable to the Units lapse (the Restrictions Lapse Date) as reported for the New York Stock Exchange- Composite Transactions in the Wall Street Journal at www.online.wsj.com or, for purposes of imposing sanctions under paragraph 2(d), on any date specified therein. In the event the New York Stock Exchange is not open for trading on the Restrictions Lapse Date, or if the Common Stock does not trade on such day, Fair Market Value for this purpose shall be the closing price of the Common Stock on the last trading day prior to the Restrictions Lapse Date. |
8. | Voting and Other Rights . |
a. | Grantee shall have no rights as a stockholder of the Company in respect of the Units, including the right to vote and to receive cash dividends and other distributions until delivery of certificates representing shares of Common Stock in satisfaction of the Units. |
b. | The grant of Units does not confer upon Grantee any right to continue in the employ of the Company or a Subsidiary or to interfere with the right of the Company or a Subsidiary, to terminate Grantees employment at any time. |
9. | Consent to Transfer Personal Data . By accepting this award, Grantee voluntarily acknowledges and consents to the collection, use, processing and transfer of personal data as described in this paragraph. Grantee is not obliged to consent to such collection, use, processing and transfer of personal data. However, failure to provide the consent may affect Grantees ability to participate in the Plan. Motorola, its Subsidiaries and Grantees employer hold certain personal information about Grantee, that may include his/her name, home address and telephone number, date of birth, social security number or other employee identification number, salary grade, hire data, salary, nationality, job title, any shares of stock held in Motorola, or details of all restricted stock units or any other entitlement to shares of stock awarded, canceled, purchased, vested, or unvested, for the purpose of managing and administering the Plan (Data). Motorola and/or its Subsidiaries will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of Grantees participation in the Plan, and Motorola and/or any of its Subsidiaries may each further transfer Data to any third parties assisting Motorola in the implementation, administration and management of the Plan. These recipients may be located throughout the world, including the United States. Grantee authorizes them to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing Grantees participation in the Plan, including any requisite transfer of such Data as may be required for the administration of the Plan and/or the subsequent holding of shares of stock on Grantees behalf to a broker or other third party with whom Grantee may elect to deposit any shares of stock acquired pursuant to the Plan. Grantee may, at any time, review Data, require any necessary amendments to it or withdraw the consents herein in writing by contacting Motorola; however, withdrawing consent may affect Grantees ability to participate in the Plan. |
A-4
10. | Nature of Award . By accepting this Award Agreement, the Grantee acknowledges his or her understanding that the grant of Units under this Award Agreement is completely at the discretion of Motorola, and that Motorolas decision to make this Award in no way implies that similar awards may be granted in the future or that Grantee has any guarantee of future employment. Nor shall this or any such grant interfere with Grantees right or the Companys right to terminate such employment relationship at any time, with or without cause, to the extent permitted by applicable laws and any enforceable agreement between Grantee and the Company. Grantees acceptance of this Award is voluntary. The Award is not part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension, or retirement benefits or similar payments, notwithstanding any provision of any compensation, insurance agreement or benefit plan to the contrary, |
11. | Remedies for Breach . Grantee hereby acknowledges that the harm caused to the Company by the breach or anticipated breach of the Restrictive Covenants will be irreparable and further agrees the Company may obtain injunctive relief against the Grantee in addition to and cumulative with any other legal or equitable rights and remedies the Company may have pursuant to this Agreement, any other agreements between the Grantee and the Company for the protection of the Companys Confidential Information (as defined in the Employment Agreement), or law, including the recovery of liquidated damages. Grantee agrees that any interim or final equitable relief entered by a court of competent jurisdiction, as specified in paragraph 14 below, will, at the request of the Company, be entered on consent and enforced by any such court having jurisdiction over the Grantee. This relief would occur without prejudice to any rights either party may have to appeal from the proceedings that resulted in any grant of such relief. |
12. | Acknowledgements . With respect to the Units, this Agreement (and any provisions of the Employment Agreement incorporated into this Agreement) is the entire agreement with the Company. No waiver of any breach of any provision of this Agreement by the Company shall be construed to be a waiver of any succeeding breach or as a modification of such provision. The provisions of this Agreement shall be severable and in the event that any provision of this Agreement shall be found by any court as specified in paragraph 14 below to be unenforceable, in whole or in part, the remainder of this Agreement shall nevertheless be enforceable and binding on the parties. Grantee hereby agrees that the court may modify any invalid, overbroad or unenforceable term of this Agreement so that such term, as modified, is valid and enforceable under applicable law. Further, by accepting any Award under this Agreement, Grantee affirmatively states that he has not, will not and cannot rely on any representations not expressly made herein. |
13. | Funding . No assets or shares of Common Stock shall be segregated or earmarked by the Company in respect of any Units awarded hereunder. The grant of Units hereunder shall not constitute a trust and shall be solely for the purpose of recording an unsecured contractual obligation of the Company. |
14. | Governing Law . All questions concerning the construction, validity and interpretation of this Award shall be governed by and construed according to the law of the State of Illinois without regard to any states conflicts of law principles. |
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Any disputes regarding this Award or Agreement shall be brought only in the state or federal courts of Illinois.
15. | Waiver . The failure of the Company to enforce at any time any provision of this Award shall in no way be construed to be a waiver of such provision or any other provision hereof. |
17. | Actions by the Compensation Committee . The Committee may delegate its authority to administer this Agreement. The actions and determinations of the Compensation Committee or delegate shall be binding upon the parties. |
18. | Acceptance of Terms and Conditions . By electronically accepting this Award within 30 days after the date of the electronic mail notification by the Company to Grantee of the grant of this Award ( Email Notification Date ), Grantee agrees to be bound by the foregoing terms and conditions, the 2006 Incentive Plan and any and all rules and regulations established by Motorola in connection with awards issued under the 2006 Incentive Plan. If Grantee does not electronically accept this Award within 30 days of the Email Notification Date Grantee will not be entitled to the Units. |
19. | Plan Documents . The 2006 Incentive Plan and the Prospectus for the 2006 Incentive Plan are available at http://myhr.mot.com/pay.finances/awards_incentives/stock_options/plan_docum ents.jsp or from Global Rewards, 1303 East Algonquin Road, Schaumburg, IL 60196, (847) 576-7885. |
20. | Subsidiary Definition . For purposes of this Agreement, a Subsidiary is any corporation or other entity in which a 50 percent or greater interest is held directly or indirectly by Motorola and which is consolidated for financial reporting purposes. |
21. | Miscellaneous . The Units shall be subject to Section 3(b)(iv)(H), Section 3(b)(iv)(I) and Section 5 of the Employment Agreement. |
A-6
EXHIBIT B
MOTOROLA, INC.
AWARD DOCUMENT
For the
Motorola Omnibus Incentive Plan of 2006
Terms and Conditions Related to Employee Nonqualified Stock Options
Recipient: | Date of Expiration: | |||||||
Commerce ID#: | Number of Options: | |||||||
Date of Grant: | Exercise Price: | |||||||
Motorola, Inc. (Motorola or the Company) is pleased to grant you options to purchase shares of Motorolas common stock [ under the Motorola Omnibus Incentive Plan of 2006 (the Plan) ] . The number of options (Options) awarded to you and the Exercise Price per Option, which is the Fair Market Value on the Date of Grant, are stated above. Each Option entitles you to purchase one share of Motorolas common stock on the terms described below and in the Plan. Reference is made to the employment agreement (Employment Agreement) by and between [ ] and Motorola, dated as of the [ ] day of [ ] 2008.
Vesting of Options Options will continue |
Definition of Terms |
|
to vest in accordance with the vesting |
If a term is used but not defined, it has |
|
schedule set forth above. |
the meaning given such term in the Plan. |
|
Exercising Options You may exercise |
Fair Market Value is the closing price for |
|
Options that are vested or that vest |
a share of Motorola common stock on the |
|
during the Leave of Absence or Temporary |
date of grant or date of exercise, |
|
Layoff. |
whichever is applicable. The official source |
|
for the closing price is the New York Stock |
||
Effect of Termination of Employment or |
Exchange Composite Transaction as |
|
Service If your employment or service is |
reported in the Wall Street Journal at |
|
terminated during the Leave of Absence or |
www.online.wsj.com. |
|
Temporary Layoff, the treatment of your |
||
Options will be determined in accordance |
Subsidiary means an entity of which |
|
with Section 5 of the Employment |
Motorola owns directly or indirectly at |
|
Agreement. |
least 50% and that Motorola consolidates |
|
for financial reporting purposes. |
||
Other Terms |
||
Method of Exercising You must follow |
Temporary Layoff means a layoff or |
|
the procedures for exercising options |
redundancy that is communicated as |
|
established by Motorola from time to time. |
being for a period of up to twelve months |
|
At the time of exercise, you must pay the |
and as including a right to recall under |
|
Exercise Price for all of the Options being |
defined circumstances. |
|
exercised and any taxes that are required to be withheld by Motorola or a Subsidiary |
Consent to Transfer Personal Data |
|
in connection with the exercise. Options |
By accepting this award, you voluntarily |
|
may not be exercised for less than 50 |
acknowledge and consent to the |
|
shares unless the number of shares |
collection, use, processing and transfer of |
|
represented by the Option is less than 50 |
personal data as described in this |
|
shares, in which case the Option must be |
paragraph. You are not obliged to |
|
exercised for the remaining amount. |
consent to such collection, use, processing |
|
and transfer of personal data. However, |
||
Transferability Unless the Committee |
failure to provide the consent may affect |
|
provides, Options are not transferable |
your ability to participate in the Plan. |
|
other than by will or the laws of descent |
Motorola, its Subsidiaries and your |
|
and distribution. |
employer hold certain personal |
|
information about you, that may include |
||
Tax Withholding Motorola or a |
your name, home address and telephone |
|
Subsidiary is entitled to withhold an |
number, date of birth, social security |
|
amount equal to the required minimum |
number or other employee identification |
|
statutory withholding taxes for the |
number, salary, salary grade, hire date, |
|
respective tax jurisdictions attributable to |
nationality, job title, any shares of stock |
|
any share of common stock deliverable in |
held in Motorola, or details of all options |
|
connection with the exercise of the |
or any other entitlement to shares of |
|
Options. You may satisfy any minimum |
stock awarded, canceled, purchased, |
|
withholding obligation and additional |
vested, or unvested, for the purpose of |
|
withholding, if desired, by electing to have |
managing and administering the Plan |
|
the plan administrator retain Option |
(Data). Motorola and/or its Subsidiaries |
|
shares having a Fair Market Value on the |
will transfer Data amongst themselves as |
|
date of exercise equal to the amount to be |
necessary for the purpose of |
|
withheld. |
implementation, administration and |
|
management of your participation in the |
||
Plan, and Motorola and/or any of its |
B-2
Subsidiaries may each further transfer |
The value of your stock option awarded |
|||
Data to any third parties assisting |
herein is an extraordinary item of |
|||
Motorola in the implementation, |
compensation. Except as provided in the |
|||
administration and management of the |
Employment Agreement, the stock option |
|||
Plan. These recipients may be located |
is not part of normal or expected |
|||
throughout the world, including the United |
compensation for purposes of calculating |
|||
States. You authorize them to receive, |
any severance, resignation, redundancy, |
|||
possess, use, retain and transfer the Data, |
end of service payments, bonuses, long- |
|||
in electronic or other form, for the |
service awards, pension, or retirement |
|||
purposes of implementing, administering |
benefits or similar payments, |
|||
and managing your participation in the |
notwithstanding any provision of any |
|||
Plan, including any requisite transfer of |
compensation, insurance agreement or |
|||
such Data as may be required for the |
benefit plan to the contrary, |
|||
administration of the Plan and/or the subsequent holding of shares of stock on |
Substitute Stock Appreciation Right |
|||
your behalf to a broker or other third |
Subject to compliance with Section 409A |
|||
party with whom you may elect to deposit |
of the Internal Revenue Code of 1986, as |
|||
any shares of stock acquired pursuant to |
amended, Motorola reserves the right to |
|||
the Plan. You may, at any time, review |
substitute a Stock Appreciation Right for |
|||
Data, require any necessary amendments |
your Option in the event certain changes |
|||
to it or withdraw the consents herein in |
are made in the accounting treatment of |
|||
writing by contacting Motorola; however, |
stock options. Any substitute Stock |
|||
withdrawing your consent may affect your |
Appreciation Right shall be applicable to |
|||
ability to participate in the Plan. |
the same number of shares as your |
|||
Option and shall have the same Date of |
||||
Acknowledgement of Discretionary |
Expiration, Exercise Price, and other terms |
|||
Nature of the Plan; No Vested Rights |
and conditions. Any substitute Stock |
|||
You acknowledge and agree that the Plan |
Appreciation Right may be settled only in |
|||
is discretionary in nature and limited in |
common stock. |
|||
duration, and may be amended, cancelled, or terminated by Motorola or a Subsidiary, |
Acceptance of Terms and Conditions |
|||
in its sole discretion, at any time. The |
By accepting the Options, you agree to be |
|||
grant of awards under the Plan is a one- |
bound by these terms and conditions, the |
|||
time benefit and does not create any |
Plan and the Stock Option Consideration |
|||
contractual or other right to receive an |
Agreement . |
|||
award in the future or to future employment. Nor shall this or any such |
Other Information about Your Options |
|||
grant interfere with your right or the |
and the Plan |
|||
Companys right to terminate such |
You can find other information about |
|||
employment relationship at any time, with |
options and the Plan on the Motorola |
|||
or without cause, to the extent permitted |
website |
|||
by applicable laws and any enforceable |
http://myhr.mot.com/pay_finances/award |
|||
agreement between you and the |
s_incentives/stock_options/plan_documen |
|||
Company. Future grants, if any, will be at |
ts.jsp. If you do not have access to the |
|||
the sole discretion of Motorola, including, |
website, please contact Motorola Global |
|||
but not limited to, the timing of any grant, |
Rewards, 1303 E. Algonquin Road, |
|||
the amount of the award, vesting |
Schaumburg, IL 60196 USA; |
|||
provisions, and the exercise price. |
GBLRW01@Motorola.com; 847-576-7885; |
|||
for an order form to request Plan |
||||
No Relation to Other |
documents. |
|||
Benefits/Termination Indemnities | ||||
Your acceptance of this award and participation under the Plan is voluntary. |
B-3
EXHIBIT C
STOCK OPTION CONSIDERATION AGREEMENT
GRANT DATE: [ ]
The following Agreement is established to protect the trade secrets, intellectual property, confidential information, customer relationships and goodwill of Motorola, Inc. (Motorola or the Company) and each of its subsidiaries (the Company) both as defined in the Motorola Omnibus Incentive Plan of 2006 (the 2006 Plan). Reference is made to the employment agreement (Employment Agreement) by and between [ ] and Motorola, dated as of the [ ] day of [ ].
As consideration for the stock option(s) granted to me on the date shown above under the terms of the 2006 Plan (the Covered Options), and Motorola having provided me with Confidential Information (as defined in the Employment Agreement) as Chief Executive Officer of the mobile devices business of Motorola, I agree to the following:
1. Sections 7(a), (b) and (c) (together, the Restrictive Covenants) of the Employment Agreement are hereby incorporated by reference into this Agreement and shall apply as if fully set forth herein mutatis mutandis and any capitalized terms used in such Sections 7(a), (b) and (c) shall have the meanings ascribed to such terms in the Employment Agreement. I acknowledge that my agreement to the Restrictive Covenants is a condition of the grant of the Covered Options.
[ 2. I acknowledge that the Covered Options are subject to the terms and conditions of the Companys Policy Regarding Recoupment of Incentive Payments upon Financial Restatement, as such policy is in effect on the grant date set forth above (such policy, as it may be amended from time to time, being the Recoupment Policy). The Recoupment Policy provides for determinations by the Companys independent directors that, as a result of intentional misconduct by me, the Companys financial results were restated (a Policy Restatement). In the event of a Policy Restatement, the Companys independent directors may require, among other things (a) cancellation of any of the Covered Options that remain outstanding; and/or (b) reimbursement of any gains realized in respect of the Covered Options, if and to the extent the conditions set forth in the Recoupment Policy apply. Any determinations made by the independent directors in accordance with the Recoupment Policy shall be binding upon me. The Recoupment Policy is in addition to any other remedies which may be otherwise available at law, in equity or under contract, to the Company. ] [Note: Bracketed text not included in make-whole award document; Recoupment Policy shall not apply to make-whole awards.]
[ 3. I agree that by accepting the Covered Options, if I violate the Restrictive Covenants, then, in addition to any other remedies available in law and/or equity in any country, all of my vested and unvested Covered Options will terminate and no longer be exercisable, and for all Covered Options exercised within one year prior to the termination of my employment for any reason or anytime after termination of my employment for any reason, I will immediately pay to the Company the difference between the exercise price on the date of grant as reflected in the Award Document for the Covered Options and the market price of the Covered Options on the date of exercise (the spread). ] [Note: Bracketed text not included in make-whole/inducement award document.]
4. The Restrictive Covenants can be waived or modified only upon the prior written consent of Motorola, Inc. (or, following a Separation Event (as defined in the Employment Agreement) or Other Transaction Event (as defined in the Employment Agreement), MDB Public (as defined in the Employment Agreement) or MDB Other (as defined in the Employment Agreement), as applicable).
5. I acknowledge that the promises in this Agreement, not any employment of or services performed by me in the course and scope of that employment, are the sole consideration for the Covered Options. I agree the Company shall have the right to assign this Agreement which shall not affect the validity or enforceability of this Agreement, subject to the limitations on assignment contained in the Employment Agreement. This Agreement shall inure to the benefit of the assigns and successors of the Companys mobile devices business and that references to Motorola or the Company shall include any such assigns and successors. For the avoidance of doubt, Motorola may unilaterally assign this Agreement to MDB Public (as defined in the Employment Agreement) or MDB Other (as defined in the Employment Agreement).
6. I acknowledge that the harm caused to the Company by the breach or anticipated breach of the Restrictive Covenants will be irreparable and I agree the Company may obtain injunctive relief against me in addition to and cumulative with any other legal or equitable rights and remedies the Company may have pursuant to this Agreement, any other agreements between me and the Company for the protection of the Companys Confidential Information (as defined in the Employment Agreement), or law, including the recovery of liquidated damages. I agree that any interim or final equitable relief entered by a court of competent jurisdiction, as specified in paragraph 10 below, will, at the request of the Company, be entered on consent and enforced by any such court having jurisdiction over me. This relief would occur without prejudice to any rights either party may have to appeal from the proceedings that resulted in any grant of such relief.
7. With respect to the Covered Options, this Agreement (and any provisions of the Employment Agreement incorporated into this Agreement) is my entire agreement with the Company. No waiver of any breach of any provision of this Agreement by the Company shall be construed to be a waiver of any succeeding breach or as a modification of such provision. The provisions of this Agreement shall be severable and in the event that any provision of this Agreement shall be found by any court as specified in paragraph 9 below to be unenforceable, in whole or in part, the remainder of this Agreement shall nevertheless be enforceable and binding on the parties. I also agree that the court may modify any invalid, overbroad or unenforceable term of this Agreement so that such term, as modified, is valid and enforceable under applicable law. Further, I affirmatively state that I have not, will not and cannot rely on any representations not expressly made herein.
8. I accept the terms of this Agreement and the above option(s) to purchase shares of the Common Stock of the Company, subject to the terms of this Agreement, the 2006 Plan, and any Award Document issued pursuant thereto. I am familiar with the 2006 Plan and agree to be bound by it to the extent applicable, as well as by the actions of the Companys Board of Directors or any committee thereof.
9. I agree that this Agreement (and any provisions of the Employment Agreement incorporated into this Agreement) and the 2006 Plan, and any Award Document issued pursuant thereto, together constitute an agreement between the Company and me. I
C-2
further agree that this Agreement is governed by the laws of Illinois, without giving effect to any states principles of Conflicts of Laws, and any legal action related to this Agreement shall be brought only in a federal or state court located in Illinois, USA. I accept the jurisdiction of these courts and consent to service of process from said courts solely for legal actions related to this Agreement and the Covered Options.
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|
|
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Date |
Signature
|
Printed Name
|
||||
Commerce ID |
IN ORDER FOR THE ABOVE-REFERENCED OPTION(S) TO BE AWARDED, THIS AGREEMENT, SIGNED AND DATED, MUST BE RETURNED TO MOTOROLA c/o EXECUTIVE REWARDS NO LATER THAN .
C-3
Exhibit D
The number of shares of MDB Public Common Stock subject to the MDB Public Stock Option ( Option Number ) shall equal the product of (1) 0.9 and (2) the difference between (a) the Total Grant Number minus (b) the Inducement Grant Number.
Total Grant Number means the product of (1) 3.0% and (2) the Shares Outstanding.
Shares Outstanding means the number of shares of MDB Public Common Stock actually outstanding immediately following the Separation Event.
Inducement Grant Number means the sum of (1) the number of shares of MDB Public Common Stock that would be issuable under the Inducement Stock Option (based on the original number of shares of Motorola Common Stock subject to the Inducement Stock Option on the date of grant of the Inducement Stock Option) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement and (2) the number of shares of MDB Public Common Stock underlying the Inducement Restricted Stock Units (based on the original number of shares of Motorola Common Stock underlying the Inducement Restricted Stock Units on the date of grant of the Inducement Restricted Stock Units) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement.
Exhibit E
The number of shares of MDB Public Common Stock underlying the MDB Public Restricted Shares ( Restricted Shares Number ) shall equal the product of (1) 0.1 and (2) the difference between (a) the Total Grant Number minus (b) the Inducement Grant Number.
Total Grant Number means the product of (1) 3.0% and (2) the Shares Outstanding.
Shares Outstanding means the number of shares of MDB Public Common Stock actually outstanding immediately following the Separation Event.
Inducement Grant Number means the sum of (1) the number of shares of MDB Public Common Stock that would be issuable under the Inducement Stock Option (based on the original number of shares of Motorola Common Stock subject to the Inducement Stock Option on the date of grant of the Inducement Stock Option) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement and (2) the number of shares of MDB Public Common Stock underlying the Inducement Restricted Stock Units (based on the original number of shares of Motorola Common Stock underlying the Inducement Restricted Stock Units on the date of grant of the Inducement Restricted Stock Units) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement.
EXHIBIT F
Form of Release
(a) In consideration for the payment of the severance described in the Executive employment agreement with the Company (the Employment Agreement ), dated as of [ ] , the Executive for himself, and for his heirs, administrators, representatives, executors, successors and assigns (collectively Releasers ) does hereby irrevocably and unconditionally release, acquit and forever discharge the Company, its subsidiaries, affiliates and divisions and their respective, current and former, trustees, officers, directors, partners, shareholders, agents, employees, consultants, independent contractors and representatives, in their individual capacities as such, including without limitation all persons acting by, through under or in concert with any of them (collectively, Releasees ), and each of them from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, remedies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys fees and costs) of any nature whatsoever, known or unknown, whether in law or equity and whether arising under federal, state or local law and in particular including any claim for discrimination based upon race, color, ethnicity, sex, age (including the Age Discrimination in Employment Act of 1967), national origin, religion, disability, or any other unlawful criterion or circumstance, which the Executive and Releasers had, now have, or may have in the future against each or any of the Releasees (collectively Executive/Releaser Actions ) from the beginning of the world until the date hereof.
(b) The Executive acknowledges that: (i) this entire Release is written in a manner calculated to be understood by him; (ii) he has been advised to consult with an attorney before executing this Release; (iii) he was given a period of twenty-one days within which to consider this Release; and (iv) to the extent he executes this Release before the expiration of the twenty-one day period, he does so knowingly and voluntarily and only after consulting his attorney. The Executive shall have the right to cancel and revoke this Release by delivering notice to the Company pursuant to the notice provision of Section 10 of the Employment Agreement prior to the expiration of the seven-day period following the date hereof or any longer period required under applicable state law, and the severance benefits under the Employment Agreement shall not become effective, and no payments or benefits shall be made or provided thereunder, until the day after the expiration of such seven-day period (the Revocation Date ). Upon such revocation, this Release and the severance provisions of the Employment Agreement shall be null and void and of no further force or effect.
(c) Notwithstanding anything herein to the contrary, the sole matters to which the Release do not apply are: (i) the Executives rights of indemnification (including the rights set forth in Section 12 of the Employment Agreement) and directors and officers liability insurance coverage (including the rights set forth in Section 11 of the Employment Agreement) to which he was entitled immediately prior to with regard to his service as an officer or director of the Company or other fiduciary capabilities; (ii) the Executives rights under any tax-qualified pension or claims for accrued vested benefits or rights under any other employee benefit plan, policy or arrangement (whether tax-qualified or not) maintained by the Company or under COBRA; (iii) the Executives rights under Section 5 of the Employment Agreement, Section 6 of the Employment Agreement solely to the extent it relates to reimbursement of legal costs and expenses and Section 8 of the Employment Agreement which are intended to survive termination of employment; (iv) any claims or rights that cannot be waived by law, including the right to file an administrative charge for discrimination; or (v) the Executives rights as a stockholder of the Company.
(d) This Release is the complete understanding between the Executive and the Company in respect of the subject matter of this Release and supersedes all prior agreements relating to the same subject matter. The Executive has not relied upon any representations, promises or agreements of any kind except those set forth herein in signing this Release.
(e) In the event that any provision of this Release should be held to be invalid or unenforceable, each and all of the other provisions of this Release shall remain in full force and effect. If any provision of this Release is found to be invalid or unenforceable, such provision shall be modified as necessary to permit this Release to be upheld and enforced to the maximum extent permitted by law.
(f) This Release shall be governed by and construed in accordance with the laws of the State of Illinois, without reference to principles of conflict of laws.
(g) This Release inures to the benefit of the Company and its successors and assigns.
EXECUTIVE |
F-2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment (the Amendment ) to the Employment Agreement (the Employment Agreement ), by and between Motorola, Inc. ( Motorola or the Company ) and Sanjay K. Jha (the Executive ) dated August 4, 2008, is made and entered into as of the 15th day of December, 2008, by and between the Company and Executive. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Employment Agreement.
1. Subject in all cases to the prior execution and non-revocation of a release substantially in the form attached to the Employment Agreement as Exhibit F , notwithstanding anything to the contrary contained in the Employment Agreement (or in any related equity grant agreement), amounts that are non-qualified deferred compensation under Section 409A that would otherwise be payable, restricted stock units that would otherwise have been settled, RSU Cash-Out Payments that would otherwise have been made and benefits that would otherwise be provided, in each case pursuant to Section 5(a)(i) and (iii), Section 5(b)(i) and (iii) or Section 5(g) shall be paid, with Interest, or settled, or made, or provided, on the first business day after the date that is six months following the Executives separation from service within the meaning of Section 409A.
2. Except as expressly amended by this Amendment, all terms and conditions of the Employment Agreement remain in full force and effect and are unmodified hereby.
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment (the Amendment ) to the Employment Agreement, by and between Motorola, Inc. ( Motorola or the Company ) and Sanjay K. Jha (the Executive ) dated August 4, 2008, as amended on December 15, 2008 (the Employment Agreement ), is effective as of February 11, 2010. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Employment Agreement.
1. The second WHEREAS recital of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
WHEREAS , Motorola has announced a plan to create two independent publicly traded companies, one of which would own (directly or indirectly) MDB (the Separation Event );
2. Section 3(a)(i) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
(i) During the Employment Period and prior to the occurrence of the Separation Event or any Other Transaction Event (the Motorola Service Period ): (A) the Executive shall serve as (1) the Chief Executive Officer of MDB, (2) the Chief Executive
Officer of the Companys Home businesses ( Home ) and (3) the Co-Chief Executive Officer of Motorola in the Office of the Chief Executive Officer (the OC ), with such duties, responsibilities and authority as are commensurate with such positions, reporting directly to the Motorola Board, (B) (1) Motorolas General Counsel, (2) Motorolas Chief Financial Officer, (3) the head of Motorolas Supply Chain, (4) the head of Motorolas Public Affairs/Communications Department and (5) the head of Motorolas Human Resources Department (clauses (1) through (5), the Dual Reporting Group ) shall report directly to the OC; provided , however , that (x) employees of MDB and Home shall have direct line reporting relationships to the Executive or his designees (including any applicable member of the Dual Reporting Group) and (y) employees of Motorolas business segments other than MDB and Home shall have direct line reporting relationships to Motorolas other Co-Chief Executive Officer or his designees (including any applicable member of the Dual Reporting Group) (items (x) and (y), together, the Reporting Rules ), (C) Motorola shall cause the Executive to be elected to the Motorola Board as of the Commencement Date, and thereafter, subject to Section 4(g), the Executive shall be nominated by Motorola to remain on the Motorola Board, (D) Executive shall devote substantially all of his business time, energies and talents to serving as Motorolas Co-Chief Executive Officer and the Chief Executive Officer of MDB and Home, perform his duties subject to the lawful directions of the Motorola Board, and in accordance with Motorolas corporate governance and ethics guidelines, conflict of interests policies, code of conduct and other written policies (collectively, the
Motorola Policies ), (E) the Motorola Board (or such committee of the Motorola Board as the Motorola Board shall duly designate) shall resolve any disagreement between Executive and Motorolas other Co-Chief Executive Officer, (F) in the event that Executive becomes the sole Chief Executive Officer of Motorola, (1) he shall continue to report directly to the Motorola Board, with such duties, responsibilities and authority as are commensurate with such position, (2) the Reporting Rules shall cease to apply, and (3) he shall devote substantially all of his business time, energies and talents to serving as Motorolas Chief Executive Officer and shall perform his duties in accordance with the Motorola Policies and (G) in the event that the Separation Event or an Other Transaction Event does not occur on or prior to August 31, 2011, unless the Parties agree otherwise in writing, (1) Executives employment with the Company shall terminate, (2) such termination shall be treated as a termination without Cause and (3) the other Co-Chief Executive Officer shall become the sole Chief Executive Officer.
3. Section 3(b)(iii)(H) of the Employment Agreement is hereby amended by replacing the two references to October 31, 2010 with the words June 30, 2011.
4. The second to last sentence of Section 3(b)(vii) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
Relocation expenses shall include without limitation temporary housing through the earlier of (A) the date on which the Separation Event occurs and (B) June 30, 2011, and coverage for any loss on the sale of his current home in San Diego, California.
5. Section 3(b)(viii) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
(viii) Additional Payment . Subject to Executives continued employment with the Company through June 30, 2011, if (A) the Separation Event has not occurred on or prior to June 30, 2011 or (B) the Company consummates an Other Transaction Event on or prior to June 30, 2011, the Company shall pay to Executive $38 million (the Additional Payment ) on July 15, 2011, to the extent not theretofore paid.
6. Section 4(c)(vii) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
(vii) the Separation Event or an Other Transaction Event has not occurred on or prior to June 30, 2011;
7. Section 5(a)(i)(D) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
(D) if (1) the Separation Event has not yet occurred, (2) Executives Date of Termination is on or prior to June 30, 2011 and (3) (x) the Company has terminated Executive without Cause or (y) Executive has terminated employment for Safe Harbor Good Reason, the Additional Payment, to the extent not theretofore paid; and
2
8. Section 5(b)(i)(D) of the Employment Agreement is hereby amended and restated in its entirety as set forth below:
(D) if (1) the Separation Event has not yet occurred, (2) Executives Date of Termination is on or prior to June 30, 2011 and (3) (x) the Company has terminated Executive without Cause or (y) Executive has terminated employment for Safe Harbor Good Reason, the Additional Payment, to the extent not theretofore paid; and
9. Notwithstanding anything to the contrary contained in the Agreement, in no event shall Executive ceasing to have any title, position, authority, duties or responsibilities with respect to Home as a result of the occurrence of (a) the sale of Home, (b) an Other Transaction Event or (c) a Separation Event in which Home is not part of MDB Public constitute Good Reason or Safe Harbor Good Reason. For the avoidance of doubt, a diminution in Executives title with respect to Home or a material diminution in Executives position, authority, duties or responsibilities with respect to Home, other than as a result of the occurrence of (1) a sale of Home, (2) an Other Transaction Event or (3) a Separation Event in which Home is not part of MDB Public, shall constitute Good Reason and Safe Harbor Good Reason.
10. Subject to Executives employment with the Company on the date that the Company makes its annual incentive awards (currently anticipated to be during May, 2010), and, subject to approval by the Company Committee, Executive will receive a long range incentive plan award, commensurate with Executives position with the Company.
11. Exhibit D to the Employment Agreement shall be amended and restated in its entirety as set forth on Exhibit D to this Amendment.
12. Exhibit E to the Employment Agreement shall be amended and restated in its entirety as set forth on Exhibit E to this Amendment.
13. Except as expressly amended by this Amendment, all terms and conditions of the Employment Agreement remain in full force and effect and are unmodified hereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF , the parties have executed or caused this Amendment to be executed as of the day and year first above written.
