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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-7221
MOTOROLA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-1115800
(State of Incorporation) (I.R.S. Employer Identification No.)
1303 East Algonquin Road, Schaumburg, Illinois 60196
(Address of principal executive offices)
Registrant's telephone number (847) 576-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
--------------------------------------- ------------------------
Common Stock, $3 Par Value per Share New York Stock Exchange
Chicago Stock Exchange
Liquid Yield Option Notes due 2009 New York Stock Exchange
Liquid Yield Option Notes due 2013 New York Stock Exchange
Rights to Purchase Junior Participating New York Stock Exchange
Preferred Stock, Series A Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of January 31, 1997 was approximately $39.2 billion (based on
closing sale price of $68.375 per share as reported for the New York Stock
Exchange-Composite Transactions).
The number of shares of the registrant's Common Stock, $3 par value per
share, outstanding as of January 31, 1997 was 593,866,999.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
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LIST OF ITEMS AMENDED
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Item Page
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Part II
6. Selected Financial Data.........................................1
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations Financial Review......................1
8. Financial Statements and Supplementary Data.....................16
Part IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................44
Signatures......................................................45
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TEXT OF AMENDMENTS
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Explanatory Note:
Each of the above listed Items is hereby amended by deleting the Item in
its entirety and replacing it with the Items attached hereto and filed herewith.
The purpose of the amendment is to restate the Company's 1995 historical
financial statements and to make resulting reclassifications to the 1996
financial statements that were incorporated by reference into the Company's
1996 Form 10-K originally filed on March 25, 1997 (the "Original Filing").
In July 1995, the Company sold its U.S. 800 megahertz Specialized Mobile
Radio business, systems and licenses to Nextel Communications, Inc. for shares
of Nextel stock. As reflected in the Company's audited financial statements for
1995, the Nextel transaction was accounted for as an exchange of productive
assets with no gain realized in the Company's 1995 Statement of Consolidated
Earnings. The Nextel stock was carried at its fair market value with an
unrealized gain on the stock reported directly to Stockholders' Equity as part
of the Company's holding of marketable securities. As reported in the Company's
1996 Consolidated Financial Statements, the Securities and Exchange Commission
(SEC) asserted during 1997 that the Company should have recognized a gain at the
time of the transaction by accounting for the transaction at fair value with
1995 income statement recognition. The Company and its auditors believed that
the original treatment was appropriate in the circumstances. The Company based
its original accounting treatment for the exchange of assets for Nextel stock
independently from a separate transaction in which Craig McCaw's investor group
("McCaw") entered into agreements with Nextel and Motorola which significantly
altered the governance structure of Nextel and limited Motorola's influence over
Nextel. Among other factors, the McCaw agreements granted control of Nextel's
operations committee to McCaw and the Company agreed to vote in accordance with
the decisions of the operating committee except in certain limited
circumstances.
After discussions with the SEC, the Company agreed to base the accounting on the
fact that its Nextel holdings subsequent to the McCaw investment do not qualify
for the equity method of accounting and therefore fair value accounting rather
than carryover basis accounting for purposes of the 1995 income statement
treatment is appropriate. Therefore, the Company has agreed to
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restate the 1995 financial statements to reflect the accounting treatment
proposed by the SEC. Other than minor reclassifications to Stockholders' Equity
and Other Assets, the restatement does not affect the Consolidated Balance Sheet
because the impact of unrealized gains related to the Nextel stock was recorded
in Stockholders' Equity during 1995 and 1996, nor does it affect the tax
treatment of the transaction. In this restatement, the Company has recorded a
gain of approximately $400 million (net of taxes) in the third quarter of 1995.
The Company also recognized the decline in share price of the Nextel stock
between the time of the transaction and December 31, 1995 as a realized loss of
approximately $133 million (net of taxes) in the fourth quarter of 1995. As a
result, 1995 earnings before income taxes have increased from $2.782 billion to
$3.225 billion and 1995 fully diluted net earnings per common and common
equivalent share have increased from $2.93 to $3.37.
Any items in the Original Filing not expressly changed hereby shall be as
set forth in the Original Filing. All information contained in this amendment
and the Original Filing is subject to updating and supplementing as provided in
the Company's periodic reports filed with the SEC subsequent to the date of such
reports.
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PART II
Item 6: Selected Financial Data
The response to this Item is incorporated by reference to the information
under the caption "Five-Year Financial Summary" of Motorola's Consolidated
Financial Statements contained in Item 8 on page 46 of this report, which is
incorporated by reference herein, and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report.
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This commentary should be read in conjunction with the Consolidated
Financial Statements and Notes, presented in Item 8 of this report, for a full
understanding of Motorola's financial position and results of operations.
MOTOROLA, INC.
1996 COMPARED WITH 1995
Sales increased 3% to $28.0 billion from $27.0 billion in 1995.
International market sales, as measured by the locale of the end customer after
internal Motorola sales eliminations, represented 58% of total sales in 1996,
compared with 59% in 1995. The highest regional growth rates were achieved in
Latin America and the United States while declines occurred in the Japan,
Europe, Asia Pacific and China markets. The Company believes the global economic
outlook is healthy, especially in emerging markets such as Latin America and
Asia. The Company also expects to see balanced growth in the developed world.
At the end of 1996, the Semiconductor Products segment began to experience
an improved pattern of orders and sales versus the rest of 1996 as the worldwide
semiconductor industry entered a cyclical rebound. However, improved year-over-
year financial results may not be evident until later in 1997. Many of the
factors that affected certain Company businesses should continue to have an
adverse impact early in 1997. During 1997, the Company plans to continue
investing in programs that create platforms for future growth, such as
IRIDIUM(R) and flat-panel displays, as well as in Motorola core technology
businesses. It is expected that, as these new products enter the Company's
revenue base, profit margins will be relatively lower until markets mature and
manufacturing economies of scale develop to reduce unit costs.
Segment operating profits were $2.3 billion in 1996 compared with $3.2
billion in 1995. The main factor contributing to the decline in earnings and
slowdown in sales growth in 1996 was the recession in the semiconductor
industry. Other factors included product deficiencies in certain segments of the
cellular telephone and modem businesses, slower sales in the U.S. paging
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business in the fourth quarter, and their impact on related component products
such as rechargeable batteries.
In addition, restructuring costs and unusual charges, related to various
asset writedowns and strategic decisions to end certain technology development
programs that no longer offered the growth potential to justify further
investment, resulted in a combined negative impact to pre-tax earnings of more
than $150 million in the fourth quarter. These actions created a reinvigorated
process to discontinue those development programs that have not lived up to
their promise, while further reducing costs in existing businesses that are not
achieving adequate profitability, and refocusing investments where Motorola
possesses, or is cultivating leadership core competencies.
Net earnings in 1996 were $1.15 billion, or $1.90 per fully diluted common
and common equivalent share, compared with $2.05 billion in 1995, or $3.37 per
fully diluted common and common equivalent share. Included in the 1995 results
is a one-time gain on the sale of 800 megahertz Specialized Mobile Radio
business, systems and licenses in the U.S. to Nextel Communications, Inc. for
shares of Nextel stock as described in Note 9, "Restatement of Financial
Statements" of the Consolidated Financial Statements and Notes contained in Item
8 hereof. Excluding the one-time effect, 1995 net earnings and related earnings
per fully diluted common and common equivalent share were $1.78 billion and
$2.93 respectively. Net margin on sales was 4.1%, compared with 7.6% during
1995. Excluding the one-time effect, 1995 net margin on sales was 6.6%.
Motorola's selling, general and administrative expenses were 17% of sales
both in 1996 at $4.7 billion and 1995 at $4.6 billion. By comparison to 1995,
the difference in dollars resulted from increases in normal operating expenses
and the restructuring and unusual charges mentioned earlier. These increases
were largely offset by lower incentive compensation payments to employees that
resulted from the decrease in Company profits.
Depreciation expense increased 20% for 1996 compared with 1995 due to
increased depreciation associated with new semiconductor manufacturing capacity
added primarily in 1995 and early 1996. Depreciation expense is expected to
increase in 1997, but at a slower rate than in 1996. This reflects the reduction
in fixed asset expenditures in 1996. Fixed asset expenditures for 1996 were $3.0
billion, compared with $4.2 billion in 1995. This decrease resulted primarily
from selective deferral of manufacturing capacity expansion, primarily in the
Semiconductor Products segment. Fixed asset expenditures for 1997 are expected
to be flat.
The effective tax rate for 1996 of 35% compared favorably to the 1995 and
1994 rate of 36%. The Company currently expects an effective tax rate of 35%
during 1997.
As of January 1, 1997, the Company adopted Statement of Position (SOP)
96-1, "Environmental Remediation Liabilities" and Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SOP 96-1 provides
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display, and disclosure of environmental cleanup
liabilities. Statement No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The impact of the adoption of these accounting standards on the
Company's financial position and results of operations is not expected to be
material.
In recent years, a large portion of the Company's net sales, operating
profits and growth have come from its international operations. As a result,
future Company business activities and financial results could be significantly
affected by the stability and policies of non-U.S. governments, particularly as
they relate to prevailing social and economic conditions, inflation
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rates, monetary fluctuations, balance of payments, non-U.S. exchange rates or
trade restrictions and prohibitions.
1995 COMPARED WITH 1994
Sales increased 22% to $27.0 billion from $22.2 billion in 1994.
International market sales, as measured by the locale of the end customer after
internal Motorola sales eliminations, represented 59% of total sales in 1995,
compared with 53% in 1994. The highest regional growth rates were achieved in
China, Asia-Pacific, Europe, Japan, and Latin America.
Segment operating profits were $3.2 billion in 1995 compared with $2.9
billion in 1994. During 1995, the Company's results were principally influenced
by three trends: increasing worldwide price competition in the Company's
wireless communications businesses; a moderating growth rate in the United
States cellular subscriber base and, to a lesser extent, in Europe; and costs
and inefficiencies resulting from the Company's addition of major elements of
new manufacturing capacity in its semiconductor business.
Motorola's selling, general and administrative expenses during 1995 were
$4.6 billion or 17% of sales, compared with $4.4 billion or 20% of sales in
1994. By comparison with 1994, expenses during 1995 included a significantly
lower level of costs resulting from the Company's ongoing evaluation of its
operations, organizational structure and asset valuations.
Net earnings in 1995 were $2.05 billion, or $3.37 per fully diluted common
and common equivalent share, compared with $1.56 billion in 1994, or $2.65 per
fully diluted common and common equivalent share. Included in the 1995 results
is a one-time gain on the sale of 800 megahertz Specialized Mobile Radio
business, systems and licenses in the U.S. to Nextel Communications, Inc. as
described in Note 9, "Restatement of Financial Statements" of the Consolidated
Financial Statements and Notes contained in Item 8 hereof. Excluding the one-
time effect, 1995 net earnings and related earnings per fully diluted common and
common equivalent share were $1.78 billion and $2.93 respectively. Net margin on
sales was 7.6%, compared with 7.0% during 1994. Excluding the one-time effect,
1995 net margin on sales was 6.6%.
MOTOROLA, INC. SEGMENTS
The following commentary should be read in conjunction with the 1996
financial results of each reporting segment as detailed in Note 7, "Information
by Industry Segment and Geographic Region" of the Consolidated Financial
Statements and Notes in this Proxy Statement.
GENERAL SYSTEMS PRODUCTS
The General Systems Products segment primarily designs, manufactures,
distributes, installs, and services cellular infrastructure equipment and
cellular telephone subscriber units. The Motorola Computer Group, within this
segment, develops, manufactures, sells, and services multi-function computer
systems and board level products, together with operating systems and system
enablers.
Segment sales advanced 6% to $11.3 billion, orders rose 15% and segment
operating profits were lower. Sales increased over 1995 due to increased unit
volume, partially offset by declining sales prices, competitive pressures, and
product deficiencies in certain market segments. Overall, sales also were
affected by a slowing growth rate in the cellular subscriber base in the United
States.
For 1996, the Cellular Subscriber Sector (CSS), formerly the Cellular
Subscriber Group, sales were slightly lower but orders were higher. The Company
began to see signs of improvement in the cellular phone business during the
third and fourth quarters of 1996 primarily from the
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introduction of leadership digital phone products. Total unit volume shipments
of the Global System for Mobile Communications (GSM) phone category rose
steadily throughout each quarter in 1996.
Throughout 1996, CSS debuted a variety of new and innovative wireless
communications products. In January, CSS unveiled the StarTAC(TM) Wearable
Cellular Telephone, the world's smallest and lightest Advanced Mobile Phone
System (AMPS) cellular phone commercially available. Shortly after, an Extended
Total Access Communication System (ETACS) version of the StarTAC phone was
announced. Mid-year, CSS announced its StarTAC(TM) 6000 Cellular Telephone, a
mid-tier featured and lower priced addition to its AMPS wearable phone family.
Later in the year, CSS followed with an announcement of its GSM StarTAC digital
cellular telephone, the world's lightest and smallest phone for GSM networks.
Other product announcements included the first GSM cellular phone to
provide Chinese character short messaging and the commercial availability of the
Personal Phone Series(R) 2 cellular phone that can also be used as a cordless
phone at home or at work. The latest version of the Easy Mobile Office data
product debuted, which includes the MicroTAC(R) International 8700 GSM phone and
the CELLect(TM) 2 PC (personal computer) card offering throughput of up to
36,000 bits per second. Using the Easy Mobile Office data solution, the phone
may be conveniently connected to a user's laptop computer to send fax, data and
e-mail messages.
