UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
-----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7882
----------------------------------
ADVANCED MICRO DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1692300
- ---------------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One AMD Place
Sunnyvale, California 94086
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 732-2400
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of $0.01 par value common stock outstanding as of July 16,
1999: 147,211,278.
ADVANCED MICRO DEVICES, INC.
- ----------------------------
INDEX
- -----
Part I. Financial Information
---------------------
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations --
Quarters Ended June 27, 1999 and June 28, 1998,
and Six Months Ended June 27, 1999 and June 28, 1998 3
Condensed Consolidated Balance Sheets --
June 27, 1999 and December 27, 1998 4
Condensed Consolidated Statements of Cash Flows --
Six Months Ended June 27, 1999 and June 28, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 14
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Part II. Other Information
-----------------
Item 1. Legal Proceedings 41
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 6. Exhibits and Report on Form 8-K 42
Signature 45
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(Thousands except per share amounts)
Quarter Ended Six Months Ended
------------------------ ---------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
---------- --------- ---------- ----------
Net sales $ 595,109 $ 526,538 $1,226,702 $1,067,394
Expenses:
Cost of sales 458,339 390,140 908,770 813,731
Research and development 167,278 139,158 327,224 267,278
Marketing, general and administrative 124,520 101,198 251,830 189,412
Restructuring and other special charges 17,514 - 32,530 -
---------- --------- ---------- ----------
767,651 630,496 1,520,354 1,270,421
---------- --------- ---------- ----------
Operating loss (172,542) (103,958) (293,652) (203,027)
Gain on sale of Vantis 432,059 - 432,059 -
Litigation settlement - - - (11,500)
Interest income and other, net 7,252 8,518 18,020 14,099
Interest expense (18,087) (17,663) (38,850) (30,135)
---------- --------- ---------- ----------
Income (loss) before income taxes and equity in joint venture 248,682 (113,103) 117,577 (230,563)
Provision (benefit) for income taxes 172,823 (44,110) 167,350 (91,107)
---------- --------- ---------- ----------
Income (loss) before equity in joint venture 75,859 (68,993) (49,773) (139,456)
Equity in net income of joint venture 4,037 4,433 1,302 12,169
---------- --------- ---------- ----------
Net income (loss) $ 79,896 $ (64,560) $ (48,471) $ (127,287)
---------- --------- ---------- ----------
Net income (loss) per common share:
Basic $ 0.54 $ (0.45) $ (0.33) $ (0.89)
---------- --------- ---------- ----------
Diluted $ 0.53 $ (0.45) $ (0.33) $ (0.89)
---------- --------- ---------- ----------
Shares used in per share calculation:
Basic 146,947 143,462 146,428 142,983
---------- --------- ---------- ----------
Diluted 149,540 143,462 146,428 142,983
---------- --------- ---------- ----------
See accompanying notes
- ----------------------
3
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS*
--------------------------------------
(Thousands)
June 27, December 27,
----------- -----------
Assets 1999 1998
----------- -----------
Current assets:
Cash and cash equivalents $ 220,638 $ 361,908
Short-term investments 430,192 335,117
----------- -----------
Total cash, cash equivalents and short-term investments 650,830 697,025
Accounts receivable, net 320,755 415,557
Inventories:
Raw materials 12,582 21,185
Work-in-process 102,667 129,036
Finished goods 87,807 24,854
----------- -----------
Total inventories 203,056 175,075
Deferred income taxes 49,827 205,959
Prepaid expenses and other current assets 73,407 68,411
----------- -----------
Total current assets 1,297,875 1,562,027
Property, plant and equipment, at cost 4,733,992 4,380,362
Accumulated depreciation and amortization (2,195,873) (2,111,894)
----------- -----------
Property, plant and equipment, net 2,538,119 2,268,468
Investment in joint venture 228,881 236,820
Other assets 181,134 185,653
----------- -----------
$ 4,246,009 $ 4,252,968
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 5,762 $ 6,017
Accounts payable 300,538 333,975
Accrued compensation and benefits 91,539 80,334
Accrued liabilities 161,789 168,280
Income tax payable 10,917 22,026
Deferred income on shipments to distributors 81,263 84,523
Current portion of long-term debt, capital lease obligations and other 131,364 145,564
----------- -----------
Total current liabilities 783,172 840,719
Deferred income taxes 60,113 34,784
Long-term debt, capital lease obligations and other, less current portion 1,440,563 1,372,416
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common stock, par value 1,490 1,465
Capital in excess of par value 1,102,723 1,071,591
Retained earnings 913,700 962,171
Accumulated other comprehensive loss (55,752) (30,178)
----------- -----------
Total stockholders' equity 1,962,161 2,005,049
----------- -----------
$ 4,246,009 $ 4,252,968
----------- -----------
* Amounts as of June 27, 1999, are unaudited. Amounts as of December 27, 1998,
are derived from the December 27, 1998, audited financial statements.
See accompanying notes
- ----------------------
4
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
Six Months Ended
----------------------------------
June 27, June 28,
1999 1998
----------- -----------
Cash flows from operating activities:
Net loss $ (48,471) $ (127,287)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of Vantis (432,059) -
Depreciation and amortization 255,371 225,334
Net decrease (increase) in deferred income tax assets 166,419 (99,066)
Restructuring and other special charges 25,038 -
Foreign grant and subsidy income (25,405) -
Net loss on disposal of property, plant and equipment 5,336 1,282
Net gain realized on sale of available-for-sale securities (4,250) -
Undistributed income of joint venture (1,302) (12,169)
Recognition of deferred gain on sale of building (840) -
Net compensation recognized on employee stock options (63) 3,632
Changes in operating assets and liabilities:
Net decrease in receivables, inventories,
prepaid expenses and other assets 22,491 67,790
Net increase in payables and accrued liabilities 31,391 7,963
(Decrease) increase in income tax payable (11,402) 4,111
----------- ----------
Net cash (used in) provided by operating activities (17,746) 71,590
Cash flows from investing activities:
Proceeds from sale of Vantis 454,269 -
Purchase of property, plant and equipment (347,446) (490,175)
Proceeds from sale of property, plant and equipment 2,915 6,482
Purchase of available-for-sale securities (1,041,084) (951,786)
Proceeds from sale of available-for-sale securities 935,686 647,630
----------- ----------
Net cash provided by (used in) investing activities 4,340 (787,849)
Cash flows from financing activities:
Proceeds from borrowings 5,835 573,865
Payments on debt and capital lease obligations (149,398) (36,189)
Deferred financing costs - (12,783)
Proceeds from foreign grants - 91,355
Proceeds from issuance of stock 27,256 21,575
----------- ----------
Net cash (used in) provided by financing activities (116,307) 637,823
Effect of exchange rate changes on cash and cash equivalents (11,557) (2,056)
----------- ----------
Net decrease in cash and cash equivalents (141,270) (80,492)
Cash and cash equivalents at beginning of period 361,908 240,658
----------- ----------
Cash and cash equivalents at end of period $ 220,638 $ 160,166
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the first six months for:
Interest $ 46,449 $ 32,416
----------- ----------
Income Taxes $ 9,768 $ (1,719)
----------- ----------
See accompanying notes
- ----------------------
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, the results of operations for the interim
periods shown in this report are not necessarily indicative of results to be
expected for the full fiscal year ending December 26, 1999. In the opinion of
the Company's management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on
Form 10-K for the year ended December 27, 1998.
The Company uses a 52- to 53-week fiscal year ending on the last
Sunday in December. The quarters ended June 27, 1999 and June 28, 1998 each
included 13 weeks.
Certain prior year amounts on the condensed consolidated financial
statements have been reclassified to conform to the 1999 presentation.
2. Restructuring and Other Special Charges
Restructuring and other special charges were $17.5 million in the second
quarter of 1999 and $15.0 million in the first quarter of 1999. These charges
were the result of the Company's efforts to better align its cost structure
with expected revenue growth rates. The restructuring efforts resulted in
non-cash charges for the:
. closure of a submicron development laboratory facility;
. write-off of equipment in the Submicron Development Center (SDC);
. write-off of equipment taken out of service in Fab 25, the Company's
integrated circuit (IC) manufacturing facility located in Austin, Texas,
related to the 0.35-micron wafer fabrication process; and
. write-off of capitalized costs related to discontinued system projects.
Cash charges consisted of:
. severance and benefits to terminated employees including 50 employees in
the Information Technology department and 128 employees in the SDC and
sales offices;
. costs for leases of vacated and unused sales offices; and
. costs for the disposal of equipment taken out of service in Fab 25 and
the SDC.
6
The restructuring and other special charges for 1999 are as follows:
Severance
and Equipment Discontinued
Employee Disposal System
(Thousands) (Unaudited) Benefits Facilities Equipment Costs Projects Total
------------- -------------- --------------- -------------- ------------------ ------------
Q1 99 charges $ 779 $ - $ 8,148 $ - $ 6,089 $ 15,016
Non-cash charges - - (8,148) - (6,089) (14,237)
------- -------------- -------- -------------- ----------------- --------
Reserves at March 28, 1999 779 - - - - 779
Q2 99 charges 2,245 968 10,801 3,500 - 17,514
Cash charges (1,360) - - - - (1,360)
Non-cash charges - - (10,801) - - (10,801)
------- -------------- -------- -------------- ----------------- --------
Reserves at June 27, 1999 $ 1,664 $968 $ - $3,500 $ - $ 6,132
======= ============== ======== ============== ================= ========
The Company's remaining reserves for severance and employee benefits will be
paid during the third quarter of 1999. The Company anticipates that the
remaining reserves for sales office facilities will be utilized over the
period through lease termination in the second quarter of 2002. The remaining
reserves for the equipment disposal costs will be fully discharged by the
first quarter of 2000.
7
3. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
June 27,
(Thousands) (Unaudited) 1999
----------
Cash equivalents:
Money market funds $ 169,000
Commercial paper 29,770
---------
Total cash equivalents $ 198,770
=========
Short-term investments:
Treasury notes $ 4,258
Bank notes 10,139
Federal agency notes 50,137
Money market auction rate preferred stocks 150,500
Certificates of deposit 62,259
Corporate notes 30,796
Commercial paper 122,103
---------
Total short-term investments $ 430,192
=========
Long-term investments:
Equity investments $ 18,528
Commercial paper 9,999
Treasury notes 1,907
---------
Total long-term investments (included in other assets) $ 30,434
=========
4. Debt
The 1996 syndicated bank loan agreement (the Credit Agreement) provided for a
$150 million three-year secured revolving line of credit and a $250 million
four-year secured term loan. On June 25, 1999, we terminated the secured
revolving line of credit. Approximately $86 million of the four-year secured
term loan was outstanding as of June 27, 1999. As of June 27, 1999, we were
in compliance with all covenants under the Credit Agreement. In July 1999, we
repaid the outstanding balance on the secured term loan, terminated the
Credit Agreement and replaced the Credit Agreement with a new Loan and
Security Agreement (the Loan Agreement) with a consortium of banks led by
Bank of America. Under the Loan Agreement, which provides for a four-year
secured revolving line of credit of up to $200 million, we can borrow up to
85 percent of our eligible accounts receivable from Original Equipment
Manufacturers (OEMs) and 50 percent of our eligible accounts receivable from
distributors, subject to reserves which may be set aside by the lenders. The
Company will be subject to compliance with certain financial covenants if the
levels of domestic cash it holds declines to certain levels, or the amount of
borrowings under the Loan Agreement rises to certain levels. Our obligations
under the Loan Agreement are secured by a pledge of most of our accounts
receivable, inventory, general intangibles and the related proceeds.
