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Basis of presentation The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. The critical accounting policies that require management's most significant estimates and judgments include valuation of non-marketable equity securities, valuation of inventory, and the assessment of recoverability of goodwill and other intangible assets. The actual results experienced by the company may differ materially from management's estimates. Recent accounting pronouncements Accounting change The cumulative effect of the adoption of SFAS No. 133 was an increase in income before taxes of $45 million, which is included in interest and other, net for 2001. The adoption did not have a material effect on other comprehensive income. Cash and cash equivalents Investments Trading assets. The company elects to classify as trading assets certain marketable debt and equity securities. The interest, currency and/or equity market risks inherent in these investments are generally mitigated through the use of derivative instruments. Also included in trading assets is a marketable equity portfolio held to generate returns that offset changes in liabilities related to certain deferred compensation arrangements. Trading assets are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. For marketable debt securities, gains or losses from changes in fair value, offset by losses or gains on related derivatives, are included in interest and other, net. For marketable equity securities having related derivative instruments, gains or losses from changes in fair value, offset or partially offset by losses or gains on the derivatives, are included in gains (losses) on equity securities, net. For other marketable equity securities related to deferred compensation arrangements, gains or losses from changes in fair value, offset by losses or gains on the related liabilities, are included in interest and other, net. Available-for-sale investments. Investments designated as available-for-sale include marketable debt and equity securities. Investments that are designated as available-for-sale as of the balance sheet date 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 and losses on the sale of debt securities are recorded in interest and other, net. Realized gains or losses on the sale or exchange of equity securities and declines in value judged to be other than temporary are recorded in gains (losses) on equity securities, net. Marketable equity securities are presumed to be impaired if the fair value is less than the cost basis for six months, absent compelling evidence to the contrary. Debt securities with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Debt securities with remaining maturities greater than one year are classified as other long-term investments. The company acquires certain equity investments for the promotion of business and strategic objectives, and to the extent these investments continue to have strategic value, the company typically does not attempt to reduce or eliminate the inherent market risks. The marketable portion of these investments is classified separately as marketable strategic equity securities. Non-marketable equity securities and other investments. Non-marketable equity securities and other investments are accounted for at historical cost or, if Intel has significant influence over the investee, using the equity method. The company's proportionate share of income or losses from investments accounted for under the equity method and any gain or loss on disposal is recorded in interest and other, net. Non-marketable equity securities and other investments, as well as equity-method investments, are included in other assets. Non-marketable equity securities are subject to a periodic impairment review, including assessment of the investee's financial condition, the existence of subsequent rounds of financing and the impact of any relevant contractual preferences, as well as the investee's historical results of operations, projected results and cash flows. Impairment of non-marketable equity investments is recorded in gains (losses) on equity securities, net. Securities lending Fair values of financial instruments Derivative financial instruments
As part of its strategic investment program, the company also acquires equity derivative instruments, such as warrants, that are not designated as hedging instruments. The gains or losses from changes in fair values of these equity derivatives are recognized in gains (losses) on equity securities, net. Currency risk. The company transacts business in various non-U.S. currencies, primarily Japanese yen and certain other Asian and European currencies. The company has established revenue, expense and balance sheet risk management programs to protect against reductions in value and volatility of future cash flows caused by changes in exchange rates. The company uses currency forward contracts, currency options, borrowings in various currencies and currency interest rate swaps in these risk management programs. These programs reduce, but do not always entirely eliminate, the impact of currency exchange movements. Currency forward contracts and currency options that are used to hedge exposures to variability in anticipated non-U.S.-dollar-denominated cash flows are designated as cash flow hedges. The maturities of these instruments are generally less than 12 months. For these derivatives, the effective portion of the gain or loss is reported as a component of other comprehensive income in stockholders' equity and is reclassified into earnings in the same period or periods in which the hedged transaction affects earnings, and within the same income statement line item. The ineffective portion of the gain or loss on the derivative in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest and other, net during the period of change. Prior to the adoption of SFAS No. 133, derivatives hedging the currency risk of future cash flows were not recognized on the balance sheet. Currency interest rate swaps and currency forward contracts are used to offset the currency risk of non-U.S.