SANJAY K. JHA | ||
/s/ SANJAY K. JHA |
||
MOTOROLA, INC. | ||
/s/ SAMUEL SCOTT |
||
Name: |
Samuel Scott | |
Title: |
Chairman, Compensation and Leadership Committee |
[SIGNATURE PAGE TO FEBRUARY 11, 2010
AMENDMENT TO JHA EMPLOYMENT AGREEMENT]
Exhibit D
The number of shares of MDB Public Common Stock subject to the MDB Public Stock Option ( Option Number ) shall equal the product of (1) 0.9 and (2) the difference between (a) the Total Grant Number minus (b) the Inducement Grant Number.
Total Grant Number means the product of (1) the Applicable Percentage and (2) the Shares Outstanding.
Applicable Percentage means:
(1) if the Market Capitalization is equal to or less than $6.0 billion, 3.0000%; and
(2) if the Market Capitalization is greater than $6.0 billion, the product of (a) 3.0000% and (b) the Applicable Ratio, with the Applicable Percentage expressed as a percentage carried out to four decimal places; provided , however , that in no event will the Applicable Percentage be below 1.8000%.
Applicable Ratio means the quotient obtained by dividing (1) $6.0 billion by (2) the Market Capitalization, with such ratio carried out to four decimal places.
Shares Outstanding means the number of shares of MDB Public Common Stock actually outstanding immediately following the Separation Event.
Market Capitalization means the product of (1) the Shares Outstanding and (2) the MDB Average Closing Price.
MDB Average Closing Price means the average closing price of MDB Public Common Stock for the first fifteen trading days following the Separation Event (including the closing price of MDB Public Common Stock on the date of the Separation Event if the stock trades on that date).
Inducement Grant Number means the sum of (1) the number of shares of MDB Public Common Stock that would be issuable under the Inducement Stock Option (based on the original number of shares of Motorola Common Stock subject to the Inducement Stock Option on the date of grant of the Inducement Stock Option) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement and (2) the number of shares of MDB Public Common Stock underlying the Inducement Restricted Stock Units (based on the original number of shares of Motorola Common Stock underlying the Inducement Restricted Stock Units on the date of grant of the Inducement Restricted Stock Units) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement.
In the event that, after the date of the Separation Event and prior to the expiration of the first fifteen trading days following the Separation Event, MDB Public changes the number of shares of MDB Public Common Stock issued and outstanding as a result of a stock split, stock dividend, stock combination, recapitalization, reclassification or reorganization, the provisions of this Exhibit D shall be equitably adjusted to the extent necessary to reflect such transaction and to preserve the intent of the parties to this Agreement.
Exhibit E
The number of shares of MDB Public Common Stock underlying the MDB Public Restricted Shares ( Restricted Shares Number ) shall equal the product of (1) 0.1 and (2) the difference between (a) the Total Grant Number minus (b) the Inducement Grant Number.
Total Grant Number means the product of (1) the Applicable Percentage and (2) the Shares Outstanding.
Applicable Percentage means:
(1) if the Market Capitalization is equal to or less than $6.0 billion, 3.0000%; and
(2) if the Market Capitalization is greater than $6.0 billion, the product of (a) 3.0000% and (b) the Applicable Ratio, with the Applicable Percentage expressed as a percentage carried out to four decimal places; provided , however , that in no event will the Applicable Percentage be below 1.8000%.
Applicable Ratio means the quotient obtained by dividing (1) $6.0 billion by (2) the Market Capitalization, with such ratio carried out to four decimal places.
Shares Outstanding means the number of shares of MDB Public Common Stock actually outstanding immediately following the Separation Event.
Market Capitalization means the product of (1) the Shares Outstanding and (2) the MDB Average Closing Price.
MDB Average Closing Price means the average closing price of MDB Public Common Stock for the first fifteen trading days following the Separation Event (including the closing price of MDB Public Common Stock on the date of the Separation Event if the stock trades on that date).
Inducement Grant Number means the sum of (1) the number of shares of MDB Public Common Stock that would be issuable under the Inducement Stock Option (based on the original number of shares of Motorola Common Stock subject to the Inducement Stock Option on the date of grant of the Inducement Stock Option) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement and (2) the number of shares of MDB Public Common Stock underlying the Inducement Restricted Stock Units (based on the original number of shares of Motorola Common Stock underlying the Inducement Restricted Stock Units on the date of grant of the Inducement Restricted Stock Units) immediately following the Separation Event and after giving effect to the adjustment contemplated by Section 3(b)(iii)(G) of the Agreement.
In the event that, after the date of the Separation Event and prior to the expiration of the first fifteen trading days following the Separation Event, MDB Public changes the number of shares of MDB Public Common Stock issued and outstanding as a result of a stock split, stock dividend, stock combination, recapitalization, reclassification or reorganization, the provisions of this Exhibit E shall be equitably adjusted to the extent necessary to reflect such transaction and to preserve the intent of the parties to this Agreement.
EXHIBIT 10.11
FORM OF MOTOROLA MOBILITY HOLDINGS, INC.
LEGACY INCENTIVE PLAN
I. | Purpose |
The purpose of this Motorola Mobility Holdings, Inc. Legacy Incentive Plan (the Plan ) is to effectuate those terms of Article 4 of the Amended and Restated Employee Matters Agreement among Motorola Mobility Holdings, Inc. (formerly known as Motorola SpinCo Holdings Corporation), Motorola Mobility, Inc. and Motorola, Inc. effective as of July 31, 2010 (the Employee Matters Agreement ) dealing with the treatment of certain equity awards in the separation of Motorola Mobility Holdings, Inc. (the Company ) from Motorola, Inc. by a distribution of all shares of the Companys common stock to holders of Motorola, Inc. common stock (the Distribution ) on a specified record date (the date of the Distribution being the Distribution Date ), as set forth in the Amended and Restated Master Separation and Distribution Agreement among the Company, Motorola, Inc. and Motorola Mobility, Inc. effective as of July 31, 2010.
Pursuant to the Employee Matters Agreement, the Company agreed that all awards of stock options, stock appreciation rights and restricted stock units with and without dividend equivalent rights over shares of Motorola, Inc.s common stock (collectively referred to as Motorola Awards ) that are held at the close of business on the Distribution Date by Transferred Employees (as defined in the Employee Matters Agreement) shall be replaced with substitute awards over shares of the Companys common stock (referred to herein as the Substitute Awards ), adjusted as set forth in the Employee Matters Agreement.
This Plan shall constitute the SpinCo Equity Plan for purposes of the Employee Matters Agreement.
In addition, the Plan may be used to effectuate the terms of any agreement between Motorola, Inc. and the Company providing for the assumption by the Company of certain equity awards granted to members of the board of directors of Motorola, Inc. who shall become directors of the Company ( Transferring Directors ) in connection with the Distribution.
II. | Motorola, Inc. Plans |
Any Motorola Award granted under one or more of the below Motorola, Inc. plans or any sub-plans to the plans (collectively, the Motorola Plans ) and held by a Transferred Employee at the close of business on the Distribution Date will be assumed by the Company and replaced with a Substitute Award over shares of the Companys common stock ( Shares ) pursuant to the provisions of Sections 4.1(b), 4.2(b) and 4.3(a) of the Employee Matters Agreement. In addition, certain equity awards granted under one or more of the Motorola Plans to Transferring Directors may also be assumed by the Company and replaced with Substitute Awards ( Assumed Director Awards ).
(i) | Motorola Amended and Restated Incentive Plan of 1998, as attached hereto as Exhibit A , including the following sub-plan: |
a. | Israeli Addendum adopted on November 7, 2000, and applicable to grants made on or after January 1, 2000. |
(ii) | Motorola Omnibus Incentive Plan of 2000, as attached hereto as Exhibit B , including the following sub-plans: |
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a. | Israeli Addendum adopted on November 7, 2000, and applicable to grants made on or after January 1, 2000; |
b. | Motorola Omnibus Incentive Plan of 2000 Addendum France (adopted January 29, 2001, and applicable to grants from January 29, 2001, to May 16, 2001); |
c. | Motorola Omnibus Incentive Plan of 2000 Addendum France (adopted July 31, 2001, and applicable to grants from May 16, 2001, to May 4, 2003); and |
d. | Motorola Omnibus Incentive Plan of 2000 Addendum France (adopted May 5, 2003, and applicable to grants after May 5, 2003). |
(iii) | Motorola Compensation/Acquisition Plan of 2000, as attached hereto as Exhibit C , including the following sub-plan: |
a. | Israeli Addendum adopted on November 7, 2000, and applicable to grants made on or after January 1, 2000. |
(iv) | Motorola Omnibus Incentive Plan of 2002, as attached hereto as Exhibit D , including the following sub-plan: |
a. | Israeli Addendum adopted on November 7, 2000, and applicable to grants made on or after January 1, 2000. |
(v) | Motorola Omnibus Incentive Plan of 2003, as attached hereto as Exhibit E , including the following sub-plans: |
a. | Israeli Addendum adopted on November 7, 2000, and applicable to grants made on or after January 1, 2000; and |
b. | Motorola Omnibus Incentive Plan of 2000 Addendum France (adopted May 5, 2003, and applicable to grants after May 5, 2003). |
(vi) | Motorola Omnibus Incentive Plan of 2006, as attached hereto as Exhibit F , including the following sub-plans: |
a. | Israeli Addendum (Sub-Plan) to Motorola Omnibus Incentive Plan of 2006 (adopted May 2, 2006); and |
b. | Motorola Omnibus Incentive Plan of 2006 Addendum France (adopted May 2, 2006, and amended through July 27, 2009). |
In accordance with the Employee Matters Agreement and any agreement between Motorola, Inc. and the Company relating to the assumption of equity awards granted to Transferring Directors, each Substitute Award or Assumed Director Award shall have the same terms and conditions as the Motorola Award or director equity award to which it relates, and the terms of the Motorola Plans are hereby incorporated by reference into this Plan and shall apply to the Substitute Awards and any Assumed Director Awards, except as may be necessary for the general administration of the Substitute Awards or Assumed Director Awards following their assumption by the Company, as expressly set forth herein.
III. | Administration |
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(i) | Unless otherwise determined by the Board, the Plan shall be administered by the Committee which shall consist solely of two or more members of the Board each of whom is an outside director, within the meaning of Section 162(m) of the U.S. Internal Revenue Code (the Code ), a Non-Employee Director as defined in Rule 16b-3 promulgated under the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ), and an independent director under the New York Stock Exchange rules (or other principal securities market on which Shares are traded); provided that any action taken by the Committee shall be valid and effective, whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section III or otherwise provided in any charter of the Committee. Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to all Substitute Awards or Assumed Director Awards held by non-employee directors of the Company and for purposes of such Substitute Awards or Assumed Director Awards the term Committee as used in this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by subsection (iii) hereof. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 under the Exchange Act or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. |
(ii) | The Committee shall have all rights and obligations as set forth for the committee designated in the Administration provision of the relevant Motorola Plan. The Committees interpretation of the Plan, any Substitute Award or Assumed Director Awards under the Plan, any award agreement and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. |
(iii) | To the extent permitted by applicable law, the Committee may from time to time delegate to one or more officers of the Company the authority to administer or amend Substitute Awards; provided that the Committee shall have the sole authority with respect to Awards granted to or held by (a) Participants (as defined below) who are subject to Section 16 of the Exchange Act, (b) covered employees within the meaning of Section 162(m) of the Code, or (c) officers of the Company (or directors) to whom authority to administer or amend Substitute Awards has been delegated hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation, and the Committee may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section III (iii) shall serve in such capacity at the pleasure of the Committee. |
IV. | Participation in the Plan |
Participation in the Plan is limited to Transferred Employees who, at the close of business on the Distribution Date, held a Motorola Award under one or more of the Motorola Plans and Transferring Directors holding Assumed Director Awards (together, the Participants ). No new awards will be granted to Participants under the Plan.
V. | Shares Available Under the Plan |
The estimated number of Shares which may be issued under the Plan shall be [XX million], provided , however , that the maximum number of Shares which may be issued under the Plan shall not
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exceed the number of Shares that may, subject to satisfaction of applicable conditions, be distributable pursuant to (i) the Motorola Awards held by Transferred Employees at the close of business on the Distribution Date; and (ii) any equity awards held by Transferring Directors that are to be Assumed Director Awards, as agreed between Motorola, Inc. and the Company.
If any Substitute Award or Assumed Director Award under the Plan for any reason expires, lapses, is forfeited, cancelled or otherwise terminated without having been exercised or settled in full or is settled in cash, the Shares allocable to the Award shall not become available for grant pursuant to this Plan. Further, any Shares withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any Substitute Award or Assumed Director Award shall be treated as issued under this Plan and shall be deducted from the aggregate number of shares which may be issued under this Section V, and any Shares tendered to satisfy the grant or exercise price or tax withholding obligation pursuant to any Substitute Award or Assumed Director Award shall not be added to the aggregate number of Shares which may be issued under this Section V.
VI. | Assumption of Outstanding Awards under the Motorola Plans and Terms and Conditions of Awards |
In accordance with the Employee Matters Agreement and any agreement between Motorola, Inc. and the Company relating to the assumption of equity awards granted to Transferring Directors, the Company:
(i) | Accepts assignment of and assumes all rights and liabilities for (a) the Motorola Awards outstanding under the Motorola Plans and held by the Participants at the close of business on the Distribution Date; and (b) any equity awards granted to Transferring Directors which are to be assumed by the Company in accordance with the terms of any agreement between Motorola, Inc. and the Company, in each case under the Participants applicable award agreements; |
(ii) | Agrees to assume and to exercise all of the powers of the plan sponsor relating to the Substitute Awards or Assumed Director Awards under the Motorola Plans and applicable award agreements thereunder which were available to Motorola, Inc. prior to the close of business on the Distribution Date; and |
(iii) |
Agrees that all outstanding Substitute Awards which have been granted to Transferred Employees and Assumed Director Awards which have been granted to Transferring Directors under the Motorola Plans shall remain outstanding and shall be governed and administered in accordance with the original terms and conditions set forth in the applicable Motorola Plans and award agreements with the exception that , unless otherwise provided by the terms of any agreement between Motorola, Inc. and the Company relating to Assumed Director Awards, (a) the number of Shares (rounded down to the nearest whole Share) subject to Substitute Awards/Assumed Director Awards will be multiplied by the SpinCo Adjustment Factor (defined in Article 1 of the Employee Matters Agreement), (b) the exercise price of Substitute Awards/Assumed Director Awards (if any) will be divided by the SpinCo Adjustment Factor and rounded up to the nearest whole cent, (c) upon the exercise, issuance, holding, availability or vesting of the Substitute Awards/Assumed Director Awards, shares of the Companys common stock are hereby issuable or available, in lieu of shares of Motorola, Inc. common stock (if applicable), (d) Section III of the Plan identifies the administrator of the Plan, notwithstanding the administration provisions of the Motorola Plans, and (e) Section VII |
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of the Plan clarifies the applicable provisions regarding change in control in the Motorola Plans. |
VII. | Change in Control |
In the event of a Change in Control (as defined in the Motorola Plans) subsequent to the Distribution Date, the Change in Control provisions in the Motorola Plans and/or Participants award agreements relating to outstanding Substitute Awards or Assumed Director Awards shall govern the treatment of the Substitute Awards/ Assumed Director Awards, provided , however , that, for avoidance of doubt, the Company hereby clarifies that, except in the case where the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, a Change in Control shall not occur until consummation or effectiveness of a Change in Control of the Company, rather than upon the announcement, commencement, stockholder approval or other potential occurrence of any event or transaction that, if completed, would result in a Change in Control of the Company.
VIII. Interpretation
Unless the context otherwise requires, as of the close of business on the Distribution Date:
(i) | Any reference (whether capitalized or lower case) in the Motorola Plans and applicable award agreements to: (a) the Company, Motorola or Motorola, Inc. means the Company, (b) Stock, Common Stock or Shares means shares of the Companys common stock, (c) the Board of Directors or the Board means the Board of Directors of the Company, and (d) the Committee means the Committee of the Company, as defined in Section III of this Plan. |
(ii) | All references in the award agreements and the Motorola Plans relating to the Participants status as an employee or director of Motorola, Inc. or a subsidiary will now refer to the Participants status as an employee or director, as applicable, of the Company or any present or future parent, subsidiary or affiliate of the Company. |
(iii) | To the extent there is a conflict between any provision of the applicable Motorola Plan or the Participants award agreement thereunder and the terms of this Plan, this Plan shall govern, except as would (a) be inconsistent with the terms of such Substitute Award/Assumed Director Award and materially detrimental to the holder thereof, as determined by the Committee, (b) be prohibited under applicable law, or (c) require approval of the Companys stockholders. |
IX. | Amendment and Termination |
The Board or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, unless expressly provided in a Participants award agreement or the applicable Motorola Plan, no such action shall reduce the amount of any existing Substitute Award or Assumed Director Award or change the terms and conditions thereof without the Participants consent; provided, however, if set forth in the applicable Motorola Plan, the Committee may, in its discretion, substitute stock appreciation rights which can be settled only in Shares for outstanding stock options without a Participants consent. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary to comply with applicable laws, regulations, or stock exchange rules.
X. | Notices |
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Any written notice to the Company required by any of the provisions of this Plan shall be addressed to [Motorola Mobility Rewards; Motorola Mobility Holdings, Inc]., 600 North US Highway 45, Libertyville, Illinois 60048 and shall be effective when it is received.
XI. | Governing Law |
Unless otherwise provided in the applicable Motorola Plan, the Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
XII. | Effective Date of Plan |
This Plan is effective as of the Distribution Date.
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EXHIBIT A
MOTOROLA AMENDED AND RESTATED INCENTIVE PLAN OF 1998
(as amended through May 4, 2009)
1. | NAME AND PURPOSE |
1.1 Name . The name of this plan is the Amended and Restated Motorola Incentive Plan of 1998 (the Plan). The Effective Date was May 4, 1998, the date the Plan was approved by the stockholders of Motorola.
1.2 Purpose . Motorola has established the Plan to promote the interests of Motorola and its stockholders by providing full and part-time employees of Motorola or its subsidiaries with additional incentive to increase their efforts on Motorolas behalf and to remain in the employ or service of Motorola or its Subsidiaries and with the opportunity, through stock ownership, to increase their proprietary interest in Motorola and their personal interest in its continued success and progress.
2. | ADMINISTRATION |
The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall qualify as a Non-Employee Director within the meaning set forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) or any successor legislation. The Committee shall have the authority to construe and interpret the Plan and any benefits granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other benefits at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may delegate the administration of the Plan, in whole or in part, on such terms and conditions as it may impose, to such other person or persons as it may determine in its discretion.
3. | SHARES AVAILABLE UNDER THE PLAN |
The number of shares which may be issued or sold or for which Stock Options and Stock Appreciation Rights may be granted or received under the Plan, shall be (i) 37,500,000 shares (as adjusted for the 3-for-1 stock split effective June 1, 2000), plus (ii) the total number of shares with respect to which no options have been granted under Motorolas Share Option Plan of 1996 on the Effective Date, plus (iii) the number of shares as to which options granted under Motorolas Share Option Plan of 1996 terminate or expire without being fully exercised. If there is (i) a lapse, expiration, termination or cancellation of any stock option or other benefit prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards prior to vesting, the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan. In addition, any shares retained by Motorola pursuant to a participants tax withholding election (other than shares used to satisfy any tax obligation upon the vesting of restricted stock or other stock awards), and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan. Shares issued under the Plan may be either authorized and unissued shares or
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issued shares reacquired by Motorola. No participant may receive (i) Stock Options relating to more than 900,000 Shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000) in any Plan Year and (ii) Stock Appreciation Rights relating to more than 150,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000) in any calendar year. The shares reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Section 8 hereof. All of the available shares may, but need not, be issued pursuant to the exercise of Incentive Stock Options.
4. | TYPES OF BENEFITS |
Benefits under the Plan shall consist of Stock Options and Stock Appreciation Rights as described below.
5. | STOCK OPTIONS |
Subject to the terms of the Plan, Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an Incentive Stock Option. The option price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The option price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares (held for at least six months) having a fair market value at the time of exercise equal to the option price, (c) certification of ownership of such previously-acquired shares, (d) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (e) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may implement, a one time only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election person holding such Stock Option, be tendered to the Company for the cancellation in exchange for issuance of a lesser amount of Stock Options with a lower exercise price, or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
6. | STOCK APPRECIATION RIGHTS |
Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. An SAR may be granted in tandem with a Stock Option granted under this Plan or on a free-standing basis. The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options granted after May 5, 2003, at any time when the Company is subject to fair value accounting. The grant price of a tandem or substitute SAR shall be equal to the option price of the related option. The grant price of a free-standing SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case of a tandem or substitute SAR or ten years in the case of a free-standing SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over
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the grant price of the SAR by the number of shares with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.
7. | CHANGE IN CONTROL |
Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, all outstanding benefits, including Stock Options and SARs shall become vested and exercisable. A Change in Control shall mean:
A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola Common Stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board.
8. | ADJUSTMENT PROVISIONS |
(a) If Motorola shall at any time change the number of issued shares of common stock by stock dividend or stock split, the total number of shares reserved for issuance under the Plan, the maximum number of shares which may be made subject to an award in any calendar year, and the number of shares covered by each outstanding award and the price therefore, if any, shall be equitably adjusted by the Committee, in its sole discretion.
(b) Subject to the provisions of Section 7, the Board of Directors or the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.
(c) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation, other than a merger, consolidation or reorganization in which Motorola is the continuing corporation and which does not result in the outstanding common stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be
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substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
9. | NONTRANSFERABILITY |
Each benefit granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at its discretion, the Committee may permit the transfer of a Stock Option by the participant, subject to such terms and conditions as may be established by the Committee.
10. | TAXES |
Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving the person entitled to receive such payment or delivery notice and Motorola may defer making payment or delivery as to any award, if any such tax is payable until indemnified to its satisfaction. The Committee may, in its discretion, subject to such rules as it may adopt, permit a participant to pay all or a portion of any required withholding taxes arising in connection with the exercise of a Stock Option or SAR by electing to have Motorola withhold shares of common stock, having a fair market value equal to the amount to be withheld.
11. | DURATION, AMENDMENT AND TERMINATION |
No Incentive Stock Option or other benefit shall be granted more than ten years after the date of original adoption of this Plan by the Board of Directors; provided, however, that the terms and conditions applicable to any benefit granted on or before such date may thereafter be amended or modified by mutual agreement between Motorola and the participant, or such other person as may then have an interest therein. The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent. No amendment of the Plan shall be made without stockholder approval if stockholder approval is required by law, regulation, or stock exchange rule.
12. | FAIR MARKET VALUE |
The fair market value of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
13. | OTHER PROVISIONS |
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or inducements for continued ownership of common stock after exercise or vesting of benefits, forfeiture of
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awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or provisions permitting the deferral of the receipt of a benefit for such period and upon such terms as the Committee shall determine.
(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.
14. | GOVERNING LAW |
The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
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EXHIBIT B
MOTOROLA OMNIBUS INCENTIVE PLAN OF 2000
(as amended through May 4, 2009)
1. Purpose . The purposes of the Motorola Omnibus Incentive Plan of 2000 (the Plan) are (i) to encourage outstanding individuals to accept or continue employment with Motorola, Inc. (Motorola) and its subsidiaries or to serve as directors of Motorola, and (ii) to furnish maximum incentive to those persons to improve operations and increase profits and to strengthen the mutuality of interest between those persons and Motorolas stockholders by providing them stock options and other stock and cash incentives.
2. Administration . The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall qualify as a Non-Employee Director within the meaning set forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) or any successor legislation. The Committee shall have the authority to construe and interpret the Plan and any benefits granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other benefits at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may delegate the administration of the Plan, in whole or in part, on such terms and conditions as it may impose, to such other person or persons as it may determine in its discretion, except with respect to benefits to officers subject to Section 16 of the Exchange Act or officers who are or may be covered employees within the meaning of Section 162(m) of the Internal Revenue Code (Covered Employees).
3. Participants . Participants may consist of all employees of Motorola and its subsidiaries and all Non-Employee Directors of Motorola. Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by Motorola shall be a subsidiary for purposes of the Plan. Designation of a participant in any year shall not require the Committee to designate that person to receive a benefit in any other year or to receive the same type or amount of benefit as granted to the participant in any other year or as granted to any other participant in any year. The Committee shall consider all factors that it deems relevant in selecting participants and in determining the type and amount of their respective benefits.
4. Shares Available under the Plan . There is hereby reserved for issuance under the Plan an aggregate of 107,100,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000) of Motorola common stock. If there is (i) a lapse, expiration, termination or cancellation of any stock option or other benefit prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards prior to vesting, the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan. In addition, any shares retained by Motorola pursuant to a participants tax withholding election (other than shares used to satisfy any tax obligation upon the vesting of restricted stock or other stock awards), and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan. All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by Motorola. Under the plan, no participant may receive in any calendar year (i) Stock Options relating to
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more than 3,000,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000), (ii) Restricted Stock that is subject to the attainment of Performance Goals of Section 13 hereof relating to more than 300,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000), (iii) Stock Appreciation Rights relating to more than 3,000,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000), or (iv) Performance Shares relating to more than 300,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000). The shares reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Section 15 hereof. All of the available shares may, but need not, be issued pursuant to the exercise of incentive stock options. Notwithstanding anything else contained in this Section 4 the number of shares that may be issued under the Plan for benefits other than stock options shall not exceed a total of 9,000,000 shares (reflecting adjustment for the 3-for-1 stock split effective June 1, 2000, subject to adjustment in accordance with Section 15 hereof).
5. Types of Benefits . Benefits under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Stock, Performance Units, Annual Management Incentive Awards and Other Stock or Cash Awards, all as described below.
6. Stock Options . Subject to the terms of the Plan, Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an Incentive Stock Option. The option price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The option price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares (held for at least six months) having a fair market value at the time of exercise equal to the option price, (c) certification of ownership of such previously-acquired shares, (d) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (e) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may provide for, and the Company may implement, a one time only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election of the person holding such Stock Option, be tendered to the Company for cancellation in exchange for the issuance of a lesser amount of Stock Options with a lower exercise price or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
7. Stock Appreciation Rights . Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. An SAR may be granted in tandem with a Stock Option granted under this Plan or on a free-standing basis. The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options granted after May 5, 2003, at any time when the Company is subject to fair value accounting. The grant price of a tandem or substitute SAR shall be equal to the option price of the related option. The grant price of a free-standing SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case of a tandem or substitute SAR or ten years in the case of a free-standing SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment
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from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR by the number of shares with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.
8. Restricted Stock . Subject to the terms of the Plan, Restricted Stock may be awarded or sold to participants under such terms and conditions as shall be established by the Committee. Restricted Stock shall be subject to such restrictions as the Committee determines, including, without limitation, any of the following:
(a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance of the shares of Restricted Stock for a specified period; or
(b) a requirement that the holder of Restricted Stock forfeit (or in the case of shares sold to the participant resell to Motorola at cost) such shares in the event of termination of employment during the period of restriction.
All restrictions shall expire at such times as the Committee shall specify.
9. Performance Stock . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance stock (Performance Stock) is to be awarded and determine the number of shares, the length of the performance period and the other terms and conditions of each such award. Each award of Performance Stock shall entitle the participant to a payment in the form of shares of common stock upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding satisfaction of any performance goals, the number of shares issued under a Performance Stock award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the number of shares earned upon satisfaction of any performance goal by any participant who is a Covered Employee. The Committee may, in its discretion, make a cash payment equal to the fair market value of shares of common stock otherwise required to be issued to a participant pursuant to a Performance Stock award.
10. Performance Units . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance units (Performance Units) are to be awarded and determine the number of units and the terms and conditions of each such award. Each Performance Unit award shall entitle the participant to a payment in cash upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount to be paid under a Performance Unit award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the amount earned under Performance Unit awards upon satisfaction of any performance goal by any participant who is a Covered Employee and the maximum amount earned by a Covered Employee in any calendar year may not exceed $5,000,000. The Committee may, in its discretion, substitute actual shares of common stock for the cash payment otherwise required to be made to a participant pursuant to a Performance Unit award.
11. Annual Management Incentive Awards . The Committee may designate Motorola executive officers who are eligible to receive a monetary payment in any calendar year based on a
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percentage of an incentive pool equal to 5% of Motorolas consolidated operating earnings for the calendar year. The Committee shall allocate an incentive pool percentage to each designated participant for each calendar year. In no event may the incentive pool percentage for any one participant exceed 30% of the total pool. Consolidated operating earnings shall mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Extraordinary Items. Extraordinary Items shall mean (i) extraordinary, unusual and/or non-recurring items of gain or loss (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report.
As soon as possible after the determination of the incentive pool for a Plan year, the Committee shall calculate the participants allocated portion of the incentive pool based upon the percentage established at the beginning of the calendar year. The participants incentive award then shall be determined by the Committee based on the participants allocated portion of the incentive pool subject to adjustment in the sole discretion of the Committee. In no event may the portion of the incentive pool allocated to a participant who is a Covered Employee be increased in any way, including as a result of the reduction of any other participants allocated portion.
12. Other Stock or Cash Awards . In addition to the incentives described in sections 6 through 11 above, and subject to the terms of the Plan, the Committee may grant other incentives payable in cash or in common stock under the Plan as it determines to be in the best interests of Motorola and subject to such other terms and conditions as it deems appropriate.
13. Performance Goals . Awards of Restricted Stock, Performance Stock, Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Internal Revenue Code, including, but not limited to, cash flow; cost; ratio of debt to debt plus equity; profit before tax; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; operating earnings; economic value added; ratio of operating earnings to capital spending; free cash flow; net profit; net sales; price of Company Stock; return on net assets, equity or stockholders equity; market share; or total return to shareholders (Performance Criteria). Any Performance Criteria may be used to measure the performance of the Company as a whole or any business unit of the Company. Any Performance Criteria may include or exclude Extraordinary Items. Performance Criteria shall be calculated in accordance with the Companys financial statements, generally accepted accounting principles, or under a methodology established by the Committee prior to the issuance of an award which is consistently applied and identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report. However, the Committee may not in any event increase the amount of compensation payable to a Covered Employee upon the attainment of a performance goal.
14. Change in Control . Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, all outstanding Stock Options and SARs shall become vested and exercisable; all restrictions on Restricted Stock shall lapse; all performance goals shall be deemed achieved at target levels and all other terms and conditions met; all Performance Stock shall be delivered; all Performance Units shall be paid out as promptly as practicable; all Annual Management Incentive Awards shall be paid out based on the consolidated operating earnings of the immediately preceding year or such other method of payment as may be determined by the Committee at the time of award or thereafter but prior to the Change in Control; and all Other Stock or Cash Awards shall be delivered or paid. A Change in Control shall mean:
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A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola Common Stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board
15. Adjustment Provisions .
(a) If Motorola shall at any time change the number of issued shares of common stock by stock dividend or stock split, the total number of shares reserved for issuance under the Plan, the maximum number of shares which may be made subject to an award in any calendar year, and the number of shares covered by each outstanding award and the price therefor, if any, shall be equitably adjusted by the Committee, in its sole discretion.
(b) Subject to the provisions of Section 14, the Board of Directors or the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.
(c) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation, other than a merger, consolidation or reorganization in which Motorola is the continuing corporation and which does not result in the outstanding common stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
16. Nontransferability . Each benefit granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the executor or administrator of the estate
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of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at its discretion, the Committee may permit the transfer of a Stock Option by the participant, subject to such terms and conditions as may be established by the Committee.
17. Taxes . Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving the person entitled to receive such payment or delivery notice and Motorola may defer making payment or delivery as to any award, if any such tax is payable until indemnified to its satisfaction. The Committee may, in its discretion, subject to such rules as it may adopt, permit a participant to pay all or a portion of any required withholding taxes arising in connection with the exercise of a Stock Option or SAR or the receipt or vesting of shares hereunder by electing to have Motorola withhold shares of common stock, having a fair market value equal to the amount to be withheld.
18. Duration, Amendment and Termination . No Incentive Stock Option shall be granted more than ten years after the date of adoption of this Plan by the Board of Directors; provided, however, that the terms and conditions applicable to any benefit granted on or before such date may thereafter be amended or modified by mutual agreement between Motorola and the participant, or such other person as may then have an interest therein. The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent. No amendment of the Plan shall be made without stockholder approval if stockholder approval is required by law, regulation, or stock exchange rule.
19. Fair Market Value . The fair market value of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
20. Other Provisions .
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or inducements for continued ownership of common stock after exercise or vesting of benefits, forfeiture of awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or provisions permitting the deferral of the receipt of a benefit for such period and upon such terms as the Committee shall determine.
(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.
21. Governing Law . The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
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22. Stockholder Approval . The Plan was adopted by the Board of Directors on February 29, 2000, subject to stockholder approval. The Plan and any benefits granted thereunder shall be null and void if stockholder approval is not obtained at the next annual meeting of stockholders.
