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Accounting policies
Fiscal year. Intel Corporation ("Intel" or "the Company") has a fiscal year that ends the last
Saturday in December. Fiscal years 1995 and 1993, each 52-week years, ended on December 30
and 25, respectively. Fiscal 1994 was a 53-week year and ended on December 31, 1994. 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 into the functional
currency in accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation," 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 accounts for investments in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," effective as of the beginning of fiscal 1994. 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. All 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.
Fair values of financial instruments. Fair values of cash and cash equivalents, short-term
investments and short-term debt approximate cost due to the short period of time to maturity. Fair
values of long-term investments, long-term debt, non-marketable instruments, swaps, currency
forward contracts, currency options and options hedging non-marketable instruments are based on
quoted market prices or pricing models using current market rates.
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 does not use
derivative financial instruments for speculative or trading purposes. The Company's accounting
policies for these instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an instrument as a hedge include
its 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
options hedging investments in non-marketable instruments are deferred and recognized in income in
the same period as the hedges mature or when the underlying transaction is sold, whichever comes
first. Income or expense on swaps is accrued as an adjustment to the yield of the related
investments or debt they hedge.
Inventories. Inventories are stated at the lower of cost or market. Cost is computed on a currently
adjusted standard basis (which approximates actual cost on a current average or first-in, first-out
basis). Inventories at fiscal year-ends were as follows:
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(In millions) 1995 1994
------------------------------------------------------------
Materials and purchased parts $ 674 $ 345
Work in process 707 528
Finished goods 623 296
------- -------
Total $2,004 $1,169
======= =======
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Property, plant and equipment. Property, plant and equipment are stated at cost. Depreciation is
computed for financial reporting purposes principally by use of the straight-line method over the
following estimated useful lives: machinery and equipment, 2-4 years; land and buildings, 4-45
years.
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," effective as of the beginning of fiscal 1995. This
adoption had no material effect on the Company's financial statements.
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 revenue is recognized. All other advertising costs are expensed as incurred. The
Company does not incur any direct-response advertising costs. Advertising expense was $654
million, $459 million and $325 million in 1995, 1994 and 1993, 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 on a monthly basis. Interest expense capitalized as a component of construction
costs was $46 million, $27 million and $8 million for 1995, 1994 and 1993, respectively.
Earnings per common and common equivalent share. Earnings per common and common
equivalent share are computed using the weighted average number of outstanding common and
dilutive common equivalent shares outstanding. Fully diluted earnings per share have not been
presented as part of the consolidated statements of income because the differences are insignificant.
Stock distribution. On June 16, 1995, the Company effected a stock distribution in the form of a
two-for-one stock split to stockholders of record as of May 19, 1995. Share, per share, Common
Stock, capital in excess of par value, stock option and warrant amounts herein have been restated
to reflect the effect of this split.
Common Stock
1998 Step-Up Warrants. In 1993, the Company issued 40 million 1998 Step-Up Warrants to
purchase 40 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 $35.75 per share
of Common Stock, subject to annual increases to a maximum price of $41.75 per share effective in
March 1997. As of December 30, 1995, approximately 40 million Warrants were exercisable at a
price of $38.75 and expire on March 14, 1998 if not previously exercised. For 1995, the Warrants
had a dilutive effect on earnings per share and represented approximately 11 million common
equivalent shares. The Warrants did not have a dilutive effect on earnings per share in 1994 or
1993.
Stock repurchase program. In 1990, the Board of Directors authorized the repurchase of up to
80 million shares of Intel's Common Stock in open market or negotiated transactions. The Board
increased this authorization to a maximum of 110 million shares in July 1994. As of December 30,
1995, the Company had repurchased and retired approximately 68 million shares for the program
to date at a cost of $2.19 billion. As of December 30, 1995, after reserving shares to cover
outstanding put warrants, 29.9 million shares remained available under the repurchase authorization.
