EXHIBIT 13
Intel Corporation 1998
Page 13
FINANCIAL SUMMARY
Ten Years Ended December 26, 1998
Net investment Additions to
Employees in property, Long-term Stock- property,
(In millions -- at Year-end (in plant & debt & put holders' plant &
except employees) thousands) equipment Total assets warrants equity equipment *
--------------- --------------- ------------ ----------- ----------- ----------- ------------
1998 64.5 $11,609 $31,471 $ 903 $23,377 $ 4,032
1997 63.7 $10,666 $28,880 $ 2,489 $19,295 $ 4,501
1996 48.5 $ 8,487 $23,735 $ 1,003 $16,872 $ 3,024
1995 41.6 $ 7,471 $17,504 $ 1,125 $12,140 $ 3,550
1994 32.6 $ 5,367 $13,816 $ 1,136 $ 9,267 $ 2,441
1993 29.5 $ 3,996 $11,344 $ 1,114 $ 7,500 $ 1,933
1992 25.8 $ 2,816 $ 8,089 $ 622 $ 5,445 $ 1,228
1991 24.6 $ 2,163 $ 6,292 $ 503 $ 4,418 $ 948
1990 23.9 $ 1,658 $ 5,376 $ 345 $ 3,592 $ 680
1989 21.7 $ 1,284 $ 3,994 $ 412 $ 2,549 $ 422
(in millions--except per share amounts)
Weighted
Basic average
Research earnings Diluted Dividends Dividends diluted
Net Cost of & devel- Operating Net per earnings declared paid shares
revenues sales opment income income share per share per share per share outstanding
- ---- ------- ------- ------- ------- ------- ------- ------- ------- -------- ----------
1998 $26,273 $12,144 $ 2,674 $ 8,379 $ 6,068 $1.82 $1.73 $ .050 $ .065 3,517
1997 $25,070 $ 9,945 $ 2,347 $ 9,887 $ 6,945 $2.12 $1.93 $ .058 $ .055 3,590
1996 $20,847 $ 9,164 $ 1,808 $ 7,553 $ 5,157 $1.57 $1.45 $ .048 $ .045 3,551
1995 $16,202 $ 7,811 $ 1,296 $ 5,252 $ 3,566 $1.08 $1.01 $ .038 $ .035 3,536
1994 $11,521 $ 5,576 $ 1,111 $ 3,387 $ 2,288 $ .69 $ .65 $ .029 $ .028 3,496
1993 $ 8,782 $ 3,252 $ 970 $ 3,392 $ 2,295 $ .69 $ .65 $ .025 $ .025 3,528
1992 $ 5,844 $ 2,557 $ 780 $ 1,490 $ 1,067 $ .32 $ .31 $ .013 $ .006 3,436
1991 $ 4,779 $ 2,316 $ 618 $ 1,080 $ 819 $ .25 $ .24 -- -- 3,344
1990 $ 3,921 $ 1,930 $ 517 $ 858 $ 650 $ .21 $ .20 -- -- 3,247
1989 $ 3,127 $ 1,721 $ 365 $ 557 $ 391 $ .13 $ .13 -- -- 3,020
Share and per share amounts shown have been adjusted for stock splits through
April 1999, including the stock split declared in January 1999.
* Additions to property, plant and equipment in 1998 included $475 million for
capital assets acquired from Digital Equipment Corporation.
Page 14
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 26, 1998
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
1998 1997 1996
------- ------- -------
NET REVENUES $26,273 $25,070 $20,847
------- ------- -------
Cost of sales 12,144 9,945 9,164
Research and development 2,509 2,347 1,808
Marketing, general and administrative 3,076 2,891 2,322
Purchased in-process research and
development 165 - -
------- ------- -------
Operating costs and expenses 17,894 15,183 13,294
------- ------- -------
OPERATING INCOME 8,379 9,887 7,553
Interest expense (34) (27) (25)
Interest income and other, net 792 799 406
------- ------- -------
INCOME BEFORE TAXES 9,137 10,659 7,934
Provision for taxes 3,069 3,714 2,777
------- ------- -------
NET INCOME $ 6,068 $ 6,945 $ 5,157
======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 1.82 $ 2.12 $ 1.57
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE $ 1.73 $1.93 $1.45
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,336 3,271 3,290
Dilutive effect of:
Employee stock options 159 204 187
1998 Step-Up Warrants 22 115 74
------- ------- -------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 3,517 3,590 3,551
======= ======= =======
SEE ACCOMPANYING NOTES.
Page 15
CONSOLIDATED BALANCE SHEETS
DECEMBER 26, 1998 AND DECEMBER 27, 1997
(IN MILLIONS--EXCEPT PER SHARE AMOUNTS)
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 2,038 $ 4,102
Short-term investments 5,272 5,630
Trading assets 316 195
Accounts receivable, net of allowance for
doubtful accounts of $62 ($65 in 1997) 3,527 3,438
Inventories 1,582 1,697
Deferred tax assets 618 676
Other current assets 122 129
------- -------
TOTAL CURRENT ASSETS 13,475 15,867
------- -------
Property, plant and equipment:
Land and buildings 6,297 5,113
Machinery and equipment 13,149 10,577
Construction in progress 1,622 2,437
------- -------
21,068 18,127
Less accumulated depreciation 9,459 7,461
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 11,609 10,666
------- -------
LONG-TERM INVESTMENTS 5,365 1,839
OTHER ASSETS 1,022 508
------- -------
TOTAL ASSETS $31,471 $28,880
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 159 $ 212
Long-term debt redeemable within one year - 110
Accounts payable 1,244 1,407
Accrued compensation and benefits 1,285 1,268
Deferred income on shipments to distributors 606 516
Accrued advertising 458 500
Other accrued liabilities 1,094 842
Income taxes payable 958 1,165
------- -------
TOTAL CURRENT LIABILITIES 5,804 6,020
------- -------
LONG-TERM DEBT 702 448
DEFERRED TAX LIABILITIES 1,387 1,076
PUT WARRANTS 201 2,041
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred Stock, $.001 par value, 50 shares
authorized; none issued -- --
Common Stock, $.001 par value, 4,500 shares
authorized; 3,315 issued and outstanding (3,256
in 1997) and capital in excess of par value 4,822 3,311
Retained earnings 17,952 15,926
Accumulated other comprehensive income 603 58
------- -------
TOTAL STOCKHOLDERS' EQUITY 23,377 19,295
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,471 $28,880
======= =======
SEE ACCOMPANYING NOTES.
Page 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 26, 1998
(IN MILLIONS)
1998 1997 1996
------- ------- ------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR $ 4,102 $ 4,165 $ 1,463
Cash flows provided by (used for)
operating activities:
Net income 6,068 6,945 5,157
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation 2,807 2,192 1,888
Net loss on retirements of
property, plant and equipment 282 130 120
Deferred taxes 77 6 179
Purchased in-process research and
development 165 -- --
Changes in assets and liabilities:
Accounts receivable (38) 285 (607)
Inventories 167 (404) 711
Accounts payable (180) 438 105
Accrued compensation and benefits 17 140 370
Income taxes payable (211) 179 185
Tax benefit from employee stock
plans 415 224 196
Other assets and liabilities (378) (127) 439
------- ------- -------
Total adjustments 3,123 3,063 3,586
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,191 10,008 8,743
------- ------- -------
Cash flows provided by (used for) investing activities:
Additions to property, plant and
equipment (3,557) (4,501) (3,024)
Purchase of Chips and Technologies,
Inc., net of cash acquired (321) -- --
Purchase of Digital Equipment
Corporation semiconductor
operations (585) -- --
Purchases of available-for-sale
investments (10,925) (9,224) (4,683)
Sales of available-for-sale
investments 201 153 225
Maturities and other changes in
available-for-sale investments 8,681 6,713 2,214
------- ------- -------
NET CASH (USED FOR) INVESTING ACTIVITIES (6,506) (6,859) (5,268)
------- ------- -------
Cash flows provided by (used for)
financing activities:
(Decrease) increase in short-term
debt, net (83) (177) 43
Additions to long-term debt 169 172 317
Retirement of long-term debt -- (300) --
Proceeds from sales of shares through
employee stock plans and other 507 317 257
Proceeds from exercise of 1998
Step-Up Warrants 1,620 40 4
Proceeds from sales of put warrants 40 288 56
Repurchase and retirement of
Common Stock (6,785) (3,372) (1,302)
Payment of dividends to
stockholders (217) (180) (148)
------- ------- -------
NET CASH (USED FOR) FINANCING ACTIVITIES (4,749) (3,212) (773)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,064) (63) 2,702
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,038 $ 4,102 $ 4,165
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 40 $ 37 $ 51
Income taxes $2,784 $ 3,305 $ 2,217
SEE ACCOMPANYING NOTES.