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EXHIBIT C
MOTOROLA COMPENSATION/ACQUISITION PLAN OF 2000
(as amended through May 4, 2009)
1. Purpose . The purposes of the Motorola Compensation/Acquisition Plan of 2000 (the Plan) are (i) to make awards to employees of Motorola, Inc. (Motorola) and its subsidiaries (excluding directors of Motorola and Officers, as defined below) in connection with Motorolas recruiting and retention efforts and (ii) to furnish maximum incentive to those persons to improve operations and increase profits and to strengthen the mutuality of interest between those persons and Motorolas stockholders by providing them stock options and other incentives.
2. Administration . The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall qualify as a Non-Employee Director within the meaning set forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) or any successor legislation. The Committee shall have the authority to determine the number of shares of Motorola common stock to be reserved for issuance under the Plan; to construe and interpret the Plan and any benefits granted thereunder; to establish and amend rules for Plan administration; to change the terms and conditions of options and other benefits at or after grant; and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may delegate the administration of the Plan, in whole or in part, on such terms and conditions as it may impose, to such other person or persons as it may determine in its discretion pursuant to section 157(c) of the Delaware General Corporation Law.
3. Participants . Participants may consist of all employees of Motorola and its subsidiaries other than directors of Motorola and officers within the meaning of Rule 16a-1 of the Exchange Act (Officers). Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by Motorola shall be a subsidiary for purposes of the Plan. Designation of a participant in any year shall not require the Committee to designate that person to receive a benefit in any other year or to receive the same type or amount of benefit as granted to the participant in any other year or as granted to any other participant in any year. The Committee shall consider all factors that it deems relevant in selecting participants and in determining the type and amount of their respective benefits.
4. Shares Available under the Plan . The Committee has the authority to determine from time to time the maximum numbers of shares of Motorola common stock reserved for issuance under the Plan. If there is (i) a lapse, expiration, termination or cancellation of any stock option or other benefit prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards prior to vesting, the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan. In addition, any shares retained by Motorola pursuant to a participants tax withholding election (other than shares used to satisfy any tax obligation upon the vesting of restricted stock or other stock awards), and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan. All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by Motorola. The shares
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reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Section 14 hereof. All of the available shares may, but need not, be issued pursuant to the exercise of incentive stock options. Notwithstanding anything else contained in this Section 4 the number of shares that may be issued under the Plan for benefits other than Stock Options, shall not exceed 10% of the shares authorized for issuance and reserved by the Committee as described in the Section 4 (subject to adjustment in accordance with Section 14 hereof).
5. Types of Benefits . Benefits under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Stock, Performance Units and Other Stock Awards, all as described below.
6. Stock Options . Subject to the terms of the Plan, Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an incentive stock option. The option price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The option price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares (held for at least six months) having a fair market value at the time of exercise equal to the option price, (c) certification of ownership of such previously-acquired shares, (d) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (e) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may provide for, and the Company may implement, a one time only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election of the person holding such Stock Option, be tendered to the Company for cancellation in exchange for the issuance of a lesser amount of Stock Options with a lower exercise price or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
7. Stock Appreciation Rights . Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. An SAR may be granted in tandem with a Stock Option granted under this Plan or on a free-standing basis. The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options granted after May 5, 2003, at any time when the Company is subject to fair value accounting. The grant price of a tandem or substitute SAR shall be equal to the option price of the related option. The grant price of a free-standing SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case of a tandem or substitute SAR or ten years in the case of a free-standing SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR by the number of shares with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.
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8. Restricted Stock and Restricted Stock Units . Subject to the terms of the Plan, Restricted Stock and Restricted Stock Units may be awarded or sold to participants under such terms and conditions as shall be established by the Committee. Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without limitation, any of the following:
(a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified period; or
(b) a requirement that the holder forfeit (or in the case of shares or units sold to the participant resell to Motorola at cost) such shares or units in the event of termination of employment during the period of restriction.
All restrictions shall expire at such times as the Committee shall specify.
9. Performance Stock . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance stock (Performance Stock) is to be awarded and determine the number of shares, the length of the performance period and the other terms and conditions of each such award. Each award of Performance Stock shall entitle the participant to a payment in the form of shares of common stock upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding satisfaction of any performance goals, the number of shares issued under a Performance Stock award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. The Committee may, in its discretion, make a cash payment equal to the fair market value of shares of common stock otherwise required to be issued to a participant pursuant to a Performance Stock award.
10. Performance Units . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance units (Performance Units) are to be awarded and determine the number of units and the terms and conditions of each such award. Each Performance Unit award shall entitle the participant to a payment in cash upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount to be paid under a Performance Unit award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. The Committee may, in its discretion, substitute actual shares of common stock for the cash payment otherwise required to be made to a participant pursuant to a Performance Unit award.
11. Other Stock Awards . In addition to the incentives described in Sections 6 through 10 above, and subject to the terms of the Plan, the Committee may grant other incentives payable in common stock under the Plan as it determines to be in the best interests of Motorola and subject to such other terms and conditions, as it deems appropriate.
12. Performance Goals . Awards of Restricted Stock, Performance Stock, Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals, including, but not limited to, cash flow; cost; ratio of debt to debt plus equity; profit before tax; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; operating earnings; economic value added; ratio of operating earnings to capital spending; free cash flow; net profit; net sales; price of Company Stock; return on net assets, equity or stockholders equity; market share; or total return to shareholders (Performance Criteria). Any Performance Criteria may be
15
used to measure the performance of the Company as a whole or any business unit of the Company. Any Performance Criteria may include or exclude Extraordinary Items. Performance Criteria shall be calculated in accordance with the Companys financial statements, generally accepted accounting principles, or under a methodology established by the Committee prior to the issuance of an award which is consistently applied and identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report.
13. Change in Control . Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, all outstanding Stock Options and SARs shall become vested and exercisable; all restrictions on Restricted Stock shall lapse; all performance goals shall be deemed achieved at target levels and all other terms and conditions met; all Performance Stock shall be delivered; all Performance Units shall be paid out as promptly as practicable; and all other Stock Awards shall be delivered or paid. A Change in Control shall mean:
A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola Common Stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board
14. Adjustment Provisions .
(a) If Motorola shall at any time change the number of issued shares of common stock by stock dividend or stock split, the total number of shares reserved for issuance under the Plan, and the number of shares covered by each outstanding award and the price therefor, if any, shall be equitably adjusted by the Committee, in its sole discretion.
(b) Subject to the provisions of Section 13, the Board of Directors or the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.
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(c) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation, other than a merger, consolidation or reorganization in which Motorola is the continuing corporation and which does not result in the outstanding common stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
15. Nontransferability . Each benefit granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution.
16. Taxes . Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving the person entitled to receive such payment or delivery notice and Motorola may defer making payment or delivery as to any award, if any such tax is payable until indemnified to its satisfaction. The Committee may, in its discretion, subject to such rules as it may adopt, permit a participant to pay all or a portion of any required withholding taxes arising in connection with the exercise of a Stock Option or SAR or the receipt or vesting of shares hereunder by electing to have Motorola withhold shares of common stock, having a fair market value equal to the amount to be withheld.
17. Duration, Amendment and Termination . No Incentive Stock Option shall be granted more than ten years after the date of adoption of this Plan by the Board of Directors; provided, however, that the terms and conditions applicable to any benefit granted on or before such date may thereafter be amended or modified by mutual agreement between Motorola and the participant, or such other person as may then have an interest therein. The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent.
18. Fair Market Value . The fair market value of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
19. Other Provisions .
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or inducements for continued ownership of common stock after exercise or vesting of benefits, forfeiture of awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or provisions permitting the deferral of the receipt of a benefit for such period and upon such terms as the Committee shall determine.
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(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.
20. Governing Law . The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
21. Broad-Based Plan . The Plan is intended to be a broadly based plan under the rules of the New York Stock Exchange.
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EXHIBIT D
MOTOROLA OMNIBUS INCENTIVE PLAN OF 2002
(as amended through May 4, 2009)
1. Purpose . The purposes of the Motorola Omnibus Incentive Plan of 2002 (the Plan) are (i) to encourage outstanding individuals to accept or continue employment with Motorola, Inc. (Motorola or the Company) and its subsidiaries or to serve as directors of Motorola, and (ii) to furnish maximum incentive to those persons to improve operations and increase profits and to strengthen the mutuality of interest between those persons and Motorolas stockholders by providing them stock options and other stock and cash incentives.
2. Administration . The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall qualify as a Non-Employee Director within the meaning set forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) or any successor legislation. The Committee shall have the authority to construe and interpret the Plan and any benefits granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other benefits at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may delegate the administration of the Plan, in whole or in part, on such terms and conditions as it may impose, to such other person or persons as it may determine in its discretion, except with respect to benefits to officers subject to Section 16 of the Exchange Act or officers who are or may be covered employees within the meaning of Section 162(m) of the Internal Revenue Code (Covered Employees).
3. Participants . Participants may consist of all employees of Motorola and its subsidiaries and all Non-Employee Directors of Motorola. Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by Motorola shall be a subsidiary for purposes of the Plan. Designation of a participant in any year shall not require the Committee to designate that person to receive a benefit in any other year or to receive the same type or amount of benefit as granted to the participant in any other year or as granted to any other participant in any year. The Committee shall consider all factors that it deems relevant in selecting participants and in determining the type and amount of their respective benefits.
4. Shares Available under the Plan . There is hereby reserved for issuance under the Plan an aggregate of 45 million shares of Motorola common stock. If there is (i) a lapse, expiration, termination or cancellation of any stock option or other benefit prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards prior to vesting, the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan.
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Shares covered by a Benefit granted under the Plan shall not be counted as used unless and until they are actually issued and delivered to a Participant. In addition, any shares retained by Motorola pursuant to a participants tax withholding election (other than shares used to satisfy any tax obligation upon the vesting of restricted stock or other stock awards), and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan. All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by Motorola. Under the plan, no participant may receive in any calendar year (i) Stock Options relating to more than 3,000,000 shares, (ii) Restricted Stock or Restricted Stock Units that are subject to the attainment of Performance Goals of Section 13 hereof relating to more than 300,000 shares, (iii) Stock Appreciation Rights relating to more than 3,000,000 shares, or (iv) Performance Shares relating to more than 300,000 shares. The shares reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Section 15 hereof. All of the available shares may, but need not, be issued pursuant to the exercise of incentive stock options. Notwithstanding anything else contained in this Section 4 the number of shares that may be issued under the Plan for benefits other than stock options shall not exceed a total of 5,000,000 shares (subject to adjustment in accordance with Section 15 hereof.
5. Types of Benefits . Benefits under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Stock, Performance Units, Annual Management Incentive Awards and Other Stock or Cash Awards, all as described below.
6. Stock Options . Subject to the terms of the Plan, Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an Incentive Stock Option. The option price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The option price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares (held for at least six months) having a fair market value at the time of exercise equal to the option price or certification of ownership of such previously-acquired shares, (c) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (d) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may provide for, and the Company may implement, a one time only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election of the person holding such Stock Option, be tendered to the Company for cancellation in exchange for the issuance of a lesser amount of Stock Options with a lower exercise price or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
7. Stock Appreciation Rights . Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. An SAR may be granted in tandem with a Stock Option granted under this Plan or on a free-standing basis. The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options granted after May 5, 2003, at any time when the Company is subject to fair value accounting. The grant price of a tandem or substitute SAR shall be equal to the option price of the related option. The grant price of a free-standing SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case
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of a tandem or substitute SAR or ten years in the case of a free-standing SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR by the number of shares with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.
8. Restricted Stock and Restricted Stock Units . Subject to the terms of the Plan, Restricted Stock and Restricted Stock Units may be awarded or sold to participants under such terms and conditions as shall be established by the Committee. Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without limitation, any of the following:
(a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified period; or
(b) a requirement that the holder forfeit (or in the case of shares or units sold to the participant resell to Motorola at cost) such shares or units in the event of termination of employment during the period of restriction.
All restrictions shall expire at such times as the Committee shall specify.
9. Performance Stock . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance stock (Performance Stock) is to be awarded and determine the number of shares, the length of the performance period and the other terms and conditions of each such award. Each award of Performance Stock shall entitle the participant to a payment in the form of shares of common stock upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding satisfaction of any performance goals, the number of shares issued under a Performance Stock award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the number of shares earned upon satisfaction of any performance goal by any participant who is a Covered Employee. The Committee may, in its discretion, make a cash payment equal to the fair market value of shares of common stock otherwise required to be issued to a participant pursuant to a Performance Stock award.
10. Performance Units . Subject to the terms of the Plan, the Committee shall designate the participants to whom long-term performance units (Performance Units) are to be awarded and determine the number of units and the terms and conditions of each such award. Each Performance Unit award shall entitle the participant to a payment in cash upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount to be paid under a Performance Unit award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the amount earned under Performance Unit awards upon satisfaction of any performance goal by any participant who is a Covered Employee and the maximum amount earned by a Covered Employee in any calendar year may not exceed $5,000,000. The Committee may, in its discretion, substitute actual shares of common stock for the cash payment otherwise required to be made to a participant pursuant to a Performance Unit award.
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11. Annual Management Incentive Awards . The Committee may designate Motorola executive officers who are eligible to receive a monetary payment in any calendar year based on a percentage of an incentive pool equal to 5% of Motorolas consolidated operating earnings for the calendar year. The Committee shall allocate an incentive pool percentage to each designated participant for each calendar year. In no event may the incentive pool percentage for any one participant exceed 30% of the total pool. Consolidated operating earnings shall mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Extraordinary Items. Extraordinary Items shall mean (i) extraordinary, unusual and/or non-recurring items of gain or loss (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report.
As soon as possible after the determination of the incentive pool for a Plan year, the Committee shall calculate the participants allocated portion of the incentive pool based upon the percentage established at the beginning of the calendar year. The participants incentive award then shall be determined by the Committee based on the participants allocated portion of the incentive pool subject to adjustment in the sole discretion of the Committee. In no event may the portion of the incentive pool allocated to a participant who is a Covered Employee be increased in any way, including as a result of the reduction of any other participants allocated portion.
12. Other Stock or Cash Awards . In addition to the incentives described in sections 6 through 11 above, and subject to the terms of the Plan, the Committee may grant other incentives payable in cash or in common stock under the Plan as it determines to be in the best interests of Motorola and subject to such other terms and conditions as it deems appropriate.
13. Performance Goals . Awards of Restricted Stock, Restricted Stock Units, Performance Stock, Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Internal Revenue Code, including, but not limited to, cash flow; cost; ratio of debt to debt plus equity; profit before tax; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; operating earnings; economic value added; ratio of operating earnings to capital spending; free cash flow; net profit; net sales; price of Motorola common stock; return on net assets, equity or stockholders equity; market share; or total return to shareholders (Performance Criteria). Any Performance Criteria may be used to measure the performance of the Company as a whole or any business unit of the Company. Any Performance Criteria may include or exclude Extraordinary Items. Performance Criteria shall be calculated in accordance with the Companys financial statements, generally accepted accounting principles, or under a methodology established by the Committee prior to the issuance of an award which is consistently applied and identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report. However, the Committee may not in any event increase the amount of compensation payable to a Covered Employee upon the attainment of a performance goal.
14. Change in Control . Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, all outstanding Stock Options and SARs shall become vested and exercisable; all restrictions on Restricted Stock and Restricted Stock Units shall lapse; all performance goals shall be deemed achieved at target levels and all other terms and conditions met; all Performance Stock shall be delivered; all Performance Units and Restricted Stock Units shall be paid out as promptly as practicable; all Annual Management Incentive Awards shall be paid out based on the consolidated operating earnings of the immediately preceding year or such other method of payment as may be determined by the Committee at the time of award or thereafter but prior to the Change in
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Control; and all Other Stock or Cash Awards shall be delivered or paid. A Change in Control shall mean:
A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, or any successor provision thereto, whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola Common Stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board
15. Adjustment Provisions .
(a) If Motorola shall at any time change the number of issued shares of common stock by stock dividend, stock split, spin-off, split-off, spin-out, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares, the total number of shares reserved for issuance under the Plan, the maximum number of shares which may be made subject to an award in any calendar year, and the number of shares covered by each outstanding award and the price therefor, if any, shall be equitably adjusted by the Committee, in its sole discretion.
(b) Subject to the provisions of Section 14, the Board of Directors or the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.
(c) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation, other than a merger, consolidation or reorganization in which Motorola is the continuing corporation and which does not result in the outstanding common stock being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
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16. Nontransferability . Each benefit granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at its discretion, the Committee may permit the transfer of a Stock Option by the participant, subject to such terms and conditions as may be established by the Committee.
17. Taxes . Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving the person entitled to receive such payment or delivery notice and Motorola may defer making payment or delivery as to any award, if any such tax is payable until indemnified to its satisfaction. A participant may pay all or a portion of any required withholding taxes arising in connection with the exercise of a Stock Option or SAR or the receipt or vesting of shares hereunder by electing to have Motorola withhold shares of common stock, having a fair market value equal to the amount required to be withheld.
18. Duration, Amendment and Termination . No Incentive Stock Option shall be granted more than ten years after the date of adoption of this Plan by the Board of Directors; provided, however, that the terms and conditions applicable to any benefit granted on or before such date may thereafter be amended or modified by mutual agreement between Motorola and the participant, or such other person as may then have an interest therein. The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent. No amendment of the Plan shall be made without stockholder approval if stockholder approval is required by law, regulation, or stock exchange rule.
19. Fair Market Value . The fair market value of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
20. Other Provisions .
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or inducements for continued ownership of common stock after exercise or vesting of benefits, forfeiture of awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or provisions permitting the deferral of the receipt of a benefit for such period and upon such terms as the Committee shall determine.
(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.
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21. Governing Law . The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
22. Stockholder Approval . The Plan was adopted by the Board of Directors on March 19, 2002, subject to stockholder approval. The Plan and any benefits granted thereunder shall be null and void if stockholder approval is not obtained at the next annual meeting of stockholders.
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EXHIBIT E
MOTOROLA OMNIBUS INCENTIVE PLAN OF 2003
(as amended through May 4, 2009)
1. Purpose . The purposes of the Motorola Omnibus Incentive Plan of 2003 (the Plan) are (i) to encourage outstanding individuals to accept or continue employment with Motorola, Inc. (Motorola or the Company) and its subsidiaries or to serve as directors of Motorola, and (ii) to furnish maximum incentive to those persons to improve operations and increase profits and to strengthen the mutuality of interest between those persons and Motorolas stockholders by providing them stock options and other stock and cash incentives.
2. Administration . The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall satisfy such requirements as:
(a) the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 or its successor under the Securities Exchange Act of 1934 (the Exchange Act);
(b) the New York Stock Exchange may establish pursuant to its rule-making authority; and
(c) the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code).
The Committee shall have the authority to construe and interpret the Plan and any benefits granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other benefits at or after grant, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may authorize one or more officers of the Company to select employees to participate in the Plan and to determine the number of option shares and other rights to be granted to such participants, except with respect to awards to officers subject to Section 16 of the Exchange Act or officers who are or may become covered employees within the meaning of Section 162(m) of the Code (Covered Employees) and any reference in the Plan to the Committee shall include such officer or officers.
3. Participants . Participants may consist of all employees of Motorola and its subsidiaries and all non-employee directors of Motorola. Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by Motorola shall be a subsidiary for purposes of the Plan. Designation of a participant in any year shall not require the Committee to designate that person to
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receive a benefit in any other year or to receive the same type or amount of benefit as granted to the participant in any other year or as granted to any other participant in any year. The Committee shall consider all factors that it deems relevant in selecting participants and in determining the type and amount of their respective benefits.
4. Shares Available under the Plan . There is hereby reserved for issuance under the Plan an aggregate of 95 million shares of Motorola common stock. If there is (i) a lapse, expiration, termination or cancellation of any Stock Option or other benefit prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards prior to vesting, the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan. Shares covered by a benefit granted under the Plan shall not be counted as used unless and until they are actually issued and delivered to a participant. Any shares covered by a Stock Appreciation Right shall be counted as used only to the extent shares are actually issued to the participant upon exercise of the right. In addition, any shares retained by Motorola pursuant to a participants tax withholding election (other than shares used to satisfy any tax obligation upon the vesting of restricted stock or other stock awards), and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan. All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by Motorola. Under the Plan, no participant may receive in any calendar year (i) Stock Options relating to more than 3,000,000 shares, (ii) Restricted Stock or Restricted Stock Units that are subject to the attainment of Performance Goals of Section 13 hereof relating to more than 1,500,000 shares, (iii) Stock Appreciation Rights relating to more than 3,000,000 shares, or (iv) Performance Shares relating to more than 1,500,000 shares. No non-employee director may receive in any calendar year Stock Options relating to more than 30,000 shares or Restricted Stock Units relating to more than 30,000 shares. The shares reserved for issuance and the limitations set forth above shall be subject to adjustment in accordance with Section 15 hereof. All of the available shares may, but need not, be issued pursuant to the exercise of Incentive Stock Options. Notwithstanding anything else contained in this Section 4 the number of shares that may be issued under the Plan for benefits other than Stock Options or Stock Appreciation Rights shall not exceed a total of 40 million shares (subject to adjustment in accordance with Section 15 hereof).
5. Types of Benefits . Benefits under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Stock, Performance Units, Annual Management Incentive Awards and Other Stock or Cash Awards, all as described below.
6. Stock Options . Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an Incentive Stock Option. The option price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The option price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares (held for at least six months if the Company is accounting for Stock Options using APB Opinion 25 or purchased on the open market) having a fair market value at the time of exercise equal to the option price or certification of ownership of such previously-acquired shares, (c) delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (d) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may provide for, and the Company may implement, a one time
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only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election of the person holding such Stock Option, be tendered to the Company for cancellation in exchange for the issuance of a lesser amount of Stock Options with a lower exercise price or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
7. Stock Appreciation Rights . Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. An SAR may be granted in tandem with a Stock Option granted under this Plan or on a free-standing basis. The Committee also may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options, at any time when the Company is subject to fair value accounting. The grant price of a tandem or substitute SAR shall be equal to the option price of the related option. The grant price of a free-standing SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case of a tandem or substitute SAR or ten years in the case of a free-standing SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR by the number of shares with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR which may be made only in stock.
8. Restricted Stock and Restricted Stock Units . Restricted Stock and Restricted Stock Units may be awarded or sold to participants under such terms and conditions as shall be established by the Committee. Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without limitation, any of the following:
(a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified period; or
(b) a requirement that the holder forfeit (or in the case of shares or units sold to the participant resell to Motorola at cost) such shares or units in the event of termination of employment during the period of restriction.
All restrictions shall expire at such times as the Committee shall specify.
9. Performance Stock . The Committee shall designate the participants to whom long-term performance stock (Performance Stock) is to be awarded and determine the number of shares, the length of the performance period and the other terms and conditions of each such award; provided the stated performance period will not be less than 12 months. Each award of Performance Stock shall entitle the participant to a payment in the form of shares of common stock upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding satisfaction of any performance goals, the number of shares issued under a Performance Stock award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the number of shares earned upon satisfaction of any performance goal by any participant who is a Covered Employee. The Committee may, in its discretion, make a cash payment equal to the fair market value of shares of common stock otherwise required to be issued to a participant pursuant to a Performance Stock award.
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10. Performance Units . The Committee shall designate the participants to whom long-term performance units (Performance Units) are to be awarded and determine the number of units and the terms and conditions of each such award; provided the stated performance period will not be less than 12 months. Each Performance Unit award shall entitle the participant to a payment in cash upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount to be paid under a Performance Unit award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the amount earned under Performance Unit awards upon satisfaction of any performance goal by any participant who is a Covered Employee and the maximum amount earned by a Covered Employee in any calendar year may not exceed $8,500,000. The Committee may, in its discretion, substitute actual shares of common stock for the cash payment otherwise required to be made to a participant pursuant to a Performance Unit award.
11. Annual Management Incentive Awards . The Committee may designate Motorola executive officers who are eligible to receive a monetary payment in any calendar year based on a percentage of an incentive pool equal to 5% of Motorolas consolidated operating earnings for the calendar year. The Committee shall allocate an incentive pool percentage to each designated participant for each calendar year. In no event may the incentive pool percentage for any one participant exceed 30% of the total pool. Consolidated operating earnings shall mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Special Items. Special Items shall include (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition, as identified in the Companys quarterly and annual earnings releases.
As soon as possible after the determination of the incentive pool for a Plan year, the Committee shall calculate the participants allocated portion of the incentive pool based upon the percentage established at the beginning of the calendar year. The participants incentive award then shall be determined by the Committee based on the participants allocated portion of the incentive pool subject to adjustment in the sole discretion of the Committee. In no event may the portion of the incentive pool allocated to a participant who is a Covered Employee be increased in any way, including as a result of the reduction of any other participants allocated portion.
12. Other Stock or Cash Awards . In addition to the incentives described in sections 6 through 11 above, the Committee may grant other incentives payable in cash or in common stock under the Plan as it determines to be in the best interests of Motorola and subject to such other terms and conditions as it deems appropriate; provided an outright grant of stock will not be made unless it is offered in exchange for cash compensation that has otherwise already been earned by the recipient.
13. Performance Goals . Awards of Restricted Stock, Restricted Stock Units, Performance Stock, Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Code, including, but not limited to, cash flow; cost; ratio of debt to debt plus equity; profit before tax; economic profit; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; operating earnings; economic value added; ratio of operating earnings to capital spending; free cash flow; net profit; net sales; sales growth; price of Motorola common stock; return on net assets, equity or stockholders equity; market share; or total return to stockholders (Performance Criteria). Any Performance Criteria may be used to measure the performance of the Company as a whole or any business unit of the Company and may be measured relative to a peer group
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or index. Any Performance Criteria may include or exclude Special Items (as defined in section 11 above). In all other respects, Performance Criteria shall be calculated in accordance with the Companys financial statements, generally accepted accounting principles, or under a methodology established by the Committee prior to the issuance of an award which is consistently applied and identified in the audited financial statements, including footnotes, or the Management Discussion and Analysis section of the Companys annual report. However, the Committee may not in any event increase the amount of compensation payable to a Covered Employee upon the attainment of a performance goal.
14. Change in Control . Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, all outstanding Stock Options and SARs shall become vested and exercisable; all restrictions on Restricted Stock and Restricted Stock Units shall lapse; all performance goals shall be deemed achieved at target levels and all other terms and conditions met; all Performance Stock shall be delivered; all Performance Units and Restricted Stock Units shall be paid out as promptly as practicable; all Annual Management Incentive Awards shall be paid out based on the consolidated operating earnings of the immediately preceding year or such other method of payment as may be determined by the Committee at the time of award or thereafter but prior to the Change in Control; and all Other Stock or Cash Awards shall be delivered or paid. A Change in Control shall mean:
A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, or any successor provision thereto, whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola common stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board.
15. Adjustment Provisions .
(a) If Motorola shall at any time change the number of issued shares of common stock by stock dividend, stock split, spin-off, split-off, spin-out, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares, the total number of shares reserved for issuance under the Plan, the maximum number of shares which may be made subject to an award in any calendar year, and the number of shares covered by each outstanding award and the price therefor, if any, shall be equitably adjusted by the Committee, in its sole discretion.
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(b) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation which results in the outstanding common stock of Motorola being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
16. Substitution and Assumption of Benefits . The Board of Directors or the Committee may authorize the issuance of benefits under this Plan in connection with the assumption of, or substitution for, outstanding benefits previously granted to individuals who become employees of Motorola or any subsidiary as a result of any merger, consolidation, acquisition of property or stock, or reorganization other than a Change in Control, upon such terms and conditions as the Committee may deem appropriate.
17. Nontransferability . Each benefit granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at its discretion, the Committee may permit the transfer of a Stock Option by the participant, subject to such terms and conditions as may be established by the Committee.
18. Taxes . Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving the person entitled to receive such payment or delivery notice and Motorola may defer making payment or delivery as to any award, if any such tax is payable until indemnified to its satisfaction. A participant may pay all or a portion of any required withholding taxes arising in connection with the exercise of a Stock Option or SAR or the receipt or vesting of shares hereunder by electing to have Motorola withhold shares of common stock, having a fair market value equal to the amount required to be withheld.
19. Duration, Amendment and Termination . No Incentive Stock Option shall be granted more than ten years after the date of adoption of this Plan by the Board of Directors; provided, however, that the terms and conditions applicable to any option granted on or before such date may thereafter be amended or modified by mutual agreement between Motorola and the participant, or such other person as may then have an interest therein. The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent. No material amendment of the Plan shall be made without stockholder approval.
20. Fair Market Value . The fair market value of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
21. Other Provisions .
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or
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inducements for continued ownership of common stock after exercise or vesting of benefits, forfeiture of awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or provisions permitting the deferral of the receipt of a benefit for such period and upon such terms as the Committee shall determine.
(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules.
(c) The Committee, in its sole discretion, may permit or require a participant to have amounts or shares of common stock that otherwise would be paid or delivered to the participant as a result of the exercise or settlement of an award under the Plan credited to a deferred compensation or stock unit account established for the participant by the Committee on the Companys books of account.
22. Governing Law . The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Delaware (without regard to applicable Delaware principles of conflict of laws).
23. Stockholder Approval . The Plan was adopted by the Board of Directors on March 20, 2003, subject to stockholder approval. The Plan and any benefits granted thereunder shall be null and void if stockholder approval is not obtained at the next annual meeting of stockholders.
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EXHIBIT F
MOTOROLA OMNIBUS INCENTIVE PLAN OF 2006
(as amended through November 10, 2009)
1. Purpose . The purposes of the Motorola Omnibus Incentive Plan of 2006 (the Plan) are (i) to encourage outstanding individuals to accept or continue employment with Motorola, Inc. (Motorola or the Company) and its Subsidiaries or to serve as directors of Motorola, and (ii) to furnish maximum incentive to those persons to improve operations and increase profits and to strengthen the mutuality of interest between those persons and Motorolas stockholders by providing them stock options and other stock and cash incentives.
2. Administration . The Plan will be administered by a Committee (the Committee) of the Motorola Board of Directors consisting of two or more directors as the Board may designate from time to time, each of whom shall satisfy such requirements as:
(a) the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 or its successor under the Securities Exchange Act of 1934 (the Exchange Act);
(b) the New York Stock Exchange may establish pursuant to its rule-making authority; and
(c) the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code).
The Compensation and Leadership Committee shall serve as the Committee administering the Plan until such time as the Board designates a different Committee.
The Committee shall have the discretionary authority to construe and interpret the Plan and any benefits granted thereunder, to establish and amend rules for Plan administration, to change the terms and conditions of options and other benefits at or after grant, to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option or other benefit granted under the Plan, and to make all other determinations which it deems necessary or advisable for the administration of the Plan. The determinations of the Committee shall be made in accordance with their judgment as to the best interests of Motorola and its stockholders and in accordance with the purposes of the Plan. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee, in writing signed by all the Committee members. The Committee may authorize one or more officers of the Company to select employees to participate in the Plan and to determine the number of option shares and other awards to be granted to such participants, except with respect to awards to officers subject to Section 16 of the Exchange Act or officers who are, or who are reasonably expected to be, covered employees within the meaning of Section 162(m) of the Code (Covered Employees) and any reference in the Plan to the Committee shall include such officer or officers.
3. Participants . Participants may consist of all employees of Motorola and its Subsidiaries and all non-employee directors of Motorola; provided, however, the following individuals shall be excluded from participation in the plan: (a) contract labor (including without limitation black badges, brown badges, contractors, consultants, contract employees and job shoppers) regardless of length of service; (b) employees whose base wage or base salary is not processed for payment by a Payroll
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Department of Motorola or any Subsidiary; (c) any individual performing services under an independent contractor or consultant agreement, a purchase order, a supplier agreement or any other agreement that the Company enters into for service. Any corporation or other entity in which a 50% or greater interest is at the time directly or indirectly owned by Motorola and which Motorola consolidates for financial reporting purposes shall be a Subsidiary for purposes of the Plan. Designation of a participant in any year shall not require the Committee to designate that person to receive a benefit in any other year or to receive the same type or amount of benefit as granted to the participant in any other year or as granted to any other participant in any year. The Committee shall consider all factors that it deems relevant in selecting participants and in determining the type and amount of their respective benefits.