Put warrants
In a series of private placements from 1991 through 1995, the Company sold put warrants that
entitle the holder of each warrant to sell one share of Common Stock to the Company at a specified
price. Activity during the past three years is summarized as follows:
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Put warrants
outstanding
Cumulative ----------------------
premium Number of Potential
(In millions) received warrants obligation
------------------------------------------------------------
December 26, 1992 $ 56 28.0 $ 373
Sales 62 21.6 561
Expirations --- (20.0) (246)
------ ------ ------
December 25, 1993 118 29.6 688
Sales 76 25.0 744
Exercises --- (2.0) (65)
Expirations --- (27.6) (623)
------ ------ ------
December 31, 1994 194 25.0 744
Sales 85 17.5 925
Repurchases --- (5.5) (201)
Expirations --- (25.0) (743)
------ ------ ------
December 30, 1995 $ 279 12.0 $ 725
====== ====== ======
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The amount related to Intel's potential repurchase obligation has been reclassified from
stockholders' equity to put warrants. The 12 million put warrants outstanding at December 30,
1995 expire on various dates between February 1996 and November 1996 and have exercise
prices ranging from $38 to $68 per share, with an average exercise price of $60 per share. There is
no significant dilutive effect on earnings per share for the periods presented.
Borrowings
Short-term debt. Short-term debt and weighted average interest rates at fiscal year-ends were as
follows:
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1995 1994
----------------- ----------------
Weighted Weighted
average average
interest interest
(In millions) Balance rate Balance rate
-------------------------------------------------------------------
Borrowed under lines of credit $ 57 3.2% $ 68 3.2%
Reverse repurchase agreements
payable in non-U.S. currencies 124 9.2% 99 8.0%
Notes payable 2 4.7% 5 4.7%
Short-term portion of
long-term debt --- --- 179 11.8%
Drafts payable 163 N/A 166 N/A
------ ------
Total $ 346 $ 517
====== ======
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At December 30, 1995, the Company had established foreign and domestic lines of credit of approximately $1.16 billion. The Company generally renegotiates these lines annually. Compensating balance requirements are not material.
The Company also borrows under commercial paper programs. Maximum borrowings reached $700 million during both 1995 and 1994. This debt is rated A1+ by Standard and Poor's and P1 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:
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(In millions) 1995 1994
--------------------------------------------------------------
Payable in U.S. dollars:
AFICA Bonds due 2013 at 4% $ 110 $ 110
Zero Coupon Notes due 1995 at 11.8%, net of
unamortized discount of $8 in 1994 --- 179
Other U.S. dollar debt 4 4
Payable in other currencies:
Irish punt due 2008-2024 at 6%-12% 240 228
Greek drachma due 2001 46 46
Other foreign currency debt --- 4
(Less short-term portion) --- (179)
------- -------
Total $ 400 $ 392
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The Company has guaranteed repayment of principal and interest on the AFICA Bonds issued by
the Puerto Rico Industrial, Medical and Environmental Pollution Control Facilities Financing
Authority (AFICA). 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 1998. The Zero Coupon Notes matured during 1995. The Irish punt borrowings
were made in connection with the financing of a factory 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.
In 1994, the Company filed a shelf registration statement with the Securities and Exchange
Commission (SEC) that became effective in 1995. When combined with previous shelf registration
statements, this filing gave Intel 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"). The Company may issue up to
$1.4 billion in additional securities under effective registration statements.
As of December 30, 1995, aggregate debt maturities were as follows: 1996-none; 1997-none;
1998-$110 million; 1999-none; 2000-none; and thereafter-$290 million.
Investments
The stated returns on a majority of the Company's marketable investments in long-term fixed rate
debt and equity securities are swapped to U.S. dollar LIBOR-based returns. The currency risks
of investments denominated in foreign currencies are hedged with foreign currency borrowings,
currency forward contracts or currency interest rate swaps (see "Derivative financial instruments"
under "Accounting policies").
Investments with maturities of greater than six months consist primarily of A and A2 or better
rated financial instruments and counterparties. Investments with maturities of up to six months
consist primarily of A1/P1 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 30, 1995, investments were placed with
approximately 100 different counterparties.