-dollar-denominated debt securities classified as trading assets, as well as other assets and liabilities denominated in various currencies. Changes in fair value of the underlying assets and liabilities are generally offset by the changes in fair value of the related derivatives, with the resulting net gain or loss, if any, recorded in interest and other, net. Interest rate risk. The company's primary objective for holding investments in debt securities is to preserve principal while maximizing yields, without significantly increasing risk. To achieve this objective, the returns on a substantial majority of the company's investments in long-term fixed-rate marketable debt securities are swapped to U.S. dollar LIBOR-based returns, using interest rate swaps and currency interest rate swaps in transactions that are not designated as hedges for accounting purposes. The floating interest rates on the swaps are reset on a monthly, quarterly or semiannual basis. Changes in fair value of the debt securities classified as trading assets are generally offset by changes in fair value of the related derivatives, resulting in negligible net impact. The net gain or loss, if any, is recorded in interest and other, net. The company also enters into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. These transactions are designated as fair value hedges. The gains or losses from the changes in fair value of the interest rate swaps, as well as the offsetting change in the hedged fair value of the long-term debt, are recognized in interest expense. Prior to the adoption of SFAS No. 133, interest rate swaps related to long-term debt were not recognized on the balance sheet, nor were the changes in the hedged fair value of the debt. Equity market risk. The company may enter into transactions designated as fair value hedges using equity options, swaps or forward contracts to hedge the equity market risk of marketable securities in its portfolio of strategic equity investments once the securities are no longer considered to have strategic value. The gain or loss from the change in fair value of these equity derivatives, as well as the offsetting change in hedged fair value of the related strategic equity securities, are recognized currently in gains or losses on equity investments, net. The company also uses equity derivatives in transactions not designated as hedges to offset the change in fair value of certain equity securities classified as trading assets. The company may or may not enter into transactions to reduce or eliminate the market risks of its investments in strategic equity derivatives, including warrants. Prior to the adoption of SFAS No. 133, warrants were not considered to be derivative instruments for accounting purposes and were not marked-to-market. Measurement of effectiveness of hedge relationships. For currency forward contracts, effectiveness of the hedge is measured using forward rates to value the forward contract and the forward value of the underlying hedged transaction. For currency options and equity options, effectiveness is measured by the change in the option's intrinsic value, which represents the change in the option's strike price compared to the spot price of the underlying hedged transaction. Not included in the assessment of effectiveness are the changes in time value of these options. For interest rate swaps, effectiveness is measured by offsetting the change in fair value of the long-term debt with the change in fair value of the interest rate swap. Any ineffective portions of the hedge, as well as amounts not included in the assessment of effectiveness, are recognized currently in interest and other, net or in gains (losses) on equity investments, net, depending on the nature of the underlying asset or liability. If a cash flow hedge were to be discontinued because it is probable that the original hedged transaction will not occur as anticipated, the unrealized gains or losses would be reclassified into earnings. 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. During 2001, the portion of hedging instruments' gains or losses excluded from the assessment of effectiveness and the ineffective portions of hedges had no material impact on earnings for either cash flow or fair value hedges. No cash flow hedges were discontinued as a result of forecasted transactions that did not occur. Inventories
Property, plant and equipment
Goodwill and other acquisition-related intangibles Through fiscal 2001, goodwill and other acquisition-related intangibles were reviewed for recoverability periodically and whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. The carrying amount was compared to the undiscounted cash flows of the businesses acquired, and if the review indicated that these intangibles were not recoverable, their carrying amount was reduced by the estimated shortfall of the undiscounted cash flows for goodwill and discounted cash flows for other acquisition-related intangibles. As a result of these reviews, $124 million of goodwill and acquisition-related intangibles was written off in fiscal 2001. Acquisition-related intangibles, comprised primarily of developed technology, are amortized on a straight-line basis over periods ranging from 2–6 years. Acquisition-related intangibles are presented net of accumulated amortization of $623 million at December 29, 2001 and $389 million at December 30, 2000. Amortization of goodwill and other acquisition-related intangibles and costs was $2.3 billion for 2001. This amount includes $1.6 billion of amortization of goodwill, $347 million of amortization of other acquisition-related intangibles (a substantial majority of which was related to developed technology) and write-offs of $124 million. In addition, the total includes $174 million of amortization of acquisition-related stock compensation costs (see "Acquisition-related unearned stock compensation") and $81 million of amortization of other acquisition-related costs. Revenue recognition Advertising Earnings per share
Weighted average common shares outstanding, assuming dilution, includes the incremental shares that would be issued upon the assumed exercise of stock options, as well as the assumed conversion of the convertible notes, for the period the notes were outstanding. Approximately 211 million of the company's stock options were excluded from the calculation of diluted earnings per share for 2001 (34 million in 2000 and 8 million in 1999). These options were excluded because they were antidilutive, but they could be dilutive in the future. Reclassifications
Prior to 2001, the company sold put warrants that allowed the holder to sell one share of stock to the company at a specified price. During 1999, the company received premiums of $20 million. As of December 29, 2001 and December 30, 2000, no put warrants were outstanding.