Page 17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
AND CAPITAL IN EXCESS
THREE YEARS ENDED DECEMBER 26, 1998 OF PAR VALUE
(IN MILLIONS - EXCEPT PER SHARE AMOUNTS) ------------------
ACCUMULATED OTHER
NUMBER OF RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME TOTAL
------- ------- ------- ----------- --------
BALANCE AT DECEMBER 30, 1995 3,286 $ 2,583 $ 9,505 $ 52 $ 12,140
Components of comprehensive income:
Net income -- -- 5,157 -- 5,157
Change in unrealized gain on
available-for-sale investments -- -- - 70 70
-------
Total comprehensive income 5,227
-------
Proceeds from sales of shares
through employee stock plans, tax
benefit of $196 and other 65 457 -- -- 457
Proceeds from sales of put warrants -- 56 -- -- 56
Reclassification of put warrant
obligation, net -- 70 272 -- 342
Repurchase and retirement of
Common Stock (68) (269) (925) -- (1,194)
Cash dividends declared
($.048 per share) -- -- (156) -- (156)
------- ------- ------- ------- -------
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 -- -- -- (64) (64)
-------
Total comprehensive income 6,881
-------
Proceeds from sales of shares through
employee stock plans, tax benefit of
$224 and other 61 581 (1) -- 580
Proceeds from sales of put warrants -- 288 -- -- 288
Reclassification of put warrant
obligation, net -- (144) (1,622) -- (1,766)
Repurchase and retirement of
Common Stock (88) (311) (3,061) -- (3,372)
Cash dividends declared
($.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 -- -- -- 545 545
-------
Total comprehensive income 6,613
-------
Proceeds from sales of shares
through employee stock plans,
tax benefit of $415 and other 66 922 -- -- 922
Proceeds from exercise of 1998
Step-Up Warrants 155 1,620 -- -- 1,620
Proceeds from sales of put warrants -- 40 -- -- 40
Reclassification of put warrant
obligation, net -- 53 588 -- 641
Repurchase and retirement of
Common Stock (162) (1,124) (4,462) -- (5,586)
Cash dividends declared
($.050 per share) -- -- (168) -- (168)
------- ------- ------- ------- -------
BALANCE AT DECEMBER 26, 1998 3,315 $ 4,822 $17,952 $ 603 $23,377
======= ======= ======= ======= =======
SEE ACCOMPANYING NOTES.
Page 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting policies
Fiscal year. Intel Corporation ("Intel" or "the Company") has a fiscal year
that ends the last Saturday in December. Fiscal years 1998, 1997 and 1996, each
52-week years, ended on December 26, 27 and 28, 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 investments with insignificant interest rate risk
and with original maturities of three months or less are classified as cash and
cash equivalents. Investments with maturities greater than three months and less
than one year are classified as short-term investments. Investments with
maturities greater than one year are classified as long-term investments.
The Company's policy is to protect the value of its 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. 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.
Investments in non-marketable instruments are recorded at the lower of cost or
market and included in other assets.
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
securities 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 $66 million, $37
million and $12 million in 1998, 1997 and 1996, respectively.
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 long-term investments, long-term debt, short-term investments,
short-term debt, long-term debt redeemable within one year, trading assets,
non-marketable instruments, swaps, currency forward contracts, currency options
and options hedging marketable instruments are based on quoted market prices or
pricing models using current market rates. No consideration is given to
liquidity issues in valuing debt.
Derivative financial instruments. The Company utilizes derivative financial
instruments to reduce financial market risks. These instruments are used to
hedge foreign currency, equity and interest rate 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.
Page 19
Inventories. Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard 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) 1998 1997
- ------------------------------------------------------------------------------
Raw materials $ 206 $ 255
Work in process 795 928
Finished goods 581 514
------- -------
TOTAL $1,582 $1,697
======= =======
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.
Deferred income on shipments to distributors. 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 such sales 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 $1.3
billion, $1.2 billion and $974 million in 1998, 1997 and 1996, 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 $6 million, $9
million and $33 million for 1998, 1997 and 1996, respectively.
Earnings per share. Basic earnings per common share are computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share incorporate the incremental shares issuable upon the
assumed exercise of stock options and warrants. For portions of 1998, 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.
Stock distribution. On January 27, 1999, the Company announced a two-for-one
stock split in the form of a special stock distribution payable April 11, 1999
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 1998 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 2000. The Standard will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings, or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The change in a derivative's fair value related to the
ineffective portion of a hedge, if any, will be immediately recognized in
earnings. 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
1998 Step-Up Warrants. In 1993, the Company issued 160 million 1998 Step-Up
Warrants to purchase 160 million shares of Common Stock. This transaction
resulted in an increase of $287 million in Common Stock and capital in excess of
par value, representing net proceeds from the offering. The Warrants became
exercisable in May 1993 at an effective price of $8.9375 per share of Common
Stock, subject to annual increases to a maximum price of $10.4375 per share
effective in March 1997. 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.
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 1998, the
Company repurchased 161.7 million shares of Common Stock at a cost of $6.8
billion. As of December 26, 1998, the Company had repurchased and retired
approximately 588.6 million shares at a cost of $13.6 billion since the program
began in 1990. As of December 26, 1998, after allowing for 5 million shares to
cover outstanding put warrants, 166.4 million shares remained available under
the repurchase authorization.
Page 20
Put warrants
In a series of private placements from 1991 through 1998, 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:
PUT WARRANTS
OUTSTANDING
-----------------------------
CUMULATIVE
NET
PREMIUM NUMBER OF POTENTIAL
(IN MILLIONS) RECEIVED WARRANTS OBLIGATION
- -------------------------------------------------------------------------------------------------------------
DECEMBER 30, 1995 $ 279 48.0 $ 725
Sales 56 36.0 603
Exercises -- (7.2) (108)
Expirations -- (58.8) (945)
--------- --------- ---------
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
========= ========= =========
The amount related to Intel's potential repurchase obligation has been
reclassified from stockholders' equity to put warrants. The 5 million put
warrants outstanding at December 26, 1998 expire on various dates in January and
February 1999 and have exercise prices ranging from $40 to $41 per share, with
an average exercise price of $40 per share. There is no significant effect on
diluted earnings per share for the periods presented.
Borrowings
Short-term debt. Non-interest-bearing short-term debt at fiscal year-ends was
as follows:
(IN MILLIONS) 1998 1997
- --------------------------------------------------------------------------------
Borrowed under
lines of credit $ 10 $ 32
Drafts payable 149 180
------- -------
TOTAL $ 159 $ 212
====== =======
The Company also borrows under commercial paper programs. Maximum borrowings
under commercial paper programs reached $325 million during 1998 and $175
million during 1997. This debt is rated A-1+ by Standard and Poor's and P-1 by
Moody's. Proceeds are used to fund short-term working capital needs.
Long-term debt. Long-term debt at fiscal year-ends was as follows:
(IN MILLIONS) 1998 1997
- ----------------------------------------------------------------------------------
Payable in U.S. dollars:
AFICA Bonds due 2013 at 3.9%-4.25% $110 $110
Other U.S. dollar debt 5 6
Payable in other currencies:
Irish punt due 2000-2027 at 5%-12% 541 396
Greek drachma due 2001 46 46
------ ------
Subtotal 702 558
Less long-term debt redeemable within one year - (110)
------ ------
TOTAL $702 $448
====== ======
The Company has guaranteed repayment of principal and interest on the AFICA
Bonds issued by the Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority ("AFICA"). During 1998, the
bonds were repriced and a portion remarketed, with interest rates effective
through 2003 of 4.25% on the $80 million of Series A bonds and 3.90% on the $30
million of Series B bonds. 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. The additional and the existing 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. The Greek drachma borrowings were made under a tax
incentive program in Ireland, and the proceeds and cash flows have been swapped
to U.S. dollars.