4. Shares Available under the Plan . There is hereby reserved for issuance under the Plan an aggregate of 80 million shares of Motorola common stock. In connection with approving this Plan, and contingent upon receipt of stockholder approval of this Plan, the Board of Directors has approved a merger of the Motorola Omnibus Incentive Plan of 2003, Motorola Omnibus Incentive Plan of 2002, the Motorola Omnibus Incentive Plan of 2000, and the Motorola Amended and Restated Incentive Plan of 1998 (collectively, the Prior Plans) into this Plan, so that on or after the date this Plan is approved by stockholders, the maximum number of shares reserved for issuance under this Plan shall not exceed (a) the total number of shares reserved for issuance under this Plan plus (b) the number of shares approved and available for grant under the Prior Plans as of the date of such stockholder approval plus (c) any shares that become available for issuance pursuant to the remainder of this section 4. If there is (i) a lapse, expiration, termination, forfeiture or cancellation of any Stock Option or other benefit outstanding under this Plan, a Prior Plan or under the Motorola Share Option Plan of 1996 (the 1996 Plan), prior to the issuance of shares thereunder or (ii) a forfeiture of any shares of restricted stock or shares subject to stock awards granted under this Plan, a Prior Plan or the 1996 Plan prior to vesting, then the shares subject to these options or other benefits shall be added to the shares available for benefits under the Plan (to the extent permitted under the terms of the Prior Plans or the 1996 Plan if the award originally occurred under such plan). Shares covered by a benefit granted under the Plan shall not be counted as used unless and until they are actually issued and delivered to a participant. Any shares covered by a Stock Appreciation Right (including a Stock Appreciation Right settled in stock which the Committee, in its discretion, may substitute for an outstanding Stock Option) shall be counted as used only to the extent shares are actually issued to the participant upon exercise of the right. In addition, any shares of common stock exchanged by an optionee as full or partial payment of the exercise price under any stock option exercised under the Plan, any shares retained by Motorola to comply with applicable income tax withholding requirements, and any shares covered by a benefit which is settled in cash, shall be added to the shares available for benefits under the Plan (to the extent permitted under the terms of the Prior Plans or the 1996 Plan if the award originally occurred under such plan). All shares issued under the Plan may be either authorized and unissued shares or issued shares reacquired by Motorola. All of the available shares may, but need not, be issued pursuant to the exercise of Incentive Stock Options (as defined in Section 422 of the Code); provided, however, notwithstanding an Options designation, to the extent that Incentive Stock Options are exercisable for the first time by the Participant during any calendar year with respect to Shares whose aggregate Fair Market Value exceeds $100,000 (regardless of whether such Incentive Stock Options were granted under this Plan, the Prior Plans or the 1996 Plan), such Options shall be treated as nonqualified Stock Options.
Under the Plan, no participant may receive in any calendar year (i) Stock Options relating to more than 3,000,000 shares, (ii) Stock Appreciation Rights relating to more than 3,000,000 shares, (iii) Restricted Stock or Restricted Stock Units relating to more than 1,500,000 shares, (iv) Performance Shares relating to more than 1,500,000 shares, or (v) Deferred Stock Units relating to more than 50,000 shares. No non-employee director may receive in any calendar year Stock Options relating to more than 50,000 shares or Restricted Stock Units or Deferred Stock Units relating to more than 50,000 shares but excluding any Stock Options, Restricted Stock Units, or Deferred Stock Units a non-employee director
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elects to receive at Fair Market Value in lieu of all or a portion of such non-employee directors Compensation. Compensation for this purpose includes all cash remuneration payable to a non-employee director, other than reimbursement for expenses, and shall include retainer fees for service on the Motorola Board of Directors; fees for serving as Chairman of the Board or for serving as Chairman or member of any committee of the Board; compensation for work performed in connection with service on a committee of the Board or at the request of the Board, any committee of the Board or a Chief Executive Officer or any other kind or other category of fees or payments which may be put into effect in the future.
The shares reserved for issuance and each of the limitations set forth above shall be subject to adjustment in accordance with section 16 hereof.
5. Types of Benefits . Benefits under the Plan shall consist of Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Deferred Stock Units, Performance Shares, Performance Cash Awards, Annual Management Incentive Awards and Other Stock or Cash Awards, all as described below.
6. Stock Options . Stock Options may be granted to participants, at any time as determined by the Committee. The Committee shall determine the number of shares subject to each option and whether the option is an Incentive Stock Option. The exercise price for each option shall be determined by the Committee but shall not be less than 100% of the fair market value of Motorolas common stock on the date the option is granted. Each option shall expire at such time as the Committee shall determine at the time of grant. Options shall be exercisable at such time and subject to such terms and conditions as the Committee shall determine; provided, however, that no option shall be exercisable later than the tenth anniversary of its grant. The exercise price, upon exercise of any option, shall be payable to Motorola in full by (a) cash payment or its equivalent, (b) tendering previously acquired shares having a fair market value at the time of exercise equal to the exercise price or certification of ownership of such previously-acquired shares, (c) to the extent permitted by applicable law, delivery of a properly executed exercise notice, together with irrevocable instructions to a broker to promptly deliver to Motorola the amount of sale proceeds from the option shares or loan proceeds to pay the exercise price and any withholding taxes due to Motorola, and (d) such other methods of payment as the Committee, at its discretion, deems appropriate. Notwithstanding any other provision of the Plan to the contrary, upon approval of the Companys stockholders, the Committee may provide for, and the Company may implement, a one time only option exchange offer, pursuant to which certain outstanding Stock Options could, at the election of the person holding such Stock Option, be tendered to the Company for cancellation in exchange for the issuance of a lesser amount of Stock Options with a lower exercise price, or other equity benefit as approved by the Committee, provided that such one time only option exchange offer is implemented within twelve months of the date of such stockholder approval.
7. Stock Appreciation Rights . Stock Appreciation Rights (SARs) may be granted to participants at any time as determined by the Committee. Notwithstanding any other provision of the Plan, the Committee may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options. The grant price of a substitute SAR shall be equal to the exercise price of the related option and the substitute SAR shall have substantive terms ( e.g., duration) that are equivalent to the related option. The grant price of any other SAR shall be equal to the fair market value of Motorolas common stock on the date of its grant. An SAR may be exercised upon such terms and conditions and for the term as the Committee in its sole discretion determines; provided, however, that the term shall not exceed the option term in the case of a substitute SAR or ten years in the case of any other SAR and the terms and conditions applicable to a substitute SAR shall be substantially the same as those applicable to the Stock Option which it replaces. Upon exercise of an SAR, the participant shall be entitled to receive payment from Motorola in an amount determined by multiplying the excess of the fair market value of a share of common stock on the date of exercise over the grant price of the SAR by the number of shares
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with respect to which the SAR is exercised. The payment may be made in cash or stock, at the discretion of the Committee, except in the case of a substitute SAR payment may be made only in stock. In no event shall the Committee cancel any outstanding SAR for the purpose of reissuing the right to the participant at a lower grant price or reduce the grant price of an outstanding SAR.
8. Restricted Stock and Restricted Stock Units . Restricted Stock and Restricted Stock Units may be awarded or sold to participants under such terms and conditions as shall be established by the Committee. Restricted Stock provides participants the rights to receive shares after vesting in accordance with the terms of such grant upon the attainment of certain conditions specified by the Committee. Restricted Stock Units provide participants the right to receive shares at a future date after vesting in accordance with the terms of such grant upon the attainment of certain conditions specified by the Committee. Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee determines, including, without limitation, any of the following:
(a) a prohibition against sale, assignment, transfer, pledge, hypothecation or other encumbrance for a specified period;
(b) a requirement that the holder forfeit (or in the case of shares or units sold to the participant, resell to Motorola at cost) such shares or units in the event of termination of employment during the period of restriction; or
(c) the attainment of performance goals including without limitation those described in section 14 hereof.
All restrictions shall expire at such times as the Committee shall specify. In the Committees discretion, participants may be entitled to dividends or dividend equivalents on awards of Restricted Stock or Restricted Stock Units.
9. Deferred Stock Units . Deferred Stock Units provide a participant a vested right to receive shares of common stock in lieu of other compensation at termination of employment or service or at a specific future designated date. In the Committees discretion, Deferred Stock Units may include the right to be credited with dividend equivalents in accordance with the terms and conditions of the units.
10. Performance Shares . The Committee shall designate the participants to whom long-term performance stock (Performance Shares) is to be awarded and determine the number of shares, the length of the performance period and the other terms and conditions of each such award; provided the stated performance period will not be less than 12 months. Each award of Performance Shares shall entitle the participant to a payment in the form of shares of common stock upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding satisfaction of any performance goals, the number of shares issued under a Performance Shares award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the number of shares earned upon satisfaction of any performance goal by any participant who is a Covered Employee (as defined in section 2 above). The Committee may, in its discretion, make a cash payment equal to the fair market value of shares of common stock otherwise required to be issued to a participant pursuant to a Performance Share award.
11. Performance Cash Awards . The Committee shall designate the participants to whom cash incentives based upon long-term performance (Performance Cash Awards) are to be awarded and determine the amount of the award and the terms and conditions of each such award; provided the stated
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performance period will not be less than 12 months. Each Performance Cash Award shall entitle the participant to a payment in cash upon the attainment of performance goals and other terms and conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount to be paid under a Performance Cash Award may be adjusted by the Committee on the basis of such further consideration as the Committee in its sole discretion shall determine. However, the Committee may not, in any event, increase the amount earned under Performance Cash Awards upon satisfaction of any performance goal by any participant who is a Covered Employee (as defined in section 2 above) and the maximum amount earned by a Covered Employee in any calendar year may not exceed $10,000,000. The Committee may, in its discretion, substitute actual shares of common stock for the cash payment otherwise required to be made to a participant pursuant to a Performance Cash Award.
12. Annual Management Incentive Awards . The Committee may designate Motorola executive officers who are eligible to receive a monetary payment in any calendar year based on a percentage of an incentive pool equal to 5% of Motorolas consolidated earnings before income taxes (as defined below) for the calendar year. The Committee shall allocate an incentive pool percentage to each designated executive officer for each calendar year. In no event may the incentive pool percentage for any one executive officer exceed 30% of the total pool.
For the purposes hereof, consolidated earnings before income taxes shall mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of: the following items, if and only if, such items are separately identified in the Companys quarterly earnings press releases: (i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or losses on the disposition of a business or investment, (iii) changes in tax or accounting regulations or laws, or (iv) the effect of a merger or acquisition.
As soon as possible after the determination of the incentive pool for a Plan year, the Committee shall calculate the executive officers allocated portion of the incentive pool based upon the percentage established at the beginning of the calendar year. The executive officers incentive award then shall be determined by the Committee based on the executive officers allocated portion of the incentive pool subject to adjustment in the sole discretion of the Committee. In no event may the portion of the incentive pool allocated to an executive officer who is a Covered Employee (as defined in section 2 above) be increased in any way, including as a result of the reduction of any other executive officers allocated portion.
13. Other Stock or Cash Awards . In addition to the incentives described in sections 6 through 12 above, the Committee may grant other incentives payable in cash or in common stock under the Plan as it determines to be in the best interests of Motorola and subject to such other terms and conditions as it deems appropriate; provided an outright grant of stock will not be made unless it is offered in exchange for cash compensation that has otherwise already been earned by the recipient.
14. Performance Goals . Awards of Restricted Stock, Restricted Stock Units, Performance Shares, Performance Cash Awards and other incentives under the Plan to a Covered Employee (as defined in section 2) may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Code, including, but not limited to, cash flow; cost; ratio of debt to debt plus equity; profit before tax; economic profit; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; operating earnings; economic value added; ratio of operating earnings to capital spending; free cash flow; net profit; net sales; sales growth; price of Motorola common stock; return on net assets, equity or stockholders equity; market share; or total return to stockholders (Performance Criteria). Any Performance Criteria may be
37
used to measure the performance of the Company as a whole or any business unit of the Company and may be measured relative to a peer group or index. Performance Criteria shall be calculated in accordance with the Companys financial statements (including without limitation the Companys consolidated earnings before income taxes as defined in section 12), generally accepted accounting principles, or under an objective methodology established by the Committee prior to the issuance of an award which is consistently applied. However, the Committee may not in any event increase the amount of compensation payable to a Covered Employee upon the attainment of a performance goal.
15. Change in Control . Except as otherwise determined by the Committee at the time of grant of an award, upon a Change in Control of Motorola, (i) all outstanding Stock Options and SARs shall become vested and exercisable; (ii) all restrictions on Restricted Stock and Restricted Stock Units shall lapse; (iii) all performance goals shall be deemed achieved at target levels and all other terms and conditions met; (iv) all Performance Shares shall be delivered, all Performance Cash Awards, Deferred Stock Units and Restricted Stock Units shall be paid out as promptly as practicable; (v) all Annual Management Incentive Awards shall be paid out at target levels (or earned levels, if greater) and all other terms and conditions deemed met; and (vi) all Other Stock or Cash Awards shall be delivered or paid; provided, however, that the treatment of outstanding awards set forth above (referred to herein as accelerated treatment) shall not apply if and to the extent that such awards are assumed by the successor corporation (or parent thereof) or are replaced with an award that preserves the existing value of the award at the time of the Change in Control and provides for subsequent payout in accordance with the same vesting schedule applicable to the original award; provided, however, that with respect to any awards that are assumed or replaced, such assumed or replaced awards shall provide for the accelerated treatment with respect to any participant that is involuntarily terminated (for a reason other than Cause) or quits for Good Reason within 24 months of the Change in Control.
The term Cause shall mean, with respect to any participant, (i) the participants conviction of any criminal violation involving dishonesty, fraud or breach of trust or (ii) the participants willful engagement in gross misconduct in the performance of the participants duties that materially injures the Company or a Subsidiary.
The term Good Reason shall mean, with respect to any participant, without such participants written consent, (i) the participant is assigned duties materially inconsistent with his position, duties, responsibilities and status with the Company or a Subsidiary during the 90-day period immediately preceding a Change in Control, or the participants position, authority, duties or responsibilities are materially diminished from those in effect during the 90-day period immediately preceding a Change in Control (whether or not occurring solely as a result of the Company ceasing to be a publicly traded entity), (ii) the Company reduces the participants annual base salary or target incentive opportunity under the Companys annual incentive plan, such target incentive opportunity as in effect during the 90-day period immediately prior to the Change in Control, or as the same may be increased from time to time, unless such target incentive opportunity is replaced by a substantially equivalent substitute opportunity, (iii) the Company or a Subsidiary requires the participant regularly to perform his duties of employment beyond a fifty (50) mile radius from the location of the participants employment immediately prior to the Change in Control, or (iv) the Company purports to terminate the Participants employment other than pursuant to a notice of termination which indicates the Participants employment has been terminated for Cause (as defined above) and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participants employment.
A Change in Control shall mean:
A Change in Control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, or any successor provision
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thereto, whether or not Motorola is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any person or group (as such terms are used in Section 13(d) and 14(d) of the 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 representing 20% or more of the combined voting power of Motorolas then outstanding securities (other than Motorola or any employee benefit plan of Motorola; and, for purposes of the Plan, no Change in Control shall be deemed to have occurred as a result of the beneficial ownership, or changes therein, of Motorolas securities by either of the foregoing), (b) there shall be consummated (i) any consolidation or merger of Motorola in which Motorola 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 Motorola 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 (ii) 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 other than any such transaction with entities in which the holders of Motorola common stock, directly or indirectly, have at least a 65% ownership interest, (c) the stockholders of Motorola approve any plan or proposal for the liquidation or dissolution of Motorola, or (d) 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 the first public announcement relating to such Control Transaction shall thereafter cease to constitute a majority of the Board.
In the event that a payment or delivery of an award following a Change in Control would not be a permissible distribution event, as defined in Section 409A(a)(2) of the Code or any regulations or other guidance issued thereunder, then the payment or delivery shall be made on the earlier of (i) the date of payment or delivery originally provided for such benefit, or (ii) the date of termination of the participants employment or service with the Company or six months after such termination in the case of a specified employee as defined in Section 409A(a)(2)(B)(i).
16. Adjustment Provisions .
(a) In the event of any change affecting the number, class, market price or terms of the shares of common stock by reason of stock dividend, stock split, recapitalization, reorganization, merger, consolidation, spin-off, disaffiliation of a Subsidiary, combination of shares, exchange of shares, stock rights offering, or other similar event, or any distribution to the holders of shares of common stock other than a regular cash dividend, (any of which is referred to herein as an equity restructuring), then the Committee shall make an equitable substitution or adjustment in the number or class of shares which may be issued under the Plan in the aggregate or to any one participant in any calendar year and in the number, class, price or terms of shares subject to outstanding awards granted under the Plan as it deems appropriate. Such substitution or adjustment shall equalize an awards intrinsic and fair value before and after the equity restructuring.
(b) In direct connection with the sale, lease, distribution to stockholders, outsourcing arrangement or any other type of asset transfer or transfer of any portion of a facility or any portion of a discrete organizational unit of Motorola or a Subsidiary (a Divestiture), the Committee may authorize the assumption or replacement of affected participants awards by the spun-off facility or organization unit or by the entity that controls the spun-off facility or organizational unit following disaffiliation.
(c) In the event of any merger, consolidation or reorganization of Motorola with or into another corporation which results in the outstanding common stock of Motorola being converted into or exchanged for different securities, cash or other property, or any combination thereof, there shall be
39
substituted, on an equitable basis as determined by the Committee in its discretion, for each share of common stock then subject to a benefit granted under the Plan, the number and kind of shares of stock, other securities, cash or other property to which holders of common stock of Motorola will be entitled pursuant to the transaction.
(d) Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), the terms of outstanding awards may not be amended to reduce the exercise price of outstanding Stock Options or SARs or cancel outstanding Stock Options or SARs in exchange for cash, other awards or Stock Options or SARs with an exercise price that is less than the exercise price of the original Stock Options or SARs without stockholder approval.
17. Substitution and Assumption of Benefits . The Board of Directors or the Committee may authorize the issuance of benefits under this Plan in connection with the assumption of, or substitution for, outstanding benefits previously granted to individuals who become employees of Motorola or any Subsidiary as a result of any merger, consolidation, acquisition of property or stock, or reorganization, upon such terms and conditions as the Committee may deem appropriate. Any substitute Awards granted under the Plan shall not count against the share limitations set forth in section 4 hereof, to the extent permitted by Section 303A.08 of the Corporate Governance Standards of the New York Stock Exchange.
18. Nontransferability . Each benefit granted under the Plan shall not be transferable other than by will or the laws of descent and distribution, and each Stock Option and SAR shall be exercisable during the participants lifetime only by the participant or, in the event of disability, by the participants personal representative. In the event of the death of a participant, exercise of any benefit or payment with respect to any benefit shall be made only by or to the beneficiary, executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participants rights under the benefit shall pass by will or the laws of descent and distribution. Subject to the approval of the Committee in its sole discretion, Stock Options may be transferable to members of the immediate family of the participant and to one or more trusts for the benefit of such family members, partnerships in which such family members are the only partners, or corporations in which such family members are the only stockholders. Members of the immediate family means the participants spouse, children, stepchildren, grandchildren, parents, grandparents, siblings (including half brothers and sisters), and individuals who are family members by adoption.
19. Taxes . Motorola shall be entitled to withhold the amount of any tax attributable to any amounts payable or shares deliverable under the Plan, after giving notice to the person entitled to receive such payment or delivery, and Motorola may defer making payment or delivery as to any award, if any such tax is payable, until indemnified to its satisfaction. In connection with the exercise of a Stock Option or the receipt or vesting of shares hereunder, a participant may pay all or a portion of any withholding as follows: (a) with the consent of the Committee, by electing to have Motorola withhold shares of common stock having a fair market value equal to the amount required to be withheld up to the minimum required statutory withholding amount; or (b) by delivering irrevocable instructions to a broker to sell shares and to promptly deliver the sales proceeds to Motorola for amounts up to and in excess of the minimum required statutory withholding amount. For restricted stock and restricted stock unit awards, no withholding in excess of the minimum statutory withholding amount will be allowed.
20. Duration of the Plan . No award shall be made under the Plan more than ten years after the date of its adoption by the Board of Directors; provided, however, that the terms and conditions applicable to any option granted on or before such date may thereafter be amended or modified by mutual
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agreement between Motorola and the participant, or such other person as may then have an interest therein.
21. Amendment and Termination . The Board of Directors or the Committee may amend the Plan from time to time or terminate the Plan at any time. However, unless expressly provided in an award or pursuant to the terms of any incentive plan implemented pursuant to this Plan, no such action shall reduce the amount of any existing award or change the terms and conditions thereof without the participants consent; provided, however, that the Committee may, in its discretion, substitute SARs which can be settled only in stock for outstanding Stock Options without a participants consent. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary to comply with applicable laws, regulations, or stock exchange rules.
22. Fair Market Value . The fair market value of shares of Motorolas common stock at any time shall be determined in such manner as the Committee may deem equitable, or as required by applicable law or regulation.
23. Other Provisions .
(a) The award of any benefit under the Plan may also be subject to other provisions (whether or not applicable to the benefit awarded to any other participant) as the Committee determines appropriate, including provisions intended to comply with federal or state securities laws and stock exchange requirements, understandings or conditions as to the participants employment, requirements or inducements for continued ownership of common stock after exercise or vesting of benefits, or forfeiture of awards in the event of termination of employment shortly after exercise or vesting, or breach of noncompetition or confidentiality agreements following termination of employment, or effective as of January 1, 2008 cancellation of awards or benefits, reimbursement of compensation paid or reimbursement of gains realized, upon certain restatement of financial results.
(b) In the event any benefit under this Plan is granted to an employee who is employed or providing services outside the United States and who is not compensated from a payroll maintained in the United States, the Committee may, in its sole discretion, modify the provisions of the Plan as they pertain to such individuals to comply with applicable law, regulation or accounting rules consistent with the purposes of the Plan and the Board of Directors or the Committee may, in its discretion, establish one or more sub-plans to reflect such modified provisions. All sub-plans adopted by the Committee shall be deemed to be part of the Plan, but each sub-plan shall apply only to Participants within the affected jurisdiction and the Company shall not be required to provide copies of any sub-plans to Participants in any jurisdiction which is not the subject of such sub-plan.
(c) The Committee, in its sole discretion, may require a participant to have amounts or shares of common stock that otherwise would be paid or delivered to the participant as a result of the exercise or settlement of an award under the Plan credited to a deferred compensation or stock unit account established for the participant by the Committee on the Companys books of account.
(d) Neither the Plan nor any award shall confer upon a participant any right with respect to continuing the participants employment with the Company; nor shall they interfere in any way with the participants right or the Companys right to terminate such relationship at any time, with or without cause, to the extent permitted by applicable laws and any enforceable agreement between the employee and the Company.
(e) No fractional Shares shall be issued or delivered pursuant to the Plan or any award, and the Committee, in its discretion, shall determine whether cash, other securities, or other
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property shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated.
(f) Payments and other benefits received by a participant under an award made pursuant to the Plan shall not be deemed a part of a participants compensation for purposes of determining the participants benefits under any other employee benefit plans or arrangements provided by the Company or a Subsidiary, notwithstanding any provision of such plan to the contrary, unless the Committee expressly provides otherwise in writing.
(g) The Committee may permit participants to defer the receipt of payments of awards pursuant to such rules, procedures or programs it may establish for purposes of this Plan. Notwithstanding any provision of the Plan to the contrary, to the extent that awards under the Plan are subject to the provisions of Section 409A of the Code, then the Plan as applied to those amounts shall be interpreted and administered so that it is consistent with such Code section.
24. Governing Law . The Plan and any actions taken in connection herewith shall be governed by and construed in accordance with the laws of the state of Illinois (without regard to any states conflict of laws principles). Any legal action related to this Plan shall be brought only in a federal or state court located in Illinois.
25. Stockholder Approval . The Plan was adopted by the Board of Directors on February 23, 2006, subject to stockholder approval. The Plan and any benefits granted thereunder shall be null and void if stockholder approval is not obtained at the next annual meeting of stockholders.
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EXHIBIT 10.16
FORM OF SPINCO CONTRIBUTION AGREEMENT
THIS SPINCO CONTRIBUTION AGREEMENT (this Agreement ) is made and entered into as of the Business Day immediately prior to the Distribution Date (such Business Day, the Effective Date ), by and between Motorola, Inc., a Delaware corporation ( Motorola ), and Motorola Mobility Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola (formerly, Motorola SpinCo Holdings Corporation) ( SpinCo ). Capitalized terms used and not otherwise defined herein have the meanings ascribed to such terms in Article 1 of that certain Amended and Restated Master Separation and Distribution Agreement effective as of July 31, 2010, as may be amended from time to time (the Separation Agreement ), by and among Motorola, SpinCo and Motorola Mobility, Inc., a Delaware corporation and wholly-owned subsidiary of Motorola ( Mobility ).
RECITALS
WHEREAS, pursuant to the Separation Agreement, Motorola, SpinCo and Mobility have agreed to separate the MD Business and the Home Business (collectively, the Transferred Businesses ) from Motorola by means of, among other actions, (i) the transfer of certain Transferred Assets, including the stock or other equity interests of certain of Motorolas Subsidiaries dedicated to the Transferred Businesses, by Motorola and certain of Motorolas Subsidiaries to Mobility and certain of Mobilitys Subsidiaries or entities that will become its Subsidiaries prior to the Distribution and the assumption of the Transferred Liabilities by Mobility and certain of Mobilitys Subsidiaries or entities that will become its Subsidiaries prior to the Distribution (the Mobility Contribution ); and (ii) following the transfer contemplated by clause (i) and the consummation of certain related reorganization transactions, the transfer by Motorola to SpinCo of certain Assets and Liabilities associated with the Transferred Businesses, including shares of capital stock of Mobility and stock or other equity interests of Motorola Mobility Japan Limited (the SpinCo Contribution );
WHEREAS, this Agreement is intended to effect the SpinCo Contribution; and
WHEREAS, it is intended that the SpinCo Contribution and the Distribution, taken together, will qualify as a reorganization for U.S. federal income tax purposes within the meaning of Sections 355 and 368(a)(1)(D) of the Code.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth below, and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows:
ARTICLE 1
CONTRIBUTION
Section 1.1 Contribution of Certain Transferred Assets . Subject to the terms of this Agreement and the Separation Agreement, Motorola hereby contributes, assigns, transfers and conveys to SpinCo, and SpinCo hereby receives and accepts from Motorola, all of Motorolas right, title and interest in and to the following (each, a SpinCo Asset and, collectively, the SpinCo Assets ):
(a) the shares of capital stock of Mobility (the Mobility Shares );
(b) the Employment Agreement by and between Motorola and Sanjay K. Jha dated as of August 4, 2008, as amended (the Employment Agreement );
(c) the Cash Contribution (as defined below), as further described below;
(d) the shares of capital stock of Motorola Mobility Japan Inc. (the MMJ Shares ); and
(e) the Deferred Stock Unit Agreements between Motorola and each Motorola director who will become a director of SpinCo following the Effective Date.
With respect to the Cash Contribution, the following will apply:
(1) Motorola will pay the Effective Date Contribution to SpinCo on the Effective Date.
(2) As soon as commercially practicable following the Distribution Date, SpinCo will provide to Motorola a certificate of its Chief Financial Officer showing the following calculations: (i) the Year End Cash Balance, (ii) the 2010 Adjusted Controllable Free Cash Flow, and (iii) the True-Up Contribution amount, if any. If the True-Up Contribution is a positive amount, Motorola will pay such amount to SpinCo within 10 Business Days of the receipt of such certificate. If the True-Up Contribution is a negative amount, SpinCo will pay such amount to Motorola within 10 Business Days of providing such certificate to Motorola; provided, however, that Motorola may instead reduce the Deferred Contribution by the amount of such True-Up Contribution by providing notice to SpinCo within 5 Business Days of receiving such certificate.
(3) Motorola will pay the Deferred Contribution to SpinCo, if any, as follows. The Motorola subsidiary set forth on Schedule 1 (the Subsidiary), is in the process of seeking a multi-year capital reduction in the aggregate amount set forth on Schedule 1 (the Capital Reduction). After the Effective Date, as Motorola receives cash (in U.S. dollars) from the Subsidiary in connection with the Capital Reduction, Motorola will contribute an amount equal to 50% of such cash to SpinCo within 10 Business Days of such receipt in an aggregate amount not to exceed $300 million (such figure to be reduced by the 2010 Subsidiary Payment, if any).
(4) Motorola and SpinCo acknowledge and agree that any cash or cash equivalents received or expended by the SpinCo Group between January 1, 2011 and the Distribution Date shall be for the account of SpinCo and shall not impact the amount of the Cash Contribution pursuant to this Agreement.
For the purposes of this Section 1.1, the following terms will have the following meanings:
2010 Adjusted Controllable Free Cash Flow means an amount equal to the Controllable Free Cash Flow as defined in the 2010 Motorola Incentive Plan Terms (as approved by the Motorola Compensation and Leadership Committee on March 16, 2010, consistent with historical practices) for 2010 for the SpinCo Group, less amounts paid by the SpinCo Group from September 22, 2010 up to and including the Effective Date for acquisitions and other equity investments (regardless of the accounting treatment of such investments).
2010 Subsidiary Payment means the amount in U.S. dollars that Motorola receives from September 22, 2010 through the Effective Date in connection with the Capital Reduction of the Subsidiary.
Cash Contribution means the Effective Date Contribution, plus the True-Up Contribution, plus the Deferred Contribution.
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Cash Flow Adjustment means $300 million less the 2010 Adjusted Controllable Free Cash Flow, provided that if the amount of the 2010 Adjusted Controllable Free Cash Flow is greater than $300 million the Cash Flow Adjustment will be zero.
Deferred Contribution means $300 million minus the amount of the 2010 Subsidiary Payment, if any.
Effective Date Contribution means an amount of cash and cash equivalents equal to $3.2 billion, plus the 2010 Subsidiary Payment, less the Preliminary Year End Cash Balance, less $100 million.
Preliminary Year End Cash Balance means the most recent estimate provided in a certificate to Motorola by SpinCos Chief Financial Officer of the aggregate amount of cash and cash equivalents held by the SpinCo Group on a global basis as of December 31, 2010, expressed in U.S. Dollars, plus amounts, if any, held by the Motorola Group on a global basis as of December 31, 2010 that should be transferred to SpinCo pursuant to Section 5.7(a) of the Separation Agreement, less amounts, if any, held by the SpinCo Group on a global basis as of December 31, 2010 that should be transferred to Motorola pursuant to Section 5.7(b) of the Separation Agreement.
True-Up Contribution means $3.2 billion plus the amount of the 2010 Subsidiary Payment, if any, minus the Year End Cash Balance, minus the Effective Date Contribution, minus the Cash Flow Adjustment, if any.
Year End Cash Balance means the aggregate amount of cash and cash equivalents held by the SpinCo Group on a global basis as of December 31, 2010, expressed in U.S. Dollars, based on SpinCos year end consolidated audited financial statements, plus amounts, if any, held by the Motorola Group on a global basis as of December 31, 2010 that should be transferred to SpinCo pursuant to Section 5.7(a) of the Separation Agreement, less amounts, if any, held by the SpinCo Group on a global basis as of December 31, 2010 that should be transferred to Motorola pursuant to Section 5.7(b) of the Separation Agreement.
Section 1.2 Assumption of Liabilities . Subject to the terms of this Agreement and the Separation Agreement, as partial consideration for the foregoing contribution, SpinCo hereby assumes the Liabilities of Motorola related to the SpinCo Assets with effect as of the Effective Date and agrees to pay, perform, satisfy and discharge such Liabilities in accordance with their respective terms.
Section 1.3 Deliveries . In furtherance of the transactions contemplated by Sections 1.1 and 1.2, the parties agree to execute and deliver, and they will cause their respective Subsidiaries to execute and deliver (a) such stock powers, assignments of contracts and other instruments of transfer, conveyance and assignment as, and to the extent, necessary or convenient to evidence the transfer, conveyance and assignment by Motorola to SpinCo of all of Motorolas right, title and interest in and to the SpinCo Assets, and (b) such assumptions of contracts and other instruments of assumption as, and to the extent, necessary or convenient to evidence the valid and effective assumption of the Liabilities related to the SpinCo Assets.
Section 1.4 No Representations or Warranties . SpinCo acknowledges and agrees that (a) Motorola is not making any representations or warranties, express or implied, with respect to the SpinCo Assets or otherwise, (b) the SpinCo Assets are being transferred on an as is, where is basis and (c) SpinCo will bear the economic and legal risks that the conveyance in Section 1.1 will prove to be
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insufficient to vest in it good and marketable title to the SpinCo Assets, free and clear of any security interest, pledge, lien, charge, claim or other encumbrance of any nature whatsoever.
Section 1.5 Transfer of Beneficial Ownership .
(a) The transfer of the Mobility Shares and the MMJ Shares (collectively, the Contributed Shares ) will be effective as of the Effective Date, from and after which date SpinCo will be the beneficial owner of the Contributed Shares for all purposes. It is the parties intent that all of the benefits and burdens of ownership of the Contributed Shares transfer to SpinCo on the Effective Date. To the extent that transfer of registered ownership of the Contributed Shares is not perfected on the Effective Date or would be contrary to applicable law, the parties will use their commercially reasonable efforts to provide to, or cause to be provided to, SpinCo, to the extent permitted by law, the rights and benefits associated with registered ownership of the Contributed Shares and take such other actions as may reasonably be requested by SpinCo in order to place SpinCo, insofar as reasonably possible, in the same position as if SpinCo were the registered stockholder. Without limiting the foregoing and in connection therewith, from and after the Effective Date, SpinCo will have the right to (i) receive all dividends or distributions (liquidating or otherwise) associated with the Contributed Shares, or direct Motorola to deliver such dividends or distributions to the party of its selection, (ii) sell, transfer or encumber, or direct Motorola to sell, transfer or encumber the Contributed Shares, and receive the proceeds therefrom, including any of the rights or privileges associated with the Contributed Shares, and (iii) vote the Contributed Shares or direct Motorola to vote the Contributed Shares as it instructs.