Additional highlights included: commercial availability of the MicroTAC(R)
SC-720 phone for Code Division Multiple Access (CDMA) networks. Also announced
was the Micro Digital M75(TM) phone, the lightest phone available for Time
Division Multiple Access (TDMA) networks in North America. This dual-mode phone
supports short message services, a pager-like feature with a scrolling display,
and can be used on TDMA digital systems or AMPS analog systems. CSS also
announced development of a GSM cellular phone which enables consumers to send
and receive cellular telephone calls and faxes, and e-mail messages and to
access the Internet, all in a single, integrated unit.
The MicroTAC Select(TM) 3000 phone, a new addition to Motorola's GSM
digital product portfolio for the 1.9 gigahertz U.S. Personal Communication
Service (PCS) market was unveiled in the third quarter.
The segment's Cellular Infrastructure Group (CIG) sales and orders were
higher. In 1997, CIG will become part of the newly formed Cellular Networks and
Space Sector. CIG sales and profit performance include large system orders which
increase the potential for volatility in the timing of revenue, profit and order
recognition during any particular period. Customers are looking to equipment
vendors as one additional source of funding, and in some cases CIG is furnishing
or guaranteeing some financing for customers.
CIG established itself as a leader in CDMA technology by deploying CDMA
networks in Hong Kong and 14 other markets. Motorola became the first company to
incorporate short message service in its CDMA digital networks and was the first
to win a CDMA PCS contract internationally. CIG also deployed WiLL(R) systems in
over 10 countries including Hungary where CIG has provided the capacity to
support more than 100,000 subscribers on wireless local loop systems.
The Motorola Computer Group (MCG) sales and orders increased over the prior
year. Growth was attributed to continuing strength in the Group's Embedded
Computing Businesses and the successful launch of the StarMax(TM) line of Mac-
compatible desktop computers using PowerPC(R) 603e and 604e microprocessors
compatible with the Mac OS(R) operating system. MCG reached an
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agreement with Apple Computer, Inc. to license the Mac OS(R) operating system.
The agreement allows the group to sub-license the Mac OS software with its
motherboards and private-label systems to the original-equipment manufacturing
marketplace. Motorola began selling PowerPC Platform desktop systems based on
Mac OS software, and used its joint venture with Panda Electronics Group to
distribute systems compatible with Mac OS systems in China. The group also
introduced a new generation of VME (Versa Module Eurobus) processor boards that
use the PowerPC 603 and PowerPC 604 microprocessors. During December 1996, MCG
also announced a shift in their product directions away from supporting
Microsoft(R)'s Windows NT(TM) operating system on PowerPC, beginning with
Windows NT version 5.0.
SEMICONDUCTOR PRODUCTS
The Semiconductor Products segment designs, manufactures and distributes a
broad line of discrete semiconductors and integrated circuits, including
microprocessors, RF (radio frequency) devices, microcontrollers, digital signal
processors, memories and sensors.
Segment sales declined 8% to $7.9 billion, orders were down 22% and segment
operating profits were lower primarily due to a recession in the semiconductor
industry. Excess supply of semiconductors caused by lower demand and increased
capacity drove average selling prices down in 1996. All businesses experienced
declining prices, with DRAMs (dynamic random access memory) being the most
severely impacted.
The segment's device portfolio includes integrated circuits and discrete
products, with a 1996 sales mix of 30% logic and analog, 28% microcontrollers,
18% discretes, 13% microprocessors and 11% memories. The end market sales mix
in 1996 was 33% to communications, 17% to automotive, 16% to industrial, 13% to
personal computer/workstation, 11% to consumer electronics and 10% to computer
(other than PC) and computer peripheral segments. The geographic sales mix in
1996 was 49% to the Pan-American region, 24% to the European region, 18% to the
Asia-Pacific region and 9% to Japan. Motorola internal business units consumed
20% of the segment's product output in 1996.
During 1996, the business groups results within the segment were as
follows: the Microcontroller Technologies Group experienced higher sales and
lower orders; the Logic and Analog Technologies Group, the Communications, Power
and Signal Technologies Group, the Communications and Advanced Consumer
Technology Group and the Microprocessor and Memory Technologies Group all
experienced lower sales and orders.
The Company believes that the semiconductor industry may have reached the
bottom of this recessionary cycle as semiconductor products began to experience
a sequential quarterly increase in orders and sales during the fourth quarter
versus the third quarter of 1996. Year-to-year industry order growth and
revenue growth comparisons are likely to remain negative during the first half
of 1997. Although the rates of decline should lessen, this is expected to
continue to place pressure on Motorola semiconductor profitability, as the
backlog has decreased significantly from a year ago. Even when order and
revenue growth begin to increase on a year-to-year basis, it is expected that
significant underutilized capacity within the industry will remain. As a
result, the Company does not expect any major improvement in average selling
prices in 1997. This translates into an expectation of a modest recovery for
both the industry and Motorola's semiconductor business in 1997. Given those
expectations, a return to a double-digit operating margin for the full year of
1997 for the Semiconductor Products segment does not appear to be achievable.
The Semiconductor Products segment implemented a range of cost reduction
and containment actions throughout 1996 to address the market slowdown. These
actions included halting building expansion and new construction as well as
reducing manufacturing equipment purchases,
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headcount, work schedules and manufacturing run rates. The segment phased down
pilot production at the COM 1 start up facility in Phoenix and on one of the
wafer production lines in East Kilbride, Scotland. Construction was postponed
for the CMOS (Complementary Metal Oxide Semiconductor) wafer fabrication
facility announced in 1995 for Richmond, Virginia.
The segment continues to make strategic investments, although at decreasing
levels, in new capacity and advanced technologies to meet the projected long-
term demand for semiconductors on a global scale. The segment believes that
these investments are setting the stage for its long-term growth. Construction
continues on the MOS 17 SMARTMOS(TM) facility in Tianjin, China. The segment
also is gradually increasing production at an expansion at MOS 9 in East
Kilbride, Scotland, for MOS (Metal Oxide Semiconductor) digital-analog and high
performance microprocessor (MPU) products. Motorola and Siemens entered into an
agreement to construct and operate a jointly owned facility in Richmond,
Virginia to manufacture next generation 64-megabit DRAMs. First production is
expected in mid-1998.
In 1996, the segment successfully used PowerPC(R) MPUs as the technology
drivers for high performance computing applications, leveraging PowerPC and
other core architectures to develop an array of embedded processors that address
a wide variety of price/performance points and end uses. Eight new PowerPC chips
were introduced, including the industry's highest performance MPUs for the
volume desktop and portable computing markets, with Power PC 603e and 604e chips
at speeds of 240 megahertz (MHz). Numerous design-ins for embedded applications
of PowerPC cores included the communications, high-speed data internetworking
and digital consumer/multimedia markets. A PowerPC-based MPC801 chip will power
Mitsubishi's DiamondWeb(TM) Internet TV. Bay Networks chose the MPC860
PowerQUICC(TM) chip for its next generation fast ethernet network management
modules. Diba Inc. will use the MPC860 family to power information appliances,
and Samsung chose it to power Internet televisions for Korean, Japanese and U.S.
consumers. Telecom applications announced for the MPC860 family include
asynchronous transfer mode (ATM) line cards, integrated services digital network
(ISDN) protocol terminators, smart Ethernet hubs, and T1 and E1 line card
controllers.
For wired communication networks, the segment announced Motorola's
selection to provide a new cell processor to Newbridge Network Corporation for
ATM switches, and debuted a single-chip ISDN transceiver for European markets.
Motorola also introduced an Asymmetric Digital Subscriber Line (ADSL)
transceiver that enables end users to use existing copper phone lines to access
data 600 times faster than today's analog modems. New RF products included
submicron bipolar technology for personal communication system base stations,
and many new devices for cable television applications, such as optical fiber
systems and amplifiers.
The ColdFire(TM) variable-length RISC (Reduced Instruction Set Computer)
architecture also is contributing to the segment's focus on high-growth
technologies for a variety of growing market segments. New ColdFire chips were
introduced for high volume, cost-sensitive uses such as data storage, imaging,
digital video disks, interactive cable set-top boxes and satellite systems. For
imaging customers, the segment formed a strategic alliance with Peerless Systems
Corporation to allow Motorola to integrate ColdFire microprocessors with
Peerless imaging technology.
Shipments of nearly one-half billion 68HCO5 MCUs (microcontroller units) in
1996 helped Motorola remain the world's leading MCU supplier. The segment
continued to expand its 8-, 16-, 32- and 64-bit portfolios. Introductions
included a new family of 16-bit, high performance, low voltage MCUs and an
erasable, programmable read-only-memory (ROM) capability on a one-time-
programmable (OTP) 8-bit device for use in low-cost number storage and keyboard
interrupt applications. In the digital signal processor (DSP) arena, the segment
announced a new DSP architecture targeted for low-cost markets.
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Smartcards also are a growing market for semiconductors, with applications
ranging from financial (electronic purse), personal identification (health
cards), communication (cellular phone access) and transportation (toll payment
for public transportation). As a leading supplier of MCUs for smartcards, the
segment unveiled new "fast crypto" chips that combine industry leading
encryption speed and high levels of data security. The segment also announced
the development of the first smart microcontroller that allows full
implementation of both contact and contactless applications.
New products introduced in the fast static random access memories (FSRAMs)
included four pipelined modules designed for level two (L2) cache applications
in desktop systems using Intel Corp.'s Pentium(R) MPUs, two products for digital
signal processor applications, and new high-performance BurstRAM(TM) chips for
workstation, server, personal computing, high-speed networking and multimedia. A
highlight for environmental and industrial applications was availability of the
segment's first chemical sensor family. The carbon monoxide detection sensor was
debuted in October and was the first silicon-based chemical sensor on the
market.
The segment addressed energy-management opportunities and lowpower
challenges in various market segments with a variety of power products. These
included introduction of the VersaPower(TM) family of hybrid power modules for
use in motor drives, and PowerLux(TM) insulated gate bipolar transistors (IGBTs)
for use in compact fluorescent lamp converters. The segment also continued to be
the world's number 1 semiconductor supplier to global automotive manufacturers
and announced the TouCAN(TM) series of MCUs for integrated Controller Area
Network (CAN) capabilities.
LAND MOBILE PRODUCTS
The Land Mobile Products segment is primarily comprised of the following
business groups: Radio Network Solutions, Radio Products, iDEN(TM), or
Integrated Digital Enhanced Network, and Radio Parts and Services. The segment
designs, manufactures and distributes analog and digital two-way radio and
enhanced communication products and systems for applications worldwide, from on-
site to wide area communications.
Segment sales rose 11% to $4.0 billion and operating profits were higher.
Orders increased 16% and were higher for both the segment's traditional analog
products and its newer digital systems products. Orders for iDEN equipment were
up significantly as more than 250,000 subscribers were added to iDEN systems
around the world during 1996. In the segment's other businesses, demand was
greater for both large advanced systems and analog portable and mobile two-way
radios.
The segment experiences worldwide competition for its products including
factors such as price, product features, product performance, product quality,
delivery, service, and systems quality and availability. Land Mobile Products
segment sales and profit performance include large system orders which increase
the potential for volatility in the timing of revenue, profit and order
recognition during any particular period. Customers are looking to equipment
vendors as one additional source of funding, and in some cases LMPS is
furnishing or guaranteeing some financing for customers.
During 1996, the Radio Network Solutions Group (RNSG) experienced increased
sales and orders. RNSG introduced its first conventional two-way radio system
compliant with the Project 25 U.S. digital standard in 1996. The system will be
configured for single site or wide area, and simulcast or voting systems. Also
during 1996, on the Channel Island of Jersey in the United Kingdom, Motorola
initiated the world's first trial of radio communications equipment compliant
with the new Trans European Trunked Radio (TETRA) Standard. RNSG announced its
line of
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TETRA products with the Dimetra(TM) system family and was awarded the first
contract for TETRA equipment for the new Gardermoen Airport in Oslo, Norway.
The LTS 2000(TM) portable and LCS 2000(TM) mobile two-way radios were
introduced for SMARTNET(TM) II trunking systems. These new radios provide a
variety of customers, including construction, utilities and public safety, with
advanced trunking features. The new VRM600(TM) mobile packet radio modem
contains both a data modem and radio in a compact package and provides the
wireless connection between in-vehicle data terminals and an organization's host
computer. The new XTS3000(TM) portable offers more functions and features in a
more compact design than the prior generation. Featuring a full alphanumeric
keypad, the XTS3000 portable operates in conventional, SMARTNET(TM), SECURNET(R)
and SmartZone(R) communication networks.
The new COMTEGRA(R) console also was introduced to provide customers in
many market segments the ability to control communications functions such as
two-way radio, paging and telephone from a compact work station.
In 1996, the Radio Products Group (RPG) experienced higher sales and
orders. RPG announced the low-power Talk-About(TM) portable two-way radio for
consumer markets in the U.S. It operates on channels in the Family Radio
Service, which does not require users to obtain a license.
New portable and mobile two-way radios meeting the market-specific
requirements for different regions of the world were introduced for on-site and
wide-area industrial, government and commercial applications. For European
countries, the GP600 portable and GM600 mobile were introduced for use on shared
trunking systems and the GP900 and 1200 series of portables meet more stringent
industrial and government market specifications and requirements. The GTX(TM)
portable was designed for use on shared trunking systems in the U.S. and Latin
America.
