UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------- --------
Commission file number 0-6217
------
INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1672743
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Mission College Boulevard, Santa Clara, California 95052-8119
------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(408) 765-8080
--------------
(Registrant's telephone number, including area code)
N/A
-------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Shares outstanding of the Registrant's common stock:
Class Outstanding at September 30, 2000
Common stock, $0.001 par value 6,730 million
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- --------------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 8,731 $ 7,328 $ 25,024 $ 21,177
Costs and expenses:
Cost of sales 3,148 3,026 9,420 8,660
Research and development 977 840 2,899 2,234
Marketing, general and administrative 1,321 952 3,668 2,767
Amortization of goodwill and other acquisition-
related intangibles and costs 420 121 1,127 170
Purchased in-process research and development 8 333 91 333
--------- --------- --------- ---------
Operating costs and expenses 5,874 5,272 17,205 14,164
--------- --------- --------- ---------
Operating income 2,857 2,056 7,819 7,013
Gains on investments, net 716 195 3,309 556
Interest expense (5) (8) (26) (28)
Interest income and other, net 255 129 664 425
--------- --------- --------- ---------
Income before taxes 3,823 2,372 11,766 7,966
Provision for taxes 1,314 914 3,424 2,760
--------- --------- --------- ---------
Net income $ 2,509 $ 1,458 $ 8,342 $ 5,206
========= ========= ========= =========
Basic earnings per common share $ 0.37 $ 0.22 $ 1.24 $ 0.78
========= ========= ========= =========
Diluted earnings per common share $ 0.36 $ 0.21 $ 1.19 $ 0.75
========= ========= ========= =========
Cash dividends declared per
common share $ 0.020 $ 0.030 $ 0.070 $ 0.055
========= ========= ========= =========
Weighted average common shares outstanding 6,719 6,650 6,704 6,639
========= ========= ========= =========
Weighted average common shares outstanding,
assuming dilution 7,007 6,943 7,002 6,930
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
Sept. 30, Dec. 25,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,434 $ 3,695
Short-term investments 7,170 7,705
Trading assets 403 388
Accounts receivable, net 4,574 3,700
Inventories:
Raw materials 334 183
Work in process 926 755
Finished goods 676 540
--------- ---------
1,936 1,478
--------- ---------
Deferred tax assets 736 673
Other current assets 257 180
--------- ---------
Total current assets 21,510 17,819
--------- ---------
Property, plant and equipment 26,037 23,557
Less accumulated depreciation 12,623 11,842
--------- ---------
Property, plant and equipment, net 13,414 11,715
Marketable strategic equity securities 4,548 7,121
Other long-term investments 1,770 790
Goodwill and other acquisition-related intangibles, net 6,163 4,934
Other assets 1,608 1,470
--------- ---------
TOTAL ASSETS $ 49,013 $ 43,849
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 336 $ 230
Accounts payable 2,360 1,370
Accrued compensation and benefits 1,381 1,454
Deferred income on shipments to distributors 716 609
Accrued advertising 725 582
Other accrued liabilities 1,621 1,159
Income taxes payable 1,386 1,695
--------- ---------
Total current liabilities 8,525 7,099
--------- ---------
Long-term debt 610 955
Deferred tax liabilities 2,173 3,130
Put warrants - 130
Stockholders' equity:
Preferred stock - -
Common stock and capital in excess
of par value 8,643 7,316
Acquisition-related unearned stock compensation (96) -
Retained earnings 27,254 21,428
Accumulated other comprehensive income 1,904 3,791
--------- ---------
Total stockholders' equity 37,705 32,535
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,013 $ 43,849
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept. 30, Sept. 25,
2000 1999
---- ----
<S> <C> <C>
Cash flows provided by (used for) operating activities:
Net income $ 8,342 $ 5,206
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,463 2,338
Amortization of goodwill and other acquisition-related
intangibles and costs 1,127 170
Purchased in-process research and development 91 333
Gains on investments, net (3,309) (556)
Net loss on retirements of property, plant and equipment 99 161
Deferred taxes (108) (216)
Changes in assets and liabilities:
Accounts receivable (839) 191
Inventories (437) 17
Accounts payable 958 288
Accrued compensation and benefits (82) (140)
Income taxes payable (311) 201
Tax benefit from employee stock plans 852 416
Other assets and liabilities 603 38
--------- ---------
Total adjustments 1,107 3,241
--------- ---------
Net cash provided by operating activities 9,449 8,447
--------- ---------
Cash flows provided by (used for) investing activities:
Additions to property, plant and equipment (4,251) (2,423)
Acquisitions, net of cash acquired (2,102) (1,039)
Purchases of available-for-sale investments (11,250) (6,199)
Sales of available-for-sale investments 3,624 628
Maturities of available-for-sale investments 10,324 6,028
Other investing activities (522) (537)
--------- ---------
Net cash used for investing activities (4,177) (3,542)
--------- ---------
Cash flows provided by (used for) financing activities:
Increase in short-term debt, net 106 3
Additions to long-term debt 11 28
Retirements of long-term debt (46) -
Proceeds from sales of shares through employee stock plans and other 737 493
Proceeds from sales of put warrants - 20
Repurchase and retirement of common stock (3,006) (3,709)
Payment of dividends to stockholders (335) (266)
--------- ---------
Net cash used for financing activities (2,533) (3,431)
--------- ---------
Net increase in cash and cash equivalents $ 2,739 $ 1,474
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 32 $ 31
Income taxes $ 2,987 $ 2,348
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED
BASIS OF PRESENTATION
The accompanying interim consolidated condensed financial statements of Intel
Corporation have been prepared in conformity with generally accepted
accounting principles, consistent in all material respects with those applied
in the company's Annual Report on Form 10-K for the year ended December 25,
1999. The interim financial information is unaudited, but reflects all normal
adjustments which are, in the opinion of management, necessary to provide a
fair statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial
statements in the company's Annual Report on Form 10-K for the year ended
December 25, 1999. Certain amounts for prior periods have been reclassified
to conform to the current presentation. All share, per share and warrant
amounts in prior periods have been restated to reflect the two-for-one stock
split, effected as a special stock distribution on July 30, 2000.