(b) In connection with the arrangement set forth in Section 1.5(a), and without limiting the foregoing, from and after the Effective Date, to the extent that transfer of registered ownership of the Contributed Shares is not perfected on the Effective Date or would be contrary to applicable law, Motorola will (i) vote the Contributed Shares at the meetings of SpinCo only as directed by SpinCo, (ii) observe all corporate formalities and filing requirements that may have to be met with regard to the Contributed Shares, (iii) forward to SpinCo, or any other person identified by SpinCo, all dividends, distributions (liquidating or otherwise), and sale proceeds made with respect to the Contributed Shares, (iv) sell, transfer or encumber the Contributed Shares only as directed by SpinCo, (v) immediately notify SpinCo upon attachment or attempted seizure of, or acquisition of any interest or assertion of any rights in, the Contributed Shares by any third party and take appropriate action to defend against such attachment and to protect SpinCos interest in the Contributed Shares, and (vi) be entitled to rely on the written instructions of the directors or officers of SpinCo, and such instructions will be deemed to have been duly authorized by SpinCo.
ARTICLE 2
MISCELLANEOUS
Section 2.1 Further Assurances . The parties hereto will each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to accomplish the transactions contemplated by this Agreement, including without limitation the use of commercially reasonable efforts to receive $150 million of the Subsidiary Capital Reduction in 2010 and the remaining Capital Reduction as promptly thereafter as possible. For the avoidance of any doubt, the respective covenants of cooperation, further assurances and expense reimbursement set forth in the Separation Agreement will apply to the obligations of the parties set forth in this Agreement.
Section 2.2 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 (whether arising in contract, tort, equity or otherwise).
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Section 2.3 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 2.4 Entire Agreement . This Agreement, together with the Separation Agreement, the Tax Sharing Agreement, the Employee Matters Agreement and each of the exhibits and schedules appended hereto and thereto, constitutes the final agreement by and among the parties with respect to the subject matter contained herein, and is the complete and exclusive statement of the parties agreement on the matters contained herein. All prior and contemporaneous negotiations and agreements by and among the parties with respect to the matters contained herein are superseded by this Agreement, the Separation Agreement, the Tax Sharing Agreement and the Employee Matters Agreement. In the event of any conflict between any provision in this Agreement and any provision in the Separation Agreement, the Tax Sharing Agreement or the Employee Matters Agreement, the provisions of any such Agreement will control over the provisions in this Agreement, and the parties agree that this Agreement is not intended to enhance, decrease or modify any of the rights or obligations of the parties from those contained in the Separation Agreement, the Tax Sharing Agreement or the Employee Matters Agreement.
Section 2.5 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 all 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 partys signature is as effective as signing and delivering the counterpart in person.
Section 2.6 Variation . No variation of this Agreement will be valid unless it is in writing and signed by authorized representatives of the parties. The expression variation will include any amendment, modification, variation, supplement, deletion or replacement however affected.
(Remainder of page intentionally left blank)
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IN WITNESS WHEREOF, each of the parties has caused this SpinCo Contribution Agreement to be executed on its behalf by a duly authorized officer on the date effective as of the Effective Date.
Motorola | SpinCo | |||||
MOTOROLA, INC., a Delaware corporation |
MOTOROLA MOBILITY HOLDINGS, INC., a
Delaware corporation |
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By: |
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By: |
|
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Name: |
Gregory Q. Brown | Name: | Sanjay K. Jha | |||
Title: |
Co-Chief Executive Officer | Title: | Chief Executive Officer |
[Signature Page to SpinCo Contribution Agreement]
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 November 12, 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 Mobilitys 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 Mobilitys common stock are currently owned by Motorola, Inc. Accordingly, there currently is no public trading market for our common stock. We are in the process of applying to list our common stock and expect to list under the ticker symbol MMI on the New York Stock Exchange (NYSE). Assuming that Motorola Mobilitys common stock is approved for listing, we anticipate that a limited market, commonly known as a when-issued trading market, for Motorola Mobilitys 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 Mobilitys 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.
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Questions and Answers About Motorola Mobility and the Separation |
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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 businesss assets to Nokia Siemens Networks is expected to be completed in 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) |
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 FrequencyDivision 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 |
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 the Amended and Restated Exclusive License Agreement, to use the Motorola Marks on a royalty-free basis for use in connection with its business in accordance with such Amended and Restated Exclusive License Agreement. 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 November 1, 2010, unless otherwise indicated.
The Gartner Reports described herein, (the Gartner Reports) represent data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (Gartner), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Information Statement) and the opinions expressed in the Gartner Reports are subject to change without notice.
This summary highlights selected information from this Information Statement relating to Motorola Mobility, Motorola Mobilitys 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.
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 Companys 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:
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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 worlds first portable cellular phone. Mobile Devices net revenues represented 65% and 67% of Motorola Mobilitys combined net revenues in 2009 and the first nine months of 2010, respectively. |
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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 33% of Motorola Mobilitys combined net revenues in 2009 and the first nine months 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 Mobilitys 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 Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Information Statement.
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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 matters, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobilitys 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:
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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. |
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Management Focus. Allow management of each independent company to concentrate that companys 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. |
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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 companys 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 companys future success. |
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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. |
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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. |
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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 SeparationReasons 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 SeparationConditions to the Distribution and Risk FactorsRisks 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 Mobilitys headquarters is located at 600 North US Highway 45, Libertyville, Illinois 60048 and its general telephone number is (847) 523-5000. Our Internet website is http://www.motorola.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. |
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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 Mobilitys 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 (BNY Mellon or the transfer agent)), BNY 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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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 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 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 Mobilitys 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 SeparationMaterial 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 SeparationMaterial U.S. Federal Income Tax Consequences of the Distribution included elsewhere in this Information Statement for more information. |
You should consult your tax advisor about how this allocation will work in your situation (including a situation where you have |
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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 matters, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobilitys 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. |
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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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. There can be no assurance that, following the distribution, the combined value of the common stock of Motorola Solutions, Inc. and the common stock of Motorola Mobility will equal or exceed what the value of Motorola, Inc. common stock would have been in the absence of the distribution. It is possible that after the distribution the combined value of the equity of Motorola Solutions, Inc. and Motorola Mobility 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 |
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number of shares of Motorola, Inc. common stock you own will not change solely as a result of the distribution. However, if approved by 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 Mobilitys 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 SeparationConditions 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 (BNY Mellon) in the distribution? |
BNY Mellon has three roles in the distribution. BNY Mellon currently serves and will continue to serve as Motorola, Inc.s transfer agent and registrar. BNY Mellon will also 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, BNY Mellon will serve as Motorola Mobilitys 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) 523-0158 |
Email: mobilityinvestors@motorola.com |
Website: www.motorola.com/investors
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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 Mobilitys 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 market prices and distribute the aggregate cash proceeds, net of |
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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 SeparationMaterial 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 SeparationConditions to the Distribution : |
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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; |
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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; |
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the Motorola Mobility common stock will have been accepted for listing on the NYSE, on official notice of issuance; |
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Motorola, Inc. will have received 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 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; |
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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 |
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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 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 are in the process of applying 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 |
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, 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. Accordingly, and so long as the distribution so qualifies, for U.S. federal income tax purposes, 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 SeparationMaterial U.S. Federal Income Tax Consequences of the Distribution included elsewhere in this Information Statement. |
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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 Mobilitys audited combined financial statements, which are included elsewhere in this Information Statement. We derived the combined operating data for the nine months ended October 2, 2010 and October 3, 2009 and the combined balance sheet data as of October 2, 2010 from Motorola Mobilitys 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 October 3, 2009, December 31, 2007, December 31, 2006 and December 31, 2005, from Motorola Mobilitys underlying financial records, which were derived from the financial records of Motorola, Inc. In managements 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 Managements 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.
Nine Months Ended | Years Ended December 31, | |||||||||||||||||||||||||||||||
(Dollars in millions) |
October 2,
2010 |
October 3,
2009 |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||
Combined Operating Data: |
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Net revenues |
$ | 8,035 | $ | 8,227 | $ | 11,050 | $ | 17,099 | $ | 23,373 | $ | 31,810 | $ | 24,447 | ||||||||||||||||||
Gross margin |
2,050 | 1,447 | 2,153 | 2,819 | 4,483 | 7,724 | 6,093 | |||||||||||||||||||||||||
Operating earnings (loss) |
(50 | ) | (1,015 | ) | (1,211 | ) | (2,040 | ) | (1,131 | ) | 2,593 | 2,258 | ||||||||||||||||||||
Net earnings (loss) |
(169 | ) | (1,132 | ) | (1,335 | ) | (2,972 | ) | (648 | ) | 1,852 | 1,576 | ||||||||||||||||||||
Net earnings (loss) attributable to Motorola Mobility Holdings, Inc. |
(166 | ) | (1,138 | ) | (1,342 | ) | (2,969 | ) | (656 | ) | 1,847 | 1,571 | ||||||||||||||||||||
Combined Balance Sheet Data: |
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Total assets |
$ | 6,158 | $ | 5,889 | $ | 5,858 | $ | 7,167 | $ | 11,096 | $ | 12,736 | $ | 9,901 | ||||||||||||||||||
Other Data: |
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Intangible assets amortization expense |
$ | 41 | $ | 43 | $ | 57 | $ | 64 | $ | 88 | $ | 60 | $ | 34 | ||||||||||||||||||
Share-based compensation expense |
120 | 126 | 166 | 147 | 157 | 133 | 8 | |||||||||||||||||||||||||
Capital expenditures |
68 | 45 | 67 | 151 | 195 | 183 | 155 | |||||||||||||||||||||||||
Research and development expenditures |
1,112 | 1,198 | 1,591 | 2,358 | 2,550 | 2,259 | 1,861 | |||||||||||||||||||||||||
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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 with increasing concentration 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 Googles Android operating system or applications are not made available to Motorola Mobility in a timely fashion, Motorola Mobility could be competitively disadvantaged and Motorola Mobilitys 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, China and Latin America, followed by Western Europe and other strategic markets. 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 operators 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 Mobilitys 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 particularly 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 suppliers 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 suppliers 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 (1) a third-party successfully asserted an intellectual property infringement claim against either us based on our products using Android software or our supplier, Google, or (2) the supply of Android software for our products were limited or foreclosed or royalties were assessed.
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 Mobilitys 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 latters 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.
We collect, store and transmit large volumes of data, including User Information and other personally identifiable information, including employee and consumer information, in the course of supporting our internal
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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 nearly 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 Mobilitys 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 and could result in government investigations and/or injunctive, monetary or other penalties. 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 countrys 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 products 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. 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. In the event of an interruption of supply or a significant price increase from these suppliers, we may not be able to diversify sources of supply in a timely manner, which could have a negative impact on our business. In addition, our current contractual arrangements with certain suppliers may be cancelled or not extended by such suppliers and, therefore, not afford the Company with sufficient protection against a reduction or interruption in supplies. Moreover, in the event any of these single source or limited source suppliers breach their contracts with us, our legal remedies associated with such a breach may be insufficient to compensate the Company for any damages we may suffer.
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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)
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standards, wireless networking standards (e.g., 802.11), and video coding standards (e.g., H.264), as well as other patents directed to features and implementations of our products. 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 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
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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.
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.
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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.
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, domestically or in a foreign jurisdiction, 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 BusinessLegal 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 BusinessLegal 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:
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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. |
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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. |
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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. |
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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:
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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. |
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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. |
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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. |
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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. |
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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. |
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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 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 SeparationMaterial 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 stockholders 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 stockholders 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 SeparationMaterial 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 TransactionsAgreements 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:
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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, accounting, information technology services, human resources, legal, ethics and compliance program |
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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. |
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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. |
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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. |
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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 TransactionsAgreements 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 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.
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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 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.
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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:
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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; |
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merging, consolidating or liquidating; |
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issuing equity securities beyond certain thresholds; |
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repurchasing Motorola Mobility common stock; and |
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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 SeparationMaterial U.S. Federal Income Tax Consequences of the Distribution and Certain Relationships and Related Party TransactionsAgreements With Motorola, Inc.Tax Sharing Agreement included elsewhere in this Information Statement.
Some 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 or involvement of the counterparty to such an assignment and failure to obtain consents with or a termination of the agreement by any of our large customers or suppliers or interference by such customers or suppliers with such an assignment, 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 Mobilitys affiliates. However, some of these contracts require the contractual counterpartys consent to such an 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 or the fact that the separation is occurring to seek more favorable contractual terms from us or to seek to
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terminate the contract. If (1) we are unable to complete the assignments in a timely manner, (2) we enter into new agreements on significantly less favorable terms, or (3) if the contracts are terminated, 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 timely complete the assignment of existing contracts, or the negotiation of new arrangements, with any of our large customers or key suppliers (including those that are single source or limited source suppliers), or a termination of any of those arrangements, 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 TransactionsAgreements With Motorola, Inc. under each of Master Separation and Distribution AgreementIndemnification 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 Mobilitys control, including:
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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 & Poors 500 Index (S&P 500) and other indices, as Motorola Mobilitys 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; |
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a shift in our investor base; |
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our quarterly or annual earnings, or those of other companies in our industry; |
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actual or anticipated fluctuations in our operating results; |
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announcements by us or our competitors of significant acquisitions or dispositions; |
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the failure of securities analysts to cover our common stock after the distribution; |
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changes in earnings estimates by securities analysts or our ability to meet our earnings guidance; |
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the operating and stock price performance of other comparable companies; and |
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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 Mobilitys 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 SeparationWhen and How You Will Receive the Dividend, Employment Contracts, Termination of Employment and Change in Control ArrangementsEmployment Agreement With Sanjay K. Jha and Certain Relationships and Related Party TransactionsAgreements 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 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:
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adverse developments in general business, economic and political conditions or any outbreak or escalation of hostilities on a national, regional or international basis; |
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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; |
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the impact of our separation from Motorola, Inc. and risks relating to our ability to operate effectively as an independent, publicly traded company; |
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changes in our cost structure, management, financing and business operations following our separation from Motorola, Inc.; |
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the rapidly changing and intensely competitive nature of the Mobile Devices and Home businesses; |
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fluctuations in our operating results, unanticipated delays or accelerations in our sales cycles and the difficulty of accurately estimating revenues; |
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competition in our existing and future lines of business and the financial resources of competitors; and |
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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:
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the expected benefits of the separation; |
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our business strategies, plans and objectives, including the anticipated impact of such strategies, plans and objectives; |
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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; |
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expectations regarding the location and amount of cash and cash equivalents in countries outside the U.S. |
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future levels of revenues, operating margins, income from operations, net income, earnings per share and other financial information; |
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expectations regarding the Companys ability to finance its operations and its ability to obtain, and the cost of, performance related bonds; |
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future hedging activities; |
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anticipated levels of demand for our products and services; |
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expectations regarding our research and development activities and intellectual property, including expectations regarding the competitiveness of the patent portfolio; |
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the success or timing of completion of ongoing or anticipated capital or maintenance projects; |
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expectations regarding opportunities for growth; |
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expectations regarding availability of materials and components, energy supplies and labor; |
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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 |
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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 Managements 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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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 Mobilitys common stock.
Furthermore, the distribution of Motorola Mobilitys 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.
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:
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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. |
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Management Focus. Allow management of each independent company to concentrate that companys 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. |
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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 companys 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 companys future success. |
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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. |
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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. |
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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 SeparationMaterial 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 (BNY 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:
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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 Mobilitys 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 BNY Mellon at the address set forth in the section The Separation included elsewhere in this Information Statement.
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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 firms 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.
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Stock Options and Stock Appreciation Rights (SARs) |
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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. |
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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. |
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Restricted Stock Units (RSUs) |
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Remaining Motorola, Inc. Employees : Each outstanding unvested Motorola, Inc. RSU with or 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. |
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Motorola Mobility Employees : Each outstanding unvested Motorola, Inc. RSU with or 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 employees 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 employees 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.
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 matters, intellectual property rights, trademark license and tax matters). Shortly before Motorola Mobilitys 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.
In connection with the distribution and certain related transactions, Motorola, Inc. expects to receive two opinions from Wachtell, Lipton, Rosen & Katz with respect to certain tax matters. Motorola, Inc. has received the first opinion from Wachtell, Lipton, Rosen & Katz to the effect that no gain or loss will be recognized by Motorola, Inc. for U.S. federal income tax purposes solely by reason of its transfer of certain property and liabilities relating to the Mobile Devices and Home businesses to Motorola Mobility, Inc. in preparation for the distribution. 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 the second opinion from Wachtell, Lipton, Rosen & Katz to the effect that (1) 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, (2) the distribution will not generally result in any taxable income, gain or loss to Motorola, Inc., and (3) 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. The distribution is conditioned upon, among other things, Motorola, Inc.s receipt of an opinion of counsel to the effect that the distribution will so qualify. The first opinion is, and the second opinion will be, based on, among other things, certain assumptions and representations made by Motorola, Inc. and us, which if incorrect or inaccurate may jeopardize the conclusions reached by counsel in its opinions. The opinions will not be binding on the IRS or the courts.
A result of the distribution qualifying as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, as discussed above, would be that: (1) 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 (2) 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 stockholders 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 stockholders basis in the Motorola, Inc. common stock and finally as capital gain from the sale or exchange of Motorola, Inc. common stock.
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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, 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 TransactionsAgreements 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 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
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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.
There is not currently a public market for Motorola Mobilitys common stock. A condition to the distribution is the listing on the NYSE of our common stock. We are in the process of applying to list Motorola Mobility common stock on the NYSE and expect to list under the ticker symbol MMI.
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.:
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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; |
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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; |
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the Motorola Mobility common stock will have been accepted for listing on the NYSE, on official notice of issuance; |
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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; |
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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; |
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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 |
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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.
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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The following table, which should be read in conjunction with Managements 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 October 2, 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 October 2, 2010 | As of December 31, 2009 | |||||||||||||
($ in millions) | Historical | Pro Forma | Historical | Pro Forma | ||||||||||
Cash and cash equivalents |
$ | | $ | 3,200 | (A) | $ | | N/A | ||||||
Business equity |
1,762 | 1,762 | 1,939 | N/A | ||||||||||
Total capitalization |
$ | 1,762 | $ | 4,962 | $ | 1,939 | N/A | |||||||
(A) | The adjustment to Cash and cash equivalents represents the cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) that Motorola, Inc. will fund Motorola Mobility with at the time of the separation. Motorola, Inc. expects to fund Motorola Mobility with up to $3.5 billion of cash and cash equivalents comprised of (i) an initial contribution of $3.2 billion of cash and cash equivalents (the Distribution Date Contribution), subject to adjustment as described below, and (ii) a deferred contribution of up to $300 million of cash and cash equivalents (Deferred Contribution) as described below. The Distribution Date Contribution could be reduced to the extent that Motorola Mobilitys 2010 adjusted controllable free cash flow (as defined in the SpinCo Contribution Agreement) is less than $300 million. We currently do not believe that a significant adjustment will be required as a result of this adjusted controllable free cash flow target. The Deferred Contribution of $300 million will be paid in cash and cash equivalents as Motorola, Inc. receives cash distributions as a result of the reduction in the registered capital of an overseas subsidiary. We currently anticipate the full $300 million of Deferred Contribution will be received within two years of the Distribution Date. The Distribution Date Contribution could be increased by $150 million to the extent Motorola, Inc. receives a distribution from an overseas subsidiary of $150 million prior to the Distribution Date, thereby reducing the Deferred Contribution by $150 million. See Liquidity and Capital ResourcesOverview of Liquidity in Managements Discussion and Analysis of Financial Condition and Results of Operations for further details on the contribution of cash and cash equivalents. |
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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 Companys 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:
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Adoption of wireless and wired broadband Internet connectivity; |
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Increased use of social networking across multiple devices; |
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Growth of online and mobile video; and |
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Widespread use of online and mobile commerce. |
These digital lifestyles are characterized by new engagement models. Consumers want to:
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Communicate using voice, text, instant messaging, email, social networking and blogs; |
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Rapidly access information through broadband connectivity anywhere and anytime; |
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Consume and interact with entertainment and media content; |
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Capture and share user generated content, such as photos and videos; and |
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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.
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 worlds first portable cellular phone. Mobile Devices net revenues represented 65% and 67% of Motorola Mobilitys combined net revenues in 2009 and the first nine months 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 6.6 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 Gartners Forecast Mobile Devices Worldwide 2007-2014 3Q 2010 Update, 1.2 billion mobile devices were sold to end customers in 2009 and 1.7 billion mobile devices are forecasted to be sold to end customers in 2012, representing a 11% 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 564 million units by 2012, representing a 48% 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:
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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. |
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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. |
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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. |
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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:
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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. |
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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. |
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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. |
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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. |
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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 Gartners Market Share: Mobile Devices and Smartphones by Region and Country 3Q10, from the fourth quarter 2009 through the third quarter 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 33% of Motorola Mobilitys combined net revenues in 2009 and the first nine months 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.
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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). |
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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. |
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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. |
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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 consumers IP-enabled devices and web-capable BluRay players, TVs 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:
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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. |
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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. |
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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. |
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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. |
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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 operators 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 operators 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.
Customers
Motorola Mobilitys products are primarily sold through wireless carriers, network and cable operators, distributors 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.
Motorola Mobilitys sales to many of its customers, including Verizon and Sprint Nextel, are governed by framework agreements that do not contain volume commitments. The framework agreements outline the general terms and conditions that govern the purchase and sale of the Companys products to its customers. The framework agreements may not require the customer to purchase products or by themselves constitute binding contractual obligations for the purchase and sale of products. Purchases are made by customers on individual purchase orders that specify the quantity of products desired at the price specified in the Companys customer- specific pricing sheet, both issued under the relevant framework agreement. Customers issue purchase orders on an as needed or quarterly basis, but are generally not committed to purchase any products until the purchase order is issued.
In 2009, aggregate net revenues from the Mobile Devices segments five largest customers, which included Verizon and Sprint Nextel, among others, represented approximately 54% of the segments 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 segments net revenues in 2009.
In 2009, aggregate net revenues from the Home segments five largest customers, primarily large cable operators and telecommunication companies located throughout the world, such as Verizon and Comcast, represented approximately 54% of the segments 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.
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Research and Development
Motorola Mobilitys 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.
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. Motorolas 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 Mobilitys 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,
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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.
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 Companys 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 Mobilitys 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 segments 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 segments 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 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.
Furthermore, certain of our key single source supplier relationships, including with our chipset providers, are governed by component supply agreements that may not contain long-term volume commitments to provide components to the Company. However, under these component supply agreements, the Company generally receives limited end-of-life supply protections with notice of cancellation. The component supply agreements outline the general terms and conditions that govern the purchase and supply of components to the Company. Purchases of components under these component supply agreements are typically made by the Company on an as needed basis through the issuance of purchase orders, which may include periodic delivery by the Company of its forecasted delivery requirements against which suppliers may make certain component delivery commitments.
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 Mobilitys 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 Mobilitys 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 Mobilitys overall productive capacity could be significantly reduced.
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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 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 attorneys 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 October 22, 2010, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of the complaint.
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 FCCs Standards on conflict preemption grounds. The Court also held that Plaintiffs claims may not be preempted to the extent they are based on
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allegations that their injuries were caused by wireless phones that did not comply with the FCCs 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 FCCs safety standards. The Court remanded the cases to the Superior Court.
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 FCCs 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 FCCs 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 Defendants 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 Plaintiffs claims in their entirety. Plaintiff filed a third amended complaint on September 21, 2010.
Patent Related Cases
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.
Microsoft Corporation v. Motorola, Inc.
On October 1, 2010, Microsoft Corporation (Microsoft) filed complaints against Motorola, Inc. in the International Trade Commission (ITC) and the United States District Court for the Western District of Washington (District Court) alleging patent infringement based on products manufactured and sold by Motorola Mobility, Inc. On October 6, 2010 and October 12, 2010, Microsoft amended the District Court and ITC complaints, respectively, to add Motorola Mobility, Inc. as a defendant. The complaints as amended allege infringement of nine patents based on Motorola, Inc.s and Motorola Mobility, Inc.s manufacture and 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. On November 1, 2010, the ITC instituted the investigation.
On November 9, 2010, Microsoft filed a complaint in the United States District Court for the Western District of Washington against Motorola, Inc. and Motorola Mobility, Inc. (the Motorola Defendants) alleging that the Motorola Defendants breached a contractual obligation to license certain patents related to 802.11 wireless networking technology and H.264 video coding technology on reasonable and non-discriminatory terms and conditions. The complaint seeks unspecified monetary damages and injunctive relief including a declaration that the Motorola Defendants have not offered royalties to Microsoft under reasonable rates, with reasonable terms and conditions that are demonstrably free of any unfair discrimination.
On November 10, 2010, Motorola Mobility, Inc. filed complaints against Microsoft in the United States District Court for the Southern District of Florida and the United States District Court for the Western District of Wisconsin alleging infringement of sixteen patents by Microsofts PC and Server software, Windows mobile software and Xbox products. The complaints seek monetary damages and injunctive relief.
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Motorola Mobility, Inc. v. Apple Inc.
On October 6, 2010, Motorola Mobility, Inc. filed a complaint alleging patent infringement against Apple Inc. with the United States International Trade Commission. The matter is entitled In the Matter of Certain Wireless Communication Devices, Portable Music and Data Processing Devices, Computers and Components Thereof . The complaint alleges infringement of claims in six patents. The complaint alleges that Apple Inc. directly infringes, contributorily infringes and/or induces others to infringe the patents-in-suit by importing and selling in the United States after importation certain wireless communication devices, portable music and data processing devices, computers, and components thereof without the authorization of Motorola Mobility. The complaint seeks the institution of an investigation and the issuance of an exclusion order barring from entry into the United States certain products and a cease and desist order prohibiting Apple from importing, marketing and distributing certain products and other related activities. On November 3, 2010, the ITC instituted the investigation.
On October 6, 2010, Motorola Mobility, Inc. filed two complaints for patent infringement against Apple Inc. in Motorola Mobility, Inc. v Apple Inc , in the United States District Court for the Northern District of Illinois (the Illinois Complaints). Motorola Mobility, Inc. filed another complaint for patent infringement against Apple Inc. in Motorola Mobility, Inc. v Apple Inc , in the United States District Court for the Southern District of Florida (the Florida Complaint). The complaints allege infringement of eighteen patents by Apple Inc. The complaints allege that Apple Inc. directly and/or indirectly infringes the patents-in-suit by making, using, offering for sale and selling in the United States certain products and services. On November 9, 2010, Motorola Mobility, Inc. voluntarily dismissed the Illinois Complaints, which are now being asserted as counterclaims in the actions brought by Apple Inc. on October 29, 2010 in the United States District Court for the Western District of Wisconsin, as described below.
On October 8, 2010, Motorola Mobility, Inc. filed a complaint for declaratory relief against Apple Inc. and NeXT Software, Inc. in Motorola Mobility, Inc. v. Apple Inc. and NeXT Software, Inc. , in the United States District Court for the District of Delaware. The complaint seeks a judgment declaring that Motorola Mobility, Inc. has not infringed, induced the infringement of, or contributed to the infringement of any valid, enforceable claim of twelve patents owned by Apple Inc. and NeXT Software, Inc.
On October 29, 2010, Apple Inc. filed two complaints alleging patent infringement against Motorola, Inc. and Motorola Mobility, Inc. in Apple Inc. v. Motorola, Inc. and Motorola Mobility, Inc. , in the United States District Court for the Western District of Wisconsin. The complaints allege infringement of six patents by Motorola, Inc. and Motorola Mobility, Inc. The complaints allege that Motorola, Inc. and Motorola Mobility, Inc. directly infringe, contributorily infringe and/or induce others to infringe the patents-in-suit by making, using, offering for sale and selling in the United States certain mobile devices and related software. The complaint seeks unspecified monetary damages and injunctive relief. On November 9, 2010, Motorola Mobility, Inc. filed counterclaims against Apple Inc. to their complaints alleging infringement of twelve Motorola Mobility, Inc. patents by Apple Inc.
On October 29, 2010, Apple Inc. filed a complaint alleging patent infringement against Motorola, Inc. and Motorola Mobility, Inc. with the United States International Trade Commission. The matter is entitled In the Matter of Certain Mobile Devices and Related Software . The complaint alleges infringement of three patents by Motorola, Inc. and Motorola Mobility, Inc. The complaint alleges that Motorola, Inc. and Motorola Mobility, Inc. directly infringe, contributorily infringe and/or induce others to infringe the patents-in-suit by manufacturing, marketing and selling in the United States mobile devices, such as smartphones, and associated software, including operating systems, user interfaces, and other application software designed for use on, and loaded onto, such devices. The complaint seeks the institution of an investigation and the issuance of an exclusion order barring from entry into the United States certain mobile devices and related software and a cease and desist order prohibiting Motorola from importing, selling, transporting, and other related activities of certain mobile devices and related software.
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Tax Proceedings in Brazil
Brazilian authorities have proposed tax assessments against the Companys Brazilian subsidiary relating to technology transfer taxes, duties, value added taxes and certain other taxes related to the subsidiarys operations. The Brazilian tax authorities have asserted the various claims against the Companys 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 generally 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 Mobilitys combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved.
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Executive Officers Following the Distribution
The following table sets forth the information as of November 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 |
46 | 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), Qualcomms 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. Jhas 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 November 1, 2010 regarding individuals who are expected to serve as our directors following the distribution.
Name |
Age |
Position(s) |
||||
Sanjay K. Jha |
47 | Director | ||||
Jon E. Barfield |
58 | Director | ||||
William R. Hambrecht |
75 | Director | ||||
Keith A Meister |
37 | Director | ||||
Thomas J. Meredith |
60 | Director | ||||
James R Stengel |
55 | Director | ||||
Anthony J. Vinciquerra |
56 | Director | ||||
Andrew J. Viterbi |
75 | Director |
JON E. BARFIELD, Principal Occupation: Chairman and President, The Bartech Group, Inc.
Mr. Barfield has served since 1981 as President and since 1995 as Chairman and President of The Bartech Group, Inc. a talent acquisition and management firm specializing in the placement of engineering and information technology professionals, business process consulting services, and managing the staffing requirements of regional and global corporations. Mr. Barfield currently serves as the lead director of BMC Software, Inc. and as a director of CMS Energy Corporation. In the last five years, Mr. Barfield previously served as a director of Dow Jones & Company, National City Corp., Tecumseh Products Company, and Granite Broadcasting Corp.
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.
KEITH A. MEISTER , Principal Occupation: Formerly, Vice Chairman of the Board of Icahn Enterprises G.P. Inc.
Mr. Meister served as Vice Chairman of the Board of Icahn Enterprises G.P. Inc., the general partner of Icahn Enterprises L.P., a diversified holding company engaged in a variety of businesses, including investment management, automotive, metals, real estate and home fashion from August 2003 until August 2010. From August 2003 through March 2006, Mr. Meister also served as Chief Executive Officer of Icahn Enterprises G.P. Inc., and from March 2006 until August 2010, Mr. Meister served as Principal Executive Officer of Icahn Enterprises G.P. Inc. From November 2004 until August 2010, Mr. Meister was also a Senior Managing Director of Icahn Capital LP. From June 2002 until August 2010, Mr. Meister served as senior investment analyst of High River Limited Partnership, an entity primarily engaged in the business of holding and investing in securities. With respect to each company mentioned above, Mr. Icahn, directly or indirectly, either (i) controls such company or (ii) has an interest in such company through the ownership of securities. Mr. Meister is a director of Motorola, Inc. In the last five years, Mr. Meister previously served on the boards of XO Holdings, Inc., Federal-Mogul Corporation, WCI Communities, Inc., American Railcar Industries, Inc., Adventrx Pharmaceuticals, Inc. and BKF Capital Group, Inc.
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THOMAS J. MEREDITH , Principal Occupation: General Partner and Co-Founder, Meritage Capital, L.P. and Chief Executive Officer, MFI Capital
Mr. Meredith is a co-founder and general partner of Meritage Capital, L.P., an investment management firm specializing in multi-manager hedge funds. He is also chief executive officer of MFI Capital, a private investment firm. He served as Acting Chief Financial Officer and Executive Vice President of Motorola, Inc. from April 1, 2007 until March 1, 2008 and remained an employee of Motorola, Inc. until March 31, 2008. Mr. Meredith served in a variety of senior executive positions at Dell, Inc. between 1992 and 2001, including serving as Chief Financial Officer from 1992 through 2000. He is a director of Motorola, Inc. and Brightstar Corp. Mr. Meredith is an adjunct professor at the McCombs School of Business at the University of Texas, and serves on the advisory boards of both the Wharton School at the University of Pennsylvania and the LBJ School at the University of Texas. In the last five years, Mr. Meredith previously served on the board of Motive, Inc.