Investments at December 30, 1995 were as follows:
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Gross Gross Estimated
unrealized unrealized fair
(In millions) Cost gains losses value
----------------------------------------------------------------------------
Commercial paper $ 576 $ --- $ --- $ 576
Repurchase agreements 474 --- --- 474
Securities of foreign governments 456 1 (1) 456
Corporate bonds 375 5 --- 380
Bank time deposits 360 --- --- 360
Loan participations 278 --- --- 278
Floating rate notes 224 --- --- 224
Fixed rate notes 159 1 (1) 159
Collateralized mortgage obligations 129 --- (1) 128
Other debt securities 119 --- (1) 118
-------- -------- -------- --------
Total debt securities 3,150 7 (4) 3,153
-------- -------- -------- --------
Hedged equity 431 45 --- 476
Preferred stock and other equity 309 91 (11) 389
-------- -------- -------- --------
Total equity securities 740 136 (11) 865
-------- -------- -------- --------
Swaps hedging investments in debt
securities --- 2 (9) (7)
Swaps hedging investments in equity
securities --- 5 (47) (42)
Currency forward contracts hedging
investments in debt securities --- 3 --- 3
-------- -------- -------- --------
Total available-for-sale securities 3,890 153 (71) 3,972
Less amounts classified as cash
equivalents (1,324) --- --- (1,324)
-------- -------- -------- --------
Total investments $ 2,566 $ 153 $ (71) $ 2,648
======== ======== ======== ========
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Investments at December 31, 1994 were as follows:
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Gross Gross Estimated
unrealized unrealized fair
(In millions) Cost gains losses value
----------------------------------------------------------------------------
Commercial paper $ 544 $ --- $ --- $ 544
Repurchase agreements 194 --- --- 194
Securities of foreign governments 518 2 (7) 513
Corporate bonds 440 12 (14) 438
Bank time deposits 406 --- --- 406
Loan participations 266 6 (2) 270
Fixed rate notes 167 1 (2) 166
Collateralized mortgage obligations 170 --- (4) 166
Floating rate notes 488 1 (1) 488
Other debt securities 293 --- (5) 288
-------- -------- -------- --------
Total debt securities 3,486 22 (35) 3,473
-------- -------- -------- --------
Hedged equity 431 --- (58) 373
Preferred stock and other equity 368 20 (16) 372
-------- -------- -------- --------
Total equity securities 799 20 (74) 745
-------- -------- -------- --------
Swaps hedging investments in debt
securities --- 22 (14) 8
Swaps hedging investments in equity
securities --- 60 --- 60
Currency forward contracts hedging
investments in debt securities --- 1 --- 1
-------- -------- -------- --------
Total available-for-sale securities 4,285 125 (123) 4,287
Less amounts classified as cash
equivalents (930) --- --- (930)
-------- -------- -------- --------
Total investments $ 3,355 $ 125 $ (123) $ 3,357
======== ======== ======== ========
Note: Certain 1994 amounts have been restated to conform to the 1995
presentation.
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During the year ended December 30, 1995, debt and marketable securities with a fair value at the date of sale of $114 million were sold. The gross realized gains on such sales totaled $60 million. There were no material proceeds or gross realized gains or losses from sales of securities during 1994.
The amortized cost and estimated fair value of investments in debt securities at December 30, 1995, by contractual maturity, were as follows:
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Estimated
(In millions) Cost fair value
------------------------------------------------------------
Due in 1 year or less $ 2,172 $ 2,172
Due in 1-2 years 486 489
Due in 2-5 years 214 214
Due after 5 years 278 278
-------- --------
Total investments in debt securities $ 3,150 $ 3,153
======== ========
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Outstanding notional amounts for derivative financial instruments at fiscal year-ends were as
follows:
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(In millions) 1995 1994
------------------------------------------------------------------
Swaps hedging investments in debt securities $ 824 $ 1,080
Swaps hedging investments in equity securities $ 567 $ 567
Swaps hedging debt $ 156 $ 156
Currency forward contracts $ 1,310 $ 784
Currency options $ 28 $ 10
Options hedging investments in non-marketable
instruments $ 82 $ ---
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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 off-balance-sheet
transactions 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 a floating U.S. dollar
interest rate based return. The floating rates on swaps are based primarily on U.S. dollar LIBOR
and reset on a monthly, quarterly or semiannual basis.