The HandiCom portable for European markets and the Pacer(TM) portable for
Asian markets were designed to meet the unit-to-unit and on-site needs of small
business users and operate on specially designated frequencies with simplified
licensing. Other new products included the GP350(TM) and GM350 portable and
mobile series for U.S. and European markets and the GP68 portable for Asian
markets.
For 1996, iDEN sales and orders increased significantly. Nextel
Communications, Inc. placed orders for more than $500 million of iDEN
infrastructure and subscriber equipment as a part of the continued rollout of
its U.S. network. Major orders for a new iDEN system were received from Movilink
in Colombia and from Infocom, a wireless system operator in the Philippines.
Southern Communications in the U.S., Clearnet Communications, Inc. in Canada,
and Movicom in Argentina launched service in 1996 and have placed system
expansion orders. IDEN service in Japan was expanded to include the Tokai region
in addition to Tokyo and Osaka and the iDEN system in Israel also was expanded.
Singapore Technologies launched commercial service on their iDEN system and
construction commenced on the first iDEN system in Fujian, China.
Motorola introduced an optional software enhancement to its iDEN
technology. Known as "iDEN 3 to l," it provides premium audio quality for
telephone interconnect communications. Several new iDEN radios also were
introduced during the year. The i370 pocket size portable integrates the instant
conferencing and wireless intercom of two-way radio communications with
telephone interconnect and alphanumeric paging. The r370 portable, designed to
withstand extreme environmental conditions, such as blowing rain, humidity,
dust, shock and vibration,
8
<PAGE>
integrates the same communications services as the i370 pocket phone. The i280
portable is a compact, flip handset that integrates full-duplex telephone
interconnect and alphanumeric paging service.
For the Radio Parts and Services Group, sales declined slightly from 1995.
The decline was attributed to the sale of Motorola-owned service shops.
MESSAGING, INFORMATION AND MEDIA PRODUCTS
The Messaging, Information and Media Products segment businesses are
primarily comprised of the Messaging Systems Products Group (formerly the Paging
Products Group), the Information Systems Group, the Wireless Data Group, and
also includes newer businesses such as the Multimedia Group, the Lexicus
Division, and the Platform Software Division. The segment designs, manufactures
and distributes a variety of messaging products including pagers, paging systems
and services, wireless and wireline communication products, and handwriting,
voice recognition, and other communications software.
Segment sales rose 8% to $4.0 billion, orders declined 3%, and operating
profits were lower for the year due to pricing pressures in the paging and modem
businesses, possible inventory reduction by paging operators, restructuring and
unusual charges, and increased investments in new technologies.
In 1996, the Messaging Systems Products Group (MSPG), which represents a
majority of this segment's revenues, experienced slower sales growth and a small
decline in orders. The decline in orders was primarily attributable to the Asian
markets. For the year in the North American market for paging products, sales
growth was strong but orders were lower in the fourth quarter as MSPG believes
paging operators reduced inventories in order to improve their financial
positions and cash flow. MSPG also believes that sales by operators to consumers
in North America during the fourth quarter continued to grow. In the U.S., the
percentage of MSPG subscriber products distributed through retail channels
continues to increase. For the year, there also was strong growth in pager sales
in the South American and European markets. The European markets continued to
expand at above-average rates due to consumer services added in both Western and
Eastern Europe, particularly in Russia.
MSPG continues to be successful in its efforts to make the FLEX(TM) family
of communication products, which includes FLEX(TM), ReFLEX(TM), and
InFLEXion(TM) technologies, the de facto worldwide standard for high-speed
messaging technology. More than 110 operators have adopted the FLEX protocol in
over 33 countries, and more than 60 FLEX communication systems are in commercial
use. ReFLEX(TM) systems provide both data messaging and two-way wireless
messaging, while InFLEXion(TM) systems enable one-way voice capability as well
as two-way high-speed data transmission. In September, the group also announced
the PageWriter(TM) two-way pager. This is the world's first pager with a
standard QWERTY-type keyboard, and is based on the Platform Software Division's
Memos(TM) open operating system which was designed for wireless messaging
devices. Also, the group began shipping the Tenor(TM) advanced voice pager which
accepts and stores voice messages and operates like a portable answering
machine.
The segment's Information Systems Group (ISG) revenue increased, driven
entirely by unit volume growth. ISG experienced significant pricing pressures in
1996, particularly in the consumer modem market.
ISG announced the first in a series of software-based communications
products, a V.34 data/fax/voice host-base modem that uses a computer's central
processing unit to perform modem
9
<PAGE>
functions. Also announced was a new Voice Relay(TM) option for the Vanguard(R)
100 Frame Relay Access Device (FRAD). ISG also began shipping the industry's
first 33.6 kilobytes-per-second (Kbps) modem/fax/LAN (Local Area Network) PC
Card. Additionally, ISG announced the Tidal Wave program for upgrading 28.8 or
33.6 Kbps modems to either 56 Kbps or ISDN (Integrated Services Digital Network)
modem technology.
The Wireless Data Group (WDG) had modest growth in sales and orders versus
a year ago as subscriber growth in the wireless data industry also grew at a
modest rate in 1996. New product introductions included the Personal
Messenger(R) 100C Wireless Modem Card for wide-area communications on the
Cellular Digital Packet Data network. In December, WDG announced plans to
discontinue sales of its Envoy(R) and Marco(R) personal digital assistants and
refocus the technology toward the corporate market.
The segment's Multimedia Group, formed in early 1995, continues to enter a
new marketplace made possible by the development of technology and products that
enable hybrid fiber coax networks to expand their capacity to carry telephony
and high-speed data traffic for residential and commercial marketplaces. This
group is still very much in an early developmental phase and made increasingly
greater investments in engineering, selling and general administrative functions
than in 1995. The group announced its first major international purchase
agreement for CableComm telephony products with Optus Vision of Australia.
Motorola also signed contracts to supply the CyberSURFR(TM) cable modems to the
top 6 cable operators in the U.S.
The Lexicus Division is a supplier of handwriting and speech recognition
products which enable the input and retrieval of computer information without
the use of a keyboard. Lexicus Division products are in the introduction stage.
In 1996, the Lexicus Division announced that its QuickPrint(R) handwriting
recognition software and CrystalTalk(TM) speech recognition software were ported
to the OS-9(R) Real-Time Operating System from Microware Systems Corporation.
OTHER PRODUCTS
The Other Products segment primarily includes the Automotive, Energy and
Components Sector (AECS), formerly the Automotive, Energy and Controls Group,
and the Space and Systems Technology Group (SSTG), formerly the Government and
Space Technology Group.
AUTOMOTIVE, ENERGY AND COMPONENTS SECTOR
AECS manufactures and sells products in three major categories: automotive
and industrial electronics; energy storage products and systems; and printed
circuit boards, and ceramic and quartz electronic components.
For the year, sector sales declined 5%, orders were 5% lower, and operating
profits were lower. Pricing pressures and reduced demand for components and
rechargeable batteries for cellular telephones were the primary factors in the
Sector's performance versus a year ago.
Automotive and Industrial Electronics Group (AIEG) sales and orders
increased over the prior year. AIEG announced a joint venture with Shanghai
Instrumentation Corporation of China. Called Motorola Automotive Electronics
Company, it will help to build relationships with current and new automotive
customers around the world.
Milestones during the year for AIEG included production of the group's
200,000th engine controller for Detroit Diesel, and its 10 millionth pressure
sensor. AIEG's manufacturing facility in Angers, France received a national
quality award from the Mouvement Francais pour la Qualite, the French equivalent
of the Malcolm Baldrige National Quality Award.
10
<PAGE>
The group began full production of Ford Motor Company's Lincoln RESCU(TM)
system consisting of an emergency communication system employing sophisticated
onboard vehicle electronics. The system is designed to provide improved safety
and security for motorists and combines Global Positioning Satellite (GPS)
location with voice communication via standard cellular technology to put the
driver in touch with a public safety agency or roadside assistance program. In
addition, Mercedes-Benz AG announced that it would offer Motorola's emergency
messaging and mobile information services in vehicles for the European market.
The Energy Products Division (EPD) experienced lower sales and orders. EPD
introduced the first single-cell lithium ion battery pack, enabling the
StarTAC(TM) cellular telephone to be the smallest, lightest cellular phone on
the market. EPD also introduced the new Universal Travel Charger, which
provides a small portable charging system for the MicroTAC(R) cellular telephone
that can be used with all of the various electrical voltages and currents around
the world. EPD expanded its notebook computing products with the introduction
of the first "smart" computer battery. By enabling full communication between
the battery and the notebook computer, the computer can both monitor and control
its energy system to achieve maximum performance.
In the Components Products Group (CPG), sales and orders were lower. CPG
shipped new Multilayer Ceramic Integrated Circuit (MCIC) products. The filters
enable cellular telephone manufacturers to continue improving the talk time of
their products. The group introduced a temperature compensated crystal
oscillator with accepted industry standard packaging that provides higher
reliability and reduced cost for digital radio applications.
The Sector established the Flat Panel Display Division which made
significant progress in commercializing the next generation flat panel display
technology. Engineering 5-inch Field Emission Displays were demonstrated and
customer sampling is expected to begin in the second half of 1997.
SPACE AND SYSTEMS TECHNOLOGY GROUP
The Space and Systems Technology Group (SSTG) is engaged in the design,
development and production of advanced electronic communication systems and
products for a host of international and domestic commercial and government
users. The group changed its name from the Government and Space Technology Group
to reflect its emphasis on becoming a premier systems developer and integrator.
The group's Satellite Communications Group is developing the IRIDIUM(R) global
communications system.
Group sales for the year rose 20% due to increased sales by the Satellite
Communications Group to Iridium LLC, a Delaware limited liability company.
Orders were 49% higher than a year ago and operating profits were higher. No
orders from Iridium LLC were booked during the fourth quarter, because orders in
previous quarters had reached the present total financing available to Iridium
LLC. Development of the IRIDIUM global communications system continued on
schedule, as Motorola met all contractual milestones during the year.
At the end of 1996, the Company was a 24% equity owner in Iridium LLC and,
during the year, agreed to guarantee up to $750 million of bank financing for a
short term credit facility that Iridium LLC is using during the initial
technology deployment and regulatory approval phases of the IRIDIUM project. An
agreement in principle has been reached with Iridium LLC to increase the
Company's guarantee of Iridium LLC bank financing by an additional $350 million
to a new total of $1.1 billion.
Iridium LLC will require additional funding, possibly before the end of the
second quarter, to continue to make contractual payments to Motorola and Iridium
LLC is currently negotiating to increase its current credit facility.
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<PAGE>
Iridium LLC also is expected to require other financial support from various
sources in order to complete the global communications system, which is expected
to take place over the next two years. There can be no assurances as to the
outcome of these negotiations. There also can be no assurance that Motorola or
any other person will provide funding or financial support. Motorola is the
largest investor in Iridium LLC and a failure of Iridium LLC to obtain
additional funding would have a material adverse effect on Motorola's
investments in Iridium LLC, in several IRIDIUM Gateway companies and in
ancillary products. In addition, the Company will have significant contractual
and financial obligations remaining under several subcontracts in the event that
Iridium LLC is unable to obtain additional funding.
The start of satellite launches began in May of 1997. Depreciation expense
for IRIDIUM satellites, which are expected to be depreciated over five years,
began upon first launch and will increase steadily as more of the 66 satellite
constellation is placed into orbit. A significant increase in staffing and
operating expenses for Iridium LLC also will be necessary in 1997 as the company
proceeds toward the start of commercial service in the fourth quarter of 1998.
As a result, Iridium LLC's losses are expected to increase by several hundred
million dollars in 1997 versus 1996. While these expenses are reported by
Iridium LLC, since Motorola is a 24% owner of the company, Motorola must use the
equity method of accounting for its investment and record its 24% share of
Iridium LLC's losses as a writedown against the investment in Iridium LLC. This
writedown is expected to affect Motorola's selling, general and administrative
expense.
The Company has executed three contracts with Iridium LLC for the
construction and operation of the global communications system, providing for
approximately $6.5 billion in payments to Motorola over a ten-year period which
began in 1993. The Company has in turn entered into significant subcontracts
for portions of the system, for which it will remain generally obligated even if
Iridium LLC is unable to satisfy the terms of the contracts with the Company,
including funding.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations reached a record $4.19 billion in 1996
compared with $3.29 billion in 1995 and $2.55 billion in 1994. The increase is
primarily due to reductions in accounts receivable and inventory balances. The
Company expects cash provided by operations to increase in 1997 but at a slower
rate than in 1996.
The number of weeks that accounts receivable were outstanding was reduced
to 6.7 for 1996 from 7.0 for 1995 and 6.8 for 1994. Inventory turns increased
to 5.6 in 1996 from 4.7 in 1995.
The Company's ratio of net debt to net debt plus equity was 13.4% at
December 31, 1996 compared with 19.9% in 1995 and 12.1% in 1994. The lower
ratio for 1996 reflects improvements of results in receivable weeks outstanding,
and a reduction in inventories and fixed asset expenditures.
The Company and its finance subsidiary have one- and five-year revolving
domestic credit agreements with a group of banks for $2 billion. These
agreements contain various conditions, covenants and representations. At
December 31, 1996, the Company's total U.S. and non-U.S. credit facilities
aggregated $4.5 billion, of which $461 million were used and the remaining $4.0
billion were not drawn, but were available to back up outstanding commercial
paper which totaled $970 million at December 31, 1996.
