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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 25, 1999,
[_] 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)
Registrant's telephone number, including area code (408) 765-8080
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value of voting stock held
by non-affiliates of the registrant as of February 25, 2000
$355.2 billion
3,342 million shares of Common Stock outstanding as of February 25, 2000
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Annual Report to Stockholders for fiscal year ended December
25, 1999 - Parts I, II and IV.
(2) Portions of the Registrant's Proxy Statement related to the 2000 Annual
Meeting of Stockholders, to be filed subsequent to the date hereof - Part
III
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PART I **
ITEM 1. BUSINESS
INDUSTRY
Intel Corporation, the world's largest semiconductor chip maker, supplies the
computing and communications industries with chips, boards, systems and software
that are integral in computers, servers, and networking and communications
products. These products are used by industry members to create advanced
computing and communications systems and are offered at various levels of
integration. The company was incorporated in California in 1968 and
reincorporated in Delaware in 1989.
PRODUCTS
The company's major products include microprocessors, chipsets, flash memory
products, networking and communications products, embedded processors and
microcontrollers, and digital imaging and other PC-peripheral products. Intel's
component-level products consist of integrated circuits used to process
information. Integrated circuits are silicon chips, known as semiconductors,
etched with interconnected electronic switches. Intel sells to:
. original equipment manufacturers (OEMs) of computer systems,
telecommunications and data communications equipment, and peripherals;
. PC and computing appliance users (including individuals, large and small
businesses, and Internet service providers) who buy Intel's PC
enhancement products, business communications products and networking
products through retail and industrial distributors, and resellers
throughout the world;
. other manufacturers, including makers of a wide range of industrial and
communications equipment;
. businesses, schools, and state and local governments that are building or
enhancing Internet data centers.
Intel also provides data center services to businesses needing e-Commerce
services.
The company is organized into five operating segments according to Intel's
various product lines: the Intel Architecture Business Group, the Wireless
Communications and Computing Group (formed out of the former Computing
Enhancement Group), the Network Communications Group, the Communications
Products Group (formed during 1999) and the New Business Group. Each group has
a vice president who reports directly to the Chief Executive Officer of Intel.
The Intel Architecture Business Group is the only reportable operating segment
for financial statement purposes. No other operating segment represents 10% or
more of revenues or operating profit of the company. Reference is made to the
information regarding revenues and operating profit by reportable segments,
and revenues from unaffiliated customers by geographic region, under the
headings "Operating segment and geographic information" on pages 27 and 28 of
Intel's 1999 Annual Report to Stockholders and "Management's discussion and
analysis of financial condition and results of operations" on pages 30 to 36
of the 1999 Annual Report, which information is hereby incorporated by
reference. Operating results of segments that are not individually reportable
are included in the "all other" category for financial statement segment
reporting purposes.
__________
** Page references to the 1999 Annual Report to Stockholders or to the company's
2000 Proxy Statement for its 2000 Annual Meeting of Stockholders under Item 1 in
Part I and Items 5, 6, 7, 7A and 8 in Part II; Items 10, 11, 12 and 13 in Part
III; and Item 14 in Part IV relate to the bound, printed versions of such annual
report and proxy statement, not to the electronic versions appearing at the
Intel(R) Internet site (www.intel.com and www.intc.com). However, all data
referred to also appears in the electronic versions.
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Intel Architecture Business Group
The Intel Architecture Business Group (IABG) tailors platform solutions around
Intel's microprocessors and chipsets for all major computing segments worldwide,
using a tiered branding approach. Intel's strategy is to provide both the
highest performance and the best value through a broad range of microprocessor
and chipset solutions that power the client and server market segments. Client
platforms incorporate IABG products in desktop computers, notebooks, entry-
level servers and workstations, and Internet appliances. Server platform
products are targeted for mid-range to high-end servers and workstations.
Servers are powerful systems, often with multiple microprocessors working
together, housing large amounts of data, directing traffic, and controlling
central functions in local and wide area networks and on the Internet.
Workstations offer higher performance than standard desktop PCs, especially
with respect to graphics, processing power and the ability to carry out
several tasks at the same time.
The IABG products include processors based on the P6 microarchitecture
(including the Intel(R) Celeron(TM), Pentium(R) III and Pentium(R) III Xeon(TM)
processors) and related board- and system-level products. In addition, the
core-logic chipset products within IABG provide features improving ease of use,
providing new capabilities and enabling system performance to scale as the
processor performance increases.
MICROPROCESSORS. A microprocessor is the central processing unit of a
computer system. It processes system data and controls other devices in the
system, acting as the brains of the computer. The rate at which a
microprocessor's internal logic operates, called its clock speed, is measured
in units of hertz or cycles processed per second. One megahertz (MHz) equals
one million cycles processed per second, and one gigahertz (GHz) equals one
billion cycles processed per second. The memory stored on a chip is measured
in bytes, with 1,024 bytes equaling a kilobyte (KB), 1.049 million bytes
equaling a megabyte (MB) and 1.074 billion bytes equaling a gigabyte (GB).
Cache is a memory subsystem in which frequently used data is duplicated for
quick access. A second level of cache (L2), located directly on the
microprocessor, can also be used to further increase system performance.
Intel's developments in the area of semiconductor design and manufacturing have
made it possible to decrease the size of circuits etched into silicon,
permitting a greater number of transistors to be used on each microprocessor
die, and a greater number of microprocessors to be placed on each silicon wafer.
The result is smaller, faster microprocessors that consume less power and cost
less to manufacture. The length of the individual transistors on a chip is
measured in microns; one micron equals one millionth of a meter. In 1999, Intel
began converting its microprocessor manufacturing to the 0.18-micron process
technology.
In 1999, Intel announced several new microprocessor products aimed at the
various computing market segments ranging from value PCs (systems costing less
than $1,000) to high-performance workstations and servers.
Value PCs. Tailored for the value PC market segment, the Intel Celeron
processor meets the core computing needs and affordability requirements common
to many new PC users. From January 1999 to August 1999, Intel introduced
several new higher speed versions of the Intel Celeron processor running at
speeds ranging from 366 MHz to 500 MHz. In January 2000, Intel introduced a
533-MHz version of the Intel Celeron processor. All of these Celeron processors
have 128 KB of integrated L2 cache on the processor core.
Performance desktop PCs. In February 1999, Intel introduced the Pentium III
processor. Targeted for the performance desktop personal computer and low-end
server and workstation market segments, the Pentium III processor is designed
specifically to enhance the Internet experience and offers high performance and
enhanced multimedia realism for Internet applications. The Pentium III
processor includes Internet Streaming SIMD Extensions, 70 new instructions that
enhance the performance of advanced imaging, 3D graphics, streaming audio, video
and speech recognition applications. The 450- and 500-MHz versions, with 512 KB
L2 cache, began shipping in March 1999; the 550-MHz version was introduced in
May 1999; and the 600-MHz version was introduced in August 1999.
In October 1999, the company introduced new versions of the Pentium III
processor built on the 0.18-micron process technology, all integrating 256 KB of
L2 Advanced Transfer Cache; these processors run at speeds of up to 733 MHz.
With Advanced Transfer Cache, the path between the processor and L2 cache memory
is wider, creating better performance than previous Pentium III processors
running at the same clock speed. The Advanced Transfer Cache enables
application performance to scale with increasing clock frequencies. In December
1999, Intel
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introduced Pentium III processors running at 750 and 800 MHz. As of October
1999, new desktop microprocessors introduced include versions available in the
flip-chip pin grid array (FC-PGA) package. The flip-chip package uses fewer
purchased components and is an improved microprocessor package that is smaller
than the previously available Single Edge Contact (SEC) cartridge.
In March 2000, Intel introduced the Pentium III processor running at 1 GHz with
integrated L2 Advanced Transfer Cache. This microprocessor has improved
performance over previous versions of the Pentium III processor, particularly in
running certain applications such as loading complex Web pages.
Mobile PCs. In January 1999, Intel introduced the first mobile Intel Celeron
processors, running at 266 and 300 MHz, providing a performance boost for low-
cost mobile PCs. From April 1999 to September 1999, the company introduced
several new higher speed versions of the mobile Intel Celeron processor running
at speeds ranging from 333 to 466 MHz. In February 2000, a 500-MHz version was
introduced. All of these processors integrate 128 KB of L2 cache on the
processor core.
The Pentium(R) II and Pentium III processors for mobile PCs have been designed
to provide mobile users with advanced performance while meeting the power
consumption and size constraints of mobile PCs. In January 1999, the company
introduced mobile Pentium II processors running at 333 and 366 MHz. These were
the first Pentium II processors built on a single processor silicon die with 256
KB of on-die L2 cache. In June 1999, the company introduced the mobile Pentium
II processor running at 400 MHz with 256 KB of on-die L2 cache. This was the
first processor built on Intel's 0.18-micron process technology. The first
mobile Pentium III processors were introduced in October 1999, also built on the
company's 0.18-micron process technology and running at 400, 450 and 500 MHz.
The mobile Pentium III processor at 400 MHz operates at a low 1.35 volts and is
targeted specifically for mini notebook designs, for which power consumption is
a significant design concern.
In January 2000, the company introduced the mobile Pentium III processor
featuring Intel(R) SpeedStep(TM) technology running at 650 and 600 MHz. These
processors have the capability of operating in two different modes, a Maximum
Performance Mode and a Battery Optimized Mode. The system by default
automatically chooses which mode to run in, depending on whether the computer is
running on batteries or is plugged into AC power. This dual-mode capability
allows the notebook to run at desktop-class speeds when plugged in, optimizing
performance, and optimizing battery life when AC power is not available.
Servers and workstations. In March 1999, Intel announced the Pentium III Xeon
processor, targeted to enhance Internet software and application performance for
the mid-range to high-end server and workstation market segments. At
introduction, the Pentium III Xeon processor was available at speeds of 500 and
550 MHz, available in 512 KB, 1 MB and 2 MB L2 cache versions for 2-, 4- and 8-
way servers and workstations. In October, the company introduced three new
versions running at 600, 667 and 733 MHz, with 256 KB L2 Advanced Transfer Cache
on-die, manufactured using the 0.18-micron process technology and aimed at 2-way
servers and workstations. In January 2000, the company introduced an 800-MHz
version with the same on-die 256 KB L2 Advanced Transfer Cache.
The company has under development a family of 64-bit microprocessors expected to
expand the capabilities of the Intel architecture to address the high-
performance server and workstation market segments while still running the
software that currently operates on 32-bit Intel processor-based machines. A
64-bit microprocessor is more complex than a 32-bit microprocessor and requires
a more complex system architecture, but it can handle twice as much data in each
clock cycle. Thus, a 64-bit microprocessor enables most data-intensive
applications, such as database and graphics applications, to run faster than
they would on a 32-bit microprocessor. In December 1999, Intel began delivering
prototype systems based on sample Itanium(TM) processors to system
manufacturers, operating system vendors and application providers to help them
complete the development and testing of products targeted for the Itanium
processor, the first processor based on the IA-64 architecture. The first
production Itanium processor-based systems are expected to be available from
OEMs in the second half of 2000.
Board-level products. While many of Intel's OEM customers use the company's
microprocessors as components in designing their own computer products, some
OEMs use Intel-designed board-level products as basic building blocks in their
computer products. OEM customers may buy at this level of integration to
accelerate their time-to-market and to direct their investments to other areas
of their product lines. The company provides board-level
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products to give OEM customers flexibility by enabling them to choose whether to
buy at the component or board level. Board-level products based on Intel's new
microprocessors are available for most computing market segments.
Sales and gross margin. During 1999, sales of microprocessors and related
board-level products based on the P6 microarchitecture, which are included in
the Intel Architecture Business Group's operations, comprised a substantial
majority of Intel's consolidated net revenues and gross margin. For 1998, these
represented a majority of Intel's consolidated net revenues and a substantial
majority of gross margin. Sales of products based on the P6 microarchitecture
first became a significant portion of the company's revenues and gross margin in
1997. Sales of Pentium processor family products, including Pentium processors
with MMX(TM) technology, were not significant for 1999, but were a rapidly
declining but still significant portion of the company's revenues and gross
margin for 1998. During 1997, sales of Pentium processor family products were a
majority of the company's revenues and gross margin. For the past several
years, the company's sales of microprocessors have generally shown a seasonal
trend, with higher sales in the second half of the year, primarily due to back-
to-school and holiday demand.
CHIPSETS. Chipsets perform essential logic functions surrounding the central
processing unit, and support and extend the graphics, audio, video and other
capabilities of many Intel processor-based systems. The company's chipsets are
compatible with one or more of a variety of industry-accepted buses, such as the
Peripheral Components Interconnect (PCI) Local Bus specification and the
Accelerated Graphics Port (AGP) specification. A bus is a circuit that carries
data between parts of the system, for example, between the processor and main
memory. The company offers the 440BX AGPset family of chipsets for the Pentium
III processor to be used in desktop and mobile products.
To help enable computer makers to speed their products to market, Intel designs,
manufactures and sells chipsets for each computing market segment. Intel makes
chipsets with and without integrated graphics capability. Previously, the
company offered stand-alone graphics accelerator chips. However, during 1999
the company shifted its focus to integrating graphics capabilities into certain
of its chipset products. In April 1999, Intel launched the Intel(R) 810 Chipset
with a 66- or 100-MHz system bus, the company's first chipset integrating
multimedia capabilities for value PCs based on the Intel Celeron processor. In
September 1999, the Intel(R) 810E Chipset with a 133-MHz system bus was
introduced which extended the capabilities of the Intel 810 Chipset as well as
adding support for Pentium III processors. In addition to the integrated
graphics capability, these new 800 series chipsets double the size of the
communications channel within the chipset for a significantly enhanced
multimedia experience.
In August 1999, Intel began shipping board-level products with Profusion(R)
Chipsets attached, aimed at the mid-range to high-end server market segment,
allowing OEMs to more easily build 8-way servers based on the Pentium III Xeon
processor.
In October 1999, Intel launched the Intel(R) 840 Chipset with a 133-MHz bus,
targeted for entry-level 2- and 4-way servers and workstations utilizing
Pentium III and Pentium III Xeon processors. This is the first chipset to
enable high-performance Direct Rambus Dynamic Random Access Memory (RDRAM)
technology. Direct RDRAM delivers a maximum theoretical memory bandwidth of up
to 1.6 GB per second. In November 1999, Intel introduced the Intel(R) 820
Chipset with a 100- or 133-MHz bus, for Pentium III processors. This was the
first desktop chipset to enable high-performance Direct RDRAM memory
technology and enhance graphics performance through AGP 4x graphics support.
The Intel 840 and 820 Chipsets do not have integrated graphics.
Wireless Communications and Computing Group
In December 1999, Intel announced the creation of the Wireless Communications
and Computing Group (WCCG), focusing on opportunities in the growing digital
cellular and wireless communications areas. WCCG's products consist of
component-level hardware and software used in digital cellular communications
products and other applications using both low-power processing and flash
memory. Within the client platform initiatives, WCCG products support handheld
devices such as mobile phones, two-way pagers and personal digital assistants.
FLASH MEMORY. Flash memory components are used to store user data and computer
program code and retain information when the power is off. Intel(R)
StrataFlash(R) memory, the first flash memory product to store multiple bits of
data in one memory cell, expands memory capacity for a variety of consumer and
networking applications. In August 1999, Intel introduced the 3 Volt Intel(R)
StrataFlash memory with triple the read performance compared
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to the previous version. Using 0.25-micron lithography, the new StrataFlash
product enables both code execution and data storage on a single 128-MB chip.
In September 1999, the company announced the Intel(R) 1.8 Volt Dual-Plane Flash
Memory, a 32-MB capacity chip for code execution and data storage in cellular
phones and other handheld wireless devices requiring low-power, 1.8-volt
operation. In 1999, the company also introduced an updated version of the
Intel(R) Advanced+ Boot Block Flash product using low-power, 1.8-volt operation
and having fraud protection capability that protects code and data from
corruption.
EMBEDDED PROCESSORS FOR HANDHELD DEVICES. Battery-powered handheld devices
have embedded processors that use low power yet provide high performance.
Intel's StrongARM(R) processors provide such performance at a low cost. During
1999, Intel and Advanced RISK Machines, Ltd. announced a licensing agreement
enabling Intel to develop solutions based on current and future versions of
the ARM(R) architecture. Intel's StrongARM product portfolio implementation of
the ARM architecture utilizes Intel's microarchitecture and low-power
technologies, while remaining compatible with software available for ARM
cores, to service the portable, handheld and applied computing market
segments. In March 1999, Intel announced the addition of the Intel(R)
StrongARM SA-1110 processor and the SA-1111 companion chip to the Intel
StrongARM product portfolio, providing increased memory and input/output
design flexibility.
StrongARM and ARM are trademarks of Advanced RISC Machines, Ltd.
CELLULAR COMMUNICATIONS PRODUCTS. In November 1999, Intel expanded its
wireless communications product offerings with the acquisition of DSP
Communications, Inc., a leading supplier of chipsets, reference designs,
software and other key technologies for the digital cellular communications
market segment. The chipsets developed by DSP Communications support a broad
range of frequency modulation standards, including Time Division Multiple
Access (TDMA), Code Division Multiple Access (CDMA) and Personal Digital
Cellular (PDC), a proprietary cellular system that works only in Japan. Under
development are chipsets for use in Wideband CDMA (WCDMA) and other third-
generation standards. Third-generation standards are expected to deliver high-
speed data transmissions combining voice and Internet capabilities into
wireless handheld devices. Other product offerings include large-scale
reference designs and form-fit reference designs enabling manufacturers of
handheld devices to outsource large portions of the development of their
handsets.
Network Communications Group
The Network Communications Group (NCG) provides component-level networking
silicon products, high-speed adapters for Internet access, and network interface
cards to provide networking and Internet connectivity solutions for enterprises,
small businesses and consumers. NCG also offers embedded microprocessors and
microcontrollers for networking and communications as well as other
applications. These embedded control products were previously offered by
Intel's former Computing Enhancement Group.