Weighted average pay and receive rates, average maturities and range of maturities on swaps at
December 30, 1995 were as follows:
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Weighted
Weighted average Weighted
average receive average Range of
pay rate rate maturity maturities
----------------------------------------------------------------------------
Swaps hedging investments in U.S.
dollar debt securities 6.5% 6.2% 1.1 years 0-3 years
Swaps hedging investments in
foreign currency debt securities 10.4% 9.1% 1.1 years 0-3 years
Swaps hedging investments in
equity securities N/A 5.4% 1.2 years 0-2 years
Swaps hedging debt 5.9% 5.2% 3.6 years 3-6 years
Note: Pay and receive rates are based on the reset rates that were in effect
at December 30, 1995.
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Pay rates on swaps hedging investments in debt securities generally match the yields on the
underlying investments they hedge. Payments on swaps hedging investments in equity securities
generally match the equity returns on the underlying investments they hedge. Receive rates on
swaps hedging debt generally match the expense on the underlying debt they hedge. Maturity
dates of swaps generally match those of the underlying investment or the debt they hedge. There is
approximately a one-to-one matching of investments and debt to swaps. Swap agreements
generally remain in effect until expiration. Income or expense on swaps is accrued as an
adjustment to the yield of the related investments or debt they hedge.
Other foreign currency instruments. Intel transacts business in various foreign currencies,
primarily Japanese yen and certain European currencies. The maturities on most of these foreign
currency instruments are less than 12 months. Deferred gains or losses attributable to foreign
currency instruments are not material.
Fair values of financial instruments
The estimated fair values of financial instruments outstanding at fiscal year-ends were as follows:
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1995 1994
------------------- ------------------
Estimated Estimated
Carrying fair Carrying fair
(In millions) amount value amount value
----------------------------------------------------------------------------
Cash and cash equivalents $ 1,463 $ 1,463 $ 1,180 $ 1,180
Short-term investments $ 995 $ 995 $ 1,230 $ 1,230
Long-term investments $ 1,699 $ 1,699 $ 2,058 $ 2,058
Non-marketable instruments $ 239 $ 259 $ 59 $ 144
Swaps hedging investments in
debt securities $ (7) $ (7) $ 8 $ 8
Swaps hedging investments in
equity instruments $ (42) $ (42) $ 60 $ 60
Options hedging investments in
non-marketable instruments $ (9) $ (13) $ --- $ ---
Short-term debt $ (346) $ (346) $ (517) $ (517)
Long-term debt $ (400) $ (399) $ (392) $ (384)
Swaps hedging debt $ --- $ (1) $ --- $ (12)
Currency forward contracts $ 3 $ 4 $ 1 $ 5
Currency options $ --- $ --- $ --- $ ---
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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. A
substantial majority of the Company's trade receivables are derived from sales to manufacturers of
microcomputer systems, with the remainder spread across various other industries.
During 1995, the Company experienced an increase in its concentration of credit risk due to
increasing trade receivables from sales to manufacturers of microcomputer systems. The
Company's five largest customers accounted for approximately 33% of net revenues for 1995. At
December 30, 1995, these customers accounted for approximately 34% of net accounts
receivable. A portion of the receivable balance from one of the Company's five largest customers
has been converted into a loan. The total amount receivable from this customer was approximately
$400 million at December 30, 1995.
The Company endeavors to keep pace with the evolving computer 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 its 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
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(In millions) 1995 1994 1993
------------------------------------------------------------
Interest income $ 272 $ 235 $ 155
Foreign currency gains 29 15 ---
Other income 114 23 33
------- ------- -------
Total $ 415 $ 273 $ 188
======= ======= =======
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Other income for 1995 included approximately $58 million from the settlement of ongoing litigation
and $60 million from sales of a portion of the Company's investment in marketable equity
securities. Other income for 1994 included non-recurring gains from the settlement of various
insurance claims. Other income for 1993 included non-recurring gains from the sale of certain
benefits related to the Company's Irish expansion and dividend income earned on equity
investments.