DIVIDEND POLICY
The company's dividend policy generally results in the Board of Directors
considering two dividend declarations in each of the first and third quarters
of the year, with dividend payments made quarterly. However, in conjunction
with the stock split announcement in the second quarter of 2000, the Board of
Directors declared a quarterly dividend that was paid on September 1, 2000,
and at the same time the Board of Directors approved an increase in the
quarterly dividend from $0.015 to $0.02 per share. Only one dividend was
declared in the third quarter, for $0.02 per share, payable December 1, 2000
to shareholders of record on November 7, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
The company will adopt Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, at the beginning of its fiscal year 2001. The standard will require
the company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings,
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The change in a derivative's fair value related to
the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. Management believes appropriate systems and processes will be in
place prior to adoption in order to comply with the requirements of the
standard. The primary impact on adoption is expected to result from the
recognition of the fair value of investments in equity warrants. The
adjustment for the cumulative effect of adoption in the first quarter of 2001
will depend on the actual holdings of derivative instruments and the market
conditions on the date of adoption, but could result in an addition to net
income per share of as much as $0.02, on an after-tax basis.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101), providing the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. For Intel, SAB
101 becomes effective in the fourth quarter of 2000. The company believes
that it is in compliance with SAB 101.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
EARNINGS PER SHARE
A reconciliation of the shares used in the computation of the company's basic
and diluted earnings per common share is as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 6,719 6,650 6,704 6,639
Dilutive effect of:
Employee stock options 283 289 291 290
Convertible notes 5 4 7 1
----- ----- ----- -----
Weighted average common shares
outstanding, assuming dilution 7,007 6,943 7,002 6,930
===== ===== ===== =====
</TABLE>
Weighted average common shares outstanding, assuming dilution, includes the
incremental shares that would be issued upon the assumed exercise of stock
options and the assumed conversion of the convertible notes for the period
they were outstanding (see Long-Term Debt note). Certain of the company's
stock options were excluded from the calculation of diluted earnings per share
because they were antidilutive, but these options could be dilutive in the
future. Net income for the purpose of computing diluted earnings per common
share is not materially affected by the assumed conversion of the convertible
notes.
STOCK REPURCHASE PROGRAM
During the first nine months of 2000, the company repurchased 50.7 million
shares of common stock under the company's authorized repurchase program at a
cost of $3.0 billion. As of September 30, 2000, approximately 149.5 million
shares remained available for repurchase under the program.
PUT WARRANTS
In a series of private placements during the 1991-1999 period, the company
sold put warrants that entitled the holder of each warrant to sell to the
company, by physical delivery, one share of common stock at a specified price.
The four million put warrants that were outstanding at December 25, 1999
expired unexercised in the first quarter of 2000.
INTEREST INCOME AND OTHER
Interest income and other, net included (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- ------------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ 267 $ 152 $ 672 $ 456
Other, net (12) (23) (8) (31)
-------- -------- -------- --------
Total $ 255 $ 129 $ 664 $ 425
======== ======== ======== ========
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
ACQUISITIONS
During the first nine months of 2000, the company completed several
acquisitions, all of which have been accounted for using the purchase method
of accounting.
In March 2000, the company acquired Ambient Technologies, Inc. in a cash
transaction. Ambient develops integrated digital subscriber line silicon
solutions and analog modems designed to bring high-speed Internet access to
home users and small businesses.
Also in March 2000, the company acquired GIGA A/S in a cash transaction. GIGA
specializes in the design of advanced high-speed communications chips used in
optical networking and communications products that direct traffic across the
Internet and corporate networks.
In April 2000, the company acquired Picazo Communications, Inc. in a cash
transaction. Picazo specializes in CT Media-TM- server software which
allows third-party vendors to develop innovative new applications for
telecommunications.
In May 2000, the company acquired Basis Communications Corporation for cash
and options assumed. Basis designs and markets advanced semiconductors and
other products used in equipment that directs traffic across the Internet and
corporate networks.
In August 2000, the company acquired Trillium Digital Systems, Inc. in
exchange for 2.6 million unregistered shares of Intel common stock, cash and
options assumed. The portion of the purchase consideration related to 1.2
million shares and the intrinsic value of stock options related to future
services, totaling $102 million, is contingent on the continued employment of
certain key employees and is classified as Acquisition-Related Unearned Stock
Compensation within Stockholders' Equity. This amount is being amortized over
the period during which the services will be performed (see Acquisition-
Related Unearned Stock Compensation note). Trillium is a provider of
communications software solutions which are used by suppliers of wireless,
Internet, broadband and telephony products.
These purchase transactions are further described below (in millions):
<TABLE>
<CAPTION>
Purchased Goodwill
Entity In-Process Research and Identified
Name Consideration and Development Intangibles Form of Consideration
--------- ------------- ------------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Ambient $ 148 $ 10 $ 135 Cash and options assumed
GIGA $ 1,247 $ 52 $ 1,184 Cash
Picazo $ 120 $ - $ 120 Cash and options assumed
Basis $ 453 $ 21 $ 472 Cash and options assumed
Trillium $ 277 $ 8 $ 232 Common stock, cash and
options assumed
</TABLE>
Consideration includes the cash paid, less any cash acquired, together with
the value of any stock issued and options assumed, but excludes any debt
assumed.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
ACQUISITIONS (CONTINUED)
For the first nine months of 2000, $91 million was allocated to purchased in-
process research and development (IPR&D) and expensed upon acquisition of the
above companies. The fair value of the IPR&D was determined using the income
approach, which discounts expected future cash flows from projects under
development to their net present value. Each project was analyzed to
determine the technological innovations included; the utilization of core
technology; the complexity, cost and time to complete development; any
alternative future use or current technological feasibility; and the stage of
completion. Future cash flows were estimated, taking into account the
expected life cycles of the products and the underlying technology, relevant
market sizes and industry trends. Discount rates were derived from weighted
average cost of capital analysis, adjusted to reflect the relative risks
inherent in each entity's development process. The IPR&D charge includes the
fair value of IPR&D completed. The fair value assigned to developed
technology is included in identified intangible assets, and no value is
assigned to IPR&D to be completed or to future development. Intel believes
the amounts determined for IPR&D, as well as developed technology, are
representative of fair value and do not exceed the amounts an independent
party would pay for these projects.
In addition to the transactions described above, Intel also purchased other
businesses in smaller transactions. The charge for IPR&D related to the other
acquisitions was not significant. The total amount allocated to goodwill and
identified intangibles for these transactions was $207 million, which
represents a substantial majority of the consideration for these transactions.
The consolidated condensed financial statements include the operating results
of acquired businesses from the dates of acquisition. The operating results
of Ambient, GIGA and Trillium since their acquisition have been included in
the operating results of the Network Communications Group operating segment.