In 1999, Intel acquired several companies to help expand the company's product
offerings in networking and communications. In July 1999, the company acquired
Softcom Microsystems, Inc., a maker of semiconductor products for OEMs in the
networking and communications market segments. In September 1999, the company
acquired NetBoost Corporation, a maker of hardware and software solutions for
communications equipment suppliers and independent software vendors in the
networking and communications segments.
In August 1999, Intel completed the acquisition of Level One Communications,
Inc., which provides silicon connectivity solutions for high-speed
telecommunications and networking applications, offering increased bandwidth and
functionality through silicon integration. The products are used to produce
systems for local area networks (LANs), wide area networks (WANs) and public
telephone transmission networks. LANs, WANs and telephone transmission networks
enable the use of intranets and the Internet. An intranet is a privately
maintained network that provides services within an organization similar to the
services provided by the Internet.
In September 1999, the company launched the Intel(R) Internet Exchange(TM)
architecture, a flexible platform for silicon-based products to help enable the
networking and communications industry to build faster, more intelligent
networks. In the second half of 1999, Level One Communications announced a
family of silicon components based on this architecture.
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Intel also continued to introduce new members of a family of networking
interface cards based on the multi-platform, single-chip Fast Ethernet
controller, the Intel(R) 82559. Featuring Intel(R) SingleDriver technology,
these new adapters are designed to lower network support costs and complexity
by providing a common set of software drivers for servers, desktops, network
PCs and mobile clients. Ethernet refers to a local network used to transfer
information at 10 million bits per second, while Fast Ethernet networks
transfer information at 100 million bits per second. In January 2000, Intel
announced its new family of Intel(R) PRO/100 S network security-enabled
adapters, which help enable higher performance and end-to-end security within
the LAN.
In January 2000, the company announced the Intel PRO/DSL 3100 Modem. Its
predecessor, the Intel(R) PRO/DSL 2100 Modem was introduced in the fourth
quarter of 1999. Both modems are based on two new industry standards that
allow access to the Internet at speeds up to 150 times faster than the fastest
analog modems.
In November 1999, the company introduced a higher performance version of its
Intel(R) AnyPoint(TM) Phoneline Home Network product that allows families to
connect multiple PCs within a single home with bandwidth of up to 10 million
bits per second over existing phone lines.
EMBEDDED CONTROL PRODUCTS. Intel's embedded control products include a range of
components used to control functions in networking and communications
applications, such as telecommunications, hubs, routers and wide area
networking. Intel's embedded control chips are also used in laser printers,
imaging, storage media, point-of-sale systems, industrial automation equipment,
automotive systems and other applications. Products include low-power-
consumption versions of the Pentium processor with MMX technology and the 32-bit
i960(R) reduced instruction set computing (RISC) processor with integrated
input/output capabilities. Additional products include microcontrollers of the
Intel(R) MCS(R)-51 and MCS(R)-296 microcontroller families.
In February 1999, Intel introduced Celeron processors running at 300 and 366 MHz
into the embedded product line. In May 1999, Intel announced the addition of
the low-power-consumption Pentium II processors running at 266 and 333 MHz as
well as the Celeron processor running at 433 MHz to its embedded product line.
In February 2000, low-power-consumption Pentium III processors running at 400
and 500 MHz as well as the Pentium III processor running at 600 MHz were made
available for embedded products aimed at new networking and communications,
point-of-sale and industrial automation equipment applications.
Communications Products Group
The Communications Products Group (CPG) provides system-level hardware, software
and support services for e-Business data centers and building blocks for
communications access solutions. These products include hubs, routers and
switches for Ethernet and Fast Ethernet networks, e-Commerce infrastructure
appliances and computer telephony components. Computer telephony is a term used
to encompass a wide variety of technologies and applications that use the
information processing capabilities of a computer, often a server, to add
intelligence to telephone functions and to combine these functions with data
processing.
In February 1999, Intel acquired Shiva Corporation to expand Intel's networking
product line with remote access and virtual private networking (VPN) solutions
for the small to medium enterprise market segment and the remote needs of
campuses and branch offices.
In July 1999, Intel acquired Dialogic Corporation, a maker of computer telephony
hardware and software. The acquisition is aimed at expanding Intel's standard-
high-volume (SHV) server business in the networking and telecommunications
market segment by providing standards-based hardware and software building
blocks for integrated voice and data networks. Dialogic's hardware products
receive and process signals from telecommunications networks and perform
computing functions to convert the signals to data (and vice versa) appropriate
for computer systems. These computing functions are based upon algorithms for a
variety of features, including voice compression and decompression, voice
storage, speech recognition, tone recognition and signaling, and facsimile
compression and generation. Dialogic hardware products are provided bundled
with software elements, such as drivers, which enable the hardware products to
work in the host environment and to be compatible with other elements within the
system in which they are installed.
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In October 1999, Intel acquired IPivot, Inc., a designer and manufacturer of
Internet commerce equipment. Internet commerce equipment is a new product
category comprising special-function devices that manage information crossing
the Internet to help ensure more reliable, faster, more efficient and secure
transactions. In February 2000, the company introduced the family of Intel(R)
NetStructure(TM) products, combining these Internet commerce products with other
Intel networking systems.
In September 1999, Intel introduced the Intel(R) 6000 Switch, now incorporated
in the family of NetStructure products as the Intel NetStructure 6000 Switch,
and the Intel(R) Express 9500 and 8200 routers. With the addition of these
products, Intel has broadened its networking systems offering to provide
medium-size enterprise customers with more flexible and manageable end-to-end
networking solutions.
New Business Group
The New Business Group (NBG) focuses on nurturing and growing opportunities in
new market segments, and it positions the company to serve these emerging market
segments. The group provides e-Commerce data center services as well as
products such as connected peripherals and security access software. In 1999,
the New Business Group launched Intel(R) Online Services, Inc., providing
second-generation Web hosting and e-Commerce services to companies worldwide.
The company opened two Internet service centers--an 85,000-square-foot, major
production facility in Santa Clara, California, hosting more than 10,000
servers, and a development facility in Folsom, California--and has plans to open
centers in Virginia, Japan and England. Second-generation Web hosting includes
not only offering customers facilities and servers but also additional services
to help them successfully maintain and grow their e-Business activities.
Other new products in 1999 include the family of Intel(R) Play(TM) toys, and the
Intel(R) PC Camera Pro Pack, an affordable and easy-to-use camera package that
includes video phone and video e-mail as well as the capability, through a
built-in video capture plug, to bring live or recorded video into PCs.
MANUFACTURING
A majority of the company's wafer production, including microprocessor
fabrication, is conducted at domestic Intel facilities in New Mexico, Oregon,
Arizona, California and Massachusetts. Intel also produces microprocessor-
related board-level products and systems at facilities in Puerto Rico, Oregon
and Washington.
A significant and growing portion of Intel's wafer production, primarily wafer
production based on the P6 microarchitecture, is conducted outside the United
States at facilities in Ireland and Israel. For the fourth quarter of 1999,
wafer production in Ireland was just under 15% of the company's total wafer
production. In June 1999, a new fabrication facility was opened in Israel to
manufacture wafers using the 0.18-micron process technology, primarily for the
production of P6 microarchitecture products. Production began at that facility
in the second half of 1999 and will continue to ramp toward full production in
2000. Wafer production in Israel is expected to be more than 10% of total
wafer production by the end of 2000. A substantial majority of the company's
components assembly and testing, including assembly and testing for processors
based on the P6 microarchitecture, is performed at facilities in the
Philippines, Malaysia, Ireland and Costa Rica. The company also performs
components assembly and testing at a facility in the People's Republic of
China.
To augment both domestic and foreign capacity, Intel uses subcontractors to
perform assembly of certain products and wafer fabrication for certain
components, primarily flash memory, chipsets and networking and communications
component products. The company also uses subcontractors for production
capacity of board-level products and systems.
In June 1999, Intel introduced its first microprocessor built using the 0.18-
micron process technology: the mobile Pentium II processor running at 400 MHz.
Intel was the first company in the industry to begin high-volume manufacturing
utilizing 0.18-micron process technology. The 0.18-micron process technology
features structures that are smaller than 1/500th the thickness of a human hair
and smaller than the visible wavelength of light (for the human eye). Intel's
new 0.18-micron process technology can feature voltages as low as 1.1 to 1.65
volts (the lowest voltage of the products introduced by Intel as of the end of
1999 was 1.35 volts). In October 1999, the company introduced Pentium III
processors built using the 0.18-micron process technology. The company is
manufacturing wafers using the 0.18-micron process technology at fabrication
facilities in Arizona, California, Oregon and Israel.
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Also in June 1999, Intel announced plans to start 300mm wafer production in
2002, and in January 2000, the company announced that it intends to build its
first 300mm wafer fabrication facility in Arizona. The largest wafer size
currently used by Intel in wafer fabrication is 200mm.
In February 2000, Intel announced that it had signed a letter of intent to
purchase a wafer fabrication facility in Colorado to add manufacturing capacity.
The company expects to begin manufacturing flash memory at the Colorado facility
by late 2000.
In general, if Intel were unable to fabricate wafers or to assemble or test its
products abroad, or if air transportation between its foreign facilities and the
United States were disrupted, there could be a material adverse effect upon the
company's operations. In addition to normal manufacturing risks, foreign
operations are subject to certain additional exposures, including political
instability, currency controls and fluctuations, and tariff, import and other
restrictions and regulations. To date, Intel has not experienced significant
difficulties related to these foreign business risks.
The manufacture of integrated circuits is a complex process. Normal
manufacturing risks include errors and interruptions in the fabrication process
and defects in raw materials, as well as other risks, all of which can affect
yields. A substantial decrease in yields would result in higher manufacturing
costs and the possibility of not being able to produce a sufficient volume of
good units to meet demand.
EMPLOYEES
At December 25, 1999, the company employed approximately 70,200 people
worldwide.
SALES
Most of Intel's products are sold or licensed through sales offices located near
major concentrations of users throughout the United States, Europe, Asia-
Pacific, Japan and other parts of the world.
The company also uses industrial and retail distributors and representatives to
distribute its products both within and outside the United States. Typically,
distributors handle a wide variety of products, including those competitive with
Intel products, and fill orders for many customers. Most of Intel's sales to
distributors are made under agreements allowing for price protection on unsold
merchandise and right of return on stipulated quantities of unsold merchandise.
Sales representatives generally do not offer directly competitive products but
may carry complementary items manufactured by others. Representatives do not
maintain a product inventory; instead, their customers place orders directly
with Intel or through distributors. Intel sold products to more than 1,000
customers worldwide in 1999. Sales to each of Compaq Computer Corporation and
Dell Computer Corporation in 1999 represented 13% of total revenues. A
substantial majority of the sales to these two customers consisted of Intel
Architecture Business Group products. No other customer accounted for more than
10% of total revenues. Sales to the company's five largest customers accounted
for approximately 44% of total revenues.
Reference is made to the information regarding revenues and operating profit by
reportable segments and revenues from unaffiliated customers by geographic
region under the heading "Operating segment and geographic information" on pages
27 and 28 of the Registrant's 1999 Annual Report to Stockholders, which
information is hereby incorporated by reference.
BACKLOG
Intel's sales are primarily made pursuant to standard purchase orders for
delivery of standard products. Intel has some agreements that give a customer
the right to purchase a specific number of products during a specified time
period. Although not generally obligating the customer to purchase any
particular number of such products, some of these agreements do contain billback
clauses. Under these clauses, customers who do not purchase the full volume
agreed to are liable for billback on previous shipments up to the price
appropriate for the quantity actually purchased. As a matter of industry
practice, billback clauses are difficult to enforce. The quantity actually
purchased by the customer, as well as the shipment schedules, are frequently
revised during the agreement term to reflect changes in the customer's needs.
In light of industry practice and experience, Intel does not believe that such
agreements are meaningful for determining backlog amounts. Intel believes that
only a small portion of its order
8
<PAGE>
backlog is noncancellable and that the dollar amount associated with the
noncancellable portion is not material. Therefore, Intel does not believe that
backlog as of any particular date is indicative of future results.
COMPETITION
The company competes in different market segments to various degrees on the
basis of functionality, performance, quality, price and availability. Intel is
engaged in a rapidly advancing field of technology in which its ability to
compete depends upon its ability to improve its products and processes, to
develop new products to meet changing customer requirements and to reduce costs.
Prices decline rapidly in the semiconductor industry as unit volumes grow, as
further competition develops and as production experience is accumulated. Many
companies compete with Intel in the various computing market segments and are
engaged in the same basic fields of activity, including research and
development. Both foreign and domestic, these competitors range in size from
large multinational companies to smaller companies competing in specialized
market segments.
The company's financial results are substantially dependent on sales of
microprocessors by the Intel Architecture Business Group. A number of
competitors are marketing software-compatible products that are intended to
compete with Intel's processors based on the P6 microarchitecture. The Celeron
processor competes with existing and future products in the highly competitive
value PC market segment. The Pentium II processor, and the Pentium III
processor introduced in February 1999, compete with existing and future products
in the performance desktop and entry-level workstation market segment.
Many of Intel's competitors are licensed to use Intel patents. Furthermore,
based on current case law, Intel's competitors can design microprocessors that
are compatible with Intel microprocessors and avoid Intel patent rights through
the use of foundry services that have licenses with Intel. Competitors'
products may add features, increase performance or sell at lower prices. The
company also faces significant competition from companies that offer rival
microprocessor architectures. The Pentium II Xeon processor, and the Pentium
III Xeon processor introduced in March 1999, compete in the mid-range and high-
end server and workstation market segments with established products based on
rival architectures. The company cannot predict whether its products will
continue to compete successfully with such existing rival architectures or
whether new architectures will establish or increase market acceptance or
provide increased competition to the company's products. Future distortion of
price maturity curves could occur as software-compatible products enter the
market segment in significant volume or alternative architectures gain market
acceptance.
Intel's goal is to be the preeminent building block supplier to the worldwide
Internet economy. The company's primary focus areas are client platform, server
platform, networking and communications, and solutions and services. 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, the company is seeking to develop higher performance microprocessors
based on the P6 microarchitecture specifically for each computing segment. The
company plans to 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 may continue to take various steps, including reducing
microprocessor prices 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.
In the network and communications infrastructure area, Intel's strategy is to
deliver both system-level communications products and component-level silicon
building blocks for networking and communications systems for the home and
small- and medium-sized businesses. Intel has made acquisitions and expects to
make additional acquisitions to grow new networking and communications areas.
The network systems and Internet servers and appliances from the Communications
Products Group compete in the small and medium enterprise market segments with
established and new, leading-edge, internetworking and server products. The
network communications silicon, network interface and network processor products
from the Network Communications Group face competition from both established and
emerging companies. The competitors in these areas use aggressive product and
acquisition plans in efforts to achieve leading-edge market positions. The
company cannot predict whether its products will continue to compete
successfully with products from existing competitors, or products from new
entrants to these market segments.
9
<PAGE>
RESEARCH AND DEVELOPMENT
The company's competitive position has developed to a large extent because of
its emphasis on research and development. This emphasis has enabled Intel to
deliver many products before they have become available from competitors and has
permitted Intel's customers to commit to the use of these new products in the
development of their own products. Intel's research and development activities
are directed toward developing new products, hardware technologies and
processes, as well as improving existing products and lowering costs. During
1999, approximately half of the company's microprocessor research and
development budget was spent on initiatives related to the server and
workstation market segment. In December 1999, Intel began delivering prototype
systems based on the Itanium processor, targeted for mid-range to high-end
servers and workstations. The Itanium processor, the first product based on
Intel's IA-64 architecture, is expected to go into production on the 0.18-micron
process technology in mid-2000, with systems solutions expected from OEMs in the
second half of 2000. In addition to microprocessor and chipset research and
development, Intel has research and development initiatives in wireless devices,
networking and communications products and e-Business services as well as
"enabling" software to enhance the functionality and acceptance of products and
services. The company has also acquired ongoing research and development
activities in these areas with businesses acquired in 1999.
In the United States, design and development of components and other products
are performed at Intel's facilities in Arizona, California, Massachusetts, New
Jersey, Oregon, Texas, Utah and Washington. Outside the United States, Intel
has product development facilities in Denmark, Israel, Malaysia and Poland.
Intel also maintains research and development facilities dedicated to improving
manufacturing processes in Arizona, California and Oregon. Intel's expenditures
for research and development were $3,111 million, $2,509 million and $2,347
million in fiscal years 1999, 1998 and 1997, respectively. These amounts
exclude charges for purchased in-process research and development related to
acquisitions of $392 million and $165 million for 1999 and 1998, respectively.
At December 25, 1999, Intel had approximately 16,800 employees engaged in
research and development. The success of Intel's research and development
activities is dependent upon competitive circumstances as well as the company's
ability to bring new products to market in each computing market segment and in
Intel's other businesses in a timely and cost-effective manner.
ACQUISITION AND STRATEGIC INVESTMENTS
During 1999, the company purchased 12 businesses for approximately $6 billion,
augmenting its capabilities in a number of strategic areas. The companies
acquired included Shiva, Softcom, Dialogic, Level One Communications, NetBoost,
IPivot and DSP Communications. These acquisitions are discussed under the
"Products" heading in this document in connection with each related business
group.
Under its Intel Capital program, the company also makes equity investments to
further its strategic objectives and to support its key business initiatives in
the areas of client and server platforms, networking and communications, and
Internet services. The company wants to stimulate growth in computing,
communications and the Internet, and to grow the total information
infrastructure, in order to create and expand markets for Intel's products.
This strategic investment program helps advance Intel's overall mission of being
a leading provider of key building blocks to the Internet economy. While
financial returns are not the company's primary goal, Intel's strategic
investment program seeks to invest in companies that can succeed and have an
impact on their market segment. At the end of 1999, the company's strategic
equity portfolio was valued at approximately $8 billion, including marketable
investments at their market value and non-marketable investments at cost.
INTELLECTUAL PROPERTY AND LICENSING
Intellectual property rights that apply to various Intel products include
patents, copyrights, trade secrets, trademarks and maskwork rights. Intel has
established an active program to protect its investment in technology by
enforcing its intellectual property rights. Intel does not intend to broadly
license its intellectual property rights unless it can obtain adequate
consideration. Reference is made to the heading "Competition" of this Form 10-
K.