8
5. Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed using the weighted-
average common shares outstanding. Diluted net income per common share is
computed using the weighted average common shares outstanding plus any
potential dilutive securities. Dilutive securities include stock options,
restricted stocks, warrants and convertible debt. The following table sets
forth the computation of basic and diluted net income (loss) per common
share:
Quarter Ended Six Months Ended
------------------------- ----------------------------
June 27, June 28, June 27, June 28,
(Thousands except per share data) (Unaudited) 1999 1998 1999 1998
---------- ------------ ------------ -------------
Numerator:
Numerator for basic and diluted net income (loss)
per common share $ 79,896 $ (64,560) $ (48,471) $ (127,287)
======== ========= ========= ==========
Denominator:
Denominator for basic net income (loss)
per common share - weighted-average shares 146,947 143,462 146,428 142,983
Effect of dilutive securities:
Employee stock options 2,538 - - -
Restricted stock 55 - - -
-------- --------- --------- ----------
Dilutive potential common shares 2,593 - - -
-------- --------- --------- ----------
Denominator for diluted net income (loss) per
common share - adjusted weighted-average shares 149,540 143,462 146,428 142,983
======== ========= ========= ==========
Basic net income (loss) per common share $ 0.54 $ (0.45) $ (0.33) $ (0.89)
======== ========= ========= ==========
Diluted net income (loss) per common share $ 0.53 $ (0.45) $ (0.33) $ (0.89)
======== ========= ========= ==========
Options to purchase 8,223,255 shares of common stock at a weighted-average
price of $17.48 per share were outstanding during the quarter ended June 27,
1999, but were not included in the computation of diluted net income per
common share because the options' exercise price was greater than the average
market price of the common shares during the period. Options and restricted
stock were outstanding during the quarter ended June 28, 1998 and both of the
six month periods ended June 27, 1999 and June 28, 1998, but were not
included in the computation of diluted net loss per common share because the
effect in periods with a net loss would be antidilutive. Warrants and
convertible debt were outstanding during both of the six month periods ended
June 27, 1999 and June 28, 1998, but were not included in the computation of
diluted net loss per common share because the effect in periods with a net
loss would be antidilutive.
6. Investment in Joint Venture
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD
Semiconductor Limited (FASL), for the development and manufacture of non-
volatile memory devices. FASL operates
9
advanced IC manufacturing facilities in Aizu-Wakamatsu, Japan, to produce
Flash memory devices. The Company's share of FASL is 49.992 percent and the
investment is being accounted for under the equity method. As of June 27,
1999, the cumulative adjustment related to the translation of the FASL
financial statements into U.S. dollars resulted in a decrease in the
investment in FASL of $34 million. The following are the significant FASL
related-party transactions and balances:
Quarter Ended Six Months Ended
--------------------------------- ---------------------------------
June 27, June 28, June 27, June 28,
(Thousands) (Unaudited) 1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Royalty income $ 6,134 $ 4,773 $ 10,737 $ 10,674
Purchases 61,618 50,727 118,776 110,682
June 27, December 27,
(Thousands) (Unaudited) 1999 1998
-------------- -------------
Royalty receivable $ 5,546 $ 6,027
Accounts payable 32,875 39,424
The following is condensed unaudited financial data of FASL:
Quarter Ended Six Months Ended
------------------------------- -------------------------------
June 27 June 28, June 27 June 28,
(Thousands) (Unaudited) 1999 1998 1999 1998
------------- --------------- -------------- --------------
Net sales $ 118,398 $ 97,908 $ 215,670 $ 216,909
Gross profit 24,836 16,737 18,670 33,451
Operating income 24,310 16,044 17,443 29,973
Net income 14,034 7,814 9,880 18,364
The Company's share of the above FASL net income differs from the equity in
net income of joint venture reported on the condensed consolidated statements
of operations due to the elimination of intercompany unrealized profits which
are reflected on the Company's condensed consolidated statements of
operations.
7. Segment Reporting
During the six months ended June 27, 1999, AMD had two principal businesses
and had two reportable segments: (1) the AMD segment, which consists of three
product groups-Computation Products Group, Memory Group and Communications
Group, and (2) the Vantis segment, which consists of the Company's
programmable logic subsidiary, Vantis Corporation (Vantis). The reportable
segments were organized as discrete and separate functional units with
separate management teams and separate performance assessment and resource
allocation processes. The AMD segment produces microprocessors, core logic
products, Flash memory devices, Erasable Programmable Read-Only Memory
(EPROM) devices, telecommunication products, networking and
10
input/output (I/O) products and embedded processors. The Vantis segment
produced complex and simple, high-performance complementary metal oxide
semiconductor (CMOS) programmable logic devices (PLDs).
On June 15, 1999, AMD completed the sale of Vantis to Lattice Semiconductor
Corporation. Therefore, results from the second quarter of 1999 included
operations of the Vantis segment only through June 15, 1999. (See Note 8.)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies contained in the Company's
financial statements in its annual report on Form 10-K for the year ended
December 27, 1998. The Company evaluates performance and allocates resources
based on segment operating income (loss).
Quarter Ended Six Months Ended
----------------------------- -------------------------------
(Thousands) (Unaudited) June 27, June 28, June 27, June 28,
1999 1998 1999 1998
------------- ------------- -------------- --------------
Net sales:
AMD segment
External customers $ 555,574 $ 474,599 $1,140,010 $ 959,231
Intersegment 15,450 25,340 32,626 48,649
--------- --------- ---------- ----------
571,024 499,939 1,172,636 1,007,880
Vantis segment external customers 39,535 51,939 86,692 108,163
Elimination of intersegment sales (15,450) (25,340) (32,626) (48,649)
--------- --------- ---------- ----------
Net sales $ 595,109 $ 526,538 $1,226,702 $1,067,394
========= ========= ========== ==========
Segment income (loss):
AMD segment $(171,813) $(106,538) $ (299,291) $ (217,251)
Vantis segment (729) 2,580 5,639 14,224
--------- --------- ---------- ----------
Total operating loss (172,542) (103,958) (293,652) (203,027)
Gain on sale of Vantis 432,059 - 432,059 -
Litigation settlement - - - (11,500)
Interest income and other, net 7,252 8,518 18,020 14,099
Interest expense (18,087) (17,663) (38,850) (30,135)
(Provision) Benefit for income taxes (172,823) 44,110 (167,350) 91,107
Equity in net income of
FASL (AMD segment) 4,037 4,433 1,302 12,169
--------- --------- ---------- ----------
Net income (loss) $ 79,896 $ (64,560) $ (48,471) $ (127,287)
========= ========= ========== ==========
8. Sale of Vantis Corporation
On June 15, 1999, AMD sold Vantis to Lattice Semiconductor Corporation for
approximately $500 million in cash. AMD received, net of cash and cash
equivalents of about $46 million held by Vantis, approximately $454 million.
AMD's pre-tax gain on the sale of Vantis was $432 million,
11
subject to adjustment, if any, based on the final determination of the net
asset value of Vantis at June 15, 1999. The gain is computed based on
Vantis' preliminary net assets as of June 15, 1999 and other direct expenses
related to the sale. The applicable tax rate on the gain was 40 percent.
Subsequent to the Vantis sale, the Company will continue to provide services
to Vantis pursuant to various re-negotiated service contracts. According to
the service contracts, the Company will continue to provide, among other
things, wafer fabrication and assembly, test, mark, pack services to Vantis.
The wafer, fabrication and assembly, test, mark and pack service agreements
will continue until September 2003.
9. Comprehensive Income (Loss)
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments
are included in other comprehensive loss.
The following are the components of comprehensive income (loss):
Quarter Ended Six Months Ended
-------------------------- ----------------------------
June 27, June 28, June 27, June 28,
(Thousands) (Unaudited) 1999 1998 1999 1998
----------- ------------ ------------ -------------
Net income (loss) $ 79,896 $ (64,560) $ (48,471) $ (127,287)
Foreign currency translation adjustments (19,679) (8,368) (29,990) (15,681)
Unrealized gains on securities, net of tax:
Unrealized gains on investments arising
during the period 6,244 7,897 7,869 6,669
Less: Reclassification adjustment for
gains included in earnings - - (3,453) -
-------- --------- --------- ----------
Other comprehensive loss (13,435) (471) (25,574) (9,012)
-------- --------- --------- ----------
Comprehensive income (loss) $ 66,461 $ (65,031) $ (74,045) $ (136,299)
======== ========= ========= ==========
The components of accumulated other comprehensive loss, net of related tax,
are as follows:
June 27, December 27,
(Thousands) (Unaudited) 1999 1998
--------- ------------
Unrealized gain on investments, net of tax $ 11,176 $ 6,760
Cumulative translation adjustments (66,928) (36,938)
--------- ---------
$ (55,752) $ (30,178)
========= =========
10. Contingencies
AMD V. ALTERA CORPORATION. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to AMD's
and Altera Corporation's programmable logic devices. In a trial held in May
1996, a jury found that five of the eight AMD patents-
12
in-suit were licensed to Altera. As a result of the bench trial held in August
1997, the Court held that Altera was licensed to the three remaining AMD
patents-in-suit. Seven patents were asserted by Altera in its counterclaim
against AMD. The Court determined that the Company is licensed to five of the
seven patents and two remain in suit. Altera filed a motion to recover
attorneys' fees in November 1997. The Company then filed, and the Court
granted, a motion to stay determination of the attorneys' fees motion until
resolution of its appeal. The Company filed an appeal of the rulings of the
jury and Court determinations that Altera is licensed to each of its eight
patents-in-suit. Both parties filed briefs and the Federal Court of Appeal
heard oral argument on our appeal in November 1998. In April 1999, the Federal
Court of Appeal reversed the earlier jury and Court decisions and held that
Altera is not licensed to the eight AMD patents-in-suit. Also in April 1999,
and following the decision of the Federal Court of Appeal, Altera filed a
petition for rehearing. In June 1999, in connection with the sale of Vantis to
Lattice Semiconductor Corporation, AMD transferred this proceeding and
substantially all of its rights and liabilities relating to this action to
Vantis.
SECURITIES CLASS ACTION LITIGATIONS. Between March 10, 1999 and April 22,
1999, AMD and certain individual officers of AMD were named as defendants in
the following lawsuits: Arthur S. Feldman v. Advanced Micro Devices, Inc., et
al.; Pamela Lee v. Advanced Micro Devices, Inc., et al.; Izidor Klein v.
Advanced Micro Devices, Inc., et al.; Nancy P. Steinman v. Advanced Micro
Devices, Inc., et al.; Robert L. Dworkin v. Advanced Micro Devices, Inc., et
al.; Howard M. Lasker v. Advanced Micro Devices, Inc., et al.; John K.
Thompson v. Advanced Micro Devices, Inc., et al.; Dan Schwartz v. Advanced
Micro Devices, Inc., et al.; Serena Salamon and Norman Silverberg v. Advanced
Micro Devices, Inc., et al.; David Wu and Hossein Mizraie v. Advanced Micro
Devices, Inc., et al.; Eidman v. Advanced Micro Devices, Inc., et al.; Nold v.
Advanced Micro Devices, Inc., et al.; Freeland v. Advanced Micro Devices,
Inc., et al.; Fradkin v. Advanced Micro Devices, Inc. et al.; Ellis Investment
Co. v. Advanced Micro Devices, Inc., et al.; Dezwareh v. Advanced Micro
Devices, Inc., et al.; and Tordjman v. Advanced Micro Devices, Inc., et al.
These class action complaints allege various violations of federal securities
law, including violations of Section 10(b) of the Securities Exchange Act and
Rule 10b-5 promulgated thereunder. Most of the complaints purportedly were
filed on behalf of all persons, other than the defendants, who purchased or
otherwise acquired common stock of AMD during the period from October 6, 1998
to March 8, 1999. Two of the complaints allege a class period from July 13,
1998 to March 9, 1999. All of the complaints allege that materially misleading
statements and/or material omissions were made by AMD and certain individual
officers of AMD concerning design and production problems relating to high-
speed versions of the AMD-K6(R)-2 and AMD-K6-III microprocessors. The
complaints seek unspecified damages, equitable relief, interest, fees and
other litigation costs.