JAMES R. STENGEL , Principal Occupation: President and Chief Executive Officer, The Jim Stengel Company, LLC
In November 2008, Mr. Stengel founded The Jim Stengel Company, LLC, a think tank and consultancy firm focused on improving marketing through a proprietary framework. In July 2009, Mr. Stengel was appointed Adjunct Professor of Marketing at the UCLA Anderson Graduate School of Management. Mr. Stengel served in a variety of positions at The Procter & Gamble Company, a global consumer products company, from 1983-2008 and was the Global Marketing Officer of Procter & Gamble Company, a consumer products company, from 2001 until he retired in October 2008. Mr. Stengel is a director of Motorola, Inc. and AOL Inc. where he serves as the chair of the Compensation Committee. He also serves as an Advisor for MarketShare Partners, an industry-leading marketing analytics firm, and for Spencer Trask Collaborative Innovations, LLC.
ANTHONY J. VINCIQUERRA , Principal Occupation: Chairman and Chief Executive Officer, Fox Networks Group
Mr. Vinciquerra, since September 2008 has served as Chairman and since 2002 has served as Chief Executive Officer of Fox Networks Group, a primary operating unit of News Corporation that includes the Fox Television Network, Fox Cable Networks, FOX Sports and Fox Networks Engineering & Operations. Mr. Vinciquerra also oversees Fox Sports Enterprises, which comprises Foxs interests in professional sports franchises like the Colorado Rockies, stadiums and leading statistical information provider, STATS. A past Chairman of the National Association of Television Program Executives, he is also a director of Motorola, Inc., the National Cable Television Association, The Ad Council, the Paley Center for Media, the Genesis Fund, the fund-raising organization of the National Birth Defects Institute, and a member of the Board of Governors of the Academy of Television Arts and Sciences. He was inducted into the Broadcasting Cable Hall of Fame in October 2009.
DR. ANDREW J. VITERBI , Principal Occupation: President, Viterbi Group, LLC
Dr. Viterbi is President of the Viterbi Group, LLC, an equity investment group he co-founded in 2000 to advise and invest in startup companies, predominantly in the wireless communications and network infrastructure field. A pioneer in the field of wireless communications, he taught at UCLA and consulted for the Jet Propulsion Laboratory. Dr. Viterbi was a co-founder of Linkabit, a small military contractor, and also co-founded Qualcomm, Inc. with Irwin Jacobs in 1985. He created the Viterbi Algorithm for interference suppression and efficient decoding of a digital transmission sequence, used by all four international standards for digital cellular telephony. Awarded the 1990 Marconi Prize for his achievements in the field of digital communications, Viterbi is a Life Fellow of the Institute of Electrical and Electronics Engineers (IEEE), and was inducted as a member of the National Academy of Engineering in 1978 and of the National Academy of Sciences in 1996. He received the 2007 National Medal of Science from the President of the United States and the 2010 IEEE Medal of Honor, the Institutes highest honor. Dr. Viterbi is a member of the USC Board of Trustees and also serves on the Board of Trustees of the Mathematical Sciences Research Institute.
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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 non-employee directors are qualified to serve as directors and members of the Committees on which they will serve based on the following experience:
Mr. Barfields experience as chairman and chief executive officer of a talent acquisition and management firm specializing in placement of high-tech professionals, business process consulting services and management of staffing requirements for regional and global corporations and varied business and legal experience.
Mr. Hambrechts 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.
Mr. Meisters experience as a senior executive of a diversified holding company and investment companies, together with his experience as a member of the Motorola, Inc. Board of Directors.
Mr. Merediths experience as the general partner of an investment management firm and as the chief financial officer of a global public high-tech company, together with his experience as a member of the Motorola, Inc. Board of Directors.
Mr. Stengels experience as the chief marketing officer of a global public consumer products company, together with his experience as a member of the Motorola, Inc. Board of Directors.
Mr. Vinciquerras experience as the chairman and chief executive officer of a global media company, together with his experience as a member of the Motorola, Inc. Board of Directors.
Dr. Viterbis experience as the co-founder of two high-tech companies, the president of a venture capital company, and as an eminent technologist and professor of electrical engineering.
Composition of the Board of Directors
We currently expect that, upon distribution, 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 Companys 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 Companys financial management, internal auditors and independent registered public accounting firm; |
|
overseeing compliance with our Companys 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. The initial members of the Audit Committee will be determined prior to the distribution.
A more detailed discussion of the committees mission, composition and responsibilities is contained in the Audit Committee charter, which will be available on the Companys website: www.motorola.com/investors.
Compensation Committee . The functions of the Compensation Committee include:
|
assisting the Board of Directors in overseeing the management of our Companys 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 Companys 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 Companys 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 committees mission, composition and responsibilities is contained in the Compensation Committee Charter, which will be available on the Companys website: www.motorola.com/investors.
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 Companys Board Governance Guidelines, the Boards 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 Companys independence standards.
A more detailed discussion of the committees mission, composition and responsibilities is contained in the Governance and Nominating Committee Charter, which will be available on the Companys website: www.motorola.com/investors.
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 Boards 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 candidates 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 Boards criteria, perform reference checks, prepare a biography for each candidate for the Committees review and help set up interviews. The Committee and the Chairman of the Board will conduct interviews with candidates who meet the Boards 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 Mobilitys 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 Mobilitys 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 Committees independent compensation consultant in determining executive compensation, see the section entitled Independent Consultant Review of Dr. Jhas 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.
Boards 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 committees 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 committees area of responsibility and report to the Board on such risks, which includes the Compensation Committees review of Company-wide compensation-related risks. The independent Board members also discuss the Companys significant risks when they meet in executive session without management.
Our Companys 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 departments 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 MobilityBoard@motorola.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 Companys 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 Companys 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) | |||||||||||||||||||||
Jon E. Barfield (6) (7) |
$0 | $0 | $0 | $0 | $0 | $0 | $0 | |||||||||||||||||||||
William R. Hambrecht |
0 | 220,003 | 0 | 0 | 0 | 0 | 220,003 | |||||||||||||||||||||
Keith A. Meister |
105,000 | 120,002 | 0 | 0 | 0 | 10,000 | (8) | 235,002 | ||||||||||||||||||||
Thomas J. Meredith |
102,500 | 120,002 | 0 | 0 | 0 | 10,000 | (8) | 235,002 | ||||||||||||||||||||
James R. Stengel |
100,000 | 120,002 | 0 | 0 | 0 | 10,000 | (8) | 230,002 | ||||||||||||||||||||
Anthony J. Vinciquerra |
94,500 | 130,506 | 0 | 0 | 0 | 10,000 | (8) | 235,006 | ||||||||||||||||||||
Andrew J. Viterbi (6) |
0 | 0 | 0 |
|
0
|
|
|
0
|
|
|
0
|
|
0 |
(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, CompensationStock 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 |
|||||||||||||||
Jon E. Barfield |
| | | | | |||||||||||||||
William R. Hambrecht |
5,910 | 19,293 | 3,771 | 2,910 | 3,222 | |||||||||||||||
Keith A. Meister |
| 19,293 | | | | |||||||||||||||
Thomas J. Meredith |
| 19,293 | | | | |||||||||||||||
James R. Stengel |
| 19,293 | | | | |||||||||||||||
Anthony J. Vinciquerra |
621 | 19,293 | | | | |||||||||||||||
Andrew J. Viterbi |
| | | | |
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(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 | |||||||||
Jon E. Barfield |
| | | |||||||||
William R. Hambrecht |
0 | 59,805 | 0 | |||||||||
Keith A. Meister |
0 | 32,330 | 0 | |||||||||
Thomas J. Meredith |
515,025 | 37,282 | 141,893 | |||||||||
James R. Stengel |
15,000 | 44,359 | 0 | |||||||||
Anthony J. Vinciquerra |
0 | 45,156 | 0 | |||||||||
Andrew J. Viterbi |
| | |
(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. |
(6) | These Motorola Mobility non-employee directors were not directors of Motorola, Inc. |
(7) | Mr. Barfield is expected to join the Motorola Mobility board of directors following the Distribution. |
(8) | These amounts represent matching gift contributions made by the Motorola Foundation at the request of the director to charitable institutions in the name of the respective director pursuant to a charitable matching gift program that is available to all U.S. Motorola, Inc. employees and directors. |
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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 Companys executive compensation.
Motorola Mobility Compensation Philosophy After Separation
Motorola Mobilitys 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 individuals 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 Mobilitys 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 Mobilitys 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 Companys 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:
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a strong link between pay and performanceboth at the company and the individual level; |
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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; |
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strongly differentiated pay for superior performers that is proportional to their contributions to the companys success; |
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alignment of the executives and stockholders interests to encourage management of the company from the perspective of owners with a meaningful equity stake; |
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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 companys goals that avoid excessive risk taking and risk exposure; |
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retention of high performers through meaningful wealth creation opportunities; and |
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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:
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base salary; |
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short-term incentives through the annual Motorola Incentive Plan (MIP); |
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long-term incentives through the Long-Range Incentive Plans (LRIP), other than for Dr. Jha, and equity grants; |
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executive benefits and perquisites; and |
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broad-based employee benefits. |
With each component of the compensation program, Motorola, Inc. strives to align the interests of executives with the interests of stockholdersby 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 companys 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 Committees 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. Jhas and Mr. Moloneys specific compensation, the Global Rewards department in Motorola, Inc.s Human Resources organization, together with the Senior Vice President, Human Resources and the Committees 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 Boards 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 Committees 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 individuals 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 individuals position and ability to impact the companys results. Accordingly, Motorola, Inc.s compensation program is generally structured so that approximately two-thirds of our Named Executive Officers 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 Companys 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. Jhas original employment agreement to ensure that economic incentives were aligned to incentivize Dr. Jha to remain at Motorola, Inc. On February 11, 2010, Dr. Jhas 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 Committees 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
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CHiPS Executive & Senior Management Total Compensation Survey , published by Pearl Meyer & Partners, a Clark Consulting Practice; |
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Towers Perrin Compensation Data Bank ® (CDB) Executive Compensation Database; |
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Radford Executive Survey Custom Compensation Report , published by Radford, an Aon company; and |
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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:
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the 16 large-cap, high-tech companies that comprise Motorola, Inc.s comparator company group and participate in the above surveys; |
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an expanded comparator company group that includes other high-tech companies (e.g., Google Inc., Palm, Inc., Advanced Micro Devices Inc.); |
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technology companies generally with annual revenue greater than $1 billion; and |
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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:
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increased responsibilities or job changes related to shifts in our strategic priorities, |
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retention of critical talent, and |
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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 Officers role, responsibilities, experience, performance, and skill set are considered in making a judgment of the Named Executive Officers 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. Jhas 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 Committees 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 Committees 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 Committees current compensation consultants from Compensation Advisory Partners also served as the Committees 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 Committees 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 Mercers 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. Jhas 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. Jhas existing agreement. Deloitte Consulting has not been engaged by the Motorola, Inc. Compensation Committee since the engagement on the second amendment to Dr. Jhas 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 Committees 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 companys 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. Jhas 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 Motorolas 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:
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base salary; |
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annual bonus (target annual bonus opportunity); |
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total cash compensation (base salary + target annual bonus opportunity); |
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LTI (annualized sign-on equity); and |
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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. Jhas and Mr. Moloneys 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:
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Base salary ($900,000) and target annual cash compensation opportunity ($2,700,000) is below the market median; |
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Long-term incentives ($11,419,000; including annualized sign-on equity, excluding make whole awards) approximate the 65 th percentile; |
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Target total compensation ($14,119,000; including annualized sign-on equity, excluding make whole awards) approximates the 65 th percentile; and |
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Dr. Jhas 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:
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Base salary ($600,000) and target annual cash compensation opportunity ($1,170,000) is below the market median; |
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Long-term incentives ($4,920,000) is between the 65 th percentile and 75 th percentile; |
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Target total compensation ($6,090,000) is between the 65 th percentile and 75 th percentile; and |
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Mr. Moloneys 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 studys findings in setting the 2010 compensation levels for the Motorola, Inc. senior leadership team, including for Dr. Jha
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
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. Jhas Base Salary
Dr. Jhas 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 Officers Salaries
The salary of the Named Executive Officers, other than Dr. Jha, are based on such officers 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 Officers 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
MIP Incentive Formula
The payout value of awards under MIP is based on the following incentive formula:
Performance Factors |
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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. Jhas 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. Jhas 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 and Networks business, Mr. Moloneys Business Performance Factor had one component based on the performance of the BMS business, of which Mr. Moloneys 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. Moloneys 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:
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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. |
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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:
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 individuals 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. Jhas 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 Companys 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 participants awards for such performance cycles will be pro rated based on the participants 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 officersincluding 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 participants individual incentive award for such performance cycles will be pro rated based on the participants 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:
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 participants performance during the performance cycle; provided, however, that any such adjustment may not result in a payment to the participant in excess of the participants 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. Jhas 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. Jhas employment agreement, see the section entitled Employment Contracts, Termination of Employment and Change in Control ArrangementsEmployment Agreement with Sanjay K. Jha included elsewhere in this Information Statement.
Mr. Rothmans 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. Moloneys 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. Ogles 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. Cipollas 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 officers 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.
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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. |
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Change in Control Protection. The Motorola, Inc. Board considers the maintenance of a sound management team to be essential to protecting and enhancing the companys 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 . |
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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. |
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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. |
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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. |
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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. |
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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 participants 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 participants modified average earnings are used to calculate the relevant pension benefit, with modified average earnings starting with the participants 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 participants 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 participants 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
(c) |
Bonus ($) (d) |
Stock Awards ($) (2) (e) |
Option Awards ($) (2) (f) |
Non-Equity
(g) |
Change in
($) (h) |
All Other
(i) |
Total ($) (j) |
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Sanjay K. Jha |
2009 | $ | 905,769 | (4) | $1,750 | (5) | $1,344,000 | (6) | $0 | $ | 1,200,000 | (7) | $0 | $ | 336,570 | (8) | $3,788,089 | |||||||||||||||||||
Chief Executive Officer |
2008 | 484,615 | 0 | 33,850,305 | (9) | 69,698,513 | (9) | 0 | (4) | 0 | 456,780 | 104,490,213 | ||||||||||||||||||||||||
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 |
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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) | 2,546,346 | ||||||||||||||||||||||
Senior Vice President, Chief Marketing Officer |
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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 |
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(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. Jhas 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, security system monitoring and legal fees. The incremental cost to Motorola, Inc. for Dr. Jhas personal use of company aircraft is calculated by multiplying the number of hours Dr. Jhas 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. Jhas 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. Jhas 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. Jhas 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. Rothmans 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. Moloneys 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. Moloneys 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. Moloneys 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 Companys acquisition of General Instrument Corporation in January of 2000, the value of Mr. Moloneys 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. Ogles 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. Cipollas 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 ($206,618). The negative change in MSPP present value is a result of Motorola, Inc. freezing all future benefit accruals and compensation increases under the MSPP, effective March 1, 2009, when calculated with the assumptions under SEC rules. |
(21) | This amount is Motorola, Inc. perquisite costs for Mr. Cipolla for financial planning. |
Compensation Proportion
Motorola, Inc.s executive compensation program is structured so that more than two-thirds of its senior executives targeted total compensation is at risk (in the form of equity grants, awards under LRIP and awards under MIP) and is therefore dependent upon Motorola, Inc.s results. In determining the at risk proportion between cash and equity among the total mix of compensation, Motorola, Inc. considers the employees position and responsibilities, the employees ability to impact Motorola, Inc.s results, and the competitive market for executive talent in our industry. Motorola, Inc. strives to balance the components of its compensation program appropriately in light of these factors. For a further discussion of Motorola, Inc.s or our compensation methodology, see the Compensation Discussion and Analysis . For a discussion of the material terms of employment agreements with our Named Executive Officers, see Employment Contracts . For a discussion of the material terms of the 2009 grants of plan based awards, see the footnotes to the Grants of Plan-Based Awards in 2009 table and the Compensation Discussion and Analysis .
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Grants of Plan-Based Awards in 2009
Estimated Future
Non-Equity Incentive Plan Award |
Estimated
Future
Equity Incentive Plan Awards |
All Other Stock
Awards: Number of Shares of Stock or Units (#) (1) (i) |
All Other
Options
(#)
(2)
|
Exercise
Awards
|
Grant
Option
|
|||||||||||||||||||||||||||||||||||||||||||||||
Name (a) |
Grant
Type |
Grant
(b) |
Threshold ($) (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 participants eligible earnings (generally, base salary) for the plan year. Maximum assumes individual and business performance factors of 1.3. |
(5) | Pursuant to Dr. Jhas 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
(d) |
Option
(e) |
Option
Expiration Date (f) |
Number of
(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
(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. Jhas employment agreement. 6,383,658 of these stock options were granted in connection with the inducement provisions of Dr. Jhas 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. Rothmans 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. Rothmans 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. Rothmans 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 Companys 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 Companys 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. |
Option Exercises and Stock Vested in 2009
Option Awards | Stock Awards (1) | |||||||||||||||
Name (a) |
Number of
Shares Acquired on Exercise (#) (b) |
Value Realized
$ (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 participants deferrals. The participants deferrals are deemed to be invested in these funds as per the participants 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
109
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 participants average earnings and the participants benefit service, offset by the participants 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 participants projected primary annual Social Security benefit at age 65 (or the participants 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 participants average earnings, and a benefit percentage determined by the participants vesting service and the participants benefit service. The Portable Plan formula consists of (1) average earnings multiplied by the participants cumulative benefit percentage, which cumulative benefit percentage is based on benefit service earned on or after July 1, 2000 and vesting service (where a participants 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 participants Traditional Plan benefit as of June 30, 2000 (if applicable) converted to a lump-sum based on the participants 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 participants final average earnings were used to calculate the relevant pension benefit, while the participants modified average earnings are used to calculate the relevant pension benefit beginning on and after January 1, 2008.
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A participants 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 participants Motorola, Inc. employment. A participants 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 participants 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 participants 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 100% on the first 4% of pre-tax 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 Directors 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 participants 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. Rothmans and Mr. Moloneys 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. Rothmans and Mr. Moloneys 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). The Company will assume Dr. Jhas amended employment agreement.
On February 11, 2010, Dr. Jhas 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. Jhas 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. Jhas 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 entitys 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 entitys 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. Jhas 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. Jhas 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. Jhas employment with Motorola, Inc. will automatically terminate without cause on August 31, 2011.
In the event of Dr. Jhas 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. Jhas 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. Jhas 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. Jhas 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 companys 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. Jhas 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. Moloneys 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. Moloneys 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. Moloneys 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. Ogles 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 officers 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 officers 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 Plans 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 officers 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 officers 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 officers 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 terminationRetirement 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 TerminationTotal 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 TerminationFor 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 officers duties that materially injures Motorola, Inc.
Involuntary TerminationNot 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 officers 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 companys 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
|
||||||||||||||||||
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. Jhas 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. Rothmans 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. Moloneys 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. Ogles 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. Cipollas 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 TerminationNot 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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TerminationChange 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. Jhas 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 TerminationRetirement 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 TerminationNot 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 TerminationNot for Cause . Amounts under Involuntary TerminationChange 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 TerminationRetirement . For Involuntary TerminationNot 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 TerminationGood Reason and Involuntary TerminationNot 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 TerminationNot for Cause and as 36 months under Involuntary TerminationChange 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 Compensation2009 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. Jhas 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 Mobilitys 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 Mobilitys directors, (2) each officer named in the Summary Compensation Table, (3) all of Motorola Mobilitys 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 persons 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) | ||||||
Jon E. Barfield |
[ ] | |||||||
William R. Hambrecht |
[ ] | |||||||
Keith A. Meister |
[ ] | |||||||
Thomas J. Meredith |
[ ] | |||||||
James R. Stengel |
[ ] | |||||||
Anthony J. Vinciquerra |
[ ] | |||||||
Andrew J. Viterbi |
[ ] | |||||||
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 Companys 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. |
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(2) | Pursuant to Dr. Jhas 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. Jhas 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 entitys 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, together with the Inducement Awards, will represent 3% of the entitys 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 |
11.30 | % | |||
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 November 3, 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 53,117,762 shares; Icahn Partners LP (Icahn Partners) directly beneficially owns 81,074,088 shares; Icahn Partners Master Fund LP (Icahn Master) directly beneficially owns 91,778,681 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 12,932,452 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 |
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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 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 November 3, 2010, amending a Schedule 13D previously filed on February 6, 2008 and amended on March 5, 2008, May 7, 2008, May 7, 2010 and August 4, 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 SeparationConditions to the Distribution .
Motorola Mobilitys 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 Mobilitys 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 Mobilitys 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 companys directors, director nominees and executive officers since the beginning of our companys last fiscal year, beneficial owners of 5% or more of any class of our companys 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 UFLs 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 arms length basis. Pursuant to the Related Person Transaction Policy, the arrangement was pre-approved by the Motorola, Inc. Governance and Nominating Committee. Mr. Hambrechts 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 matters, 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 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 |
127
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 SeparationConditions 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 Mobilitys 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, owns 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. retains the exclusive right, pursuant to an exclusive 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 enterprise products, government, public safety and military 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 Licensed FOU may be expanded with Motorola Mobilitys consent, which is not to be unreasonably withheld. If Motorola Mobility agrees to expand the Licensed FOU, it will be royalty free to Motorola, Inc. If Motorola, Inc. sub-licenses the brand to a third-party within Motorola, Inc.s expanded field of use, Motorola, Inc. and Motorola Mobility will share any royalties earned. Motorola Mobility may license the brand to third-parties within the government, public safety and military market, but outside of Motorola, Inc.s Licensed FOU, with Motorola, Inc.s consent, which shall not be unreasonably withheld. If Motorola, Inc. agrees to such license, then Motorola, Inc. and Motorola Mobility will share any royalties earned.
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 partys 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.
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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.
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:
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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. |
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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. |
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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:
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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: |
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Any acquisition of all or a portion of our stock or assets, whether by merger or otherwise; |
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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; |
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We cease to actively conduct the Mobile Devices business during the two-year period following the distribution; |
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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. |
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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. |
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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. |
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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. 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 companys 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 was or 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 SeparationTreatment 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 Mobilitys 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 stock 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 SeparationTreatment 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), certain former shared services employees and the above specified exceptions listed.
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 partys 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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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 Boards 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 years 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 nominees 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 are in the process of applying 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 corporationa 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 persons 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 corporations 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:
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any breach of the directors duty of loyalty to our Company or our stockholders; |
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any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law; |
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unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; and |
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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 SECs website at http://www.sec.gov. You may read and copy any filed document at the SECs public reference rooms in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549, at the SECs 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.motorola.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 Managements 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 Companys historical combined annual and condensed combined interim financial statements, including the unaudited condensed combined balance sheet as of October 2, 2010, the unaudited condensed combined statement of operations for the nine months ended October 2, 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 October 2, 2010. In managements 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:
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the anticipated completion of the separation in the first quarter of 2011; |
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the funding of $3.2 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. The $3.2 billion of cash and cash equivalents do not reflect (1) an additional deferred contribution of up to $300 million of cash and cash equivalents (Deferred Contribution) and (2) a potential reduction of the $3.2 billion to the extent that Motorola Mobilitys 2010 adjusted controllable free cash flow is less than $300 million. The Deferred Contribution of $300 million will be paid in cash and cash equivalents as Motorola, Inc. receives cash distributions as a result of the reduction in the registered capital of an overseas subsidiary. The Distribution Date contribution of $3.2 billion of cash and cash equivalents could be increased by $150 million to the extent Motorola, Inc. receives a distribution from an overseas subsidiary of $150 million prior to the Distribution Date, thereby reducing the Deferred Contribution by $150 million. See Liquidity and Capital ResourcesOverview of Liquidity in Managements Discussion and Analysis of Financial Condition and Results of Operations for further details on the contribution of cash and cash equivalents; and |
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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 third quarter of 2010, Motorola, Inc. has incurred approximately $327 million of non-recurring pre-tax separation costs, approximately $22 million of which has been capitalized. Motorola, Inc. expects to incur approximately an additional $121 million of non-recurring pre-tax separation costs through the Distribution Date, approximately $16 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 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 Mobilitys behalf. As an independent, publicly traded company, Motorola Mobilitys 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)
Nine Months Ended October 2, 2010
(Dollars in millions, except per share data) | Historical | Adjustments | Pro Forma | |||||||||
Net revenues |
$ | 8,035 | $ | 8,035 | ||||||||
Costs of sales |
5,985 | 5,985 | ||||||||||
Gross margin |
2,050 | 2,050 | ||||||||||
Selling, general and administrative expenses |
1,141 | $ | (41 | ) (A) | 1,100 | |||||||
Research and development expenditures |
1,112 | 1,112 | ||||||||||
Other charges |
(153 | ) | (153 | ) | ||||||||
Operating loss |
(50 | ) | 41 | (9 | ) | |||||||
Other income (expense): |
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Interest expense, net |
(40 | ) | 40 | (B) | | |||||||
Gains (losses) on sales of investments and business, net |
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Other, net |
(24 | ) | (24 | ) | ||||||||
Total other income (expense) |
(64 | ) | 40 | (24 | ) | |||||||
Loss before income taxes |
(114 | ) | 81 | (33 | ) | |||||||
Income tax expense |
55 | | (C) | 55 | ||||||||
Net loss |
(169 | ) | 81 | (88 | ) | |||||||
Less: Loss attributable to non-controlling interests |
(3 | ) | (3 | ) | ||||||||
Net loss attributable to Motorola Mobility Holdings, Inc. |
$ | (166 | ) | $ | 81 | $ | (85 | ) | ||||
Loss per share |
N/A | $ | [ ] | (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): |
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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 |
N/A | $ | [ ] | (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
October 2, 2010
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 $41 million for the nine months ended October 2, 2010, and $24 million for the year ended December 31, 2009 related to the Companys 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, $40 million and $41 million for the nine months ended October 2, 2010, and the year ended December 31, 2009, respectively, primarily related to the Companys 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 Companys 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 Companys 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 nine months ended October 2, 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 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 $3.2 billion of cash and cash equivalents do not reflect (1) an additional deferred contribution of up to $300 million of cash and cash equivalents (Deferred Contribution) and (2) a potential reduction of the $3.2 billion to the extent that Motorola Mobilitys 2010 adjusted controllable free cash flow is less than $300 million. The Deferred Contribution of $300 million will be paid in cash and cash equivalents as Motorola, Inc. receives cash distributions as a result of the reduction in the registered capital of an overseas subsidiary. The Distribution Date contribution of $3.2 billion of cash and cash equivalents could be increased by $150 million to the extent Motorola, Inc. receives a distribution from an overseas subsidiary of $150 million prior to the Distribution Date, thereby reducing the Deferred Contribution by $150 million. See Liquidity and Capital |
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ResourcesOverview of Liquidity in Managements Discussion and Analysis of Financial Condition and Results of Operations for further details on the contribution of cash and cash equivalents. |
(F) | The adjustments to Additional paid-in capital and to Owners 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 Owners net investment in our combined balance sheet, was reclassified to Additional paid-in capital. |
MANAGEMENTS 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 nine months ended October 2, 2010 and October 3, 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 .
Managements 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 Mobilitys business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. MD&A is organized as follows:
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Separation from Motorola, Inc. This section provides a general discussion of our separation from Motorola, Inc. |
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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. |
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Looking Forward The section provides a discussion of managements general outlook about market demand, our competitive position and product development. |
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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. |
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Results of Operations This section provides an analysis of our results of operations for the nine months ended October 2, 2010 and October 3, 2009 and the three years ended December 31, 2009. |
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Liquidity and Capital Resources This section provides a discussion of our current financial condition and an analysis of our cash flows for the nine months ended October 2, 2010 and October 3, 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. |
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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. |
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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 Companys stock that 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, $1.3 billion in 2007 and $739 million for the nine months ended October 2, 2010, 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.
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 Companys 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 segments net revenues were $7.1 billion in 2009 and $5.4 billion in the first nine months of 2010, representing 65% and 67%, respectively, of Motorola Mobilitys combined net revenues.
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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 segments net revenues were $3.9 billion in 2009 and $2.6 billion in the first nine months of 2010, representing 35% and 33%, respectively, of Motorola Mobilitys combined net revenues.
Motorola Mobilitys financial results for the first nine months of 2010
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Net Revenues: Our net revenues were $8.0 billion in the first nine months of 2010, down 2% compared to net revenues of $8.2 billion in the first nine months of 2009. Net revenues decreased 9% in the Home segment and increased 1% in the Mobile Devices segment. |
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Operating Loss: We had an operating loss of $50 million in the first nine months of 2010, compared to an operating loss of $1.0 billion in the first nine months of 2009. |
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Net Loss: We had a net loss of $166 million in the first nine months of 2010, compared to a net loss of $1.1 billion in the first nine months of 2009. |
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Operating Cash Flows: We generated $381 million of net cash from operating activities in the first nine months of 2010, compared to using $1.3 billion of net cash for operating activities in the first nine months of 2009. |
Motorola Mobilitys financial results for the year ended December 31, 2009
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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. |
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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. |
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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. |
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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. |
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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 nine months of 2010
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In Our Mobile Devices Business: Net revenues were $5.4 billion in the first nine months of 2010, an increase of 1% compared to net revenues of $5.3 billion in the first nine months of 2009. On a geographic basis, net revenues increased in North America, and the Europe, Middle East and Africa region (EMEA), partially offset by decreased net revenues in Latin America and Asia. The 1% increase in net revenues was primarily driven by a 67% increase in average selling price (ASP), partially offset by a 40% decrease in unit shipments. We shipped 26.0 million handsets in the first nine months of 2010, a 40% decrease compared to shipments of 43.1 million units in the first nine months of 2009. We shipped 8.8 million smartphones in the first nine months of 2010. |
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The segment incurred an operating loss of $148 million in the first nine months of 2010, compared to an operating loss of $1.1 billion in the first nine months 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, (ii) lower excess inventory and other related charges in 2010 than in 2009, and (iii) the 1% increase in net revenues. Also contributing to the decrease in the operating loss were: (i) $228 million of gains related to legal settlements, (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 $2.6 billion in the first nine months of 2010, a decrease of 9% compared to net revenues of $2.9 billion in the first nine months of 2009. On a geographic basis, net revenues decreased in North America, Asia and EMEA and increased in Latin America. The 9% decrease in net revenues in the Home segment is primarily attributable to a 20% decrease in net revenues of set-top boxes, reflecting: (i) a 13% decrease in shipments of set-top boxes to 9.9 million units, and (ii) a lower ASP due to competitive pricing pressures. The decrease in net revenues of set-top boxes was partially offset by higher net revenues of video and access infrastructure equipment. |
The segment had operating earnings of $98 million in the first nine months of 2010, compared to operating earnings of $41 million in the first nine months 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) an increase in gross margin, driven by a favorable product margin mix across product lines.
Financial results for our two business segments for the year ended December 31, 2009
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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.
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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.
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Recent developments and accomplishments in the first nine months of 2010
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In the first quarter of 2010, we announced a target date of the first quarter of 2011 for the completion of our planned separation from Motorola, Inc. into an independent, publicly traded company. |
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During the first nine months 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 nine months of 2010, the Mobile Devices business launched 22 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 cost-reduction initiatives, partially offset by higher SG&A expenses driven by an increase in marketing expenses. |
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The Home business continues to focus on developing solutions to support our customers needs to deliver content and advanced services for consumers. In the first nine months of 2010, we have made a number of enhancements to our product portfolio. This includes: new 3D set-top boxes for cable television, significantly enhancing the 3D experience for consumers; 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; and 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 overall revenues have declined year-over-year, we have improved operating income by reducing our cost structure and have benefited from increased sales of video and access infrastructure equipment as operators begin to reinvest in their networks. |
Major challenges and accomplishments in 2009
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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. |
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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. |
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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 |
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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 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. |
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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. |
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. Our smartphone portfolio focus will be on the following: (i) differentiating our products using MOTOBLUR TM , 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 market priorities continue to be primarily North America, China, and Latin America, followed by Western Europe and other strategic markets. Our mid- to high-tier feature phone portfolio will continue to be more limited than in prior years given the declining opportunity in this segment of the handset market. For lower-priced, voice-centric mobile devices, we are partnering with third-party original design manufacturers, primarily in Asia, to deliver a handset 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, demand for set-top boxes has contracted in 2010 compared to 2009 due primarily to adverse market conditions, particularly in the U.S. Growth in market demand may require improved market conditions and may be driven by increased consumer demand for high definition TV, whole-home network solutions, 3D-TV, advanced interactive services and converged experiences. 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 continue to leverage our position in set-top boxes and video delivery systems and prioritize our product portfolio and research and development efforts to ensure that we are well positioned for emerging opportunities in this marketplace.
