Intel 2003 Annual Report Download - page 66

Table of Contents
Index to Financial Statements
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Benefit Plans
The company has employee stock benefit plans, which are described more fully in “Note 12: Employee Stock Benefit Plans.” The
company’s stock option plans are accounted for under the intrinsic value recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations. Because the exercise price of all options granted under these stock
option plans was equal to the market price of the underlying common stock (defined as the average of the high and low trading prices reported
by The NASDAQ Stock Market*) on the grant date, no stock-based employee compensation, other than acquisition-related compensation, is
recognized in net income. The following table illustrates the effect on net income and earnings per share if the company had applied the fair
value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended, to options granted under the stock
option plans and rights to acquire stock granted under the company’s Stock Participation Plan, collectively called “options.” For purposes of
this pro-forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense
over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the
employee may be significantly different.
It is the company’s policy under SFAS No. 123 to periodically make adjustments to pro-forma compensation expense to reflect
forfeitures. Based on recent forfeiture data, the company reversed previously recognized pro-forma compensation expense and related tax
effects totaling $190 million in 2003 ($87 million in 2002 and $93 million in 2001).
SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-
Scholes option pricing model was developed for use in estimating the fair value of short-lived exchange-traded options that have no vesting
restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the
option’s expected life and the price volatility of the underlying stock. 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. See “Note 12: Employee Stock Benefit Plans”
for a discussion of the assumptions used in the option pricing model and estimated
fair value of employee stock options.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,”
in January 2003 and amended the Interpretation in December 2003. FIN 46 requires an investor with a majority of the variable interests
(primary beneficiary) in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A VIE is an entity in which the voting equity investors do not have a controlling financial interest or
the equity investment at risk is insufficient to finance the entity’
s activities without receiving additional subordinated financial support from the
other parties. Development-stage entities that have sufficient equity invested to finance the activities they are currently engaged in and entities
that are businesses, as defined in the Interpretation, are not considered VIEs. The provisions of FIN 46 were effective immediately for all
arrangements entered into with new VIEs created after January 31, 2003, and Intel has elected to apply the remaining provisions of the
Interpretation for the period ending December 27, 2003. Intel has completed a review of its investments in both non-
marketable and marketable
equity securities as well as other arrangements to determine whether Intel is the primary beneficiary of any VIEs. The review did not identify
any VIEs that would require consolidation or any significant exposure to VIEs that would require disclosure.
61
(In Millions—Except Per Share Amounts) 2003 2002 2001
Net income, as reported
$
5,641
$
3,117
$
1,291
Less: Total stock-based employee compensation expense determined under the fair value method
for all awards, net of tax
991
1,170
1,037
Pro
-
forma net income
$
4,650
$
1,947
$
254
Reported basic earnings per common share
$
0.86
$
0.47
$
0.19
Reported diluted earnings per common share
$
0.85
$
0.46
$
0.19
Pro
-
forma basic earnings per common share
$
0.71
$
0.29
$
0.04
Pro
-
forma diluted earnings per common share
$
0.71
$
0.29
$
0.04