The operating results of Picazo and Basis since their acquisition have been
included in the operating results of the Communications Product Group
operating segment. These groups have been included in the "all other"
category for segment reporting purposes.
The pro forma information below assumes that companies acquired in 2000 and
1999 had been acquired at the beginning of 1999 and includes the effect of
amortization of goodwill and other identified intangibles and costs from that
date. The impact of charges for IPR&D has been excluded. This is presented
for informational purposes only and is not necessarily indicative of the
results of future operations or results that would have been achieved had the
acquisitions taken place at the beginning of 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
(in millions, except per share amounts) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 8,735 $ 7,434 $ 25,086 $ 21,765
Net income $ 2,509 $ 1,497 $ 8,288 $ 4,543
Basic earnings per common share $ 0.37 $ 0.22 $ 1.24 $ 0.68
Diluted earnings per common share $ 0.36 $ 0.21 $ 1.18 $ 0.65
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES
Net goodwill and other acquisition-related intangibles at the end of each
period consisted of the following (in millions):
<TABLE>
<CAPTION>
Sept. 30, Dec. 25,
Life in Years 2000 1999
------------- ---- ----
<S> <C> <C> <C>
Goodwill 2-6 $ 5,168 $ 4,124
Developed technology 3-6 793 612
Other intangibles 2-6 202 198
-------- --------
Total $ 6,163 $ 4,934
======== ========
</TABLE>
Other intangibles include items such as trademarks, workforce-in-place and
customer lists. The total balances presented above are net of total
accumulated amortization of $1.6 billion and $471 million at September 30,
2000 and December 25, 1999, respectively.
Amortization of goodwill and other acquisition-related intangibles and costs
was $1.1 billion for the first nine months of 2000. This includes $942
million of amortization of goodwill, $179 million of amortization of other
acquisition-related intangibles (a majority of which was related to developed
technology) and $6 million of amortization of acquisition-related compensation
costs (see Acquisition-Related Unearned Stock Compensation note).
MTH RESERVE
In May 2000, the company announced that it would replace motherboards that
have a defective memory translator hub (MTH) component that enables SDRAM
memory to work with the Intel-R- 820 Chipset. The MTH component began shipping
in November 1999, with a substantial majority of Intel's shipments occurring
in the first quarter of 2000. The company estimates that fewer than one
million boards or systems with the MTH component were shipped to end users.
In the first quarter of 2000, the company recorded a revenue reserve for
chipsets and motherboards with the MTH component that remained in raw
materials inventories at Intel's customers and which could be returned to
Intel for credit. The company also recorded additional inventory reserves
related to these products. In the second quarter of 2000, the company was
able to estimate the cost of the motherboard replacement program and recorded
a $200 million reserve. For the nine months ended September 30, 2000, the
total impact on gross margin of the revenue and inventory reserves and the
estimated cost of the motherboard replacement program was approximately $253
million. As of September 30, 2000, the balance in the reserve was
approximately $87 million. Management believes that the balance in the
reserve is adequate for the estimated remaining costs of the motherboard
replacement program.
LONG-TERM DEBT
During August of 2000, the company announced its intention to call the 4%
convertible subordinated notes due 2004 issued by Level One Communications,
Inc. In September, all of the notes were exchanged for approximately 7.4
million shares of unregistered Intel common stock. The notes had a principal
amount of $115 million and a total carrying value of $207 million.
INCOME TAX BENEFIT
In March of 2000, the Internal Revenue Service closed its examination of the
company's tax returns for years up to and including 1998. Resolution was
reached on a number of issues including adjustments related to the
intercompany allocation of profits. As part of this closure, the company
reversed previously accrued taxes, reducing the tax provision for the first
quarter of 2000 by $600 million, or approximately $0.09 per share.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
ACQUISITION-RELATED UNEARNED STOCK COMPENSATION
During the third quarter of 2000, the company recorded acquisition-related
purchase consideration of $102 million as unearned stock-based compensation,
in accordance with Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation." This
amount represents the portion of the purchase consideration related to shares
issued contingent on continued employment of certain employee stockholders and
the intrinsic value of stock options assumed that become exercisable as future
services are provided by employees. The compensation is being recognized over
the related employment period and the expense is included in the amortization
of goodwill and other acquisition-related intangibles and costs. A total of
$6 million of expense was recognized in the third quarter of 2000.
COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,509 $ 1,458 $ 8,342 $ 5,206
Change in net unrealized gain on
available-for-sale investments (1,072) 929 (1,887) 1,456
-------- -------- -------- --------
Total $ 1,437 $ 2,387 $ 6,455 $ 6,662
======== ======== ======== ========
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
COMMITMENTS
During May 2000, the company announced that it had entered into an agreement
to form a new company with Excalibur Technologies Corporation. Upon
completion of the transaction, the new company will be named Convera. Intel
expects to contribute its Interactive Media Services division to Convera and
invest approximately $155 million in cash. Convera is intended to enable
owners of branded content, such as sports and entertainment, to produce and
securely sell their audio and video content over the Internet. The completion
of this transaction is subject to regulatory review, Excalibur stockholder
approval and other normal closing conditions.
CONTINGENCIES
In November 1997, Intergraph Corporation filed suit in Federal District Court
in Alabama for patent infringement and generally alleging that Intel attempted
to coerce Intergraph into relinquishing certain patent rights. The suit
alleges that Intel infringes five Intergraph microprocessor-related patents,
and includes alleged violations of antitrust laws and various state law
claims. The suit seeks injunctive relief, damages and prejudgment interest,
and further alleges that Intel's infringement is willful and that any damages
awarded should be trebled. Intergraph's expert witness has claimed that
Intergraph is entitled to damages of approximately $2.2 billion for Intel's
alleged patent infringement, $500 million for the alleged antitrust violations
and an undetermined amount for alleged state law violations. Intel has
counterclaimed that the Intergraph patents are invalid and further alleges
infringement of seven Intel patents, breach of contract and misappropriation
of trade secrets. In October 1999, the court reconsidered an earlier adverse
ruling and granted Intel's motion for summary judgment that the Intergraph
patents are licensed to Intel, and dismissed all of Intergraph's patent
infringement claims with prejudice. Intergraph has appealed this ruling. In
November 1999, the Court of Appeals for the Federal Circuit reversed the
District Court's April 1998 order requiring Intel to continue to deal with
Intergraph on the same terms as it treats allegedly similarly situated
customers with respect to confidential information and products supply. In
March 2000, the District Court issued an order granting Intel summary judgment
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
INTEL CORPORATION, NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -
UNAUDITED (CONTINUED)
CONTINGENCIES (CONTINUED)
on Intergraph's antitrust claims. Intergraph has appealed this ruling. The
company disputes Intergraph's remaining state law claims, and intends to
defend the lawsuit vigorously.