Obligations under securities lending agreements had an average rate of 1.75% as of December 29, 2001. The company also borrows under commercial paper programs. Maximum borrowings under commercial paper programs reached $105 million during 2001 and $539 million during 2000. This debt is rated A-1+ by Standard & Poor's and P-1 by Moody's. Long-term debt
The company has guaranteed repayment of principal and interest on bonds issued by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. The bonds are adjustable and redeemable at the option of either the company or the bondholder every five years through 2013 and are next adjustable and redeemable in 2003. In April 2001, the company issued zero coupon senior exchangeable notes for net proceeds of $208 million in a private placement. The note holders have the right to exchange their Intel notes for Samsung Electronics Co., Ltd. convertible notes (Samsung notes) owned by Intel. The Intel note holders may exercise their exchange option any time prior to January 12, 2004. The exchangeable notes were issued in order to partially mitigate the equity market risk of Intel's investment in the Samsung notes, and the exchange option is accounted for as an equity derivative and marked-to-market. The carrying value of the debt instrument, excluding the portion allocated to the equity derivative, is being accreted to its principal amount of $200 million through interest expense over the period to its maturity. The Intel notes are redeemable by Intel at any time. In September 2000, all of the company's convertible subordinated notes, with a carrying value of $207 million, were exchanged for approximately 7.4 million shares of unregistered Intel common stock. The Euro borrowings were made in connection with the financing of manufacturing facilities in Ireland, and Intel has invested the proceeds in Euro-denominated instruments of similar maturity to hedge currency and interest rate exposures. As of December 29, 2001, aggregate debt maturities were as follows: 2002—$14 million; 2003—$142 million; 2004—$285 million; 2005—$34 million; 2006—$36 million; and thereafter—$553 million.
Trading assets outstanding at fiscal year-ends were as follows:
Upon initial adoption of SFAS No. 133 at the beginning of 2001, approximately $1.4 billion of available-for-sale investments in marketable debt securities that had related derivative instruments were reclassified to trading assets. At the same time, the related derivatives were reclassified to other current assets, other assets or other accrued liabilities. These investments and derivatives had total associated unrealized gains of $57 million and unrealized losses of $56 million. Available-for-sale investments
Available-for-sale investments at December 30, 2000 were as follows:
The company sold available-for-sale securities with a fair value at the date of sale of $1.3 billion in 2001, $4.2 billion in 2000 and $1.0 billion in 1999. The gross realized gains on these sales totaled $548 million in 2001, $3.4 billion in 2000 and $883 million in 1999. The company realized gross losses on sales of $187 million in 2001, $52 million in 2000 and none in 1999. The company recognized gains on shares exchanged in third-party merger transactions of $156 million in 2001 and $682 million in 2000. The company recognized impairment losses on available-for-sale and non-marketable investments of $1.1 billion in 2001 and $297 million in 2000. For 2001, the company also recognized $122 million of net marked-to-market gains on equity trading assets and equity derivatives. The amortized cost and estimated fair value of available-for-sale investments in debt securities at December 29, 2001, by contractual maturity, were as follows:
Due to restrictions on sales extending beyond one year, publicly traded securities with a carrying value of $85 million and an estimated fair value of $210 million were classified as non-marketable equity securities at December 29, 2001. At December 30, 2000, similarly restricted securities had a carrying amount of $109 million and an estimated fair value of $631 million.