The Company expects that these suits will be consolidated into one action
within the next several months. AMD intends to contest the litigation
vigorously. Based upon information presently known to management, the Company
does not believe that the ultimate resolution of these lawsuits will have a
material adverse effect on our financial condition or results of operations.
13
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward-looking are based on
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially. The forward-looking
statements relate to, among other things, operating results; anticipated cash
flows; capital expenditures; adequacy of resources to fund operations and
capital investments; our ability to access external sources of capital; our
ability to transition to new process technologies; our ability to produce the
AMD Athlon microprocessor in the volume required by customers on a timely basis;
our ability, and the ability of third parties, to provide timely infrastructure
solutions (motherboards and chipsets) to support the AMD Athlon microprocessor;
customer and market acceptance of the AMD Athlon microprocessor; our ability to
maintain average selling prices for the AMD Athlon microprocessor; strengthening
demand for Flash memory devices; Year 2000 costs; the impact on our business as
a result of Year 2000 issues; the impact on customers and suppliers as they
prepare for the Year 2000; our new integrated circuit manufacturing and design
facility in Dresden, Germany (Dresden Fab 30); and the Fujitsu AMD Semiconductor
Limited (FASL) manufacturing facilities. See "Financial Condition" and "Risk
Factors" below, as well as such other risks and uncertainties as are detailed in
our other Securities and Exchange Commission reports and filings for a
discussion of the factors that could cause actual results to differ materially
from the forward-looking statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto as of December 27, 1998, and December 28,
1997, and for each of the three years in the period ended December 27, 1998.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, K86, AMD-
K6, AMD-K6-2, AMD-K6-III, AMD Athlon and 3DNow! are either trademarks or
registered trademarks of Advanced Micro Devices, Inc. Vantis is a trademark of
Vantis Corporation. Microsoft and Windows are either registered trademarks or
trademarks of Microsoft Corporation. Pentium is a registered trademark and
Celeron is a trademark of Intel Corporation. Other terms used to identify
companies and products may be trademarks of their respective owners.
14
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
During the six months ended June 27, 1999, we participated in all three
technology areas within the digital integrated circuit (IC) market - memory
circuits, logic circuits and microprocessors - through (1) our AMD segment,
which consists of our three product groups - Computation Products Group (CPG),
Memory Group and Communications Group and (2) our Vantis segment, which
consisted of our former programmable logic subsidiary, Vantis Corporation
(Vantis). CPG products include microprocessors, core logic products and embedded
processors. Memory Group products include Flash memory devices and Erasable
Programmable Read-Only Memory (EPROM) devices. Communications Group products
include telecommunication products, networking, and input/output (I/O) products.
Vantis products are complex and simple high-performance complementary metal
oxide semiconductor (CMOS) programmable logic devices (PLDs).
On June 15, 1999, we completed the sale of our Vantis segment to Lattice
Semiconductor Corporation for approximately $500 million in cash. The actual
cash received was approximately $454 million, which was net of Vantis' cash and
cash equivalent balance of approximately $46 million as of the closing.
The following is a summary of the net sales of the AMD and Vantis segments for
the periods presented below:
Quarter Ended Six Months Ended
------------------------------------------------ -------------------------------
June 27, March 28, June 28, June 27, June 28,
(Millions) 1999 1999 1998 1999 1998
-------------- -------------- -------------- -------------- --------------
AMD Segment:
CPG $ 317 $ 395 $ 272 $ 712 $ 502
Memory Group 166 126 132 292 299
Communications Group 70 64 71 133 158
Other 2 - - 2 -
----- ----- ----- ------ ------
555 585 475 1,139 959
Vantis Segment 40 47 52 87 108
----- ----- ----- ------ ------
Total $ 595 $ 632 $ 527 $1,226 $1,067
===== ===== ===== ====== ======
Net Sales Comparison of Quarters Ended June 27, 1999 and March 28, 1999
Net sales for the second quarter of 1999 decreased by six percent compared to
the first quarter of 1999.
CPG net sales of $317 million decreased 20 percent in the second quarter of 1999
compared to the first quarter of 1999 due primarily to a decrease in sales of
microprocessors. Net sales from our AMD-K6(R) family of microprocessors
substantially declined from the previous quarter as a result of aggressive Intel
marketing, pricing and product bundling. Unit shipments declined approximately
14 percent, and the average selling price declined approximately 15 percent for
our AMD-K6 family of microprocessors compared to the previous quarter. We expect
net sales from our AMD-K6
15
family of microprocessors to decline due to the decreasing average selling
prices. CPG sales growth during the remainder of 1999 is dependent on a
successful production ramp and market acceptance of our AMD Athlon(TM)
microprocessor, as to which we cannot give any assurance.
Memory Group net sales of $166 million increased by 32 percent in the second
quarter of 1999 compared to the first quarter of 1999 as a result of strong
growth in unit shipments of Flash memory devices at higher average selling
prices, slightly offset by a decline in unit shipments of EPROM devices. Demand
for Flash memory devices, particularly in the cellular phone industry, grew
during the second quarter of 1999. Demand for EPROM devices continues to
decline due to a shift away from EPROM devices to Flash memory devices. As a
result of this ongoing trend, we continue to expect future EPROM sales to
decline.
Communications Group net sales of $70 million increased nine percent in the
second quarter of 1999 compared to the first quarter of 1999. This was due to
an increase in unit shipments of telecommunication products as a result of
improved Asian and world economies, particularly in China and Latin America.
This increase was partially offset by a decrease in average selling prices of
communication products due to price pressures, and a decrease in net sales of
networking products. Sales of our new higher-performance networking products
have not grown enough to offset the decline in sales of our older products.
Vantis net sales of $40 million decreased 15 percent in the second quarter of
1999 compared to the first quarter of 1999, primarily as a result of only 11
weeks of sales in the second quarter due to the sale of Vantis on June 15, 1999,
as compared to a full 13 weeks of sales in the prior quarter.
Net Sales Comparison of Quarters Ended June 27, 1999 and June 28, 1998
Net sales for the second quarter of 1999 increased by 13 percent compared to the
second quarter of 1998.
CPG net sales increased by 17 percent in the second quarter of 1999 compared to
the same quarter in the previous year due primarily to an increase in sales of
microprocessors. Unit shipments of our AMD-K6 family of microprocessors
increased 40 percent as a result of our development of a broader and stronger
customer base and more competitive products. This increase in unit shipments
was partially offset by a 20 percent decrease in average selling prices.
Aggressive Intel marketing, pricing and product bundling in the second quarter
of 1999 caused the decline of the average selling price of our AMD-K6 family of
microprocessors compared to the same period in 1998. We expect net sales from
our AMD-K6 family of microprocessors to decline due to the decreasing average
selling prices. CPG sales growth during the remainder of 1999 is dependent on a
successful production ramp and market acceptance of our AMD Athlon
microprocessor, as to which we cannot give any assurance.
Memory Group net sales increased by 26 percent in the second quarter of 1999
compared to the second quarter of 1998. We experienced significant growth in
unit shipments of Flash memory devices, which were partially offset by lower
average selling prices of Flash memory devices and lower net sales of EPROM
devices. Demand for Flash memory devices, particularly in the cellular phone
industry, grew during the second quarter of 1999. Demand for EPROM devices
16
continues to decline with the shift away from EPROM devices to Flash memory
devices. As a result of this ongoing trend, we continue to expect future EPROM
sales to decline.
Communications Group net sales were relatively flat in the second quarter of
1999 compared to the second quarter of 1998. This was due to a combination of a
slight decrease in net sales of telecommunication products and a slight increase
in net sales of networking products.
Vantis net sales decreased by 23 percent in the second quarter of 1999 compared
to the second quarter of 1998. This decrease was due to lower sales of SPLD
products which were partially offset by higher sales of CPLD products, as well
as only 11 weeks of sales in the second quarter due to the sale of Vantis on
June 15, 1999, as compared to a full 13 weeks of sales in the second quarter of
1998.
Net Sales Comparison of Six Months Ended June 27, 1999 and June 28, 1998
Net sales for the first half of 1999 increased by 15 percent compared to the
first half of 1998.
CPG net sales increased by 42 percent in the first half of 1999 compared to the
first half of 1998. Our net sales of AMD-K6 family of microprocessors doubled
during this period. Growth in our AMD-K6 family of microprocessors was
primarily driven by a 91 percent increase in unit shipments which resulted from
our development of a stronger customer base and more competitive products.
Aggressive Intel marketing, pricing and product bundling in the first half of
1999 caused the decline of the average selling price of our AMD-K6 family of
microprocessors from the first half of 1998. We expect net sales from our AMD-K6
family of microprocessors to decline due to the decreasing average selling
prices. CPG sales growth during the remainder of 1999 is dependent on a
successful production ramp and market acceptance of our AMD Athlon
microprocessor, as to which we cannot give any assurance.
Memory Group net sales decreased two percent in the first half of 1999 compared
to the first half of 1998 due to lower net sales of EPROM devices. This
decrease was partially offset by slightly higher net sales of Flash memory
devices as a result of growing demand for Flash in the latter part of the
period. Demand for EPROM devices continues to decline with the shift away from
EPROM devices to Flash memory devices. As a result of this ongoing trend, we
continue to expect future EPROM sales to decline.
Communications Group net sales decreased 16 percent in the first half of 1999
compared to the first half of 1998. This decrease was a result of fewer
unit shipments as well as lower average selling prices of both telecommunication
and networking products. During the later part of the period, sales of our
telecommunication products increased, but not enough to have a significant
impact on the full period. Sales of our new higher-performance networking
products have not grown enough to offset the decline in sales of our older
products.
17
Vantis net sales decreased 19 percent in the first half of 1999 compared to the
first half of 1998. This decrease was due to lower sales of SPLD products which
were partially offset by higher sales of CPLD products, as well as only 24 weeks
of sales in the first half of 1999 due to the sale of Vantis on June 15, 1999,
as compared to a full 26 weeks of sales in the first half of 1998.
Comparison of Expenses, Gross Margin Percentage and Interest
The following is a summary of expenses, gross margin percentage and interest
income and other, net for the periods presented below:
Quarter Ended Six Months Ended
------------------------------------------ ---------------------------
June 27, March 28, June 28, June 27, June 28,
(Millions except for gross margin 1999 1999 1998 1999 1998
percentage) ------------ ------------ ------------ ------------ ------------
Cost of sales $ 458 $ 450 $ 390 $ 909 $ 814
Gross margin percentage 23 % 29 % 26 % 26 % 24 %
Research and development 167 160 139 327 267
Marketing, general and administrative 125 127 101 252 189
Restructuring and other special charges 18 15 - 33 -
Gain on sale of Vantis 432 - - 432 -
Litigation settlement - - - - 12
Interest income and other, net 7 11 8 18 14
Interest expense 18 21 18 39 30
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly due to the state-of-the-art
production facilities required for microprocessors. As a result, gross margin
is significantly affected by fluctuations in product sales. Gross margin
percentage growth is dependent on increased sales from microprocessor and other
products as fixed costs continue to rise due to additional capital investments
made as we continue to expand production capacity.
Gross margin percentage of 23 percent in the second quarter of 1999 decreased
from 29 percent in the first quarter of 1999. The decrease in gross margin
percentage was due to lower net sales of microprocessors and higher fixed costs.
