摩托罗拉公司1978年年报

1978 Annual Report

Contents

3 Financial Highlights 4 Letter to Stockholder 7 Where We're Heading 8 Communications Group 11 Semiconductor Group 15 Automotive Products Division 17 Government Electronic Division 19 Display Systems 20 Codex 21 Financial Review 22 Financial Statements 25 Notes to Consolidated Financial Statements 34 Ten-Year Financial Summary 36 Directors and Officer 37 Major Facilities and Products

Annual Meeting of Stockholders The annual meeting will be held on Monday, May 7,1979. A notice of the meeting, together with a form of proxy and a prox statement, will be mailed to stockholders on or about March 27,1979, at which time proxies will be solicited by management

Transfer Agents and Registrars Harris Trust and Savings Bank 111 W. Monroe Street Chicago, III. 60690 Citibank, N.A. 111 Wall Street New York, N.Y 10015

Auditors Peat, Marwick, Mitchell & Co. 222 S. Riverside Plaza Chicago, III. 60606 Form 10-K At the close of each fiscal yea Motorola submits a report on Form 10-K to the Securities and Exchange Commission containing certain additional information concerning its business. A copy of this report may be obtained by addressing your request to the Secretary, Motorola, Inc., Corporate Offices, Motorola Center, 1303 E. Algonquin Road, Schaumburg, III. 60196.

The Company Motorola, Inc., one of the world' leading manufacturers of electronic equipment and components, is engaged in the design, manufacture and sale, principally under the Motorola brand, of a diversified line of products These products include twoway radios and other forms of electronic communications systems; semiconductors, including integrated circuits, discrete semiconductors and microprocessor units; electronic equipment for military and aerospace use; automobile radios; stereo tape players, citi zens band radios and other automotive electronic equipment; and data communications products such as high speed modems, multiplexers and network processors. Motorola's products are manufactured for both United States and international markets.

Financial Highlights

(Dollars in thousands, except per share data) 1978 1977* Sales and Other Revenues $2,219,744 $1,853,514 Earnings before Income Taxes 220,390 191,620 % to Sales 9.9% 10.3% Income Taxes 95,208 84,669 Earnings 125,182 106,951 % to Sales 5.6% 5.8% Earnings per Share 4.04 3.46 Earnings per Share, before pooling of Universal Data Systems 4.06 3.50 Research and Development 133,414 109,729 Fixed Asset Expenditures 146,377 128,406 Depreciation 83,340 72,770 Working Capital 619,930 567,044 Current Ratio 2.20:1 2.47:1 Return on Average Invested Capital (stockholders' equity plus long- and short-term debt net of short-term investments) 12.3% 11.8% % of Total Debt (long- and short-term) to Total Debt plus Equity 24.1% 26.1% Book Value per Common Share 28.49 25.47 Yearend Employment (approximate) 68,000 60,000 *1977 results include Universal Data Systems, acquired in 1978 in a business combination accounted for as a pooling of interests (See Note 2 of the Notes to Consolidated Financial Statements).

To Our Stockholders and Friends

Motorola's fiftieth year in busi ness was a strong growth year for the company with record sales and earnings and, more significantly, continued strengthening of product and market positions in key business categories. Each of our major operations achieved record sales. For the second consecutive year, sales and earnings set records in every quarter of the year. For the 12 months, sales were slightly over $2.2 billion. This represents a 20 percent improvement over the $1.8 billion recorded in 1977. Earnings totaled $125 million, or 5. percent of sales, compared with $107 million, or 5.8 percent of sales, in 1977. Return

on average invested capital (stockholders' equity plus long- and short-term debt net of marketable securities) was 12.3 percent compared with 11.8 percent the previous year. The above figures include the results of Universal Data Systems, acquired in December, 1978, for both 1977 and 1978. 1978 earnings per share, before adjustment for the UDS acquisition, were $4.06 compared with $3.50 a year earlier. Reflecting the UDS acquisition, earnings per share for the year were $4.04, up from a restated $3.46 in 1977. Fourth quarter total sales and earnings were $636 million and $33.5 million respectively, compared with restated $525 million and $30.3 million in the previous year. Net mar-

gin for the quarter was 5.3 per cent compared to 5.8 percent for the year earlier period. Earnings per share in the quar ter, and before restatement, were $1.09 vs. $.99 in 1977 and, after restatement, $1.08 and $.98 for the final quarter of the respective years. 1978 earnings gains would have been larger but for the substantially increased costs of improved employee retirement plans which became effective at the beginning of the year. Review of Operations 1978 was a satisfying year for Motorola's Semiconductor Group with record sales and increased operating margins reported for the year.

Throughout the year the group showed record sales for each quarter. Bookings were up by 32 percent, and backlog ended the year 54 percent over a year earlier. Both integrated circuits and discrete products made major contributions to each of these accomplishments. Of equal importance, the Semiconductor Group continued its outstanding progress in product offerings and market posture, particularly— but not limited to—advanced integrated circuits, memories and microprocessor devices and systems. Our discrete semiconductor business, due to its continuously strengthening product position and further improvements in manufacturing tech-

nology, also achieved record sales and a higher operating margin than in 1977. The Communications Group achieved record sales in each successive quarter and for the full year 1978, resulting in a 17 percent sales increase for the year. Orders booked increased almost 15 percent over 1977. The group's earnings and margin performance, while at a good level, were dissatisfying to us. Operating margin, as defined for segment reporting in the Financial Statements, declined to 11.5 percent from 15.9 percent the previous year. There are several reasons for this decline: • The difficulty and, con-

sequently, the costs of activat ing a 300,000 square foot highly automated mobile radio facility in Fort Worth, Texas, well as technical and manufacturing problems incurred in starting production of certain advanced state-of-the-art new products, exceeded our anticipations. These problems are in the process of being remedied. • The incurring of cost variations on systems contracts, extra and unanticipated warranty obligations, accounts receivable and inventory write-offs, and an addition to the accounts receivable reserve—some of which related to 1978 business and some to prior years. • At each stage in the growth of our communications busi-

ness, we invest in a high rate research and development aimed at ever expanding the mix of new businesses. While satisfactory margins were recorded in certain of the traditional two-way radio and paging businesses, the group's overall result was impacted by a continuing high rate of engineering and other costs invested in major new business opportunities. These include 800 MHz products, trunked systems and high capacity mobile radiotelephone systems; mobile and portable data communications products and concepts; and further state-of-the-art advances in basic radio communications technology. The Automotive Products Division's 1978 sales were higher than in 1977. Earnings were lower due to continuing losses in the Angers, France, alternator facility; the highe cost of imported components and finished products caused by the lower exchange value of the U.S. dollar; and increased investment in major future business opportunities, includ ing electronic engine controls and AM stereo radio. The division's business mix has also been changing. Sales of entertainment products to original equipment manufacturers were down from 1977 while international sales were higher. Electronic systems sales were also higher. The Government Electronics Division continued to

grow and perform well in 1978. Sales and operating margin were up from 1977. Orders booked increased by more than 20 percent over 1977. Yearend backlog was at a record level. Emphasis on longterm growth and diversification continued, with higher spending for Motorola-financed research and development and the activation of a new special ized production center which accounted for almost $30 million in orders booked. Codex recorded superb financial and operational results. Sales were up by more than 58 percent over 1977, and margin increased. Orders booked were up more than 45 percent due, in large part, to more technologically advanced new products. Display Systems' sales increased by more than 10 percent with margins also higher. New order bookings grew 14 percent over 1977. In our 1977 report to stockholders we reported substantial operating losses for CB radio, watch modules, watch crystals and at Autovox, our subsidiary in Italy. Each of these operations showed significantly better results in 19 These and other operations' 1978 results are detailed later in this report. Research and Development In 1978 Motorola spent $133 million on corporate-funded R&D, compared with $110 million in 1977. These figures do not include government-

funded programs in the Government Electronics Division. For many years the company has decentralized its research and development activities which have been located in the applied research departments of our various divisions and groups. In general, we believe this continues to be the most effective way to manage R&D. However, in order to enhance these efforts and to substantially increase our research in new technological areas not normally undertaken by the groups or divisions, we reassigned part of the Communications Group's existing research effort and the management of the Motorola Integrated Circuits Research Laboratory from the Semiconductor Group to a new Corporate Research and Development Department, established in May 1978. This department reports to Martin Cooper, who was named to the newly created position of vice president and corporate director of research and development. Universal Data Systems At the end of the year we acquired the business of Universal Data Systems, Inc. (UDS), a manufacturer of moderately priced equipment used for transmitting digital i formation between computers, terminals and other business machines. In line with our corporate data communications strategy, UDS will report directly to our Codex subsidiary and will continue to operate

under its present manage- 1979 payment to stockholders, slowing in economic growth, ment. we have increased our divi- while in most other developed Wage Price Guidelines dend rate from 25 cents to 30 nations the prospects are We have advised President cents per quarter. This De- more favorable. In our planCarter and the Council on cember 1978 declaration rep- ning for 1979 we are attemptWage and Price Stability that resents the ninth consecutive ing both to recognize the real Motorola is, and intends to re- year in which the declared div- possibility of reduced ecomain, in compliance with the idend has been increased. Fu- nomic growth and, at the same voluntary stabilization guide- ture dividend increases de- time, not forego the sales oplines. For Motorola overall, pend, of course, on operating portunities which the strong these guidelines are not ex- results and the financial needs order bookings and backlog of pected to adversely limit our of the corporation from time to our operations now suggest. prices or margins. time. Our current judgment is Management and In Memoriam that 1979, the first year of Organizational Changes With profound sorrow and Motorola's second half cenIn October, the Semicon- regret, and with recognition of tury, will enable us to achiev ductor Group formed a third his many contributions to another record sales and earndivision—the International Di- Motorola's success as sales- ings year. vision—under the direction of man, executive, officer and director over a span of 42 years, Yours very truly, Pasquale Pistorio as vice president and general manager. we note the death on DeIn December, 1978, we cember 16,1978, of Arthur L. formed the Automotive and Reese, member of the board Display Systems Group, con- of directors. sisting of the existing Automo- People Robert W. Galvin tive Products Division and the As we mark our golden Chairman Display Systems Unit. Autovox jubilee and recall the accomalso joins this group as a part plishments of these first fifty of the Automotive Products Di- years, we look to the future vision. Carl E. Lindholm, a with excitement and with consenior vice president, was fidence—because of the ever William J. Weisz named general manager of the growing opportunity for elec- President Automotive and Display Sys- tronic technology to serve the tems Group, and Levy Katzir needs of human beings and was named vice president and help solve their problems, and general manager of the Auto- principally because of our motive Products Division. John F. Mitchell most important resource—the Executive Vice President In the Communications 68,000 talented and dedicated Group, John Battin was Motorolans, worldwide, whose elected a corporate vice presi- contributions we acknowledge dent and appointed general with sincere respect and apmanager of the Communica- preciation. tions Systems Division to suc- Outlook ceed Martin Cooper. For the U.S., 1979 is curIncreased Dividend rently regarded by many As reflected in the January, economists as a year of likely