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.
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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. If demand for our products increases from our current expectations, we may experience periodic supply shortages.
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 relatively stable, 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 BusinessBusiness Segments entitled Mobile Devices SegmentOur Strategy and Home SegmentOur 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 FactorsRisks Relating to the Separation and The Separation in this Information Statement.
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 Companys 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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Nine Months Ended October 2, 2010 and October 3, 2009
Nine Months Ended | ||||||||||||||||
(Dollars in millions) |
October 2, 2010 |
% of Revenues |
October 3, 2009 |
% of Revenues |
||||||||||||
Net revenues |
$ | 8,035 | $ | 8,227 | ||||||||||||
Costs of sales |
5,985 | 74.5 | % | 6,780 | 82.4 | % | ||||||||||
Gross margin |
2,050 | 25.5 | % | 1,447 | 17.6 | % | ||||||||||
Selling, general and administrative expenses |
1,141 | 14.2 | % | 1,076 | 13.1 | % | ||||||||||
Research and development expenditures |
1,112 | 13.8 | % | 1,198 | 14.6 | % | ||||||||||
Other charges (income) |
(153 | ) | (1.9 | )% | 188 | 2.2 | % | |||||||||
Operating loss |
(50 | ) | (0.6 | )% | (1,015 | ) | (12.3 | )% | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(40 | ) | (0.5 | )% | (34 | ) | (0.4 | )% | ||||||||
Losses on sales of investments and businesses, net |
| | % | (32 | ) | (0.4 | )% | |||||||||
Other |
(24 | ) | (0.3 | )% | (39 | ) | (0.5 | )% | ||||||||
Total other income (expense) |
(64 | ) | (0.8 | )% | (105 | ) | (1.3 | )% | ||||||||
Loss before income taxes |
(114 | ) | (1.4 | )% | (1,120 | ) | (13.6 | )% | ||||||||
Income tax expense |
55 | 0.7 | % | 12 | 0.1 | % | ||||||||||
Net loss |
(169 | ) | (2.1 | )% | (1,132 | ) | (13.7 | )% | ||||||||
Less: Earnings (loss) attributable to non-controlling interests |
(3 | ) | (0.0 | )% | 6 | 0.1 | % | |||||||||
Net loss attributable to Motorola Mobility Holdings, Inc. |
$ | (166 | ) | (2.1 | )% | $ | (1,138 | ) | (13.8 | )% | ||||||
Nine months ended October 2, 2010 compared to nine months ended October 3, 2009
Net Revenues
Net revenues were $8.0 billion in the first nine months of 2010, down 2% compared to net revenues of $8.2 billion in the first nine months of 2009. The decrease in net revenues reflects a $269 million, or 9%, decrease in net revenues in the Home segment, partially offset by a $77 million, or 1% increase in net revenues in the Mobile Devices segment. The 9% decrease in net revenues in the Home segment reflects a 20% decrease in net revenues from set-top boxes, partially offset by higher net revenues from video and access infrastructure equipment. The 1% increase in net revenues in the Mobile Devices segment was primarily driven by a 67% increase in average selling price (ASP), partially offset by a 40% decrease in unit shipments.
Gross Margin
Gross margin was $2.1 billion, or 25.5% of net revenues, in the first nine months of 2010 compared to $1.4 billion, or 17.6% of net revenues, in the first nine months of 2009. The increase in gross margin reflects: (i) a significant increase in the Mobile Devices segment, and (ii) an increase 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 smartphone devices, (ii) lower excess inventory and other related charges in 2010 than in 2009, and (iii) the 1% increase in net revenues. The increase in gross margin in the Home segment was due to a favorable product margin mix across all product lines. The increase in gross margin as a percentage of net revenues in the first nine months of 2010 compared to the first nine months of 2009 reflects an increase in gross margin percentage in both segments. The Companys overall gross margin as a percentage of net revenues is impacted by the proportion of overall net revenues generated by its various businesses.
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Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased 6% to $1.1 billion, or 14.2% of net revenues, in the first nine months of 2010, compared to $1.1 billion, or 13.1% of net revenues, in the first nine months 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 slight 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 7% to $1.1 billion, or 13.8% of net revenues, in the first nine months of 2010, compared to $1.2 billion, or 14.6% of net revenues, in the first nine months of 2009. The decrease in R&D expenditures reflects lower R&D expenditures in both segments, which was primarily due to savings from cost-reduction initiatives. R&D expenditures as a percentage of net revenues decreased 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 (Income)
The Company recorded net other income of $153 million in Other charges (income) in the first nine months of 2010, compared to net other charges of $188 million in the first nine months of 2009. The net other income in the first nine months of 2010 included a $228 million gain related to a legal settlement, partially offset by: (i) $41 million of charges relating to the amortization of intangible assets, and (ii) $34 million of net reorganization of business charges included in Other charges (income). The charges in the first nine months of 2009 include: (i) $145 million of net reorganization of business charges included in Other charges (income), and (ii) $43 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 $40 million in the first nine months of 2010, compared to net interest expense of $34 million in the first nine months of 2009. Net interest expense in the first nine months of 2010 includes interest expense of $64 million, partially offset by interest income of $24 million. Net interest expense in the first nine months of 2009 included interest expense of $57 million, partially offset by interest income of $23 million. Our net interest expense primarily represents the amount allocated from Motorola, Inc. This allocation is based on the Companys 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 nine months of 2010, compared to a loss of $32 million in the first nine months of 2009. In the first nine months 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 $24 million in the first nine months of 2010, compared to $39 million in the first nine months of 2009. The net expense in the first nine months of 2010 was primarily comprised of $25 million of foreign currency losses. The net expense in the first nine months of 2009 was primarily comprised of $40 million of foreign currency losses.
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Effective Tax Rate
The Company recorded $55 million of net tax expense in the first nine months of 2010, resulting in a negative effective tax rate of 48%, compared to $12 million of net tax expense in the first nine months of 2009, resulting in a negative effective tax rate of 1%. The Companys effective tax rates for the first nine months of 2010 and 2009 were less than the U.S. statutory tax rate of 35%, primarily due to no net tax benefits being recorded on the Companys U.S. losses and on certain losses in Brazil and China due to offsetting valuation allowances. Additionally, the Companys tax provisions include net tax expense primarily related to foreign withholding taxes incurred during the period on royalty and dividend income.
The Companys 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 $114 million in the first nine months of 2010, compared with a loss before income taxes of $1.1 billion in the first nine months of 2009. After taxes, and excluding Earnings (loss) attributable to non-controlling interests, the Company incurred a net loss of $166 million in the first nine months of 2010, compared to a net loss of $1.1 billion in the first nine months of 2009.
The decrease in the loss before income taxes in the first nine months of 2010 compared to the first nine months of 2009 was primarily attributable to: (i) a $603 million increase in gross margin, primarily due to a favorable product mix, partially offset by a decrease in net revenues, (ii) a $341 million improvement in Other charges (income), primarily due to a $228 million gain related to a legal settlement and a $111 million decrease in net reorganization of business charges included in Other charges (income), and (iii) an $86 million decrease in R&D expenditures.
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
Companys condensed combined financial statements as of and for the nine months ended October 2, 2010. Net revenues and operating results for the Companys two operating business segments for the nine months ended October 2, 2010
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 nine months of 2010, the segments net revenues represented 67% of the Companys consolidated net revenues, compared to 65% in the first nine months of 2009.
Nine Months Ended | ||||||||||||
October 2,
2010 |
October 3,
2009 |
%
Change |
||||||||||
Segment net revenues |
$ | 5,399 | $ | 5,322 | 1 | % | ||||||
Operating loss |
(148 | ) | (1,056 | ) | 86 | % | ||||||
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Nine months ended October 2, 2010 compared to nine months ended October 3, 2009
In the first nine months of 2010, the segments net revenues were $5.4 billion, an increase of 1% compared to net revenues of $5.3 billion in the first nine months of 2009. The 1% increase in net revenues was primarily driven by a 67% increase in average selling price (ASP), partially offset by a 40% decrease in unit shipments. The segments unit shipments 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 unit shipments of smartphones. On a geographic basis, net revenues increased in North America and the Europe, Middle East and Africa region (EMEA), partially offset by decreased net revenues in Latin America and Asia.
The segment incurred an operating loss of $148 million in the first nine months of 2010, compared to an operating loss of $1.1 billion in the first nine months 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, (ii) lower excess inventory and other related charges in 2010 than in 2009, and (iii) the 1% increase in net revenues. Also contributing to the decrease in the operating loss were: (i) $228 million of gains related to legal settlements, (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. As a percentage of net revenues in the first nine months of 2010 as compared to the first nine months of 2009, gross margin and SG&A expenses increased and R&D expenditures decreased.
The segments industry typically experiences short life cycles for new products. Therefore, it is vital to the segments 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 nine months of 2010 were 26.0 million units, a 40% decrease compared to shipments of 43.1 million units in the first nine months of 2009. Android-based smartphone shipments in the first nine months of 2010 were 8.8 million. In the first nine months of 2010, ASP increased approximately 67% compared to the first nine months 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 television (TV) and telecommunication service providers. For the first nine months of 2010, the segments net revenues represented 33% of the Companys combined net revenues, compared to 35% for the first nine months of 2009.
Nine months Ended | ||||||||||||
October 2,
2010 |
October 3,
2009 |
%
Change |
||||||||||
Segment net revenues | $ | 2,636 | $ | 2,905 | (9 | )% | ||||||
Operating earnings |
$ | 98 | $ | 41 | 139 | % | ||||||
Nine months ended October 2, 2010 compared to nine months ended October 3, 2009
In the first nine months of 2010, the segments net revenues were $2.6 billion, a decrease of 9% compared to net revenues of $2.9 billion in the first nine months of 2009. The 9% decrease in net revenues in the Home
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segment is primarily attributable to a 20% decrease in net revenues from set-top boxes, reflecting: (i) a 13% decrease in shipments of set-top boxes to 9.9 million units, and (ii) a lower ASP due to 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 SD set-top units decreased significantly, primarily due to lower shipments to large telecommunication and cable operators in North America as a result of lower demand. In addition to the decrease in unit shipments of SD set-tops, HD set-top unit shipments also decreased, but to a lesser extent. The decrease in unit shipments of SD and HD set-tops was partially offset by an increase in HD/DVR set-top unit shipments due to increased demand for DVR capabilities.
On a geographic basis, net revenues decreased in North America, Asia and EMEA and increased in Latin America. Net revenues in North America continued to comprise a significant portion of the segments business, accounting for approximately 73% of the segments net revenues in the first nine months of 2010, compared to approximately 78% in the first nine months of 2009.
The segment had operating earnings of $98 million in the first nine months of 2010, compared to operating earnings of $41 million in the first nine months 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) an increase in gross margin, driven by a favorable product margin mix across product lines. As a percentage of net revenues in the first nine months of 2010 as compared to the first nine months of 2009, gross margin and SG&A expenses increased while R&D expenditures decreased.
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 nine months ended October 2, 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 Companys business segments were impacted by these plans. The employees affected were located in all regions.
During the nine months ended October 2, 2010, the Company recorded net reorganization of business charges of $45 million, including $11 million of charges in Costs of sales and $34 million of charges in Other charges (income) in the Companys condensed combined statements of operations. Included in the aggregate $45 million are charges of $61 million for employee separation costs, partially offset by $16 million of reversals for accruals no longer needed.
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The following table displays the net charges incurred by business segment:
October 2, 2010 | Nine Months Ended | |||
Mobile Devices |
$ | 30 | ||
Home |
15 | |||
$ | 45 | |||
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 October 2, 2010:
Accruals at
January 1, 2010 |
Additional
Charges |
Adjustments |
Amount
Used |
Accruals at
October 2, 2010 |
||||||||||||||||
Exit costs |
$ | 39 | $ | | $ | (3 | ) | $ | (17 | ) | $ | 19 | ||||||||
Employee separation costs |
33 | 61 | (16 | ) | (47 | ) | 31 | |||||||||||||
$ | 72 | $ | 61 | $ | (19 | ) | $ | (64 | ) | $ | 50 | |||||||||
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 nine months ended October 2, 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 $17 million used reflects cash payments. The remaining accrual of $19 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 2, 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 $61 million during the nine months ended October 2, of 2010 represent severance costs for approximately an additional 1,500 employees, of which 500 are direct employees and 1,000 are indirect employees.
The adjustments of $16 million reflect: (i) $13 million of reversals of accruals no longer needed and (ii) $3 million of foreign currency translation adjustments.
During the nine months ended October 2, 2010, approximately 900 employees, of which 300 were direct employees and 600 were indirect employees, were separated from the Company. The $47 million used reflects cash payments to these separated employees. The remaining accrual of $31 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 2, 2010, is expected to be paid, generally, within one year to: (i) severed employees who have already begun to receive payments, and (ii) approximately 1,100 employees to be separated in 2010.
2009 Charges
During the nine months ended October 3, 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 Companys 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 nine months ended October 3, 2009, the Company recorded net reorganization of business charges of $178 million, including $33 million of charges in Costs of sales and $145 million of charges in Other charges (income) in the Companys condensed combined statements of operations. Included in the aggregate $178 million are charges of $174 million for employee separation costs, $30 million for exit costs and $18 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:
October 3, 2009 |
Nine months
Ended |
|||
Mobile Devices |
$ | 161 | ||
Home |
17 | |||
$ | 178 | |||
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 October 3, 2009:
Accruals at January 1, 2009 |
Additional Charges |
Adjustments |
Amount Used |
Accruals at October 3, 2009 |
||||||||||||||||
Exit costs |
$ | 63 | $ | 30 | $ | (7) | $ | (39) | $ | 47 | ||||||||||
Employee separation costs |
103 | 174 | (32) | (213) | 32 | |||||||||||||||
$ | 166 | $ | 204 | $ | (39) | $ | (252) | $ | 79 | |||||||||||
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 $30 million during the nine months ended October 3, 2009 are primarily related to the exit of leased facilities and contractual termination costs, both within the Mobile Devices segment. The adjustments of $7 million reflect $8 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $39 million used reflects cash payments. The remaining accrual of $47 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 3, 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 $174 million during the nine months ended October 3, 2009 represent severance costs for approximately an additional 5,100 employees, of which 1,800 are direct employees and 3,300 are indirect employees.
The adjustments of $32 million reflect $36 million of reversals of accruals no longer needed, partially offset by $4 million of foreign currency translation adjustments.
During the nine months ended October 3, 2009, approximately 6,100 employees, of which 2,600 were direct employees and 3,500 were indirect employees, were separated from the Company. The $213 million used reflects cash payments to these separated employees. The remaining accrual of $32 million, which was included in Accrued liabilities in the Companys condensed combined balance sheet at October 3, 2009, was expected to be paid to approximately 600 separated employees.
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Liquidity and Capital Resources
Overview of Liquidity
Motorola, Inc. expects to fund Motorola Mobility with up to $3.5 billion of cash and cash equivalents comprised of (i) an initial contribution of $3.2 billion of cash and cash equivalents (the Distribution Date Contribution), subject to adjustment as described below and (ii) a deferred contribution of up to $300 million of cash and cash equivalents (Deferred Contribution), as described below. The Distribution Date Contribution could be reduced to the extent that Motorola Mobilitys 2010 adjusted controllable free cash flow (as defined in the SpinCo Contribution Agreement) is less than $300 million. We currently do not believe that a significant adjustment will be required as a result of this adjusted controllable free cash flow target. The Deferred Contribution of $300 million will be paid in cash and cash equivalents as Motorola, Inc. receives cash distributions as a result of the reduction in the registered capital of an overseas subsidiary. We currently anticipate the full $300 million will be received within two years of the Distribution Date. The Distribution Date Contribution could be increased by $150 million to the extent Motorola, Inc. receives a distribution from an overseas subsidiary of $150 million prior to the Distribution Date, thereby reducing the Deferred Contribution by $150 million. For more information on the contribution, see the form of SpinCo Contribution Agreement filed as an exhibit in the third amendment to the registration statement on Form 10 of which this Information Statement is a part. 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 Companys operations and the related activity between the Company and Motorola, Inc. is reflected as business equity transactions in Owners net investment in our condensed combined balance sheets. Therefore, the Company has recorded no cash or cash equivalents on its combined balance sheet.
Following the distribution, approximately one-third of the Companys cash and cash equivalents is expected to be held by the Company or its subsidiaries in countries outside the U.S.
As highlighted in the combined statements of cash flows, the Companys 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 nine months of 2010 was $381 million, compared to $1.3 billion of cash used for operating activities in the first nine months of 2009. The primary contributors to the net cash generation in the first nine months of 2010 were: (i) an $686 million increase in accounts payable and accrued liabilities, and (ii) net earnings (adjusted for non-cash items) of $135 million, which included the receipt of $175 million in cash related to a legal settlement, partially offset by: (i) a
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$225 million increase in net accounts receivable, (ii) a $166 million increase in net inventories, and (iii) a $42 million net increase in other assets and liabilities. The primary contributors to the net cash used in the first nine months of 2009 were: (i) a $1.7 billion decrease in accounts payable and accrued liabilities, and (ii) the net loss (adjusted for non-cash items) of $833 million, partially offset by: (i) an $949 million decrease in net inventories, and (ii) an $263 million decrease in other current assets.
Accounts Receivable: The Companys net accounts receivable were $1.6 billion at October 2, 2010, compared to $1.3 billion at December 31, 2009. Compared to December 31, 2009, net accounts receivable at October 2, 2010 were higher in both segments. The Companys 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 Companys 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.
As further described below under Sales of Receivables, from time to time, Motorola, Inc. elects to sell accounts receivable to third-parties, and the Companys accounts receivable are sold in this program. The Companys 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 Companys net inventories were $854 million at October 2, 2010, compared to $688 million at December 31, 2009. Compared to December 31, 2009, inventories at October 2, 2010 were higher in both segments. 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 Companys accounts payable were $1.7 billion at October 2, 2010, compared to $1.4 billion at December 31, 2009. Compared to December 31, 2009, accounts payable at October 2, 2010 were higher 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 Companys 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 $64 million in the first nine months of 2010, as compared to $252 million in the first nine months of 2009. Of the $50 million reorganization of businesses accrual at October 2, 2010, $31 million relates to employee separation costs and is expected to be paid within one year. The remaining $19 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 $121 million in the first nine months of 2010, compared to net cash used of $59 million in the first nine months of 2009. The $62 million increase in net cash used for investing activities was primarily due to (i) a $45 million increase in net cash used for acquisitions and investments, and (ii) a $23 million increase in cash used for capital expenditures.
Strategic Acquisitions and Investments: The Company used $66 million of net cash for acquisitions and new investment activities in the first nine months of 2010, compared to net cash used of $21 million in the first nine months of 2009. The cash used in the first nine months of both 2010 and 2009 was for small strategic acquisitions and investments across the Company.
Capital Expenditures: Capital expenditures were $68 million in the first nine months of 2010, compared to $45 million in the first nine months of 2009. The Companys emphasis in making capital expenditures is to focus on strategic investments driven by customer demand, new design capability and process improvements, including IT systems.
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Sales of Investments and Business: The Company received $12 million of net cash from the sales of investments and business in the first nine months of 2010, compared to using net cash of $15 million in the first nine months of 2009. The $12 million in proceeds in the first nine months of 2010 was primarily comprised of net proceeds received in connection with the sales of certain equity investments. The $15 million in net cash used in the first nine months 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 both October 2, 2010 and December 31, 2009, the Companys 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 Companys available-for-sale investments are included in Investments in the Companys condensed combined balance sheets.
Financing Activities
Net cash used for financing activities was $293 million in the first nine months of 2010, compared to $1.4 billion of net cash provided in the first nine months of 2009. Cash used for financing activities in the first nine months of 2010 and cash provided by financing activities in the first nine months 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 Owners net investment in the Companys condensed combined balance sheets. When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Companys funds in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Companys operations and Motorola, Inc. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Companys 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 $293 million in the first nine months of 2010, compared to receiving net cash of $1.4 billion in the first nine months 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 Companys businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc. For the first nine months of both 2010 and 2009, total accounts receivable sold by the Company were $370 million and $579 million, respectively. As of October 2, 2010 and December 31, 2009, there were $25 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.
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For at least the next 12 months, the Company expects to have sufficient liquidity and capital resources arising from the cash generated by the Companys 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 Companys ongoing operations.
Motorola, Inc. expects to fund Motorola Mobility with up to $3.5 billion of cash and cash equivalents, comprised of (i) an initial contribution of $3.2 billion of cash and cash equivalents (the Distribution Date Contribution), subject to adjustment as described below, and (ii) a deferred contribution of up to $300 million of cash and cash equivalents (Deferred Contribution) as described below. The Distribution Date Contribution could be reduced to the extent that Motorola Mobilitys 2010 adjusted controllable free cash flow (as defined in the SpinCo Contribution Agreement) is less than $300 million. We currently do not believe that a significant adjustment will be required as a result of this adjusted controllable free cash flow target. The Deferred Contribution of $300 million will be paid in cash and cash equivalents as Motorola, Inc. receives cash distributions as a result of the reduction in the registered capital of an overseas subsidiary. We currently anticipate the full $300 million of Deferred Contribution will be received within two years of the Distribution Date. The Distribution Date Contribution could be increased by $150 million to the extent Motorola, Inc. receives a distribution from an overseas subsidiary of $150 million prior to the Distribution Date, thereby reducing the Deferred Contribution by $150 million. See Liquidity and Capital ResourcesOverview of Liquidity in Managements Discussion and Analysis of Financial Condition and Results of Operations for further details on the contribution of cash and cash equivalents.
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 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 partys claims. Further, Motorola Mobilitys 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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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:
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The operation of our business; |
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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; |
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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 |
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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). |
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:
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Failure to pay, perform or otherwise properly discharge any liabilities of Motorola, Inc. and its affiliates other than liabilities allocated to us; |
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The business of Motorola, Inc. and any liabilities of Motorola, Inc. which are not allocated to us; |
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Any breach by Motorola, Inc. or its affiliates of the Master Separation and Distribution Agreement or any of the ancillary agreements; and |
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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.
Intellectual Property Matters: During the three months ended October 2, 2010, the Company entered into a settlement agreement with another company to resolve certain intellectual property disputes. As a result of the
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settlement agreement, the Company received $26 million in cash and was assigned certain patent properties. The settlement is subject to the dismissal of a dispute resolution proceeding between the parties by a third-party tribunal. The dismissal by the third-party tribunal is expected during the three months ended December 31, 2010; in such event, the Company will record a gain for the cash consideration received plus the fair value of the assigned patent properties.
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 generally 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 Mobilitys combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved. See BusinessLegal Proceedings for more details.
Years Ended December 31, 2009, 2008 and 2007
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): |
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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 | )% |
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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 |
64 | % | 54 | % | 53 | % | ||||||
Latin America |
16 | 21 | 16 | |||||||||
Asia, excluding China |
6 | 7 | 8 | |||||||||
China |
6 | 6 | % | 6 | ||||||||
Europe |
5 | 8 | 11 | |||||||||
Other markets |
3 | 4 | 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 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 Companys 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 Companys 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
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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.
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 Companys 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 Companys 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.
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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 Companys 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 Companys U.S. losses due to the inability to recognize additional deferred tax assets. The Companys 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 Companys U.S., Brazil and China deferred tax assets, partially offset by a net reduction in unrecognized tax benefits.
The Companys 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.
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
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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 8% 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 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 Companys 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 Companys 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.
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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 Companys 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 Companys U.S., Brazil and China deferred tax assets, partially offset by a net reduction in unrecognized tax benefits. The Companys 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 Companys 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.
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 Companys combined financial statements as of and for the year ended December 31, 2009. Net revenues and operating results for the Companys 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 segments net revenues represented 65% of the Companys combined net revenues, compared to 71% in 2008 and 82% in 2007.
Years Ended December 31 | Percent Change | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | 2007 | 20092008 | 20082007 | |||||||||||||||
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 segments net revenues were $7.1 billion, a decrease of 41% compared to net revenues of $12.2 billion in 2008. The segments net revenues were negatively impacted by reduced product offerings in large market segments, particularly 3G products, including smartphones, and the segments limited product offerings in very low-tier products. The 41% decrease in net revenues was primarily driven by a 45% decrease in
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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 segments industry typically experiences short life cycles for new products. Therefore, it is vital to the segments 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 segments 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.
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 segments five largest customers accounted for approximately 54% of the segments 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 segments net revenues in 2009. The loss of any of the segments key customers could have a significant impact on the segments business.
Although the U.S. market continued to be the segments largest individual market, many of our customers, and 42% of the segments 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 segments 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 segments net revenues were negatively impacted by the segments limited product offerings in critical market segments, particularly 3G products, including smartphones, as well as very low-tier products. In addition, the segments 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.
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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 segments 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 segments 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 segments five largest customers accounted for approximately 40% of the segments 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 segments net revenues in 2008.
Although the U.S. market continued to be the segments largest individual market, many of our customers, and 56% of the segments 2008 net revenues, were outside the U.S. In 2008, the largest of these international markets were Brazil, China and Mexico.
As the segments 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 segments net revenues represented 35% of the Companys combined net revenues, compared to 29% in 2008 and 18% in 2007.
Years Ended December 31 | Percent Change | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | 2007 | 20092008 | 20082007 | |||||||||||||||
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 segments 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%
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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 segments total net revenues in 2009, compared to approximately 81% of the segments 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 segments top five customers represented approximately 54% of the segments net revenues. The loss of one of these major customers could have a significant impact on the segments business. The segments backlog was $378 million at December 31, 2009, compared to $431 million at December 31, 2008.
In the Home business, demand for the segments 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 segments 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 segments 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 segments total net revenues in 2008, compared to approximately 83% of the segments total net revenues in 2007.
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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 segments top five customers represented approximately 58% of the segments net revenues. The segments backlog was $431 million at December 31, 2008, compared to $515 million at December 31, 2007.
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.
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 Companys 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 Companys 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 | |||
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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 Companys 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 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 Companys 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 Companys 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 Companys 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.
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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 Companys 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 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 Companys 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 Companys 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 Companys combined statements of operations. Included in the aggregate $202 million were charges of $200 million for employee
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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 Companys 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.
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 Companys 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 Companys operations and the related
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activity between the Company and Motorola, Inc. is reflected as business equity transactions in Owners 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 Companys 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 Companys 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 Companys 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 Companys accounts receivable are sold in this program. The Companys 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 Companys 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 Companys 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.
Accounts Payable: The Companys 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 Companys 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.
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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 Companys 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 Companys 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. At December 31, 2008, the Companys 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 Companys available-for-sale investments are included in Investments in the Companys 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.
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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 Owners net investment in the Companys combined balance sheets. When necessary, Motorola, Inc. has provided the Company funds for its operating cash needs. The Companys cash in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Companys operations and Motorola, Inc. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Companys 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 Companys 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 Companys 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.
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 Companys 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 Companys 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.
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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 Companys 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 Companys 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 partys claims. Further, Motorola Mobilitys 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.
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 generally 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 Mobilitys combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys combined financial position, liquidity or results of operations in the periods in which the matters are ultimately resolved. See BusinessLegal Proceedings for more details.
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Managements Discussion and Analysis of Financial Condition and Results of Operations discusses the Companys 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 nine months ended October 2, 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 arrangements 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 arrangements 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 products 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.
The Companys 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
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Companys products have both software and non-software components that function together to deliver the products 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 Companys 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.
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VSOEIn 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. |
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TPEVSOE 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 Companys 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 |
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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. |
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ESPThe 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys recorded revenues are reduced by allowances for these items at the time the sales are recorded. The allowances are based on managements 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 Companys 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, net 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys stand-alone position. As a result, the Companys deferred tax balances and effective tax rate as a stand-alone entity will likely differ significantly from those prevailing in historical periods.
The Companys 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 Companys quarterly operating results. In the event that there is a significant unusual or discrete item recognized, or expected to be recognized, in the Companys 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 Companys 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 Companys U.S operations had generated three consecutive years of pre-tax losses. Because of the Companys 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 Companys 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 Companys 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 $2.8 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:
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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. |
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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 |
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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:
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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: |
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Any acquisition of all or a portion of our stock or assets, whether by merger or otherwise; |
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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; |
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We cease to actively conduct the Mobile Devices business during the two-year period following the distribution; |
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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. |
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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. |
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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. |
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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.
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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 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
189
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 units goodwill. A charge is recorded in the financial statements if the carrying value of the reporting units 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, 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.
190
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. 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 units 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 Companys 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 Companys 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 entitys 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 Companys strategy is not successful. The results of the Companys 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
191
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 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 groups 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 managements 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 segments software platform strategy and the Companys 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 Companys 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
192
indirectly. Additionally, this guidance requires enhanced disclosures about transfers of financial assets and a transferors continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Companys 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 companys 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 Companys 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. 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. Beginning in August 2010, the balance sheet hedges are recorded in the name of Motorola Mobility, Inc., as opposed to Motorola, Inc. The Companys 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 Companys 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 Companys 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
193
accounting guidance for derivative instruments and hedging activities. A portion of the Companys 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 Companys 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 Companys 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 Companys combined statements of operations.
194
At December 31, 2009, the maximum term of derivative instruments that hedge forecasted transactions was six months. The weighted average duration of the Companys derivative instruments that hedge forecasted transactions was four months.
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 Companys financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Companys available-for-sale investment portfolios and derivative financial instruments are recorded in the Companys 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 Companys 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.
195
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: |
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F-2 | ||||
Combined Statements of Operations for the years ended December 31, 2009, 2008 and 2007 |
F-3 | |||
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 | |||
F-7 | ||||
Condensed Combined Financial Statements as of October 2, 2010 (Unaudited) and December 31, 2009 and for the nine months ended October 2, 2010 and October 3, 2009 (Unaudited): |
||||
F-41 | ||||
Condensed Combined Balance Sheets as of October 2, 2010 (Unaudited) and December 31, 2009 |
F-42 | |||
F-43 | ||||
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. |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 Companys 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 |
F-2
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.
F-3
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: | ||||||||
Owners 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.
F-4
Motorola Mobility Holdings, Inc. and Subsidiaries
Combined Statements of Business Equity
(Dollars in millions) |
Owners Net Investment |
Accumulated Other Comprehensive Income (Loss) |
Non-controlling Interests |
Comprehensive Earnings (Loss) |
||||||||||||||||||||||||
Fair Value Adjustment To Available For Sale
Securities,
|
Foreign Currency Translation
Adjustments,
|
Retirement Benefits
Adjustments,
|
Other
Items,
|
|||||||||||||||||||||||||
Balances at January 1, 2007 |
$ | 3,184 | $ | 38 | $ | (463 | ) | $ | (6 | ) | $ | 9 | $ | 10 | ||||||||||||||
Net earnings (loss) |
(656 | ) | 8 | $ | (648 | ) | ||||||||||||||||||||||
Net transfers from Motorola, Inc. |
1,420 | |||||||||||||||||||||||||||
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 |
3,948 | 20 | (516 | ) | (3 | ) | | 35 | (725 | ) | ||||||||||||||||||
Net loss |
(2,969 | ) | (3 | ) | (2,972 | ) | ||||||||||||||||||||||
Net transfers from Motorola, Inc. |
1,066 | |||||||||||||||||||||||||||
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.
F-5
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.
F-6
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Owners 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 Companys 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.
F-7
Revenue Recognition: The Companys 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
F-8
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 Companys 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 Companys 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 units fair value to determine the fair value of the reporting units 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 assets 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 Companys 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 Companys 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 Companys stand-alone position. As a result, the Companys deferred tax balances and effective tax rate as a stand-alone entity will likely differ significantly from those prevailing in historical periods.
F-9
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys combined statements of operations.
Share-Based Compensation Costs: The Companys 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, Motorolas Incentive Plans). The Companys combined statements of operations include expenses related to the Companys employees participation in Motorolas Incentive Plans, as well as an allocation of expenses related to Motorola, Inc.s corporate employees who participate in Motorolas Incentive Plans. These expenses are allocated based on awards granted to the Companys employees and based on a three-part formula that averages the relative percentage of the Companys net revenues, payroll, and net property, plant and equipment/inventory to the
F-10
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 Companys combined statements of operations.
Advertising Expense: Advertising expenses, which are the external costs of marketing the Companys 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 managements 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 arrangements 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).
F-11
The new guidance also eliminates the use of the residual method to allocate an arrangements 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 products 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 transferors continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Companys 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 companys 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 Companys 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 Companys net revenues generated from sales to other Motorola, Inc. businesses included in net revenues in the Companys 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 Companys 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 Companys combined balance sheets.
F-12
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys combined statements of operations. Beginning in 2008 and continuing in 2009, certain engineers in Motorola, Inc.s corporate functions were transferred to the Companys 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 Companys 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 Companys combined statements of operations.