Intel has filed and obtained a number of patents in the United States and
abroad. Intel has entered into patent cross-license agreements with many of its
major competitors and other parties. While Intel's various intellectual
property rights are important to its success, its business as a whole is not
materially dependent upon any particular patent or license. Intel and other
companies in the computer, telecommunications and related high-technology fields
typically
10
<PAGE>
in the aggregate apply for and receive thousands of patents in the United States
and other countries on an annual basis. In addition, because of the fast pace
of innovation and product development for Intel's products, the products are
often obsolete before the expiration of patents related to them. For this
reason, Intel believes that the duration of the applicable patents is adequate
in relation to the expected lives of its products.
Intel protects many of its computer programs by copyrighting them. Intel has
registered numerous copyrights with the United States Copyright Office. The
ability to protect or to copyright software in some foreign jurisdictions is not
clear. However, Intel has a policy of requiring customers to obtain a software
license contract before providing a customer with certain computer programs.
Certain components have computer programs embedded in them, and Intel has
obtained copyright protection for some of these programs as well. Intel has
obtained protection for the maskworks for a number of its components under the
Chip Protection Act of 1984.
Intel has obtained certain trademarks and trade names for its products to
distinguish genuine Intel products from those of its competitors and is
currently engaged in a cooperative program with OEMs to identify certain
personal computers that incorporate genuine Intel microprocessors with the Intel
Inside logo. Intel maintains certain details about its processes, products and
strategies as trade secrets.
As is the case with many companies in the semiconductor and other high-
technology industries, Intel has, from time to time, been notified of claims
that it may be infringing certain intellectual property rights of others. These
claims have been referred to counsel, and they are in various stages of
evaluation and negotiation. If it appears necessary or desirable, Intel may
seek licenses for these intellectual property rights. Intel can give no
assurance that licenses will be offered by all claimants, that the terms of any
offered licenses will be acceptable to Intel or that in all cases the dispute
will be resolved without litigation, which may be time consuming and expensive,
and may result in injunctive relief or the payment of damages by Intel.
Reference is made to the information appearing under the heading "Legal
Proceedings" in Part I, Item 3 of this Form 10-K.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
To Intel's present knowledge, compliance with federal, state and local
provisions enacted or adopted for protection of the environment has had no
material effect upon its operations. Reference is made to the information
appearing under the heading "Legal Proceedings" in Part I, Item 3 of this Form
10-K.
11
<PAGE>
EXECUTIVE OFFICERS
The following sets forth certain information with regard to executive officers
of Intel (ages are as of December 25, 1999):
Craig R. Barrett (age 60) has been a director of Intel since 1992, Chief
Executive Officer since 1998 and President since 1997. Prior to that, Dr.
Barrett was Chief Operating Officer from 1993 to 1998 and Executive Vice
President from 1990 to 1997.
Andrew S. Grove (age 63) has been a director of Intel since 1974 and Chairman of
the Board since 1997. Dr. Grove was Chief Executive Officer from 1987 to 1998
and President from 1979 to 1997.
Gordon E. Moore (age 70) has been a director of Intel since 1968 and Chairman
Emeritus of the Board since 1997. Prior to that, Dr. Moore was Chairman of the
Board from 1979 to 1997.
Leslie L. Vadasz (age 63) has been a director of Intel since 1988 and Executive
Vice President and President, Intel Capital, since January 2000. Prior to that,
Mr. Vadasz was Senior Vice President and Director of Corporate Business
Development from 1991 to January 2000.
Paul S. Otellini (age 49) has been Executive Vice President and General Manager,
Intel Architecture Business Group, since 1998. Prior to that, Mr. Otellini was
Executive Vice President and Director, Sales and Marketing Group, from 1996 to
1998; and Senior Vice President and Director, Sales and Marketing Group, from
1994 to 1996.
Gerhard H. Parker (age 56) has been Executive Vice President and General
Manager, New Business Group, since 1998. Prior to that, Dr. Parker was
Executive Vice President and General Manager, Technology and Manufacturing
Group, from 1996 to 1998 and Senior Vice President and General Manager,
Technology and Manufacturing Group, from 1992 to 1996.
Andy D. Bryant (age 49) has been Senior Vice President and Chief Financial and
Enterprise Services Officer since December 1999. Prior to that, Mr. Bryant was
Senior Vice President and Chief Financial Officer from January 1999 to December
1999 and Vice President and Chief Financial Officer from 1994 to January 1999.
Sean M. Maloney (age 43) has been Senior Vice President and Director, Sales and
Marketing Group, since January 1999 and Vice President and Director, Sales and
Marketing Group, from 1998 to January 1999. Prior to that, Mr. Maloney was Vice
President, Sales, and General Manager, Asia-Pacific Operations, from 1995 to
1998 and Technical Assistant to the Chairman and Chief Executive Officer from
1992 to 1995.
Michael J. Splinter (age 49) has been Senior Vice President and General Manager,
Technology and Manufacturing Group, since January 1999 and Vice President and
General Manager, Technology and Manufacturing Group, from 1998 to January 1999.
Prior to that, Mr. Splinter was Vice President and Assistant General Manager,
Technology and Manufacturing Group, from 1996 to 1998; and General Manager,
Components Manufacturing, from 1992 to 1996.
Albert Y. C. Yu (age 58) has been Senior Vice President and General Manager,
Microprocessor Products Group, since 1993.
F. Thomas Dunlap, Jr. (age 48) has been Vice President, General Counsel and
Secretary since 1987.
Arvind Sodhani (age 45) has been Vice President and Treasurer since 1990.
12
<PAGE>
ITEM 2. PROPERTIES
At December 25, 1999, Intel owned the major facilities described below:
<TABLE>
<CAPTION>
No. of
- ------
Bldgs. Location Total Sq. Ft. Use
- ------ -------- ------------- ---
<C> <S> <C> <C>
83 United States 17,935,000 Executive and administrative offices, wafer fabrication,
research and development, sales and marketing, computer and
service functions, e-Commerce data center services, board and
system assembly, and warehousing.
8 Ireland 1,795,000 Wafer fabrication, components assembly and testing,
warehousing and administrative offices.
11 Malaysia (A) 1,721,000 Components assembly and testing, research and development,
warehousing and administrative offices.
11 Israel (B) 1,709,000 Wafer fabrication, research and development, warehousing and
administrative offices.
6 Philippines (C) 1,364,000 Components assembly and testing, warehousing and
administrative offices.
3 Costa Rica 735,000 Components assembly and testing, warehousing and
administrative offices.
5 Puerto Rico 426,000 Board and system assembly, warehousing and administrative
offices.
1 People's Republic 187,000 Components assembly and testing and administrative offices.
of China (D)
1 United Kingdom 184,000 Sales and marketing and administrative offices.
3 Japan 167,000 Sales and marketing and administrative offices.
1 Germany 86,000 Sales and marketing and administrative offices.
</TABLE>
At December 25, 1999, Intel also leased 51 major facilities in the United States
totaling approximately 2,317,000 square feet, and 30 facilities in other
countries totaling approximately 823,000 square feet. Leased facilities
increased during 1999, primarily due to the addition of properties leased by
companies acquired by Intel. These leases expire at varying dates through 2013
and include renewals at the option of Intel. Intel believes that its existing
facilities are suitable and adequate for its present purposes, and that the
productive capacity in such facilities is substantially being utilized. Intel
also has 1.7 million square feet of building space under various stages of
construction in the United States to be used for manufacturing and
administrative purposes.
Intel does not identify or allocate assets or depreciation by operating segment.
Reference is made to information on net property, plant and equipment by country
under the heading "Operating segment and geographic information" on pages 27 and
28 of the Registrant's 1999 Annual Report to Stockholders, which information is
hereby incorporated by reference.
- --------------
(A) Leases on portions of the land used for these facilities expire in 2003
through 2057.
(B) Lease on a portion of the land used for these facilities expires in 2039.
(C) Leases on portions of the land used for these facilities expire in 2008
through 2046.
(D) Lease on a portion of the land used for these facilities expires in 2046.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
A. Litigation
Intergraph Corporation v. Intel
U.S. District Court, Northern District of Alabama,
--------------------------------------------------
Northeastern Division (CV-97-N-3023-NE)
---------------------------------------
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 on Intergraph's antitrust claims. The company disputes
Intergraph's remaining state law claims, and intends to defend the lawsuit
vigorously.
TechSearch L.L.P. v. Intel Corporation
U.S. District Court for the Northern District
---------------------------------------------
of California (C98-0348WHO)
---------------------------
In June 1998, TechSearch L.L.P. filed suit against Intel Corporation in the
United States District Court for the Northern District of Illinois alleging
that Intel's microprocessors based on the P6 microarchitecture infringe a
patent related to emulation technology and that TechSearch is entitled to
unspecified damages and an injunction. The case was transferred to the
United States District Court for the Northern District of California. In
October 1999, TechSearch's expert witness claimed that TechSearch is
entitled to damages ranging from $2 billion to $8 billion. Intel raised
several defenses to the patent claim and disputes this damage estimate. In
November 1999, the Court issued its order construing the asserted claims of
the patent, and in December 1999 the Court granted Intel's motion for
summary judgment of non-infringement. Judgment was entered for Intel in
January 2000. TechSearch has filed a notice of appeal.
B. Environmental Proceedings
Intel has been named to the California and U.S. Superfund lists for three
of its sites and has completed, along with two other companies, a Remedial
Investigation/Feasibility study with the U.S. Environmental Protection
Agency (EPA) to evaluate the groundwater in areas adjacent to one of its
former sites. The EPA has issued a Record of Decision with respect to a
groundwater cleanup plan at that site, including expected costs to
complete. Under the California and U.S. Superfund statutes, liability for
cleanup of this site and the adjacent area is joint and several. The
company, however, has reached agreement with those same two companies which
significantly limits the company's liabilities under the proposed cleanup
plan. Also, the company has completed extensive studies at its other sites
and is engaged in cleanup at several of these sites. In the opinion of
management, including internal counsel, the potential losses to the company
in excess of amounts already accrued arising out of these matters would not
have a material adverse effect on the company's financial position or
overall trends in results of operations, even if joint and several
liability were to be assessed.
The company is currently party to various legal proceedings, including those
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
14
<PAGE>
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. The estimate
of the potential impact on the company's financial position or overall results
of operations for the above legal proceedings could change in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
PART II **
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Reference is made to the information regarding market, market
price range and dividend information appearing under "Financial
information by quarter (unaudited)" on page 37 of the company's
1999 Annual Report to Stockholders, which information is hereby
incorporated by reference.
(b) As of February 25, 2000, there were approximately 254,000 registered
holders of record of Intel's common stock.
(c) Unregistered sales of equity securities.
None in the quarter ended December 25, 1999.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the information regarding selected financial data for the
fiscal years 1995 through 1999, under the heading "Financial summary" on page 13
of the company's 1999 Annual Report to Stockholders, which information is hereby
incorporated by reference.
In addition, the ratios of earnings to fixed charges for each of the five years
in the period ended December 25, 1999 are as follows:
Fiscal year
__________________________________________________________
1995 1996 1997 1998 1999
68x 108x 206x 167x 166x
Fixed charges consist of interest expense and the estimated interest component
of rent expense.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to the information appearing under the heading "Management's
discussion and analysis of financial condition and results of operations" on
pages 30 through 36 of the company's 1999 Annual Report to Stockholders, which
information is hereby incorporated by reference.
In March 2000, the company completed the acquisition of GIGA A/S in a cash
transaction valued at approximately $1.25 billion. GIGA specializes in the
design of high-speed communications chips used in optical networking and
communications products that direct traffic across the Internet and corporate
networks. This acquisition targets the market segment for networking chips
enabling the build-out of the fiber-optic infrastructure necessary to support
the growth of the Internet.
Also in March 2000, Intel entered into a definitive agreement to acquire
privately held Basis Communications Corporation in a transaction valued at
approximately $450 million in cash and assumed options. Basis designs and
markets semiconductors and other products used in equipment that directs traffic
across the Internet and corporate networks. Its products include network
processors and related software targeted for a range of "network access" systems
and customer premise equipment used in homes and small to medium-size offices.
This transaction is subject to regulatory review and customary closing
conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing under 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 company's 1999
Annual Report to Stockholders, which information is hereby incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Intel at December 25, 1999 and December 26,
1998, and for each of the three years in the period ended December 25, 1999 and
the Report of Independent Auditors thereon, and the company's unaudited
quarterly financial data for the two-year period ended December 25, 1999 are
incorporated by reference from the company's 1999 Annual Report to Stockholders,
on pages 13 through 29 and page 37.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE>
PART III **
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information regarding Directors and Executive Officers
appearing under the heading "Election of Directors" on pages 2 through 5 and
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 24 of the
company's Proxy Statement related to the 2000 Annual Meeting of Stockholders
(the "2000 Proxy Statement"), which information is hereby incorporated by
reference, and to the information under the heading "Executive Officers" in Part
I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the headings "Directors'
Compensation" on page 8, "Certain Relationships and Related Transactions" on
page 16, "Compensation Committee Interlocks and Insider Participation" on page
16, "Employment Contracts and Change of Control Arrangements" on page 16,
"Report of the Compensation Committee on Executive Compensation" on page 12,
"Stock Price Performance Graph" on page 11, and "Executive Compensation," on
pages 17 through 19 of the 2000 Proxy Statement, which information is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to information appearing in the 2000 Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management," on
pages 9 and 10, which information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information appearing in the 2000 Proxy Statement under the
heading "Certain Relationships and Related Transactions," on page 16, which
information is hereby incorporated by reference.
18
<PAGE>
PART IV **
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements listed in the accompanying index to
financial statements and financial statement schedules are
filed or incorporated by reference as part of this annual
report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying
index to financial statements and financial statement
schedules is filed as part of this annual report.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this annual
report.
(b) Reports on Form 8-K
On October 13, 1999, Intel filed a report on Form 8-K
relating to financial information for Intel Corporation for
the quarter ended September 25, 1999 and forward-looking
statements relating to the fourth quarter of 1999 and the
second half of 1999, as presented in a press release of
October 12, 1999.
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
Reference Page
--------------
1999
Annual
Form Report to
10-K Stockholders
---- ------------
Consolidated Balance Sheets
December 25, 1999 and December 26, 1998............................... 15
Consolidated Statements of Income for
the years ended December 25, 1999,
December 26, 1998 and December 27, 1997............................... 14
Consolidated Statements of Cash Flows
for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997............................... 16
Consolidated Statements of Stockholders'
Equity for the years ended December 25, 1999,
December 26, 1998 and December 27, 1997............................... 17
Notes to Consolidated Financial Statements
December 25, 1999, December 26, 1998 and
December 27, 1997.................................................. 18-28
Report of Ernst & Young LLP, Independent Auditors...................... 29
Supplemental Information
Financial Information by Quarter (unaudited).......................... 37
Schedule for years ended December 25, 1999,
December 26, 1998 and December 27, 1997:
II- Valuation and Qualifying Accounts............ 21
Schedules other than the one listed above are omitted for the reason that they
are not required or are not applicable, or the required information is shown in
the financial statements or notes thereto.
The consolidated financial statements listed in the above index, which are
included in the company's 1999 Annual Report to Stockholders, are hereby
incorporated by reference. With the exception of the pages listed in the above
index and the portions of such report referred to in Items 1, 5, 6, 7, 7A and 8
of this Form 10-K, the 1999 Annual Report to Stockholders is not to be deemed
filed as part of this report.
20
<PAGE>
INTEL CORPORATION
-------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
December 27, 1997, December 26, 1998 and December 25, 1999
(In Millions)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses (A) Deductions (B) of Year
---------- ------------ -------------- -------
<S> <C> <C> <C> <C>
1997
Allowance for Doubtful Receivables $68 $ 2 $ 5 $65
1998
Allowance for Doubtful Receivables $65 $14 $17 $62
1999
Allowance for Doubtful Receivables $62 $17 $12 $67
</TABLE>
(A) For 1999, includes approximately $7 million of valuation account balances of
companies acquired during the year. Remainder represents amounts charged to
costs and expenses.
(B) Uncollectible accounts written off, net of recoveries.
21
<PAGE>
INDEX TO EXHIBITS
(Item 14(a))
Description
2.1 Agreement and Plan of Merger Dated as of March 4, 1999 among Intel
Corporation, Level One Communications, Incorporated and Intel RSW
Corporation (incorporated by reference to Appendix A of the Registrant's
Registration Statement on Form S-4 as filed on July 7, 1999).
3.1 Intel Corporation Restated Certificate of Incorporation dated May 11,
1993 and Certificate of Amendment to the Restated Certificate of
Incorporation dated June 2, 1997 (incorporated by reference to Exhibit
3.1 of Registrant's Form 10-K as filed on March 27, 1998).
3.2 Intel Corporation Bylaws as amended (incorporated by reference to
Exhibit 3.1 of Registrant's Form 10-Q for the quarter ended June 26,
1999 as filed on August 2, 1999).
4.1 Agreement to Provide Instruments Defining the Rights of Security Holders
(incorporated by reference to Exhibit 4.1 of Registrant's Form 10-K as
filed on March 28, 1986).
10.1 * Intel Corporation 1984 Stock Option Plan as amended and restated,
effective July 16, 1997 (incorporated by reference to Exhibit 10.1 of
Registrant's Form 10-Q for the quarter ended June 27, 1998 as filed on
August 11, 1998).
10.2 * Intel Corporation 1988 Executive Long Term Stock Option Plan as amended
and restated, effective July 16, 1997 (incorporated by reference to
Exhibit 10.2 of Registrant's Form 10-Q for the quarter ended June 27,
1998 as filed on August 11, 1998).
10.3 * Intel Corporation Executive Officer Bonus Plan as amended and restated
effective January 1, 1995 (incorporated by reference to Exhibit 10.7 of
Registrant's Form 10-Q for the quarter ended April 5, 1995 as filed on
May 16, 1995).
10.4 * Intel Corporation Sheltered Employee Retirement Plan Plus, as amended
and restated effective July 15, 1996 (incorporated by reference to
Exhibit 4.1.1 of Registrant's Post-Effective Amendment No. 1 to
Registration Statement on Form S-8 as filed on July 17, 1996).