Where We're Heading

Motorola, Inc., has completed sion with 9 percent compared in sales by 1981. of technically advanced its fiftieth year in business. In to 30 percent and 11 percent However, we are looking be- equipment. that time we have grown from a respectively last year. The yond this short-term sales ob- Another major growth area small electronics company, Government Electronics Divi- jective to setting a course that for us is in electronic engine begun in 1928 as the Galvin sion and other operations ac- will ensure the company's controls. The increasing deManufacturing Corporation counted for the remaining long-term growth. This is being mand will affect both our auwith five employees and a first 17 percent as opposed to done by building on our tra- tomotive electronics and our week's payroll of $63.00, to an 15 percent in 1977. ditional strengths and expand- semiconductor businesses. international corporation with In the past ten years we ing into related electronics We have been involved in the annual sales of $2.2 billion and have extended our worldwide fields where we have never design, development and sale 68,000 employees worldwide. operations so that we now been before. of these types of controls for We believe that the long- have 24 major facilities in 16 An example of this has been some years. In 1978 we introterm outlook for the electronics countries. Our international the development of our data duced a distributorless igniti industry, and for Motorola in sales in 1978 represented 24 communications business. system which we are currently particular, seems to be more percent of our overall company As the speed of distributed marketing in Europe as well as positive than at any time in the sales compared with 23 per- processing and digital trans- different types of sensors for past. The solutions required to cent in 1977. We consider that mission equipment increases, engines for U.S. manufactursatisfy society's needs over Motorola's successful growth the U.S. market for data com- ers. We continue to design a the years for such things as in the long-term is, in part, de- munications equipment grows number of custom automotive better communications, trans- pendent on our increased in- rapidly. Industry consultants microprocessor products for portation, productivity im- volvement in international predict that the markets for leading automobile manufacprovement and many others, markets. data communications services turers. have done nothing but en- Motorola's profit margin in and equipment will grow by In the years to come there hance the pervasiveness of the five-year period between approximately 30 percent in will be a great many opporelectronics in our everyday 1974 and 1978 averaged 5.2 1979. We believe that we are tunities in the electronics business and personal lives. percent even with the reces- now in a position to offer our fields. We believe that Our business strategy in sion year of 1975 when it fell to customers in this rapidly ex- Motorola is well positioned the past ten years has been 3.4 percent. In 1978 our profit panding market a wide range to accept the challenges this to develop Motorola into a margin was 5.6 percent, com- entails. technologically advanced pared to 1977's level of 5.8 electronics company that mar- percent. Dividends Declared Per Share kets its products primarily to Although there have been commercial, government and fluctuations in the levels of net $1 industrial users with less em- earnings per share, we have phasis, than in past years, on still been able to increase our consumer products. It is in dividend payments per share these markets that we see our for the past ten years. Over this greatest growth potential. period dividends have grown $ .60 In 1978 the Communica- from $0.25 in 1969 to $1.05 in tions Group accounted for 43 1978 (see diagram). $ .45 percent of the company's total Traditionally we have been sales compared with 44 per- doubling our sales about every $ .30 $ - 3 1 2 cent in 1977. The Semiconduc- five or six years. Our 20 pertor Group contributed 31 per- cent increase in sales in 1978 cent of our sales followed by the Automotive Products Diviindicates that we are on target to achieve the goal of $3 billion 1969 1970 1971 1972 1973 1974 1975 1976 LtLU 1977 1978

saw tne formation

of the then Com munications Division. Initia

orders included design and production of two-way radios for allied armed forces duri World War II.

Communications Group

The Communications Group reported record sales for 1978. In each successive quarter the group set records in sales over the comparable 1977 period, resulting in a 17 percent increase in total sales over last year. However, as discussed earlier in this report, the group's earning were lower than the record level of a year earlier. New order bookings worldwide were up almost 15 percent over 1977 levels. Increased booking levels were reported for both the domestic and international markets, although sales i Canada were lower due to a softening in the Canadian economy.

Strong domestic bookings in-

cluded substantial increases in the geographic markets which comprised sales to small and

medium-sized businesses, as well as the common carrier, petroleum, utility and industrial markets. Motorola does not expect "Proposition 13" and similar limitations on the resources available to state and local governments to adversely impact its communications business in these markets. Bookings in these markets grew by 12 percent in 1978 over 1977. We believe that the operating cost savings and productivity enhancement characteristics of advanced two-way radio systems should provide the opportunity for the continued growth of our business to these customers.

Internationally, the level of new orders booked continued strong in Europe, Mexico, Australia, the Asia/Pacific area and Israel. New Products Two new products introduced during the year were the Mitrek1 and Maxar® 80 FM two-way mobile radios, bringing the tota number of mobile radio price categories to six. The Mitrek mobile radio provides premium technical performance specifications and is the first known commercially available FM two-way radio to meet the stringent military design specification 810C for weatherproofing, shock and vibrations. Maxar 80, the top category in

a line of dash mounted radios,

was designed to provide improved receiver performance with up to 55 watts of radio fre

quency (RF) power output. Customers have found that the improved specifications of the Maxar 80 radio make it an excellent economical choice for both urban areas as well as more open rural areas. A typical example of a Maxar 80 mobile system sale was one made to a group of Michigan school districts to provide an area-wide emergency bus transportation radio network. This system allows transportation personnel to keep in immediate contact for routine and emergency communication requirements. Markets Expand In addition to the impact of

Mitrek and Maxar 80 mobile radio introductions, our markets reflected the continuing need fo a wide variety of communications services. Orders received by the group ranged from a mobile radio system used by agricultural services suppliers to coordinate their crop spraying operations in California, throug a multi-frequency portable radio system operated by pilots in the Mississippi River delta area to ensure the safety and movement of ships, to a radio system through which ABC Network News correspondents in New York and Washington, D.C., can coordinate with their newsrooms live news broadcasts to television audiences. Highlighting order growth in

the common carrier market-

place was the continued demand for radio paging services. Orders received for pagers to

telephone companies and radio common carriers were up substantially. An increasing awareness among the general public of the economic advantages of radiotelephones also contributed to the order growth in the telephone and common carrier markets. Record level energy costs spurred both the search for new energy sources and the conservation of existing sources durin 1978. This reflected positively upon orders in many energy related markets. The mass transportation industry continued to turn to communications as a means of operating bus fleets more energy efficiently. To im-

prove that efficiency, the Metrocom II®, a new bus communications system, was introduced. The system combines microprocessor technology with a liquid crystal display allowing voice and data communications in a small single package. The utility market also showed strong growth during the year with demand by power companies for load management systems, in which radio switches are used to help electric utilities shave peak power demands and conserve energy. The industrial market also experienced growth during 1978. The use of communications included in-plant radio communication systems to expedite material handling; sys tems to keep machinery downtime at a minimum; and systems to enhance inventory control. An innovative system for the industrial marketplace, the RDX-1000" Portable Data System, was introduced. The system features a handheld portable data terminal, making possible complete two-way wireless communications with a central computer. Granite City Steel, in Granite City, III., is utilizing the RD

1000 as part of its computerize steel coil location system.

Important orders received in the government markets for communications systems that

improve efficiency included a contract from the Chicago Fire Department for a $5 million

computer-aided dispatch communications system, enabling

more efficient dispatching of fir equipment and reducing response times. Major government contracts were also received from the New York City Police Department, the State of Georgia and the State of Minnesota. In May, the Federal Communications Commission permitted use, for the first time, o digitally modulated scramblers for federal, state and local law enforcement agencies. Our Digital Voice Protection System (DVP) is designed to provide the user with a very high degree of voice communication privacy. Many cities have purchased systems since the FCC rulings. Product offerings in the 800 MHz spectrum were broadened by the introduction of the Motorola trunked radio system. The heart of the system is a microprocessor based central controller which provides efficient system operation and control,featuring automatic channel assignment. A marine version of the MX-300 FM two-way portable radio was added to the existing portable line. This new portable radio can also be used for ship-

to-shore and inter-ship communications. Our mobile marine line was

expanded with the addition of the Nautilus 440™ marine radio. The Nautilus radio is designed

to permit customers to select any of 50 channels and have the dealer program the radio on site.

International Orders Up European operations con-

The RDX-1000 portable data terminal (top) introduced in 1978 provides a wireless link to a centr computer and a two-way radio capability. (Above) Improved receiver performance with up to 55 watts of radio frequency power output are the hallmarks of the Maxar 80, the latest in the line Maxar mobile radio systems. The high performance Mitrek radio (left) is the first known commercially available FM two-way mobile radio that meets military design specification 810C.

tinued very strong, paced by tion of the Movar'" mobile radio Motorola's paging product lead- which is a special adaptation of ership. Major contracts included the Maxar product line for the awards from the British Post Of- Australian marketplace. This fice for 5,000 Metrx™ radio pa- adaptation of basic radio design gers for the Motorola designed of a product category to meet London area paging system; requirements in different world from the Belgium Post, Tele- markets continues to be a signifgraph and Telecommunications icant factor in international (PTT) system for 4,000 eight- growth. function pagers for the Sema- Expanded Facilities foon System which covers the To keep pace with the ever Netherlands and Belgium; and increasing growth of operations, from the Helsinki Telephone we unveiled plans for the exCompany and Netherlands PTT pansion of the group's present for city-wide paging systems. Florida facilities which are bein The recently announced enlarged with the construction MT-700'" portable two-way of a new 100,000 square foot radio is an example of our grow- building. Administrative offices ing European product strength. and engineering laboratories This portable radio has been will be housed in the new facilit designed to meet most Euro- in which radio paging equippean specifications. ment, wireless computer termiRecent technological sys- nals, and portable two-way tems development for the Euro- radios are designed and propean marketplace include an duced. This is scheduled for electronic mobile exchange completion in 1980. terminal system designed for Internationally, the the Austrian PTT and the suc- Basingstoke plant in the United cessfully demonstrated Simul- Kingdom was expanded to incast Base Station for the clude a thick-film hybrid laboraHanover, Germany, police. tory and custom manufacturing While the general economy in facility. Our order growth in AuCanada during 1978 was stralia has led to the relocation somewhat soft, a multi-million of our headquarters into larger dollar contract was received offices and an expansion of from the Royal Canadian manufacturing operations at the Mounted Police including Mulgrave, Victoria, facility. multi-channel mobile radio units and vehicular repeaters. Increased orders were also recorded in Mexico and Israel. (Above) The Digital Voice Protection system used by federal, state and local law enforcement agencies to ensure a very high degree of voice The multi-tiered product lines communication privacy. (Below) The Triton VHF Marine Radiotelephone were significant factors in this line has been expanded with the introduction of the Nautilus 440 radio. growth. Australian order growth was enhanced by the introduc-

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Semiconductor Group Technological Advances grams with these major cusThere were several major ac- tomers. The successful complecomplishments throughout the tion of these programs could 1978 represented a year of solid year in a number of key IC prod- mean sizable production opporgrowth for the Semiconductor uct areas, including NMOS tunities over the next several Group, with new records estab- memories, microprocessors, years. Several other custom milished in both sales and earn- CMOS, logic and special croprocessor components were ings. Worldwide sales for the functions, and bipolar digital designed for non-automotive group were up by 23 percent and linear circuits. Our16K customers during the year. over last year. The group also dynamic random access mem- During 1978 our new MC6801 improved its operating margin. ory (RAM) was introduced early single-chip microcomputer was Worldwide new order bookings in the year and is currently being introduced and is currently for the group increased by 32 shipped to customers around being sampled by customers percent over 1977, while back- the world. As the year drew to a with highly satisfactory results. log was up by 54 percent. close, a prototype 64K dynamic This microcomputer is already While the year included many RAM was developed, using an being designed into several important management and advanced version of the com- major customer programs. product activities, one organiza- pany's high density HMOS-1 Design is nearly completed tional development is especially wafer processing technology. for the MC6800016-bit adworthy of note. In November, the Customers will be sampled with vanced microprocessor, which third operating division of the 64K dynamic RAMs early in we believe will be the highest Semiconductor Group, the In- 1979, and it is anticipated that performance microprocessor ternational Division, was formed production volumes will accel- available in the market during j Q r r marked the formaI « / 3 D tion of the then to give closer attention to impor- erate throughout the year. 1979. This high-end product Semiconductor Division. One tant market growth areas of the The sale of microprocessors uses an advanced design which of the first products it ma world. This division will be re- will operate ten times as fast as ufactured was this germaniu for both automotive and non- power transistor used in ca sponsible for all marketing activ- automotive applications in- Motorola's original MC6800 radios. ities outside the U.S. and forthe creased during 1978. The microprocessor and will be group's manufacturing facilities MC6802 two-chip micro- aimed at complex and high in Toulouse, France, and East processor, introduced late in speed microcomputer applicaKilbride, Scotland. 1977, has been well received by tions. Record IC Sales customers this year, as were During 1979, we plan to samThe group sustained its rapid several newly introduced ple customers with a total of six growth pattern in integrated cir- peripheral components re- new microprocessors. These cuits (IC) throughout 1978 and quired for microprocessor ap- multiple product introductions achieved record sales for the full plications such as video display are consistent with the group's year. Our new order booking generation and instrumentation strategy of providing an entire rate for ICs was up substantially interface circuitry. spectrum of microprocessors from last year, growing more The design of a number of based on the highly successful than 50 percent, enabling the custom automotive micro- M6800 product line. group to enter 1979 at a strong processor products was also The CMOS logic family of inrun rate. The current backlog for completed under contract to two tegrated circuits was expanded ICs is satisfactory. We do not major automobile manufactur- in 1978 and several special pursee an indication of any undue ers. We have the opportunity to pose circuits were added during inventory accumulation by cus- participate in future automotive the year. These special circuits tomers. electronic development pro- were designed for use in smoke

•4 Q 7 Q The 64K dynam 1 5 / f O panding lin by customers. This RAM the some 200,000 discr ufactured by Motorola.