Under shelf registration statements filed with the Securities and Exchange
Commission, Intel had the authority to issue up to $3.3 billion in the aggregate
of Common Stock, Preferred 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. In 1993, Intel completed an offering of
Step-Up Warrants (see "1998 Step-Up Warrants") under these registration
statements. The Company may issue up to $1.4 billion in additional securities
under effective registration statements.
As of December 26, 1998, aggregate debt maturities were as follows:
2000-$9 million; 2001-$57 million; 2002-$22 million; 2003-$130 million; and
thereafter-$484 million.
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
Page 21
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
26, 1998, investments were placed with approximately 185 different
counterparties.
Investments at December 26, 1998 were as follows:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
(IN MILLIONS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
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
SECURITIES 11,560 1,063 (136) 12,487
Less amounts classified
as cash equivalents (1,850) -- -- (1,850)
-------- -------- -------- --------
TOTAL INVESTMENTS $9,710 $1,063 $ (136) $10,637
======== ======== ======== ========
Investments at December 27, 1997 were as follows:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
Commercial paper $3,572 $ 1 $(9) $3,564
Bank time deposits 2,369 -- (2) 2,367
Corporate bonds 1,788 12 (73) 1,727
Floating rate notes 843 1 (2) 842
Loan participations 743 -- -- 743
Repurchase agreements 515 -- -- 515
Securities of foreign
governments 75 -- (6) 69
Fixed rate notes 32 -- -- 32
Other debt securities 294 -- (1) 293
-------- -------- -------- --------
Total debt securities 10,231 14 (93) 10,152
-------- -------- -------- --------
Hedged equity 504 9 (17) 496
Marketable strategic equity securities 279 130 (34) 375
Preferred stock and other
equity 341 1 (7) 335
-------- -------- -------- --------
Total equity securities 1,124 140 (58) 1,206
-------- -------- -------- --------
Swaps hedging investments
in debt securities -- 76 (12) 64
Swaps hedging investments
in equity securities -- 17 (9) 8
Currency forward contracts
hedging investments in
debt securities -- 16 (1) 15
-------- -------- -------- --------
TOTAL AVAILABLE-FOR-SALE
SECURITIES 11,355 263 (173) 11,445
Less amounts classified
as cash equivalents (3,976) -- -- (3,976)
-------- -------- -------- --------
TOTAL INVESTMENTS $7,379 $263 $ (173) $7,469
======== ======== ======== ========
Available-for-sale securities with a fair value at the date of sale of $227
million, $153 million and $225 million were sold in 1998, 1997 and 1996,
respectively. The gross realized gains on these sales totaled $185 million, $106
million and $7 million, respectively.
The amortized cost and estimated fair value of investments in debt securities
at December 26, 1998, by contractual maturity, were as follows:
ESTIMATED
FAIR
(IN MILLIONS) COST VALUE
- -----------------------------------------------------------------------------------------------------------
Due in 1 year or less $6,412 $6,436
Due in 1-2 years 3,097 3,099
Due in 2-5 years 65 65
Due after 5 years 450 450
-------- --------
TOTAL INVESTMENTS IN DEBT SECURITIES $10,024 $10,050
======== ========
Page 22
Derivative financial instruments
Outstanding notional amounts for derivative financial instruments at fiscal
year-ends were as follows:
(IN MILLIONS) 1998 1997
- -----------------------------------------------------------------------------------------------------------
Swaps hedging investments in debt securities $2,526 $2,017
Swaps hedging investments in equity securities $ 100 $ 604
Swaps hedging debt $ 156 $ 156
Currency forward contracts $ 830 $1,724
Currency options $ -- $ 55
Options creating synthetic money
market instruments $2,086 $ --
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 the counterparties'
obligations exceed the obligations of the Company. 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 26, 1998 were as follows:
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE RECEIVE AVERAGE RANGE OF
PAY RATE RATE MATURITY MATURITIES
- ------------------------------------------------------------------------------------------------------------------
Swaps hedging
investments
in U.S. dollar
debt securities 5.4% 5.1% 0.5 years 0-2 years
Swaps hedging
investments
in foreign currency
debt securities 5.5% 5.5% 0.7 years 0-2 years
Swaps hedging
investments in
equity securities N/A 5.8% 1.0 years 0-1 years
Swaps hedging debt 5.6% 5.7% 4.1 years 2-5 years
Note: Pay and receive rates are based on the reset rates that were in effect
at December 26, 1998.
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 pro-grams 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:
1998 1997
---------------------------------- -------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(IN MILLIONS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------
Cash and
cash equivalents $2,038 $2,038 $4,102 $4,102
Short-term investments $4,821 $4,821 $5,561 $5,561
Trading assets $ 316 $ 316 $ 195 $ 195
Long-term investments $5,375 $5,375 $1,821 $1,821
Non-marketable
instruments $ 571 $ 716 $ 387 $ 497
Options creating synthetic money
market instruments $ 474 $ 474 $ -- $ --
Swaps hedging
investments in
debt securities $ (33) $ (33) $ 64 $ 64
Swaps hedging
investments in
equity securities $ 2 $ 2 $ 8 $ 8
Short-term debt $ (159) $ (159) $(212) $(212)
Long-term debt
redeemable within one year $ -- $ -- $(110) $(109)
Long-term debt $ (702) $ (696) $(448) $(448)
Swaps hedging debt $ -- $ 1 $ -- $ (1)
Currency forward
contracts $ (1) $ (1) $ 26 $ 28
Currency options $ -- $ -- $ 1 $ 1
Page 23
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 42% of net revenues
for 1998. At December 26, 1998, these customers accounted for approximately 39%
of net accounts receivable.
The Company endeavors to keep pace with the evolving computing industry 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 the Company's end customers and geographic sales areas. Intel
performs ongoing credit evaluations of its customers' financial condition and
requires collateral as deemed necessary.
INTEREST INCOME AND OTHER
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Interest income $ 593 $ 562 $ 364
Foreign currency gains 11 63 26
Other income, net 188 174 16
----- ----- -----
TOTAL $ 792 $ 799 $ 406
===== ===== =====
Other income for 1998 and 1997 included approximately $185 and $106
million, respectively, from sales of a portion of the Company's investments
in marketable strategic equity securities.
Comprehensive income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," at the
beginning of fiscal 1998. The adoption had no impact on net income or total
stockholders' equity. Comprehensive income consists of net income and other
comprehensive income.
The components of other comprehensive income and related tax effects were
as follows:
(IN MILLIONS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Gains on investments during the year, net of tax
of $(357), $(4) and $(37) in 1998, 1997 and 1996,
respectively $ 665 $ 5 $75
Less: adjustment for gains included in net income,
net of tax of $65, $37, and $2 in 1998, 1997, and
1996, respectively (120) (69) (5)
------ ------ ------
OTHER COMPREHENSIVE INCOME $ 545 $ (64) $70
====== ====== ======
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:
(IN MILLIONS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Income before taxes:
U.S. $6,677 $8,033 $5,515
Foreign 2,460 2,626 2,419
------ ------ ------
TOTAL INCOME BEFORE TAXES $9,137 $10,659 $7,934
====== ====== ======
Provision for taxes:
Federal:
Current $2,321 $2,930 $2,046
Deferred 145 30 8
------ ------ ------
2,466 2,960 2,054
------ ------ ------
State:
Current 320 384 286
Foreign:
Current 351 394 266
Deferred (68) (24) 171
------ ------ ------
283 370 437
------ ------ ------
TOTAL PROVISION FOR TAXES $3,069 $3,714 $2,777
====== ====== ======
EFFECTIVE TAX RATE 33.6% 34.8% 35.0%
====== ====== ======
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for 1998 by $415 million ($224 million and $196
million for 1997 and 1996, respectively).
Page 24
The provision for taxes reconciles to the amount computed by applying the
statutory federal rate of 35% to income before taxes as follows:
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Computed expected tax $3,198 $3,731 $2,777
State taxes, net of federal benefits 208 249 186
Foreign income taxed at different rates (339) (111) (127)
Other 2 (155) (59)
------ ------ ------
PROVISION FOR TAXES $3,069 $3,714 $2,777
====== ====== ======
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:
(IN MILLIONS) 1998 1997
- -----------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Accrued compensation and benefits $117 $ 76
Deferred income 181 200
Inventory valuation and related reserves 106 163
Interest and taxes 52 49
Other, net 162 188
------ ------
618 676
DEFERRED TAX LIABILITIES
Depreciation (911) (882)
Unremitted earnings of certain subsidiaries (152) (162)
Unrealized gain on investments (324) (32)
------ ------
(1,387) (1,076)
NET DEFERRED TAX (LIABILITY) ------ ------
$ (769) $ (400)
====== ======
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.