The company is currently party to various legal proceedings, including that
noted above. While management, including internal counsel, currently believes
that the ultimate outcome of these proceedings, individually and in the
aggregate, will not have a material adverse effect on the company's financial
position or overall trends in results of operations, litigation is subject to
inherent uncertainties. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the net income of the period in
which the ruling occurs.
OPERATING SEGMENT INFORMATION
Intel is organized into five product-line operating segments, the Intel
Architecture Group, the Wireless Communications and Computing Group, the
Network Communications Group, the Communications Products Group, and the New
Business Group.
Although the company has five operating segments, only the Intel Architecture
Group is a reportable segment. The Intel Architecture Group's products
include microprocessors, motherboards and other related board-level products,
including chipsets.
The "all other" category includes revenues and earnings or losses for all
operating segments other than the Intel Architecture Group. In addition, "all
other" includes certain corporate-level operating expenses (primarily the
amount by which total profit-dependent bonus expenses differ from a targeted
level allocated to all of the operating segments) not allocated to operating
segments.
Prior to the third quarter of 2000, changes in the reserve for deferred income
on shipments to distributors were not allocated to the operating segments and
therefore were included in the "all other" category in order to reconcile
total revenues and operating profits. As of the third quarter of 2000, the
revenue and operating profit related to changes in the distributor reserve
have been allocated to the operating segments for internal management
reporting and segment reporting. Information for prior periods has been
restated to conform to the new presentation.
Segment information is summarized as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Intel Architecture Group:
-------------------------
Revenues $ 7,038 $ 6,268 $ 20,449 $ 18,496
Operating profit $ 3,457 $ 2,731 $ 9,612 $ 8,120
All other:
----------
Revenues $ 1,693 $ 1,060 $ 4,575 $ 2,681
Operating loss $ (600) $ (675) $ (1,793) $ (1,107)
Total:
------
Revenues $ 8,731 $ 7,328 $ 25,024 $ 21,177
Operating profit $ 2,857 $ 2,056 $ 7,819 $ 7,013
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER OF 2000 COMPARED TO THIRD QUARTER OF
1999
Intel's net revenues in Q3 2000 increased by 19% compared to Q3 1999. Net
revenues for the Intel Architecture Group operating segment increased 12% in
Q3 2000 compared to Q3 1999. The increase in net revenues for the Intel
Architecture Group was primarily due to higher unit sales volume of
microprocessors as well as increased revenues from sales of chipsets.
Additionally within the "all other" category for segment reporting purposes,
revenues from sales of flash memory and networking and communications products
grew significantly between these periods. As of the third quarter of 2000,
the revenues related to changes in the distributor reserve have been allocated
to the operating segments. Amounts for 1999 have been reclassified on a
comparable basis.
For Q3 2000, sales of microprocessors and related board-level products based
on the P6 microarchitecture, which are included in the Intel Architecture
Group's operations, comprised a majority of Intel's consolidated net revenues
and a substantial majority of gross margin. For Q3 1999, these products
represented a substantial majority of the company's consolidated net revenues
and gross margin.
Cost of sales increased 4% in Q3 2000 compared to Q3 1999. Within the Intel
Architecture Group operating segment, cost of sales decreased primarily due to
lower unit costs in Q3 2000, partially offset by increased costs due to higher
sales volume of microprocessors and other products. The lower unit costs in
Q3 2000 were achieved primarily through the continued transition to
microprocessor products with lower-cost packaging as well as factory
efficiencies. Increased costs due to higher sales volume of products within
the "all other" category more than offset decreased costs in the Intel
Architecture Group. The company's gross margin percentage increased to 64% in
Q3 2000 from 59% in Q3 1999. The improvement in gross margin was primarily a
result of lower unit costs of microprocessors in the Intel Architecture Group.
In addition, improved demand and higher prices for flash memory in Q3 2000
also contributed to the improvement in gross margin. See "Outlook" for a
discussion of gross margin expectations.
Excluding charges of $8 million for purchased in-process research and
development (IPR&D) related to the acquisitions completed in Q3 2000, research
and development spending increased $137 million, or 16%, in Q3 2000 compared
to Q3 1999. This increase was primarily due to increased spending on product
development programs, including product development of companies acquired
since Q3 1999. Marketing, general and administrative expenses increased $369
million, or 39%, in Q3 2000 compared to Q3 1999, primarily due to increases
for the Intel Inside-R- cooperative advertising program, profit-dependent
bonus expenses, and marketing, general and administrative expenses from
companies acquired. Excluding the charges for IPR&D and the amortization of
goodwill and other acquisition-related intangibles and costs, operating
expenses were 26% of net revenues in Q3 2000 and 24% of net revenues in Q3
1999.
In Q3 2000, the company recorded a charge of $8 million for IPR&D related to
the acquisition of Trillium Digital Systems, Inc. In Q3 1999, the company
recorded a charge of $333 million for IPR&D primarily related to the
acquisitions of Dialogic Corporation and Level One Communications, Inc.
Amortization of goodwill and other acquisition-related intangibles and costs
increased to $420 million in Q3 2000 compared to $121 million in Q3 1999,
primarily due to the increased level of acquisitions since Q3 1999.
Gains on investments amounted to $716 million in Q3 2000 and $195 million in
Q3 1999, primarily resulting from sales of marketable strategic equity
securities. Interest and other income increased to $255 million in Q3 2000
compared to $129 million in Q3 1999 primarily due to higher interest income.
The increase in interest income is due to higher average investment balances
and higher interest rates in Q3 2000 compared to Q3 1999.
The company's effective income tax rate was approximately 34.4% in Q3 2000.