Provision for taxes
The provision for taxes consisted of the following:
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(In millions) 1995 1994 1993
------------------------------------------------------------
Interest before taxes:
U.S. $ 3,427 $ 2,460 $ 2,587
Foreign 2,211 1,143 943
-------- -------- --------
Total income before taxes $ 5,638 $ 3,603 $ 3,530
======== ======== ========
Provision for taxes:
Federal:
Current $ 1,169 $ 1,169 $ 946
Deferred 307 (178) 35
-------- -------- --------
1,476 991 981
-------- -------- --------
State:
Current 203 162 150
Foreign:
Current 354 134 127
Deferred 39 28 (23)
-------- -------- --------
393 162 104
-------- -------- --------
Total provision for taxes $ 2,072 $ 1,315 $ 1,235
======== ======== ========
Effective tax rate 36.8% 36.5% 35.0%
======== ======== ========
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The tax benefit associated with dispositions from employee stock plans reduced taxes currently
payable for 1995 by $116 million ($61 million and $68 million for 1994 and 1993, respectively).
The provision for taxes reconciled to the amount computed by applying the statutory federal rate
of 35% to income before taxes as follows:
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(In millions) 1995 1994 1993
-------------------------------------------------------------
Computed expected tax $ 1,973 $ 1,261 $ 1,235
State taxes, net of federal
benefits 132 105 98
Other (33) (51) (98)
-------- -------- --------
Provision for taxes $ 2,072 $ 1,315 $ 1,235
======== ======== ========
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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:
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(In millions) 1995 1994
------------------------------------------------------------------
Deferred tax assets:
Accrued compensation and benefits $ 61 $ 49
Deferred income 127 127
Inventory valuation and related reserves 104 255
Interest and taxes 61 54
Other, net 55 67
------- -------
408 552
Deferred tax liabilities:
Depreciation (475) (338)
Unremitted earnings of certain subsidiaries (116) (51)
Other, net (29) ---
------- -------
(620) (389)
------- -------
Net deferred tax (liability) asset $ (212) $ 163
======= =======
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U.S. income taxes were not provided for on a cumulative total of approximately $615 million 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's U.S. income tax returns for the years 1978 through 1987 have been examined by
the Internal Revenue Service (IRS). In 1989, the Company received a notice of proposed
deficiencies from the IRS totaling $36 million, exclusive of penalties and interest, for the years
1978 through 1982. These proposed deficiencies relate primarily to operations in Puerto Rico. In
1989, the Company filed a petition in the U.S. Tax Court contesting these proposed deficiencies
and subsequently reached settlement of certain issues with the IRS. In 1993, the U.S. Tax Court
ruled in favor of the Company on an export source issue and for the IRS on another, smaller issue.
The IRS appealed the decision to the United States Court of Appeals for the Ninth Circuit, and
the Company filed a cross-appeal of the decision. In 1995, the Court of Appeals affirmed the
decision of the Tax Court. The IRS has subsequently requested a re-hearing.
The Company has also received an examination report for the years 1983 through 1987. Intel has
lodged a protest, which relates solely to the export source issue referenced above, to the IRS
Appeals Office, but no decisions have been reached.
The Company's U.S. income tax returns for the years 1988 through 1990 are presently under
examination by the IRS. Final proposed adjustments have not yet been received for these years.
Management believes that adequate amounts of tax and related interest and penalties, if any, have
been provided for any adjustments that may result from unsettled portions of the 1978-1987 cases
or the years now under examination.
Employee benefit plans
Stock option plans. Intel has a stock option plan (hereafter referred to as the EOP 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 an
Executive Long-Term Stock Option Plan (ELTSOP) under which certain key executive officers
may be granted options to purchase shares of the Company's authorized but unissued Common
Stock. Under all plans, the option purchase price is not less than fair market value at the date of
grant. The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company intends to continue to apply APB No. 25 for
purposes of determining net income and to adopt the pro forma disclosure requirements for fiscal
1996.
Options currently expire no later than ten years from the grant date. Proceeds received by the
Company from exercises are credited to Common Stock and capital in excess of par value.