During 1998, the Company settled all tax and related interest for years
1991 through 1996 with the Internal Revenue Service ("IRS"). The settlement
did not result in a material effect on the Company's 1998 financial
statements. Years after 1996 are open to examination by the IRS. 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.
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.
Options 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 is as follows:
OUTSTANDING OPTIONS
--------------------------
WEIGHTED
SHARE AVERAGE
AVAILABLE FOR NUMBER EXERCISE
(IN MILLIONS) OPTIONS OF SHARES PRICE
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 30, 1995 173.8 342.0 $ 5.30
Grants (53.4) 53.4 $17.28
Exercises -- (47.4) $ 2.47
Cancellations 10.2 (10.2) $ 8.53
----- -----
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
====== ======
Options exercisable at:
December 28, 1996 114.5 $ 2.86
December 27, 1997 115.2 $ 3.66
December 26, 1998 103.8 $ 6.11
The range of option exercise prices for options outstanding at December 26,
1998 was $1.46 to $60.80. The range of exercise prices for options is wide,
primarily due to the increasing price of the Company's stock over the period in
which the option grants were awarded.
Page 25
The following tables summarize information about options outstanding at
December 26, 1998:
OUTSTANDING OPTIONS
-----------------------------------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHTED
SHARES CONTRACTUAL AVERAGE
(IN LIFE EXERCISE
RANGE OF EXERCISE PRICES MILLIONS) (IN YEARS) PRICE
- -----------------------------------------------------------------------------------------------------------
$1.46-$5.55 55.8 2.2 $ 2.83
$5.62-$11.10 70.2 4.9 $ 7.18
$11.42-$34.75 89.2 6.9 $15.16
$34.85-$60.80 97.3 8.8 $37.51
------
TOTAL 312.5 6.2 $18.13
======
EXERCISABLE OPTIONS
--------------------------
NUMBER OF WEIGHTED
SHARES AVERAGE
(IN MILLIONS) EXERCISE
RANGE OF EXERCISE PRICES PRICE
- ------------------------------------------------------------------------------------------
$1.46-$5.55 55.8 $ 2.83
$5.62-$11.10 37.6 $ 6.16
$11.42-$34.75 7.0 $16.82
$34.85-$60.80 3.4 $37.53
------
TOTAL 103.8 $ 6.11
======
These options will expire if not exercised at specific dates ranging from
January 1999 to December 2008. Option exercise prices for options exercised
during the three-year period ended December 26, 1998 ranged from $0.78 to
$48.97.
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, 79.7 million shares remained available for issuance at December 26, 1998.
Employees purchased 6.3 million shares in 1998 (9 million in 1997 and 14 million
in 1996) for $229 million ($191 million and $140 million in 1997 and 1996,
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 value method of that statement. The fair value
of options granted in 1998, 1997 and 1996 reported below has been estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions:
EMPLOYEE STOCK OPTIONS 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Expected life (in years) 6.5 6.5 6.5
Risk-free interest rate 5.3% 6.6% 6.5%
Volatility .36 .36 .36
Dividend yield .2% .1% .2%
STOCK PARTICIPATION PLAN SHARES 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Expected life (in years) .5 .5 .5
Risk-free interest rate 5.2% 5.3% 5.3%
Volatility .42 .40 .36
Dividend yield .2% .1% .2%
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 1998, 1997 and 1996 was $17.91, $17.67 and $8.17
per share, respectively. The weighted average estimated fair value of shares
granted under the Stock Participation Plan during 1998, 1997 and 1996 was
$10.92, $11.04 and $4.05, 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 (in millions except for earnings per share
information):
1998 1997 1996
- -------------------------------------------------------------------------------------------
Pro forma net income $5,755 $6,735 $5,046
Pro forma basic earnings per share $ 1.73 $ 2.06 $ 1.53
Pro forma diluted earnings per share $ 1.66 $ 1.88 $ 1.42
Page 26
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years. Because SFAS No. 123 is applicable only to options granted subsequent
to December 31, 1994, the pro forma effect will not be fully reflected until
1999.
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 accrued $291 million for the Qualified Plans and the
Non-Qualified Plan in 1998 ($273 million in 1997 and $209 million in 1996). The
Company expects to fund approximately $283 million for the 1998 contribution to
the Qualified Plans and to allocate approximately $13 million for the
Non-Qualified Plan, including the utilization of amounts accrued in prior years.
A remaining accrual of approximately $205 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
In May 1998, the Company purchased the semiconductor operations of Digital
Equipment Corporation, including manufacturing facilities in Massachusetts as
well as development operations in Israel and Texas. The original cash purchase
price of $625 million was adjusted to $585 million as a result of revisions to
the valuations of certain capital assets as contemplated in the original
purchase agreement. The purchase price remains subject to adjustment for asset
valuation in accordance with the agreement. 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.
In January 1998, the Company acquired the outstanding shares of Chips and
Technologies, Inc., a supplier of graphics accelerator chips for mobile
computing products. The purchase price was approximately $430 million ($321
million in net cash). The Company recorded a non-deductible charge of $165
million for purchased in-process research and development, representing the
appraised value of products still in the development stage that were not
considered to have reached technological feasibility.
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 $64 million in 1998, $69 million in 1997 and $57 million
in 1996. Minimum rental commitments under all non-cancelable leases with an
initial term in excess of one year are payable as follows: 1999-$35 million;
2000-$28 million; 2001-$22 million; 2002-$20 million; 2003-$15 million; 2004
and beyond-$22 million. Commitments for construction or purchase of property,
plant and equipment approximated $2.1 billion at December 26, 1998. In
connection with certain manufacturing arrangements, Intel had minimum
purchase commitments of approximately $83 million at December 26, 1998 for
flash memory.
In October 1998, Intel announced that it had entered into a definitive
agreement to acquire Shiva Corporation ("Shiva"), whose 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. Intel expects that the total cash required to complete the
transaction will be approximately $185 million, before consideration of any
cash to be acquired.
Page 27
Contingencies
In November 1997, Intergraph Corporation ("Intergraph") filed suit in Federal
District Court in Alabama generally alleging that Intel attempted to coerce
Intergraph into relinquishing certain patent rights. The suit initially alleged
that Intel infringes three Intergraph microprocessor-related patents and has
been amended to add two other patents. The suit also includes alleged violations
of antitrust laws and various state law claims. The suit seeks injunctive relief
and unspecified damages. Intel has counterclaimed that the Intergraph patents
are invalid and alleges infringement of seven Intel patents, breach of contract
and misappropriation of trade secrets. In April 1998, the Court ordered Intel to
continue to deal with Intergraph on the same terms as it treats allegedly
similarly situated customers with respect to confidential information and
product supply. Intel's appeal of this order was heard in December 1998. In June
1998, Intel filed a motion for summary judgment on Intergraph's patent claims on
the grounds that Intel is licensed to use those patents. In July 1998, the
Company received a letter stating that Intergraph believes that the patent
damages will be "several billion dollars by the time of trial." In addition,
Intergraph alleges that Intel's infringement is willful and that any damages
awarded should be trebled. The letter also stated that Intergraph believes that
antitrust, unfair competition and tort and contract damages will be "hundreds of
millions of dollars by the time of trial." The Company disputes Intergraph's
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 adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in 1998. SFAS No. 131 establishes standards for reporting
information about operating segments and related disclosures about products,
geographic information and major customers. Operating segment information for
1997 and 1996 is also presented in accordance with SFAS No. 131.
Intel designs, develops, manufactures and markets microcomputer components
and related products at various levels of integration. The Company is organized
into four product line operating segments: Intel Architecture Business Group,
Computing Enhancement Group, Network Communications Group and New Business
Group. Each of these groups has a vice president who reports directly to the
Chief Executive Officer ("CEO"). The CEO allocates resources to each of these
groups using information on their revenues and operating profits before interest
and taxes. The CEO has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131.