Fixed costs will continue to increase as we introduce equipment for 0.18-micron
process technology capacity and facilitize Fab 25, our IC manufacturing facility
in Austin, Texas. Dresden Fab 30 will also contribute to an increase in cost of
sales at the time it begins producing units for sale, which we anticipate to be
no earlier than the first quarter of 2000. Accordingly, absent significant
increases in sales, particularly with respect to microprocessors, we will
continue to experience pressure on our gross margin percentage. Gross margin
percentage of 23 percent in the second quarter of 1999 decreased from 26 percent
in the same quarter of 1998. This decrease was primarily due to higher fixed
costs as a result of continued investment in Fab 25. Gross margin percentage of
26 percent in the first half of 1999 increased from 24 percent in the first half
of 1998, due to higher net sales of microprocessors.
18
Research and development expenses of $167 million in the second quarter of 1999
increased four percent compared to the first quarter of 1999. Increased costs
related to the facilitization of Dresden Fab 30 and research and development
activities for the AMD Athlon microprocessor were partially offset by decreases
in expenses as a result of spending controls. Research and development expenses
in the second quarter of 1999 increased 20 percent compared to the second
quarter of 1998 primarily due to increased costs for the facilitization of
Dresden Fab 30 and the 1998 alliance with Motorola for the development of Flash
memory and logic process technologies, which were partially offset by the
recognition of deferred credits in 1999 on foreign capital grants and interest
subsidies related to the costs of Dresden Fab 30. These credits of approximately
$13 million per quarter will continue to be offset against Dresden Fab 30
expenses in future quarters until June 2007. Beginning no earlier than the first
quarter of 2000, we expect Dresden Fab 30 to begin producing units for sale. At
that time, a significant portion of Dresden Fab 30 expenses, including the
deferred credits referred to above, will shift from research and development
expense to cost of sales. Research and development expenses of $327 million in
the first half of 1999 increased 22 percent compared to the first half of 1998
due to increased costs for the facilitization of Dresden Fab 30, the 1998
alliance with Motorola for the development of Flash memory and logic process
technologies and research and development activities for the AMD Athlon
microprocessor, which were partially offset by the recognition of deferred
credits in 1999 as discussed above as well as decreases in expenses resulting
from spending controls.
Marketing, general and administrative expenses of $125 million in the second
quarter of 1999 decreased two percent compared to the first quarter of 1999.
This was due to nonrecurring software charges incurred in the first quarter as
well as slightly lower spending on Year 2000 upgrade. These increases were
partially offset by costs incurred late in the quarter for introduction of the
AMD Athlon microprocessor. Marketing, general and administrative expenses in the
second quarter of 1999 increased 24 percent compared to the second quarter of
1998 primarily due to significantly higher marketing and promotional activities,
along with increased depreciation expense and costs associated with the
installation of new order management and accounts receivable systems. Marketing,
general and administrative expenses of $252 million in the first half of 1999
increased 33 percent compared to the first half of 1998 primarily due to
significantly higher marketing and promotional activities and increased
amortization expense and costs associated with the installation of new order
management and accounts receivable systems.
In the first quarter of the current fiscal year we initiated a review of our
cost structure. Based upon this review, we recorded restructuring and other
special charges of $18 million in the second quarter and $15 million in the
first quarter of 1999 as a result of certain of our actions to better align our
cost structure with expected revenue growth rates. Although we have achieved the
expected cost savings as a result of this realignment, we have not achieved the
expected revenue growth rates. As a result, we will continue to evaluate our
cost structure and expect to incur additional restructuring and other special
charges during the third quarter, and possibly the fourth quarter, of the
current fiscal year.
The restructuring activities and other special charges primarily relate to: 1)
the closure of a submicron development laboratory facility; 2) write-offs of
certain equipment, including estimated disposal costs, in the Submicron
Development Center (SDC); 3) write-offs of equipment utilized in the
discontinued 0.35-micron wafer fabrication process; 4) the elimination of job
responsibilities for 50 employees in the first quarter and 128 employees in the
second quarter in the SDC, sales offices and Information Technology department;
5) the write-off of
19
discontinued system projects; and 6) costs for vacated and unused sales office
leases. During the second quarter of 1999, we discharged our accrual balance of
$779 thousand which was incurred in the first quarter of 1999 relating to the
severance costs for the termination of 50 employees. We expect to discharge our
second quarter accrual balances as follows: 1) the $3.5 million accrual for SDC
equipment disposal costs is expected to be discharged by the first quarter of
2000; 2) the $1.7 million accrual for severance costs will be discharged during
the third quarter of the current fiscal year; and 3) the $968 thousand accrual
for costs related to vacated and unused sales office leases will be discharged
through the second quarter of 2002.
On June 15, 1999, we completed the sale of our Vantis segment to Lattice
Semiconductor Corporation for approximately $500 million in cash. The actual
cash received was net of Vantis' cash and cash equivalent balance of
approximately $46 million at the closing. Our pre-tax gain on the sale of
Vantis was $432 million, subject to adjustment, if any, based on the final
determination of the net asset value of Vantis at June 15, 1999. The gain is
computed based on Vantis' net assets as of June 15, 1999 and other direct
expenses related to the sale. The applicable tax rate on the gain was 40
percent.
A litigation settlement of approximately $12 million was recorded during the six
months ended June 28, 1998 for the settlement of a class action securities
lawsuit against AMD and certain current and former officers and directors. We
paid the settlement during the third quarter of 1998.
Interest income and other, net of $7 million in the second quarter of 1999
decreased $4 million compared to the first quarter of 1999. This decrease was
due primarily to a nonrecurring gain realized in the first quarter of 1999
related to the sale of an investment. Interest income and other, net decreased
$1 million compared to the second quarter of 1998. This decrease was mainly due
to lower average cash balances. Interest income and other, net of $18 million
in the first half of 1999 increased $4 million compared to the first half of
1998. This increase was primarily due to the gain on the sale of an investment.
Interest expense of $18 million in the second quarter of 1999 decreased $3
million compared to the first quarter of 1999. This decrease was primarily due
to a higher amount of interest that was capitalized rather than expensed.
Interest expense remained flat compared to the same quarter in the previous
year. Interest expense of $39 million in the first half of 1999 increased $9
million compared to the first half of 1998. This increase was a result of
higher average debt balances, including the $517.5 million of Convertible
Subordinated Notes sold in May 1998 (the Convertible Subordinated Notes),
partially offset by higher capitalized interest.
Income Tax
We recorded an income tax provision of $172.8 million in the second quarter of
1999 and a tax benefit of $44.1 million in the second quarter of 1998.
Excluding the gain on the sale of Vantis and restructuring and other special
charges, the effective tax rate for the quarter and six months ended June 27,
1999 is zero percent, and effective tax benefit rate for the quarter and six
months
20
ended June 28, 1998 is 39 percent. The tax provision recorded in the second
quarter of 1999 is attributable to the gain on the sale of the Vantis
subsidiary. No tax benefits were recorded for the operating losses in the
quarter and six months ended June 27, 1999 because the deferred tax assets
arising from such losses are offset by a valuation allowance. The effective tax
rate is expected to be zero for the remainder of 1999.
We had net deferred tax liabilities of $10.3 million as of June 27, 1999
representing certain foreign deferred taxes.
Other Items
International sales as a percent of net sales were 58 percent in both the second
quarter of 1999 and the first quarter of 1999, and 48 percent in the second
quarter of 1998. International sales were 58 percent of net sales in the first
half of 1999 and 52 percent of net sales in the first half of 1998. During the
first half of 1999, approximately nine percent of our net sales were denominated
in foreign currencies. We do not have sales denominated in local currencies in
those countries which have highly inflationary economies (as defined by
generally accepted accounting principles). The impact on our operating results
from changes in foreign currency rates individually and in the aggregate has not
been material.
Comparison of Segment Income (Loss)
For a comparison of segment net sales, refer to the previous discussions on net
sales by product group.
On June 15, 1999, we completed the sale of our Vantis segment to Lattice
Semiconductor Corporation for approximately $500 million in cash. The actual
cash received of approximately $454 million was net of Vantis' cash and cash
equivalent balance of approximately $46 million as of the closing.
The following is a summary of operating income (loss) by segment for the periods
presented below:
Quarter Ended Six Months Ended
------------------------------------------------- --------------------------------
June 27, March 28, June 28, June 27, June 28,
(Millions) 1999 1999 1998 1999 1998
------------- ------------------ ------------ --------------- --------------
AMD segment $(172) $(127) $(107) $(299) $(217)
Vantis segment (1) 6 3 5 14
----- ----- ----- ----- -----
Total $(173) $(121) $(104) $(294) $(203)
===== ===== ===== ===== =====
The AMD segment incurred a larger operating loss in the second quarter of 1999
compared to the first quarter of 1999 due to a decrease in net sales of the AMD
segment, primarily as a result of aggressive Intel marketing, pricing and
product bundling. While net sales decreased, cost of sales remained high, and
research and development costs and restructuring and other special charges
increased. The AMD segment's operating loss increased in the second quarter of
1999 compared to the same quarter in 1998, and in the first half of 1999
compared to the first half of 1998, despite higher net sales. These operating
loss increases were caused by higher costs associated
21
with the facilitization of Fab 25 and Dresden Fab 30, the alliance with
Motorola, research and development on the AMD Athlon microprocessor,
restructuring and other special charges and depreciation on the new order
management and accounts receivable systems.
Net sales for the Vantis segment decreased for all periods presented due to the
sale of the Vantis segment on June 15, 1999, which created a fewer number of
weeks included in the quarter and six months ended June 27, 1999. The Vantis
segment incurred an operating loss in the second quarter of 1999 compared to
operating income in the first quarter of 1999 due to lower net sales in the
Vantis segment, higher research and development expenses and higher marketing,
general and administrative expenses. Research and development expenses were
higher as a result of increased work on Field Programmable Gate Array (FPGA)
products. Marketing, general and administrative expenses increased due to
various employee bonus plans. The Vantis segment's operating income decreased
in the second quarter of 1999 compared to the same quarter in 1998. This was
due to lower net sales and higher marketing, general and administrative expenses
resulting from employee incentive plans and the implementation of new order
management and accounts receivable systems. The Vantis segment's operating
income decreased in the first half of 1999 compared to the first half of 1998
due to lower net sales along with higher marketing, general and administrative
expenses. These expenses resulted from various employee incentive plans and
additional sales and marketing employees.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Cash and cash equivalents in the first half of 1999 decreased by $141 million
compared to a decrease of $80 million in the first half of 1998. Year to date
capital expenditures in 1999 have been offset by cash received on the sale of
Vantis in the second quarter of 1999. A portion of these cash proceeds were
used to pay down our debt holdings by $150 million in the current year. By
comparison, capital expenditures in the first half of 1998 were financed
primarily through proceeds from borrowings and foreign grants.
Operating activities consumed $18 million in the first half of 1999 compared to
positive operating cash flows of $72 million in the first half of 1998. The
cash used in current year operations is primarily due to our cumulative net loss
of $48 million which was partially offset by a decrease in net operating assets
of $42 million. Depreciation expense, non-cash restructuring charges and other
non-cash adjustments of $446 million that would normally be added back to net
loss were offset by the gain on the sale of Vantis of $432 million and deferred
foreign grant and subsidy income of $25 million.
Net investing activities generated $4 million during the first half of 1999.
Proceeds from the sale of Vantis of $454 million more than offset current year
capital expenditures of $347 million. This increase in cash was offset by the
investment of nearly $105 million in cash in short-term securities during the
first half of this year. Investing activities used $788 million in the first
half of 1998, primarily due to $490 million of capital expenditures and $304
million of cash invested in short-term securities.
22
Financing activities consumed $116 million during the first half of 1999,
primarily as a result of debt payments of $150 million which were partially
offset by proceeds from borrowings and stock issuances. Financing activities in
the first half of 1998 generated $638 million mostly from the issuance of debt
and the receipt of foreign grants.