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 38% of net revenues for 2001. At December 29, 2001, these customers accounted for approximately 41% of net accounts receivable. The company endeavors to keep pace with the evolving computer and communications industries, and has adopted credit policies and standards intended to accommodate industry growth and inherent risk. Management believes that credit risks are moderated by the diversity of its end customers and geographic sales areas. Intel performs ongoing credit evaluations of its customers' financial condition and requires collateral as deemed necessary.
In December 2000, Intel contributed its Interactive Media Services division to Convera Corporation and invested $150 million in cash in exchange for 14.9 million voting and 12.2 million non-voting shares of Convera. Intel recognized a gain of $117 million on the portion of the business and related assets contributed to Convera in which Intel did not retain an ownership interest. During 2001, Intel recorded a loss of approximately $39 million as its proportionate share of Convera's loss and recognized a combined net loss of $157 million on the impairment and subsequent sale of the remaining investment.
The components of accumulated other comprehensive income, net of tax, were as follows:
The tax benefit associated with dispositions from employee stock plans reduced taxes currently payable for 2001 by $435 million ($887 million for 2000 and $506 million for 1999). The provision for taxes reconciles to the amount computed by applying the statutory federal rate of 35% to income before taxes as follows:
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:
U.S. income taxes were not provided for on a cumulative total of approximately $5.5 billion of undistributed earnings for certain non-U.S. subsidiaries. The company intends to reinvest these earnings indefinitely in operations outside the United States. The company reduced its tax provision for 2001 by $100 million, or approximately $0.015 per share, due to an increase in the calculated tax benefit related to export sales for 2000, including the impact of a revision in the tax law. This change in estimated taxes was reflected in the federal tax return for 2000 filed in September 2001. In March 2000, the Internal Revenue Service (IRS) closed its examination of the company's tax returns for years up to and including 1998. Resolution was reached on a number of issues, including adjustments related to the intercompany allocation of profits. As part of this closure, the company reversed previously accrued taxes, reducing the tax provision for the first quarter of 2000 by $600 million, or approximately $0.09 per share. Years after 1998 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.
Options granted by Intel currently expire no later than 10 years from the grant date and generally vest within 5 years. Additional information with respect to stock option plan activity is as follows:
In March 2001, a supplemental stock grant was given to employees who had been previously granted options with an exercise price above $30 per share. These additional grants were made in order to retain employees due to competitive market conditions and a decline in the company's stock price. The 2001 supplemental grants vest ratably over a two-year period from the date of grant. In October 2001, the company granted merit-based options that would have been granted in 2002 in order to enhance the potential long-term retention value of these stock options. The company intends to reduce merit grants in 2002 by the shares in this early grant program. The 2002 merit grant vests in 2007, on about the same date it would vest if granted in 2002. The range of option exercise prices for options outstanding at December 29, 2001 was $0.01 to $87.90. The range of exercise prices for options is wide, primarily due to the impact of assumed options of acquired companies that had experienced significant price fluctuations. The following tables summarize information about options outstanding at December 29, 2001:
These options will expire if not exercised at specific dates through December 2011. Option exercise prices for options exercised during the three-year period ended December 29, 2001 ranged from $0.01 to $49.81. Stock Participation Plan Pro forma information Pro forma information is required by SFAS No. 123 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 2001, 2000 and 1999 reported below was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:
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 employee stock 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 employee stock options. The weighted average estimated fair value of employee stock options granted during 2001 was $12.62 ($28.27 in 2000 and $14.77 in 1999). The weighted average estimated fair value of shares granted under the Stock Participation Plan during 2001 was $8.97 ($19.60 in 2000 and $9.90 in 1999). 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:
Retirement Plans 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 and to permit employee deferral of a portion of salaries in excess of certain tax limits and deferral of bonuses. This plan is unfunded. The company expensed $190 million for the Qualified Plans and the Non-Qualified Plan in 2001 ($362 million in 2000 and $294 million in 1999). The company expects to fund approximately $250 million for the 2001 contribution to the Qualified Plans and to allocate approximately $10 million for the Non-Qualified Plan, including the utilization of amounts expensed in prior years. A remaining accrual of approximately $47 million carried forward from prior years is expected to be contributed to these plans in future years. 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 and retirees 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 other countries. The company's funding policy for non-U.S. defined-benefit pension plans is consistent with the local requirements in each country. The company provides certain postretirement 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. The defined-benefit pension plans and the postretirement benefits had no material impact on the company's financial statements for the periods presented. The related unrecognized actuarial gains or losses and unrecognized prior service costs were not material to the company's balance sheet at December 29, 2001 or December 30, 2000.