12

M (above), Motorola's latest in a MOS memory products, is now being 155,000 components. (Below) Examp emiconductor device types current

detectors, electronic watches, digital volt meters, and other consumer and industrial products. Bipolar integrated circuits also had a year of continued growth and expansion. In the digital category, there was solid growth in both emitter-coupled logic (ECL) memories and in low power Schottky, a commodity logic family. Design is well unde way on an ECL complex gate array using a newly developed high speed bipolar fabrication process. The large scale integration (LSI) array, intended for high speed computer applications, is finding excellent acceptance among computerbased customers. The new array promises to enhance the cost/performance features of larger computer systems. Continuing sales gains in the low power Schottky product line has led to industry recognition of Motorola as a supplier of these commodity integrated circuit products. New automotive applications prompted continued growth in our linear IC business this year. Speed control and pressure sensitive devices along with other customer and special circuits designed for automotive customers were put into production during 1978. A major investment program was initiated to facilitate the process of complex LSI linear

circuitry. The first step of this program, the construction of an LSI photo resist area, is ex-

pected to be completed by the

end of the first quarter, 1979. O u r wafe r processi ng capa ity in East Kilbride, Scotland, and Toulouse, France, was expanded and this included the introduction of four-inch wafer technology at both locations. At the Mesa, Ariz., plant important additions are being set in place which will expand bipolar digita and MOS wafer processing capabilities. Also, the major ex pansion program at the Austin, Texas, facility remains on schedule. A nearly 60 percent increase in orders was achieved in microprocessor software and hardware engineering tools developed and built by Motorola's microsystems unit. These products, in a sense, are key to the future growth of the microprocessor business, since most MPU customers cannot employ microprocessors without first using these developmental programming and testing tools. We devoted significant resources to the co"ntinuing development of integrated circuit processing technology during the year. For example, tools and processes are now in place which will permit future production of ICs having critical line and space dimensions approaching one micron in width (there are 25,400 microns in an inch). Current industry standard geometries are in the 3-6 micron range, but future IC develop-

ments will require line and space dimensions of 1-2 microns. This increases the den-

sity of chips on a wafer which

reduces costs. The desire to make tomorrow's computers smaller and faster will lead to new applications. While, to our knowledge, no products employing these minute dimensions are yet in production, we firmly believe that our early work in developin this processing technology will be invaluable in the 1980s when device complexities are expected to reach hundreds of thousands—or even a million— components per chip. Sales of discrete semiconductors were up substantially, surpassing the record level established in 1973. Both new order bookings and backlog were up significantly over the previous year. The group experienced growth in all its main

discrete semiconductor product families, including small signal and power transistors, radio frequency (RF) transistors and

modules, rectifiers and zener diodes. Primary reasons for this success include the steady and timely introduction of new or im proved products to the marketplace; the continuing emphasis on mechanization and automation programs to help offset inflation and allow us to remain price agressive; and the rapidly growing demand for a variety of discrete components created by microprocessor and other integrated circuit applications. New Discrete Markets As a result of its developmen of a number of important new power transistors we are enjoying expanded opportunities and

"••••••••I"

increased market shares.

These new devices include deflection transistors, used in te vision and automotive applica-

tions; "Power Base" transistors used in industrial and consumer applications; and an expanded line of "Switchmode" transistors, used in switching power supplies. During 1978, contract commitments were received from most major television manufacturers in the U.S. for high voltage deflection power transistors. We also more than tripled our production of TO-220 plastic-packaged power devices. In RF products, our worldwide customer base in the industrial and communications markets is being expanded through the introduction of such new devices as microwave and pulse power

components, CATV modules,

RF modules and 900 MHz RF power transistors. Orders for small signal tran-

sistors have increased in the industrial, computer and distribution markets. New device developments include IC optocouplers, dual-gate MOS-FETs and AM tuning diodes. These products will serve new markets for discrete components, and all represent substantial future growth opportunities. A new line of fiber optic devices was introduced in 1978. These new technology devices are used to either emit or detec infrared light passed through a fiber optic cable. Fiberoptic technology is expected to replace wire cable usage in a variety of electronic applications, including automotive and tele-

Through the use of Motorola's developmental programming and testing modules, microprocessor-based systems can be designed around Motorola's latest available microprocessors. Here an MC6809 microprocessor is placed in a prototype support module.

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communications. We believe that the field of fiber optics re resents an important new growth opportunity. The rapid expansion of microprocessor applications in the consumer, automotive and industrial markets is also provid ing myriad opportunities for some of the group's older product lines as well. A wide variety of discrete devices, including small signal and power transistors, zener diodes, optoelectronic devices and thyristors, is being required in growing numbers because of the current microprocessor explosion. Major Mechanization Programs We continued our investment in important discrete semiconductor mechanization programs begun in 1976 and 1977. Major mechanization programs were continued or completed in such product areas as small signal and power transistors, rectifiers and zener diodes. Programs were also initiated or continued to convert to larger wafer sizes, including four-inch and fiveinch. During 1978, the Semiconductor Research and Development Lab (SRDL) continued to develop new products and technologies. The research programs included work on sensors, fiber optic devices and advanced power devices. In order to better serve our

customers, we have continued to concentrate on product reliability improvements during the year. New reliability levels were achieved in several major dis-

crete product lines, resulting substantially lowered field fai ure rates. This emphasis on reliability should provide custom ers with lower systems costs in the future. The Subsystems Products Unit developed several new products in 1978. The products introduced included linear and switching power supplies, solid state relays and input/output modules. Many of these will be used in microprocessor and other state-of-the-art applications.

Automotive Products to meet the growing demand for modules encompass microproDivision different types of sensors in the cessor based technology to perfuture. Another major product form many control functions and The Automotive Products Divi- introduction during the year was are expected to replace the sion recorded a modest in- the digital tachometer used on electro-magnetic devices in a crease in sales in 1978. Excel- farm combine harvesters to large number of home lent performance in electronic monitor engine speed, ground appliances. systems products and an in- speed and fan speed. AM Stereo crease in international sales The distributorless ignition for During 1978, we continued compensated for a decrease in Citroen represents our first our research and development sales of entertainment products major electronic engine control work and promotion of our AM to original equipment manufac- product for the European mar- stereo concept with the Federal turers which fell off significantly ket. This unit electrically deter- Communications Commission as Ford continued to supply mines spark timing advance and the National Association of more of is own entertainment and dwell based on engine load Radio Broadcasters. We beproducts. and rpm. The successful per- lieve that AM stereo is the next Operating margin for the year formance of this product for Cit- exciting breakthrough for in-car was down from 1977. This was roen gives us a strong base from entertainment, responding to principally due to losses at the which this type of product can consumer demand for stereo Angers, France, facility, in- be marketed to other European while offering long-range AM creased investment in new firms. reception as contrasted to reproduct development and the In 1978, our electronic ignition stricted line-of-sight FM signals. We fully intend to apply our •if\r%f\ was the year negative impact of currency modules continued to provide the company fluctuations on some opera- excellent field reliability both technological leadership in the first began to develop a tions. domestically and internationally. AM stereo field and become a radio, and it was in tha leader in this market. year the Automotive Prod Technology Opens Markets Sales of these modules have ucts Division had its or Bookings for electronic igni- contributed substantially to the The Lamon Avenue facility in The company's first comtion modules and related engine growth in volume of the di- Chicago, which manufactured mercially successful car radio was manufactured i control modules were up signifi- vision's electronic systems printed circuit boards, was 1930. cantly. Orders for the newly in- products. closed due to decreased voltroduced digital appliance con- In Europe start-up deliveries ume and added manufacturing trols added to bookings for the of a smaller diameter alternator expenses resulting from enyear. Export orders increased from the Angers, France, facility vironmental considerations. Its by more than 30 percent with were made to several large production was transferred to the majority of this rise coming European automotive manufac- the Communications Group's from Latin America and Europe. turers. This alternator fulfills the facility in Franklin Park, III. The In June, the division began growing requirement for Midland, Ontario, Canada, faproduction of dual pressure smaller, lighter, more efficient cility, which was closed during sensors which are used to components as the size of vehi- 1977, was sold during the year. monitor both barometric and cles are reduced for fuel Motorola also sold its interest manifold absolute pressure. economy reasons. in a joint venture in Japan to Our technology in this area has Also during the year, we en- Alps Electric Co. We are conenabled us to develop new mar- tered the digital appliance con- tinuing the technology licensing kets for these and related prod- trols market for the home arrangement with the company ucts such as position and knock appliance industry. These as well as continuing the sales sensors, so that we will be able highly sophisticated electronic interface of certain items in that

product line. In the early part of 1979, production of digital appliance controls will begin at a new manufacturing facility opened in Puerto Rico. Our business in electronic systems is expected to increase with continued strong demand for ignition and related products, sophisticated instrumentation to the automotive, agricultural and industrial sector and full scale delivery of digital controls in th home appliance industry.

•4 Q " 7 Q (Above) Motorola's new distributorless ignition system will make an I * / / O important contribution to both fuel economy and environmental control. (Below) The TC8 90AX, one of the newest autosound systems introduced in 1978. When coupled with our graphic equalizer, it is capable of delivering 30 watts power output and reproducing high fidelity sound in the car.

Government Electronics Division

The Government Electronics Division has experienced a year of growth with sales, bookings and backlog climbing and profit margins increased over the prior year. The keys to this suc cess were a continuing concentration on high technology, product diversification and expansion of the division's customer base. These programs included the start-up of a new specialized production center and the decision to relocate radar operations into a new facility in Tempe, Ariz, (scheduled for move-in during April of 1979). Emphasis on long-term growth was also reflected in the con-

tinued increase of investment in independent research and development and the higher rate of

bid and proposal activity coupled with the development of business in the larger sys-

tems and subsystems markets. Potential returns for each of these investments continue to be high as indicated by the substantial increase in new business bookings and backlog.