10.5 * Special Deferred Compensation Plan (incorporated by reference to Exhibit
4.1 of Registrant's Registration Statement on Form S-8 as filed on
February 2, 1998).
10.6 * Intel Corporation Deferral Plan for Outside Directors, effective July 1,
1998 (incorporated by reference to Exhibit 10.6 of the Registrant's Form
10-K as filed on March 26, 1999).
12. Statement Setting Forth the Computation of Ratios of Earnings to Fixed
Charges.
13. Portions of the Annual Report to Stockholders for the fiscal year ended
December 25, 1999, as specified elsewhere in this document, are
expressly incorporated by reference herein.
21. Intel subsidiaries.
23. Consent of Ernst & Young LLP, independent auditors.
27. Financial Data Schedule.
* Compensation plans or arrangements in which directors and executive officers
are eligible to participate.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ F. Thomas Dunlap, Jr.
--------------------------
F. Thomas Dunlap, Jr.
Vice President, General Counsel and Secretary
March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Craig R. Barrett /s/ Gordon E. Moore
- -------------------- -------------------
Craig R. Barrett Gordon E. Moore
President, Chief Executive Chairman Emeritus
Officer and Director, of the Board and Director
Principal Executive Officer March 23, 2000
March 23, 2000
/s/ David S. Pottruck
/s/ John P. Browne ---------------------
- ------------------ David S. Pottruck
John P. Browne Director
Director March 23, 2000
March 23, 2000
/s/ Jane E. Shaw
/s/ Andy D. Bryant ----------------
- ------------------ Jane E. Shaw
Andy D. Bryant Director
Senior Vice President, Chief March 23, 2000
Financial Officer and Principal
Accounting Officer
March 23, 2000 /s/ Leslie L. Vadasz
--------------------
Leslie L. Vadasz
/s/ Winston H. Chen Executive Vice President
- ------------------- Director
Winston H. Chen March 23, 2000
Director
March 23, 2000
/s/ David B. Yoffie
-------------------
/s/ Andrew S. Grove David B. Yoffie
- ------------------- Director
Andrew S. Grove March 23, 2000
Chairman of the Board
and Director
March 23, 2000 /s/ Charles E. Young
--------------------
Charles E. Young
/s/ D. James Guzy Director
- ----------------- March 23, 2000
D. James Guzy
Director
March 23, 2000
23
<PAGE>
EX - 12
INTEL CORPORATION
STATEMENT SETTING FORTH THE COMPUTATION
OF RATIOS OF EARNINGS TO FIXED CHARGES FOR INTEL CORPORATION
(In millions, except ratios)
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dec. 30, Dec. 28, Dec. 27, Dec. 26, Dec. 25,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Income before taxes $5,638 $7,934 $10,659 $9,137 $11,228
Add - Fixed charges net of
capitalized interest 38 41 43 49 63
------ ------ ------- ------ -------
Income before taxes and fixed
charges (net of capitalized interest) $5,676 $7,975 $10,702 $9,186 $11,291
====== ====== ======= ====== =======
Fixed charges:
Interest* $ 29 $ 25 $ 27 $ 34 $ 36
Capitalized interest 46 33 9 6 5
Estimated interest component
of rental expense 9 16 16 15 27
------ ------ ------- ------ -------
Total $ 84 $ 74 $ 52 $ 55 $ 68
====== ====== ======= ====== ========
Ratio of earnings before taxes
and fixed charges, to fixed
charges 68x 108x 206x 167x 166x
</TABLE>
* Interest expense includes the amortization of underwriting fees for the
relevant periods outstanding.
1
<PAGE>
EXHIBIT - 13
Financial summary
Ten years ended December 25, 1999
<TABLE>
<CAPTION>
Net Weighted
(In Employees investment Additions average
millions- at Year-end in property, Long-term Stock- to property, diluted
except (in plant & Total debt & put holders' plant & shares
employees) thousands) equipment assets warrants equity equipment/A/ outstanding
- ---------- ----------- ------------- -------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 70.2 $11,715 $43,849 $1,085 $32,535 $3,403 3,470
1998 64.5 $11,609 $31,471 $ 903 $23,377 $4,032 3,517
1997 63.7 $10,666 $28,880 $2,489 $19,295 $4,501 3,590
1996 48.5 $ 8,487 $23,735 $1,003 $16,872 $3,024 3,551
1995 41.6 $ 7,471 $17,504 $1,125 $12,140 $3,550 3,536
1994 32.6 $ 5,367 $13,816 $1,136 $ 9,267 $2,441 3,496
1993 29.5 $ 3,996 $11,344 $1,114 $ 7,500 $1,933 3,528
1992 25.8 $ 2,816 $ 8,089 $ 622 $ 5,445 $1,228 3,436
1991 24.6 $ 2,163 $ 6,292 $ 503 $ 4,418 $ 948 3,344
1990 23.9 $ 1,658 $ 5,376 $ 345 $ 3,592 $ 680 3,247
</TABLE>
<TABLE>
<CAPTION>
Amortization
In of goodwill
millions - & other Basic
except Research acquisition- earnings Diluted Dividends
per share Net Cost of & devel- related Operating Net per earnings declared per
amounts) revenues sales /B/ opment /C/ intangibles income income share per share per share
- ---------- -------- ---------- ---------- ------------ --------- ------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $29,389 $11,836 $3,111 $411 $9,767 $7,314 $2.20 $2.11 $.110
1998 $26,273 $12,088 $2,509 $ 56 $8,379 $6,068 $1.82 $1.73 $.050
1997 $25,070 $ 9,945 $2,347 -- $9,887 $6,945 $2.12 $1.93 $.058
1996 $20,847 $ 9,164 $1,808 -- $7,553 $5,157 $1.57 $1.45 $.048
1995 $16,202 $ 7,811 $1,296 -- $5,252 $3,566 $1.08 $1.01 $.038
1994 $11,521 $ 5,576 $1,111 -- $3,387 $2,288 $ .69 $ .65 $.029
1993 $ 8,782 $ 3,252 $ 970 -- $3,392 $2,295 $ .69 $ .65 $.025
1992 $ 5,844 $ 2,557 $ 780 -- $1,490 $1,067 $ .32 $ .31 $.013
1991 $ 4,779 $ 2,316 $ 618 -- $1,080 $ 819 $ .25 $ .24 --
1990 $ 3,921 $ 1,930 $ 517 -- $ 858 $ 650 $ .21 $ .20 --
</TABLE>
Share and per share amounts shown have been adjusted for stock splits through
1999.
/A/ Additions to property, plant and equipment in 1998 include $475 million for
capital assets acquired from Digital Equipment Corporation.
/B/ Cost of sales for 1998 reflects the reclassification of amortization of
goodwill and other acquisition-related intangibles to a separate line item.
/C/ Research and development excludes in-process research and development of
$392 million and $165 million for 1999 and 1998, respectively.
Page 13
<PAGE>
Consolidated statements of income
Three years ended December 25, 1999
(In millions--except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net revenues $29,389 $26,273 $25,070
------- ------- -------
Cost of sales 11,836 12,088 9,945
Research and development 3,111 2,509 2,347
Marketing, general and administrative 3,872 3,076 2,891
Amortization of goodwill and other acquisition-related
intangibles 411 56 -
Purchased in-process research and
development 392 165 -
------- ------- -------
Operating costs and expenses 19,622 17,894 15,183
------- ------- -------
Operating income 9,767 8,379 9,887
Interest expense (36) (34) (27)
Interest income and other, net 1,497 792 799
------- ------- -------
Income before taxes 11,228 9,137 10,659
Provision for taxes 3,914 3,069 3,714
------- ------- -------
Net income $7,314 $6,068 $6,945
======= ======= =======
Basic earnings per common share $ 2.20 $ 1.82 $ 2.12
======= ======= =======
Diluted earnings per common share $ 2.11 $ 1.73 $ 1.93
======= ======= =======
Weighted average common shares
outstanding 3,324 3,336 3,271
======= ======= =======
Weighted average common shares
outstanding, assuming dilution 3,470 3,517 3,590
======= ======= =======
</TABLE>
See accompanying notes.
Page 14
<PAGE>
Consolidated balance sheets
December 25, 1999 and December 26, 1998
(In millions--except per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,695 $ 2,038
Short-term investments 7,705 5,272
Trading assets 388 316
Accounts receivable, net of allowance for
doubtful accounts of $67 ($62 in 1998) 3,700 3,527
Inventories 1,478 1,582
Deferred tax assets 673 618
Other current assets 180 122
------- --------
Total current assets 17,819 13,475
------- --------
Property, plant and equipment:
Land and buildings 7,246 6,297
Machinery and equipment 14,851 13,149
Construction in progress 1,460 1,622
------- -------
23,557 21,068
Less accumulated depreciation 11,842 9,459
------- -------
Property, plant and equipment, net 11,715 11,609
------- -------
Marketable strategic equity securities 7,121 1,757
Other long-term investments 790 3,608
Goodwill and other acquisition-related intangibles 4,934 111
Other assets 1,470 911
------- -------
Total assets $43,849 $31,471
======= =======
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 230 $ 159
Accounts payable 1,370 1,244
Accrued compensation and benefits 1,454 1,285
Deferred income on shipments to distributors 609 606
Accrued advertising 582 458
Other accrued liabilities 1,159 1,094
Income taxes payable 1,695 958
------- -------
Total current liabilities 7,099 5,804
------- -------
Long-term debt 955 702
Deferred tax liabilities 3,130 1,387
Put warrants 130 201
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 50 shares
authorized; none issued -- --
Common stock, $0.001 par value, 4,500 shares
authorized; 3,334 issued and outstanding (3,315
in 1998) and capital in excess of par value 7,316 4,822
Retained earnings 21,428 17,952
Accumulated other comprehensive income 3,791 603
------- -------
Total stockholders' equity 32,535 23,377
------- -------
Total liabilities and stockholders' equity $43,849 $31,471
======= =======
</TABLE>
See accompanying notes.
Page 15
<PAGE>
Consolidated statements of cash flows
Three years ended December 25, 1999
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash and cash equivalents,
beginning of year $ 2,038 $ 4,102 $ 4,165
------- --------- --------
Cash flows provided by (used for)
operating activities:
Net income 7,314 6,068 6,945
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation 3,186 2,807 2,192
Amortization of goodwill and other
acquisition-related intangibles 411 56 --
Purchased in-process research and
development 392 165 --
Gains on sales of marketable
strategic equity securities (883) (185) (106)
Net loss on retirements of
property, plant and equipment 193 282 130
Deferred taxes (219) 77 6
Changes in assets and liabilities:
Accounts receivable 153 (38) 285
Inventories 169 167 (404)
Accounts payable 79 (180) 438
Accrued compensation and benefits 127 17 140
Income taxes payable 726 (211) 179
Tax benefit from employee stock
plans 506 415 224
Other assets and liabilities (819) (249) (21)
------- --------- --------
Total adjustments 4,021 3,123 3,063
------- --------- --------
Net cash provided by operating activities 11,335 9,191 10,008
------- --------- --------
Cash flows provided by (used for)
investing activities:
Additions to property, plant and
equipment (3,403) (3,557) (4,501)
Acquisitions, net of cash acquired (2,979) (906) --
Purchases of available-for-sale
investments (7,055) (10,925) (9,224)
Sales of available-for-sale
investments 831 201 153
Maturities and other changes in
available-for-sale investments 7,156 8,681 6,713
------- --------- --------
Net cash used for investing activities (5,450) (6,506) (6,859)
------- --------- --------
Cash flows provided by (used for)
financing activities:
Increase (decrease) in short-term
debt, net 69 (83) (177)
Additions to long-term debt 118 169 172
Retirement of long-term debt -- -- (300)
Proceeds from sales of shares through
employee stock plans and other 543 507 317
Proceeds from exercise of 1998
step-up warrants -- 1,620 40
Proceeds from sales of put warrants 20 40 288
Repurchase and retirement of
common stock (4,612) (6,785) (3,372)
Payment of dividends to
stockholders (366) (217) (180)
------- --------- --------
Net cash used for financing activities (4,228) (4,749) (3,212)
------- --------- --------
Net increase (decrease) in cash and cash
equivalents 1,657 (2,064) (63)
------- --------- --------
Cash and cash equivalents, end of year $ 3,695 $ 2,038 $ 4,102
======= ========= ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 40 $ 40 $ 37
Income taxes $ 2,899 $ 2,784 $ 3,305
</TABLE>
See accompanying notes.
Page 16
<PAGE>
Consolidated statements of
stockholders' equity
<TABLE>
<CAPTION>
Common stock
and capital in excess
of par value
---------------------
Accumulated
Three years ended December 25, 1999 other
(In millions - except per share Number of Retained comprehensive
amounts) shares Amount earnings income Total
--------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 28, 1996 3,283 $ 2,897 $13,853 $ 122 $16,872
Components of comprehensive income:
Net income -- -- 6,945 -- 6,945
Change in unrealized gain on
available-for-sale investments, net of tax -- -- -- (64) (64)
------
Total comprehensive income 6,881
------
Proceeds from sales of shares
through employee stock plans,
tax benefit of $224 and other 61 581 (1) -- 580
Proceeds from sales of put warrants -- 288 -- -- 288
Reclassification of put warrant
obligation, net -- (144) (1,622) -- (1,766)
Repurchase and retirement of
common stock (88) (311) (3,061) -- (3,372)
Cash dividends declared
($0.058 per share) -- -- (188) -- (188)
----- ----- ------- ----- ------
Balance at December 27, 1997 3,256 3,311 15,926 58 19,295
Components of comprehensive income:
Net income -- -- 6,068 -- 6,068
Change in unrealized gain on
available-for-sale investments,
net of tax -- -- -- 545 545
------
Total comprehensive income 6,613
------
Proceeds from sales of shares
through employee stock plans,
tax benefit of $415 and other 66 922 -- -- 922
Proceeds from exercise of 1998
step-up warrants 155 1,620 -- -- 1,620
Proceeds from sales of put warrants -- 40 -- -- 40
Reclassification of put warrant
obligation, net -- 53 588 -- 641
Repurchase and retirement of
common stock (162) (1,124) (4,462) -- (5,586)
Cash dividends declared
($0.050 per share) -- -- (168) -- (168)
----- ----- ------- ----- ------
Balance at December 26, 1998 3,315 4,822 17,952 603 23,377
Components of comprehensive income:
Net income -- -- 7,314 -- 7,314
Change in unrealized gain on
available-for-sale investments, net of tax -- -- -- 3,188 3,188
------
Total comprehensive income 10,502
------
Proceeds from sales of shares
through employee stock plans,
tax benefit of $506 and other 56 1,049 -- -- 1,049
Proceeds from sales of put warrants -- 20 -- -- 20
Reclassification of put warrant
obligation, net -- 7 64 -- 71
Repurchase and retirement of
common stock (71) (1,076) (3,536) -- (4,612)
Issuance of common stock in
connection with Level One Communications
acquisition 34 1,963 -- -- 1,963
Stock options assumed in connection
with acquisitions -- 531 -- -- 531
Cash dividends declared
($0.110 per share) -- -- (366) -- (366)
----- ------ ------- ------ -------
Balance at December 25, 1999 3,334 $ 7,316 $21,428 $3,791 $32,535
===== ======= ======= ====== =======
</TABLE>
See accompanying notes.
Page 17
<PAGE>
Notes to consolidated financial statements
Accounting policies
Fiscal year. Intel Corporation has a fiscal year that ends the last Saturday
in December. Fiscal years 1999, 1998 and 1997, each 52-week years, ended on
December 25, 26 and 27, respectively. Periodically, there will be a 53-week
year. The next 53-week year will end on December 30, 2000.
Basis of presentation. The consolidated financial statements include the
accounts of Intel and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated. Accounts denominated in foreign
currencies have been remeasured using the U.S. dollar as the functional
currency.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Investments. Highly liquid debt securities with insignificant interest rate
risk and with original maturities of three months or less are classified as cash
and cash equivalents. Debt securities with original maturities greater than
three months and remaining maturities less than one year are classified as
short-term investments. Debt securities with remaining maturities greater than
one year are classified as other long-term investments. The company's policy is
to protect the value of its fixed income investment portfolio and to minimize
principal risk by earning returns based on current interest rates.
The company enters into certain equity investments for the promotion of
business and strategic objectives, and typically does not attempt to reduce or
eliminate the inherent market risks on these investments. The marketable portion
of these strategic investments is classified separately as marketable strategic
equity securities. The non-marketable equity and other investments are included
in other assets.
A substantial majority of the company's marketable investments are classified
as available-for-sale as of the balance sheet date and are reported at fair
value, with unrealized gains and losses, net of tax, recorded in stockholders'
equity. The cost of securities sold is based on the specific identification
method. Realized gains or losses and declines in value, if any, judged to be
other than temporary on available-for-sale securities are reported in other
income or expense. Non-marketable investments are recorded at the lower of cost
or market.
Trading assets. The company maintains its trading asset portfolio to generate
returns that offset changes in certain liabilities related to deferred
compensation arrangements. The trading assets consist of marketable equity
instruments and are stated at fair value. Both realized and unrealized gains and
losses are included in other income or expense and generally offset the change
in the deferred compensation liability, which is also included in other income
or expense. Net gains on the trading asset portfolio were $44 million, $66
million and $37 million in 1999, 1998 and 1997, respectively. The deferred
compensation liabilities amounted to $384 million and $287 million in 1999 and
1998, respectively, and are included in other accrued liabilities on the
consolidated balance sheets.
Fair values of financial instruments. Fair values of cash and cash
equivalents approximate cost due to the short period of time to maturity. Fair
values of short-term investments, trading assets, marketable strategic equity
securities, other long-term investments, non-marketable investments, short-term
debt, long-term debt, swaps, currency forward contracts and options hedging
marketable instruments are based on quoted market prices or pricing models using
current market rates. For certain non-marketable equity securities, fair value
is estimated based on prices recently paid for shares in that company. No
consideration is given to liquidity issues in valuing the debt and investments.
The estimated fair values are not necessarily representative of the amounts that
the company could realize in a current transaction.