2001 In April 2001, the company acquired VxTel Inc. In addition to the $381 million of consideration paid upon acquisition, payment of approximately $110 million is contingent upon the continued employment of certain employees. VxTel is a semiconductor company that has developed Voice over Packet (VoP) products that deliver high-quality voice and data communications over next-generation optical networks. In April 2001, the company acquired Cognet, Inc. in exchange for cash and 3.6 million unregistered shares of Intel common stock, of which approximately 1.4 million shares are contingent upon the continued employment of the founding stockholders. An additional 900,000 registered shares are issuable to certain employees contingent upon meeting certain performance criteria and are not included in purchase consideration. In addition to the total common stock and cash consideration of $156 million, payment of approximately $60 million in cash compensation is contingent upon continued employment of certain employees and meeting certain performance criteria. Cognet is a developer of components that process electrical signals within optical modules after those signals have been converted from light waves. Cognet has developed electronic components for use in 10-Gigabit Ethernet modules. In May 2001, the company acquired LightLogic, Inc. in exchange for 14.2 million shares of Intel common stock. Approximately 1.9 million of these shares are contingent upon the continued employment of certain employees. LightLogic develops highly integrated opto-electronic components and subsystems for high-speed fiber-optic telecommunications equipment. 2000 In May 2000, the company acquired Basis Communications Corporation. Basis designs and markets advanced semiconductors and other products used in equipment that directs traffic across the Internet and corporate networks. In August 2000, the company acquired Trillium Digital Systems, Inc. in exchange for 2.6 million unregistered shares of Intel common stock, cash and options assumed, of which approximately 1.2 million shares are contingent upon the continued employment of certain employees. Trillium is a provider of communications software solutions used by suppliers of wireless, Internet, broadband and telephony products. In October 2000, the company acquired Ziatech Corporation. Ziatech designs and markets a full range of Intel® architecture-based circuit boards, hardware platforms and development systems. 1999 In August 1999, the company acquired Level One Communications, Inc. Approximately 69 million shares of Intel common stock were issued in connection with the purchase. In addition, Intel assumed Level One's convertible debt with a fair value of approximately $212 million at acquisition. This debt has since been converted to Intel common stock. Level One provides silicon connectivity solutions for high-speed telecommunications and networking applications. In September 1999, the company acquired NetBoost Corporation. NetBoost develops and markets hardware and software solutions for communications equipment suppliers and independent software vendors in the networking and communications market segments. In October 1999, the company acquired IPivot, Inc. IPivot designs and manufactures Internet commerce equipment that manages large volumes of Internet traffic securely and efficiently. In November 1999, the company acquired DSP Communications, Inc., which supplies solutions for digital cellular communications products, including chipsets, reference designs, software and other key technologies for lightweight wireless handsets. (See "Contingencies" for a discussion of class-action litigation relating to Intel's acquisition of DSP Communications.) These purchase transactions are further described below:
In addition to the transactions described above, Intel purchased other businesses in seven smaller transactions in 2001 (thirteen in 2000 and seven in 1999). The 2001 transactions were in exchange for total consideration of $228 million, $73 million in cash and $147 million representing 3.2 million unregistered shares of Intel common stock. Of these shares, 1.9 million shares are contingent upon the continued employment of certain employees. The remaining consideration of $8 million related to the value of assumed options. A total of $153 million was allocated to goodwill for these transactions in 2001, while $71 million was allocated to deferred stock compensation and $22 million to purchased in-process research and development (IPR&D). Consideration for the smaller transactions in 2000 was $513 million, with $477 million allocated to goodwill, $5 million to intangibles and $10 million to IPR&D. In 1999, consideration for these transactions was $468 million, with $363 million allocated to goodwill, $44 million to intangibles and $9 million to IPR&D. For 2001, $198 million was allocated to IPR&D and expensed upon acquisition of the above companies ($109 million for 2000 and $392 million for 1999), because the technological feasibility of products under development had not been established and no future alternative uses existed. The fair value of the IPR&D was determined using the income approach, which discounts expected future cash flows from projects under development to their net present value. Each project was analyzed to determine