A specialized production cen-

ter was established during 1978

marking the division's entry int

the very competitive high

technology mass production

manufacturing business. This center was successful in booking almost $30 million in new business during its first year. Since most of this type of business is made up of multi-year

contracts, the impact in terms of sales and profit will not be felt however, until midyear 1979 and beyond. R & D Emphasis Efforts in fuze production have been focused on widening the range of advanced tactical proximity fuzes, with special emphasis on new proprietary small caliber devices. Success in today's research and development activities should create excellent opportunities for the next three- to five-year period in high rate production of these proprietary devices. Our penetration into the highly classified electronic countermeasures market was significantly broadened during 1978. Development work in surface acoustic wave channelized receivers and special broad-

band receivers using advanced field effect transistor technolog has created a whole range of

new multiservice opportunities for Motorola countermeasures systems. During the year a

strong passive system capability was added. The division is now in a position to address threats on the basis of complete spectrum coverage. Included are advanced technologies to

jam long-range early warning

radars, medium-range ground

control intercept radars and

terminal radars for fire control

guns and missiles.

New Contracts and Bookings In 1978, we won a number of significant contracts for missile fuzing. These bookings range from study contracts, through

research and development, to production and involve such major programs as the Phoenix, Shrike and High-Speed AntiRadiation Missile (HARM). Utilizing large scale integra tion (LSI) technology and microprocessors, aerospace communications continued to expand. New bookings on several major aerospace programs included the Geostationary Operational Environmental Satellite (GOES); Landsat, an Earth resources satellite; the advanced range instrumentation aircraft; the P-80, an Air Force experimental satellite; the global positioning satellite; the tactical data relay satellite sys tem; and space shuttle. The division's communications operations continued to

grow based largely on the growing requirement for more digital communications, particularly

the secure communications segment. Additionally, two key radio development contracts for

hand-held transceivers were booked. Soon to move into production is an addition to the division's family of VHF/UHF radios. This family of state-of-the-art radios is for ground-air-ground fixed

installation applications. They

are designed for more effective

communications in a high den-

sity air control environment with

significantly reduced interfer-

ence when located in close proximity to other transmitters and receivers. Following the sales pattern of other radios presently in production, major

was the year t Military Electronics Division was forme to handle U.S. government contracts. One of its firs tems contracts was for the U.S. Army's AN/MRC-66 Mobile Radio Control. The division changed its name the Government Electronics Division in 1965.

orders are expected from both domestic and international customers. In radar operations a major booking was received from the U.S. Coast Guard for sidelooking modular airborne radar. This radar will be used in the surveillance of the 200-mile offshore coastal waters of the United States. The system will also be applicable to international territorial shoreline patro During 1978, a multicolor air traffic control and landing system display, which leads the state-of-the-art in tactical air controller displays, was delivered to the U.S. Marine Corps. Inter-operability options designed into this new display open NATO markets beyond the U.S. military. Solar Cell Energy Plant Our design of the world's largest solar cell energy plant, be located at Phoenix International Airport, was completed in February of 1979. We are confident of being awarded the building and installation phase of the complete system. If Motorola is awarded the contract, this system will use more than 14,000 Motorola Meinel solar concentrators. We believe that new systems using various numbers of these concentrators have great sales potential in both the domestic and international marketplace. (Above) Meinel optical concentrators proposed for the world's largest A series of different sized solar cell energy plant designed by Motorola for installation at Phoenix solar arrays, using Motorola International Airport, Ariz., being tested. (Below) A helium-neon laser is microprocessors for tracking being used to develop optical waveguides for eventual use in electronic and control, is presently in fina countermeasures equipment. development for the same

18

broad world markets. Display Systems Unit The division improved its position in the electronic funds The Display Systems Unit's transfer market with its Info- (formerly called the Data Prodguard'" data security products. ucts Unit) 1978 sales were up Five New York savings banks more than 10 percent over the awarded the division a contract previous year with operating calling for a substantial amount margin higher than in 1977. of Info-guard equipment. Grow- New order bookings were up ing customer acceptance of this 14 percent. line of products was also indi- Display Module Line Grows cated by shipments made for The majority of the unit's use in the data communications growth occurred in the cathode networks of corporations, finan- ray tube (CRT) display module cial institutions and government line, which is marketed to OEM agencies. The division is now in computer terminal manufactura strong position to capitalize on ers worldwide. In the systems' these growing markets. products line, initial shipments Position determining systems of information display systems continued to show improvement were made to the health care with bookings, sales and earn- industry. ings up again in 1978. These In addition to CRT display products are sold to both modules marketed direct to domestic and international computer terminal manufacturmarkets. ers, we manufacture a complete International bookings for line of closed circuit television 1978 were nearly twice as high systems, information display as for 1977. The Canadian, systems, which are distributed A Motorola 15-inch cathode ray tube German, French and Jap- through Motorola's Communi- components of the word processing t anese markets were major cations Distribution Division, and a subassembly consisting of a CRT a contributors to this growth. the MagicScore" bowling scor- up" data on the face of the tube. In late 1978, we made a ing system. During the year a change in the division's inter- $2 million contract for the denational structure by establish- velopment and manufacture of home computer terminal seging a second marketing region a "second generation" Magic- ments of the computer industry. covering Canada, Latin Amer- Score computerized scoring New Facility ica and the Far East. system was received from During 1978, we broke AMF's Bowling Products ground for the construction of a Division. new 200,000 square foot manThe CRT display module line ufacturing facility in Joplin, Mo. is expected to continue as the (occupancy first quarter, 1980), chief product of the Display Sys- and announced the purchase of tems Unit with major emphasis a 50 acre site in St. Charles, III. placed on introducing new for future construction of the opproducts into the word process- eration's administrative and ening, small business system and gineering headquarters.

Codex Codex had another record year in 1978 with a significant increase in sales and an improved profit margin over 1977. New orders booked were up 45 percent with continued strength reported in all traditional markets. Forty percent of the orders were for export. The strongest international markets were West Germany, Italy, the United Kingdom, Sweden, Japan, Australia and Brazil. Both the dollar's poor performance and the com-

pany's increasing activities in

these markets contributed to export strengths. In 1978, the markets for modem and multiplexer products continued to expand at the rate of 30 to 35 percent. The international market for our da communications modem, the LSI 96/V.29, for example, is proving exceptional as attested by the purchase of that Codex modem by several major post, telegraph and telecommunications (PTT) authorities during 1978. These included the Swedish, Norwegian and German PTTs and the Australian Telecommunications Commission. Other LSI 96/V.29 contracts included those with the Japanese Travel Bureau and Western Union Information Systems. Major contracts were also awarded by Serpro in Brazil for Codex's 6000 series of Intelli gent Network Processors and by Hydro Quebec for the 4800 large scale integration (LSI)

20

In 1978 Codex's markets for modem

LSI high speed modem provide effi while reducing user costs.

ries of high speed modems. New Products Three new products were introduced in 1978. They were the Automatic Circuit Quality Monitoring System; the 6010, the newest member of the 6000 family of Intelligent Network Processors; and the LSI 24/24, 2400 two-wire, full-duplex 2400 bps speed modem. The 6010 broadens the 6000 statistical time division multiplexer product line by providing applications support to smaller computer systems. The 24/24's potential market is in dial network and secure speech applications. They continue the Codex tradition of advancing technology with products of unique capabilities that have practical economic benefit to customers. New Operations In May, Codex established a Far East office in Tokyo in order

tinued to expand. Products like t

and reliable transmission of dat

to support its distributors in th Asia/Pacific area. New operations established in Phoenix, Ariz., and Toronto, Canada, will provide Codex with the capability to expand its research and development and manufacturing capabilities more rapidly than in the past. In November, we moved our worldwide Codex headquarters to a new 90,000 square foot facility in Mansfield, Mass. The building, which shares a 41 acre site with our 125,000 square foot assembly facility, houses executive, research, engineering, marketing and administration offices. We expect to continue our growth in revenues and income and to expand our participation in the rapidly developing data communications products and systems markets.

Financial Review

Financial Strength which has gained a high level Standards Board (SFAS-8). Segment Reporting As we have previously of attention within the com- Included in this amount is a Footnote No. 9 to the finanstated, a strong balance sheet pany in recent years is the $1.3 million translation loss at cial statements contains our and conservatively stated "funding of growth." Briefly, Autovox, where for cost and continuing compliance with asset and earnings figures are this requires an operation other considerations, it was the Statement of Financial key elements in Motorola's which does "fund" its growth to impractical to neutralize our Accounting Standards No.14 corporate financial policy and earn and manage its net as- SFAS-8 exposure. We note (SFAS-14). strategy. sets employed so as to provide that the Financial Accounting Although Motorola continAt yearend 1978, total bor- its reasonable share of the div- Standards Board has indicated ues to regard its operations as rowings, long- and short-term, idend to the stockholders and, its intent to study significant being predominately in one inwere 24.1 percent (down from at the same time, limit addi- modification of SFAS-8. dustry—electronic equipment 26.1 percent ia 1977) of total tional borrowings to a modest Because of the difficulty in and components—the data borrowings plus stockholders' portion of its retained earnings predicting currency values, we required by SFAS-14 is preequity. These ratios would be growth. have continued our policy of sented for communications prod15.3 percent and 19.6 percent With a 20 percent increase monitoring the consolidated ucts, semiconductor products for 1978 and 1977, respec- in revenues, fixed asset ex- exposure position of each cur- and automotive products. tively, if marketable securities penditures of $146 million, de- rency in which we deal, and We again advise the stockof $121 million ($96 million of preciation of $83 million, divi- attempted to keep our world- holders that SFAS-14 provides which results from accumu- dend payments of $32 million, wide exposure as near neutral for presentation of segment lated profits for subsidiaries total debt at yearend in- as economically and legally profit at the "operating" level, operating in Puerto Rico) were creased only slightly from feasible. This policy, which has before additions or deductions offset against borrowings. $278 million in 1977 to $281 served us well in the past, will of general corporate expenses, The current ratio at De- million. be our guide for the future. interest expense and income cember 31,1978, was 2.20, Puerto Rico London Listing taxes. Certain of these expenmodestly down from 2.47 a Plans are now near comple- Recognizing the importance ses are not uniformly apportionyear earlier, but still well within tion and negotiation for ap- of our international markets, able, related either to revenues our policy range. Working capi- proval of the Puerto Rican the growing number of or assets. Therefore, any allotal increased from $567 million government is underway cov- Motorola employees and cation of these expenses a year ago to $620 million. ering repatriation in 1979 of the stockholders in Europe, and to the indicated segments Long-term debt of $198 mil- first increment of accumulated the prominence of London as a is necessarily subjective lion includes the proceeds of profits for subsidiaries operat- financial center outside the and comparisons to segments the October 1977 $100 million ing in Puerto Rico. Adequate United States, Motorola stock of other enterprises may eight percent domestic deben- provision for the Puerto Rican has been listed on the London not be meaningful. ture issue, a $56 million revolv- withholding (tollgate) tax for Stock Exchange. ing credit agreement which this and other expected repasupports domestic commer- triations have been made in Current Ratio* Total Debt to Total Debt p cial paper notes and certain our accrued tax accounts. (As of Year End) (As of Year End) short-term non-U.S. borrow- Foreign Currency • Total ings, and long-term borrow- 1978 was a difficult year for • Net of Marketable Secu

ings outside the United States. the U.S. dollar as it devalued •Current Assets *Long- and Short-Term Debt Current Liabilities Long- and Short-Term Debt $173 million of short-term vis-a-vis most other major cur- plus Stockholders Equity bank lines of credit were rencies. In this environment, 3.0 additionally available (not Motorola recorded a $1.1 million 2.75 being used) at yearend. foreign exchange loss as deFunding Growth fined by the current rules 2.50 I—h A management concept of the Financial Accounting 2.25 1 "Ik

n r E 2.0

F 0 c 1974 1975 1976 1977 1978 ] 1974 111975 1976 u y

Consolidated Balance Sheets Motorola, Inc. and Subsidiaries, Years Ended December 31