Derivative financial instruments. The company utilizes derivative financial
instruments to reduce financial market risks. These instruments are used to
hedge foreign currency, interest rate and certain equity market exposures of
underlying assets, liabilities and other obligations. The company also uses
derivatives to create synthetic instruments, for example, buying and selling put
and call options on the same underlying security, to generate money market like
returns with a similar level of risk. The company does not use derivative
financial instruments for speculative or trading purposes. The company's
accounting policies for these instruments are based on whether they meet the
company's criteria for designation as hedging transactions. The criteria the
company uses for designating an instrument as a hedge include the instrument's
effectiveness in risk reduction and one-to-one matching of derivative
instruments to underlying transactions. Gains and losses on currency forward
contracts, and options that are designated and effective as hedges of
anticipated transactions, for which a firm commitment has been attained, are
deferred and recognized in income in the same period that the underlying
transactions are settled. Gains and losses on currency forward contracts,
options, and swaps that are designated and effective as hedges of existing
transactions are recognized in income in the same period as losses and gains on
the underlying transactions are recognized and generally offset. Gains and
losses on any instruments not meeting the above criteria are recognized in
income in the current period. If an underlying hedged transaction is terminated
earlier than initially anticipated, the offsetting gain or loss on the related
derivative instrument would be recognized in income in the same period.
Subsequent gains or losses on the related derivative instrument would be
recognized in income in each period until the instrument matures, is terminated
or is sold. Income or expense on swaps is accrued as an adjustment to the yield
of the related investments or debt they hedge.
Inventories. Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard
Page 18
<PAGE>
basis (which approximates actual cost on a current average or first-in, first-
out basis). Inventories at fiscal year-ends were as follows:
(In millions) 1999 1998
- --------------------------------------------------------------------------
Raw materials $ 183 $ 206
Work in process 755 795
Finished goods 540 581
------ ------
Total $1,478 $1,582
====== ======
Property, plant and equipment. Property, plant and equipment are stated at
cost. Depreciation is computed for financial reporting purposes principally
using the straight-line method over the following estimated useful lives:
machinery and equipment, 2-4 years; buildings, 4-40 years.
Goodwill and other acquisition-related intangibles. Goodwill is recorded when
the consideration paid for acquisitions exceeds the fair value of net tangible
and intangible assets acquired. Goodwill and other acquisition-related
intangibles are amortized on a straight-line basis over the periods indicated
below. Reviews are regularly performed to determine whether facts or
circumstances exist which indicate that the carrying values of assets are
impaired. The company assesses the recoverability of its assets by comparing the
projected undiscounted net cash flows associated with those assets against their
respective carrying amounts. Impairment, if any, is based on the excess of the
carrying amount over the fair value of those assets. No impairment has been
indicated to date.
Net goodwill and other acquisition-related intangibles at fiscal year-ends
were as follows:
<TABLE>
<CAPTION> Life in
(In millions) Years 1999 1998
<S> <C> <C> <C>
- -----------------------------------------------------------------
Goodwill 2-6 $4,124 $ 52
Developed technology 3-6 612 33
Other intangibles 2-6 198 26
------ ----
$4,934 $111
====== ====
</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 $471 million and $60 million at December 25, 1999 and December
26, 1998, respectively.
Amortization of goodwill and other acquisition-related intangibles of $411
million for 1999 consisted of $307 million of amortization of goodwill and $104
million of amortization of other acquisition-related intangibles, a majority of
which was related to developed technology.
Revenue recognition. The company generally recognizes net revenues upon the
transfer of title. However, certain of the company's sales are made to
distributors under agreements allowing price protection and/or right of return
on merchandise unsold by the distributors. Because of frequent sales price
reductions and rapid technological obsolescence in the industry, Intel defers
recognition of revenues on shipments to distributors until the merchandise is
sold by the distributors.
Advertising. Cooperative advertising obligations are accrued and the costs
expensed at the same time the related revenues are recognized. All other
advertising costs are expensed as incurred. Advertising expense was $1.7
billion, $1.3 billion and $1.2 billion in 1999, 1998 and 1997, respectively.
Interest. Interest as well as gains and losses related to contractual
agreements to hedge certain investment positions and debt (see "Derivative
financial instruments") are recorded as net interest income or expense. Interest
expense capitalized as a component of construction costs was $5 million, $6
million and $9 million for 1999, 1998 and 1997, respectively.
Earnings per share. The shares used in the computation of the company's basic
and diluted earnings per common share are reconciled as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding 3,324 3,336 3,271
Dilutive effect of:
Employee stock options 145 159 204
Convertible notes 1 -- --
1998 step-up warrants -- 22 115
----- ----- -----
Weighted average common shares
outstanding, assuming dilution 3,470 3,517 3,590
===== ===== =====
</TABLE>
Weighted average common shares outstanding, assuming dilution, includes the
incremental shares that would be issued upon the assumed exercise of stock
options, as well as the assumed conversion of the convertible notes and the
incremental shares for the step-up warrants. Put warrants outstanding had no
dilutive effect on diluted earnings per common share for the periods presented.
For the three year period ended December 25, 1999, 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. (See "Long-term debt" under "Borrowings.")
Stock distribution. On April 11, 1999, the company effected a two-for-one
stock split in the form of a special stock distribution to stockholders of
record as of March 23, 1999. On July 13, 1997, the company effected a two-for-
one stock split in the form of a special stock distribution to stockholders of
record as of June 10, 1997. All share, per share, common stock, stock option and
warrant amounts herein have been restated to reflect the effects of these
splits.
Reclassifications. Certain amounts reported in previous years have been
reclassified to conform to the 1999 presentation.
Recent accounting pronouncements. The company intends to adopt Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as of 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
Page 19
<PAGE>
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. The effect of adopting the
standard is currently being evaluated but is not expected to have a material
effect on the company's financial position or overall trends in results of
operations.
Common stock
Stock repurchase program. The company has an ongoing authorization, as
amended, from the Board of Directors to repurchase up to 760 million shares of
Intel's common stock in open market or negotiated transactions. During 1999, the
company repurchased 71.3 million shares of common stock at a cost of $4.6
billion. As of December 25, 1999, the company had repurchased and retired
approximately 659.9 million shares at a cost of $18.2 billion since the program
began in 1990. As of December 25, 1999, after allowing for 2 million shares to
cover outstanding put warrants, 98.1 million shares remained available under the
repurchase authorization.
1998 step-up warrants. In 1993, the company issued 160 million 1998 step-up
warrants to purchase 160 million shares of common stock. The warrants became
exercisable in May 1993. Between December 27, 1997 and March 14, 1998,
approximately 155 million warrants were exercised and shares of common stock
were issued for proceeds of $1.6 billion. The expiration date of these warrants
was March 14, 1998.
Put warrants
In a series of private placements from 1991 through 1999, the company sold put
warrants that entitle the holder of each warrant to sell to the company, by
physical delivery, one share of common stock at a specified price. Activity
during the past three years is summarized as follows:
<TABLE>
<CAPTION>
Put warrants
outstanding
-----------------------------
Cumulative
net Number of Potential
(In millions) premium received warrants obligation
--------------------------------- ----------------- --------- ----------
<S> <C> <C> <C>
December 28, 1996 $335 18.0 $ 275
Sales 288 92.6 3,525
Expirations -- (58.0) (1,759)
--------- -------- --------
December 27, 1997 623 52.6 2,041
Sales 40 15.0 588
Exercises - (30.0) (1,199)
Expirations - (32.6) (1,229)
--------- -------- --------
December 26, 1998 663 5.0 201
Sales 20 4.0 261
Expirations -- (7.0) (332)
--------- -------- ---------
December 25, 1999 $683 2.0 $ 130
========= ======== =========
</TABLE>
The amount related to Intel's potential repurchase obligation has been
reclassified from stockholders' equity to put warrants. The 2 million put
warrants outstanding at December 25, 1999 expired unexercised in January 2000
and had an average exercise price of $65 per share.
Borrowings
Short-term debt. Non-interest-bearing short-term debt at fiscal year-ends was
as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Borrowed under
lines of credit $ -- $ 10
Drafts payable 230 149
---- ----
Total $230 $159
==== ====
</TABLE>
The company also borrows under commercial paper programs. Maximum borrowings
under commercial paper programs reached $200 million during 1999 and $325
million during 1998. This debt is rated A-1+ by Standard and Poor's and P-1 by
Moody's.
Long-term debt. Long-term debt at fiscal year-ends was as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payable in U.S. dollars:
Puerto Rico bonds due 2013 at 3.9%-4.25% $110 $110
Convertible subordinated notes due 2004 at 4% 210 -
Other U.S. dollar debt 6 5
Payable in other currencies:
Irish punt due 2001-2027 at 4%-13% 583 541
Other non-U.S. dollar debt 46 46
---- ----
Total $955 $702
==== ====
</TABLE>
The company has guaranteed repayment of principal and interest on bonds issued
by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental
Control Facilities Financing Authority. The bonds are adjustable and redeemable
at the option of either the company or the bondholder every five years through
2013 and are next adjustable and redeemable in 2003.
During 1999, the company assumed 4% convertible subordinated notes with a
principal amount of $115 million as a result of the Level One Communications,
Inc. acquisition (see "Acquisitions"). The value assigned to the notes was
approximately $212 million, based upon the assumed conversion price at the date
of acquisition. Amortization of the premium substantially offsets the interest
expense on the notes. The notes are convertible into common stock of the company
at a conversion price of $31.01 per share. After September 2000, the notes are
redeemable at the option of the company.
The Irish punt borrowings were made in connection with the financing of
manufacturing facilities in Ireland, and Intel has invested the proceeds in
Irish punt denominated instruments of similar maturity to hedge foreign currency
and interest rate exposures.
Under shelf registration statements filed with the Securities and Exchange
Commission, Intel may issue up to $1.4 billion of additional securities in the
form of common stock, preferred
Page 20
<PAGE>
stock, depositary shares, debt securities and warrants to purchase the company's
or other issuers' common stock, preferred stock and debt securities, and,
subject to certain limits, stock index warrants and foreign currency exchange
units.
As of December 25, 1999, aggregate debt maturities were as follows: 2001-$62
million; 2002-$21 million; 2003-$134 million; 2004-$236 million; and thereafter-
$502 million.
Available-for-sale investments
The returns on a majority of the company's marketable investments in long-term
fixed rate debt and certain equity securities are swapped to U.S. dollar LIBOR-
based returns. The currency risks of investments denominated in foreign
currencies are hedged with foreign currency borrowings, currency forward
contracts or currency interest rate swaps (see "Derivative financial
instruments" under "Accounting policies").
Investments with maturities of greater than six months consist primarily of A
and A2 or better rated financial instruments and counterparties. Investments
with maturities of up to six months consist primarily of A-1 and P-1 or better
rated financial instruments and counterparties. Foreign government regulations
imposed upon investment alternatives of foreign subsidiaries, or the absence of
A and A2 rated counterparties in certain countries, result in some minor
exceptions. Intel's practice is to obtain and secure available collateral from
counterparties against obligations whenever Intel deems appropriate. At December
25, 1999, investments were placed with approximately 175 different
counterparties.
Available-for-sale investments at December 25, 1999 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
(In millions) Cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities $ 2,746 $ -- $ (5) $ 2,741
Commercial paper 2,971 -- (2) 2,969
Floating rate notes 2,152 -- (4) 2,148
Bank time deposits 2,022 -- (3) 2,019
Corporate bonds 865 49 (9) 905
Loan participations 625 -- -- 625
Fixed rate notes 275 -- (1) 274
Securities of foreign
governments 59 -- -- 59
Other debt securities 33 -- (1) 32
-------- -------- -------- --------
Total debt securities 11,748 49 (25) 11,772
-------- -------- -------- --------
Marketable strategic equity securities 1,277 5,882 (38) 7,121
Preferred stock and other equity 121 -- -- 121
-------- -------- -------- --------
Total equity securities 1,398 5,882 (38) 7,242
-------- -------- -------- --------
Swaps hedging
investments in
debt securities -- 12 (50) (38)
Currency forward
contracts hedging
investments in
debt securities -- 2 -- 2
-------- -------- -------- --------
Total available-for-sale
investments 13,146 5,945 (113) 18,978
Less amounts classified
as cash equivalents (3,362) -- -- (3,362)
-------- -------- -------- --------
$ 9,784 $5,945 $(113) $15,616
======== ======== ======== ========
</TABLE>
Available-for-sale investments at December 26, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
(In millions) Cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities $ 2,824 $ -- $ (11) $ 2,813
Commercial paper 2,694 5 (2) 2,697
Floating rate notes 1,273 2 (2) 1,273
Corporate bonds 1,153 51 (17) 1,187
Bank time deposits 1,135 1 (1) 1,135
Loan participations 625 -- -- 625
Repurchase agreements 124 -- -- 124
Securities of foreign
governments 36 1 (1) 36
Other debt securities 160 -- -- 160
-------- -------- -------- --------
Total debt securities 10,024 60 (34) 10,050
-------- -------- -------- --------
Hedged equity 100 -- (2) 98
Marketable strategic equity securities 822 979 (44) 1,757
Preferred stock and other equity 140 1 -- 141
-------- -------- -------- --------
Total equity securities 1,062 980 (46) 1,996
-------- -------- -------- --------
Options creating synthetic
money market instruments 474 -- -- 474
Swaps hedging
investments in
debt securities -- 19 (52) (33)
Swaps hedging
investments in
equity securities -- 2 -- 2
Currency forward
contracts hedging
investments in
debt securities -- 2 (4) (2)
-------- -------- -------- --------
Total available-for-sale
investments 11,560 1,063 (136) 12,487
Less amounts classified
as cash equivalents (1,850) -- -- (1,850)
-------- -------- -------- --------
$ 9,710 $1,063 $(136) $10,637
======== ======== ======== ========
</TABLE>
Available-for-sale securities with a fair value at the date of sale of $1
billion, $227 million and $153 million were sold in 1999, 1998 and 1997,
respectively. The gross realized gains on these sales totaled $883 million, $185
million and $106 million, respectively.
The amortized cost and estimated fair value of investments in debt securities
at December 25, 1999, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Estimated
fair
(In millions) Cost value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in 1 year or less $11,031 $11,054
Due in 1-2 years 192 194
Due in 2-5 years 58 58
Due after 5 years 467 466
-------- --------
Total investments in debt securities $11,748 $11,772
======== ========
</TABLE>
Page 21
<PAGE>
Derivative financial instruments
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends were as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Swaps hedging investments in debt securities $2,002 $2,526
Swaps hedging investments in equity securities $ -- $ 100
Swaps hedging debt $ 156 $ 156
Currency forward contracts $ 845 $ 830
Options creating synthetic money
market instruments $ -- $2,086
</TABLE>
While the contract or notional amounts provide one measure of the volume of
these transactions, they do not represent the amount of the company's exposure
to credit risk. The amounts potentially subject to credit risk (arising from the
possible inability of counterparties to meet the terms of their contracts) are
generally limited to the amounts, if any, by which a counterparty's obligations
exceed the obligations of Intel with that counterparty. The company controls
credit risk through credit approvals, limits and monitoring procedures. Credit
rating criteria for derivative financial instruments are similar to those for
investments.
Swap agreements. The company utilizes swap agreements to exchange the foreign
currency, equity and interest rate returns of its investment and debt portfolios
for floating U.S. dollar interest rate based returns. The floating rates on
swaps are based primarily on U.S. dollar LIBOR and are reset on a monthly,
quarterly or semiannual basis.
Pay rates on swaps hedging investments in debt securities match the yields on
the underlying investments they hedge. Payments on swaps hedging investments in
equity securities match the equity returns on the underlying investments they
hedge. Receive rates on swaps hedging debt match the expense on the underlying
debt they hedge. Maturity dates of swaps match those of the underlying
investment or the debt they hedge. There is approximately a one-to-one matching
of swaps to investments and debt. Swap agreements generally remain in effect
until expiration.
Weighted average pay and receive rates, average maturities and range of
maturities on swaps at December 25, 1999 were as follows:
<TABLE>
<CAPTION>
Weighted
Weighted average Weighted
average receive average Range of
pay rate rate maturity maturities
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps hedging
investments
in U.S. dollar
debt securities 6.0% 6.0% 1.0 years 0-4 years
Swaps hedging
investments
in foreign currency
debt securities 5.6% 5.7% 1.6 years 0-4 years
Swaps hedging debt 5.5% 5.7% 3.8 years 1-4 years
</TABLE>
Note: Pay and receive rates are based on the reset rates that were in effect at
December 25, 1999.
Other foreign currency instruments. Intel transacts business in various
foreign currencies, primarily Japanese yen and certain other Asian and
European currencies. The company has established revenue and balance sheet
hedging programs to protect against reductions in value and volatility of
future cash flows caused by changes in foreign exchange rates. The company
utilizes currency forward contracts and currency options in these hedging
programs. The maturities on these instruments are less than 12 months.
Fair values of financial instruments
The estimated fair values of financial instruments outstanding at fiscal
year-ends were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
(In millions) amount fair value amount fair value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and
cash equivalents $3,695 $ 3,695 $2,038 $2,038
Short-term investments $7,740 $ 7,740 $4,821 $4,821
Trading assets $ 388 $ 388 $ 316 $ 316
Marketable strategic
equity securities $7,121 $ 7,121 $1,757 $1,757
Other long-term
investments $ 791 $ 791 $3,618 $3,618
Non-marketable
instruments $1,177 $ 3,410 $ 571 $ 716
Options creating
synthetic money
market instruments $ -- $ -- $ 474 $ 474
Swaps hedging
investments in
debt securities $ (38) $ (38) $ (33) $ (33)
Swaps hedging
investments in
equity securities $ -- $ -- $ 2 $ 2
Short-term debt $ (230) $ (230) $ (159) $ (159)
Long-term debt $ (955) $(1,046) $ (702) $ (696)
Swaps hedging debt $ -- $ (5) $ -- $ 1
Currency forward
contracts $ 1 $ -- $ (1) $ (1)
</TABLE>
Concentrations of credit risk
Financial instruments that potentially subject the company to concentrations
of credit risk consist principally of investments and trade receivables. Intel
places its investments with high-credit-quality counterparties and, by policy,
limits the amount of credit exposure to any one counterparty based on Intel's
analysis of that counterparty's relative credit standing. A majority of the
company's trade receivables are derived from sales to manufacturers of computer
systems, with the remainder spread across various other industries. The
company's five largest customers accounted for approximately 44% of net revenues
for 1999. At December 25, 1999, these customers accounted for approximately 35%
of net accounts receivable.