the technological innovations included; the utilization of core technology; the complexity, cost and time to complete development; any alternative future use or current technological feasibility; and the stage of completion. Future cash flows were estimated, taking into account the expected life cycles of the products and the underlying technology, relevant market sizes and industry trends. For 2001, the company adopted the recommendations of an accounting industry task force, and determined a discount rate for each project based on the relative risks inherent in the project's development horizon, the estimated costs of development, and the level of technological change in the project and the industry, among other factors. This change in methodology did not have a material impact on the valuation of the IPR&D. Intel believes that the amounts determined for IPR&D, as well as developed technology, are representative of fair value and do not exceed the amounts an independent party would pay for these projects. The consolidated financial statements include the operating results of acquired businesses from the dates of acquisition. The operating results of all of the significant companies acquired have been included in the Intel Communications Group operating segment, except for the results of DSP Communications, which have been included in the Wireless Communications and Computing Group operating segment. The unaudited pro forma information below assumes that companies acquired in 2001 and 2000 had been acquired at the beginning of 2000, and includes the effect of amortization of goodwill and other identified intangibles from that date. The impact of charges for IPR&D has been excluded. This is presented for informational purposes only and is not necessarily indicative of the results of future operations or results that would have been achieved had the acquisitions taken place at the beginning of 2000.
In August 2001, Intergraph filed a second suit in the U.S. District Court for the Eastern District of Texas, alleging that the Intel® Itanium™ processor infringes two Intergraph microprocessor-related patents, and seeking an injunction and unspecified damages. Intergraph has withdrawn its request for damages and, consequently, Intergraph's sole requested remedy is an injunction that would prohibit Intel from making, using or selling Itanium processors. If granted, such an injunction would significantly limit Intel's ability to succeed in the enterprise server market segment for 64-bit processors. The Texas suit is currently scheduled for trial before Judge Ward, sitting without a jury, in July 2002. The company disputes the plaintiff's claims and intends to defend the lawsuit vigorously. On May 1, 2000, various plaintiffs filed a class-action lawsuit in the United States District Court for the Northern District of California, alleging violations of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission Rule 14d-10 in connection with Intel's acquisition of DSP Communications. The complaint alleges that Intel and CWC (Intel's wholly owned subsidiary at the time) agreed to pay certain DSP Communications insiders additional consideration of $15.6 million not offered or paid to other stockholders. The alleged purpose of this payment to the insiders was to obtain DSP Communications insiders' endorsement of Intel's tender offer in violation of the anti-discrimination provision of Section 14(d)(7) and Rule 14d-10. The plaintiffs are seeking unspecified damages for the class, and unspecified costs and expenses. The suit is currently scheduled for trial in July 2002; however, the presiding judge has retired and the case has been reassigned. The company disputes the plaintiffs' claims and intends to defend the lawsuit vigorously. On September 10, 2001, VIA Technologies, Inc. and Centaur Technology, Inc. sued Intel in the United States District Court for the Western District of Texas, alleging that the Intel® Pentium® 4 processor infringes a VIA Technologies microprocessor-related patent. The suit seeks injunctive relief and damages in an unspecified amount. The company disputes the plaintiffs' claims and intends to defend the lawsuit vigorously. In September, October and November 2001, various plaintiffs filed lawsuits against Intel alleging violations of the Securities Exchange Act of 1934. The five class-action complaints allege that purchasers of Intel stock between July 19, 2000 and September 29, 2000 were misled by false and misleading statements by Intel and certain of its officers and directors concerning the company's business and financial condition. In addition, stockholder derivative complaints have been filed in California Superior Court and Delaware Chancery Court against the company's directors and certain officers, alleging that they have mismanaged the company and otherwise breached their fiduciary obligations to the company. All complaints seek unspecified damages. The company disputes the plaintiffs' claims and intends to defend the lawsuits vigorously. The company is currently party to various legal proceedings, including those noted above. While management, including internal counsel, currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the company's financial position or overall trends in results of 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.
