Motorola 2004 Annual Report Download - page 99

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MOTOROLA INC. AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Dollars in millions, except as noted)
The weighted-average fair value of options granted was $7.74, $3.21, and $5.04 for 2004, 2003 and 2002,
respectively. The fair value of each option is estimated at the date of grant using a modiÑed Black-Scholes option
pricing model, with the following weighted-average assumptions for 2004, 2003 and 2002, respectively: dividend
yields of 0.9%, 1.8% and 1.3%; expected volatility of 46.8%, 46.6% and 45.1%; risk-free interest rate of 3.7%, 2.6%
and 3.8%; and expected lives of 5 years for each grant.
Use of Estimates: The preparation of Ñnancial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and assumptions that aÅect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Ñnancial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
diÅer from those estimates.
ReclassiÑcations: Certain amounts in prior years' Ñnancial statements and related notes have been reclassiÑed
to conform to the 2004 presentation.
Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board
(""FASB'') issued Statement No. 123R (""SFAS 123R''), a revision to Statement No. 123, ""Accounting for Stock-
Based Compensation.'' This standard requires the Company to measure the cost of employee services received in
exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as
compensation expense over the vesting period of the awards. The Company is required to adopt SFAS 123R at the
beginning of the third quarter, 2005. The standard provides for a prospective application. Under this method, the
Company will begin recognizing compensation cost for equity based compensation for all new or modiÑed grants
after the date of adoption. In addition, the Company will recognize the unvested portion of the grant date fair
value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes. At
December 31, 2004, the aggregate value of unvested options, as determined using a Black-Scholes option valuation
model, was $540 million. Upon adoption of SFAS 123R, the majority of this amount will be recognized over the
remaining vesting period of these options.
In November 2004, the FASB issued SFAS No. 151, ""Inventory Costs'' (""SFAS 151''). SFAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs, and spoilage, be charged to expense in the period
they are incurred rather than capitalized as a component of inventory costs. Statement 151 is eÅective for inventory
costs incurred in Ñscal periods beginning after June 15, 2005. The adoption of this standard may result in higher
expenses in periods where production levels are lower than normal ranges of production. Because actual future
production levels are subject to many factors, including demand for the Company's products, the Company cannot
determine if the adoption of SFAS 151 will have a material impact on future results of operations.
In December 2004, the FASB issued SFAS No. 153, ""Exchanges of Nonmonetary Assets,'' (""SFAS 153'').
SFAS 153 amends Accounting Principles Board (""APB'') Opinion No. 29, ""Accounting for Nonmonetary
Transactions,'' to require exchanges of nonmonetary assets be accounted for at fair value, rather than carryover
basis. Nonmonetary exchanges that lack commercial substance are exempt from this requirement. SFAS 153 is
eÅective for nonmonetary exchanges entered into in Ñscal years beginning after June 15, 2005. The Company does
not routinely enter into exchanges that could be considered nonmonetary, accordingly the Company does not
expect the adoption of SFAS 153 to have a material impact on the Company's Ñnancial statements.
2. Discontinued Operations
During the second quarter of 2004, the Company completed the separation of its semiconductor operations
into a separate subsidiary, Freescale Semiconductor, Inc. (""Freescale Semiconductor''). Under the terms of the
Master Separation and Distribution Agreement entered into between Motorola and Freescale Semiconductor,
Freescale Semiconductor has agreed to indemnify Motorola for substantially all past, present and future liabilities
associated with the semiconductor business. In July 2004, an initial public oÅering (""IPO'') of a minority interest
of approximately 32.5% of Freescale Semiconductor was completed. As a result of the IPO the company recorded
additional paid-in capital of $397 million related to the excess of the IPO price over the book value of the shares
sold. Concurrently in July 2004, Freescale Semiconductor issued senior debt securities in an aggregate principal
amount of $1.25 billion. On December 2, 2004, Motorola completed the spin-oÅ of its remaining 67.5% equity
interest in Freescale Semiconductor. The spin-oÅ was eÅected by way of a pro rata non-cash dividend to Motorola
stockholders, which reduced retained earnings by $2.5 billion. Holders of Motorola stock at the close of business
on November 26, 2004 received a dividend of .110415 shares of Freescale Semiconductor Class B common stock
per share of Motorola common stock. No fractional shares of Freescale Semiconductor were issued. Stockholders