Our 1996 syndicated bank loan agreement (the Credit Agreement) provided for a
$150 million three-year secured revolving line of credit and a $250 million
four-year secured term loan. On June 25, 1999, we terminated the secured
revolving line of credit. Approximately $86 million of the four-year secured
term loan was outstanding as of June 27, 1999. As of June 27, 1999, we were in
compliance with all covenants under the Credit Agreement. In July 1999, we
repaid the outstanding balance on the secured term loan, terminated the Credit
Agreement and refinanced the Credit Agreement with a new Loan and Security
Agreement (the Loan Agreement) with a consortium of banks led by Bank of
America. Under the Loan Agreement, which provides for a four-year secured
revolving line of credit of up to $200 million, we can borrow up to 85 percent
of our eligible accounts receivable from Original Equipment Manufacturers (OEMs)
and 50 percent of our eligible accounts receivable from distributors, subject to
reserves which may be set aside by the lenders. AMD will be subject to
compliance with certain financial covenants if the levels of domestic cash it
holds declines to certain levels, or the amount of borrowings under the Loan
Agreement rises to certain levels. Our obligations under the Loan Agreement are
secured by a pledge of most of our accounts receivable, inventory, general
intangibles and the related proceeds.
As of June 27, 1999, we had available unsecured uncommitted bank lines of credit
in the amount of $68 million, of which $6 million was outstanding.
We plan to continue to make significant capital investments throughout the
remainder of 1999. These investments include those relating to the continued
facilitization of Dresden Fab 30 and Fab 25.
AMD Saxony Manufacturing GmbH (AMD Saxony), an indirect wholly owned German
subsidiary of AMD, has constructed and is installing equipment in Dresden Fab
30, a 900,000-square-foot submicron integrated circuit manufacturing and design
facility located in Dresden, in the State of Saxony, Germany. AMD, the Federal
Republic of Germany, the State of Saxony and a consortium of banks are
supporting the project. We currently estimate construction and facilitization
costs of Dresden Fab 30 to be $1.8 billion. In March 1997, AMD Saxony entered
into a loan agreement and other related agreements (the Dresden Loan Agreements)
with a consortium of banks led by Dresdner Bank AG. The Dresden Loan Agreements
provide for the funding of the construction and facilitization of Dresden Fab
30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of
Germany and the State of Saxony.
The Dresden Loan Agreements, which were amended in February 1998 to reflect
planned upgrades in wafer production technology as well as the decline in the
deutsche mark relative to the U.S. dollar, require that we partially fund
Dresden Fab 30 project costs in the form of subordinated loans to, or equity
investments in, AMD Saxony. In accordance with the terms of the Dresden Loan
Agreements, we have invested $286 million to date (most of which is
23
denominated in deutsche marks) in the form of subordinated loans and equity in
AMD Saxony. We amended the Dresden Loan Agreements in June 1999 to remove a
requirement that we sell at least $200 million of our stock by June 30, 1999 in
order to fund a $70 million loan to AMD Saxony. In lieu of the stock offering,
we funded the $70 million loan to AMD Saxony with proceeds from the sale of
Vantis. We are required to make additional subordinated loans to, or equity
investments in, AMD Saxony of $100 million before December 31, 1999.
Additionally, the consortium of banks referred to above has made available $871
million in loans (denominated in deutsche marks) to AMD Saxony to help fund
Dresden Fab 30 project costs. AMD Saxony had $264 million of such loans
outstanding as of June 27, 1999.
Finally, the Federal Republic of Germany and the State of Saxony are supporting
the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in
the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount
of $871 million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $159 million.
Of these amounts (which are all denominated in deutsche marks), AMD Saxony had
received $275 million in capital investment grants and $15 million in interest
subsidies as of June 27, 1999. The grants and subsidies are subject to
conditions, including meeting specified levels of employment in December 2001
and maintaining those levels until June 2007. Noncompliance with the conditions
of the grants and subsidies could result in the forfeiture of all or a portion
of the future amounts to be received as well as the repayment of all or a
portion of amounts received to date. As of June 27, 1999, we were in compliance
with all of the conditions of the grants and subsidies.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed,
such funding to be repaid to AMD as AMD Saxony receives the grants or
subsidies from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under
the subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $115 million (denominated in deutsche
marks) until Dresden Fab 30 has been completed;
. fund certain contingent obligations including obligations to fund
project cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30,
up to approximately $77 million (denominated in deutsche marks) if AMD
Saxony does not meet its fixed charge coverage ratio covenant.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth above are subject to change based
on applicable conversion rates. We used the exchange rate at the end of the
second quarter of 1999, which was
24
approximately 1.89 deutsche marks to 1 U.S. dollar, to value our obligations
denominated in deutsche marks.
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Saxony Holding GmbH (AMD Holding), the parent
company of AMD Saxony and a wholly owned subsidiary of AMD, to comply with
obligations in connection with the Dresden Loan Agreements, including:
. material variances from the approved schedule and budget;
. our failure to fund equity contributions or shareholder loans or
otherwise comply with our obligations relating to the Dresden Loan
Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings or proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding;
and
. the occurrence of default under the indenture dated August 1, 1996
between AMD and the United States Trust Company of New York (the
Indenture) pursuant to which our $400 million aggregate principal amount
of 11% Senior Secured Notes due 2003 (the Senior Secured Notes) were
issued or the Loan Agreement.
Generally, any such default which either (1) results from our non-compliance
with AMD obligations under the Dresden Loan Agreements and is not cured by AMD
or (2) results in recourse to AMD of more than $2.5 million and is not cured by
AMD, would result in a cross-default under the Dresden Loan Agreements, the
Indenture and the Loan Agreement. Under certain circumstances, cross-defaults
result under the Convertible Subordinated Notes, the Indenture, and the Dresden
Loan Agreements.
In the event we are unable to meet our obligation to make loans to, or equity
investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD
Saxony will be unable to complete Dresden Fab 30 and we will be in default under
the Dresden Loan Agreements, the Indenture and the Loan Agreement, which would
permit acceleration of certain indebtedness, which would have a material adverse
effect on our business. There can be no assurance that we will be able to obtain
the funds necessary to fulfill these obligations. Any such failure would have a
material adverse effect on our business.
FASL, a joint venture formed by AMD and Fujitsu Limited in 1993, is continuing
the facilitization of its second Flash memory device wafer fabrication facility,
FASL II, in Aizu-Wakamatsu, Japan. We expect the facility, including equipment,
to cost approximately $1 billion when fully equipped. As of June 27, 1999,
approximately $394 million of this cost had been funded. Capital expenditures
for FASL II construction to date have been funded by cash generated from FASL
operations and local borrowings by FASL. We currently anticipate that during
1999, FASL capital expenditures will continue to be funded by cash generated
from FASL operations and local borrowings by FASL. However, to the extent that
FASL is unable to secure the necessary funds for FASL II, we may be required to
contribute cash or guarantee third-party loans in proportion to our 49.992
percent interest in FASL. As of June 27, 1999, we had loan guarantees of $47
million outstanding with respect to these loans. The planned FASL II costs are
25
denominated in yen and are, therefore, subject to change due to foreign exchange
rate fluctuations.
We believe that cash flows from operations and current cash balances, together
with external financing activities, will be sufficient to fund operations and
capital investments through the next twelve months.
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
Microprocessor Products
Future Dependence on AMD Athlon Microprocessor. We will need to successfully
market our seventh-generation microprocessor, the AMD Athlon microprocessor, in
order to increase our microprocessor product revenues in 1999 and beyond, and to
benefit fully from the substantial financial investments and commitments we have
made and continue to make related to microprocessors. We commenced initial
shipments of the AMD Athlon microprocessor in June 1999. Our production and
sales plans for the AMD Athlon microprocessor are subject to numerous risks and
uncertainties, including:
. our ability to produce the AMD Athlon microprocessor in the volume
required by customers on a timely basis;
. the availability and acceptance of motherboards and chipsets designed
for the AMD Athlon microprocessor;
. market acceptance of the AMD Athlon microprocessor;
. our ability to maintain average selling prices of the AMD Athlon
microprocessor despite Intel marketing, pricing and bundling activities
or deterioration of market conditions or customer relationships which
affect market demand;
. the successful development and installation of 0.18-micron process
technology and copper interconnect technology;
. the pace at which we are able to transition production in Fab 25 from
0.25 to 0.18-micron process technology and to ramp production in Dresden
Fab 30 on 0.18-micron copper interconnect process technology;
. the use and market acceptance of a non-Intel processor bus (adapted by
us from Digital Equipment Corporation's EV6 pin bus) in the design of
the AMD Athlon microprocessor, and the availability of chipset vendors
who will develop, manufacture and sell chipsets with the EV6 interface
in volumes required by us;
. our ability to expand our chipset and system design capabilities;
. the availability to our customers of cost and performance competitive
Static Random Access Memories (SRAMs) (including Tag chips) if Intel
corners the market for SRAM production capacity through its relationship
with SRAM manufacturers; and
. our ability to design and manufacture processor modules through
subcontractors.
If we fail to achieve market acceptance of the AMD Athlon microprocessor, our
business will be materially and adversely affected.
26
Investment in and Dependence on K86(TM) AMD Microprocessor Products. Our
microprocessor product revenues have significantly impacted, and will continue
in 1999 and 2000 to significantly impact, our revenues, profit margins and
operating results. We plan to continue to make significant capital expenditures
to support our microprocessor products both in the near and long term. These
capital expenditures will be a substantial drain on our cash flow and cash
balances.
Our ability to increase microprocessor product revenues, and benefit fully from
the substantial financial investments and commitments we have made and continue
to make related to microprocessors, depends upon the success of the AMD Athlon
microprocessor, which is our seventh-generation Microsoft Windows compatible
microprocessor, the AMD-K6-2 and AMD-K6-III microprocessors with 3DNow!(TM)
technology (the AMD-K6 family of microprocessors or the AMD-K6 microprocessors),
and the future generations of K86 microprocessors. The microprocessor market is
characterized by short product life cycles and migration to ever-higher
performance microprocessors. To compete successfully against Intel in this
market, we must transition to new process technologies at a faster pace than
before and offer higher performance microprocessors in significantly greater
volumes. We must achieve acceptable yields while producing microprocessors at
higher speeds. In the past, we have experienced significant difficulty in
achieving microprocessor yield and volume plans. Such difficulties have in the
past, and may in the future, adversely affect our results of operations and
liquidity. If we fail to offer higher performance microprocessors in significant
volume on a timely basis in the future, our business could be materially and
adversely affected. We may not achieve the production ramp necessary to meet our
customers' volume requirements for higher performance AMD Athlon and AMD-K6
microprocessors. It is also possible that we may not increase our microprocessor
revenues enough to achieve sustained profitability.
To sell the volume of AMD Athlon and AMD-K6 microprocessors we currently plan to
make in 1999 and 2000, we must increase sales to existing customers and develop
new customers. If we lose any current top tier OEM customer, or if we fail to
attract additional customers through direct sales and through our distributors,
we may not be able to sell the volume of units planned. This result could have a
material adverse effect on our business.
Our production and sales plans for the AMD Athlon and AMD-K6 microprocessors are
subject to other risks and uncertainties, including:
. market acceptance of the AMD Athlon microprocessor, including the timely
availability of motherboards and chipsets designed for this processor;
. whether we can successfully fabricate higher performance AMD Athlon and
AMD-K6 microprocessors in planned volume mixes;
. the effects of Intel's new product introductions, marketing strategies
and pricing;
. the continued development of worldwide market acceptance for the AMD-K6
microprocessors and systems based on them;
. whether we will have the financial and other resources necessary to
continue to invest in the microprocessor products, including leading-
edge wafer fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective;
. adverse market conditions in the personal computer (PC) market and
consequent diminished demand for our microprocessors; and
27
. unexpected interruptions in our manufacturing operations.