The company endeavors to keep pace with the evolving computer and Internet-
related industries, and has adopted credit policies and standards intended to
accommodate industry growth and inherent risk. Management believes that credit
risks are moderated by the diversity of its end customers and geographic sales
areas. Intel performs ongoing credit evaluations of its customers' financial
condition and requires collateral or other credit support as deemed necessary.
Page 22
<PAGE>
Interest income and other
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 618 $593 $562
Gains on sales of marketable strategic equity
securities 883 185 106
Foreign currency gains (losses), net (1) 11 63
Other income (expense), net (3) 3 68
------ ----- -----
Total $1,497 $792 $799
====== ===== =====
</TABLE>
Comprehensive income
The components of other comprehensive income and related tax effects were as
follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gains on investments during the year, net of tax of $(2,026), $(357)
and $(4) in 1999, 1998 and 1997, respectively $3,762 $ 665 $ 5
Less: adjustment for gains realized and included in net income, net of tax
of $309, $65 and $37 in 1999, 1998 and 1997, respectively (574) (120) (69)
----- ----- -----
Other comprehensive income $3,188 $ 545 $ (64)
====== ===== =====
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists of the accumulated net unrealized gain on
available-for-sale investments.
Provision for taxes
Income before taxes and the provision for taxes consisted of the following:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before taxes:
U.S. $ 7,239 $6,677 $ 8,033
Foreign 3,989 2,460 2,626
------- ------ -------
Total income before taxes $11,228 $9,137 $10,659
======= ====== =======
Provision for taxes:
Federal:
Current $ 3,356 $2,321 $ 2,930
Deferred (162) 145 30
------- ------ -------
3,194 2,466 2,960
------- ------ -------
State:
Current 393 320 384
Foreign:
Current 384 351 394
Deferred (57) (68) (24)
-------- ------- --------
327 283 370
-------- ------- --------
Total provision for taxes $ 3,914 $3,069 $ 3,714
======= ====== =======
Effective tax rate 34.9% 33.6% 34.8%
======= ====== =======
</TABLE>
The tax benefit associated with dispositions from employee stock plans reduced
taxes currently payable for 1999 by $506 million ($415 million and $224
million for 1998 and 1997, respectively).
The provision for taxes reconciles to the amount computed by applying the
statutory federal rate of 35% to income before taxes as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax $3,930 $3,198 $3,731
State taxes, net of federal benefits 255 208 249
Foreign income taxed at different rates (239) (339) (111)
Non-deductible acquisition-related costs 274 74 -
Other (306) (72) (155)
------ ------ ------
Provision for taxes $3,914 $3,069 $3,714
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the company's deferred tax assets and liabilities at
fiscal year-ends were as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued compensation and benefits $ 111 $ 117
Accrued advertising 66 62
Deferred income 182 181
Inventory valuation and related reserves 91 106
Interest and taxes 48 52
Other, net 175 100
------ ------
673 618
DEFERRED TAX LIABILITIES
Depreciation (703) (911)
Acquired intangibles (214) -
Unremitted earnings of certain subsidiaries (172) (152)
Unrealized gain on investments (2,041) (324)
------ ------
(3,130) (1,387)
------ ------
Net deferred tax (liability) $(2,457) $ (769)
======== ========
</TABLE>
U.S. income taxes were not provided for on a cumulative total of approximately
$2.2 billion of undistributed earnings for certain non-U.S. subsidiaries. The
company intends to reinvest these earnings indefinitely in operations outside
the United States.
The years 1998 and 1997 are currently under examination by the Internal
Revenue Service. Management believes that adequate amounts of tax and related
interest and penalties, if any, have been provided for any adjustments that may
result for these years.
Page 23
<PAGE>
Employee benefit plans
Stock option plans. Intel has a stock option plan under which officers, key
employees and non-employee directors may be granted options to purchase shares
of the company's authorized but unissued common stock. The company also has a
stock option plan under which stock options may be granted to employees other
than officers and directors. The company's Executive Long-Term Stock Option
Plan, under which certain key employees, including officers, have been granted
stock options, terminated in September 1998. Although this termination will not
affect options granted prior to this date, no further grants may be made under
this plan. Under all of the plans, the option exercise price is equal to the
fair market value of Intel common stock at the date of grant. During 1999, Intel
also assumed the stock option plans and the outstanding options of certain
acquired companies. No additional options will be granted under these assumed
plans.
Options granted by Intel currently expire no later than 10 years from the
grant date and generally vest within 5 years. Proceeds received by the company
from exercises are credited to common stock and capital in excess of par value.
Additional information with respect to stock option plan activity was as
follows:
<TABLE>
<CAPTION>
Outstanding options
---------------------------
Weighted
Share average
available Number exercise
(Shares in millions) for options of shares price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 28, 1996 130.6 337.8 $ 7.49
Additional shares reserved 260.0 -- --
Grants (63.0) 63.0 $36.23
Exercises -- (47.2) $ 3.06
Cancellations 8.8 (8.8) $16.38
----- -----
DECEMBER 27, 1997 336.4 344.8 $13.12
Grants (48.0) 48.0 $38.35
Exercises -- (63.0) $ 4.59
Cancellations 17.3 (17.3) $23.64
Lapsed under terminated plans (38.5) -- --
------ -----
DECEMBER 26, 1998 267.2 312.5 $18.13
Grants (40.6) 40.6 $63.91
Options assumed in acquisitions -- 12.8 $25.74
Exercises -- (48.0) $ 6.64
Cancellations 12.3 (12.3) $32.85
----- ------
DECEMBER 25, 1999 238.9 305.6 $25.73
====== ======
Options exercisable at:
December 27, 1997 115.2 $ 3.66
December 26, 1998 103.8 $ 6.11
December 25, 1999 103.2 $ 9.42
</TABLE>
The range of option exercise prices for options outstanding at December 25,
1999 was $0.15 to $84.97. The range of exercise prices for options is wide due
primarily to the increasing price of the company's stock over the period in
which the option grants were awarded, in addition to the impact of assumed
options of acquired companies that had experienced even greater price
appreciation.
The following tables summarize information about options outstanding at
December 25, 1999:
<TABLE>
<CAPTION>
Outstanding options
------------------------------------------------------------------
Weighted
Number of average Weighted
shares contractual average
(in life exercise
Range of exercise prices millions) (in years) price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$0.15-$7.58 59.6 2.4 $ 4.28
$8.66-$15.09 62.9 4.8 $10.46
$15.12-$37.45 91.4 6.7 $25.61
$37.47-$84.97 91.7 8.6 $50.28
-----------
Total 305.6 6.0 $25.73
===========
<CAPTION>
Exercisable options
----------------------------
Number of Weighted
shares average
(in exercise
Range of exercise prices millions) price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
$0.15-$7.58 59.2 $ 4.29
$8.66-$15.09 28.4 $ 9.11
$15.12-$37.45 12.3 $25.87
$37.47-$84.97 3.3 $43.04
------
Total 103.2 $ 9.42
======
</TABLE>
These options will expire if not exercised at specific dates through December
2009. Option exercise prices for options exercised during the three-year period
ended December 25, 1999 ranged from $0.15 to $61.41.
Stock Participation Plan. Under this plan, eligible employees may purchase
shares of Intel's common stock at 85% of fair market value at specific,
predetermined dates. Of the 472 million shares authorized to be issued under the
plan, 74.3 million shares remained available for issuance at December 25, 1999.
Employees purchased 5.4 million shares in 1999 (6.3 million in 1998 and 9.0
million in 1997) for $241 million ($229 million and $191 million in 1998 and
1997, respectively).
Pro forma information. The company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, because the exercise price of
the company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
company's financial statements.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123. This information is required to be determined as if the company
had accounted for its employee stock options (including shares issued under the
Stock Participation Plan, collectively called "options") granted subsequent to
December 31, 1994 under the fair
Page 24
<PAGE>
value method of that statement. The fair value of options granted in 1999, 1998
and 1997 reported below has been estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee stock options 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (in years) 6.5 6.5 6.5
Risk-free interest rate 5.2% 5.3% 6.6%
Volatility .38 .36 .36
Dividend yield .2% .2% .1%
Stock Participation Plan shares 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (in years) .5 .5 .5
Risk-free interest rate 4.9% 5.2% 5.3%
Volatility .45 .42 .40
Dividend yield .2% .2% .1%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated fair value of employee
stock options granted during 1999, 1998 and 1997 was $29.53, $17.91 and $17.67
per share, respectively, excluding options assumed through acquired companies.
The weighted average estimated fair value of shares granted under the Stock
Participation Plan during 1999, 1998 and 1997 was $19.81, $10.92 and $11.04,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The company's pro
forma information follows:
<TABLE>
<CAPTION>
(In millions - except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 6,860 $ 5,755 $ 6,735
Pro forma basic earnings per share $ 2.06 $ 1.73 $ 2.06
Pro forma diluted earnings per share $ 1.98 $ 1.66 $ 1.88
</TABLE>
Retirement plans. The company provides tax-qualified profit-sharing retirement
plans (the "Qualified Plans") for the benefit of eligible employees in the U.S.
and Puerto Rico and certain foreign countries. The plans are designed to provide
employees with an accumulation of funds for retirement on a tax-deferred basis
and provide for annual discretionary employer contributions to trust funds.
The company also provides a non-qualified profit-sharing retirement plan (the
"Non-Qualified Plan") for the benefit of eligible employees in the U.S. This
plan is designed to permit certain discretionary employer contributions in
excess of the tax limits applicable to the Qualified Plans and to permit
employee deferrals in excess of certain tax limits. This plan is unfunded.
The company expensed $294 million for the Qualified Plans and the Non-
Qualified Plan in 1999 ($291 million in 1998 and $273 million in 1997). The
company expects to fund approximately $333 million for the 1999 contribution to
the Qualified Plans and to allocate approximately $9 million for the Non-
Qualified Plan, including the utilization of amounts expensed in prior years. A
remaining accrual of approximately $157 million carried forward from prior years
is expected to be contributed to these plans when allowable under IRS
regulations and plan rules.
Contributions made by the company vest based on the employee's years of
service. Vesting begins after three years of service in 20% annual increments
until the employee is 100% vested after seven years.
The company provides tax-qualified defined-benefit pension plans for the
benefit of eligible employees in the U.S. and Puerto Rico. Each plan provides
for minimum pension benefits that are determined by a participant's years of
service, final average compensation (taking into account the participant's
social security wage base) and the value of the company's contributions, plus
earnings, in the Qualified Plan. If the participant's balance in the Qualified
Plan exceeds the pension guarantee, the participant will receive benefits from
the Qualified Plan only. Intel's funding policy is consistent with the funding
requirements of federal laws and regulations. The company also provides defined-
benefit pension plans in certain foreign countries. The company's funding policy
for foreign defined-benefit pension plans is consistent with the local
requirements in each country. These defined-benefit pension plans had no
material impact on the company's financial statements for the periods presented.
The company provides postemployment benefits for retired employees in the U.S.
Upon retirement, eligible employees are credited with a defined dollar amount
based on years of service. These credits can be used to pay all or a portion of
the cost to purchase coverage in an Intel-sponsored medical plan. These benefits
had no material impact on the company's financial statements for the periods
presented.
Acquisitions
During 1999 and 1998, the company completed a number of acquisitions that were
accounted for using the purchase method of accounting.
In February 1999, the company acquired Shiva Corporation in a cash
transaction. Shiva's products include remote access and virtual private
networking solutions for the small to medium enterprise market segment and the
remote access needs of campuses and branch offices.
Page 25
<PAGE>
In July 1999, the company acquired privately held Softcom Microsystems, Inc.
in a cash transaction. Softcom develops and markets semiconductor products for
original equipment manufacturers in the networking and communications market
segments. Softcom's high-performance components are designed for networking gear
(access devices, routers and switches) used to direct voice and data across the
Internet as well as traditional enterprise networks.
In July 1999, the company acquired Dialogic Corporation in a cash transaction.
The acquisition is aimed at expanding the company's standard high-volume server
business in the networking and telecommunications market segments. Dialogic
designs, manufactures and markets computer hardware and software enabling
technology for computer telephony systems.
In August 1999, the company acquired Level One Communications in a stock-for-
stock transaction. Approximately 34 million shares of Intel common stock were
issued in connection with the purchase. In addition, Intel assumed Level One
Communications' convertible debt with a fair value of approximately $212
million. Level One Communications provides silicon connectivity solutions for
high-speed telecommunications and networking applications.
In September 1999, the company acquired privately held NetBoost Corporation in
a cash transaction. NetBoost develops and markets hardware and software
solutions for communications equipment suppliers and independent software
vendors in the networking and communications market segments.
In October 1999, the company acquired privately held IPivot, Inc. in a cash
transaction. IPivot designs and manufactures Internet commerce equipment that
manages large volumes of Internet traffic more securely and efficiently.
In November 1999, the company acquired DSP Communications, Inc. in a cash
transaction. DSP Communications is a leading supplier of solutions for digital
cellular communications products, including chipsets, reference designs,
software and other key technologies for lightweight wireless handsets.
In January 1998, the company acquired Chips and Technologies, Inc. in a cash
transaction. Chips and Technologies was a supplier of graphics accelerator chips
for mobile computing products.
In May 1998, the company purchased the semiconductor operations of Digital
Equipment Corporation. Assets acquired consisted primarily of property, plant
and equipment. Following the completion of the purchase, lawsuits between the
companies that had been pending since 1997 were dismissed with prejudice.
For 1999 and 1998, $392 million and $165 million, respectively, were allocated
to purchased in-process research and development, and expensed upon acquisition
of the above companies, because the technological feasibility of products under
development had not been established and no future alternative uses existed.
These purchase transactions are further described below:
<TABLE>
<CAPTION>
Purchased
in-process Goodwill &
research & identified Form of
(in millions) Consideration development intangibles consideration
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Shiva $ 132 $ -- $ 99 Cash and options
assumed
Softcom $ 149 $ 9 $ 139 Cash and options
assumed
Dialogic $ 732 $ 83 $ 614 Cash and options
assumed
Level One
Communications $2,137 $231 $2,007 Common stock and
options assumed
NetBoost $ 215 $ 10 $ 205 Cash and options
assumed
IPivot $ 496 $ -- $ 505 Cash and options
assumed
DSP
Communications $1,599 $ 59 $1,491 Cash and options
assumed
1998
Chips and
Technologies $ 337 $165 $ 126 Cash and options
assumed
Semiconductor
operations of
Digital $ 585 $ -- $ 32 Cash
</TABLE>
Consideration includes the cash paid, less any cash acquired; the value of
stock issued and options assumed; and excludes any debt assumed.
In addition to the transactions described above, Intel purchased other
businesses in smaller transactions. The charge for purchased in-process research
and development related to these other acquisitions was not significant. The
total amount allocated to goodwill and identified intangibles for these
transactions was $175 million, which represents a substantial majority of the
consideration for these transactions.
The consolidated financial statements include the operating results of
acquired businesses from the dates of acquisition. The operating results of
Softcom, Level One Communications and NetBoost have been included in the Network
Communications Group operating segment. The operating results of Shiva, Dialogic
and IPivot have been included in the Communications Products Group operating
segment. The operating results of DSP Communications have been included in the
Wireless Communications and Computing Group operating segment. All of these
groups are part of the "all other" category for segment reporting purposes. The
operating results of Chips and Technologies have been included in the Intel
Architecture Business Group operating segment.
Page 26
<PAGE>
The unaudited pro forma information below assumes that companies acquired in
1999 and 1998 had been acquired at the beginning of 1998 and includes the effect
of amortization of goodwill and identified intangibles from that date. The
impact of charges for purchased in-process research and development 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 1998.
<TABLE>
<CAPTION>
(in millions, except per share amounts--unaudited) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $29,894 $27,101
Net income $ 6,948 $ 5,218
Basic earnings per common share $ 2.08 $ 1.55
Diluted earnings per common share $ 1.99 $ 1.46
</TABLE>
Commitments
The company leases a portion of its capital equipment and certain of its
facilities under operating leases that expire at various dates through 2010.
Rental expense was $71 million in 1999, $64 million in 1998 and $69 million in
1997. Minimum rental commitments under all non-cancelable leases with an initial
term in excess of one year are payable as follows: 2000-$68 million; 2001-$57
million; 2002-$53 million; 2003-$41 million; 2004-$32 million; 2005 and beyond
$77 million. Commitments for construction or purchase of property, plant and
equipment approximated $2.5 billion at December 25, 1999. In connection with
certain manufacturing arrangements, Intel had minimum purchase commitments of
approximately $59 million at December 25, 1999 for flash memory.
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 the alleged state law violations. Intel has also
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. The company disputes Intergraph's remaining
antitrust and 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.
Intel has been named to the California and U.S. Superfund lists for three of
its sites and has completed, along with two other companies, a Remedial
Investigation/Feasibility study with the U.S. Environmental Protection Agency
(EPA) to evaluate the groundwater in areas adjacent to one of its former
sites. The EPA has issued a Record of Decision with respect to a groundwater
cleanup plan at that site, including expected costs to complete. Under the
California and U.S. Superfund statutes, liability for cleanup of this site and
the adjacent area is joint and several. The company, however, has reached
agreement with those same two companies which significantly limits the
company's liabilities under the proposed cleanup plan. Also, the company has
completed extensive studies at its other sites and is engaged in cleanup at
several of these sites. In the opinion of management, including internal
counsel, the potential losses to the company in excess of amounts already
accrued arising out of these matters would not have a material adverse effect
on the company's financial position or overall trends in results of
operations, even if joint and several liability were to be assessed.
The estimate of the potential impact on the company's financial position or
overall results of operations for the above legal proceedings could change in
the future.