Capital expenditures required to support current and long-term growth
decreased to $3.0 billion from $4.2 billion in 1995 primarily because of
decisions to halt or delay building expansion and
12
<PAGE>
new construction. The 1994 expenditures totaled $3.3 billion. The Semiconductor
Products segment continues to comprise the largest portion of fixed asset
expenditures, with approximately 50% of all such investments in 1996. The
Company's capital expenditures for 1997 are expected to be flat.
A discussion of the Company's commitments and contingencies is detailed in
Note 6 to the Consolidated Financial Statements and Notes in this Proxy
Statement.
IRIDIUM(R) is a registered trademark of Iridium LLC. PowerPC(R) is a
registered trademark of IBM Corporation. All other brand names mentioned are
registered trademarks or trademarks of their respective holders, and are herein
acknowledged.
OTHER MATTERS
Environmental Matters: A discussion of the Company's environmental matters
is detailed in Note 6 to the Consolidated Financial Statements and Notes in this
Proxy Statement.
Research and Development: Expenditures increased to $2.39 billion in 1996,
up from $2.20 billion in 1995 and $1.86 billion in 1994. Over the past three
years, the Company has invested 8% to 9% of every sales dollar in product
development and technological advances, and continues to believe that a strong
commitment to research and development is required to drive long-term growth.
Restatement of Financial Statements: In July 1995, the Company sold its
U.S. 800 megahertz Specialized Mobile Radio business, systems and licenses to
Nextel Communications, Inc. for shares of Nextel stock. As reflected in the
Company's audited financial statements for 1995, the Nextel transaction was
accounted for as an exchange of productive assets with no gain realized in the
Company's 1995 Statement of Consolidated Earnings. The Nextel stock was carried
at its fair market value with an unrealized gain on the stock reported directly
to Stockholders' Equity as part of the Company's holding of marketable
securities. As reported in the Company's 1996 Consolidated Financial Statements,
the Securities and Exchange Commission (SEC) asserted during 1997 that the
Company should have recognized a gain at the time of the transaction by
accounting for the transaction at fair value with 1995 income statement
recognition. The Company and its auditors believed that the original treatment
was appropriate in the circumstances. The Company based its original accounting
treatment for the exchange of assets for Nextel stock independently from a
separate transaction in which Craig McCaw's investor group ("McCaw") entered
into agreements with Nextel and Motorola which significantly altered the
governance structure of Nextel and limited Motorola's influence over Nextel.
Among other factors, the McCaw agreements granted control of Nextel's operations
committee to McCaw and the Company agreed to vote in accordance with the
decisions of the operating committee except in certain limited circumstances.
After discussions with the SEC, the Company agreed to base the accounting on the
fact that its Nextel holdings subsequent to the McCaw investment do not qualify
for the equity method of accounting and therefore fair value accounting rather
than carryover basis accounting for purposes of the 1995 income statement
treatment is appropriate. Therefore, the Company has agreed to restate the 1995
financial statements to reflect the accounting treatment proposed by the SEC.
Other than minor reclassifications to Stockholders' Equity and Other Assets, the
restatement does not affect the Consolidated Balance Sheet because the impact of
unrealized gains related to the Nextel stock was recorded in Stockholders'
Equity during 1995 and 1996, nor does it affect the tax treatment of the
transaction. In this restatement, the Company has recorded a gain of
approximately $400 million (net of taxes) in the third quarter of 1995. The
Company also recognized the decline in share price of the Nextel stock between
the time of the transaction and December 31, 1995 as a realized loss of
approximately $133 million (net of taxes) in the fourth quarter of 1995. As a
result, 1995 earnings before income taxes have increased from $2.782
13
<PAGE>
billion to $3.225 billion and 1995 fully diluted net earnings per common and
common equivalent share have increased from $2.93 to $3.37.
BUSINESS RISK FACTORS
With the exception of historical facts, the statements contained in
Management's Discussion and Analysis of Financial Conditions and Results of
Operations are forward looking statements based on current expectations that
involve risks and uncertainties. Forward looking statements in this commentary
include, but are not limited to, statements about: (i) the global economic
outlook and growth in the developed world; the cyclical rebound in the
semiconductor business; the outlook for the communications businesses;
investment plans in 1997 and the expected benefit from those investments; 1997
depreciation expenses and fixed asset expenditures; and the impact of certain
accounting changes in the section "Motorola, Inc., 1996 Compared With 1995,"
(ii) the impact of large system orders on CIG in the discussion of General
Systems Products, (iii) the recessionary cycle in the semiconductor business and
1997 order and revenue growth; underutilized capacity; average selling prices
and likelihood of double-digit operating margins in 1997; the competitive impact
of alliances between competitors; timing of the first production at the joint
venture facility in Richmond, Va. and expected 1997 capital investments, in the
Semiconductor Products discussion, (iv) the impact of large system orders in the
Land Mobile Products discussion, and (v) Iridium LLC financings and 1997
staffing and operating expenses for Iridium LLC in the Space and Systems
Technology discussion.
Motorola wishes to caution the reader that the following important factors,
and those important factors described elsewhere in the commentary, or in other
Securities and Exchange Commission filings, could affect (and in some cases have
affected) Motorola's actual results and could cause such results to differ
materially from those expressed in any forward looking statements made by, or on
behalf of, Motorola:
. The trend towards increasingly large systems contracts for CIG and LMPS
infrastructure equipment and the resulting reliance on large customers,
the technological risks of such contracts, especially when the contracts
involve new technology such as CDMA, and financial risks to Motorola
under these contracts, including the difficulty of projecting costs
associated with large contracts;
. Increasing demand for vendor financing of equipment sales particularly
for infrastructure equipment sold by CIG, LMPS and MSPG and the ability
of these businesses to provide financing on competitive terms with other
vendors;
. Pricing pressure on digital cellular subscriber products and cellular
infrastructure equipment and the impact on sales margins for those
items;
. The ability of the semiconductor industry to sustain a rebound and the
ability of Motorola's semiconductor business to capitalize on that
rebound and compete in the highly competitive semiconductor business.
Factors that could affect Motorola's ability to compete are production
inefficiencies and higher costs related to underutilized facilities,
both wholly-owned and joint venture facilities; shortage of
manufacturing capacity; start-up expenses, inefficiencies and delays and
increased depreciation costs in connection with the capital investments
in 1997 for facilities in Korea, China, Arizona and Texas; competitive
factors, such as rival chip architectures, mix of products, acceptance
of new products and price pressures; risk of inventory obsolescence due
to shifts in market demand; and the effect of lower orders from
Motorola's other businesses such as the Cellular Subscriber Sector and
the Automotive, Energy and Components Sector;
14
<PAGE>
. The ability of the Company to develop the consumer paging market and success
at making the FLEX(TM) family of communication protocols the de facto
worldwide standard in high speed messaging technology;
. The risks related to the IRIDIUM(R) project including: the ability of
investors to timely obtain licenses and sign agreements for, and to market,
the service, to timely receive and, as appropriate, operate and sell
telecommunications equipment and to otherwise timely finance and operate a
successful telecommunications business; the successful and timely orbiting of
the project's low-earth orbit satellites and the successful and timely
operation of such satellites and related ground equipment; the ability of
Iridium LLC to raise the significant funds it needs during at least the next
few years to continue to make contractual payments to Motorola and to make
debt payments and otherwise operate, including raising needed funds in early
1997; the outcome of Motorola's and Iridium LLC's negotiations to increase
Iridium LLC's bank financing and Motorola's guarantee; the risks associated
with the large IRIDIUM systems contracts and the financial risk to Motorola
under those contracts, including the difficulty in projecting costs
associated with those contracts; the market acceptance (both on its own and
when compared to possible competitors) of what is expected to be the first
worldwide global satellite-based communication service and of the related
equipment; and the significant technological and other risks associated with
the development and commercial operation of the project, including any
software and support systems-related risks;
. The risks related to the Company's significant investment in developing and
introducing new products such as two-way and voice paging, CDMA for cellular
and PCS systems, wireless local loop, flat panel display products, telephony
and high-speed cable products, integrated digital radios and next generation
DRAMS and other semiconductor products. Factors include difficulties and
delays in the development, production, testing and marketing of products;
customer acceptance of products, particularly as the Company's focus on the
consumer market increases; and the ability of the Company to differentiate
its products;
. Because more than half of the Company's sales are outside the U.S., the
Company's results could be significantly affected by weak economic conditions
in countries in which it does significant business and by changes in foreign
currency exchange rates affecting those countries;
. The ability of the Company to predict the impact of new accounting positions
and standards, particularly related to future environmental liabilities of
the Company;
. The effect of, and change in, trade, monetary and fiscal policies, laws and
regulations, other activities of U.S. and non-U.S. governments, agencies and
similar organizations, and social and economic conditions, affecting the
Company's operations, including emerging markets in Asia and Latin America
and other emerging markets; and
. The outcome of pending and future litigation and the protection and validity
of patents and other intellectual property rights.
15
<PAGE>
Item 8: Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(In millions, except as noted) Motorola, Inc. and Consolidated Subsidiaries
- --------------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 (4)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $27,973 $27,037
Earnings before income taxes 1,775 3,225
% to sales 6.3% 11.9%
Net earnings 1,154 2,048
% to sales 4.1% 7.6%
Fully diluted net earnings per common and common equivalent share (in dollars)(1) 1.90 3.37
Research and development expenditures 2,394 2,197
Fixed asset expenditures 2,973 4,225
Working capital 3,324 2,717
Current ratio 1.42 1.35
Return on average invested capital (2) 8.4% 16.7%
Return on average stockholders' equity 10.0% 20.2%
% of net debt to net debt plus equity (3) 13.4% 19.9%
Book value per common share (in dollars) 19.88 18.57
Year-end employment (in thousands) 139 142
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Primary earnings per common and common equivalent share were the same as
fully diluted for the full years ended December 31, 1996 and December 31,
1995.
(2) Average invested capital is defined as stockholders' equity plus long and
short-term debt less short-term investments (including those short-term
investments categorized as cash equivalents).
(3) Includes short-term investments categorized as cash equivalents.
(4) Amounts have been restated to reflect the gain on the Nextel asset exchange
further discussed in Note 9.
16
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
- ----------------------------------------------------
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this report. The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles, applying certain
estimates and judgments as required.
Motorola's internal controls are designed to provide reasonable assurance as to
the integrity and reliability of the financial statements and to adequately
safeguard, verify and maintain accountability of assets. Such controls are based
on established written policies and procedures, are implemented by trained,
skilled personnel with an appropriate segregation of duties and are monitored
through a comprehensive internal audit program. These policies and procedures
prescribe that the Company and all its employees are to maintain the highest
ethical standards and that its business practices throughout the world are to be
conducted in a manner which is above reproach.
KPMG Peat Marwick LLP, independent auditors, are retained to audit Motorola's
financial statements. Their accompanying report is based on audits conducted in
accordance with generally accepted auditing standards, which include the
consideration of the Company's internal controls to establish a basis for
reliance thereon in determining the nature, timing and extent of audit tests to
be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management Board members. The Audit Committee meets periodically with the
independent auditors and with the Company's internal auditors, both privately
and with management present, to review accounting, auditing, internal controls
and financial reporting matters.
/S/ SIGNATURE /S/ SIGNATURE
Christopher B. Galvin Carl F. Koenemann
Chief Executive Officer Executive Vice President
and Chief Financial Officer
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors and Stockholders of Motorola, Inc.:
We have audited the accompanying consolidated balance sheets of Motorola, Inc.
and consolidated subsidiaries as of December 31, 1996 and 1995, and the related
statements of consolidated earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements have been restated as disclosed in note 9.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Motorola, Inc. and
consolidated subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/S/ SIGNATURE
KPMG Peat Marwick LLP
Chicago, Illinois
January 9, 1997, except as to Note 9, which is as of May 9, 1997
18
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED EARNINGS
(In millions, except per share amounts) Motorola, Inc. and Consolidated Subsidiaries
- ----------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $27,973 $27,037 $22,245
-----------------------------------------------------------------------------------
Costs and expenses
Manufacturing and other costs of sales 18,990 17,545 13,760
Selling, general and administrative expenses 4,715 4,642 4,381
Depreciation expense 2,308 1,919 1,525
Interest expense, net 185 149 142
- ----------------------------------------------------------------------------------------
Total costs and expenses 26,198 24,255 19,808
- ----------------------------------------------------------------------------------------
Net gain on Nextel asset exchange (Note 9) --- 443 ---
- ----------------------------------------------------------------------------------------
Earnings before income taxes (3) 1,775 3,225 2,437
- ----------------------------------------------------------------------------------------
Income taxes provided on earnings (3) 621 1,177 877
- ----------------------------------------------------------------------------------------
Net earnings (3) $ 1,154 $ 2,048 $ 1,560
- ----------------------------------------------------------------------------------------
Fully diluted net earnings per common
and common equivalent share (1,2,3) $ 1.90 $ 3.37 $ 2.65
- ----------------------------------------------------------------------------------------
Fully diluted average common and common
equivalent shares outstanding (1,2) 609.6 609.8 592.7
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Primary earnings per common and common equivalent share were the same as
fully diluted for all years shown, except in 1994 when they were one cent
higher than fully diluted. Average primary common and common equivalent
shares outstanding for 1996, 1995 and 1994 were 609.0, 609.7 and 591.7,
respectively (which includes the dilutive effects of the convertible zero
coupon notes and the outstanding stock options.)