Because Intel dominates the industry and has brand strength, we have in the past
priced the AMD-K6 microprocessors below the published price of Intel processors
offering comparable performance. Thus, Intel's decisions on processor prices can
impact and have impacted the average selling prices of the AMD-K6
microprocessors, and consequently can impact and have impacted our margins. Our
business could be materially and adversely affected if we fail to:
. achieve the product performance improvements necessary to meet customer
needs;
. continue to achieve market acceptance of our AMD-K6 microprocessors and
increase market share;
. substantially increase revenues of the AMD-K6 family of microprocessors;
and
. successfully ramp production and sales of the AMD Athlon microprocessor.
See also discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for a long time. Because of its dominant market position, Intel sets and
controls x86 microprocessor and PC system standards and, thus, dictates the type
of product the market requires of Intel's competitors. In addition, Intel can
vary prices on its microprocessors and other products at will and thereby affect
the margins and profitability of its competitors due to its financial strength
and dominant position. Intel exerts substantial influence over PC manufacturers
and their channels of distribution through the Intel Inside advertising rebate
program and other marketing programs. Intel invests hundreds of millions of
dollars in, and as a result exerts influence over, many other technology
companies. We expect Intel to continue to invest heavily in research and
development, new manufacturing facilities and other technology companies, and to
remain dominant:
. through the Intel Inside and other marketing programs;
. through other contractual constraints on customers, retailers, industry
suppliers and other third parties;
. by controlling industry standards; and
. by controlling supply and demand of motherboards, chipsets and other
system components.
As an extension of its dominant microprocessor market share, Intel also now
dominates the PC platform. As a result, it is difficult for PC manufacturers to
innovate and differentiate their product offerings. We do not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, we may be materially and adversely affected by its:
. product mix and introduction schedules;
. product bundling and pricing strategies;
. control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, chipset and BIOS suppliers; and
. customer brand loyalty.
As Intel has expanded its dominance over the PC system platform, many PC
manufacturers have reduced their system development expenditures and have
purchased microprocessors in conjunction with chipsets or in assembled
motherboards. PC OEMs have become increasingly dependent on Intel, less
innovative on their own and more of a distribution channel for Intel
28
technology. In marketing our microprocessors to these OEMs and dealers, we
depend on companies other than Intel for the design and manufacture of core-
logic chipsets, motherboards, basic input/output system (BIOS) software and
other components. In recent years, these third-party designers and manufacturers
have lost significant market share to Intel. In addition, these companies
produce chipsets, motherboards, BIOS software and other components to support
each new generation of Intel's microprocessors only if Intel makes information
about its products available to them in time to address market opportunities.
Delay in the availability of such information makes, and will continue to make,
it increasingly difficult for these third parties to retain or regain market
share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form closer relationships with third-party designers and
manufacturers of core-logic chipsets, motherboards, BIOS software and other
components. Similarly, we intend to expand our chipset and system design
capabilities, and to offer OEMs licensed system designs incorporating our
microprocessors and companion products. We cannot be certain, however, that our
efforts will be successful. We expect that, as Intel introduces future
generations of microprocessors, chipsets and motherboards, the design of
chipsets, memory and other semiconductor devices, and higher level board
products which support Intel microprocessors, will become increasingly dependent
on the Intel microprocessor design and may become incompatible with non-Intel
processor-based PC systems.
Intel's Pentium(R) II, III and Celeron(TM) microprocessors are sold only in form
factors that are not physically or interface protocol compatible with "Socket 7"
motherboards currently used with AMD-K6 microprocessors. Thus, Intel no longer
supports the Socket 7 infrastructure as it has transitioned away from its
Pentium processors. Because the AMD-K6 microprocessors are designed to be Socket
7 compatible, and will not work with motherboards designed for Pentium II, III
and Celeron processors, we intend to continue to work with third-party designers
and manufacturers of motherboards, chipsets and other products to ensure the
continued availability of Socket 7 infrastructure support for the AMD-K6
microprocessors, including support for enhancements and features we add to our
microprocessors. Socket 7 infrastructure support for the AMD-K6 microprocessors
may not endure over time as Intel moves the market to its infrastructure
choices. We do not currently plan to develop microprocessors that are bus
interface protocol compatible with the Pentium II, Pentium III and Celeron
processors because our patent cross-license agreement with Intel does not extend
to microprocessors that are bus interface protocol compatible with Intel's sixth
and subsequent generation processors. Thus, the AMD Athlon microprocessor card
is not designed to function with motherboards and chipsets designed to work with
Intel microprocessors. Our ability to compete with Intel in the market for AMD
Athlon seventh-generation and future generation microprocessors will depend on
our:
. success in designing and developing the microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support Intel's microprocessors and our microprocessors, or
that alternative platforms are available which are competitive with
those used with Intel processors.
A failure for any reason of the designers and producers of motherboards,
chipsets and other system components to support our K86 microprocessor offerings
would have a material adverse effect on our business.
29
Dependence on Microsoft and Logo License. Our ability to innovate beyond the x86
instruction set controlled by Intel depends on support from Microsoft in its
operating systems. If Microsoft does not provide support in its operating
systems for the x86 instructions that we innovate and design into our
processors, independent software providers may forego designing their software
applications to take advantage of our innovations. This would adversely affect
our ability to market our processors. In addition, we have entered into logo
license agreements with Microsoft that allow us to label our products as
"Designed for Microsoft Windows." We have also obtained appropriate
certifications from recognized testing organizations for our K86
microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our K86 microprocessors with the
Microsoft Windows logo. This could impair our ability to market the products and
could have a material adverse effect on our business.
Fluctuations in PC Market. Since most of our microprocessor products are used in
PCs and related peripherals, our future growth is closely tied to the
performance of the PC industry. Industry-wide fluctuations in the PC marketplace
have in the past and may in the future materially and adversely affect our
business.
Financing Requirements
We plan to continue to make significant capital investments in 1999. These
investments include those relating to the continued facilitization of Dresden
Fab 30 and Fab 25.
In 1998, equipment was installed and production was initiated in FASL II. We
expect the facility, including equipment, to cost approximately $1 billion when
fully equipped. Capital expenditures for FASL II construction to date have been
funded by cash generated from FASL operations and borrowings by FASL. If FASL is
unable to secure the necessary funds for FASL II, we may be required to
contribute cash or guarantee third-party loans in proportion to our 49.992
percent interest in FASL.
In 1996, we entered into the Credit Agreement, which provided for a $150 million
three-year secured revolving line of credit and a $250 million four-year secured
term loan. Approximately $86 million of the secured term loan was outstanding as
of June 27, 1999. On June 25, 1999, we terminated the secured revolving line of
credit. In July 1999, we repaid the outstanding balance on the secured term
loan, terminated the Credit Agreement and replaced the Credit Agreement with the
Loan Agreement. Under the Loan Agreement, which provides for a four-year secured
revolving line of credit of up to $200 million, we can borrow up to 85 percent
of our eligible accounts receivable from OEMs and 50 percent of our eligible
accounts receivable from distributors, subject to reserves which may be set
aside by the lenders. AMD will be subject to compliance with certain financial
covenants if the levels of domestic cash it holds declines to certain levels,
or the amount of borrowings under the Loan Agreement rises to certain levels.
Our obligations under the Loan Agreement are secured by a pledge of most of our
accounts receivable, inventory, general intangibles and the related proceeds.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered the
Dresden Loan Agreements with a consortium of banks led by Dresdner Bank AG. The
terms of the Dresden Loan Agreements required us to make subordinated loans to
AMD Saxony totaling $100 million in 1998. The Dresden Loan Agreements, which
were amended in February 1998 to reflect planned upgrades in wafer production
technology as well as the decline in the deutsche mark
30
relative to the U.S. dollar, require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we have
invested $286 million to date in the form of subordinated loans and equity in
AMD Saxony. We amended the Dresden Loan Agreements in June 1999 to remove a
requirement that we sell at least $200 million of our stock by June 30, 1999 in
order to fund a $70 million loan to AMD Saxony. In lieu of the stock offering,
we funded the $70 million loan to AMD Saxony with proceeds from the sale of
Vantis. We are required to make additional subordinated loans to, or equity
investments in, AMD Saxony of $100 million before December 31, 1999.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. As of the end of the second quarter of 1999, the
exchange rate was approximately 1.89 deutsche marks to 1 U.S. dollar (which we
used to calculate our obligations denominated in deutsche marks).
If we are unable to meet our obligation to make loans to, or equity investments
in, AMD Saxony as required under the Dresden Loan Agreements, AMD Saxony will be
unable to complete Dresden Fab 30 and we will be in default under the Dresden
Loan Agreement, the Loan Agreement and the Indenture, which would permit
acceleration of indebtedness, which would have a material adverse effect on our
business. If we are unable to obtain the funds necessary to fulfill these
obligations, our business will be materially and adversely affected.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. Our operations related to
microprocessors have been particularly affected by this situation. If we
underutilize our manufacturing facilities in the future, our revenues may
suffer. We are substantially increasing our manufacturing capacity by making
significant capital investments in Fab 25 and Dresden Fab 30. In addition, the
building construction of FASL II, a second Flash memory device manufacturing
facility, is complete and equipment installation is in progress. We have also
built a new test and assembly facility in Suzhou, China. We are basing our
strategy of increasing our manufacturing capacity on industry projections for
future growth. If these industry projections are inaccurate and demand for our
products does not increase, we will likely underutilize our manufacturing
facilities and our business could be materially and adversely affected.
In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to generate sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the risk is that we will have insufficient capacity to meet demand
for Flash memory products and significant capacity relative to demand for our
microprocessor offerings.
Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these
31
investments might not be fully recovered if we fail to continue to gain market
acceptance or if the market for our Flash memory products should significantly
deteriorate. Likewise, we are making a substantial investment in Dresden Fab 30.
The business plan for Dresden Fab 30 calls for the successful development and
installation of 0.18-micron process technology and copper interconnect
technology in order to manufacture the AMD Athlon microprocessor in Dresden Fab
30. We have entered into a strategic alliance with Motorola to co-develop the
copper interconnect technology required for the AMD Athlon microprocessor and
subsequent generations of microprocessors. We cannot be certain that the
strategic alliance will be successful or that we will be able to develop or
obtain the leading-edge process technologies that will be required in Fab 25 or
Dresden Fab 30 to fabricate the AMD Athlon microprocessor successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been and may in the future be materially and adversely
affected by fluctuations in manufacturing yields. For example, our results in
the past have been negatively affected by disappointing AMD-K6 microprocessor
yields. The design and manufacture of ICs is a complex process. Normal
manufacturing risks include errors and interruptions in the fabrication process
and defects in raw materials, as well as other risks, all of which can affect
yields. Additional manufacturing risks incurred in ramping up new fabrication
areas and/or new manufacturing processes include equipment performance and
process controls as well as other risks, all of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products is shipped in
volume, we could be materially adversely affected. It is also possible that we
may be unsuccessful in correcting any such compatibility problems that are
discovered or that corrections will be unacceptable to customers or made in an
untimely manner. In addition, the mere announcement of an incompatibility
problem relating to our products could have a material adverse effect on our
business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall, or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could impose
substantial costs on us and have a material and adverse effect our business.