The Intel Architecture Business Group's products include the
Pentium-Registered Trademark- family of microprocessors, and microprocessors
and related board-level products based on the P6 micro-architecture
(including the Pentium-Registered Trademark- II processor, the
Intel-Registered Trademark- Celeron-TM- processor and the Pentium-Registered
Trademark- II Xeon-TM- processor). Sales of microprocessors and related
board-level products based on the P6 microarchitecture represented a majority
of the Company's 1998 revenues and a substantial majority of its 1998 gross
margin. The Computing Enhancement Group's
Page 28
products include chipsets, embedded processors (including embedded
Pentium-Registered Trademark- processors), microcontrollers, flash memory
products and graphics products. The Network Communications Group's products
include fast Ethernet connections, hubs, switches and routers. The New
Business Group's products include systems management software, digital
imaging products, and video and data conferencing products. 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 the aforementioned 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 profit-dependent bonus expenses) 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 four operating segments, only the Intel Architecture
Business Group and Computing Enhancement Group are reportable segments under the
criteria of SFAS No. 131. Intel does not identify or allocate assets or
depreciation by operating segment, nor does the CEO evaluate groups on these
criteria. Operating segments do not sell products to each other, and
accordingly, there are no intersegment revenues 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").
Information on reportable segments for the three years ended December 26,
1998 is as follows:
(IN MILLIONS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
INTEL ARCHITECTURE BUSINESS GROUP
Revenues $21,545 $20,782 $17,000
Operating profit $ 9,077 $10,659 $ 7,666
COMPUTING ENHANCEMENT GROUP
Revenues $ 4,047 $ 3,793 $ 3,622
Operating profit $ 358 $ 529 $ 940
ALL OTHER
Revenues $ 681 $ 495 $ 225
Operating (loss) $(1,056) $(1,301) $(1,053)
TOTAL
Revenues $26,273 $25,070 $20,847
Operating profit $ 8,379 $ 9,887 $ 7,553
In 1998, one customer accounted for 13% of the Company's revenues and another
customer accounted for 11%. In 1997, one customer accounted for 12% of the
Company's revenues. In 1996, no customer exceeded 10% of the Company's revenues.
A substantial majority of the sales to these customers were Intel Architecture
Business Group products, but these customers also purchased Computing
Enhancement Group products.
Enterprise-wide information is provided in accordance with SFAS No. 131.
Geographic revenue information for the three years ended December 26, 1998 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:
(IN MILLIONS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
United States $11,663 $11,053 $ 8,668
Europe 7,452 6,774 5,876
Asia-Pacific 5,309 4,754 3,844
Japan 1,849 2,489 2,459
------- ------- -------
TOTAL REVENUES $26,273 $25,070 $20,847
======= ======= =======
Net property, plant and equipment by country was as follows:
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------------------------------------------------
United States $ 8,076 $ 8,022
Ireland 1,287 919
Other foreign countries 2,246 1,725
------- -------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET $11,609 $10,666
======= =======
Supplemental information (unaudited)
Quarterly information for the two years ended December 26, 1998 is presented
on page 37.
Page 29
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 26, 1998 and December 27, 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 26, 1998. 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 generally accepted auditing
standards. 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 26, 1998 and December 27, 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 26, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 11, 1999
Page 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of operations
Intel posted record net revenues in 1998, for the 12th consecutive year,
increasing by 5% from 1997, and by 20% from 1996 to 1997. The increases in both
periods were primarily due to higher revenues from sales of micro-processors by
the Intel Architecture Business Group and to a lesser extent due to increases in
revenues of the Computing Enhancement Group.
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-Registered Trademark-II processor. From 1996 to 1997, cost of
sales increased by 8.5% primarily due to microprocessor unit volume growth,
costs related to the 0.25-micron microprocessor manufacturing process ramp
and shifts in product mix, partially offset by factory efficiencies due to
the increased volumes. The gross margin percentage was 54% in 1998, compared
to 60% in 1997 and 56% in 1996. See "Outlook" for a discussion of gross
margin expectations.
Research and development spending grew by 14% from 1997 to 1998, primarily
due to increased spending on development of microprocessor products and the
charge for in-process research and development related to the acquisition of
Chips and Technologies, Inc. (See the discussion about purchased in-process
research and development under "Computing Enhancement Group segment.") Research
and development spending increased 30% from 1996 to 1997 due to substantially
increased investment in both microprocessor product development and
manufacturing technology development.
Marketing, general and administrative spending grew 6% in 1998, primarily
due to the Intel Inside-Registered Trademark- cooperative advertising program
and merchandising spending, partially offset by lower profit-dependent bonus
expenses. From 1996 to 1997, marketing, general and administrative spending
grew 25%, primarily due to merchandising spending, the Intel Inside program
and higher profit-dependent expenses.
Interest expense increased $7 million from 1997 to 1998 due to higher average
borrowing balances and lower interest capitalization. Interest and other income
was essentially unchanged for the same period, with higher gains on sales of
equity securities and higher interest income offset by lower foreign currency
gains. For 1997 compared to 1996, interest expense was essentially unchanged,
and interest and other income increased by $393 million, primarily due to higher
average investment balances and higher gains on sales of equity investments.
The Company's effective income tax rate decreased to 33.6% in 1998 from 34.8%
in 1997 and 35.0% in 1996. Foreign income taxed at rates different from U.S.
rates contributed to the lower tax rate in 1998.
Intel Architecture Business Group segment. Revenues increased 4% from 1997
to 1998, primarily due to higher volumes of microprocessors sold,
particularly processors based on the P6 microarchitecture (including the
Intel-Registered Trademark- Celeron-TM-, Pentium II, Pentium-Registered
Trademark- Pro and Pentium-Registered Trademark- II Xeon-TM- processors).
The higher volumes were partially offset by lower average selling prices.
Revenues for this operating segment increased 22% from 1996 to 1997,
primarily due to higher volumes of the Pentium-Registered Trademark-
microprocessor family (including processors with Intel's MMX-TM- media
enhancement technology) and Pentium Pro processor, and the introduction of
the Pentium II processor, along with increased average selling prices in the
first half of 1997 compared to the first half of 1996.
During 1998, sales of microprocessors and related board-level products based
on the P6 microarchitecture comprised a majority of the Company's consolidated
revenues and a substantial majority of its gross margin. Sales of these
microprocessors first became a significant portion of the Company's revenues and
gross margin in 1997. Also during 1998, sales of Pentium family processors,
including Pentium processors with MMX technology, were a rapidly declining but
still significant portion of the Company's revenues and gross margin. During
1997, sales of the Pentium family processors were a majority of the Company's
revenues and gross margin, and in 1996 were a majority of its revenues and a
substantial majority of its gross margin.
Operating profit for the Intel Architecture Business Group operating segment
decreased 15% from 1997 to 1998, primarily due to the increased costs 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. In the second half of 1998, gross margin improved compared to the first
half of the year as the transition to the P6 microarchitecture was largely
complete and the SEC cartridge had no further
Page 31
incremental impact on the gross margin percentage. In addition, in the second
half of 1998, this operating segment began to see the benefit of the Company's
cost reduction efforts. Operating profit for the segment increased 39% from 1996
to 1997 due to the increase in processor unit volumes and higher average selling
prices in the first half of 1997 arising from the ramp of the Pentium processor
with MMX technology.
Computing Enhancement Group segment. Revenues increased 7% from 1997 to 1998
and 5% from 1996 to 1997. Revenues from sales of chipsets represented a majority
of revenues for this operating segment only in 1998. Chipset revenues increased
primarily due to higher average selling prices in 1998 compared to 1997, and
primarily due to increased unit volumes from 1996 to 1997. These increases were
partially offset in both periods by decreases in revenues from sales of flash
memory and embedded processors.
Operating profits for the Computing Enhancement Group operating segment
declined 32% from 1997 to 1998 and 44% from 1996 to 1997, primarily due to
competitive pressures in flash memory products, partially offset by increased
profitability of chipsets. In 1998, the results were also negatively affected by
the purchase of Chips and Technologies, Inc. ("C&T"), including the related $165
million charge for purchased in-process research and development.
In the first quarter of 1998, the Company purchased C&T for a total price of
approximately $430 million. C&T had a product line of mobile graphics
controllers based on 2D and video graphics technologies, and 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, all of
which were individually insignificant.
