Condensed notes to consolidated financial statements

c o n d e n s e d n o t e s t o
c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s
Motorola, Inc. and Consolidated Subsidiaries

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 an increase to stockholders' equity, other assets and deferred taxes of $242 million, $401 million and $159 million as of December 31, 1996; and of $328 million, $543 million and $215 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 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.
2. Commitments and Contingencies
Financial: Development of the IRIDIUM® 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 also can 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 10-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 $925 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 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® is a registered trademark and service mark of Iridium LLC.
3. 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.

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