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, a few foreign companies principally supply several types of the IC
packages purchased by us, as well as by the majority of other companies in the
semiconductor industry. Interruption of supply or increased demand in the
industry could cause shortages in various essential materials. We would have to
reduce our manufacturing operations if we were unable to procure certain of
these materials. This reduction in our manufacturing operations could have a
material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and final
testing of our products are performed at our manufacturing facilities in Penang,
Malaysia; Bangkok, Thailand; and Singapore; or by subcontractors in Asia. We
have also constructed an additional assembly
32
and test facility in Suzhou, China. We also depend on foreign foundry suppliers
and joint ventures for the manufacture of a portion of our finished silicon
wafers. Foreign manufacturing and construction of foreign facilities entail
political and economic risks, including political instability, expropriation,
currency controls and fluctuations, changes in freight and interest rates, and
loss or modification of exemptions for taxes and tariffs. For example, if we
were unable to assemble and test our products abroad, or if air transportation
between the United States and our overseas facilities were disrupted, there
could be a material adverse effect on our business.
Impact of Year 2000
General. The Year 2000 issue is the result of computer software and firmware
being written using two digits rather than four to define the applicable year.
If our computer software and firmware with date-sensitive functions are not Year
2000 capable, they may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions in
manufacturing operations or in the ability to process transactions, send
invoices or engage in other normal business activities.
Our multi-step Year 2000 readiness plan includes development of corporate
awareness, assessment of internal systems, project planning, project
implementation (including remediation, upgrading and replacement), validation
testing and contingency planning for both information technology (IT) and non-IT
internal systems.
The Plan. Our plan covers four areas that are critical to our business
operations:
. Information Technology, which includes application software,
infrastructure and network engineering and telecommunications;
. Manufacturing, which includes wafer fabrication facilities, assembly and
test facilities and third-party foundries;
. Products and product design, which includes our commercial products and
the hardware and software tools used specifically for product design;
and
. Organizational support, which includes non-fabrication facilities,
security, corporate supply management, shipping, quality and
environmental health and safety (EHS) departments.
. Information Technology. We have modified or replaced significant portions of
our application software so that our systems will function properly with respect
to dates in the year 2000 and thereafter. Application software consists of
business software required for our corporate business systems, including our
accounts payable and receivable, payroll, order management, general ledger and
shipping applications. In December 1998, we installed new Year 2000 capable
order management and accounts receivable systems. As of June 27, 1999, we
completed remediation of all core business software that did not require an
upgrade or a replacement. A few other core business related software programs
still require upgrades. We plan to continue to test our application software
through the end of the third quarter of 1999. Our goal is to complete testing
and put all application systems into production by September 30, 1999. If
required modifications to existing software are not made, or are not completed
in a timely manner, the Year 2000 issue could have a material impact on our
business.
33
IT infrastructure consists of hardware and software other than application
software that supports our mainframe and distributed computer systems, including
PCs, operating systems and system utilities. We have tested Year 2000 capable
versions of all our infrastructure software and are in the process of
transitioning such software into productive use. Approximately 99 percent of our
Year 2000 capable infrastructure hardware and software was installed and in
production as of June 27, 1999. Our goal is for the remaining one percent to be
completed by September 30, 1999. If we are unable to successfully transition
our infrastructure software or to install and put our infrastructure hardware
and software into production as anticipated, our business could be materially
and adversely affected.
Network engineering and telecommunications consists of components in our data
and voice communication networks. All of the data components and the voice
components in our communication networks were Year 2000 capable as of June 27,
1999. However, we do not currently have all of the information necessary to
determine if certain of our international network service providers will be Year
2000 capable in a timely manner. If they are not Year 2000 capable, our
business could be materially and adversely affected.
. Manufacturing. We are dedicating substantial resources to Year 2000 issues
with respect to our wafer fabrication facilities worldwide to ensure continued
operation of all critical wafer fabrication systems in the year 2000 and
thereafter. We have retained an outside firm to provide Year 2000 program
management and implementation assistance in connection with problem assessment,
remediation and compliance testing. Approximately 90 percent of the critical
wafer fabrication equipment was made Year 2000 capable as of June 27, 1999. It
is our goal that 99 percent of the wafer fabrication equipment will be
Year 2000 capable by September 30, 1999 and the remaining one percent of the
equipment will be Year 2000 capable by year-end 1999. Fabrication equipment
software testing and installation is ongoing and will continue through the
fourth quarter of 1999. Some vendors have indicated that Year 2000 capable
upgrades will not be available until late 1999. If these vendors do not provide
Year 2000 capable upgrades in time for us to install the products and to do
adequate testing, or if the products do not adequately address the Year 2000
problem, our business could be materially and adversely affected.
Our assembly and test facilities are located in Malaysia, Thailand, China and
Singapore. The remediation and replacement process for noncompliant systems and
equipment in these facilities was 99 percent complete as of June 27, 1999. Our
goal is to complete this remediation by September 30, 1999.
We believe that all critical Year 2000-related manufacturing areas, including
our wafer fabrication facilities and assembly and test facilities, will be Year
2000 capable by year-end 1999. We have begun contingency planning for critical
areas of our wafer manufacturing facilities and will continue developing and
refining these plans throughout 1999.
However, we cannot give any assurance that we will be successful in our efforts
to resolve any Year 2000 issues and to continue operations in our wafer
fabrication facilities in the year 2000. Our failure to successfully resolve
such issues could result in a shutdown of some or all of our operations, which
would have a material adverse effect on our business.
34
. Products and Product Design. We have reviewed the status of our current
products and have not identified any critical products with Year 2000 problems.
We believe that the critical hardware and software we use for product design
will be Year 2000 capable as of September 30, 1999. Testing of these systems is
ongoing and will continue through the end of the year. If we fail to make the
hardware and software we use for product design Year 2000 capable by year-end
1999, our business could be materially and adversely affected.
. Organizational Support. Since organizational support consists of several
functional divisions that provide administrative support to us as a whole, and
this support overlaps in many areas, we are unable to quantify the overall
progress of this group. However, some divisions have commenced significant
projects aimed at Year 2000 readiness. For example, the facilities department is
in the process of upgrading the building management system at our corporate
marketing, general and administrative facility located in Sunnyvale, California.
As of June 27, 1999, we had installed all software upgrades required by
facilities for Year 2000 readiness. EHS provides another example. Upgrades are
being scheduled and performed on gas detection systems, acid neutralization
systems and groundwater cleanup controls. EHS' critical Year 2000 readiness
activities were complete as of June 27, 1999. Similarly, our security department
has completed our plan to ensure Year 2000 compliance of the fire, intrusion and
industrial process alarms in our China, Thailand and Germany sites. Our goal is
to have our domestic alarm systems upgraded and tested for Year 2000 compliance
by September 30, 1999, and to have all remaining alarm system upgrades and
testing complete by October 31, 1999. In addition to upgrades, these
organizational support divisions have replaced and will continue to replace
equipment and systems to the extent it is required for our Year 2000 readiness.
However, if we are unable to make our organizational support systems Year 2000
capable before year-end 1999, our business could be materially and adversely
affected.
Third-Party Suppliers and Customers. We have initiated communication with our
significant suppliers and customers to determine the extent to which our
operations are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Suppliers of hardware, software or products that might contain
embedded processors were asked to provide information regarding the Year 2000
compliance status of their products. We have also contacted critical materials
and services suppliers in the first and second quarters of 1999. We will
continue to seek information from non-responsive suppliers in the third quarter
of 1999. In addition, in order to protect against the acquisition of additional
non-compliant products, we now require suppliers to warrant that products sold
or licensed to us are Year 2000 capable. We are currently assessing our
significant customers' Year 2000 readiness plans. In the event that any of our
significant customers and suppliers do not successfully and timely achieve Year
2000 compliance, our business or operations could be adversely affected. We
cannot give any assurance that the systems of other companies on which our
systems rely will be converted in a timely manner and will not have an adverse
effect on our operations. We are currently assessing the extent to which our
significant customers' exposure to contingencies related to the Year 2000 will
affect the products we sell; however, we do not expect these to have a material
impact on our operations.
Overall our goal is to resolve our remaining critical Year 2000 issues by
September 30, 1999, which is prior to any anticipated impact on our operating
systems. We expect some testing and verification activities, as well as some
upgrading of the wafer fabrication equipment, to continue through the end of the
year. We also expect some aspects of the Year 2000 plan to continue beyond
January 1, 2000 with respect to resolution of non-critical issues. However,
these dates are contingent upon the timeliness and accuracy of software and
hardware upgrades from vendors, adequacy and
35
quality of resources available to work on completion of the project and any
other unforeseen factors.
Costs. The total expense of the Year 2000 plan is currently estimated to be
approximately $25 million, although actual expenditures may differ. Actual
costs incurred through the end of the second quarter of 1999 were approximately
$15 million, the majority of which was expensed. The expenses of the Year 2000
project are being funded through operating cash flows.
Estimates. The costs of the Year 2000 plan and the dates on which we believe we
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. We cannot give any assurance that these
estimates will be achieved. Consequently, actual results could differ
materially from those anticipated.
Contingency Planning. While substantial contingency planning has occurred, we
have not yet completed a comprehensive contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations. Development of contingency plans is in progress and will develop and
expand during the remainder of 1999. We cannot give any assurance that we will
be able to develop a contingency plan that will adequately address all issues
that may arise in the year 2000. Our failure to develop and implement, if
necessary, an appropriate contingency plan could have a material adverse impact
on our operations. Finally, we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
Demand for Our Products Affected by Asian and Other Domestic and International
Economic Conditions
While general industry demand is currently strengthening, the demand for our
products during the last few years has been weak due to the general downturn in
the worldwide semiconductor market and an economic crisis in Asia. The economic
crisis in Asia may continue to adversely affect our business. A renewed decline
of the worldwide semiconductor market and economic condition in Asia could
decrease the demand for microprocessors and other ICs. A significant decline in
economic conditions in any significant geographic area, both domestically and
internationally, could decrease the overall demand for our products.
Flash Memory Products
Competition in the market for Flash memory devices continues to increase as
existing manufacturers introduce new products and industry-wide production
capacity increases, and as Intel continues to aggressively price its Flash
memory products. We expect competition in the marketplace for Flash memory
devices to continue to increase. It is possible that we will be unable to
maintain or increase our market share in Flash memory devices as the market
develops and as existing and potential new competitors introduce competitive
products. A decline in our Flash memory device business or decline in the gross
margin percentage in this product line could have a material adverse effect on
this product line.
Other Risk Factors
Debt Restrictions. The Loan Agreement and the Indenture contain significant
covenants that limit our ability and our subsidiaries' ability to engage in
various transactions and require satisfaction
36
of specified financial performance criteria. In addition, the occurrence of
certain events, including, among other things, failure to comply with the
foregoing covenants, material inaccuracies of representations and warranties,
certain defaults under or acceleration of other indebtedness and events of
bankruptcy or insolvency would, in certain cases after notice and grace periods,
constitute events of default permitting acceleration of indebtedness. The
limitations imposed by the Loan Agreement and the Indenture are substantial, and
failure to comply with such limitations could have a material adverse effect on
our business.
In addition, the Dresden Loan Agreements substantially prohibit AMD Saxony from
transferring assets to us, which will prevent us from using current or future
assets of AMD Saxony other than to satisfy obligations of AMD Saxony.
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition.
Currently accepted industry standards may change. Our success depends
substantially on our ability, on a cost-effective and timely basis, to continue
to enhance our existing products and to develop and introduce new products that
take advantage of technological advances and adhere to evolving industry
standards. An unexpected change in one or more of the technologies related to
our products, in market demand for products based on a particular technology or
of accepted industry standards could materially and adversely affect our
business. We may or may not be able to develop new products in a timely and
satisfactory manner to address new industry standards and technological changes,
or to respond to new product announcements by others. In addition, new products
may or may not achieve market acceptance.
Competition. The IC industry is intensely competitive and, historically, has
experienced rapid technological advances in product and system technologies.