Operating segment and geographic information
Intel designs, develops, manufactures and markets computer, networking and
communications products at various levels of integration. The company is
organized into five product-line operating segments: the Intel Architecture
Business Group, the Wireless Communications and Computing Group (formed out of
the former Computing Enhancement Group), the Communications Products Group
(formed during 1999), the Network Communications Group and the New Business
Group. Each group has a vice president who reports directly to the Chief
Executive Officer (CEO). The CEO allocates resources to each group using
information on their revenues and operating profits before interest and taxes.
The CEO has been identified as the Chief Operating Decision Maker.
Page 27
<PAGE>
The Intel Architecture Business Group's products include microprocessors and
related board-level products based on the P6 microarchitecture (including the
Pentium(R) III, Intel(R) Celeron(TM) and Pentium(R) III Xeon(TM) processors).
Sales of microprocessors and related board-level products based on the P6
microarchitecture represented a substantial majority of the company's 1999
revenues and gross margin. As a result of a reorganization during 1999, the
Intel Architecture Business Group's products also include chipsets. The Wireless
Communications and Computing Group's products are component-level hardware and
software for digital cellular communications, including flash memory, low-power
processors and digital signal processors. The Communications Products Group's
products consist of system-level hardware, software and support services for e-
Business data centers and communications access solutions. The Network
Communications Group's products include communications silicon components and
embedded control chips (formerly included in the Computing Enhancement Group)
for networking and communications applications. The New Business Group provides
e-Commerce data center services as well as products such as connected
peripherals and security access software. Intel's products in all operating
groups are sold directly to original equipment manufacturers, retail and
industrial distributors, and resellers throughout the world.
In addition to these operating segments, the sales and marketing,
manufacturing, finance and administration groups also report to the CEO.
Expenses of these groups are allocated to the operating segments and are
included in the operating results reported below. Certain corporate-level
operating expenses (primarily the amount by which profit-dependent bonus
expenses differ from a targeted level recorded by the operating segments) and
reserves for deferred income on shipments to distributors are not allocated to
operating segments and are included in "all other" in the reconciliation of
operating profits reported below.
Although the company has five operating segments, only the Intel Architecture
Business Group is a reportable segment. Intel had previously shown two
reportable segments; however, as a result of a reorganization during 1999, no
segment other than the Intel Architecture Business Group now represents 10% or
more of revenues or operating profit. Information for prior periods has been
reclassified. Intel does not identify or allocate assets by operating segment,
and does not allocate depreciation as such to the operating segments, nor does
the CEO evaluate groups on these criteria. Operating segments do not record
intersegment revenues, and, accordingly, there are none to be reported. Intel
does not allocate interest and other income, interest expense or taxes to
operating segments. The accounting policies for segment reporting are the same
as for the company as a whole (see "Accounting policies"), except that operating
segments recognize revenues upon shipment to distributors, and changes in the
reserves for deferred income on these shipments are recorded at the corporate
level only.
Information on reportable segments for the three years ended December 25, 1999
is as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEL ARCHITECTURE BUSINESS GROUP
Revenues $25,274 $23,853 $22,606
Operating profit $11,356 $ 9,413 $11,132
ALL OTHER
Revenues $ 4,115 $ 2,420 $ 2,464
Operating loss $(1,589) $(1,034) $(1,245)
TOTAL
Revenues $29,389 $26,273 $25,070
Operating profit $ 9,767 $ 8,379 $ 9,887
</TABLE>
In 1999, two customers each accounted for 13% of the company's revenues. In
1998, one customer accounted for 13% of the company's revenues and another
accounted for 11%. In 1997, one customer accounted for 12% of the company's
revenues. A substantial majority of the sales to these customers were Intel
Architecture Business Group products.
Geographic revenue information for the three years ended December 25, 1999 is
based on the location of the selling entity. Property, plant and equipment
information is based on the physical location of the assets at the end of each
of the fiscal years.
Revenues from unaffiliated customers by geographic region were as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $12,740 $11,663 $11,053
Europe 7,798 7,452 6,774
Asia-Pacific 6,704 5,309 4,754
Japan 2,147 1,849 2,489
------- ------- -------
Total revenues $29,389 $26,273 $25,070
======= ======= =======
Net property, plant and equipment by country was as follows:
(In millions) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
United States $ 8,127 $ 8,076
Ireland 1,312 1,287
Other foreign countries 2,276 2,246
------- -------
Total property, plant and equipment, net $11,715 $11,609
======= =======
</TABLE>
Supplemental information (unaudited)
Quarterly information for the two years ended December 25, 1999 is presented
on page 37.
Page 28
<PAGE>
Report of Ernst & Young LLP, independent auditors
The Board of Directors
and Stockholders, Intel Corporation
We have audited the accompanying consolidated balance sheets of Intel
Corporation as of December 25, 1999 and December 26, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 25, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Intel Corporation at December 25, 1999 and December 26, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 25, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
January 11, 2000
Page 29
<PAGE>
Management's discussion and analysis of financial condition and results of
operations
Results of operations
Intel posted record net revenues in 1999, for the 13th consecutive year,
increasing by 12% from 1998, and by 5% from 1997 to 1998. Net revenues for the
Intel Architecture Business Group operating segment increased by 6% from 1998,
and by 5.5% from 1997 to 1998. The increases for the Intel Architecture Business
Group for both periods were primarily due to higher unit volumes of
microprocessors, partially offset by lower average selling prices for
microprocessors. As a result of a change in the company's internal organization
during 1999, the Intel Architecture Business Group is the only remaining
reportable operating segment. Within the "all other" category for operating
segment reporting, revenues from sales of flash memory and networking and
communications products grew significantly from 1998 to 1999. From 1997 to 1998,
sales of flash memory and embedded products declined while networking and
communications products grew significantly.
During 1999, sales of microprocessors and related board-level products based
on the P6 microarchitecture (including the Intel(R) Celeron(TM), Pentium(R) III
and Pentium(R) III Xeon(TM) processors), which are included in the Intel
Architecture Business Group's operations, comprised a substantial majority of
Intel's consolidated net revenues and gross margin. For 1998, these represented
a majority of Intel's consolidated net revenues and a substantial majority of
gross margin. Sales of the P6 microprocessors first became a significant portion
of the company's revenues and gross margin in 1997. Sales of Pentium(R) family
processors, including Pentium(R) processors with MMX(TM) technology, were not
significant for 1999, but were a rapidly declining but still significant portion
of the company's revenues and gross margin for 1998. During 1997, sales of
Pentium family processors were a majority of the company's revenues and gross
margin.
Total cost of sales decreased by 2% from 1998 to 1999, primarily due to lower
unit costs for microprocessors in 1999 for the Intel Architecture Business Group
operating segment. These lower unit costs were partially offset by higher unit
sales volume in 1999. The lower unit costs in 1999 were achieved primarily
through redesigned microprocessor products with lower cost packaging, including
packaging using fewer purchased components, as well as factory efficiencies and
lower purchase prices on purchased components. Total cost of sales increased by
22% from 1997 to 1998, primarily due to microprocessor unit volume growth and
additional costs associated with purchased components for the Single Edge
Contact (SEC) cartridge housing the Pentium(R) II processor. The total gross
margin percentage increased to 60% in 1999 from 54% in 1998, primarily due to
lower unit costs in the Intel Architecture Business Group operating segment,
partially offset by lower average selling prices. The gross margin percentage
decreased to 54% in 1998 from 60% in 1997, primarily due to the increased costs
in the Intel Architecture Business Group related to the SEC cartridge in the
Pentium II processor and the lower average selling prices of processors in the
first half of 1998 compared to the first half of 1997. See "Outlook" for a
discussion of gross margin expectations.
Excluding charges of $392 million for purchased in-process research and
development (IPR&D) related to the current year's acquisitions and $165 million
in 1998, research and development spending increased $602 million, or 24%, from
1998 to 1999, primarily due to increased spending on product development
programs including product development of acquired companies. Research and
development spending increased 7% from 1997 to 1998, primarily due to increased
spending on development of microprocessor products. Marketing, general and
administrative expenses increased $796 million, or 26%, from 1998 to 1999,
primarily due to increases for the Intel Inside cooperative advertising program,
merchandising spending relating to new product launches and profit-dependent
bonus expenses. From 1997 to 1998, marketing, general and administrative
expenses increased $185 million, or 6%, primarily due to the Intel Inside
program and merchandising spending, partially offset by lower profit-dependent
bonus expenses.
The fair value of the IPR&D for each of the acquisitions 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 the remaining development
efforts; any alternative future use or current technological feasibility; and
the stage of completion. Future cash flows were estimated based on forecasted
revenues and costs, 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 a weighted average
Page 30
<PAGE>
cost of capital analysis, adjusted to reflect the relative risks inherent in
each entity's development process, including the probability of achieving
technological success and market acceptance. The IPR&D charge includes the fair
value of IPR&D completed. The fair value assigned to developed technology is
included in identifiable 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.
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.
The total charge for IPR&D for the Dialogic Corporation acquisition, completed
in July 1999, was approximately $83 million. Dialogic designs, manufactures and
markets computer hardware and software enabling technology for computer
telephony systems. Twelve IPR&D projects were identified and valued, with two
projects under the Springware and CT Server product groups accounting for 65% of
the value assigned to IPR&D. Springware is a line of voice and intelligent
network interface boards that provides signal processing features that can be
reconfigured by developers for special applications. The next-generation
Springware project was estimated to be approximately 60% complete, with
estimated costs to complete of $3 million and an estimated completion date of
the first quarter of 2000. The CT Server project is designed to converge voice,
media and packet communications within enterprise or public networking systems
by providing a single platform for telecommunications switching, media
processing and other communications services. The CT Server project was
estimated to be approximately 55% complete, with estimated costs to complete of
$11.5 million. The estimated completion date for the CT Server project was
originally the first quarter of 2000 but is now estimated to be the second
quarter of 2000. Dialogic's other IPR&D projects ranged from 10% to 90% complete
and averaged approximately 60% complete. Total estimated costs to complete all
other projects were $17.5 million, with expected completion dates from the third
quarter of 1999 through the third quarter of 2000. Projects expected to complete
during 1999 completed on schedule. The average discount rates used were 22% for
IPR&D projects and 14% for developed technology. Dialogic's weighted average
cost of capital was 17%.
The total charge for IPR&D for the Level One Communications, Inc. acquisition,
completed in August 1999, was approximately $231 million. Level One
Communications provides silicon connectivity, switching and access solutions for
high-speed telecommunications and networking applications. Eight IPR&D projects
were identified and valued, with each project representing from 5% to 18% of the
total IPR&D value for this acquisition. Current Level One Communications
products provide silicon connectivity, local area network (LAN) switching and
wide area network (WAN) access solutions for high-speed telecommunications and
networking applications. In-process projects include transceivers, routers and
switch chipsets using current and emerging technologies for the networking and
telecommunications markets. These projects ranged from 39% to 86% complete, with
total remaining costs to complete of $19.1 million. Expected project completion
dates ranged from the third quarter of 1999 through the third quarter of 2000,
and projects expected to complete during 1999 completed on schedule. The
discount rates used were 30% for IPR&D projects and 20% for developed
technology. Level One Communications' weighted average cost of capital was 23%.
The total charge for IPR&D for the DSP Communications,Inc. acquisition,
completed in November 1999, was approximately $59 million. DSP Communications
develops and supplies form-fit reference designs, chipsets and software for
mobile telephone manufacturers. Four IPR&D projects were identified and valued,
with each project representing from 9% to 31% of the total IPR&D value. The in-
process projects are enhancements of DSP Communications' existing digital
cellular chipsets, new third-generation chipsets and new products designed for
use in other emerging wireless personal communications services. These projects
ranged from 10% to 90% complete, with expected project completion dates from
2000 to 2003, and total remaining costs to complete of $13 million. The average
discount rates used for DSP Communications were 20% for IPR&D projects and 11%
for developed technology. DSP Communications' weighted average cost of capital
was 17%.
In the first quarter of 1998, the company purchased Chips and Technologies,
Inc. and recorded a charge for IPR&D of $165 million. Chips and Technologies
had a product line of mobile graphics controllers based on 2D and video
graphics
Page 31
<PAGE>
technologies. Their major development activities included new technologies for
embedded memory and 3D graphics. Other development projects included
improvements to the existing 2D and video technologies and several other new
business product lines. The discount rates applied were 15% for developed
technology and 20% for IPR&D projects, compared to an estimated weighted average
cost of capital of approximately 10%. Costs to complete all of the in-process
projects were estimated to be $30 million. Approximately 70% of the estimated
IPR&D was attributable to the embedded memory technology and the 3D technology
that were expected to be used together and separately in products under
development. Development of the first in a series of mobile graphics products
using the embedded memory technology was estimated to be approximately 80%
complete and was completed in August 1998. The 3D technology was at an earlier
stage of development with a minimal amount of work completed at the time of the
acquisition. Close to the time of the acquisition, Intel also began working with
another company to license their 3D technology for a line of desktop graphics
controllers. Subsequent to the acquisition, a decision was made that the mobile
and desktop product lines should have compatible 3D technologies, and further
development of the Chips and Technologies 3D technology was stopped. During
1999, Intel realigned its discrete graphics resources to focus on integrated
graphics chipsets utilizing the core technology acquired from Chips and
Technologies.
Amortization of goodwill and other acquisition-related intangibles increased
$355 million from 1998 to 1999, primarily due to the impact of acquisitions made
in 1999, including Level One Communications, Dialogic, DSP Communications and
IPivot, Inc. For 1999, a substantial majority of this amortization was included
in the calculation of the operating loss for the "all other" category for
segment reporting purposes.
Interest expense increased $2 million from 1998 to 1999 due to higher average
borrowing balances and lower interest capitalization. Interest and other income
increased $705 million from 1998 to 1999, primarily due to higher realized gains
on sales of equity investments. For 1998 compared to 1997, interest expense
increased $7 million due to higher average borrowing balances and lower interest
capitalization. Interest and other income was essentially unchanged for the same
period, with higher realized gains on sales of equity securities and higher
interest income offset by lower foreign currency gains.
The company's effective income tax rate was 34.9% in 1999, 33.6% in 1998 and
34.8% in 1997. Excluding the impact of the non-deductible charges for IPR&D and
the amortization of goodwill and other acquisition-related intangibles, the
company's effective income tax rate was approximately 33% for both 1999 and
1998. Foreign income taxed at rates different from U.S. rates contributed to the
lower tax rate in 1999 and 1998 compared to 1997, excluding the impact of
acquisitions.
Financial condition
The company's financial condition remains very strong. At December 25, 1999,
total cash, trading assets and short- and long-term investments, excluding
marketable strategic equity securities, totaled $13 billion, up from $11 billion
at December 26, 1998. Cash provided by operating activities was $11 billion in
1999, compared to $9.2 billion and $10 billion in 1998 and 1997, respectively.
The company used $5.5 billion in net cash for investing activities during
1999, compared to $6.5 billion during 1998 and $6.9 billion during 1997. Capital
expenditures totaled $3.4 billion in 1999, as the company continued to invest in
property, plant and equipment, primarily for additional microprocessor
manufacturing capacity and the transition of manufacturing technology. The
company also paid $3 billion in cash for acquisitions, net of cash acquired,
including the purchases of Shiva Corporation, Softcom Microsystems, Inc.,
Dialogic, NetBoost Corporation, IPivot and DSP Communications. In addition, the
company issued approximately 34 million shares of common stock and assumed
convertible debt valued at approximately $212 million in connection with the
purchase of Level One Communications. Sales of available-for-sale investments
provided $831 million in cash. The company also had committed approximately $2.5
billion for the purchase or construction of property, plant and equipment as of
December 25, 1999. See "Outlook" for a discussion of capital expenditure
expectations in 2000.
Inventory levels in total decreased in 1999, with raw materials, work-in-
process and finished goods inventory all contributing to the decrease. For 1999,
the impact of the increase in revenues on the accounts receivable balance was
offset by a decrease in the days sales outstanding. The company's five largest
customers accounted for approximately 44% of net revenues for 1999. Two
customers each accounted for 13% of revenues in 1999. One customer accounted for
13% of revenues and another accounted for 11% in 1998, and one customer
accounted for 12% of revenues in 1997. At December 25, 1999, the five largest
customers accounted for approximately 35% of net accounts receivable.
The company used $4.2 billion for financing activities in 1999, compared to
$4.7 billion and $3.2 billion in 1998 and 1997, respectively. The major
financing applications of cash in 1999 were for the repurchase of 71.3 million
shares of common stock for $4.6 billion and payment of dividends of $366
million. The major financing applications of cash in 1998 and 1997 were for
stock repurchases totaling $6.8 billion and $3.4 billion, respectively; payments
of dividends of $217 million and $180 million, respectively; and for 1997, a
$300 million repayment under a private reverse repurchase arrangement. Financing
sources of cash during 1999 were primarily $543 million in proceeds from the
sale of shares mainly pursuant to employee stock plans ($507 million in 1998 and
$317 million in 1997). Financing sources of cash during 1998 also included $1.6
billion in proceeds from the exercise of the 1998 step-up warrants ($40 million
in 1997).
As part of its authorized stock repurchase program, the company had
outstanding put warrants at the end of 1999, with the potential obligation to
buy back 2 million shares of its common stock at an aggregate price of $130
million. Subsequent to the year-end, these put warrants expired unexercised.
Page 32
<PAGE>
At December 25, 1999, marketable strategic equity securities totaled $7.1
billion with approximately $5.8 billion in unrealized appreciation, an increase
in total value of $5.3 billion compared to December 26, 1998 and an increase in
unrealized appreciation of approximately $4.9 billion.
Other sources of liquidity include authorized commercial paper borrowings of
$700 million. The company also maintains the ability to issue an aggregate of
approximately $1.4 billion in debt, equity and other securities under Securities
and Exchange Commission shelf registration statements.
The company believes that it has the financial resources needed to meet
business requirements for the next 12 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.
Financial market risks
The company is exposed to financial market risks, including changes in
interest rates, foreign currency exchange rates and marketable equity security
prices. To mitigate these risks, the company utilizes derivative financial
instruments. The company does not use derivative financial instruments for
speculative or trading purposes. All of the potential changes noted below are
based on sensitivity analyses performed on the company's financial positions at
December 25, 1999. Actual results may differ materially.
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 past year
and determined that it was reasonably possible that an adverse change of 60
basis points, approximately 10% of the rate at the end of 1999, could be
experienced in the near term. A hypothetical 60-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 the end of 1999 ($30 million
as of the end of 1998).