Assets (Dollars in thousands) 1978 1977 Current Assets: Cash $ 35,976 $ 30,132 Short-term investments, at cost (approximating market) 121,429 85,681 Accounts receivable, less allowance for doubtful accounts (1978, $23,775; 1977, $13,543) 454,245 381,165 Inventories Finished goods 146,117 133,608 Work in process and production materials 292,724 252,893 Future income tax benefits 43,762 32,155 Other current assets 40,739 36,403 Total Current Assets 1,134,992 952,037 Property, Plant and Equipment: Land 23,651 21,223 Buildings 287,249 263,945 Machinery and equipment 503,499 426,965 Accumulated depreciation (310,602) (269,678 Property, Plant and Equipment, Net 503,797 442,455 Sundry Assets, Net 17,768 25,367 Total Assets $1,656,557 $1,419,859

Liabilities and Stockholders' Equity Current Liabilities: Notes payable—banks and other $ 78,502 $ 73,936 Current maturities of long-term debt 4,461 3,782 Accounts payable 183,339 135,260 Accrued expenses 188,378 131,973 Income taxes payable 60,382 40,042 Total Current Liabilities 515,062 384,993 Long-Term Debt 198,091 200,279 Other Noncurrent Liabilities 57,866 46,543 Stockholders' Equity: Common Stock, $3.00 par value Authorized: 40,000,000 shares Outstanding: 1978—31,085,178 shares; 1977—30,941,057 shares 93,256 92,823 Preferred stock, $100.00 par value issuable in series Authorized: 500,000 shares (none issued) Additional paid-in capital 156,376 152,322 Retained earnings 635,906 542,899 Total Stockholders' Equity 885,538 788,044 Total Liabilities and Stockholders' Equity $1,656,557 $1,419,859 See accompanying notes to consolidated financial statements

22

Statements of Consolidated Earnings and Retained Earnings Motorola, Inc., and Subsidiaries, Years Ended December 31

(Dollars in thousands, except per share data) 1978 1977 Sales and Other Revenues $2,219,744 $1,853,514 Manufacturing and other costs of sales 1,339,806 1,139,877 Selling, service and administrative expense 548,667 426,304 Depreciation of plant and equipment 83,340 72,770 Interest and amortization of debenture discount, expense and premium, net 27,541 22,943 Total Costs and Other Expenses 1,999,354 1,661,894 Earnings before income taxes 220,390 191,620 Income taxes 95,208 84,669 Net Earnings- 125,182 106,951 Retained earnings at beginning of year 542,899 462,305 Cash dividends declared (per common share: 1978, $1.05; 1977, $.880) (32,175) (26,357 Retained earnings at end of year $ 635,906 $ 542,899 Net Earnings Per Share $ 4.04 $ 3.46 Average shares outstanding (in thousands) 31,019 30,933

Statements of Consolidated Additional Paid-in Capital Motorola, Inc., and Subsidiaries, Years Ended December 31

(Dollars in thousands) 1978 1977 Balance at beginning of year $ 152,322 $ 151,488 Share option plans 2,962 748 1 Conversion of 4 /2% convertible guaranteed debentures 1,092 86 Balance at end of year $ 156,376 $ 152,322

See accompanying notes to consolidated financial statements

Statements of Consolidated Changes in Financial Position Motorola, Inc., and Subsidiaries, Years Ended December 31

(Dollars in thousands) 1978 1977 Sources of Funds Net earnings $125,182 $106,951 Add noncash charges Depreciation 83,340 72,770 Amortization of deferred debenture discount, expense and premium, net 204 551 Funds provided from operations 208,726 180,272 Increase in notes payable and current maturities of long-term debt 5,245 13,140 Increase in accounts payable 48,079 18,500 Increase in accrued expenses 56,405 16,928 Disposals and other changes of plant and equipment (and tooling), net 12,113 7,324 Increase in long-term debt — 98,941 Issuance of common stock 4,487 968 Increase in income taxes payable 20,340 — Decrease in sundry assets, net 7,599 — Other sources, net 6,783 2,596 Total Sources of Funds 369,777 338,669 Uses of Funds Increase in receivables 73,080 64,885 Increase in inventories 52,340 56,065 Fixed asset expenditures 146,377 128,406 Increase in equipment rented to others, at cost 10,418 10,715 Decrease in long-term debt 2,188 — Dividends 32,175 26,357 Decrease in income taxes payable — 9,088 Increase in future income tax benefits 11,607 8,010 Increase in sundry assets, net — 2,471 Total Uses of Funds 328,185 305,997 Net Increase in Funds 41,592 32,672 Cash and short-term investments Beginning of year 115,813 83,141 End of Year $157,405 $115,813 See accompanying notes to consolidated financial statements

Accountants' Report Peat, Marwick, Mitchell & Co. cember 31,1978 and 1977 and the counting records and such other the results of their operation Certified Public Accountants related statements of consoli- auditing procedures as we and changes in their financial 222 South Riverside Plaza dated earnings and retained earn- considered necessary in the position for the years then Chicago, Illinois 60606 ings, additional paid-in capital and circumstances. ended, in conformity with genchanges in financial position for In our opinion, the aforemen- erally accepted accounting The Board of Directors and the years then ended. Our exam- tioned consolidated financial principles applied on a consis Stockholders of Motorola, Inc.: inations were made in accordance statements present fairly the tent basis. We have examined the consoli- with generally accepted auditing financial position of Motorola, dated balance sheets of Motorola, standards, and accordingly Inc., and Subsidiaries at De- Peat, Marwick, Mitchell & Co. Inc., and Subsidiaries as of De- included such tests of the ac- cember 31,1978 and 1977 and February 14,1979

Notes to Consolidated Financial Statements

1. Accounting Policies: Following is a summary of significant accounting policies used in the preparation of these consolidated financial statements, which policies are in accordance with generally accepted accounting principles. Consolidation: The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. International: The company follows the method of foreign currency translation prescribed in Statement No. 8 of the Financial Accounting Standards Board. Assets and liabilities expressed in foreign currencies, other than principally fixed assets and inventories, are translated at the approximate period ending rates of exchange; inventories and fixed assets are translated at approximate rates in effect when the assets were acquired. The earnings statements are translated at rates prevailing during the year except for depreciation, amor-

tization, and cost of sales which are translated at historical rates. Gains and losses from currency realignments have been reflected in earnings as incurred. Inventories: Inventories are valued at the lower of average cost (which approximates computation on a first-in, first-out basis) or market. Market value of work in process and production materials is represented by replacement cost and for finished goods by net realizable value.

Investment Tax Credits: Investment tax credits are recorded as a reduction of income tax expense in the year in which the

related assets are placed in service.

Property, Plant and Equipment: Property, plant and equip-

ment is stated at cost. The cost and accumulated depreciation

of items of property, plant and equipment sold, retired or full

depreciated are removed from the related accounts and any

gain or loss on disposition is reflected in earnings. Mainte-

nance and repairs are expensed as incurred, while major

renewals or betterments are capitalized. The cost of buildings, machinery and equipment is depreciated generally by the declining balance method, over the estimated useful lives of such assets, as follows: buildings an building equipment, 5-50 years; machinery and equipment, 2-12 years. For income tax purposes, the company has

selected the provisions of the Class Life Asset Depreciation Range System (ADR) permitting accelerated depreciation. The tax effect of the difference between book and tax depreciation has been provided as deferred income taxes. Share Options: When share options are exercised, the proceeds received are credited to the common stock account to the extent of the par value of shares issued, and the excess is credited to additional paid-in capital. The tax benefit that th company receives from disqualifying dispositions by optionees of exercised qualified share options, and from the exercise of non-qualified share options is credited to addition paid-in capital. Earnings per Share: Earnings per share are calculated on average daily shares outstanding.

2. Business Combination: On December27,1978, Motorola exchanged 554,375 shares of its common stock for substantially all the assets, liabilities and business of Universal Dat Systems, Inc. (UDS), a supplier of data communication equipment. UDS has distributed the Motorola common stock as a liquidating dividend to its shareholders. This combination has been accounted for as a pooling-of-interests and, accordingly, the accompanying consolidated financial statements include the results of operations of UDS for all periods prior to the combination. For the twelve months ended December 31,1978, UDS contributed sales and other revenues and net earnings of $11,616 thousand and $1,531 thousand, respectively. Sales and other revenues and net earnings for the year ended December 31,1977, have been restated as follows:

Sales and Net (Dollars in thousands) Other Revenues Earnings

Motorola (as previously reported) $1,848,395 $106,265 UDS 5,119 686 Combined (as restated) $1,853,514 $106,951

The combination also caused the beginning balances for 1977 retained earnings to increase by $645 thousand and additional paid-in capital to decrease by $1,444 thousand.

3. International Operations: A net foreign currency ex-

change loss of $1,126,000 and a gain of $2,544,000 are in-

cluded in earnings from operations for 1978 and 1977, respec-

tively. The net earnings from non-U.S. subsidiaries included in

earnings from operations are $22,232,000 and $14,458,000

for 1978 and 1977, respectively.

The company's equity in net assets of non-U.S. subsidiaries

at December 31 consisted of the following:

(Dollars in thousands) 1978 1977 Current assets $291,722 $237,112 Property, plant and equipment net 109,621 93,401 (162,721) Current liabilities (114,393

Other assets (liabilities), net (40,911) (17,72 Equity in net assets of non-U.S. subsidiaries $197,711 $198,398

The company's equity in undistributed earnings of profitable non-U.S. subsidiaries at December 31,1978, amounted to $91,525,000 ($67,813,000 at December 31,1977).

4. Long-Term Debt: Long-term debt at December 31 con- sinking fund payments are required beginning October 1, sisted of the following: 1988, in installments of $5 million sufficient to retire 95% of the issue prior to maturity. The net proceeds from the sale of the (Dollars in thousands) 1978 1977 debentures were used to reduce outstanding domestic comDebt outside the United States: mercial paper and redeem the 8% guaranteed sinking fund debentures (issued by Motorola International Capital Corpora41/2% convertible guaranteed debentures due July 1,1983 5,583 tion) due March 1, 1987. $ $ 6,908 Under the terms of the revolving credit agreement, which 8% guaranteed sinking fund were amended in 1978, the full amount of the agreement ($56 debentures due March 1,1987 200 million) extends through December 31,1981, with $7 million in Notes payable (generally at prevailing equal semi-annual reductions thereafter. Any borrowings prime rates) due in installments through June 30,1981, will be at the prevailing prime commerto 1991 22,924 18,341 cial rate of interest, for the next two years at the prevailing Notes supported by revolving credit prime commercial rate of interest plus 1A% and for the last two commitments from banks 14,632 — years at the prevailing prime commercial rate of interest plus 1 Debt in the United States: /2%. It is the intention of the company to maintain the availability of the revolving credit agreement during 1979, and Commercial paper supported by revolving credit commitments therefore the debt, both domestic and foreign, is classified as from banks 41,368 56,000 long-term. Domestic debt refers to outstanding commercial paper, whereas foreign debt refers to short-term borrowings 4%% debentures due April 1, 1986 undertaken for interest arbitrage or exposure management (net of debentures held by the considerations, the repayment of which is not subject to company for sinking fund payments, $4,739 at December 31, 1978; domestic or foreign exchange control limitations. $2,480 at December 31,1977) 15,261 19,020 The revolving credit agreement restricts retained earnings 8% sinking fund debentures due available for payment of cash dividends. At December 31, October 1,2007 99,713 99,702 1978, approximately $329 million ($237 million at December 31,1977) of retained earnings were not restricted for dividend Capitalized lease obligations, due in payments. The revolving credit agreement also requires the installments at various maturity dates through 1987 at interest rates company to maintain a ratio of consolidated current assets to of 7V2% to 81/2% 3,071 3,890 consolidated current liabilities at not less than 1.75:1.00 and consolidated net working capital (as defined) of not less than 202,552 204,061 $225 million. Less current maturities, included in The aggregate maturities and sinking fund requirements for current liabilities 4,461 3,782 long-term debt during the next five years are as follows: Net long-term debt $ 198,091 $ 200,279 1979 1980 1981 1982 1983 The 41/2% convertible guaranteed debentures (issued by $4,461 $4,402 $3,894 $18,631 $23,584 Motorola International Development Corporation) are convertible into common stock of Motorola, Inc., at the rate of 25.2 shares for each one thousand dollar principal amount, subject In 1982 and 1983 maturities and sinking fund requirements to adjustment in certain events, and are guaranteed as to the include $14 million of commercial paper and foreign notes payment of principal and interest by Motorola, Inc. The deben- payable supported by revolving credit commitments. tures are redeemable at various dates at redemption prices reducing from 101% to 100% of the principal amount thereof. 5. Income Taxes: The company provides for income taxes For the year ended December 31,1978, $1,325 thousand in based on earnings reported for financial statement purposes. debentures ($108 thousand for the year ended December 31, Income tax expense differs from amounts currently payable 1977) were converted into 33,386 shares (2,720 in 1977). At because of timing differences in the recognition of certain December 31,1978, there were 140,784 shares (174,170 at income and expense items for tax and financial statement December 31,1977) of Motorola, Inc., common stock reserved purposes.The amounts reported for 1977 have been restated for issuance upon conversion of these debentures. The 8% sinking fund debentures due October 1, 2007, are redeemable at various dates at redemption prices reducing from 107.4% to 100% of the principal amount thereof. Annual