After a product is introduced, prices normally decrease over time as production
efficiency and competition increase, and as successive generations of products
are developed and introduced for sale. Technological advances in the industry
result in frequent product introductions, regular price reductions, short
product life cycles and increased product capabilities that may result in
significant performance improvements. Competition in the sale of ICs is based
on:
. performance;
. product quality and reliability;
. price;
. adherence to industry standards;
. software and hardware compatibility;
. marketing and distribution capability;
. brand recognition;
. financial strength; and
. ability to deliver in large volumes on a timely basis.
Fluctuations in Operating Results. Our operating results are subject to
substantial quarterly and annual fluctuations due to a variety of factors,
including:
37
. the effects of competition with Intel in microprocessor and Flash memory
device markets;
. competitive pricing pressures;
. anticipated decreases in unit average selling prices of our products;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. the gain or loss of significant customers;
. new product introductions by us or our competitors;
. changes in the mix of products produced and sold and in the mix of sales
by distribution channels;
. market acceptance of new or enhanced versions of our products;
. seasonal customer demand due to vacation and holiday schedules (for
example, decreased demand in Europe during the summer); and
. the timing of significant orders and the timing and extent of product
development costs.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery, or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most instances
our agreements with distributors protect their inventory of our products against
price reductions, as well as products that are slow moving or have been
discontinued. These agreements, which may be canceled by either party on a
specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could materially
and adversely affect us if there is an unexpected significant decline in the
price of our products.
Key Personnel. Our future success depends upon the continued service of numerous
key engineering, manufacturing, sales and executive personnel. We may or may
not be able to continue to attract and retain qualified personnel necessary for
the development and manufacture of our products. Loss of the service of, or
failure to recruit, key engineering design personnel could be significantly
detrimental to our product development programs or otherwise have a material
adverse effect on our business.
Intellectual Property Rights; Potential Litigation. It is possible that:
38
. we will be unable to protect our technology or other intellectual
property adequately through patents, copyrights, trade secrets,
trademarks and other measures;
. patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual
property rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide
competitive advantages to us; and
. others will independently develop similar products, duplicate our
products or design around our patents and other rights.
From time to time, we have been notified that we may be infringing intellectual
property rights of others. If any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
We could decide, in the alternative, to resort to litigation to challenge such
claims. Such challenges could be extremely expensive and time-consuming and
could materially and adversely affect our business. We cannot give any
assurance that all necessary licenses can be obtained on satisfactory terms, or
whether litigation may always be avoided or successfully concluded.
Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Our failure to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused and are
likely to continue to cause the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology
company stocks in general have experienced extreme price and volume fluctuations
that are often unrelated to the operating performance of the companies. This
market volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current business plan envisions substantial cash outlays requiring external
capital financing. It is possible
39
that capital and/or long-term financing will be unavailable on terms favorable
to us or in sufficient amounts to enable us to implement our current plan.
Earthquake Danger. Our corporate headquarters, a portion of our manufacturing
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. We
could be materially and adversely affected in the event of a major earthquake.
Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their existing
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that date. The transition period will last through
January 1, 2002. We are assessing the potential impact to us that may result
from the euro conversion. We do not expect the introduction and use of the euro
to materially affect our foreign exchange activities, to affect our use of
derivatives and other financial instruments, or to result in any material
increase in costs to us. We will continue to assess the impact of the
introduction of the euro currency over the transition period as well as the
period subsequent to the transition, as applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
In 1998, we entered into a no-cost collar arrangement to hedge Dresden Fab 30
project costs through which we purchased $300 million of put option contracts
and sold $300 million of call option contracts. In the second quarter of 1999,
we entered into a no-cost collar arrangement to offset and neutralize our
remaining 1998 no-cost collar position.
For additional Quantitative and Qualitative Disclosures about Market Risk,
including other foreign exchange risks associated with Dresden Fab 30,
reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
about Market Risk, in our Annual Report on Form 10-K for the year ended December
27, 1998.
40
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AMD V. ALTERA CORPORATION. This litigation, which began in 1994,
involves multiple claims and counterclaims for patent infringement
relating to AMD's and Altera Corporation's programmable logic devices.
In a trial held in May 1996, a jury found that at least five of the
eight AMD patents-in-suit were licensed to Altera. As a result of the
bench trial held in August 1997, the Court held that Altera was
licensed to the three remaining AMD patents-in-suit. Seven patents
were asserted by Altera in its counterclaim against AMD. The Court
determined that we are licensed to five of the seven patents and two
remain in suit. Altera filed a motion to recover attorneys' fees in
November 1997. AMD then filed, and the Court granted, a motion to stay
determination of the attorneys' fees motion until resolution of its
appeal. AMD filed an appeal of the rulings of the jury and Court
determinations that Altera is licensed to each of our eight
patents-in-suit. Both parties filed briefs and the Federal Court of
Appeal heard oral argument on our appeal in November 1998. In April
1999, the Federal Court of Appeal reversed the earlier jury and Court
decisions and held that Altera is not licensed to the eight AMD
patents-in-suit. Also in April 1999, and following the decision of the
Federal Court of Appeal, Altera filed a petition for rehearing. In
June 1999, in connection with the sale of Vantis to Lattice
Semiconductor Corporation, AMD transferred this proceeding and
substantially all of its rights and liabilities relating to this
action to Vantis.
SECURITIES CLASS ACTION LITIGATION. Between March 10, 1999 and
April 22, 1999, AMD and certain individual officers of AMD were named
as defendants in the following lawsuits: Arthur S. Feldman v. Advanced
Micro Devices, Inc., et al.; Pamela Lee v. Advanced Micro Devices,
Inc., et al.; Izidor Klein v. Advanced Micro Devices, Inc., et al.;
Nancy P. Steinman v. Advanced Micro Devices, Inc., et al.; Robert L.
Dworkin v. Advanced Micro Devices, Inc., et al.; Howard M. Lasker v.
Advanced Micro Devices, Inc., et al.; John K. Thompson v. Advanced
Micro Devices, Inc., et al.; Dan Schwartz v. Advanced Micro Devices,
Inc., et al.; Serena Salamon and Norman Silverberg v. Advanced Micro
Devices, Inc., et al.; David Wu and Hossein Mizraie v. Advanced Micro
Devices, Inc., et al.; Eidman v. Advanced Micro Devices, Inc., et al.;
Nold v. Advanced Micro Devices, Inc., et al.; Freeland v. Advanced
Micro Devices, Inc., et al.; Fradkin v. Advanced Micro Devices, Inc.
et al.; Ellis Investment Co. v. Advanced Micro Devices, Inc., et al.;
Dezwareh v. Advanced Micro Devices, Inc., et al.; and Tordjman v.
Advanced Micro Devices, Inc., et al. These class action complaints
allege various violations of federal securities law, including
violations of Section 10(b) of the Securities Exchange Act and Rule
10b-5 promulgated thereunder. Most of the complaints purportedly were
filed on behalf of all persons, other than the defendants, who
purchased or otherwise acquired common stock of AMD during the period
from October 6, 1998 to March 8, 1999. Two of the complaints allege a
class period from July 13, 1998 to March 9, 1999. All of the
complaints allege that materially misleading statements and/or
material omissions were made by AMD and certain individual officers of
AMD concerning design and production problems relating to high-speed
versions of the AMD-K6-2 and AMD-K6-III microprocessors. The
complaints seek unspecified
41
damages, equitable relief, interest, fees and other litigation costs.
AMD expects that these suits will be consolidated into one action
within the next several months. AMD intends to contest the litigation
vigorously. Based upon information presently known to management, AMD
does not believe that the ultimate resolution of these lawsuits will
have a material adverse effect on our financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AMD's annual meeting of stockholders was held on April 29, 1999. The
following are the results of the voting on the proposals submitted to
stockholders at the annual meeting.
Proposal No. 1 Election of Directors. The following individuals were elected
as directors:
Name For Withheld
W.J. Sanders III 112,533,049 3,283,216
Friedrich Baur 113,035,661 2,780,604
Charles M. Balack 113,043,435 2,772,830
R. Gene Brown 113,102,443 2,713,822
Robert B. Palmer 112,459,051 3,357,214
Richard Previte 113,047,177 2,769,088
S. Atiq Raza 113,129,163 2,687,102
Joe L. Roby 113,136,135 2,680,130
Leonard Silverman 113,130,231 2,686,034
Proposal No. 2 The proposal to ratify the appointment of Ernst & Young LLP as
AMD's independent auditors for the current fiscal year was approved.
For: 114,367,748 Against: 963,645 Abstain: 484,872
Proposal No. 3 The proposal to approve the amendment to the 1991 Stock
Purchase Plan was approved.
For: 110,406,655 Against: 4,503,309 Abstain: 906,301
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.3(a) First Amendment to Stock Purchase Agreement, dated as of June 7,
1999, between AMD and Lattice Semiconductor Corporation.
2.3(b) Second Amendment to Stock Purchase Agreement, dated as of June 15,
1999, between AMD and Lattice Semiconductor Corporation.
42
10.24(i) Eighth Amendment to Credit Agreement, dated as of June 25,
1999, among AMD, Bank of America NT&SA, as administrative agent
and lender, ABN AMRO Bank N.V., as syndicated agent and lender,
and Canadian Imperial Bank of Commerce, as documentation agent
and lender.
10.24(j) Ninth Amendment to Credit Agreement, dated as of July 30, 1999,
among AMD, Bank of America NT&SA, as administrative agent and
lender, ABN AMRO Bank N.V., as syndicated agent and lender, and
Canadian Imperial Bank of Commerce, as documentation agent and
lender.
10.50(a-3) Supplemental Agreement No. 2 to the Syndicated Loan Agreement
as of March 11, 1997, dated as of June 29, 1999, among AMD
Saxony Manufacturing GmbH, Dresdner Bank AG and Dresdner Bank
Luxembourg S.A.
10.50(f-3) Second Amendment to Sponsors' Support Agreement, dated as of
June 29, 1999, among AMD, AMD Saxony Holding GmbH, Dresdner
Bank AG and Dresdner Bank Luxembourg S.A.
10.50(g-3) Second Amendment to Sponsors' Loan Agreement, dated as of June
25, 1999, among AMD, AMD Saxony Holding GmbH and AMD Saxony
Manufacturing GmbH.
10.51 Loan and Security Agreement, dated as of July 13, 1999, among
AMD, AMD International Sales and Service, Ltd. and Bank of
America NT&SA, as agent.
10.51(a) First Amendment to Loan and Security Agreement, dated as of
July 30, 1999, among AMD, AMD International Sales and Service,
Ltd. and Bank of America NT&SA, as agent.
10.52 Agreement, dated as of June 16, 1999, between AMD and Richard
Previte.
10.53 Agreement, dated as of June 23, 1999, between AMD and Gene
Conner.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter for which
this report is filed:
1. Current Report on Form 8-K dated April 7, 1999 reporting under Item
5-Other Events with respect to expected financial results for the
first quarter ended March 28, 1999.
2. Current Report on Form 8-K dated April 14, 1999 reporting under Item
5-Other Events with respect to financial results for the first
quarter ended March 28, 1999.
3. Current Report on Form 8-K dated April 21, 1999 reporting under Item
5-Other Events with respect to execution of a definitive agreement
with Lattice Semiconductor Corporation for the sale of Vantis.
43
4. Current Report on Form 8-K dated June 15, 1999, as amended, reporting
under Item 2 - Acquisition or Disposition of Assets with respect to
the completion of the sale of Vantis to Lattice Semiconductor
Corporation.
5. Current Report on Form 8-K dated June 23, 1999 reporting under Item
5-Other Events with respect to expected financial results for the
second quarter ended June 27, 1999.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC.
Date: August 6, 1999 By: /s/ Francis P. Barton
----------------------
Francis P. Barton
Senior Vice President, Chief Financial Officer
Signing on behalf of the registrant and as
the principal accounting officer
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