(2) Includes adjustments for the 1994 two-for-one stock split effected in the
form of a 100 percent stock dividend.
(3) 1995 earnings before income taxes, income taxes provided on earnings, net
earnings and the related earnings per fully diluted common and common
equivalent share would have been $2,782, $1,001, $1,781, and $2.93,
respectively, without the one-time gain on the exchange of 800 megahertz
Specialized Mobile Radio business, systems and licenses in the U.S. to
Nextel Communications, Inc. for shares of Nextel stock as described in Note
9.
19
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(In millions, except per share amounts) Motorola, Inc. and Consolidated Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock and
Additional Paid-In Capital (1) Retained Earnings
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Years ended December 31 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1 $3,257 $3,138 $1,875 $7,728 $5,917 $4,534
Net earnings - - - 1,154 2,048 1,560
Conversion of zero coupon notes 7 23 251 - - -
Stock issuance (2) - - 973 - - -
Unrealized net gain (loss) on certain investments (103) 85 (8) - - -
Stock options exercised and other 24 11 47 - - -
Dividends declared ($.46 per share
in 1996, $.40 in 1995
and $.31 in 1994) - - - (272) (237) (177)
--------------------------------------------------------------------------------------------------------------------------------
Balances at December 31 $3,185 $3,257 $3,138 $8,610 $7,728 $5,917
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1994 Stock Split: An amount equal to the par value of the additional shares
issued was transferred from additional paid-in capital to common stock due
to the two-for-one stock split effected in the form of a 100 percent stock
dividend. All references to shares outstanding, dividends and per share
amounts during 1994 have been adjusted on a retroactive basis.
(2) During November 1994, the Company completed a public equity offering of 17.1
million shares of common stock.
See accompanying notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Current assets
Cash and cash equivalents $ 1,513 $ 725
Short-term investments 298 350
Account receivable, less allowance for doubtful accounts
(1996, $137; 1995, $123) 4,035 4,081
Inventories 3,220 3,528
Future income tax benefits 1,580 1,222
Other current assets 673 604
----------------------------------------------------------------------------------
Total current assets 11,319 10,510
----------------------------------------------------------------------------------
Property, plant and equipment, less accumulated depreciation 9,768 9,356
(1996, $9,830; 1995, $8,110)
Other assets 2,989 2,872
----------------------------------------------------------------------------------
Total assets $ 24,076 $ 22,738
- ---------------------------------------------------------------------------------------------------
Liabilities and Current liabilities
Stockholders' Notes payable and current portion of long-term debt $ 1,382 $ 1,605
Equity Accounts payable 2,050 2,018
Accrued liabilities 4,563 4,170
----------------------------------------------------------------------------------
Total current liabilities 7,995 7,793
----------------------------------------------------------------------------------
Long-term debt 1,931 1,949
Deferred income taxes 1,108 968
Other liabilities 1,247 1,043
----------------------------------------------------------------------------------
Stockholders' equity
Common stock, $3 par value
Authorized shares: 1996 and 1995, 1,400
Issued and outstanding shares: 1996, 593.4; 1995, 591.4 1,780 1,774
Preferred stock, $100 par value issuable in series
Authorized shares: 0.5 (none issued) -- --
Additional paid-in capital 1,405 1,483
Retained earnings 8,610 7,728
----------------------------------------------------------------------------------
Total stockholders' equity 11,795 10,985
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 24,076 $ 22,738
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In millions) Motorola, Inc. and Consolidated Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Net earnings $ 1,154 $ 2,048 $ 1,560
Add (deduct) non-cash items
Depreciation 2,308 1,919 1,525
Deferred income taxes (160) (55) (177)
Amortization of debt discount and issue costs 8 12 22
Gain on disposition of investments in affiliated companies (78) (111) (9)
Non-cash gain on Nextel asset exchange -- (267) --
Change in assets and liabilities, net of effects of
acquisitions and dispositions
Accounts receivable, net 101 (653) (945)
Inventories 308 (856) (806)
Other current assets (69) (100) (328)
Accounts payable and accrued liabilities 398 1,172 1,134
Other assets 14 8 554
Other liabilities 206 148 (19)
------------------------------------------------------------------------------------------------
Net cash provided by operations 4,190 3,265 2,511
- -----------------------------------------------------------------------------------------------------------
Investing Acquisitions and advances to affiliated companies (346) (563) (894)
Dispositions of investments in affiliated companies 119 252 23
Payments for property, plant and equipment (2,973) (4,225) (3,320)
Other changes to property, plant and equipment, net 242 (11) 183
(Increase) decrease in short-term investments 52 (32) 40
------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,906) (4,579) (3,968)
- -----------------------------------------------------------------------------------------------------------
Financing Net increase (decrease) in commercial paper and short-term
borrowings less than 90 days (260) 686 517
Proceeds from issuance of debt 55 851 32
Repayment of debt (37) (74) (190)
Issuance of common stock 7 71 1,102
Payment of dividends (261) (236) (149)
------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (496) 1,298 1,312
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 788 $ (16) $ (145)
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 725 $ 741 $ 886
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,513 $ 725 $ 741
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION
(In millions) Motorola, Inc. and Consolidated Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Cash Activities
Conversion of zero coupon notes $ 7 $ 23 $ 251
Unrealized net gain (loss) on certain investments $ (103) $ 85 $ (8)
===========================================================================================================
</TABLE>
22
<PAGE>
1. Summary of Significant Accounting Policies
- -----------------------------------------------
Consolidation and Investments: The consolidated financial statements include the
accounts of the Company and all those majority-owned subsidiaries where the
Company has control. The Company's non-controlled investments in entities in
which it has the ability to exercise significant influence over operating and
financial policies are accounted for by the equity method. Accordingly, the
Company's share of the net earnings of these entities is included in
consolidated net income. The Company's non-controlled investments in other
entities are carried at cost. Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
requires the carrying value of certain cost-based investments to be adjusted to
fair value, which resulted in the Company recording a decrease to stockholders'
equity, other assets and deferred taxes of $26 million, $43 million and $17
million as of December 31, 1996; and an increase to stockholders' equity, other
assets and deferred taxes of $77 million, $128 million and $51 million as of
December 31, 1995.
Cash Equivalents: The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Revenue Recognition: The Company uses the percentage-of-completion method to
recognize revenues and costs associated with most long-term contracts. For
contracts involving certain new technologies, revenues and profits or parts
thereof are deferred until technological feasibility is established, customer
acceptance is obtained and other contract-specific factors have been completed.
For other product sales, revenue is recognized at the time of shipment, and
reserves are established for price protection and cooperative marketing programs
with distributors.
Inventories: Inventories are valued at the lower of average cost (which
approximates computation on a first-in, first-out basis) or market (i.e., net
realizable value or replacement cost). As of December 31, 1996, contract field
inventories (inventory held by the customer for which no sale has yet been
recorded) were $222 million.
Property, Plant and Equipment: Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation is recorded principally using the
declining-balance method, based on the estimated useful lives of the assets
(buildings and building equipment, 5-50 years; machinery and equipment, 2-12
years).
Foreign Currency Translation: The Company's European and Japanese operations and
certain non-consolidated affiliates use the respective local currencies, instead
of the U.S. dollar, as the functional currency. For all other operations, the
Company uses the U.S. dollar as the functional currency. The effects of
translating the financial position and results of operations of local functional
currency operations are included in stockholders' equity. The effects of foreign
currency transactions and of remeasuring the financial position and results of
non-U.S. operations into the functional currency are included in the statement
of earnings.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and
23
<PAGE>
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company's periodic filings
with the Securities and Exchange Commission include, where applicable,
disclosures of estimates, assumptions, uncertainties and concentrations in
products, sources of supply and markets which could affect the financial
statements and future operations of the Company.
Reclassifications: Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1996 presentation.
24
<PAGE>
(In millions, except as noted)
2. Income Taxes
- -----------------
Components of earnings before income taxes
1996 1995 1994
- ----------------------------------------------------------
United States $ 433 $ 1,350 $ 1,140
Other nations 1,342 1,875 1,297
--------------------------------
Total $ 1,775 $ 3,225 $ 2,437
- ----------------------------------------------------------
Components of income taxes provided on earnings
1996 1995 1994
- ----------------------------------------------------------
Current:
United States $ 547 $ 400 $ 728
Other nations 276 386 254
State income taxes (U.S.) 16 50 72
-----------------------------
839 836 1,054
(218) 341 (177)
Deferred -----------------------------
Income taxes $ 621 $ 1,177 $ 877
- ----------------------------------------------------------
Income tax payments were $506 million in 1996, $947 million in 1995 and $962
million in 1994.
Except for certain earnings that Motorola, Inc. intends to reinvest
indefinitely, provisions have been made for the cumulative estimated U.S.
federal income tax liabilities applicable to undistributed earnings of
affiliates and associated companies. Undistributed earnings for which no U.S.
income tax has been provided aggregated $4.0 billion and $3.5 billion at
December 31, 1996 and 1995, respectively. Should these earnings be distributed,
foreign tax credits may reduce the additional U.S. income tax which would be
payable. In cases where taxes are provided on such undistributed earnings, those
taxes have been included in U.S. income taxes.
At December 31, 1996, certain non-U.S. subsidiaries had loss carryforwards for
income tax reporting purposes of $141.6 million, with expiration dates starting
in 1997.
Differences between income tax expense computed at the U.S.
federal statutory tax rate of 35% for 1996, 1995 and 1994
and income taxes provided on earnings
1996 1995 1994
- ----------------------------------------------------------
Income tax expense at
statutory rate $ 621 $ 1,129 $ 853
Taxes on non-U.S. earnings 92 47 13
State income taxes 7 61 46
Foreign Sales Corporation (73) (45) (46)
Tax credits (10) (8) (6)
Other (16) (7) 17
------------------------
Income taxes $ 621 $ 1,177 $ 877
- ----------------------------------------------------------
25
<PAGE>
(In millions, except as noted)
Significant deferred tax assets (liabilities)
December 31 1996 1995
- ----------------------------------------------------------
Inventory reserves $ 440 $ 345
Contract accounting methods 231 157
Employee benefits 291 286
Capitalized items 138 89
Tax basis differences on investments (199) (176)
Depreciation (213) (197)
Deferred taxes on non-U.S. earnings (545) (382)
Other deferred income taxes 329 132
-------------------
Net deferred tax asset $ 472 $ 254
- ----------------------------------------------------------
Gross deferred tax assets were $2,264 million and $1,753 million at December 31,
1996 and 1995, respectively. Gross deferred tax liabilities were $1,792 million
and $1,499 million at December 31, 1996 and 1995, respectively.
The deferred tax assets are considered realizable given past income and
estimates of future income. These considerations include, but are not limited
to, carrybacks, earnings trends and tax planning strategies.
The Internal Revenue Service (IRS) has examined the federal income tax returns
for Motorola, Inc. through 1987 and has settled the respective returns through
1985. The IRS has completed its field audit of the years 1986 and 1987. In
connection with the 1986 and 1987 tax years, the Company settled the return for
adjustments agreed to at the field level. Certain adjustments were referred to
the Appeals level of the IRS and are expected to result in a net refund. The IRS
is currently reviewing the 1988 through 1991 period and has proposed certain
adjustments. In the opinion of the Company's management, the final disposition
of these matters, and proposed adjustments from other tax authorities, will not
have a material adverse effect on the consolidated financial position, liquidity
or results of operations of the Company.
26
<PAGE>
(In millions, except as noted)
3. Debt and Credit Facilities
- ------------------------------
<TABLE>
<CAPTION>
Long-term debt
December 31 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
7.5% debentures due 2025 $ 397 $ 397
6.5% debentures due 2025 (redeemable
at the holders' option in 2005) 397 397
7.6% notes due 2007 300 300
6.5% debentures due 2008 199 199
Zero coupon notes due 2009 29 34
Zero coupon notes due 2013 330 325
8.4% debentures due 2031
(redeemable at the holders' option in 2001) 200 200
Other long-term debt 126 110
----------------
1,978 1,962
Less current maturities 47 13
----------------
Long-term debt $1,931 $1,949
- --------------------------------------------------------------------------
Short-term debt
December 31 1996 1995
- --------------------------------------------------------------------------
Notes to banks $ 360 $ 212
Commercial paper 970 1,375
Other short-term debt 5 5
----------------
1,335 1,592
Add current maturities of long-term debt 47 13
----------------
Notes payable and current
portion of long-term debt $1,382 $1,605
- --------------------------------------------------------------------------
Weighted average interest rates on short-term borrowings
- --------------------------------------------------------------------------
Commercial paper 5.4% 5.9%
Other short-term debt 7.1% 6.8%
- --------------------------------------------------------------------------
</TABLE>
As of December 31, 1996, the outstanding zero coupon notes due 2009, referred to
as Liquid Yield Option(TM) Notes (LYONs(TM)), had a face value at maturity of
$62 million. The 2009 LYONs were priced at a 6% yield to maturity and are now
convertible into 18.268 shares of Motorola common stock for each $1,000 note.
During 1996, various holders of the 2009 LYONs exercised conversion rights for
approximately 14,000 notes ($14 million face value; $6.5 million net carrying
value).