Excluding the impact of non-deductible charges for IPR&D and amortization of
goodwill, the company's effective income tax rate was approximately 31.8% for
Q3 2000 compared to approximately 33% in Q3 1999. The decreased rate in Q3
2000 compared to Q3 1999 reflects the impact of the resolution reached with
the Internal Revenue Service in Q1 2000 on a number of issues including
adjustments related to the intercompany allocation of profits.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 2000 COMPARED TO FIRST NINE
MONTHS OF 1999
Intel's net revenues for the first nine months of 2000 increased by 18%
compared to the first nine months of 1999. Net revenues for the Intel
Architecture Group operating segment increased 11% in the first nine months of
2000 compared to the first nine months of 1999. The increase in net revenues
for the Intel Architecture Group was primarily due to higher unit sales volume
of microprocessors partially offset by lower prices. Additionally within the
"all other" category for segment reporting purposes, revenues from sales of
flash memory and networking and communications products grew significantly
between these periods.
Sales of microprocessors and related board-level products based on the P6
microarchitecture comprised a majority of Intel's consolidated net revenues
and a substantial majority of gross margin for the first nine months of 2000.
For the first nine months of 1999, these products represented a substantial
majority of the company's consolidated net revenues and gross margin.
Cost of sales increased 9% in the first nine months of 2000 compared to the
first nine months of 1999. Within the Intel Architecture Group operating
segment, cost of sales decreased primarily due to lower unit costs in the
first nine months of 2000, partially offset by increased costs due to higher
sales volume of microprocessors and other products. The lower unit costs in
the first nine months of 2000 were achieved primarily through the continued
transition to redesigned microprocessor products with lower-cost packaging as
well as factory efficiencies. Lower unit costs within the Intel Architecture
Group were also partially offset by the costs recorded in the first nine
months of 2000 for the impact of inventory reserves related to chipsets and
motherboards with the defective MTH component and the charge for the
motherboard replacement program. Increased costs due to higher sales volume
of products within the "all other" category more than offset decreased costs
from the Intel Architecture Group. The company's gross margin percentage
increased to 62% in the first nine months of 2000, up from 59% in first nine
months of 1999. The improvement in gross margin was primarily a result of
lower unit costs of microprocessors in the Intel Architecture Group, partially
offset by the impact of lower sales prices for microprocessors and the impact
of the MTH issue. In addition, improved demand and higher prices for flash
memory in the first nine months of 2000 also contributed to the improvement in
gross margin. See "Outlook" for a discussion of gross margin expectations.
Excluding charges of $91 million for IPR&D related to the acquisitions
completed in the first nine months of 2000, research and development spending
increased $665 million, or 30%, in the first nine months of 2000 compared to
the first nine months of 1999. This increase was primarily due to increased
spending on product development programs including product development of
companies acquired. Marketing, general and administrative expenses increased
$901 million, or 33%, in the first nine months of 2000 compared to the first
nine months of 1999, primarily due to increases for the Intel Inside
cooperative advertising program, profit-dependent bonus expenses, and
marketing, general and administrative expenses from companies acquired.
Excluding the charges for IPR&D and the amortization of goodwill and other
acquisition-related intangibles and costs, operating expenses were 26% of net
revenues in the first nine months of 2000 and 24% of net revenues in the first
nine months of 1999.
In the first nine months of 2000, the company recorded $91 million in charges
for IPR&D related to the acquisition of GIGA A/S, Basis Communications
Corporation, Trillium and Ambient Technologies, Inc. The total charge for
IPR&D for GIGA was approximately $52 million. GIGA specializes in the design
of advanced high-speed communications chips used in optical networking and
communications products that direct traffic across the Internet and corporate
networks. One project, in the 10 gigabits-per-second (Gbps) product group,
accounted for 73% of the IPR&D value, with four remaining projects each
contributing from 5% to 9% of the total IPR&D value. The in-process projects
include the development of next generation integrated circuit devices
featuring improved speed, efficiency and functionality for communications
equipment. These projects ranged from 7% to 78% complete, with the 10 Gbps
project approximately 61% complete. Expected completion dates for the
projects range from Q2 2000 to Q2 2001, with total remaining costs to complete
of approximately $12 million. The average discount rates used for GIGA were
20% for IPR&D projects, and 11% for developed technology. GIGA's weighted
average cost of capital was 15%.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - FIRST NINE MONTHS OF 2000 COMPARED TO FIRST NINE
MONTHS OF 1999 (CONTINUED)
The estimated completion dates of certain IPR&D projects from companies
acquired in 1999 were revised in the first nine months of 2000. For the
Dialogic Corporation acquisition, the computer telephony (CT) server project,
accounting for 35% of the value assigned to IPR&D, is now expected to be
completed in Q4 2000. This project was originally scheduled to be completed
in Q1 2000. For the Level One Communications, Inc. acquisition, one project
related to digital subscriber lines and accounting for 13% of the value
assigned to IPR&D, originally expected to be completed in Q2 2000, is now
expected to be completed in Q1 2001. A project for Level One Communications
related to high-end switches and accounting for 17% of the value assigned to
IPR&D is now complete. This project was originally scheduled to be completed
in Q1 2000 and was subsequently revised to Q4 2000. For the DSP
Communications acquisition, development efforts for three projects have
revised plans. One project based on CDMA (code division multiple access)
frequency standards, which accounted for 30% of the value assigned to IPR&D,
has been discontinued, with development efforts refocused on new and emerging
market technologies built on the CDMA base. One project based on PDC
(personal digital cellular) standards and accounting for 10% of the value
assigned to IPR&D originally scheduled to be completed in 2001 is now expected
to be completed in Q1 2002. The third project based on TDMA Edge (time
division multiple access) standards and accounting for 11% of the value
assigned to IPR&D originally scheduled to be completed in 2003 is now expected
to be completed in 2004. All other significant projects are substantially on
schedule.
Failure to deliver new products to the market on a timely basis, or to achieve
expected market acceptance or revenue and expense forecasts, could have a
significant impact on the financial results and operations of the acquired
businesses.
Amortization of goodwill and other acquisition-related intangibles and costs
increased to $1.1 billion in the first nine months of 2000 compared to $170
million in the first nine months of 1999, primarily due to the increased level
of acquisitions.
Gains on investments in the first nine months of 2000 increased to $3.3
billion compared to $556 million in the first nine months of 1999 and include
a realized gain on the sale of the company's holdings of Micron Technology,
Inc. shares. Interest and other income increased to $664 million in the first
nine months of 2000 compared to $425 million in the first nine months of 1999
primarily due to higher interest income. The increase in interest income is
due to higher average investment balances and higher interest rates in the
first nine months of 2000 compared to the first nine months of 1999.