Additional information with respect to EOP Plan activity was as follows:
|
Outstanding options
Shares ---------------------
available Number of Aggregate
(In millions) for options shares price
------------------------------------------------------------
December 26, 1992 65.4 73.6 $ 669
Grants (15.2) 15.2 357
Exercises --- (9.0) (56)
Cancellations 1.8 (1.8) (24)
------- ------- -------
December 25, 1993 52.0 78.0 946
Grants (12.0) 12.0 397
Exercises --- (8.2) (54)
Cancellations 1.6 (1.6) (33)
------- ------- -------
December 31, 1994 41.6 80.2 1,256
Grants (13.5) 13.5 645
Exercises --- (9.8) (81)
Cancellations 3.0 (3.0) (77)
------- ------- -------
December 30, 1995 31.1 80.9 $ 1,743
======= ======= =======
Options exercisable at:
December 25, 1993 20.4 $ 135
December 31, 1994 26.2 $ 198
December 30, 1995 25.3 $ 236
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The range of exercise prices for options outstanding under the EOP Plan at December 30, 1995
was $3.13 to $69.43. These options will expire if not exercised at specific dates ranging from
January 1996 to December 2005. Prices for options exercised during the three-year period ended
December 30, 1995 ranged from $3.04 to $36.13.
Activity for the ELTSOP Plan is summarized below:
|
Outstanding options
Shares ---------------------
available Number of Aggregate
(In millions) for options shares price
------------------------------------------------------------
December 26, 1992 13.2 6.0 $ 44
Grants (0.4) 0.4 11
Exercises --- (0.8) (6)
------- ------- -------
December 25, 1993 12.8 5.6 49
Exercises --- (0.6) (4)
------- ------- -------
December 31, 1994 12.8 5.0 45
Grants (0.5) 0.5 30
Exercises --- (0.9) (6)
------- ------- -------
December 30, 1995 12.3 4.6 $ 69
======= ======= =======
Options exercisable at:
December 25, 1993 1.4 $ 11
December 31, 1994 2.6 $ 19
December 30, 1995 3.8 $ 29
|
The range of exercise prices for options outstanding under the ELTSOP Plan at December 30,
1995 was $7.31 to $60.48.
These options will expire if not exercised at specific dates ranging from April 1999 to September
2005. Prices for options exercised during the three-year period ended December 30, 1995
ranged from $7.31 to $7.34.
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 59.0 million
shares authorized to be issued under the plan, 11.9 million shares were available for issuance at
December 30, 1995. Employees purchased 3.5 million shares in 1995 (4.0 million and 4.4 million
in 1994 and 1993, respectively) for $110 million ($94 million and $71 million in 1994 and 1993,
respectively).
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. The plans are
designed to provide employees with an accumulation of funds for retirement on a tax-deferred
basis and provide for annual discretionary 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 $188 million for the Qualified Plans and the Non-Qualified Plan in 1995
($152 million in 1994 and $103 million in 1993). Of the $188 million accrued in 1995, the
Company expects to fund approximately $145 million for the 1995 contribution to the Qualified
Plans and to allocate approximately $6 million for the Non-Qualified Plan. The remainder, plus
approximately $140 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 balance in the participant's 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.
Pension expense for 1995, 1994 and 1993 for the U.S. and Puerto Rico plans was less than $1
million per year, and no component of expense exceeded $2 million.
The funded status of these plans as of December 30, 1995 and December 31, 1994 was as
follows:
|
(In millions) 1995 1994
------------------------------------------------------------------
Vested benefit obligation $ (3) $ (3)
====== ======
Accumulated benefit obligation $ (4) $ (3)
====== ======
Projected benefit obligation $ (6) $ (5)
Fair market value of plan assets 8 6
------ ------
Projected benefit obligation less than plan assets 2 1
Unrecognized net (gain) (12) (12)
Unrecognized prior service cost 3 4
------ ------
Accrued pension costs $ (7) $ (7)
====== ======
|
At fiscal year-ends, the weighted average discount rates and long-term rates for compensation
increases used for estimating the benefit obligations and the expected return on plan assets were as
follows:
|
1995 1994 1993
------------------------------------------------------------
Discount rate 7.0% 8.5% 7.0%
Rate of increase in compensation levels 5.0% 5.5% 5.0%
Expected long-term return on assets 8.5% 8.5% 8.5%
|
Plan assets of the U.S. and Puerto Rico plans consist primarily of listed stocks and bonds,
repurchase agreements, money market securities, U.S. government securities and stock index
derivatives.