Intel obtained an outside valuation of C&T, and values were assigned to
developed technology, in-process research and development, customer base and
assembled workforce. The valuations of developed technology and in-process
research and development were established using an income-based approach.
Revenue estimates for each product line under development were based on
discussions with management, existing product family revenues, anticipated
product development schedules, product sales cycles and estimated life of each
of the technologies. Revenue estimates were then compared for reasonableness to
external industry sources on expected market growth. Percentages of product
revenues for each project were designated as developed, in-process and future
yet-to-be-defined. Revenues on the products under development were estimated to
begin in 1998 and continue through 2006, with the majority of the revenues
related to in-process technology occurring between 2001 and 2003. Operating
expenses, including cost of goods sold, were estimated based primarily on C&T's
historical experience. The resulting operating income was adjusted for a charge
for the use of contributory assets and income tax expense using Intel's tax
rate. The risk-adjusted discount rate applied to after-tax cash flow was 15% for
developed technology and 20% for in-process technology, compared to an estimated
weighted-average cost of capital for C&T of approximately 10%.
The total value of in-process research and development was estimated to be
approximately $165 million. Costs to complete all of the in-process projects
were estimated to be $30 million. Approximately 70% of the estimated in-process
research and development 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 technology,
and further development of the C&T 3D technology was stopped.
Financial condition
The Company's financial condition remains very strong. At December 26, 1998,
total cash, trading assets, and short- and long-term investments totaled $13
billion, up from $11.8 billion at December 27, 1997. Cash provided by operating
activities was $9.2 billion in 1998, compared to $10 billion and $8.7 billion in
1997 and 1996, respectively.
The Company used $6.5 billion in cash for investing activities during 1998,
compared to $6.9 billion during 1997
Page 32
and $5.3 billion during 1996. Capital expenditures totaled $3.6 billion in
1998, 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 purchased the
semiconductor manufacturing operations of Digital Equipment Corporation for
$585 million, including $475 million in capital assets. The Company had
committed approximately $2.1 billion for the purchase or construction of
property, plant and equipment as of December 26, 1998. See "Outlook" for a
discussion of capital expenditure expectations in 1999. In addition, during
1998 the Company used $321 million in cash to purchase C&T and $500 million
to acquire a non-voting equity interest in Micron Technology, Inc.
Inventory levels in total decreased in 1998, with a decrease in raw
materials and work-in-process inventory, partially offset by an increase in
finished goods inventory. The increase in accounts receivable in 1998 was
mainly due to the higher level of revenues. The Company's five largest
customers accounted for approximately 42% of net revenues for 1998. One
customer accounted for 13% of revenues and another accounted for 11% in 1998.
One customer accounted for 12% of revenues in 1997 and no customer accounted
for more than 10% of revenues in 1996. At December 26, 1998, the five largest
customers accounted for approximately 39% of net accounts receivable.
The Company used $4.7 billion for financing activities in 1998, compared
to $3.2 billion and $773 million in 1997 and 1996, respectively. The major
financing applications of cash in 1998 were for repurchase of 161.7 million
shares of Common Stock, adjusted for the stock split declared in January
1999, for $6.8 billion (including $1.2 billion for exercised put warrants).
The major financing applications of cash in 1997 and 1996 were for stock
repurchases totaling $3.4 billion and $1.3 billion (including $108 million
for exercised put warrants), respectively, as well as for a $300 million
repayment in 1997 under a private reverse repurchase arrangement. Financing
sources of cash during 1998 included $507 million in proceeds from the sale
of shares, primarily pursuant to employee stock plans ($317 million in 1997
and $257 million in 1996) and $1.6 billion in proceeds from the exercise of
1998 Step-Up Warrants ($40 million in 1997 and $4 million in 1996). Financing
sources in 1996 also included $300 million under the private reverse
repurchase arrangement.
As part of its authorized stock repurchase program, the Company had
outstanding put warrants at the end of 1998, with the potential obligation to
buy back 5 million shares of its Common Stock at an aggregate price of $201
million. The exercise price of these warrants ranged from $40 to $41 per
share, with an average exercise price of $40 per share as of December 26,
1998.
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.
In October 1998, the Company announced that it had entered into a
definitive agreement to acquire Shiva Corporation ("Shiva"). Intel expects
that the total cash required to complete the transaction will be
approximately $185 million, before consideration of any cash to be acquired.
The Company believes that it has the financial resources needed to meet
business requirements in the foreseeable future, including the acquisition of
Shiva, capital expenditures for the expansion or upgrading of worldwide
manufacturing capacity, working capital requirements, the potential put
warrant obligation 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 26, 1998 and December 27, 1997. Actual results may differ materially.
The primary objective of the Company's investment activities is to
preserve principal while at the same time 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 and certain equity securities, excluding equity investments
entered into for strategic purposes, are swapped to U.S. dollar LIBOR-based
returns. A hypothetical 60 basis point increase in interest rates would
result in an approximate $30 million decrease (less than 0.3%) in the fair
value of the Company's available-for-sale securities as of the end of 1998
($18 million as of the end of 1997).
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 foreign 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 foreign 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
foreign currency exchange rate movements. For example, an adverse change in
exchange rates (defined as 20% in certain Asian currencies and 10% in all
other currencies) would result in an
Page 33
adverse impact on income before taxes of less than $20 million as of the end
of each of 1998 and 1997.
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments entered into for
the promotion of business and strategic objectives. These investments are
generally in companies in the high-technology industry sector, many of which
are small capitalization stocks. The Company typically does not attempt to
reduce or eliminate its market exposure on these securities. A 20% adverse
change in equity prices would result in an approximate $350 million decrease
in the fair value of the Company's available-for-sale securities as of the
end of 1998 ($75 million as of the end of 1997). The increase compared to
1997 reflects the increase in the dollar value of the Company's marketable
strategic equity securities, a significant portion of which represents
unrealized market appreciation. Approximately $825 million of the value of
these equity securities as of the end of 1998 consisted of the investment in
Micron Technology, Inc., described above under "Financial condition."
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 1998.
Intel expects that the total number of computers using Intel's Pentium
family processors, P6 microarchitecture processors (including Intel Celeron,
Pentium II, Pentium-Registered Trademark- III, Pentium II Xeon and
Pentium-Registered Trademark- III Xeon-TM- processors) and other
semiconductor components sold worldwide will continue to grow in 1999. The
Company's financial results are substantially dependent on sales of these
microprocessors by the Intel Architecture Business Group and other
semiconductor components sold by the Computing Enhancement 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 fore-cast. Because of
the large price difference between types of microprocessors, this mix affects
the average price 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, including the ongoing financial difficulties in the Asian markets
and certain emerging markets in other regions.
Intel's strategy is to introduce ever higher performance microprocessors
tailored for the different 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 specifically for each
computing segment: the Intel Celeron processor for entry-level PC buyers
interested in a value PC, the Pentium II and Pentium III processors for the
performance desktop and entry-level servers and workstations, and the Pentium
II Xeon and Pentium III Xeon processors for mid-range and high-end servers
and workstations. The Company plans to cultivate new businesses and continue
to work with the computing industry to expand Internet capabilities and
product offerings and to develop compelling software applications that can
take advantage of this higher performance, thus driving demand toward the
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.
The Company's gross margin varies depending on the mix of types and speeds
of processors sold and the mix of microprocessors and related motherboards
and purchased components within a product family. The Company's Pentium II
processor is packaged with purchased components in the SEC cartridge, and the
inclusion of purchased components has tended to increase absolute margin
dollars but to lower the gross margin percentage. However, the Company has
also been developing new packaging formats that use fewer purchased
components. These new packaging formats are expected to reduce costs on
certain microprocessor products. In addition, the Company expects to have
reduced costs due to continued productivity improvements on its existing
manufacturing processes during 1999. Various other factors--including unit
volumes, yield issues associated with production at factories, ramp of new
technologies, excess or obsolete inventory, variations in inventory valuation
and mix of shipments of other semiconductors--will also continue to affect
the amount of cost of sales and the variability of gross margin percentages
in future quarters.
Intel's current gross margin expectation for 1999 is 57% plus or minus a
few points compared to 54% for 1998. Intel's primary goal is to get its
advanced technology to the marketplace, and the Company sometimes may
implement strategies that increase margin dollars but lower margin
percentages, for example, the Company's plans to grow in non-microprocessor
areas that have the potential to expand computing and communications
capabilities. 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 semiconductor manufacturing and assembly and test
capacity over the last few years, and continues to plan capacity based on the
assumed continued success of its strategy and the acceptance of its products
in specific market segments. The Company expects that capital spending will
decrease to approximately $3 billion in 1999, primarily as a result of
reduced investment for new facilities and improved utilization of equipment.