The company's effective income tax rate was approximately 29.1% in the first
nine months of 2000. Excluding the one-time benefit for the reversal in Q1
2000 of previously accrued taxes, and the impact of non-deductible charges for
IPR&D and amortization of goodwill, the company's effective income tax rate
was approximately 31.8% for the first nine months of 2000 compared to
approximately 33% in the first nine months of 1999. The decreased rate in the
first nine months of 2000 compared to the first nine months of 1999 reflects
the impact of the resolution reached with the Internal Revenue Service in Q1
2000 on a number of issues including adjustments related to the intercompany
allocation of profits.
FINANCIAL CONDITION
The company's financial condition remains very strong. At September 30, 2000,
total cash, trading assets, and short- and long-term investments, excluding
marketable strategic equity securities, totaled $15.8 billion, up from $12.6
billion at December 25, 1999.
The major sources of cash during the first nine months of 2000 were cash
provided by operating activities of $9.4 billion and proceeds of $3.6 billion
from sales of strategic equity securities. Major uses of cash during the
period included $3.0 billion to repurchase 50.7 million shares of common stock
and capital spending of $4.3 billion for
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
property, plant and equipment, primarily for microprocessor manufacturing
capacity. The company also paid $2.1 billion in net cash for acquisitions,
including the purchases of GIGA, Basis, Ambient, Picazo Communications, Inc
and Trillium. See "Outlook" for a discussion of capital expenditure
expectations in 2000.
The company's five largest customers accounted for approximately 41% of net
revenues for the first nine months of 2000. At September 30, 2000, the five
largest customers accounted for approximately 39% of net accounts receivable.
At September 30, 2000, marketable strategic equity securities totaled $4.5
billion with approximately $2.9 billion in unrealized appreciation. Compared
to December 25, 1999, the total value of marketable strategic equity
securities decreased by approximately $2.6 billion and the unrealized
appreciation decreased by approximately $2.9 billion. The decrease in value
is primarily due to sales of appreciated equity securities and declines in
market values partially offset by additional investments.
During May 2000, the company announced that it had entered into an agreement
to form a new company (Convera) with Excalibur Technologies Corporation.
Intel expects to contribute its Interactive Media Services division to Convera
and invest approximately $155 million in cash. Convera is intended to enable
owners of branded content, such as sports and entertainment, to produce and
securely sell their audio and video content over the Internet. The completion
of this transaction is subject to regulatory review, Excalibur stockholder
approval and other normal closing conditions.
The company believes that it has the financial resources needed to meet
business requirements for the next twelve months, including potential future
acquisitions or strategic investments, capital expenditures for the expansion
or upgrading of worldwide manufacturing capacity, working capital requirements
and the dividend program.
OUTLOOK
This outlook section contains a number of forward-looking statements, all of
which are based on current expectations. Actual results may differ
materially. These statements do not reflect the potential impact of any
mergers, acquisitions or other business combinations that had not closed as of
the end of the third quarter of 2000.
Intel's goal is to be the preeminent building block supplier to the worldwide
Internet economy. The company's primary focus areas are the client platform,
the server platform, networking and communications, and solutions and
services. The company's five product-line operating segments support these
initiatives. The Intel Architecture Group operating segment supports the
client and server platform initiatives. Intel's strategy for client and
server platforms is to introduce ever higher performance microprocessors and
chipsets, tailored for the different market segments of the worldwide
computing market, using a tiered branding approach. In line with this
strategy, during the third quarter of 2000, the company introduced higher
performance microprocessors based on the P6 microarchitecture specifically for
different computing segments: a mobile version of the Intel-R- Celeron-TM-
processor for the value segment; mobile versions of the Pentium-R- III
processor for home and business applications; and a Pentium-R- III Xeon-TM-
processor for mid-range and high-end servers and workstations. In addition,
the Intel Architecture Group provides products and services to accelerate
integration and deployment of Intel Architecture-based e-Business solutions.
In the fourth quarter of 2000, the company expects to introduce a new
generation of desktop microprocessors based on the new Intel-R- NetBurst-TM-
microarchitecture under the Pentium-R- 4 brand name. The Pentium 4 processor
is designed for consumers who want to take advantage of the latest Web
technologies like broadband, interactive 3-D and streaming audio and video.
Subsequent to the end of the third quarter of 2000, the company began to ship
processors based on the IA-64 architecture, under the Itanium-TM- brand, for
systems used by information technology end-users in pilot installations.
Pilot systems will be followed by the release of generally available system
hardware, operating systems environments, and application solutions, following
industry practice for enterprise computing systems.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
Intel plans to cultivate new businesses as well as continue to work with the
computing industry to expand Internet capabilities and product offerings, and
develop compelling software applications that can take advantage of higher
performance microprocessors and chipsets, thus driving demand toward Intel's
newer products in each computing market segment. The company's microprocessor
products compete with existing and future products in the various computing
market segments. The company has recently experienced an increase in the
competitive product offerings in the performance desktop market segment. The
company may continue to take various steps, including reducing microprocessor
prices and offering rebates at such times as it deems appropriate, in order to
increase acceptance of its latest technology and to remain competitive within
each relevant market segment.
The client platform strategy also includes providing low-power processors and
flash memory for handheld wireless devices. The Wireless Communications and
Computing Group supports the handheld wireless device initiatives.
In the network and communications infrastructure area, Intel's strategy is to
deliver both the system-level communications products and solutions, and
component-level silicon building blocks for networking and communications
systems. The Communications Products Group operating segment supports
initiatives to deliver the system-level communications products and solutions
directed at service providers running e-Business data centers. The
Communications Products Group plans to transition from a business model of
selling Intel NetStructure-TM- products direct to service providers,
distributors, resellers and OEMs (original equipment manufacturers), to a
model where it increases its focus on providing communications building blocks
to OEM customers. The Communications Products Group also provides component-
level products for converged voice and data communications systems for the
telecommunications industry. The Network Communications Group operating
segment supports initiatives to deliver component-level networking products
for home and small- and medium-sized businesses. Intel has made acquisitions
and expects to make additional acquisitions to grow new networking and
communications areas.
Intel also intends to build new service businesses around the Internet.
Intel-R- Online Services, which provides Web hosting and e-Commerce services
for customers, is part of this initiative. Intel intends to deliver a
consistent worldwide platform for developing and delivering e-Business
solutions. The New Business Group operating segment supports these service
business initiatives.