The Company provides defined-benefit pension plans in certain foreign countries where required
by statute. The Company's funding policy for foreign defined-benefit plans is consistent with the
local requirements in each country. Pension expense for 1995, 1994 and 1993 for the foreign
plans included the following:
|
(In millions) 1995 1994 1993
----------------------------------------------------------------
Service cost-benefits earned during the year $ 9 $ 5 $ 5
Interest cost of projected benefit obligation 6 5 6
Actual investment (return) on plan assets (4) (8) (7)
Net amortization and deferral (2) 3 2
----- ----- -----
Net pension expense $ 9 $ 5 $ 6
===== ===== =====
|
The funded status of the foreign defined-benefit plans as of December 30, 1995 and December
31, 1994 is summarized below:
|
Assets Accumulated
exceed benefits
1995 accumulated exceed
(In millions) benefits assets
------------------------------------------------------------
Vested benefit obligation $ (44) $ (8)
======= =======
Accumulated benefit obligation $ (46) $ (14)
======= =======
Projected benefit obligation $ (62) $ (22)
Fair market value of plan assets 67 4
------- -------
Projected benefit obligation less than
(in excess of) plan assets 5 (18)
Unrecognized net loss 4 5
Unrecognized net transition obligation 2 ---
------- -------
Prepaid (accrued) pension costs $ 11 $ (13)
======= =======
Assets Accumulated
exceed benefits
1994 accumulated exceed
(In millions) benefits assets
------------------------------------------------------------
Vested benefit obligation $ (32) $ (4)
======= =======
Accumulated benefit obligation $ (34) $ (9)
======= =======
Projected benefit obligation $ (49) $ (16)
Fair market value of plan assets 51 3
------- -------
Projected benefit obligation less than
(in excess of) plan assets 2 (13)
Unrecognized net loss 2 2
Unrecognized net transition obligation --- 1
------- -------
Prepaid (accrued) pension costs $ 4 $ (10)
======= =======
|
At fiscal year-ends, the weighted average discount rates and long-term rates for compensation
increases used for estimating the benefit obligations and the expected return on plan assets were as
follows:
|
1995 1994 1993
--------------------------------------------------------------
Discount rate 5.5%-14% 5.5%-14% 5.5%-14%
Rate of increase in compensation
levels 4.5%-11% 4.5%-11% 4.5%-11%
Expected long-term return
on assets 5.5%-14% 5.5%-14% 5.5%-14%
|
Plan assets of the foreign plans consist primarily of listed stocks, bonds and cash surrender value
life insurance policies.
Other postemployment benefits. The Company has adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." There was no material impact on the Company's
financial statements for the periods presented.
Commitments
The Company leases a portion of its capital equipment and certain of its facilities under operating
leases that expire at various dates through 2011. Rental expense was $38 million in 1995, $38
million in 1994 and $35 million in 1993. Minimum rental commitments under all non-cancelable
leases with an initial term in excess of one year are payable as follows: 1996-$25 million;
1997-$20 million; 1998-$15 million; 1999-$12 million; 2000-$10 million; 2001 and beyond-$23
million. Commitments for construction or purchase of property, plant and equipment approximated
$1.47 billion at December 30, 1995. In connection with certain manufacturing arrangements, Intel
had minimum purchase commitments of approximately $1.12 billion at December 30, 1995 for
flash memories and other memory components and for production capacity of board-level
products.
Contingencies
On March 29, 1995, Thorn EMI North America Inc. brought suit in Federal Court in Delaware
against Intel and Advanced Micro Devices, Inc. (AMD) alleging infringement of a U.S. patent
relating to processes for manufacturing semiconductors, certain of which processes are utilized in
the manufacture of the Company's Pentium(R) and Pentium(R) Pro microprocessors. The plaintiff is
seeking injunctive relief and unspecified damages. On September 8, 1995, Intel was granted a
motion to sever its case from the AMD case. Trial of the plaintiff's claims against Intel is presently
set for June 1996. The Company believes this lawsuit to be without merit and intends to defend
the lawsuit vigorously. Although the ultimate outcome of this lawsuit cannot be determined at this
time, management, including internal counsel, does not believe that the outcome of this litigation
will have a material adverse effect on the Company's financial position or overall trends in results
of operations.