At December 31, 1996, the LYONs due 2013 had a face value of approximately $480
million at maturity. The 2013 LYONs were priced to yield 2.25% to maturity and
are convertible into 11.178 shares of Motorola common stock for each $1,000
note.
The LYONs issues are subordinated to all existing and future senior indebtedness
of the Company, rank on a parity with each other, and may be put back to the
Company by the holders on specific dates prior to the stated maturities.
27
<PAGE>
(In millions, except as noted)
During December 1995, the Company filed and declared effective a universal shelf
registration statement totaling $1.0 billion of debt and equity securities with
the Securities and Exchange Commission. As of December 31, 1996, no securities
have been issued under this universal shelf registration statement.
Aggregate requirements for long-term debt maturities, in millions, during the
next five years are as follows: 1997, $47; 1998, $25; 1999, $21; 2000, $3; 2001,
$2.
The Company and its finance subsidiary have one- and five-year revolving
domestic credit agreements with a group of banks for $2.0 billion. These
domestic credit agreements contain various conditions, covenants and
representations. At December 31, 1996, the Company's total domestic and non-U.S.
credit facilities aggregated $4.3 billion, of which $461 million were used and
the remaining $3.8 billion were not drawn, but were available to back up
outstanding commercial paper which totaled $970 million at December 31, 1996.
Outstanding letters of credit aggregated approximately $175 million and $285
million at December 31, 1996 and 1995, respectively.
LYONs is a trademark of Merrill Lynch & Co., Inc.
28
<PAGE>
(In millions, except as noted)
4. Other Financial Data
- ------------------------
Income Statement and Balance Sheet Information
- ----------------------------------------------
<TABLE>
<CAPTION>
Income statement information
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development $ 2,394 $ 2,197 $ 1,860
----------------------------
Foreign currency (gains)/losses (8) 4 25
----------------------------
Interest expense, net:
Interest expense 249 213 192
Interest income (64) (64) (50)
----------------------------
Interest expense, net $ 185 $ 149 $ 142
- -------------------------------------------------------------------------------
</TABLE>
The Company's cash payments for interest expense were $237 million in 1996, $193
million in 1995 and $209 million in 1994.
29
<PAGE>
(In millions, except as noted)
Balance sheet information
December 31 1996 1995
- --------------------------------------------------------------------
Inventories:
Finished goods $ 830 $ 1,026
W.I.P and production materials 2,390 2,502
-------------------
Total $ 3,220 $ 3,528
-------------------
Property, plant and equipment:
Land $ 261 $ 201
Buildings 5,362 4,754
Machinery 13,975 12,511
-------------------
19,598 17,466
Less accumulated depreciation (9,830) (8,110)
-------------------
Total $ 9,768 $ 9,356
-------------------
Other assets:
Equity based investments in
non-consolidated subsidiaries $ 928 $ 823
Cost based investments in
non-consolidated subsidiaries 1,133 1,091
Fair value adjustment of qualified
SFAS No. 115 investments (43) 128
Other 971 830
-------------------
Total $ 2,989 $ 2,872
-------------------
Accrued liabilities:
Compensation $ 460 $ 682
Customer reserves 385 349
Deferred revenue 218 287
Accrued warranties 314 309
Taxes other than income 185 162
Income taxes payable 246 125
Contribution to employees'
profit sharing funds 82 194
Dividends payable 71 59
Other 2,602 2,003
-------------------
Total $ 4,563 $ 4,170
- ------------------------------------------------------------------
Derivative Financial Instruments
- --------------------------------
The Company uses financial instruments to hedge, and therefore attempt to
reduce, its overall exposure to the effects of currency fluctuations on cash
flows. The Company does not speculate in financial instruments for profit on the
exchange rate price fluctuation, trade in currencies for which there are no
underlying exposures, or enter into trades for any currency to intentionally
increase the underlying exposure.
30
<PAGE>
The Company's strategy is to offset the gains or losses of the financial
instruments against losses or gains on the underlying operational cash flows or
investments based on the operating business units' assessment of risk. Gains and
losses on hedges of existing assets or liabilities are marked to market on a
monthly basis. Other gains or losses on financial instruments that do not
qualify as hedges are recognized immediately as income or expense.
Currently, the Company primarily hedges firm commitments. Gains and losses on
financial instruments which hedge firm future commitments are deferred until
such time as the underlying transactions are recognized or immediately when the
transaction is no longer expected to occur. The Company expects that there could
be hedges of anticipated transactions in the future.
Many of the Company's non-functional currency receivables and payables are
denominated in major currencies which can be traded on open markets that are
hedged. Some of the Company's exposure is to currencies which are not traded on
open markets, such as those in Latin America and China, and these are addressed,
to the extent reasonably possible, through managing net asset positions, product
pricing, and other means, such as component sourcing.
As of December 31, 1996 and 1995, the Company had net outstanding foreign
exchange contracts totaling $1.3 billion and $1.2 billion, respectively. Most of
the hedge contracts, which are over-the-counter instruments, mature within three
months with the longest maturity extending out two years. Management believes
that these financial instruments should not subject the Company to undue risk
due to foreign exchange movements because gains and losses on these contracts
should offset losses and gains on the assets, liabilities and transactions being
hedged. At December 31, 1996, deferred gains totaled $1.5 million and deferred
losses totaled $2.1 million. At December 31, 1995, deferred gains totaled $1.5
million and deferred losses totaled $0.5 million. The following schedule shows
the five largest net foreign exchange hedge positions as of December 31, 1996:
Foreign Exchange Net Hedge Positions at December 31
In millions of U.S. dollars
Buy (Sell) 1996 1995
- -----------------------------------------------------------------
British Pound Sterling $ (363) $ (226)
Japanese Yen (258) (373)
Italian Lira (115) (91)
Singapore Dollar 84 83
French Franc (82) (44)
- -----------------------------------------------------------------
The Company is exposed to credit-related losses if counterparties to financial
instruments fail to perform their obligations. However, it does not expect any
counterparties, which presently have high credit ratings, to fail to meet their
obligations.
At December 31, 1996, the Company had no outstanding interest rate swaps or
options.
Fair Value of Financial Instruments
- -----------------------------------
31
<PAGE>
(In millions, except as noted)
The Company's financial instruments include accounts receivable, short-term
investments, long-term finance receivables, accounts payable, notes payable,
long-term debt, foreign currency contracts and other financing commitments. At
December 31, 1996, the fair value of the convertible zero coupon notes due 2013
was $397 million compared to a carrying value of $330 million. The convertible
zero coupon notes due 2013 will be callable by the Company commencing September
1998.
The fair values of financial instruments have been determined based on quoted
market prices and market interest rates as of December 31, 1996 or were not
materially different than their carrying (or contract) values.
Finance Subsidiary
- ------------------
The Company's finance subsidiary purchases customer obligations under long-term
contracts from the Company at net carrying value.
The finance subsidiary's interest revenue is included in the Company's
consolidated net sales. Interest expense totaled $14 million in 1996 and $15
million in 1995 and 1994 and is included in manufacturing and other costs of
sales. In addition, long-term finance receivables of $289 million in 1996 and
$290 million in 1995 are included in other assets.
Financial Data of Consolidated Finance Subsidiary
1996 1995 1994
- --------------------------------------------------------------------
Total revenue $27,973 $27,037 $22,246
Net earnings 1,154 2,064 1,560
Total assets 23,661 22,766 17,495
Total debt (12,102) (11,748) (8,440)
Stockholder's investments
and advances $11,559 $11,018 $ 9,055
- --------------------------------------------------------------------
Leases
- ------
The Company owns most of its major facilities, but does lease certain office,
factory and warehouse space, land, and data processing and other equipment under
principally noncancelable operating leases. Rental expense, net of sublease
income, was $279 million in 1996, $222 million in 1995 and $185 million in 1994.
At December 31, 1996, future minimum lease obligations, net of minimum sublease
rentals, for the next five years and beyond, in millions, are as follows: 1997,
$178; 1998, $148; 1999, $96; 2000, $69; 2001, $44; beyond, $142.
32
<PAGE>
(In millions, except as noted)
5. Employee Benefit and Incentive Plans
- ----------------------------------------
Pension Benefits
- ----------------
The Company's noncontributory pension plan covers most U.S. employees after one
year of service. The benefit formula is dependent upon employee earnings and
years of service. The Company's policy is to fund the accrued pension cost or
the amount allowable based on the full funding limitations of the Internal
Revenue Code, if less. The Company has a noncontributory supplemental retirement
benefit plan for its elected officers. The plan contains provisions for funding
the participants' expected retirement benefits when the participants meet the
minimum age and years of service requirements.
Certain non-U.S. subsidiaries have varying types of retirement plans providing
benefits for substantially all of their employees. Amounts charged to earnings
for all non-U.S. plans were $103 million in 1996, $82 million in 1995 and $68
million in 1994.
The Company uses a three-year, market-related asset value method of amortizing
asset-related gains and losses. Net transition amounts and prior service costs
are being amortized over periods ranging from 10 to 15 years.
Benefits under all U.S. pension plans are valued based upon the projected unit
credit cost method. The assumptions used to develop the projected benefit
obligations for the plans for 1996 and 1995 were as follows:
1996 1995
- -------------------------------------------------------------------
Discount rate for obligations 7.75% 7.75%
Future compensation increase rate 4.50% 4.50%
Investment return assumption (regular) 9.00% 9.00%
Investment return assumption (elected officers) 6.00% 6.50%
- -------------------------------------------------------------------
Accounting literature requires discount rates to be established based on
prevailing market rates for high-quality fixed-income instruments that, if the
pension benefit obligation was settled at the measurement date, would provide
the necessary future cash flows to pay the benefit obligation when due. As of
December 31, 1996, the investment portfolio was predominantly equity
investments, which have historically realized annual returns at or significantly
above the assumed investment return rate. The Company believes that discount
rate fluctuations are short-term in nature and should not adversely affect the
Company's long-term obligation.
Components of net U.S. pension expense for the
regular pension plan
1996 1995 1994
- -------------------------------------------------------------------
Service costs $ 147 $ 126 $ 119
Interest cost on projected obligation 124 107 83
Actual return on plan assets (279) (334) 7
Net amortization and deferral 137 213 (113)
------------------------
Net pension expense $ 129 $ 112 $ 96
- -------------------------------------------------------------------
33
<PAGE>
(In millions, except as noted)
The net U.S. pension expense for the elected officers' supplemental retirement
benefit plan was $39 million in 1996, $31 million in 1995 and $27 million in
1994. The net U.S. pension expense for the Motorola Supplemental Pension Plan
was $2 million in 1996 and 1995. No expense was incurred in 1994.
<TABLE>
<CAPTION>
U.S. funded pension plans
December 31 1996 1995
- --------------------------------------------------------------------------------------------
Elected Elected
Officers Officers
and and
Regular Other(1) Regular Other(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ (1,329) $ (64) $ (1,110) $ (55)
--------------------------------------------
Accumulated benefit obligation (1,408) (119) (1,193) (96)
--------------------------------------------
Projected benefit obligation for service
rendered to date (1,863) (140) (1,585) (113)
Plan assets at fair value, primarily bonds,
stocks and cash equivalents 1,927 76 1,537 74
--------------------------------------------
Plan assets in excess of/(less than) the
projected benefit obligation 64 (64) (48) (39)
Unrecognized net (gain)/loss (69) 56 41 26
Unrecognized prior service cost 1 25 1 32
Unrecognized net transition (asset) liability (23) 5 (35) 6
Adjustment required to recognize minimum
liability -- (65) -- (47)
--------------------------------------------
Pension liability recognized in balance sheet $ (27) $ (43) $ (41) $ (22)
- --------------------------------------------------------------------------------------------
(1) Includes the Motorola Supplemental Pension Plan which became effective January
1, 1994. The Plan was established and will be maintained by Motorola, Inc. for
the purpose of providing supplemental benefits in excess of the limitation imposed
by the Internal Revenue Code on defined benefit plans for certain of its employees
(excluding elected officers) who participate in the Motorola, Inc. Pension Plan.
</TABLE>
Postretirement Health Care Benefits
- -----------------------------------
In addition to providing pension benefits, the Company provides certain health
care benefits to its retired employees. The majority of its domestic employees
may become eligible for these benefits if they reach normal retirement age while
working for the Company. The Company's policy is to fund the maximum amount
allowable based on funding limitations of the Internal Revenue Code.
The assumptions used to develop the accumulated postretirement benefit
obligation for the retiree health care plan for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------
<S> <C> <C>
Discount rate for obligations 7.75% 7.75%
Investment return assumption 9.00% 9.00%
- ----------------------------------------------
</TABLE>
Net retiree health care expense recognized in 1996 was $32 million, $29 million
in 1995 and $26 million in 1994.
34
<PAGE>
(In millions, except as noted)
U.S. funded retiree health care plan
December 31 1996 1995
- ----------------------------------------------------------------------------
Actuarial present value of accumulated
postretirement benefit obligation $(385) $(342)
Plan assets at fair value, primarily listed stocks,
bonds and cash equivalents 185 121
Unrecognized prior service cost (1) 2
Unrecognized net loss 72 66
----------------------
Retiree health care liability recognized in
balance sheet $(129) $(153)
- ----------------------------------------------------------------------------
The health care trend rate used to determine the pre-age 65 accumulated
postretirement benefit obligation was 8.22% for 1996, decreasing to 6% or 5% for
medical benefits, depending on the option chosen, by the year 2002 and beyond.