The company hedges currency risks of investments denominated in foreign
currencies with foreign currency borrowings, currency forward contracts and
currency interest rate swaps. Gains and losses on these foreign currency
investments would generally be offset by corresponding losses and gains on the
related hedging instruments, resulting in negligible net exposure to the
company.
A substantial majority of the company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the company does
enter into these transactions in other currencies, primarily Japanese yen and
certain other Asian and European currencies. To protect against reductions in
value and the volatility of future cash flows caused by changes in currency
exchange rates, the company has established revenue, expense and balance sheet
hedging programs. Currency forward contracts and currency options are utilized
in these hedging programs. The company's hedging programs reduce, but do not
always entirely eliminate, the impact of currency exchange rate movements. The
company considered the historical trends in currency exchange rates and
determined that it was reasonably possible that adverse changes in exchange
rates of 20% for certain Asian currencies and 10% for all other currencies could
be experienced in the near term. Such an adverse change would result in an
adverse impact on income before taxes of less than $20 million as of the end of
each of 1999 and 1998.
The company is exposed to equity price risks 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 December 25, 1999, five equity
positions constituted approximately 49% of the market value of the portfolio, of
which approximately $1.2 billion, or 17% of the market value of the portfolio,
consisted of an investment in Micron Technology, Inc.
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 $2.1
billion, based on the value of the portfolio as of December 25, 1999. Assuming
the same 30% adverse change as of December 26, 1998, the company's marketable
strategic equity securities would have decreased in value by approximately $525
million. The increase in the impact of the assumed adverse change from 1998 to
1999 reflects the increase in size of the portfolio, a significant portion of
which represents unrealized appreciation. 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.
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 or
acquisitions that had not closed as of the end of 1999.
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,
server platform, networking and communications, and solutions and services. The
company's five product-line operating segments support these initiatives.
Page 33
<PAGE>
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, the company is seeking to develop higher performance
microprocessors based on the P6 microarchitecture specifically for each
computing segment: the Intel Celeron processor for the value segment; Pentium
III processors for home and business applications, and for entry-level servers
and workstations; and Pentium III Xeon processors for mid-range and high-end
servers and workstations. During 2000, the company also expects to introduce
processors for high-end servers based on the IA-64 architecture, under the
Itanium(TM) brand. In addition, the client platform strategy includes providing
low-power processors and flash memory for handheld wireless devices. The Intel
Architecture Business Group operating segment supports the client and server
platform initiatives. The Wireless Communications and Computing Group supports
the handheld wireless device initiatives for the client platform.
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 may continue to
take various steps, including reducing microprocessor prices 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.
In the network and communications infrastructure area, Intel's strategy is to
deliver both system-level communications products and component-level silicon
building blocks for networking and communications systems for the home and
small- and medium-sized businesses. Intel has made acquisitions and expects to
make additional acquisitions to grow new networking and communications areas.
Initiatives in these areas are supported by the Communications Products Group
operating segment, focusing on system-level products, and the Network
Communications Group, focusing on component-level products.
Intel also intends to build new service businesses around the Internet. During
1999, the company launched Intel Online Services, which provides Web hosting and
e-Commerce services for customers. Intel intends to deliver a consistent
worldwide platform for developing and delivering e-Business solutions. The New
Business Group operating segment supports the service business initiatives.
Intel expects that the total number of computers using Intel's P6
microarchitecture processors and other semiconductor components sold worldwide
will continue to grow in 2000. In addition, Intel expects to grow revenues in
the networking, communications and wireless businesses by 50% or more in 2000.
However, the company's financial results are substantially dependent on sales of
microprocessors and related components by the Intel Architecture Business Group.
Revenues are also a function of the mix of microprocessor types and speeds sold
as well as the mix of related 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 that Intel will realize and has a large impact on Intel's
revenues. The company's expectations regarding growth in the computing industry
worldwide are dependent in part on the growth in usage of the Internet and the
expansion of Internet product offerings. The expectations are also subject to
the impact of economic conditions in various geographic regions.
Intel's expectations regarding growth in the networking, communications and
wireless areas, as well as in new service businesses, are subject to the
company's ability to acquire businesses as well as to integrate and operate them
successfully, and to grow new businesses internally.
Intel's current gross margin expectation for 2000 is 61% plus or minus a few
points compared to 60% for 1999. The company's gross margin 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. The company
has been implementing new packaging formats that have reduced costs on certain
microprocessor products, and this is expected to be the primary driver of cost
reductions for 2000 as the transition to the new packaging formats continues.
The company also expects to have reduced costs due to continued productivity
improvements on its existing manufacturing processes, including the new 0.18-
micron manufacturing process. Various other factors--including unit volumes,
yield issues associated with production at factories, ramp of new technologies,
the reusability of factory equipment, excess or obsolete inventory, 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. In addition,
from time to time the company may forecast a range of gross margin percentages
for the coming quarter. Actual results may differ from these estimates.
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 as well as the acceptance of its
products in specific market segments. The company expects that capital spending
will increase to approximately $5 billion in 2000 from $3.4 billion in 1999. The
increase is primarily a result of expected spending related to the
Page 34
<PAGE>
development of next-generation 0.13-micron process technology for both 300
millimeter and 200 millimeter manufacturing, in addition to increased spending
on new fabrication facility construction and equipment purchases to add 0.18-
micron capacity. If the market demand does not continue to grow and move rapidly
toward higher performance products in the various market segments, revenues and
gross margin may be affected, the capacity installed might be under-utilized and
capital spending may be slowed. Revenues and gross margin may also be affected
if the company does not add capacity fast enough to meet market demand. 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 2000 is expected to be
approximately $3.4 billion, an increase of approximately $200 million from 1999.
Most of this increase would be included in cost of sales and research and
development spending. Amortization of goodwill and other acquisition-related
intangibles is expected to be approximately $1.2 billion for 2000.
The industry in which Intel operates is characterized by very short product
life cycles, and the company's continued success is dependent on technological
advances, including the development and implementation of new processes and new
strategic products for specific market segments. Because Intel considers it
imperative to maintain a strong research and development program, spending for
research and development in 2000, excluding in-process research and development,
is expected to increase to approximately $3.8 billion from $3.1 billion in 1999.
The higher spending is driven primarily by the full-year impact of acquisitions
and investments in new businesses as well as increased investment in Intel
architecture-related businesses. The company intends to continue spending to
promote its products and to increase the value of its product brands. Based on
current forecasts, spending for marketing, general and administrative expenses
is also expected to increase in 2000.
The company currently expects its tax rate to be 31.7% for 2000, excluding the
impact of costs related to prior and any future acquisitions. This estimate is
based on current tax law, the current estimate of earnings and the expected
distribution of income among various tax jurisdictions, and is subject to
change.
During 1998, Intel established a team to address the issues raised by the
introduction of the Single European Currency, the Euro, on January 1, 1999. The
team is continuing to work on the conversion issues during the transition period
through January 1, 2002. Intel's internal systems that were affected by the
initial introduction of the Euro were made Euro capable without material system
modification costs. Further internal systems changes are being made during the
three-year transition phase in preparation for the ending of bilateral rates in
January 2002 and the ultimate withdrawal of the legacy currencies in July 2002.
The costs of these changes are not expected to be material. The introduction of
the Euro has not materially affected the company's foreign exchange and hedging
activities, or the company's use of derivative instruments, and is not expected
to result in any material increase in costs to the company. While Intel will
continue to evaluate the impact of the ongoing Euro conversion over time, based
on currently available information, management does not believe that the Euro
conversion will have a material adverse impact on the company's financial
condition or overall trends in results of operations.
Intel established a comprehensive program to deal with issues related to the
year 2000 computer programming problem. By the end of 1999, all of the company's
internal systems categorized as critical, priority or important were determined
to be year 2000 capable. To date, there have been no material problems caused by
year 2000 issues related to the company's internal systems or non-performance of
suppliers.
Intel also established a program to assess the year 2000 capability of its
products. The definition of "Year 2000 Capable" is available on Intel's Web
site. To assist customers in evaluating their year 2000 issues, the company
developed a Web-enabled database indicating the capability of Intel's current
branded products and certain branded products no longer being produced. The
capabilities of certain non-Intel branded products of certain subsidiaries are
posted on the Web sites of those entities.
All Intel processors and microcontrollers (embedded processors) are Year 2000
Capable, with the exception of two custom microcontroller products sold to a
limited number of customers. However, the ability of a complete system to
operate correctly depends on firmware (BIOS) capability and software design and
integration, which for many end users includes firmware and software provided by
companies other than Intel.
Except as specifically provided in the limited warranties offered on certain
of its current and some discontinued products, the company does not believe it
is legally responsible for costs incurred by customers to ensure their year 2000
capability. Nevertheless, the company has incurred various costs to provide
customer support and customer satisfaction services regarding year 2000 issues.
The company currently expects that the total cost of these programs will be
approximately $100 million. Approximately $96 million has been spent on the
programs to date, of which approximately $54 million was incurred in 1999. Costs
include estimated payroll costs for redeployed personnel and the costs of
consultants, software and hardware upgrades, and dedicated program offices.
No significant internal systems projects were deferred due to year 2000
program efforts. The installation schedule of certain new software and hardware
was accelerated to solve year 2000 capability issues, for which related costs
were estimated to be an additional amount of approximately $15 million. These
estimated costs do not include any potential costs related to customer or other
claims.
Based on currently available information, management does not believe that the
year 2000 matters discussed above will have a material adverse impact on the
company's financial condition or overall trends in results of operations.
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<PAGE>
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 investment balances, that even an
adverse judgment would not have a material impact on cash and investments or
liquidity.
The company's future results of operations and the other forward-looking
statements contained in this outlook--in particular the statements regarding
expected product introductions, expectations regarding additional acquisitions,
intentions regarding building new service businesses around the Internet, the
number of computers using Intel processors, gross margin and cost savings,
capital spending, depreciation and amortization, research and development,
marketing and general and administrative expenses, the tax rate, the conversion
to the Euro, the year 2000 issue 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: changes in end user demand due to usage of the Internet; 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; pricing pressures;
development and timing of the introduction of compelling software applications;
execution of the manufacturing ramp, including the transition to the 0.18-micron
process technology; the ability to grow new networking, communications, wireless
and other Internet-related businesses and successfully integrate and operate any
acquired businesses; unanticipated costs or other adverse effects associated
with processors and other products containing errata (deviations from published
specifications); impact on the company's business by year 2000 problems and
claims; 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
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.
Page 36
<PAGE>
Financial information by quarter (unaudited)
(In millions-except per share amounts)
<TABLE>
<CAPTION>
1999 for quarter ended December 25 September 25 June 26 March 27
- -------------------------- ---------- ----------- ------ -------
<S> <C> <C> <C> <C>
Net revenues $8,212 $7,328 $6,746 $7,103
Cost of sales $3,176 $3,026 $2,740 $2,894
Net income/A/ $2,108 $1,458 $1,749 $1,999
Basic earnings per share $ .63 $ .44 $ .53 $ .60
Diluted earnings per share $ .61 $ .42 $ .51 $ .57
Dividends per share/B/ Declared $ - $ .060 $ - $ .050
Paid $ .030 $ .030 $ .030 $ .020
Market price range common stock/C/ High $83.13 $89.31 $66.06 $70.47
Low $65.13 $57.00 $50.50 $54.91
</TABLE>
(In millions-except per share amounts)
<TABLE>
<CAPTION>
1998 for quarter ended December 26 September 26 June 27 March 28
- -------------------------- ---------- ----------- ------ -------
<S> <C> <C> <C> <C>
Net revenues $7,614 $6,731 $5,927 $6,001
Cost of sales/D/ $3,160 $3,176 $3,012 $2,740
Net income/A/ $2,064 $1,559 $1,172 $1,273
Basic earnings per share $ .62 $ .46 $ .35 $ .39
Diluted earnings per share $ .59 $ .44 $ .33 $ .36
Dividends per share/B/ Declared $ - $ .035 $ - $ .015
Paid $ .020 $ .015 $ .015 $ .015
Market price range common stock/C/ High $62.50 $45.72 $42.41 $47.09
Low $39.22 $35.59 $32.97 $35.13
Market price range step-up warrants/C/ High $ - $ - $ - $36.56
Low $ - $ - $ - $24.73
</TABLE>
/A/ Net income for the third and fourth quarters of 1999 reflects charges of
$333 million and $59 million, respectively, for purchased in-process
research and development related to acquisitions. Net income for the first
quarter of 1998 reflects a similar charge of $165 million.
/B/ As of the second quarter of 1998, the company had adopted a new dividend
declaration schedule which results in the Board of Directors considering two
dividend declarations in the first and third quarters of the year and no
declarations in the second and fourth quarters. A dividend was paid in each
quarter of 1999 and 1998.
/C/ Intel's common stock (symbol INTC) trades on The Nasdaq Stock Market* and is
quoted in the Wall Street Journal and other newspapers. Intel's 1998 step-up
warrants traded on The Nasdaq Stock Market prior to their March 1998
expiration. Intel's common stock also trades on The Swiss Exchange. At
December 25, 1999, there were approximately 238,000 registered holders of
common stock. All stock and warrant prices are closing prices per The Nasdaq
Stock Market, as adjusted for stock splits.
/D/ Cost of sales for 1998 reflects the reclassification of amortization of
goodwill and other acquisition-related intangibles to a separate line item.
* All other brands and names are the property of their respective owners.
Page 37
<PAGE>
GRAPHICS APPENDIX LIST*
FOR PAGES 30 AND 31
* In this Appendix, the following descriptions of graphs on pages 30 and 31 of
the Company's 1999 Annual Report to Stockholders that are omitted from the
EDGAR text are more specific with respect to the actual amounts and percentages
than can be determined from the graphs themselves.
The Company submits such more specific descriptions only for the purpose of
complying with EDGAR requirements for transmitting this Annual Report on Form
10-K; such more specific descriptions are not intended in any way to provide
information that is additional to that otherwise provided in the 1999 Annual
Report to Stockholders.
<TABLE>
<CAPTION>
REVENUES AND INCOME
(Dollars in billions) 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues 25.1 26.3 29.4
Net income 6.9 6.1 7.3
COSTS AND EXPENSES
(Percent of revenues) 1997 1998 1999
---- ---- ----
Cost of sales 40% 46% 40%
R&D 9% 9% 11%
Marketing and G&A 12% 12% 13%
Acquisition-related costs 0% 1% 3%
(Total) 61% 68% 67%
OTHER INCOME AND EXPENSE
(Dollars in millions) 1997 1998 1999
---- ---- ----
Interest income & other 799 792 1,497
Interest expense 27 34 36
CASH AND INVESTMENTS
(Dollars in billions) 1998 1999
---- -----
Cash & cash equivalents 2.0 3.7
Short-term investments 5.3 7.7
Marketable strategic equity securities 1.8 7.1
Other long-term investments 3.6 0.8
</TABLE>
<PAGE>
EXHIBIT 21
INTEL CORPORATION
SUBSIDIARIES
(All 100% Owned)
<TABLE>
<CAPTION>
Subsidiaries of the Registrant State or other Jurisdiction of Incorporation
- ----------------------------- ---------------------------------------------
<S> <C>
Componentes Intel de Costa Rica, S.A. Costa Rica
DSP Communications, Inc. Delaware, USA
Dialogic Corporation New Jersey, USA
Intel Commodities Limited Cayman
Intel Corporation (UK) Limited United Kingdom
Intel Electronics Limited Israel
Intel International BV Netherlands
Intel Ireland Limited Cayman
Intel Kabushiki Kaisha Japan
Intel Massachusetts, Inc. Delaware, USA
Intel Overseas Corporation California, USA
Intel Products (M) Sdn. Bhd. Malaysia
Intel Puerto Rico, Inc California, USA
Intel Semiconductor Limited Delaware, USA
Intel Technology Phils, Inc. Philippines
Intel Technology Sdn. Berhad Malaysia
IPivot, Inc. Delaware, USA
Level One Communications, Inc. Delaware, USA
Mission College Investments Limited Cayman
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Intel Corporation of our report dated January 11, 2000, included in the
1999 Annual report to Stockholders of Intel Corporation.
Our audits also include the financial statement schedule of Intel Corporation
listed in Item 14(a). This schedule is the responsibility of the company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-10392, 2-73464, 2-56648, 33-33983, 2-90217, 33-
29672, 33-41771, 33-63489, 333-20951, 333-24229, 333-45391, 333-45395, 333-
67537, 333-93057, 333-90807, 333-77279, 333-75163, 333-82387, 333-84247, 333-
88251, 333-96255; and Form S-3 Nos. 33-20117, 33-54220, 33-58964, and 33-
56107) of our report dated January 11, 2000, with respect to the financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of Intel Corporation.
/s/ Ernst & Young LLP
San Jose, California
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM INTEL CORPORATION'S
CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> DEC-25-1999
<CASH> 3695
<SECURITIES> 8093
<RECEIVABLES> 3767
<ALLOWANCES> 67
<INVENTORY> 1478
<CURRENT-ASSETS> 17819
<PP&E> 23557
<DEPRECIATION> 11842
<TOTAL-ASSETS> 43849
<CURRENT-LIABILITIES> 7099
<BONDS> 955
130<F2>
0
<COMMON> 7316
<OTHER-SE> 25219
<TOTAL-LIABILITY-AND-EQUITY> 43849
<SALES> 29389
<TOTAL-REVENUES> 29389
<CGS> 11836
<TOTAL-COSTS> 11836
<OTHER-EXPENSES> 3914<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 11228
<INCOME-TAX> 3914
<INCOME-CONTINUING> 7314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7314
<EPS-BASIC> 2.20
<EPS-DILUTED> 2.11
<FN>
<F2>ITEM CONSISTS OF PUT WARRANTS.
<F1>ITEM CONSISTS OF RESEARCH AND DEVELOPMENT, INCLUDING PURCHASED IN-PROCESS
RESEARCH AND DEVELOPMENT, AND AMORTIZATION OF GOODWILL AND OTHER
ACQUISITION-RELATED INTANGIBLES.
</FN>
</TABLE>