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
Page 34
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. Depreciation and amortization for
1999 is expected to be approximately $3.4 billion, an increase of
approximately $600 million from 1998. Most of this increase would be included
in cost of sales and research and development spending.
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. Since
Intel considers it imperative to maintain a strong research and development
program, spending for research and development in 1999 is expected to
increase to approximately $3 billion. 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 1999.
The Company currently expects its tax rate to be 33.5% for 1999. This
estimate is based on current tax law and the current estimate of earnings,
and is subject to change.
Intel has established a team to address the issues raised by the
introduction of the Single European Currency ("Euro") on January 1, 1999 and
during the transition period through January 1, 2002. Intel's internal
systems that are affected by the initial introduction of the Euro have been
made Euro capable without material system modification costs. Further
internal systems changes will be made during the three-year transition phase
in preparation for the ultimate withdrawal of the legacy currencies in July
2002, and the costs of these changes are not expected to be material. The
Company does not presently expect that introduction and use of the Euro will
materially affect the Company's foreign exchange and hedging activities, or
the Company's use of derivative instruments, or will result in any material
increase in costs to the Company. While Intel will continue to evaluate the
impact of the Euro introduction over time, based on currently available
information, management does not believe that the introduction of the Euro
will have a material adverse impact on the Company's financial condition or
overall trends in results of operations.
Like many other companies, Intel is subject to risks from the year 2000
computer issue. If internal systems do not correctly recognize and process
date information beyond the year 1999, there could be an adverse impact on
the Company's operations. Two other related issues could also lead to
incorrect calculations or failures: i) some systems' programming assigns
special meaning to certain dates, such as 9/9/99 and ii) the fact that the
year 2000 is a leap year.
The Company has established a comprehensive program with dedicated program
management and executive-level sponsorship to deal with year 2000 issues. The
Company is addressing its most critical internal systems first and has
categorized as "critical" or "priority" those systems whose failure would
cause an extended shutdown of all or part of a factory, could cause personal
injury or would have a sustained and significant detrimental financial
impact. The Company is also testing customer and supplier interfaces with its
internal systems as appropriate. These activities are intended to encompass
all major categories of systems in use by the Company, including network and
communications infrastructure, manufacturing, facilities management, sales,
finance and human resources. The Company's approach prioritizes functions and
systems worldwide, and all divisions and facilities are working toward the
same global milestones.
The Company's semiconductor manufacturing and assembly and test
("manufacturing") equipment and systems are highly automated, incorporating
PCs, embedded processors and related software to control scheduling,
inventory tracking, statistical analysis and automated manufacturing. A
significant portion of the Company's year 2000 efforts on internal systems is
intended to prevent disruption to manufacturing operations.
As of December 1998, approximately 99% of the Company's critical and
priority manufacturing systems, and 85% of critical and priority
non-manufacturing systems, were determined to be already year 2000 capable,
or remediation needed (replacements, changes, upgrades or workarounds) has
been determined and unit testing completed. Deployment of replacements,
changes and upgrades has been completed for 93% of manufacturing systems and
84% of non-manufacturing systems. The Company has planned a comprehensive
program of integration testing of internal systems. The integration testing
began in the third quarter of 1998 and will continue into 1999 as necessary.
The following table indicates the phases of the year 2000 project related
to the Company's critical and priority internal systems and the expected time
frames.
Phases of the project Start date End date
- ------------------------------------------------------------------------------
High-level assessment of systems 1996 Q3 1998 (actual)
Detailed assessment, remediation
and unit testing 1996 Q1 1999 (expected)
Deployment 1997 Mid-1999 (expected)
Integration testing Q3 1998 Mid-1999 (expected)
Intel is also actively working with suppliers of products and services to
determine the extent to which the suppliers' operations and the products and
services they provide are year 2000 capable, and to monitor their progress
toward year 2000 capability. Highest priority is being placed on working with
critical suppliers, defined by Intel as those whose failure would shut down
manufacturing or other critical operations within a short period of time. The
Company has made inquiries of its major suppliers and has received responses
to its initial inquiries from 100% of critical suppliers.
Follow-up activities seek to determine whether the supplier is taking all
appropriate steps to fix year 2000 problems and to be prepared to continue
functioning effectively as a
Page 35
supplier in accordance with Intel's standards and requirements. Contingency
plans are being developed to address issues related to suppliers that are not
considered to be making sufficient progress in becoming year 2000 capable.
The Company is also developing contingency plans to address possible
changes in customer order patterns due to year 2000 issues. As with
suppliers, the readiness of customers to deal with year 2000 issues may
affect their operations and their ability to order and pay for products.
Intel has surveyed its major direct customers about their year 2000 readiness
in critical areas of their operations. The results identified certain key
areas to be addressed by the customers. Intel is also communicating
information about its own readiness to customers and is conducting seminars
to help communicate the methodologies and processes used in Intel's year 2000
programs.
Intel believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather
than with the Company's internal systems or its products. Because the Company
has less control over assessing and remediating the year 2000 problems of
third parties, the Company believes the risks are greatest with
infrastructure (e.g., electricity supply and water and sewer service),
telecommunications, transportation supply chains and critical suppliers of
materials.
The Company's microprocessor production is conducted in a network of
domestic and foreign facilities. Each location relies on local private and
governmental suppliers for electricity, water, sewer and other needed
supplies. Failure of an electricity grid or an uneven supply of power, for
example, would be a worst-case scenario that would completely shut down the
affected facilities. Electrical failure could also shut down airports and
other transportation facilities.
The Company does not generally maintain facilities that would allow it to
generate its own electrical or water supply in lieu of that supplied by
utilities. To the extent possible, the Company is working with the
infrastructure suppliers for its manufacturing sites, major subcontractor
sites and relevant transportation hubs to seek to better ensure continuity of
infrastructure services. Contingency planning regarding major infrastructure
failure generally emphasizes planned increases in inventory levels of
specific products and the shift of production to unaffected sites. By the end
of 1999, Intel expects to have in place a buffer supply of finished goods
inventory and is evaluating where to locate inventory geographically in light
of infrastructure concerns. In addition, multiple plants engage in similar
tasks in the Intel system, and production can be expanded at some sites to
partially make up for capacity unavailable elsewhere. Although overall
capacity would be reduced, it is not expected that the entire production
system would halt due to the unavailability of one or two facilities.
A worst-case scenario involving a critical supplier of materials would be
the partial or complete shutdown of the supplier and its resulting inability
to provide critical supplies to the Company on a timely basis. The Company
does not maintain the capability to replace most third-party supplies with
internal production. Where efforts to work with critical suppliers to ensure
year 2000 capability have not been successful, contingency planning generally
emphasizes the identification of substitute and second-source suppliers, and
in certain situations includes a planned increase in the level of inventory
carried. In an industry characterized by rapid technological change, higher
levels of raw materials and finished goods inventories involve increased risk
of inventory obsolescence and the potential for write-downs in the value of
inventory.
The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur.
This contingency planning will continue through 1999 as the Company learns
more about the preparations and vulnerabilities of third parties regarding
year 2000 issues. Due to the large number of variables involved, the Company
cannot provide an estimate of the damage it might suffer if any of these
scenarios were to occur.
The Company also has a program to assess the capability of its products to
handle the year 2000. To assist customers in evaluating their year 2000
issues, the Company has developed a list that indicates the capability of
Intel's current products, and certain products no longer being produced, to
handle the year 2000. Products are assigned to one of five categories as
defined by the Company: "Year 2000 Capable," "Year 2000 Capable" with update,
not "Year 2000 Capable," under evaluation and will not test. The list is
located on the Company's Year 2000 support Web site and is periodically
updated as analysis on additional products is completed.
All Intel processors are "Year 2000 Capable." All Intel micro-controllers
(embedded processors) are also "Year 2000 Capable," with the exception of two
custom microcontroller products sold to a limited number of customers.
However, the assessment of whether a complete system will operate correctly
depends on firmware (BIOS) capability and software design and integration,
and for many end users this will include firmware and software provided by
companies other than Intel.