A flat 5% rate per year is used for the post-age 65 obligation. Changing the
health care trend rate by one percentage point would change the accumulated
postretirement benefit obligation by approximately $50 million as of December
31, 1996, and would change the 1996 net retiree health care expense by $6
million. There are no significant postretirement health care benefit plans
outside of the United States.
Other Benefits
- --------------
Profit Sharing Plans: The Company and certain subsidiaries have profit sharing
plans, principally contributory, in which all eligible employees participate.
The Company makes contributions to profit sharing funds in the United States and
other nations, which are generally based upon percentages of pretax earnings, as
defined, from those operations. Company contributions to all profit sharing
plans totaled $118 million, $194 million and $176 million in 1996, 1995 and
1994, respectively.
Motorola Executive Incentive Plan: The Company may provide up to 7% of its
annual consolidated pretax earnings, as defined in the Motorola Executive
Incentive Plan, for the payment of cash incentive awards to key employees.
During 1996, $55 million was provided for incentive awards, as compared to $137
million and $129 million in 1995 and 1994, respectively.
Long Range Incentive Program: The Company has a Long Range Incentive Program to
reward participating elected officers for the Company's achievement of
outstanding long-range performance, based on four performance objectives
measured over four-year cycles. These objectives are benchmarked and evaluated
against both similar-industry companies and internal Motorola objectives. During
1996 and 1995, respectively, $22 million and $51 million was provided for long-
range incentive awards; $18 million and $13 million was disbursed to qualifying
participants in 1996 and 1995, respectively. In 1994, when the current plan was
approved and adopted, $12 million was provided and no disbursements were made.
RONA Incentive Program: The RONA (Return On Net Assets employed) Incentive
Program is available to eligible employees who are not participating in the
Motorola Executive Incentive Plan. RONA awards are
35
<PAGE>
earned and paid semiannually to participants and depend, first, on the Company
and, in most cases, the major business unit for which the participant works,
exceeding a minimum RONA percentage (as determined by the Company) during the
six-month period and, second, the extent to which such minimum percentage was
exceeded. During 1996, $32 million was provided for RONA awards, as compared to
$234 million and $269 million in 1995 and 1994, respectively.
Stock Options: The Company applies the provisions of APB 25. The Company has
evaluated the proforma effects of the recent accounting pronouncement, SFAS No.
123, "Accounting for Stock-Based Compensation," which was effective for the
Company's fiscal year-end 1996. Based on its evaluation, the effects are not
material to the Company's consolidated financial position, liquidity or results
of operations.
Under the Company's share option plan, shares of common stock have been made
available for grant to certain employees and non-employee directors. Each option
granted has an exercise price of 100% of market value on the date of grant and
depending upon the vesting schedule is exercisable from one year to four years
from the date of grant.
Options exercised during 1996 were at per share prices ranging from $8.83 to
$58.31. Options outstanding at December 31, 1996 were at per share prices
ranging from $9.46 to $79.31. There are approximately 15,900 total current stock
option holders. All 1994 amounts and prices have been adjusted to reflect the
1994 two-for-one stock split.
Shares subject to options
(In thousands, except employee data) 1996 1995 1994
- -------------------------------------------------------------------------------
Options outstanding at January 1 26,385 24,104 22,906
Additional options granted 6,295 4,931 3,972
Options exercised (1,846) (2,535) (2,654)
Options terminated, cancelled or expired (188) (115) (120)
--------------------------
Options outstanding at December 31 30,646 26,385 24,104
Shares reserved for future option grants 31,679 8,786 13,602
--------------------------
Total shares reserved 62,325 35,171 37,706
--------------------------
Total options exercisable 24,337 21,455 20,137
- -------------------------------------------------------------------------------
Approximate number of employees granted options 13,800 10,000 7,300
36
<PAGE>
6. Commitments and Contingencies
- -------------------------------------
Financial: Development of the IRIDIUM(R) global communications system continued
on schedule, as Motorola met all contractual milestones during 1996. Initial
satellite launches, which were originally scheduled for January 1997, have been
delayed to the second quarter of 1997.
Iridium LLC, a Delaware Limited Liability Company, negotiated a $750 million
credit facility, which Motorola guaranteed, in 1996 providing it with funding
until May 1997. At that time, Iridium LLC will require further funding to
continue to make contractual payments to Motorola. As of December 31, 1996, $512
million of the credit facility had been drawn. Motorola is negotiating to
increase its guarantee of Iridium LLC bank financing, and Iridium LLC is
negotiating to increase its credit facility. These negotiations are expected to
be completed in the first half of 1997. There can be no assurances as to the
outcome of these negotiations. In addition, Iridium LLC is expected to require
other financial support from various sources in order to complete the global
communications system, which is expected to take place over the next two years.
There can also be no assurances that Motorola or any other person will provide
funding or financial support.
At the end of 1996, Motorola was a 24% equity owner and is the largest investor
in Iridium LLC. A failure of Iridium LLC to obtain additional funding would
materially adversely affect Motorola's investment in Iridium LLC, in several
Iridium Gateway companies and in ancillary products. The Company's investment in
Iridium LLC and in several Iridium Gateway companies, which is approximately
$537 million, is included in the Consolidated Balance Sheet category "Other
Assets."
The Company has executed three contracts with Iridium LLC for the construction
and operation of the global communications system, providing for approximately
$6.5 billion in payments to Motorola over a ten-year period which began in 1993.
The Company has in turn entered into significant subcontracts for portions of
the system, for which it will generally remain obligated even if Iridium LLC is
unable to satisfy the terms of the contracts with the Company, including
funding. Except as noted above, the Company had no significant concentrations of
credit risk as of December 31, 1996.
The Company has entered into arrangements whereby the Company may increase, for
an amount up to approximately $140 million, its percentage interest in certain
non-consolidated affiliates at the option of Motorola or its respective partners
at various dates which do not extend beyond 1998.
Other off-balance-sheet commitments to extend or guarantee financing and
recourse obligations under receivable sales arrangements which represent firm
obligations at December 31, 1996 and 1995, aggregated approximately $725 million
and $858 million, respectively. Commitments to extend or guarantee financing
include commitments for customer financing and for the financing of non-
consolidated affiliates. Customer financing commitments require the customer to
meet certain conditions established in the financing arrangements. Commitments
represent the maximum amounts available under these arrangements and may not be
completely utilized.
Environmental and Legal: Under the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended (CERCLA, or Superfund), the
Company has been designated as a potentially responsible party by the United
States Environmental Protection Agency with respect to certain waste sites
37
<PAGE>
with which the Company may have had direct or indirect involvement. Such
designations are made regardless of the extent of the Company's involvement.
These claims are in various stages of administrative or judicial proceedings.
They include demands for recovery of past governmental costs and for future
investigations or remedial actions. In many cases, the dollar amounts of the
claims have not been specified, and have been asserted against a number of other
entities for the same cost recovery or other relief as was asserted against the
Company. The Company accrues costs associated with environmental matters when
they become probable and reasonably estimable, and these totaled $87 million and
$86 million as of December 31, 1996 and 1995, respectively. The amount of such
charges to earnings was $29 million, $24 million and $20 million in 1996, 1995
and 1994, respectively. However, due to their uncertain nature, the amounts
accrued could differ, perhaps significantly, from the actual costs that will be
incurred. These amounts assume no substantial recovery of costs from any
insurer. The remedial efforts include environmental cleanup costs and
communication programs. These liabilities represent only the Company's share of
any possible costs incurred in environmental cleanup sites, since in most cases,
potentially responsible parties other than the Company may exist.
The Company is a defendant in various suits, including environmental and
product-related suits, and is subject to various claims which arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
consolidated financial position, liquidity or results of operations of the
Company.
IRIDIUM(R) is a registered trademark and service mark of Iridium LLC
38
<PAGE>
7. Information by Industry Segment and Geographic Region
- ----------------------------------------------------------
The Company operates predominantly in the wireless communication, semiconductor
technology and advanced electronics industries. Operations involve the design,
manufacture and sale of a diversified line of products, which include, but are
not limited to, cellular phones and systems, semiconductors, including discrete
semiconductors and integrated circuits; two-way radios, pagers, data
communication, personal communications equipment and systems; automotive,
defense and space electronic products; and computer equipment. As of December
31, 1996, manufacturing and distribution operations in any one non-U.S. country
did not account for more than 10% of consolidated net sales or total assets.
Sales and operating profits by geographical area are measured by the locale of
the revenue-producing operations. Operating profits (revenues less operating
expenses) exclude general corporate expenses, net interest and income taxes.
Intersegment and intergeographic transfers are accounted for on an arm's length
pricing basis.
Identifiable assets (excluding intersegment receivables) are the Company's
assets that are identified with classes of similar products or operations in
each geographic area. Corporate assets primarily include cash, marketable
securities, equity investments and the administrative headquarters of the
Company.
In 1996, no single customer or group under common control represented 10% or
more of the Company's sales. The equity in net assets of non-U.S. subsidiaries
amounted to $6.2 billion at December 31, 1996 and $5.5 billion at December 31,
1995.
Information for 1994 has been reclassified to reflect the realignment of various
business units. The Messaging, Information and Media Products segment includes
the Paging Products and Wireless Data groups (formerly reported as part of the
Communications segment) and the Information Systems Group (formerly reported as
part of the Other Products segment). Land Mobile Products (formerly reported as
part of the Communications segment) is a separate reportable segment. The Space
and Systems Technology Group is reported as part of the Other Products segment.
39
<PAGE>
<TABLE>
<CAPTION>
(In millions, except as noted)
==================================================================================================================================
Industry Segment Information
Net Sales Operating Profit
-------------------------------- ------------------------------------------------------------
Years ended December 31 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Systems Products $ 11,324 $ 10,660 $ 8,613 $ 1,251 11.0% $ 1,266 11.9% $ 1,214 14.1%
Semiconductor Products 7,858 8,539 6,936 382 4.9 1,218 14.3% 996 14.4%
Land Mobile Products 3,986 3,598 3,399 508 12.7% 324 9.0 311 9.1%
Messaging, Information and
Media Products 3,958 3,681 2,981 90 2.3% 310 8.4% 282 9.5%
Other Products 3,560 3,346 2,660 107 3.0% 131 3.9% 97 3.6%
Adjustments and eliminations (2,713) (2,787) (2,344) (29) - (48) - (29) -
-------------------------------- --------- --------- ---------
Industry segment totals $ 27,973 $ 27,037 $ 22,245 2,309 8.3% 3,201 11.8% 2,871 12.9%
--------------------------------
General corporate expenses (349) (270) (292)
Net gain on Nextel asset exchange --- 443 ---
Interest expense, net (185) (149) (142)
--------- --------- ---------
Earnings before income taxes $ 1,775 6.3% $ 3,225 11.9% $ 2,437 11.0%
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Assets Fixed Asset Expenditures Depreciation Expense
-------------------------------- ----------------------------- -----------------------------
Years ended December 31 1996 1995 1994 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Systems Products $ 6,736 $ 6,118 $ 4,699 $ 709 $ 762 $ 621 $ 499 $ 450 $ 327
Semiconductor Products 7,889 7,938 5,886 1,416 2,530 1,640 1,160 909 683
Land Mobile Products 2,113 2,097 2,232 158 169 217 161 155 142
Messaging, Information and 2,506 2,527 2,087 275 357 270 243 204 167
Media Products
Other Products 1,851 1,839 1,470 161 285 320 197 154 143
Adjustments and eliminations (262) (224) (72) - - - - -
-------------------------------- ----------------------------- -----------------------------
Industry segment totals 20,833 20,295 16,302 2,719 4,103 3,068 2,260 1,872 1,462
General corporate 3,243 2,443 1,193 254 122 254 48 47 63
-------------------------------- ----------------------------- -----------------------------
Consolidated totals $ 24,076 $ 22,738 $ 17,495 $ 2,973 $ 4,225 $ 3,322 $ 2,308 $ 1,919 $ 1,525
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Geographic area information (1)
Net Sales Operating Profit
-------------------------------- ------------------------------------------------------------
Years ended December 31 1996 1995 1994 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $ 20,614 $ 19,187 $ 16,297 $ 1,249 6.1% $ 1,681 8.8% $ 1,932 11.9%
Other nations 16,883 16,954 12,758 1,430 8.5% 1,901 11.2% 1,292 10.1%
Adjustments and eliminations (9,524) (9,104) (6,810) (370) - (381) - (353) -
-------------------------------- -------- -------- --------
Geographic totals $ 27,973 $27,037 $ 22,245 2,309 8.3% 3,201 11.8% 2,871 12.9%
--------------------------------
General corporate expenses (349) (270) (292)
Net gain on Nextel asset exchange --- 443 ---
Interest expense, net (185) (149) (142)
-------- -------- -------
Earnings before income taxes $ 1,775 6.3% $ 3,225 11.9% $ 2,437 11.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Assets
-----------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 12,797 $ 12,552 $ 10,750
Other nations 8,604 8,197 5,902
Adjustments and eliminations (568) (454) (350)
-----------------------------
Geographic totals 20,833 20,295 16,302
General corporate assets 3,243 2,443 1,193
-----------------------------
Consolidated totals $ 24,076 $ 22,738 $ 17,495
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As measured by the locale of the revenue-producing operations.
1994 has been reclassified to reflect the realignment of various business units.