Intel expects to grow revenues in the networking, communications and wireless
businesses by 50% or more in 2000. Intel's expectations for growth in these
areas, as well as in new service businesses, are subject to the company's
ability to acquire businesses as well as integrate and operate them
successfully, and to grow new businesses internally.
The company expects revenue for the fourth quarter of 2000 to be up 4% to 8%
from third quarter revenue of $8.7 billion. The company's financial results
are substantially dependent on sales of microprocessors and related components
by the Intel Architecture Group. Revenue is partly a function of the mix of
microprocessor types and speeds sold as well as the mix of related chipsets,
motherboards, purchased components and other semiconductor products, all of
which are difficult to forecast. Because of the wide price difference among
types of microprocessors, this mix affects the average price Intel will
realize and has a large impact on Intel's revenues. Revenue is also subject
to the impact of economic conditions in various geographic regions.
The company expects the gross margin percentage in the fourth quarter of 2000
to be approximately 63%, plus or minus a point. The company's gross margin
percentage in any period varies depending on the mix of types and speeds of
processors sold as well as the mix of microprocessors and related motherboards
and purchased components. In the fourth quarter of 2000, unit cost reductions
due to the continued transition to microprocessor products with lower cost
packaging and continued productivity improvements on existing manufacturing
processes are expected to be largely offset by increases in start-up costs.
Various other factors (including unit volumes, yield issues associated with
production at factories, ramp of new technologies, shortage of manufacturing
capacity and the company's ability to forecast demand and optimize the
allocation of existing capacity across product lines, the reusability of
factory equipment, the estimate of the MTH motherboard replacement rate,
insufficient or excess inventory, inventory
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
obsolescence, variations in inventory valuation and mix of shipments of other
semiconductor and non-semiconductor products) will also continue to affect the
amount of cost of sales and the variability of gross margin percentages.
Intel's primary goal is to get its advanced technology to the marketplace, and
at the same time increase gross margin dollars. The company's plans to grow
in non-microprocessor areas, particularly those areas that have the potential
to expand networking and communications capabilities, are intended to increase
gross margin dollars but may lower the gross margin percentage.
The company has expanded its semiconductor manufacturing and assembly and test
capacity over the last few years, and continues to plan capacity based on the
assumed continued success of its strategy and the acceptance of its products
in specific market segments. The company currently expects that capital
spending will be approximately $6.0 billion in 2000. This capital spending
includes expected spending related to the next-generation 0.13-micron process
technology, spending on new fabrication facility construction and equipment
purchases to add 0.18-micron process capacity. If demand for the company's
products does not continue to grow, revenues and gross margins could be
adversely affected and manufacturing capacity could be underutilized. This
spending plan is dependent upon expectations regarding production efficiencies
and delivery times of various machinery and equipment, and construction
schedules for new facilities. Depreciation for the fourth quarter of 2000 is
expected to be approximately $865 million. Amortization of goodwill and other
acquisition-related intangibles and costs is expected to be approximately $440
million in the fourth quarter.
Spending on research and development, excluding IPR&D, and marketing, general
and administrative expenses in the fourth quarter of 2000 is expected to be
approximately 6% to 8% higher than third quarter expenses of $2.3 billion,
primarily due to seasonally higher spending on marketing programs, and higher
revenue dependent expenses. Expenses are dependent in part on the level of
revenue.
Research and development spending, excluding IPR&D, is expected to be
approximately $1.0 billion in the fourth quarter of 2000.
The company expects gains on investments and interest and other income for the
fourth quarter of 2000 to be approximately $950 million depending on interest
rates, cash balances, equity market levels and volatility, the realization of
expected gains on investments, including gains on investments acquired by
third parties, and assuming no unanticipated items.
The company expects the tax rate for 2000 to be approximately 31.8%, excluding
the one-time tax benefit related to the closure of the Internal Revenue
Service audit of tax returns for years up to and including 1998, and the
impact of any IPR&D and amortization of goodwill from both prior and potential
future mergers or acquisitions. This estimate is based on current tax law,
the current estimate of earnings and the expected distribution of income among
various tax jurisdictions.
In September of 2000, the company was notified that the investigation by the
Federal Trade Commission (FTC) into Intel's business practices has been
closed. The investigation began in September 1997 and covered all aspects of
Intel's business. The FTC also closed its investigation of whether Intel's
acquisition of Chips and Technologies Inc. and equity in Real3D had any anti-
competitive effect on any markets for graphics components or other computer
hardware.
The company is currently party to various legal proceedings. Although
litigation is subject to inherent uncertainties, management, including
internal counsel, does not believe that the ultimate outcome of these legal
proceedings will have a material adverse effect on the company's financial
position or overall trends in results of operations. However, were an
unfavorable ruling to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations of that
period. Management believes, given the company's current liquidity and cash
and investments balances, that even an adverse judgment would not have a
material impact on cash and investments or liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK (CONTINUED)
The company's future results of operations and the other forward-looking
statements contained in this outlook-in particular the statements regarding
Intel's goals and strategies, statements regarding expected product
introductions, expectations regarding additional acquisitions, revenues,
pricing, gross margin, costs and continued productivity improvements, capital
spending, depreciation and amortization, research and development expenses,
marketing and general and administrative expenses, interest and other income,
the tax rate, and pending legal proceedings-involve a number of risks and
uncertainties. In addition to the factors discussed above, among the other
factors that could cause actual results to differ materially are the
following: business and economic conditions and growth in the computing
industry in various geographic regions; changes in customer order patterns;
competitive factors such as rival chip architectures and manufacturing
technologies, competing software-compatible microprocessors and acceptance of
new products in specific market segments; development and timing of the
introduction of compelling software applications; pricing pressures; continued
success in technological advances, including development and implementation of
new processes and strategic products for specific market segments; execution
of the manufacturing ramp, including the transition to the 0.18-micron process
technology; impact of events outside the United States such as the business
impact of fluctuating currency rates or unrest or political instability in a
locale, such as transport disruption in Europe or unrest in Israel;
unanticipated costs or other adverse effects associated with processors and
other products containing errata (deviations from published specifications);
and litigation involving antitrust, intellectual property, consumer and other
issues.
Intel believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
net revenues, costs, margins and profits are all influenced by a number of
factors, including those discussed above, all of which are inherently
difficult to forecast.