26

to reflect the company's tax return for that year as filed. The components of the provision for income taxes are as follows:

(Dollars in thousands) 1978 1977 Taxes currently payable: United States $70,720 $63,844 Other nations 18,526 12,232

State income taxes (U.S.) 7,539 7,617

Total currently payable 96,785 83,693

Deferred Taxes: Difference between depreciation recorded for Income tax purposes and financial statement purposes 2,767 2,604

Income taxes on profits of Domestic International Sales Corporations 2,387 3,272 Current earnings of foreign subsidiaries anticipated to be repatriated in the future 5,035 (Increase) decrease in: Future warranty obligations (1,215) (628

Inventory valuations (8,088) (7,201 Future employee benefits (1,022) 3,051 Allowance for doubtful accounts (3,827) (742 Other nations 2,739 (2,245

Other—net (353) 2,865

Total deferred (1,577) 976 Total income tax expense $95,208 $84,669

The company anticipates that payment for current taxes on

income will not exceed the provision for income tax expense in

the near future by any significant amount. This situation princi-

pally arises because of U.S. taxes that must be paid on profits

of domestic sales to foreign subsidiaries, the profits of which

are eliminated for financial reporting purposes. The amount of

intercompany profit included in inventory is principally subject

to inventory levels. It is not feasible to forecast inventory level for the future, and therefore no estimates are provided on the future changes in deferred taxes.

Income taxes have been provided on aggregate earnings of

the company's Domestic International Sales Corporation. In-

come taxes have been provided on that portion of the com-

pany's share of the undistributed earnings of subsidiaries that are anticipated to be repatriated in the future. Income taxes have not been provided on the company's share of other undistributed earnings of subsidiaries ($82,179,000 and $67,813,000 at December 31,1978 and 1977, respectively), where it is intended these earnings will be permanently invested in operations outside the United States. Should these earnings be distributed, foreign tax credits would reduce the additional U.S. income tax which would be payable.

A reconciliation of the statutory corporate tax rate with the financial statement effective income tax rate is as follows:

1978 1977 Statutory U.S. Federal rate 48.0% 48.0° Increase (decrease) in tax rate resulting from: Taxes on earnings in other nations, net of loss operations with no tax

benefits and tax holidays 1.0 2.4

Tax benefits arising from tax holiday in Puerto Rico (4.2) (4.8) Investment tax credits (4.1) (3.8)

State income taxes 1.8 2.1 Other .7 .

Effective tax rate 43.2% 44.2%

At December 31,1978, certain non-U.S. subsidiaries of the company had loss carryforwards of approximately $7.7 million. The company's federal income tax returns have been examined and settled through 1973 by the Internal Revenue Service.

6. Contingencies: The company is one of 23 defendants named in a lawsuit commenced on September 20,1974, by Zenith Radio Corporation ("Zenith") in the United States District Court for the Eastern District of Pennsylvania. Zenith's

complaint alleged conspiracies and other violations of the United States antitrust and anti-dumping laws. The complaint also challenges, under the U.S. antitrust laws, the purchase by subsidiaries of Matsushita Electric Industrial Co., Ltd., of Japan (collectively with such subsidiaries,

"MEI") of certain assets and business of Motorola's Consumer

Products Division home television receiver business. Prior to

the consummation of such purchase, the U.S. Department of

Justice, at the request of Motorola and MEI, investigated the

antitrust implicationsofthetransaction. During such investiga-

tion, the Department of Justice took no legal action to prevent

the sale.

For all such alleged violations, Zenith claims monetary damages in the aggregate of more than $300 million (and the trebling of that amount). It seeks judgment against the defen-

dants jointly and individually in that amount plus costs and

plaintiff's attorney's fees. It also seeks divestiture by MEI of the

assets purchased from Motorola.

In the event a divestiture is ordered or litigation damages are assessed against MEI arising out of such purchase, Motorola has agreed to share to a limited extent the loss, if any, incurred by MEI. The maximum loss for which Motorola could be responsible to MEI under this agreement is $20 million. Management believes that the company has acted properly throughout and has denied any conspiracy or other violation of law alleged by Zenith.

The company is a defendant in various other suits and claims which arise in the normal course of business and is obligated under repurchase and other agreements principally in connection with the financing of sales. The company's business under certain United States government contracts is subject to the provisions of the Renegotiation Act of 1951. Renegotiation has been completed through 1970. It is the opinion of management that no significant adjustments will result from the Renegotiation Board's review of the open contract years. In January 1979, the Federal Court for the Northern District of Illinois issued an order and decision in favor of the Equal Employment Opportunity Commission and a certified class plaintiff that they had prevailed on the issue of liability with respect to hiring of blacks at Motorola's locations in the Northern District of Illinois from November 1968 to December 31, 1975, except for executive and professional positions. The court did not rule upon the amount or measure of damages or injunctive relief, which will be considered later. Motorola intends to appeal at the appropriate time. Motorola is currently defending two other certified class actions, together with a lawsuit brought by the EEOC, in the Federal Court for the Northern District of Illinois. These suits allege discrimination in the hiring of females and persons of Spanish surname for certain jobs and the promotion and certain employment practices relating to blacks in the Northern District of Illinois for various time segments beginning in 1965 These suits have not been tried. Motorola employs approximately 10,000 persons in northern Illinois. Motorola is also defending a suit brought as a class action i Federal Court for the Northern District of Georgia wherein the plaintiff claims discrimination with respect to pregnancy leaves of absence. In each of these actions the plaintiffs are seeking injunctive relief together with damages in the form of back pay. In addition, Motorola is contesting an EEOC determination on November 4,1977, that there is reasonable cause to believe that Motorola has engaged in a pattern and practice of employment discrimination since 1965 at its facilities in the Phoenix, Ariz., area where Motorola employs more than 10,000 persons. In that case Motorola is participating in statutorily mandated conciliation discussions with the EEOC staff. If resolution through those discussions should fail, the

EEOC could file suit. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the business or financial position of the company.

7. Share Option Plans: Under the company's employee share option plans, shares of common stock have been made available for grant to employees of the company and certain subsidiaries. The exercise price of options granted may not be less than 100% of market value on date of grant. The Share Option Plan of 1972 permitted granting of qualified (all of which have been cancelled and replaced with non-qualified options, or have expired) or non-qualified op-

tions, exercisable one year from date of grant. Non-qualified options expire ten years from date of grant. Authority to grant options under the 1972 plan was suspended upon implementation of the Share Option Plan of 1977. The Share Option Plan of 1977 permits the grant of nonqualified options only, which are exercisable in installments commencing one year from the date of grant and expire ten years from such date. In 1977, outstanding options previously granted to employees of Codex Corporation and its subsidiaries pursuant to the Codex Corporation Qualified Stock Option Plan and the Codex Corporation 1975 Qualified Stock Option Plan were assumed by Motorola. All of the options currently outstanding may be exercised in installments commencing six months after the date of grant, and expire five years from such date. In 1978, the company authorized the Compensation Committee to request the mutual cancellation of certain of the company's share options previously granted, and the granting of replacement share options at 100% of the market price on the date of grant. Qualifying tendered share options were replaced with share options at the rate of three shares for every four shares offered for cancellation, which are exercisable to the extent at the times, and in the manner of the cancelled share options. Share options for the one share out of every four shares offered for cancellation that was not regranted were granted to eligible employees in a new share option grant. Information on share options is summarized below:

1978 1977 Options outstanding beginning of year (shares) 1,449,848 1,221,416 Additional options granted 1,340,640 295,765

Options exercised (110,712) (36,066 Options terminated for cancellation and regrant and discontinued employment (1,382,550) (31,266 Options expired (1,858) — Options outstanding end of year 1,295,369 1,449,849

Shares reserved for possible future option grants 811,680 767,912

Total shares reserved 2,107,049 2,217,761 Total options exercisable (shares) 785,808 1,135,330 Aggregate exercise price of outstanding options $47,633,000 $67,364,000 Aggregate exercise price of exercisable options $28,488,000 $52,636,000

In addition, 5,775 warrants to purchase common stock were exercised by employees of Codex in 1977.

Options shown have been restated to include stock options of Universal Data Systems, Inc., employees which were outstanding and exercised in 1978 and 1977. There are no options outstanding that were previously granted to purchase shares of Universal Data Systems, Inc., Common Stock. Options exercised during 1978, including options previously granted to employees of Codex and UDS, were at per share prices of $2.00 to $53.81 ($2.00 to $46.25 in 1977). Options outstanding at December 31,1978, were at per share prices of $9.96 to $53.13.