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 will not have a material adverse
effect on the Company's financial position or overall trends in results of operations, even if joint
and several liability were to be assessed.
The Company is party to various other legal proceedings. In the opinion of management, including
internal counsel, these proceedings will not have a material adverse effect on the financial position
or overall trends in results of operations of the Company.
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.
Industry segment reporting
The Company operates predominantly in one industry segment. The Company designs, develops,
manufactures and markets microcomputer components and related products at various levels of
integration. The Company sells its products directly to original equipment manufacturers (OEMs)
and also to a network of industrial and retail distributors throughout the world. The Company's
principal markets are in the United States, Europe, Asia-Pacific and Japan, with the U.S. and
Europe being the largest based on revenues. The Company's major products include
microprocessors and related board-level products, chipsets, embedded processors and
microcontrollers, flash memory chips, and network and communications products.
Microprocessors and related board-level products account for a substantial majority of the
Company's net revenues. No customer exceeded 10% of revenues in 1995 or 1994. One
significant customer accounted for 10% of revenues in 1993. Summary balance sheet information
for operations outside the United States at fiscal year-ends is as follows:
|
(In millions) 1995 1994
-----------------------------------------------------------------
Total assets $ 4,404 $ 2,940
Total liabilities $ 1,661 $ 962
Net property, plant and equipment $ 1,414 $ 1,238
|
Geographic information for the three years ended December 30, 1995 is presented in the
following table. Transfers between geographic areas are accounted for at amounts that are
generally above cost and consistent with rules and regulations of governing tax authorities. Such
transfers are eliminated in the consolidated financial statements. Operating income by geographic
segment does not include an allocation of general corporate expenses. Identifiable assets are those
that can be directly associated with a particular geographic area. Corporate assets include cash
and cash equivalents, short-term investments, deferred tax assets, other current assets, long-term
investments and certain other assets.
|
Transfers
Sales to between
(In millions) unaffiliated geographic Net Operating Identifiable
1995 customers areas revenues income assets
----------------------------------------------------------------------------------------
United States $ 7,922 $ 6,339 $14,261 $ 3,315 $12,603
Europe 4,560 1,190 5,750 1,383 2,517
Japan 1,737 28 1,765 353 665
Asia-Pacific 1,983 1,566 3,549 271 893
Other --- 684 684 410 329
Eliminations --- (9,807) (9,807) 124 (3,651)
Corporate --- --- --- (604) 4,148
-------- -------- -------- -------- --------
Consolidated $16,202 $ --- $16,202 $ 5,252 $17,504
======== ======== ======== ======== ========
1994
----------------------------------------------------------------------------------------
United States $ 5,826 $ 4,561 $10,387 $ 2,742 $ 7,771
Europe 3,158 380 3,538 418 1,733
Japan 944 61 1,005 125 343
Asia-Pacific 1,593 1,021 2,614 154 540
Other --- 639 639 378 324
Eliminations --- (6,662) (6,662) 179 (1,878)
Corporate --- --- --- (609) 4,983
-------- -------- -------- -------- --------
Consolidated $11,521 $ --- $11,521 $ 3,387 $13,816
======== ======== ======== ======== ========
1993
----------------------------------------------------------------------------------------
United States $ 4,416 $ 3,406 $ 7,822 $ 2,896 $ 5,379
Europe 2,476 51 2,527 309 1,214
Japan 678 119 797 108 351
Asia-Pacific 1,212 745 1,957 132 420
Other --- 566 566 348 207
Eliminations --- (4,887) (4,887) 85 (1,123)
Corporate --- --- --- (486) 4,896
-------- -------- -------- -------- --------
Consolidated $ 8,782 $ --- $ 8,782 $ 3,392 $11,344
======== ======== ======== ======== ========
| Financial Statements and accompanying notes are as
originally published. Share and per share amounts have not been adjusted to reflect subsequent
stock splits. | |
|
|
|