OUTLOOK PUBLICATION PROCEDURES
In connection with the recent adoption of new SEC rules on corporate
disclosure, the company is changing its procedures for publishing and updating
its Outlook forward-looking statements and risk factors statements. Following
the publication of its Outlook in its quarterly Earnings Release and in this
quarterly report on Form 10-Q, the company will continue its current practice
of having corporate representatives meet privately during the quarter with
investors, the media, investment analysts and others. At these meetings the
company may reiterate the published Outlook. At the same time, the company
will keep its Earnings Release and Outlook publicly available on its Web site
(www.intc.com). Prior to the start of the Quiet Period (described below), the
public can continue to rely on the Outlook on the Web site as still being
Intel's current expectations on matters covered, unless the company publishes
a notice stating otherwise.
Towards the end of each fiscal quarter, the company will have a "Quiet Period"
during which the Outlook as provided in the 10-Q and the company's most recent
quarterly Earnings Release no longer constitute the company's current
expectations. During the Quiet Period, the Outlook in these documents should
be considered to be historical, speaking as of prior to the Quiet Period only
and not subject to update by the company. During the Quiet Period the
company's representatives will not comment concerning the Outlook or Intel's
financial results or expectations. The Quiet Period will extend until the day
when company's next quarterly Earnings Release is published. For the fourth
quarter of 2000, the Quiet Period will be December 16, 2000 through January
16, 2001.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in foreign currency exchange
rates, reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 25, 1999 and to the subheading "Financial Market
Risks" under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 33 of the Registrant's 1999
Annual Report to Stockholders.
The primary objective of the company's investments in debt securities is to
preserve principal while maximizing yields, without significantly increasing
risk. To achieve this objective, the returns on a substantial majority of the
company's marketable investments in long-term fixed rate debt securities are
swapped to U.S. dollar LIBOR-based returns. The company considered the
historical volatility of the three-month LIBOR rate experienced in the most
recent twelve months and determined that it was reasonably possible that an
adverse change of 80 basis points, or approximately 12% of the rate at the end
of the quarter, could be experienced in the near term. A hypothetical 80-
basis-point increase in interest rates would result in an approximate $16
million decrease in the fair value of the company's investments in debt
securities as of September 30, 2000.
The company is exposed to equity price risk on the marketable portion of its
portfolio of strategic equity securities. The company typically does not
attempt to reduce or eliminate its market exposure on these securities. These
investments are generally in companies in the high-technology industry, and a
substantial majority of the market value of the portfolio is in three sectors:
Internet, semiconductor and networking. As of September 30, 2000, five equity
positions constituted approximately 31% of the market value of the portfolio
and no individual holding constituted 10% or more of the value.
The company analyzed the historical movements over the past several years of
high-technology stock indices that the company considered appropriate. Based
on the analysis, the company estimated that it was reasonably possible that
the prices of the stocks in the company's portfolio could experience a 30%
adverse change in the near term. Assuming a 30% adverse change, the company's
marketable strategic equity securities would decrease in value by
approximately $1.4 billion, based on the value of the portfolio as of
September 30, 2000. During the month of October 2000, many high-technology
stocks experienced a significant decrease in value. If the company's
marketable strategic equity security positions as of September 30, 2000 had
been valued using prices as of October 27, 2000, the value of these securities
would have decreased by approximately $1.0 billion, or 23%. The portfolio's
concentrations in specific companies or sectors may vary over time and may be
different from the compositions of the indices analyzed, and these factors may
affect the portfolio's price volatility. This estimate is not necessarily
indicative of future performance and actual results may differ materially.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings in the Registrant's Annual
Report on Form 10-K for the year ended December 25, 1999 and Part II, Item 1,
Legal Proceedings in the Registrant's Form 10-Q for the quarter ended April 1,
2000 for descriptions of legal proceedings.
ITEM 2. CHANGES IN SECURITIES
(c) Unregistered sales of equity securities.
In August 2000, the company acquired approximately 14.9 million shares of
Trillium Digital Systems, Inc. in exchange for approximately 2.6 million
shares of Intel common stock, pursuant to the exemption from registration
provided by Rule 506 of Regulation D of the Securities Act of 1933. This
transaction was made without general solicitation or advertising. The company
believes that each purchaser (i) was an accredited investor or a sophisticated
investor (either alone or through its representative) with access to all
relevant information necessary, (ii) was acquiring the Intel common stock
solely for his or her own account and for investment, and (iii) does not
intend to offer, sell or dispose of such shares except in compliance with the
Securities Act of 1933.
During the quarter ended September 30, 2000, warrants were exercised for
approximately 200,000 shares of Intel common stock at an exercise price of
approximately $3.58 per share. These warrants were assumed by the company in
its August 1999 acquisition of Level One Communications, Inc. Level One had
previously assumed the warrants in Level One's acquisition of Acclaim
Communications, Inc., who had issued the warrants to two individuals in a
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The issuance of Intel common stock upon exercise of
the warrants was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. These transactions were made without general
solicitation or advertising. The company believes that each purchaser (i) was
an accredited investor or a sophisticated investor (either alone or through
its representative) with access to all relevant information necessary, (ii)
was acquiring the Intel common stock solely for his or her own account and for
investment, and (iii) does not intend to offer, sell or dispose of such shares
except in compliance with the Securities Act of 1933.
In connection with the acquisition of Level One, the company assumed the
obligations of Level One with respect to its prior acquisition of SF Telecom,
Inc. In partial satisfaction of these obligations, the company issued 2,500
shares of Intel common stock to the former shareholders of SF Telecom in
August 2000 pursuant to the exemption from registration provided by Section
4(2) of the Securities Act of 1933. This transaction was made without general
solicitation or advertising. The company believes that each purchaser (i) was
an accredited investor or a sophisticated investor (either alone or through
its representative) with access to all relevant information necessary, (ii)
was acquiring the Intel common stock solely for his or her own account and for
investment, and (iii) does not intend to offer, sell or dispose of such shares
except in compliance with the Securities Act of 1933.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Statement setting forth the computation of ratios of earnings to
fixed charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K
1) On July 20, 2000, Intel filed a report on Form 8-K relating to financial
information for Intel Corporation for the quarter ended July 1, 2000 and
forward-looking statements relating to 2000, the third quarter of 2000 and the
second half of 2000 as presented in a press release of July 18, 2000.
2) On September 26, 2000, Intel filed a report on Form 8-K relating to an
announcement regarding an update to forward-looking statements relating to
2000 and the third quarter of 2000 as presented in a press release of
September 21, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEL CORPORATION
(Registrant)
Date: November 13, 2000 By: /s/ Andy D. Bryant
-------------------
Andy D. Bryant
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