40
<PAGE>
8. Stockholder Rights Plan
- -------------------------------
Each outstanding share of common stock carries with it one-quarter of a
preferred share purchase right. Each right becomes exercisable for $150 (subject
to adjustment) for one-thousandth share of junior participating preferred stock,
if a person or group acquires 20% or more of the outstanding common stock or
announces an offer for 30% or more of the outstanding common stock. If a person
or group acquires 20% or more of the outstanding common stock and in certain
other circumstances, each right (except, in some cases, those held by an
acquiror) becomes exercisable for common stock (or that of the acquiror) with a
market value of twice the exercise price. In some cases, the Board of Directors
may exchange rights for shares of common stock (or the equivalent) and may
suspend the rights' exercisability. The rights have no voting power, expire in
November 1998, and may be redeemed for $.05 per right prior to a public
announcement that 20% or more of the outstanding common stock has been
accumulated by a person or group.
9. Restatement of Financial Statements
- ----------------------------------------
In July 1995, the Company sold its U.S. 800 megahertz Specialized Mobile Radio
business, systems and licenses to Nextel Communications, Inc. for shares of
Nextel stock. As reflected in the Company's audited financial statements for
1995, the Nextel transaction was accounted for as an exchange of productive
assets with no gain realized in the Company's 1995 Statement of Consolidated
Earnings. The Nextel stock was carried at its fair market value with an
unrealized gain on the stock reported directly to Stockholders' Equity as part
of the Company's holding of marketable securities. As reported in the Company's
1996 Consolidated Financial Statements, the Securities and Exchange Commission
(SEC) asserted during 1997 that the Company should have recognized a gain at the
time of the transaction by accounting for the transaction at fair value with
1995 income statement recognition. The Company and its auditors believed that
the original treatment was appropriate in the circumstances. The Company based
its original accounting treatment for the exchange of assets for Nextel stock
independently from a separate transactions in which Craig McCaw's investor group
("McCaw") entered into agreements with Nextel and Motorola which significantly
altered the governance structure of Nextel and limited Motorola's influence over
Nextel. Among other factors, the McCaw agreements granted control of Nextel's
operations committee to McCaw and the Company agreed to vote in accordance with
the decisions of the operating committee except in certain limited
circumstances.
After discussions with the SEC, the Company agreed to base the accounting on the
fact that its Nextel holdings subsequent to the McCaw investment do not qualify
for the equity method of accounting and therefore fair value accounting rather
than carryover basis accounting for purposes of the 1995 income statement
treatment is appropriate. Therefore, the Company has agreed to restate the 1995
financial statements to reflect the accounting treatment proposed by the SEC.
Other than minor reclassifications to Stockholders' Equity and Other Assets, the
restatement does not affect the Consolidated Balance Sheet because the impact of
unrealized gains related to the Nextel stock was recorded in Stockholders'
Equity during 1995 and 1996, nor does it affect the tax treatment of the
transaction. In this restatement, the Company has recorded a gain of
approximately $400 million (net of taxes) in the third quarter of 1995. The
Company also recognized the decline in share price of the Nextel stock between
the time of the transaction and December 31, 1995 as a realized loss of
approximately $133 million (net of taxes) in the fourth quarter of 1995. As a
result, 1995 earnings before income taxes have increased from $2.782 billion to
$3.225 billion and 1995 fully diluted net earnings per common and common
equivalent share have increased from $2.93 to $3.37.
41
<PAGE>
<TABLE>
<CAPTION>
(In millions, except per share amounts and other data)
Five Year Financial Summary
Years ended December 31 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Net sales $27,973 $27,037 $22,245 $16,963 $13,303
Results Manufacturing and other costs of sales 18,990 17,545 13,760 10,351 8,395
Selling, general and administrative expenses 4,715 4,642 4,381 3,776 2,951
Depreciation expense 2,308 1,919 1,525 1,170 1,000
Interest expense, net 185 149 142 141 157
Total costs and expenses 26,198 24,255 19,808 15,438 12,503
Net gain on Nextel asset exchange -- 443 -- -- --
Earnings before income taxes and cumulative effect of
change in accounting principle 1,775 3,225 2,437 1,525 800
Income taxes provided on earnings 621 1,177 877 503 224
Net earnings before cumulative effect of change in
accounting principle $ 1,154 $ 2,048 $ 1,560 $ 1,022 $ 576
Net earnings $ 1,154 $ 2,048 $ 1,560 $ 1,022 $ 453
Net earnings before cumulative effect of change in
accounting principle as a percent of sales 4.1% 7.6% 7.0% 6.0% 4.3%
Net earnings as a percent of sales 4.1% 7.6% 7.0% 6.0% 3.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Fully diluted
Data (1,2) Net earnings before cumulative effect of change in
(In dollars) accounting principle $ 1.90 $ 3.37 $ 2.65 $ 1.78 $ 1.05
Cumulative effect of change in accounting principle -- -- -- -- (0.22)
Net earnings $ 1.90 $ 3.37 $ 2.65 $ 1.78 $ 0.83
Average common and common equivalent shares outstanding 609.6 609.8 592.7 583.7 567.1
Dividends declared $ 0.460 $ 0.400 $ 0.310 $ 0.220 $ 0.198
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Total assets $24,076 $22,738 $17,495 $13,498 $10,629
Sheet Working capital 3,324 2,717 3,008 2,324 1,883
Long-term debt 1,931 1,949 1,127 1,360 1,258
Total debt 3,313 3,554 2,043 1,915 1,695
Total stockholders' equity $11,795 $10,985 $ 9,055 $ 6,409 $ 5,144
- -----------------------------------------------------------------------------------------------------------------------------------
Other Data Current ratio 1.42 1.35 1.51 1.53 1.56
Return on average invested capital before cumulative
effect of change in accounting principle 8.4% 16.7% 17.5% 15.3% 9.4%
Return on average invested capital 8.4% 16.7% 17.5% 15.3% 7.5%
Return on average stockholders' equity before cumulative
effect of change in accounting principle 10.0% 20.2% 21.1% 17.8% 11.7%
Return on average stockholders' equity 10.0% 20.2% 21.1% 17.8% 9.4%
Fixed asset expenditures $ 2,973 $ 4,225 $ 3,322 $ 2,187 $ 1,442
% to sales 10.6% 15.6% 14.9% 12.9% 10.8%
Research and development expenditures $ 2,394 $ 2,197 $ 1,860 $ 1,521 $ 1,306
% to sales 8.6% 8.1% 8.4% 9.0% 9.8%
Year-end employment (in thousands) 139 142 132 120 107
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All earnings per share, dividends and outstanding shares data have been
restated to reflect the 1994 and 1992 two-for-one stock splits.
(2) Primary earnings per common and common equivalent share were the same as
fully diluted for all years shown except in 1994 when primary earnings per
share were one cent higher than fully diluted. Average primary common and
common equivalent shares outstanding for 1996, 1995, 1994, 1993 and 1992
were 609.0, 609.7, 591.7, 582.6 and 565.6, respectively.
42
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY AND OTHER FINANCIAL DATA Motorola, Inc. and Consolidated Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
(In millions, except per share amounts; unaudited) 1st 2nd 3rd 4th 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Net sales $6,955 $6,835 $6,498 $7,685 $6,011 $6,877 $6,851 $7,298
Results Gross profit 2,237 2,250 2,009 2,487 2,133 2,483 2,463 2,413
Net earnings 384 326 206 238 372 481 921 274
Net earnings as a percent of sales 5.5% 4.8% 3.2% 3.1% 6.2% 7.0% 13.4% 3.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share
Data (1) Primary net earnings per common and common
equivalent share $ 0.63 $ 0.54 $ 0.34 $ 0.39 $ 0.61 $ 0.80 $ 1.51 $ 0.45
(in dollars) Fully diluted net earnings per common and common
equivalent share $ 0.63 $ 0.54 $ 0.34 $ 0.39 $ 0.61 $ 0.79 $ 1.51 $ 0.46
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends declared $0.100 $0.120 $0.120 $0.120 $0.100 $0.100 $0.100 $0.100
Dividends paid $0.100 $0.100 $0.120 $0.120 $0.100 $0.100 $0.100 $0.100
Stock prices
High $59.00 $67.13 $68.50 $63.63 $64.75 $67.88 $82.50 $77.38
Low $45.00 $50.63 $46.75 $44.13 $53.00 $51.50 $66.75 $56.00
- -----------------------------------------------------------------------------------------------------------------------------------
The number of stockholders of record of Motorola common stock on January 31, 1997 was 71,410.
</TABLE>
43
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
See Part II, Item 8 hereof.
2. Financial Statement Schedule and Auditors' Report
Title Schedule
----- --------
Valuation and Qualifying Accounts II
All schedules omitted are inapplicable or the information required is
shown in the Consolidated Financial Statements or notes thereto. The
auditors' report of KPMG Peat Marwick LLP with respect to the
Financial Statement Schedule is located at page 45.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Motorola, Inc.:
Under date of January 9, 1997, except for note 9, which is as of May 9,
1997, we reported on the consolidated balance sheets of Motorola, Inc. and
consolidated subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements have been restated as described in Note 9.
These consolidated financial statements and our report thereon are included in
the annual report on Form 10-K/A for the year ending December 31, 1996 filed
with the Securities and Exchange Commission on May 15, 1997. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in Part IV, Item
14(a)2. The financial statement schedule is the responsibility of Motorola's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
January 9, 1997, except as to Note 9, which is as of May 9, 1997
Chicago, Illinois
45
<PAGE>
Motorola, Inc. and Subsidiaries Schedule II
Valuation and Qualifying Accounts
Three years ended December 31, 1996
(in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Balance at Charged to Charged Balance at
beginning of costs & to other end of
period expenses accounts Deductions period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
- ----
Allowance for doubtful accounts $123 $ 42 -- $ 28 (1) $137
Product and service warranties 309 160 -- 155 (2) 314
Customer reserves 349 524 -- 488 (3) 385
1995
- ----
Allowance for doubtful accounts $118 $ 45 -- $ 40 (1) $123
Product and service warranties 283 122 -- 96 (2) 309
Customer reserves 121 790 -- 562 (3) 349
1994
- ----
Allowance for doubtful accounts $ 91 $ 48 -- $ 21 (1) $118
Product and service warranties 166 195 -- 78 (2) 283
Customer reserves 51 291 -- 221 (3) 121
</TABLE>
(1) Uncollectible accounts written off
(2) Warranty claims paid
(3) Customer claims paid/reductions in reserves
46
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of Motorola, Inc.:
We consent to incorporation by reference in the registration statements on
Form S-8 (Nos. 333-03681, 333-03731 and 333-12817) and Form S-3 (Nos. 33-62911
and 333-11433) of Motorola, Inc. and consolidated subsidiaries of our reports
dated January 9, 1997, except for note 9, which is as of May 9, 1997, relating
to the consolidated balance sheets of Motorola, Inc. and consolidated
subsidiaries as of December 31, 1996 and 1995, and the related statements of
consolidated earnings, stockholders' equity, and cash flows and related
financial statement schedule for each of the years in the three-year period
ended December 31, 1996, which reports appear in the annual report on Form 10-
K/A of Motorola, Inc. for the year ended December 31, 1996.
/s/ KPMG Peat Marwick LLP
May 15, 1997
Chicago, Illinois
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Motorola, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
May 6, 1997
MOTOROLA, INC.
By: /s/ Christopher B. Galvin
------------------------------
Christopher B. Galvin
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Motorola, Inc. and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Christopher B. Galvin
- ------------------------------
Christopher B. Galvin Director and Principal Executive Officer 5/6/97
/s/ Carl F. Koenemann
- ------------------------------
Carl F. Koenemann Principal Financial Officer 5/6/97
/s/ Kenneth J. Johnson
- ------------------------------
Kenneth J. Johnson Principal Accounting Officer 5/6/97
/s/ H. Laurance Fuller
- ------------------------------
H. Laurance Fuller Director 5/6/97
/s/ Robert W. Galvin
- ------------------------------
Robert W. Galvin Director 5/6/97
/s/ Robert L. Growney
- ------------------------------
Robert L. Growney Director 5/6/97
/s/ Anne P. Jones
- ------------------------------
Anne P. Jones Director 5/6/97
/s/ Donald R. Jones
- ------------------------------
Donald R. Jones Director 5/6/97
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Judy C. Lewent
- ------------------------------
Judy C. Lewent Director 5/6/97
/s/ Walter E. Massey
- ------------------------------
Walter E. Massey Director 5/6/97
/s/ John F. Mitchell
- ------------------------------
John F. Mitchell Director 5/6/97
/s/ Thomas J. Murrin
- ------------------------------
Thomas J. Murrin Director 5/6/97
/s/ Nicholas Negroponte
- ------------------------------
Nicholas Negroponte Director 5/6/97
/s/ John E. Pepper, Jr.
- ------------------------------
John E. Pepper, Jr. Director 5/6/97
/s/ Samuel C. Scott III
- ------------------------------
Samuel C. Scott III Director 5/6/97
/s/ Gary L. Tooker
- ------------------------------
Gary L. Tooker Director 5/6/97
/s/ B. Kenneth West
- ------------------------------
B. Kenneth West Director 5/6/97
/s/ John A. White
- ------------------------------
John A. White Director 5/6/97
</TABLE>
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit No.
- ----------- -----------
<S> <C>
23 Consent of KPMG Peat Marwick LLP. See page 47 of the
Annual Report on Form 10-K/A of which this Exhibit
Index is a part.
</TABLE>
