Most financial statements include a footnote captioned “commitments and contingencies.” The purpose of this note is to alert financial statement users to the fact that a variety of actual and potential future claims exist that do not meet the FASB’s criteria for recognition as liabilities at the balance sheet date. Yet these claims may be important to users in assessing the firm’s debt position.
Commitments are agreements with suppliers, customers, employers, or other entities that are not yet completed transactions and consequently have not been recognized in the accounts. If such agreements are significant, they should be disclosed in the notes to the financial statements. Contingencies are existing conditions whose resulting gains and losses are currently uncertain, but will be resolved by the occurrence of future events. Commitments and contingencies may be referenced in either the current or the noncurrent liability sections, depending on when they are likely to require payment, or they may only be disclosed in the notes.
Exhibit 7.1 includes portions of the note discussing commitments and contingencies included in the 1997 annual report of Intel Corporation, and the first portion of the exhibit illustrates a commitment. The company has signed a variety of contracts related to its future operations, yet because these contracts are not yet executed, they are not valued in the financial statements.
The second portion of the exhibit 7.1 illustrates Intel Corporation’s significant contingent obligations. Similar obligations are faced by many firms in the chemical, petroleum refining, nuclear power, and special metals fabrication industries. Pursuant to environmental laws, this obligation is the requirement to control potentially hazardous emissions and correct the effects of past disposals of toxic wastes. Although Intel’s managers are currently unable to put a “price tag” on the ultimate amount of the liability, the dollar magnitude is potentially substantial.
Exhibit 7.1 Commitments and Contingencies
Intel Corporation – Selected Portions of Footnotes to 1997 Financial Statements
In October 1997, the Company and Digital Equipment Corporation announced that they have agreed to establish a broad-based business relationship. The agreement includes sale of Digital’s semiconductor manufacturing operations to Intel for approximately $700 million, a 10-year patent cross-license, supply of both Intel and Alpha microprocessors by Intel to Digital, development by Digital of future systems based on Intel’s 64-bit microprocessors, and termination of litigation between the companies as described below (see “Contingencies”). This agreement is also subject to U.S. government review. The transactions in the agreement are not expected to have a material adverse effect on the Company’s financial condition or ongoing results of operations in any reporting period.
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 that 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.