8. Employee Benefit Plans: As specified in the Motorola Executive Incentive Plan, amended in 1977, the company may provide up to 7% of its annual consolidated pre-tax earnings, as defined, for the payment of cash incentive awards. Awards made in 1979 for 1978 performance and in 1978 for 1977 performance are payable in full or in installments, or may be otherwise deferred at the option of the participant and with approval of the Compensation Committee. Awards granted in 1976 and prior years are payable generally in equal annual installments over a period of five years and are generally subject to the recipient's continued employment. Amounts of $8,426,000 and $7,625,000 were provided in 1978 and 1977 for such awards, representing 7% of earnings from total operations as defined in the respective years. In 1978, awards of $5,629,000 were made for 1977 performance ($3,985,000 in 1977 for 1976 performance). Awards for 1978 performance have not yet been determined. At December 31,1978, $10,858,000 was available for such awards. The company and certain subsidiaries have contributory profit sharing plans in which all eligible employees participa The contributions to profit sharing funds in the United States and other nations, based upon percentages of pre-tax earnings from totai operations, as defined, were $36,123,000 in 1978 and $24,062,000 in 1977. The company's domestic profit sharing plan was amended effective January 1,1978, to provide among other things, an increased company contribution which resulted in additional company costs. Priorto January 1,1978, the company and certain subsidiaries had a voluntary and contributory domestic pension plan. Effective January 1,1978, anew non-contributory plan was adopted and substantially all domestic employees are automatically covered under this plan after one year of service. The company's policy is to fund pension costs as accrued: $14,114,000 in 1978 and $6,612,000 in 1977. The incremental cost of the revised plan was approximately $6,833,000. Also, at December 31,1978, vested benefits were fully funded as determined by the latest actuarial valuation, December 31,1977. In the event that the amount actually payable annually und the Pension Plan to any officer of the company elected by the Board of Directors does not amount to a specified percentage as defined, of such elected officer's rate of salary at reti ment, it is the intention of the company (subject to certain qualifications and conditions), to make supplementary payments so that the total annual payments to such officer will

aggregate a maximum of 50% of such officer's rate of salary at retirement, oraminimumof 40% of such officer's rate of salary at retirement, depending upon such officer's seniority as of January 1,1978, and the year in which such officer attains age 60, (or 30%, in the case of payments to the surviving spouse, of an elected officer's rate of salary upon the officer's death during employment by the company or after retirement from such employment). The company is accruing for these supplementary payments on a current basis. In addition, certain foreign subsidiaries have varying types of retirement plans providing benefits for substantially all of their employees. Essentially all of the cost of these plans is borne by the company. Amounts charged to earnings for the plans were $5,748,000 in 1978 and $4,200,000 in 1977.

9. Information by Industry Segment and Geographic Area: The Financial Accounting Standards Board in December 1976 issued Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise", which requires that financial statements for fiscal periods beginning after December 15,1976, include information about a company's operations in different industry segments, and information about a company's foreign operations. In line with Statement No. 14, the Securities and Exchange Commission in December 1977 adopted "Regulation S-K" which requires that financial statements for fiscal period beginning after December 15,1976, include a description of a company's operations by focusing on their industry segments and to present for a five year historical period revenue, profi and asset information relating to their industry segments and geographic areas. Information as to lines of business is permitted to be presented in lieu of industry segment data for years beginning before December 16,1976. The following disclosures disaggregate elements of the company's financial statements according to the guidelines established by Statement No. 14. However, management in its measurement and review of the company's activities may, from time to time, aggregate or disaggregate operations, or allocate costs among operations as necessary to satisfy internal requirements. Due to the subjective judgements necessary in aggregating similar classes of products into industry segments, comparisons of the company's product operations to similar operations of other enterprises may not be meaningful. Motorola operates predominantly in one industry, electronic equipment and components. Operations involve the design, manufacture and sale of a diversified line of electronic products, which includes, but is not limited to, two-way radios and other forms of electronic communications; semiconductors, including integrated circuits and microprocessor units; display products, automobile radios, stereo tape players, citizens band radios and other automotive electronic equipment. Within this industry communications product, semiconductor product and automotive product sales account for approximately 83% of total revenues from unaffiliated customers.

Information about the company's operations in different industry segments for the years ended December 31,1978 & 1977 is summarized below (dollars in thousands):

1977 Communications products $ 821,496 $ 1,999 $ 823,495 $130,890 $ 598,463 $ 25,948 $ 55,445 Semiconductor products 551,111 31,189 582,300 79,977 389,946 31,498 53,137 Automotive products 196,906 2,021 198,927 11,237 144,282 8,532 9,676 Other products 283,114 5,690 288,804 11,161 196,271 Adjustments & eliminations (40,899) (40,899) (1,491) (3,550) Total $1,852,627 $ — $1,852,627 231,774 1,325,412 Equity in net earnings/net assets of 50% owned affiliate $ 887 887 2,395 General corporate expenses/assets (18,098) 92,052 Interest expense (22,943) Earnings before income taxes $191,620 Total assets $1,419,859

The company operates manufacturing and distribution principally cash and marketable securities, the corporate adfacilities outside the United States. No single facility or country ministrative headquarters, and future income tax benefits. outside the United States accounts for more than 10% of Interproduct and intergeographic transfers are accounted for consolidated sales and other revenues or total assets. on an arm's length pricing basis and are consistent with rules Operating profit was computed as total revenues less and regulations of domestic and foreign taxing authorities. operating expenses. In computing operating profit, none of the Certain re-grouping of assets as identified with industry segfollowing items have been added or deducted: general corpo- ments has been made as a refinement of the amounts rerate expenses, interest expense, income taxes, and equity in ported. Investments previously reported in corporate assets, net earnings of a 50% owned affiliate in 1977, which equity have been reclassified to the communications segment. Acwas sold in 1978. Included in operating profit and sales and cordingly, the amounts reported for the year ended December other revenue for the automotive segment was a gain on the 31,1977, were restated, reflecting a transfer of $26,479 sale of the interest in the aforementioned affiliate. Identifiable thousand. assets are those assets of the company that are identified to classes of similar products or operations in each geographical Sales to United States federal government agencies aggrearea, excluding internal receivables. Corporate assets are gated $223,148 thousand during the twelve month period

30

Information about the company's operations in different geog summarized below:

1978 United States Foreign Adjustments & eliminations Total General corporate expenses/assets Interest expense Earnings before income taxes Total assets 1977 United States Foreign Adjustments & eliminations Total Equity in net earnings/net assets of 50% owned affiliate General corporate expenses/assets Interest expense Earnings before income taxes Total assets

ended December 31,1978. No other single customer (or group of customers under common control) accounted for 10% or more of the company's sales. The following table sets forth certain lines of business in formation for each class of similar products or services which accounted for ten percent or more of the total sales and revenues of Motorola.

Sales and Other Revenues (in millions) 1976 197

Communications products $680 $614 Semiconductor products 447 348 Automotive products 162 126

The sales shown in the foregoing table do not include products manufactured by Motorola and incorporated into other products manufactured and sold by Motorola. The classes of products indicated above for lines of business information are essentially equivalent to those used to present the industry segment information for 1978 and 1977.

ic regions, for the years ended December 31,1978 and 1977 is

Sales & Other Total Revenues Sales & Unaffiliated Intersegment Other Operating Identifiabl Customers Sales Revenue Profit Assets $1,688,029 $351,828 $2,039,857 $234,426 $1,159,015 531,715 284,078 815,793 49,678 428,227 (635,906) (635,906) (14,427) (43,479) $2,219,744 $ — $2,219,744 269,677 1,543,763 (21,746) 112,794 (27,541) $220,390 $1,656,557

10. Lease Commitments: Although the company owns most of its major facilities, it does lease certain office, factory and warehouse space, land, data processing and other sundry equipment. The company classifies and accounts for leases entered into subsequent to December 31,1976, in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases." This statement requires that a lease that transfers substantially all of the benefits and risks 1974 incident to the ownership of the property be accounted for as $584 an acquisition of an asset and incurrence of an obligation. 454 Accordingly, certain computer equipment and land and build144 ing leases have qualified for capitalization. At December 31, 1978 and 1977, the gross amount of assets recorded under capitalized leases is $4,187,000 of which $40,000 is included in land, $607,000 is included in building and the remainder is included in machinery and equipment. Associated total accumulated lease amortization was $1,263,000 and $330,000 for the years at December 31,1978 and 1977, respectively. Amortization of property under capital leases is included in depreciation of plant and equipment. The company has de-

termined that the effect of retroactive application of Statement and cost of sales approximate a replacement cost basis. ConNo. 13 to leases entered into prior to January 1,1977, is sequently, the company's stated inventory value and cost of insignificant. sales have not been restated. While the replacement cost of Total rental expense (including taxes, insurance and the company's fixed assets would be substantially higher than maintenance when included in rent) for all non-capital leases the stated acquisition cost, and while depreciation charges (including those with terms of less than one year) reduced by (straight-line) based on such higher replacement costs would sublease rental income (not considered to be material) was be greater than the 1978 and 1977 depreciation charges in the $25,727,000 in 1978 and $22,749,000 in 1977. consolidated financial statements, management believes (but Minimum future obligations on all noncancelable leases, net cannot definitely quantify) that lower costs of operation would of minimum sublease rentals, with initial terms of one year or result from using newer and more efficient fixed assets and more in effect at December 31,1978, are as follows for the that the savings, which would result from these efficiencies, periods ending December 31: would at least offset the higher depreciation indicated. Because the SEC's requirements exclude the effect of price level (Dollars in thousands) Capital Operating changes on assets and liabilities other than inventories and 1979 1,342 16,377 fixed assets, the data cannot be used to estimate the effect of 1980 1,339 12,313 inflation on the company's operation. Also, because of the inherent subjectivity of the replacement cost disclosure re1981 986 7,663 quirements and the consequent differences of interpretation 1982 99 5,664 between different companies, management believes that this 1983 103 3,011 information may not be comparable to other companies. Later 225 14,864 The company's annual report to the SEC on Form10-K, a copy of which is available upon request, will contain the preTotal minimum obligations 4,094 59,892 scribed SEC disclosure. Less executory cost 436 Net minimum obligation 3,658 13. Quarterly Financial Data (unaudited): Selected unauLess amount representing interest 587 dited quarterly financial data for 1978 and 1977 are as follows: Present value of net minimum obligation 3,071 (Dollars in thousands, except per share data) Three Months Ended Less current portion 911 1978 April 1 July 1 Sept. 30 Dec. 31 Long-term obligation at December 31,1978 2,160 Sales and other revenues $495,976 $551,031 $537,179 $635,558 Some of the leases contain renewal options for varying Gross profit before periods. Certain leases include options to purchase during or depreciation (a) 199,495 225,808 212,301 242,334 at the end of the lease term. Capitalized leases net of amortiNet earnings $ 27,997 $ 33,366 $ 30,342 $ 33,477 zation were formerly included in "other sundry assets, net" on the balance sheet. Beginning in 1978, capitalized leases and Net earnings per share $ .90 $ 1.08 $ .98 $ 1.08 their related accumulated amortization will be included in Three Months Ended "property, plant and equipment" on the balance sheet. 1977 1977 April 2 July 2 Oct. 1 Dec. 31 amounts have been reclassified to conform with the 1978 Sales and other disclosure. revenues $420,156 $461,003 $447,090 $525,265 Gross profit before 11. Supplementary Data: Company funded research and depreciation (a) 166,429 183,753 162,293 201,162 development expenditures, which are charged against operations as incurred, were $133,414,000 in 1978 and Net earnings $ 24,154 $ 27,986 $ 24,471 $ 30,340 $109,729,000 in 1977. Net earnings per share $ .78 $ .91 $ .79 $ .98 (a) Profit after manufacturing and other costs of sales exclusive of 12. Estimated Replacement Cost Information (unau- depreciation expense. dited): Requirements of the Securities and Exchange ComPeat, Marwick, Mitchell & Co., made a limited review of the mission direct the calculation of cost of sales and depreciation 1978 and 1977 quarterly data in accordance with standards expense based on the estimated replacement costs of invenestablished by the American Institute of Certified Public Actories and fixed assets. countants. Since Peat, Marwick, Mitchell & Co., did not audit The company's annual review of stated inventory values, the quarterly data for either year, they express no opinion on confirms level or slightly declining input costs, which coupled such data. with productivity increases traditionally experienced in the electronics industry, indicates that stated costs of inventories 32

Management Discussion and Analysis of Statements of Consolidated Earnings

1978 versus 1977 Sales and other revenues for 1978 increased by $366.2 million (19.8%) over 1977. Improved unit sales volume accounted for substantially all of the sales increase. This sales increase was primarily due to the sales of communications products and semiconductor products which increased approximately 16.8% and 24.6%, respectively, over 1977. Sales of automotive products increased 2.8% reflecting business mix changes in demand from the automotive industry. Manufacturing and other costs of sales increased $199.9 million (17.5%) over 1977. This increase reflects the mixed effects of increases in gross margins for the semiconductor segment and.data communications business offset by a decline in the gross margin for the communications segment. The decline in the communications segment's gross margin is attributable to additional write-offs for cost overruns evident certain systems contracts, extra unanticipated warranty obligations, additional technical and manufacturing problems incurred in starting production of certain advanced state-ofthe-art new products, and a continuing high rate of engineering and other costs invested in major new business opportunities. Selling, service and administrative expense for 1978 increased $122.4 million (28.7%) over 1977. This change was higherthan the 19.8% increase in sales and was attributable to higher distribution costs, higher costs associated with improved pension and profit sharing programs for the company, and a greater than normal adjustment in the communications segment for additional accounts receivable write-offs that became apparent during the year. Depreciation of plant and equipment for 1978 increased $10.6 million (14.5%) over 1977, as a result of fixed asset expenditures during the past three years of $146 million in 1978, $128 million in 1977 and $98 million in 1976. Interest and amortization for 1978 increased $4.6 million (20.0%) over 1977. This change was the result of increased borrowings and higher interest rates. The company's overall effective tax rate decreased from 44.2% in 1977 to 43.2% in 1978, due principally to significant reduction in losses from certain foreign operations which had provided no tax benefit. Net earnings from continuing operations increased $18.2 million (17.0%) in 1978. The increased earnings were due primarily to higher sales volume, improved margins in the semiconductor segment and data communications business, and significantly improved operating results for citizens band radio, watch module and watch crystal programs and Autovox, an Italian subsidiary.