For the periods presented, the Chief Operating Decision Maker (CODM), as defined by SFAS No. 131, was the Chief Executive Officer (CEO), who is Craig R. Barrett. The CODM allocates resources to and assesses the performance of each operating segment using information about their revenues and operating profits before interest and taxes. In January 2002, the company announced the promotion of Paul S. Otellini, who was Executive Vice President and General Manager of the Intel Architecture Group, to President and Chief Operating Officer (COO) of Intel. Beginning in 2002, the company's Executive Office will consist of both the CEO and COO, who will have joint responsibility as the CODM. The Intel Architecture operating segment's products include microprocessors and related board-level products and chipsets based on the P6 microarchitecture (including the Intel® Pentium® III, Celeron® and Pentium® III Xeon™ processors), as well as the Pentium 4 and Intel® Xeon™ processors based on the new Intel® NetBurst™ microarchitecture. Sales of microprocessors and related products based on the P6 microarchitecture comprised a majority of the company's 2001 revenues and a substantial majority of the company's 2001 gross margin. For the same period, sales of products based on the Intel NetBurst microarchitecture, including Pentium 4 and Intel Xeon processors and related products, were a significant and rapidly increasing portion of our consolidated net revenues and gross margin. For 2000, sales of microprocessors and related products based on the P6 microarchitecture comprised a substantial majority of our consolidated net revenues and gross margin. The Intel Communications Group's products include Ethernet connectivity products, network processing components, modular network infrastructure components and embedded microcontrollers. The Wireless Communications and Computing Group's products include flash memory, application processors and cellular baseband chipsets for cellular handsets and handheld devices. The New Business Group provides e-Business data center services. Intel's products in all operating segments are sold directly to original equipment manufacturers, and through retail and industrial distributors, resellers and e-Business channels throughout the world. In addition to these operating segments, the company has sales and marketing, manufacturing, finance and administration groups. Expenses of these groups are allocated to the operating segments and are included in the operating results reported below. The "all other" category includes acquisition-related costs, including amortization of goodwill and identified intangibles, in-process research and development, and write-offs of acquisition-related goodwill and intangibles, as well as the revenues and earnings or losses of the New Business Group. In addition, certain corporate-level operating expenses (primarily the amount by which profit-dependent bonus expenses differ from a targeted level recorded by the operating segments) are not allocated to operating segments and are included in "all other" in the reconciliation of operating profits reported below. Prior to 2001, the majority of the profit-dependent bonus expenses were reported at the corporate level. For 2001, a higher percentage of these expenses has been allocated to the operating segments. Information for prior periods has been restated to conform to the 2001 presentation. Intel does not identify or allocate assets by operating segment, and does not allocate depreciation as such to the operating segments, nor does the CODM evaluate operating segments on these criteria. Operating segments do not record intersegment revenues, and, accordingly, there are none to be reported. Intel does not allocate interest and other income, interest expense or taxes to operating segments. The accounting policies for segment reporting are the same as for the company as a whole (see "Accounting policies"). Information on reportable segments for the three years ended December 29, 2001 is as follows:
In 2001, one customer accounted for approximately 14% of the company's revenues. In both 2000 and 1999, two customers each accounted for 13% of the company's revenues. A substantial majority of the sales to these customers were Intel Architecture products. Geographic revenue information for the three years ended December 29, 2001 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:
Net property, plant and equipment by country was as follows:
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* Legal Information © 2002 Intel Corporation
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Intel Corporation has a fiscal year that
ends on the last Saturday in December. Fiscal year 2001, a 52-week year, ended
on December 29, 2001. Fiscal year 2000 was a 53-week year that ended on December
30, while 1999, a 52-week year, ended on December 25. The next 53-week year
will end on December 31, 2005.
