Intel 2004 Annual Report Download - page 83

Table of Contents
INTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18: Contingencies
Tax Matters
In August 2003, in connection with the IRS’s regular examination of Intel’s tax returns for the years 1999 and 2000, the IRS proposed
certain adjustments primarily related to the amounts reflected by Intel on these returns as a tax benefit for its export sales. In January 2005, the
IRS issued formal assessments for these adjustments. The company does not agree with these adjustments and intends to appeal these
assessments. If the IRS prevails in its position, Intel’s federal income tax due for these years would increase by approximately $600 million,
plus interest. The IRS may make similar claims for years subsequent to 2000 in future audits.
Although the final resolution of the adjustments is uncertain, based on currently available information, management believes that the
ultimate outcome will not have a material adverse effect on the company’s financial position, cash flows or overall trends in results of
operations. There is the possibility of a material adverse impact on the results of operations of the period in which the matter is ultimately
resolved, if it is resolved unfavorably, or in the period in which an unfavorable outcome becomes probable and reasonably estimable.
Legal Proceedings
In 1997, Intergraph Corporation filed suit in Federal District Court in Alabama, generally alleging, among other claims, that Intel
infringed certain Intergraph patents. In 2001, Intergraph filed a second suit in the U.S. District Court for the Eastern District of Texas, alleging
that Intel infringed additional Intergraph patents, and seeking an injunction and unspecified damages. In 2002, Intel and Intergraph entered into
a settlement agreement, pursuant to which they agreed to settle the Alabama lawsuit and dismiss it with prejudice. Pursuant to the 2002
settlement agreement, Intel made a cash payment of $300 million to Intergraph and received a license under all Intergraph patents, excluding
the patents at issue in the Texas case.
Under the 2002 settlement agreement, if the patents in the Texas case were found to be infringed, Intel would pay Intergraph $150
million. If Intergraph prevailed on either patent on appeal, the 2002 settlement agreement provided that Intel would pay Intergraph an
additional $100 million and receive a license for the patents at issue in the case. In 2002, the Texas District Court ruled that Intel infringed both
patents at issue in that case. Pursuant to the settlement agreement, Intel paid Intergraph $150 million. Intel then appealed the decision. In
February 2004, the Court of Appeals for the Federal Circuit found that the District Court had erred, and remanded the case to the District Court
to determine in the first instance whether the patents at issue had been infringed.
In 2002, Intergraph filed suit in the Eastern District of Texas against Dell Inc., Gateway Inc. and Hewlett-Packard Company, alleging
infringement of three of Intergraph’s patents. These three patents are a subset of the patents that were the subject of the Alabama lawsuit that
Intergraph had filed against Intel. In 2003, Dell filed its answer and counterclaim and named Intel as well as Intergraph in a counterclaim for
declaratory judgment.
In March 2004, Intel and Intergraph entered into a second settlement agreement, pursuant to which they agreed to settle the Texas
lawsuit, and Intergraph agreed to dismiss Intergraph’s separate pending litigation against Dell Inc. The Texas case and Intergraph’s claims
against Dell in the Eastern District case were dismissed with prejudice. Pursuant to the 2004 settlement agreement, Intel will pay Intergraph a
total of $225 million, with $125 million paid in April 2004 and $25 million paid in each of the following four quarters. Also pursuant to the
2004 settlement agreement, Intergraph granted Dell a license under patents filed prior to April 4, 2012 to sell Dell products, including Dell
computer systems that contain Intel microprocessors. The 2004 settlement agreement further provided that Intergraph is entitled to retain the
$150 million previously paid by Intel pursuant to the 2002 settlement agreement, but that no additional $100 million payment would be
required under the 2002 settlement agreement. The 2004 settlement agreement also includes additional license rights in favor of Intel and
Intel’s customers and a covenant by Intergraph not to sue any Intel customer for products that include Intel microprocessors, Intel chipsets and
Intel motherboards in combination. As a result of the 2004 settlement agreement, Intel recorded a $162 million charge to cost of sales in the
first quarter of 2004. The remaining balance of $63 million represented the value of intellectual property assets acquired as part of the
settlement. This balance will be amortized over the assets’ remaining useful lives.
In March 2004, MicroUnity, Inc. filed suit against Intel and Dell Inc. in the Eastern District of Texas. MicroUnity claims that Intel
®
Pentium
®
III , Pentium
®
4, Pentium
®
M and Itanium
®
2 microprocessors infringe seven MicroUnity patents, and that certain Intel chipsets
infringe one MicroUnity patent. MicroUnity also alleges that Dell products that contain these Intel products infringe the same patents. At Dell’
s
request, Intel agreed to indemnify Dell with respect to MicroUnity’
s claims against Dell, subject to the terms of a prior agreement between Intel
and Dell. MicroUnity seeks an injunction, unspecified damages and attorneys’ fees against both Intel and Dell. Intel disputes MicroUnity’s
claims and intends to defend the lawsuit vigorously.
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