1977 versus 1976 Sales and other revenues from continuing operations for the year were $1,853.5 million compared with $1,537.5 million in 1976. Substantially all of the 20.6% increase was due to improved unit sales volume. Sales of communications products increased approximately 20% in 1977 and accounted for more than 40% of the increase in consolidated sales and other revenues. This increase was attributable to an increase in demand with virtually no price increases. Worldwide sales of semiconductor products were up 23% over 1976. This increase was due solely to improved volume, as price decreases made possible because of the continued improvements in productivity, which yield lower unit costs, were passed on to customers. Sales of automotive products increased by approximately 21 % reflecting increased demand from the automotive industry. Manufacturing and other costs of sales increased $199.5 million (21.2%) in 1977. This increase was consistent with the 20.6% increase in sales and other revenues. Selling, service and administrative expense increased $71.7 million (20.2%) over 1976. This increase was consistent with the 20.6% increase in sales and reflected significantly higher employment costs due to both an increase in personnel and increases in certain employee benefits. Depreciation of plant and equipment increased $14.9 million (25.7%) over 1976, the result of fixed asset expenditures during the past three years of $128 million in 1977, $98 million i 1976 and $75 million in 1975. Interest and amortization expense increased $6.0 million (35.2%) over 1976. This change reflected an increase in both long and short-term debt and higher interest rates. The company's overall effective tax rate decreased from 45.1% in 1976 to 44.2% in 1977, due principally to increased investment tax credits. Net earnings from continuing operations increased $15.0 million (16.3%) in 1977. This increase reflected level or increased profit margins on the sale of communications, semiconductor and automotive products, offset by start-up costs and operating losses in citizens band radio, watch module and crystal programs, and certain international operations which reduced consolidated profit margins.

Ten Year Financial Summary

(Dollars in thousands, except per share data)

Operating Results from Continuing Operations (1) 1978 1977 1976 Sales and other revenues $2,219,744 $1,853,514 $1,537,533 Manufacturing and other costs of sales 1,339,806 1,139,877 940,389 Selling, service & administrative expense 548,667 426,304 354,602 Depreciation of plant and equipment 83,340 72,770 57,916 Interest & amortization of debenture discount, expense and premium, net 27,541 22,943 16,967 Total costs and other expenses 1,999,354 1,661,894 1,369,874 Earnings from continuing operations before income taxes 220,390 191,620 167,659 Income taxes 95,208 84,669 75,661 Earnings from continuing operations 125,182 106,951 91,998 Return on sales 5.6% 5.8% 6.0% Discontinued operations—profit (loss) — — (2,470) Net earnings $ 125,182 $ 106,951 $ 89,528

Per Share Data Earnings from continuing operations $ 4.04 $ 3.46 $ 3.00 Net earnings 4.04 3.46 2.92 Dividends declared 1.05 .88 .735

Balance Sheet and Other Data (2) Working capital $ 619,930 $ 567,044 $ 439,181 Current ratio 2.20:1 2.47:1 2.27:1 Short-term debt $ 82,963 $ 77,718 $ 64,578 Long-term debt 198,091 200,279 101,388 Stockholders' equity 885,538 788,044 706,482 Less short-term investments 121,429 85,681 60,972 Total invested capital $1,045,163 $ 980,360 $ 811,476 Return on average invested capital 12.3% 11.8% 11.8% Return on average stockholders' equity from continuing operations 15.0% 14.3% 13.9% Yearend employment (approximate) 68,000 60,000 56,000 Average shares outstanding (in thousands) 31,019 30,933 30,699

(1) All periods have been retroactively restated to include the results of opera- (2) All periods have been retroactively restated to include Universal Data Systion of Universal Data Systems, acquired in 1978 in a business combination tems; the 1969 through 1973 data has not been restated to exclude the home accounted for as a pooling-of-interests (see Note 2 of the Notes to Consolidated television receiver business. Financial Statements). In May 1974, Motorola sold its home television receiver business. Consequently, the 1969 through 1973 operating results have been adjusted to remove the effect of the television business.

34

Stock Price and Dividend Data The table below sets forth the high and low sales price per share for Motorola Common Stock on the New York Stock Exchange and the dividends declared and paid for the periods indicated: Stock Prices Divide 1978 High Low Declared 1 st Quarter $39.38 $35.00 $ .250 2nd Quarter 51.88 38.00 .250 3rd Quarter 54.88 44.88 .250 4th Quarter 45.63 38.38 .300 $1.05

Stock Prices 1977 High Low .250 1st Quarter $56.88 $43.50 .250 2nd Quarter 46.75 36.25 .250 3rd Quarter 47.25 39.25 .250 4th Quarter 45.37 33.63 1.00

Directors

ROBERT W. GALVIN WILLIAM J. WEISZ

JOHN F. MITCHELL JOHN J. ANTALEK, Retired, formerly Chairman of the Board, J & S Steel Corporation, a warehouser and fabricator of steel JAMES W. BIRKENSTOCK President, Intercal, Inc., a management consulting firm JOHNT. HICKEY

STEPHEN L. LEVY HOMER L. MARRS ARTHUR C. NIELSEN, JR. Chairman of the Board, A.C. Nielsen Comp a market research organization WILLIAM G. SALATICH Director of a cable and broadcast televi business; former Vice Chairman of the Bo The Gillette Company

ELMER H. SCHULZ Director Emeritus, I.IT. Research Instit

WALTER B. SCOTT B. KENNETH WEST Executive Vice President, Harris Trust a Savings Bank

Directors Emeritus DANIEL E. NOBLE Chairman, Science Advisory Board, Motorola, Inc.

ELMER H. WAVERING Retired, formerly Vice Chairman and Chief Operating Officer, Motorola, Inc.

36

Officers Motorola, Inc.

CORPORATE Robert W. Galvin Chairman of the Board and Chief Executive Officer William J. Weisz President and Chief Operating Officer John F Mitchell Executive Vice President and Assistant Chief Operating Officer Homer L. Marrs Senior Vice President and Assistant to the Chief Operating Office

FINANCE John T. Hickey Senior Vice President and Chief Financial Officer Donald R. Jones Vice President and Assistant Chief Financial Offi Edward J. Harty Vice President and Controller William P. Meehan Vice President and Treasurer Richard H. Weise Vice President, General Counsel and Secretary STAFF Stephen L. Levy Senior Vice President and Chief Corporate Staff O Martin Cooper Vice President and Corporate Director of Research and Development L. Curtis Foster Vice President and Corporate Director of Engineer R. James Harring Vice President and Corporate Director of Planning C. Travis Marshall Vice President and Corporate Director of

Government Relations Vincent J. Rauner Vice President for Patents, Trademarks and Licens Vice President and Corporate Director of Walter B. Scott Manufacturing and Facilities PERSONNEL RELATIONS

Robert N. Swift Vice President and Director of Personnel Relations AUTOMOTIVE AND DISPLAY SYSTEMS GROUP Carl E. Lindholm Senior Vice President and General Manager Automotive and Display Systems Group

Levy Katzir Vice President and General Manager Automotive Products Division

COMMUNICATIONS GROUP Joseph F Miller, Jr. Senior Vice President and General Manager Communications Group Jack Germain Vice President and Assistant General Manager Communications Group Arthur P. Sundry Vice President and General Manager Communications Distribution Division Ira W. Walker Vice President and Assistant General Manager Communications Distribution Division Rhesa S. Farmer, Jr. Vice President and General Manager Communications International Division John W. Battin Vice President and General Manager Communications Systems Division John M. Duich Vice President and Assistant General Manager Communications Products Division GOVERNMENT ELECTRONICS DIVISION Ralph W. Eisner Vice President and General Manager Government Electronics Division James R. Lincicome Vice President and Assistant General Manager Government Electronics Division SEMICONDUCTOR GROUP John R. Welty Senior Vice President and General Manager Semiconductor Group Earl R. Gomersall Vice President and Director, Precision Electronics, Materials and Manufacturing, Semiconductor Group Gary L. Tooker Vice President and General Manager Discrete Semiconductor Division Alfred J. Stein Vice President and General Manager Integrated Circuits Division Pasquale Pistorio Vice President and General Manager International Division

Motorola Products

Communications Group Car telephone systems Communications control centers Component products Electronic command and control sys Health care communications systems Microwave communications systems Mobile and portable data communica Mobile and portable FM two-way rad communications systems Precision instruments Radio paging systems Signaling and remote control syste

Semiconductor Group

Bipolar and CMOS logic circuits Bipolar linear integrated circuits Bipolar VLSI macrocell arrays Custom MOS and bipolar circuits Electronic materials Fiber-optic devices Field-effect transistors Hobby components Liquid crystal displays

Memory systems

Microprocessor support systems

Microprocessors

Microwave components

NMOS, CMOS and bipolar memories

Optoelectronics Power and small signal transistors Rectifiers RF modules RF power and small signal transist

Semiconductor chips Solar energy components

Solar energy systems

Surge suppressors

Thyristors

Triggers

Varactors

Watch modules

Zener and tuning diodes

Automotive Products Division Alternator charging systems AM, AM/FM antennas AM, AM/FM car radios Automotive power amplifiers Automotive sensors (pressure and positio Automotive sound equalizers Automotive speaker systems Automotive stereo 8-track tape and casse players Citizens band radios and antennas Digital appliance controls Electronic engine controls Engine management systems

Regulators

Solid-state ignition systems Tachometers, speedometers, odometers, hourmeters Government Electronics Division Advanced seeker systems Countermeasures systems Data security products Drone communications control and data li Energy systems, including solar photovol

Fixed and satellite communications syste

Information display systems

Missile and aircraft instrumentations

Missile guidance systems

Positioning and navigation systems

Radar remote sensing surveys Radar surveillance and display systems Secure communications Space communications systems Tactical electronics systems

Display Systems

Closed circuit TV systems

CRT display modules

Information display systems

Codex

Data communications equipment (modems,

multiplexers, network processors, test

equipment) Other Businesses Industrial process controls Plasma processing systems

MOTOROLA INC.

Corporate Offices Motorola Center 1303 E. Algonquin Rd. Schaumburg, III. 60196 Phone: (312) 397-5000

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