The following table presents the expense (income) allocations reflected in the Companys 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 |
F-13
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 Owners net investment in the Companys combined balance sheets. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Companys 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 Companys 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 Companys 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 Companys funds in excess of working capital needs have been advanced to Motorola, Inc. Intercompany accounts are maintained for such borrowings that occur between the Companys 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 | $ | 1,066 | $ | 1,420 | ||||||
Allocation of stock compensation expense from Motorola, Inc. |
(166 | ) | (147 | ) | (157 | ) | ||||||
Non-cash transfers of assets and liabilities to (from) Motorola, Inc., net* |
(293 | ) | 379 | (499 | ) | |||||||
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. |
F-14
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
|
||||||||||||||||||
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
|
||||||||||||||||||
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 Companys 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 Companys 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 Companys available-for-sale investment portfolio. Investment impairment charges are included in Other, net, within Other income (expense) in the Companys 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 Companys 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
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
F-19
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 Companys financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Companys available-for-sale investment portfolios and derivative financial instruments are recorded in the Companys combined balance sheets at fair value. All other financial instruments are carried at cost, which is not materially different than the instruments fair values.
F-20
Equity Price Market Risk
At December 31, 2009, the Companys 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 Companys 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 Companys 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 Companys contribution to Motorola, Inc.s tax losses and tax credits on a separate return basis has been included in these financial statements. The Companys 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 Companys 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
F-21
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 Companys cumulative U.S. loss position. The increase in the Companys 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 Companys non-U.S. operations had deferred tax assets from tax loss carry forwards, calculated on a separate
F-22
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 Companys recent losses and Chinas 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 Companys 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 Companys 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 Companys 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 Companys 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
F-23
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 Companys 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 Companys 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 employees MSPP benefit for all future years will be the greater of: (i) such employees 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.
F-24
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 Companys 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 Companys share of the Motorola, Inc. plans assets and liabilities are not included in the Companys 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 Companys 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 Companys 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 Companys 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 Companys share of the Motorola, Inc. Postretirement Health Care Benefits Plans assets and liabilities are not included in the Companys 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 Companys 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 100% on the first 4% of pre-tax employee contributions. The maximum matching contributions for 2010 will be pro-rated to account for the number of months remaining in the year.
The Companys 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 Companys participants as well as a proportionate share of corporate employee contributions.
F-25
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 Companys employees. The following disclosures represent the Companys portion of the plans maintained by Motorola, Inc., in which the Companys 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 Companys 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 Companys 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.
F-26
Stock option activity for 2009 for the Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys combined financial statements.
The following table summarizes information about stock options held by the Companys employees that were outstanding and exercisable by the Companys 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 |
F-27
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys employees and based on a three-part formula that averages the relative percentage of the Companys 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.
F-28
Motorola Incentive Plan
The Motorola Incentive Plan provides eligible employees with an annual payment, calculated as a percentage of an employees eligible earnings, in the year after the close of the current calendar year if specified goals are met. The Companys 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 Companys 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 Motorolas 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 Companys 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 Companys 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 |
F-29
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 Companys 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 Companys business. The Company will generally 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 Companys combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys 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 Companys 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 partys claims. Further, the Companys 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.
F-30
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 Companys 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 arms-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 Companys 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 | ) |
F-31
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 Companys 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 Companys 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.
F-32
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 Companys 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 Companys 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 Companys 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 Companys combined statements of operations. Included in the aggregate $229 million are charges of
F-33
$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 Companys 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 Companys 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 Companys business segments were impacted by these plans. The employees affected were located in all regions.
F-34
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 Companys 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 Companys 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 Companys 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 Companys combined financial statements for the period subsequent to the date of acquisition. The pro forma effects of these acquisitions on the Companys combined financial statements were not significant individually or in the aggregate.
F-35
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 Companys 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 Companys combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Companys 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
F-36
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 Companys 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 Companys combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Companys 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 Companys 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 Companys combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Companys 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 Companys 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 Companys combined financial statements subsequent to the date of acquisition. The pro forma effects of this acquisition on the Companys 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 Companys 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.
F-38
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 Companys 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 units 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.
F-39
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 | 48 | 23 | 99 | 58 | 22 | 43 | 160 | ||||||||||||||||||||||||
Operating loss |
(542 | ) | (268 | ) | (205 | ) | (196 | ) | (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.
F-40
Motorola Mobility Holdings, Inc. and Subsidiaries
Condensed Combined Statements of Operations
(Unaudited)
Nine Months Ended | ||||||||
(Dollars in million) |
October 2,
2010 |
October 3,
2009 |
||||||
Net revenues |
$ | 8,035 | $ | 8,227 | ||||
Costs of sales |
5,985 | 6,780 | ||||||
Gross margin |
2,050 | 1,447 | ||||||
Selling, general and administrative expenses |
1,141 | 1,076 | ||||||
Research and development expenditures |
1,112 | 1,198 | ||||||
Other charges (income) |
(153 | ) | 188 | |||||
Operating loss |
(50 | ) | (1,015 | ) | ||||
Other income (expense): |
||||||||
Interest expense, net |
(40 | ) | (34 | ) | ||||
Loss on sales of investments and businesses, net |
| (32 | ) | |||||
Other |
(24 | ) | (39 | ) | ||||
Total other income (expense) |
(64 | ) | (105 | ) | ||||
Loss before income taxes |
(114 | ) | (1,120 | ) | ||||
Income tax expense |
55 | 12 | ||||||
Net loss |
(169 | ) | (1,132 | ) | ||||
Less: Earnings (loss) attributable to non-controlling interests |
(3 | ) | 6 | |||||
Net loss attributable to Motorola Mobility Holdings, Inc. |
$ | (166 | ) | $ | (1,138 | ) | ||
See accompanying notes to condensed combined financial statements (unaudited).
F-41
Motorola Mobility Holdings, Inc. and Subsidiaries
Condensed Combined Balance Sheets
(Dollars in millions) |
October 2, 2010 |
December 31, 2009 |
||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Accounts receivable, net |
$ | 1,568 | $ | 1,341 | ||||
Inventories, net |
854 | 688 | ||||||
Deferred income taxes |
111 | 114 | ||||||
Other current assets |
692 | 685 | ||||||
Total current assets |
3,225 | 2,828 | ||||||
Property, plant and equipment, net |
737 | 807 | ||||||
Investments |
123 | 57 | ||||||
Deferred income taxes |
49 | 48 | ||||||
Goodwill |
1,323 | 1,285 | ||||||
Other assets |
701 | 833 | ||||||
Total assets |
$ | 6,158 | $ | 5,858 | ||||
LIABILITIES AND BUSINESS EQUITY | ||||||||
Accounts payable |
$ | 1,734 | $ | 1,430 | ||||
Accrued liabilities |
2,076 | 1,862 | ||||||
Total current liabilities |
3,810 | 3,292 | ||||||
Other liabilities |
586 | 627 | ||||||
Business equity: | ||||||||
Owners net investment |
2,136 | 2,348 | ||||||
Accumulated other comprehensive loss |
(398 | ) | (444 | ) | ||||
Total Motorola Mobility Holdings, Inc. equity |
1,738 | 1,904 | ||||||
Non-controlling interests |
24 | 35 | ||||||
Total business equity |
1,762 | 1,939 | ||||||
Total liabilities and business equity |
$ | 6,158 | $ | 5,858 | ||||
See accompanying notes to condensed combined financial statements (unaudited).
F-42
Motorola Mobility Holdings, Inc. and Subsidiaries
Condensed Combined Statement of Business Equity
(Unaudited)
Accumulated Other Comprehensive
Income (Loss) |
||||||||||||||||||||||||||||
(Dollars in millions) |
Owners
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 |
(166 | ) | (3 | ) | $ | (169 | ) | |||||||||||||||||||||
Net transfers to Motorola, Inc. |
(46 | ) | (5 | ) | ||||||||||||||||||||||||
Dividends paid to noncontrolling interest on subsidiary common stock |
(8 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustments (net of tax of $0) |
51 | 51 | ||||||||||||||||||||||||||
Balances at October 2, 2010 |
$ | 2,136 | $ | 14 | $ | (402 | ) | $ | (10 | ) | $ | | $ | 24 | $ | (118 | ) | |||||||||||
See accompanying notes to condensed combined financial statements (unaudited).
F-43
Motorola Mobility Holdings, Inc. and Subsidiaries
Condensed Combined Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||
(Dollars in millions) |
October 2010 |
October 2009 |
||||||
Operating |
||||||||
Net loss attributable to Motorola Mobility Holdings, Inc. |
$ | (166 | ) | $ | (1,138 | ) | ||
Less: Earnings (loss) attributable to non-controlling interests |
(3 | ) | 6 | |||||
Net loss |
(169 | ) | (1,132 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |
||||||||
Depreciation and amortization |
169 | 162 | ||||||
Non-cash other charges |
1 | 15 | ||||||
Share-based compensation expense |
120 | 126 | ||||||
Losses on sales of investments and business, net |
| 32 | ||||||
Deferred income taxes |
14 | (36 | ) | |||||
Changes in assets and liabilities, net of effects of acquisitions and dispositions: |
||||||||
Accounts receivable |
(225 | ) | (42 | ) | ||||
Inventories |
(166 | ) | 949 | |||||
Other current assets |
(7 | ) | 263 | |||||
Accounts payable and accrued liabilities |
686 | (1,739 | ) | |||||
Other assets and liabilities |
(42 | ) | 66 | |||||
Net cash provided by (used for) operating activities |
381 | (1,336 | ) | |||||
Investing |
||||||||
Acquisitions and investments, net |
(66 | ) | (21 | ) | ||||
Proceeds from (payments related to) sales of investments and business, net |
12 | (15 | ) | |||||
Capital expenditures |
(68 | ) | (45 | ) | ||||
Proceeds from sales of property, plant and equipment |
1 | 7 | ||||||
Proceeds from sales of short-term investments, net |
| 15 | ||||||
Net cash used for investing activities |
(121 | ) | (59 | ) | ||||
Financing |
||||||||
Net transfers from (to) Motorola, Inc. |
(293 | ) | 1,425 | |||||
Net cash provided by (used for) financing activities |
(293 | ) | 1,425 | |||||
Effect of exchange rate changes on cash and cash equivalents |
33 | (30 | ) | |||||
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).
F-44
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 Companys 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 (the Separation). Motorola, Inc. currently expects that, upon Separation, the Company will be comprised of Motorola, Inc.s Mobile Devices and Home businesses.
During the three months ended October 2, 2010, Motorola, Inc. transferred to the Company and its subsidiaries substantially all of the assets and liabilities of the Companys Mobile Devices and Home businesses through intercompany transactions that had no impact on the results of operations of the Company. On the date of the distribution, Motorola, Inc. will distribute all of the shares of the Companys 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 Companys 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 Companys 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 Owners 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 October 2, 2010 and for the nine months ended October 2, 2010 and October 3, 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
F-45
condensed 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 October 2, 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 nine months ended October 2, 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 arrangements 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 arrangements 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 products 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 Companys 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 Companys 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.
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VSOEIn 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. |
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TPEVSOE 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 Companys 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. |
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ESPThe 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 Companys 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 Companys 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
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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 Companys 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 nine months ended October 2, 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:
Nine Months Ended October 2, 2010 | As Reported | Pro Forma Basis | ||||||
Net revenues |
$ | 8,035 | $ | 6,016 | ||||
For the nine months ended October 2, 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 Companys Mobile Devices segment. 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. To the extent that the smartphone arrangement contains a specified software upgrade right, revenue under the subscription model is deferred until the specified software upgrade is delivered as the Company was unable to determine VSOE for the specified software upgrade right. Once the specified software upgrade is delivered, revenue is then recognized under the subscription-based model over the remainder of the estimated expected life of the smartphone. The as reported revenue reflects the allocation of revenue related to smartphones shipped under arrangements executed during the nine months ended October 2, 2010 using ESP for the device, the service, specified software upgrade rights, when applicable, 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 Companys 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 transferors continuing involvement. The Company has adopted this guidance effective January 1, 2010. This adoption did not have a material impact on the Companys 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 companys 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 Companys 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. The Company has evaluated subsequent events after October 2, 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 Companys net revenues generated from sales to other Motorola, Inc. businesses included in Net revenues in the Companys condensed combined statement of operations were $16 million and $35 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Accounts receivable from sales to other Motorola, Inc. businesses were $0 million and $6 million as of October 2, 2010 and December 31, 2009, respectively, and are included in Accounts receivable in the Companys condensed combined balance sheets. Accounts payable from the purchases from other Motorola, Inc. businesses were $0 million and $1 million as of October 2, 2010 and December 31, 2009, respectively, and are included in Accounts payable in the Companys 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 Companys 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 Companys condensed combined statements of operations:
Nine Months Ended |
October 2, 2010 |
October 3, 2009 |
||||||
Leveraged services expenses |
$ | 369 | $ | 459 | ||||
Employee benefits and incentives |
327 | 258 | ||||||
Basic research |
5 | 9 | ||||||
Interest expense, net |
38 | 36 | ||||||
$ | 739 | $ | 762 |
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 Owners net investment in the Companys condensed combined balance sheets. Types of intercompany transactions between the Company and Motorola, Inc. include: (i) cash deposits from the Companys 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 October 2, 2010 and December 31, 2009, $55 million and $163 million, respectively, were allocated to the Companys 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 Companys employees as a percentage of the total square footage of the facility. The decrease in the allocated amount at October 2, 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 the 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 Companys 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 Companys 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:
Nine Months Ended
October 2, 2010 |
||||
Net transfers to Motorola, Inc. per statement of business equity |
$ | (46 | ) | |
Allocation of stock compensation expense from Motorola, Inc. |
(120 | ) | ||
Non-cash transfers of assets and liabilities from Motorola, Inc., net* |
(127 | ) | ||
Net transfers to Motorola, Inc. per statement of cash flows |
$ | (293 | ) |
* | 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:
Nine Months Ended |
October 2, 2010 |
October 3, 2009 |
||||||
Other charges (income): |
||||||||
Amortization of intangible assets |
$ | 41 | $ | 43 | ||||
Reorganization of businesses |
34 | 145 | ||||||
Legal settlement |
(228 | ) | | |||||
$ | (153 | ) | $ | 188 |
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 nine months ended October 2, 2010, related to the settlement of the
Other Income (Expense)
Interest expense, net, and Other, net, both included in Other income (expense), consist of the following:
Nine Months Ended |
October 2, 2010 |
October 3, 2009 |
||||||
Interest expense, net: |
||||||||
Interest expense |
$ | (64 | ) | $ | (57 | ) | ||
Interest income |
24 | 23 | ||||||
$ | (40 | ) | $ | (34 | ) | |||
Other: |
||||||||
Foreign currency loss |
(25 | ) | (40 | ) | ||||
Investment impairments |
(7 | ) | (4 | ) | ||||
Other |
8 | 5 | ||||||
$ | (24 | ) | $ | (39 | ) | |||
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Balance Sheet Information
Accounts Receivable
Accounts receivable, net, consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Accounts receivable |
$ | 1,618 | $ | 1,400 | ||||
Less allowance for doubtful accounts |
(50 | ) | (59 | ) | ||||
$ | 1,568 | $ | 1,341 | |||||
Inventories
Inventories, net, consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Work-in-process and production materials |
$ | 745 | $ | 680 | ||||
Finished goods |
491 | 542 | ||||||
1,236 | 1,222 | |||||||
Less inventory reserves |
(382 | ) | (534 | ) | ||||
$ | 854 | $ | 688 | |||||
Other Current Assets
Other current assets consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Contractor receivables |
$ | 284 | $ | 308 | ||||
Deferred costs |
163 | 164 | ||||||
Tax refunds receivable |
71 | 87 | ||||||
Royalty license arrangements |
48 | 48 | ||||||
Other |
126 | 78 | ||||||
$ | 692 | $ | 685 | |||||
Property, Plant and Equipment
Property, plant and equipment, net, consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Land |
$ | 44 | $ | 37 | ||||
Buildings |
651 | 627 | ||||||
Machinery and equipment |
1,654 | 1,615 | ||||||
2,349 | 2,279 | |||||||
Less accumulated depreciation |
(1,612 | ) | (1,472 | ) | ||||
$ | 737 | $ | 807 | |||||
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Depreciation expense for the nine months ended October 2, 2010 and October 3, 2009 was $128 million and $119 million, respectively.
Investments
Investments consists of the following:
Recorded
Value |
Less | |||||||||||||||
October 2, 2010 |
Unrealized
Gains |
Unrealized
Losses |
Cost
Basis |
|||||||||||||
Available-for-sale securities: |
||||||||||||||||
Common stock and equivalents |
$ | 21 | $ | 14 | $ | | $ | 7 | ||||||||
Other securities, at cost |
75 | | | 75 | ||||||||||||
Equity method investments |
27 | | | 27 | ||||||||||||
$ | 123 | $ | 14 | $ | | $ | 109 | |||||||||
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 October 2, 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 $7 million and $4 million for the nine months ended October 2, 2010 and October 3, 2009, respectively, representing other-than-temporary declines in the Companys investment portfolio. Investment impairment charges are included in Other, net, within Other income (expense) in the Companys condensed combined statements of operations.
Other Assets
Other assets consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Royalty license arrangements |
$ | 239 | $ | 250 | ||||
Deferred costs |
205 | 285 | ||||||
Intangible assets, net of accumulated amortization of $597 and $554 |
168 | 138 | ||||||
Value-added tax refunds receivable |
54 | 118 | ||||||
Other |
35 | 42 | ||||||
$ | 701 | $ | 833 | |||||
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Accrued Liabilities
Accrued liabilities consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Deferred revenue |
$ | 314 | $ | 303 | ||||
Contractor payables |
243 | 226 | ||||||
Customer reserves |
240 | 224 | ||||||
Compensation |
221 | 169 | ||||||
Royalty license arrangements |
191 | 133 | ||||||
Warranty reserves |
180 | 156 | ||||||
Tax liabilities |
122 | 115 | ||||||
Other |
565 | 536 | ||||||
$ | 2,076 | $ | 1,862 | |||||
Other Liabilities
Other liabilities consists of the following:
October 2,
2010 |
December 31,
2009 |
|||||||
Deferred revenue |
$ | 245 | $ | 327 | ||||
Post retirement health care benefit plan |
94 | 21 | ||||||
Deferred income taxes |
85 | 74 | ||||||
Capital lease obligation |
55 | 56 | ||||||
Unrecognized tax benefits |
17 | 35 | ||||||
Other |
90 | 114 | ||||||
$ | 586 | $ | 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. Beginning in August 2010, the balance sheet hedges are recorded in the name of Motorola Mobility, Inc., as opposed to Motorola, Inc. The Companys 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 Companys 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
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Companys 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 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 Companys 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 October 2, 2010 and December 31, 2009, the Company had outstanding foreign exchange contracts totaling $497 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 Companys 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 October 2, 2010 and the corresponding positions as of December 31, 2009:
Notional Amount | ||||||||
Net Buy (Sell) by Currency |
October 2, 2010 |
December 31, 2009 |
||||||
Brazilian Real |
$ | (294 | ) | $ | (348 | ) | ||
Euro |
(60 | ) | (9 | ) | ||||
Canadian Dollar |
26 | 43 | ||||||
Chinese Renminbi |
(25 | ) | 63 | |||||
Taiwan Dollar |
24 | 31 | ||||||
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 nine months ended October 2, 2010 and October 3, 2009:
Nine Months Ended | ||||||||||||
Losses on Derivative Instrument |
October 2, 2010 |
October 3,
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 |
(36) | (70) |
|
Other income
(expense) |
|
|||||||
Total derivatives not designated as hedging instruments |
$ | (36) | $ | (70) | ||||||||
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The following table summarizes the gains and losses recognized in the condensed combined financial statements for the nine months ended October 2, 2010 and October 3, 2009:
Nine Months Ended | ||||||||||
Foreign Exchange Contracts |
October 2,
2010 |
October 3,
2009 |
Financial Statement Location |
|||||||
Derivatives in cash flow hedging relationships: |
||||||||||
Gain (loss) recognized in Accumulated other comprehensive loss (effective portion) |
$ | (1 | ) | $ | (6 | ) |
Accumulated other comprehensive income
(loss) |
|||
Gain reclassified from Accumulated other comprehensive loss into Net earnings (loss) (effective portion) |
1 | (3 | ) | 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 Companys financial instruments include short-term investments, accounts receivable, accounts payable, accrued liabilities, derivative financial instruments and other financing commitments. The Companys available-for-sale investment portfolios and derivative financial instruments are recorded in the Companys 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 both October 2, 2010 and December 31, 2009, the Company had valuation allowances of $2.9 billion, including $147 million and $255 million, respectively, relating to deferred tax assets for non-U.S. subsidiaries. The Companys valuation allowance for its non-U.S. subsidiaries decreased, as well as the related deferred tax assets, as a result of the Companys reorganization transactions which took place during the third quarter of 2010. The reorganization transactions facilitated the transfer of the Companys assets and liabilities from within Motorola entities to the Companys entities, which in some instances reduced the amount of tax carryforwards, deferred tax assets and valuation allowances the Company had recorded on a stand-alone basis. The Companys U.S. valuation allowance increased by $127 million, offset by an increase in deferred tax assets primarily relating to capitalized costs, withholding taxes and the recognition of additional tax carryforwards relating to uncertain tax positions which the Company now feels are more-likely-than-not of being sustained.
The Company had unrecognized tax benefits of $107 million and $236 million, at October 2, 2010 and December 31, 2009, respectively, of which approximately $56 million if recognized would affect the effective tax rate, net of resulting changes in valuation allowances. During the nine months ended October 2, 2010, the Company reduced its unrecognized tax benefits by $141 million, of which $67 million related to settlements with tax authorities and $74 million related to a reduction in unrecognized tax benefits for effective settlements and facts that now indicate the extent to which certain tax positions are more-likely-than-not of being sustained. Included in the $74 million of unrecognized tax benefits now being recognized is $64 million of deferred tax assets relating to tax carryforwards in tax jurisdictions which require full valuation allowances. The tax benefits on the tax carryforwards were previously unrecognized in the Companys financial statements as the tax positions were not more-likely-than-not of being sustained. The recognition of the tax carryforwards now increases the Companys gross deferred tax assets and thereby increases the Companys valuation allowance needs, resulting in a net zero tax benefit being recognized through the effective tax rate. The remaining $10 million reduction in unrecognized tax benefits favorably impacted the Companys effective tax rate.
Based on the potential outcome of the Companys 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
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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 $80 million.
The Companys 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 nine months 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 Companys global tax disputes is uncertain, based on current information, in the opinion of the Companys management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Companys combined financial position, liquidity or results of operations.
6. Retirement Benefits
Defined Benefit Pension Plans
During the nine months ended October 2, 2010 and October 3, 2009, net periodic pension costs for the noncontributory pension (Regular Pension Plan), the noncontributory Supplemental Officers Plan (Officers Plan), and the noncontributory Motorola Supplemental Pension Plan (MSPP) of $37 million and $18 million, respectively, were allocated to the Company and are included in its condensed combined statements of operations.
Effective August 1, 2010, the Company established pension plans in certain of its foreign subsidiaries in preparation for the planned separation of Motorola, Inc. into two independent, publicly traded companies (the Non-U.S. Plans). A portion of the pension assets and benefit obligations from Motorola, Inc.s previously existing pension plans in these countries were transferred to the Non-U.S. Plans based on specific participant data of the Companys employees. The initial funded status of the Non-U.S. Plans resulted in a $65 million liability being recorded by the Company within Other liabilities in its condensed combined balance sheet. In addition, a balance of $8 million was recorded to Other comprehensive income, net of tax, representing the balance of unrecognized net losses attributable to the Non-U.S. Plans. Prior to the creation of these separate plans, all pension related balances had only been recorded in the condensed consolidated balance sheets of Motorola, Inc.
The net periodic pension costs for the newly created Non-U.S. Plans for the period from August 1, 2010 through October 2, 2010 was not material.
During the three months ended October 2, 2010, the Company made contributions of $1 million to its newly created Non-U.S. Plans.
In addition, during the nine months ended October 2, 2010, and October 3, 2009, net periodic pension cost of $5 million and $7 million were allocated to the Company and are included in its condensed combined statements of operations for its participation in the Motorola, Inc. non-U.S. pension plans.
Postretirement Health Care Benefits Plan
During the nine months ended October 2, 2010 and October 3, 2009, net postretirement health care expenses for Motorola, Inc.s Postretirement Health Care Benefits Plan of $4 million were allocated in each period to the Company and are included in its condensed combined statements of operations.
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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 Companys employees, as well as allocated compensation expense from Motorola, Inc.s corporate functions, was as follows:
Nine Months Ended |
October 2,
2010 |
October 3,
2009 |
||||||
Share-based compensation expense included in: |
||||||||
Costs of sales |
$ | 12 | $ | 12 | ||||
Selling, general and administrative expenses |
68 | 75 | ||||||
Research and development expenditures |
40 | 39 | ||||||
Share-based compensation expense included in Operating earnings (loss) |
120 | 126 | ||||||
Tax benefit |
| | ||||||
Share-based compensation expense, net of tax |
$ | 120 | $ | 126 | ||||
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 October 2, 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 Companys 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 Companys financial assets by level in the fair value hierarchy as of October 2, 2010 and December 31, 2009, were as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Common stock and equivalents: |
||||||||||||||||
October 2, 2010 |
$ | 21 | $ | | $ | | $ | 21 | ||||||||
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.
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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 Companys businesses currently participate in this activity by transferring certain of their accounts receivable balances to Motorola, Inc.
For the nine months ended October 2, 2010 and October 3, 2009, total accounts receivable sold by the Company were $370 million and $579 million, respectively. As of October 2, 2010 and December 31, 2009, there were $25 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 Companys business. The Company will generally 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 Companys combined financial position, liquidity or results of operations. However, an unfavorable resolution could have a material adverse effect on the Companys 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 partys claims. Further, the Companys obligations under these agreements for 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 Companys 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 October 2, 2010 for potential claims under these provisions was de minimis .
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11. Segment Information
Summarized below are the Companys segment net revenues and operating earnings (loss) for the nine months ended October 2, 2010 and October 3, 2009:
Net Revenues | Operating Earnings (Loss) | |||||||||||||||
Nine Months Ended |
October 2,
2010 |
October 3, 2009 |
October 2, 2010 |
October 3, 2009 |
||||||||||||
Mobile Devices |
$ | 5,399 | $ | 5,322 | $ | (148 | ) | $ | (1,056 | ) | ||||||
Home |
2,636 | 2,905 | 98 | 41 | ||||||||||||
$ | 8,035 | $ | 8,227 | |||||||||||||
Operating loss |
(50 | ) | (1,015 | ) | ||||||||||||
Total other income (expense) |
(64 | ) | (105 | ) | ||||||||||||
Loss before income taxes |
$ | (114 | ) | $ | (1,120 | ) | ||||||||||
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 nine months ended October 2, 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 Companys business segments were impacted by these plans. The employees affected were located in all regions.
During the nine months ended October 2, 2010, the Company recorded net reorganization of business charges of $45 million, including $11 million of charges in Costs of sales and $34 million of charges in Other charges (income) in the Companys condensed combined statements of operations. Included in the aggregate $45 million are charges of $61 million for employee separation costs, partially offset by $16 million of reversals for accruals no longer needed.
The following table displays the net charges incurred by business segment:
October 2, 2010 |
Nine months
Ended |
|||
Mobile Devices |
$ | 30 | ||
Home |
15 | |||
$ | 45 | |||
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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 October 2, 2010:
Accruals at January 1, 2010 |
Additional Charges |
Adjustments |
Amount Used |
Accruals at October 2, 2010 |
||||||||||||||||
Exit costs |
$ | 39 | $ | | $ | (3) | $ | (17) | $ | 19 | ||||||||||
Employee separation costs |
33 | 61 | (16) | (47) | 31 | |||||||||||||||
$ | 72 | $ | 61 | $ | (19) | $ | (64) | $ | 50 | |||||||||||
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 nine months ended October 2, 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 $17 million used reflects cash payments. The remaining accrual of $19 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 2, 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 $61 million during the nine months ended October 2, 2010 represent severance costs for approximately an additional 1,500 employees, of which 500 are direct employees and 1,000 are indirect employees.
The adjustments of $16 million reflect: (i) $13 million of reversals of accruals no longer needed and (ii) $3 million of foreign currency translation adjustments.
During the nine months ended October 2, 2010, approximately 900 employees, of which 300 were direct employees and 600 were indirect employees, were separated from the Company. The $47 million used reflects cash payments to these separated employees. The remaining accrual of $31 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 2, 2010, is expected to be paid, generally, within one year to: (i) severed employees who have already begun to receive payments, and (ii) approximately 1,100 employees to be separated in 2010.
2009 Charges
During the nine months ended October 3, 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 Companys 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 nine months ended October 3, 2009, the Company recorded net reorganization of business charges of $178 million, including $33 million of charges in Costs of sales and $145 million of charges in Other charges (income) in the Companys condensed combined statements of operations. Included in the aggregate $178 million are charges of $174 million for employee separation costs, $30 million for exit costs and $18 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:
October 3, 2009 |
Nine Months
Ended |
|||
Mobile Devices |
$ | 161 | ||
Home |
17 | |||
$ | 178 | |||
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 October 3, 2009:
Accruals at January 1, 2009 |
Additional Charges |
Adjustments |
Amount Used |
Accruals at October 3, 2009 |
||||||||||||||||
Exit costs |
$ | 63 | $ | 30 | $ | (7) | $ | (39) | $ | 47 | ||||||||||
Employee separation costs |
103 | 174 | (32) | (213) | 32 | |||||||||||||||
$ | 166 | $ | 204 | $ | (39) | $ | (252) | $ | 79 | |||||||||||
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 $30 million during the nine months ended October 3, 2009 are primarily related to the exit of leased facilities and contractual termination costs, both within the Mobile Devices segment. The adjustments of $7 million reflect $8 million of reversals of accruals no longer needed, partially offset by $1 million of foreign currency translation adjustments. The $39 million used reflects cash payments. The remaining accrual of $47 million, which is included in Accrued liabilities in the Companys condensed combined balance sheet at October 3, 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 $174 million during the nine months ended October 3, 2009 represent severance costs for approximately an additional 5,100 employees, of which 1,800 are direct employees and 3,300 are indirect employees.
The adjustments of $32 million reflect $36 million of reversals of accruals no longer needed, partially offset by $4 million of foreign currency translation adjustments.
During the nine months ended October 3, 2009, approximately 6,100 employees, of which 2,600 were direct employees and 3,500 were indirect employees, were separated from the Company. The $213 million used reflects cash payments to these separated employees. The remaining accrual of $32 million, which was included in Accrued liabilities in the Companys condensed combined balance sheet at October 3, 2009, was expected to be paid to approximately 600 separated employees.
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13. Intangible Assets and
Intangible Assets
Intangible assets and accumulated amortization, excluding goodwill, consists of the following:
October 2, 2010 | December 31, 2009 | |||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
|||||||||||||
Intangible assets: |
||||||||||||||||
Completed technology |
$ | 500 | $ | 407 | $ | 489 | $ | 374 | ||||||||
Patents |
64 | 11 | 12 | 9 | ||||||||||||
Customer-related |
50 | 34 | 49 | 29 | ||||||||||||
Licensed technology |
105 | 105 | 105 | 105 | ||||||||||||
Other intangibles |
46 | 40 | 37 | 37 | ||||||||||||
$ | 765 | $ | 597 | $ | 692 | $ | 554 | |||||||||
Amortization expense on intangible assets, which is included within Other charges (income) in the condensed combined statements of operations, was $41 million and $43 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. As of October 2, 2010, annual amortization expense is estimated to be $55 million in 2010, $54 million in 2011, $36 million in 2012, $29 million in 2013 and $9 million in 2014.
Intangible assets and accumulated amortization, excluding goodwill, by business segment were as follows:
October 2, 2010 | December 31, 2009 | |||||||||||||||
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
|||||||||||||
Mobile Devices |
$ | 111 | $ | 49 | $ | 45 | $ | 45 | ||||||||
Home |
654 | 548 | 647 | 509 | ||||||||||||
$ | 765 | $ | 597 | $ | 692 | $ | 554 | |||||||||
Goodwill
The following table displays a roll forward of the carrying amount of goodwill by reportable segment from January 1, 2010 to October 2, 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 |
30 | 8 | 38 | |||||||||
Balance as of October 2, 2010: |
||||||||||||
Aggregate goodwill acquired |
85 | 1,366 | 1,451 | |||||||||
Accumulated impairment losses |
(55 | ) | (73 | ) | (128 | ) | ||||||
Goodwill, net of impairment losses |
$ | 30 | $ | 1,293 | $ | 1,323 | ||||||
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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 units goodwill. A charge is recorded in the financial statements if the carrying value of the reporting units 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 or third quarter of 2010.
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