As described more fully at the support Web site, Intel offers a "Year 2000
Capable" Limited Warranty on certain of its current products. Except as
specifically provided for in the Limited Warranty, the Company does not
believe it is legally responsible for costs incurred by customers related to
ensuring their year 2000 capability. Nevertheless, the Company is incurring
various costs to provide customer support and customer satisfaction services
regarding year 2000 issues, and it is anticipated that these expenditures
will continue through 1999 and thereafter. An Intel product, when used in
accordance with its associated documentation, is "Year 2000 Capable" when,
upon installation, it accurately stores, displays, processes, provides and/or
receives data from, into and between 1999 and 2000, and the 20th and 21st
centuries, including leap-year calculations, provided
Page 36
that all other technology used in combination with the Intel product properly
exchanges date data with it.
Various of the Company's disclosures and announcements concerning its
products and year 2000 programs are intended to constitute "Year 2000
Readiness Disclosures" as de-fined in the recently enacted Year 2000
Information and Readiness Disclosure Act. The Act provides added protection
from liability for certain public and private statements concerning an
entity's year 2000 readiness and the year 2000 readiness of its products and
services. The Act also potentially provides added protection from liability
for certain types of year 2000 disclosures made after January 1, 1996 and
before the date of enactment of the Act.
The Company's year 2000 efforts have been undertaken largely with its
existing personnel. In some instances, consultants have been engaged to provide
specific assessment, remediation or other services. Activities with suppliers
and customers have also involved their staffs and consultants. The Company
engaged a third-party firm to assist with planning and taking the inventory of
internal systems, and engaged another firm to perform an assessment of the
overall scope and schedule of Intel's year 2000 efforts.
The Company currently expects that the total cost of these programs,
including both incremental spending and redeployed resources, will not exceed
$175 million. This estimate is lower than the previous estimate that costs
would not exceed $250 million, primarily due to a higher than expected
percentage of manufacturing systems requiring no remediation and lower than
expected costs of remediation on the remaining manufacturing systems.
Approximately $42 million has been spent on the programs to date, of which
approximately $36 million was incurred in 1998. Costs include estimated
payroll costs for redeployed personnel and the costs of consultants, software
and hardware upgrades, and dedicated program offices. A majority of the total
estimated costs are expected to be incurred in assessing and remediating
issues with manufacturing systems and contingency planning for manufacturing
systems. As a result, a majority of the costs are expected to be included in
cost of sales and in the calculation of gross margin. Year 2000 costs for
manufacturing and non-manufacturing internal systems in 1998 represented less
than 10% of the total information technology budget for 1998 and are also
expected to be less than 10% of the budget for 1999.
No significant internal systems projects are being deferred due to the
year 2000 program efforts. In some instances, the installation schedule of
new software and hardware in the normal course of business is being
accelerated to also afford a solution to year 2000 capability issues. The
Company expects that costs related to accelerated systems replacements will
be approximately $15 million in addition to the total costs noted above. In
addition, the estimated costs do not include any potential costs related to
customer or other claims, or potential amounts related to executing
contingency plans, such as costs incurred as a result of an infrastructure or
supplier failure. The Company has adequate general corporate funds with which
to pay for the programs' expected costs. All expected costs are based on the
current assessment of the programs and are subject to change as the programs
progress.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's
financial condition or overall trends in results of operations; however, it
is uncertain to what extent the Company may be affected by such matters. In
addition, there can be no assurance that the failure to ensure year 2000
capability by a supplier, customer or another third party would not have a
material adverse effect on the Company's financial condition or overall
trends in results of operations.
In September 1997, the Federal Trade Commission ("FTC") staff notified
Intel that the FTC had begun an investigation of the Company's business
practices. In June 1998, the FTC filed an administrative complaint against
Intel before an FTC Administrative Law Judge. The complaint charges that
Intel is attempting to further its alleged microprocessor monopoly by
improperly withholding its intellectual property, in the form of confidential
product information, from three companies that had filed or threatened to
file intellectual property lawsuits against Intel. Although the outcome of
the administrative action cannot be determined at this time, management,
including internal counsel, does not believe that the outcome will have a
material adverse effect on the Company's financial position or overall trends
in results of operations.
The Company is currently party to various legal proceedings. Although
litigation is subject to inherent uncertainties, management, including
internal counsel, does not believe that the ultimate outcome of these legal
proceedings will have a material adverse effect on the Company's financial
position or overall trends in results of operations. However, were an
unfavorable ruling to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations of that
period. Management believes, given the Company's current liquidity and cash
and investments balances, that even an adverse judgment would not have a
material impact on cash and investments or liquidity.
The Company's future results of operations and the other forward-looking
statements contained in this outlook--in particular the statements regarding
the number of computers using Intel processors, costs, gross margin, 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, the FTC investigation 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, including
changes in customer and channel inventory levels and changes due to year 2000
Page 37
issues; 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 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 due to internal systems or systems of suppliers,
infrastructure providers and other third parties adversely affected by year
2000 problems; claims due to year 2000 issues allegedly related to the
Company's products or year 2000 remediation efforts; and litigation involving
anti-trust, 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.
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
(IN MILLIONS-EXCEPT
PER SHARE AMOUNTS)
1998 FOR QUARTER ENDED DECEMBER 26 SEPTEMBER 26 JUNE 27 MARCH 28
- ------------------------------------------------------------------------------------------------------------------------
Net revenues $7,614 $6,731 $5,927 $6,001
Cost of sales $3,176 $3,192 $3,027 $2,749
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
(IN MILLIONS-EXCEPT
PER SHARE AMOUNTS)
1997 FOR QUARTER ENDED DECEMBER 27 SEPTEMBER 27 JUNE 28 MARCH 29
- ------------------------------------------------------------------------------------------------------------------------
Net revenues $6,507 $6,155 $5,960 $6,448
Cost of sales $2,691 $2,604 $2,343 $2,307
Net income $1,743 $1,574 $1,645 $1,983
Basic earnings per share $ .53 $ .48 $ .50 $ .61
Diluted earnings per share $ .49 $ .44 $ .46 $ .55
Dividends per share (B)
Declared $ .0150 $ .0150 $.0150 $.0125
Paid $ .0150 $ .0150 $.0125 $.0125
Market price range
Common Stock (C)
High $47.69 $50.25 $42.33 $41.19
Low $34.56 $34.77 $32.63 $32.59
Market price range
Step-Up Warrants (C)
High $37.34 $39.94 $32.08 $31.31
Low $24.19 $24.78 $22.66 $22.53
(A) NET INCOME FOR THE FIRST QUARTER OF 1998 REFLECTED A $165 MILLION CHARGE
FOR PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT RELATED TO THE
ACQUISITION OF CHIPS AND TECHNOLOGIES, INC.
(B) AS OF THE SECOND QUARTER OF 1998, THE COMPANY 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 1998. INTEL PLANS TO CONTINUE ITS DIVIDEND PROGRAM.
HOWEVER, DIVIDENDS ARE DEPENDENT ON FUTURE EARNINGS, CAPITAL REQUIREMENTS
AND FINANCIAL CONDITION.
(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 26, 1998, THERE WERE APPROXIMATELY 203,000 REGISTERED HOLDERS
OF COMMON STOCK. ALL STOCK AND WARRANT PRICES ARE CLOSING PRICES PER THE
NASDAQ STOCK MARKET AS ADJUSTED FOR STOCK SPLITS.
* All other brands and names are the property of their respective owners.
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 1998 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 1998 Annual
Report to Stockholders.
REVENUES AND INCOME
(Dollars in billions) 1996 1997 1998
---- ---- ----
Net revenue 20.8 25.1 26.3
Net income 5.2 6.9 6.1
COSTS AND EXPENSES
(Percent of revenues) 1996 1997 1998
---- ---- ----
Cost of sales 44% 40% 46%
R&D 9% 9% 10%
Marketing and G&A 11% 12% 12%
(Total) 64% 61% 68%
OTHER INCOME AND EXPENSE
(Dollars in millions) 1996 1997 1998
---- ---- ----
Interest income & other 406 799 792
Interest expense 25 27 34
CASH AND INVESTMENTS
(Dollars in billions) 1997 1998
---- ----
Cash & cash equivalents 4.1 2.0
Short-term investments 5.6 5.3
Long-term investments 1.8 5.4