<PAGE>
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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 26, 1994
----------------
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
P.O. Box 3453
Sunnyvale, California 94088-3453
- - ---------------------------------------- -------------------------
(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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 26, 1994:
Common Stock, $0.01 par value 94,053,152
- - ----------------------------- ----------
Class Number of Shares
<PAGE>
ADVANCED MICRO DEVICES, INC.
FINANCIAL INFORMATION INDEX
Part I. Financial Information PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Statements of Income--
Quarters Ended June 26, 1994
and June 27, 1993 and Six Months Ended June 26,
1994 and June 27, 1993 3
Condensed Consolidated Balance Sheets--
June 26, 1994 and December 26, 1993 4
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 26, 1994
and June 27, 1993 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
2
<PAGE>
<TABLE>
<CAPTION>
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED MICRO DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Thousands Except Per Share Amounts)
Quarter Ended Six Months Ended
----------------------------- ---------------------------
June 26, June 27, June 26, June 27,
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 533,297 $ 409,092 $1,046,377 $ 816,525
Expenses:
Cost of sales 235,623 186,931 466,060 381,013
Research and development 67,889 69,323 136,110 131,150
Marketing, general and administrative 91,731 67,253 184,625 135,734
---------- ---------- ---------- ----------
395,243 323,507 786,795 647,897
---------- ---------- ---------- ----------
Operating income 138,054 85,585 259,582 168,628
Interest and other income, net 6,366 4,043 10,548 7,430
Net interest expense (899) (91) (1,638) (1,173)
---------- ---------- ---------- ----------
Income before income taxes and equity
in joint venture 143,521 89,537 268,492 174,885
Provision for income taxes 47,362 25,072 87,352 48,969
---------- ---------- ---------- ----------
Income before equity in joint venture 96,159 64,465 181,140 125,916
Equity in net income (loss) of joint
venture (2,925) (112) (3,319) (112)
---------- ---------- ---------- ----------
Net income 93,234 64,353 177,821 125,804
Preferred stock dividends 2,587 2,588 5,175 5,175
---------- ---------- ---------- ----------
Net income applicable to common
shareholders $ 90,647 $ 61,765 $ 172,646 $ 120,629
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per common share
Primary $ 0.93 $ 0.65 $ 1.78 $ 1.28
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted $ 0.89 $ 0.63 $ 1.71 $ 1.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in per share calculation
Primary 97,394 95,079 96,814 94,415
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted 104,249 101,937 103,959 101,379
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
<CAPTION>
ADVANCED MICRO DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
June 26, December 26,
1994 1993
(Unaudited) (Audited)
------------- -------------
Assets
- - ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 79,268 $ 60,423
Temporary cash investments 492,061 427,775
------------ ------------
Total cash and cash equivalents, and
temporary cash investments 571,329 488,198
Accounts receivable, net 314,743 263,617
Inventories:
Raw materials 15,067 15,371
Work-in-process 60,388 56,504
Finished goods 37,192 32,175
------------ ------------
Total inventories 112,647 104,050
Prepaid expenses and other current assets 38,284 30,399
Deferred income taxes 78,105 77,922
------------ ------------
Total current assets 1,115,108 964,186
Property, plant and equipment, at cost 2,096,659 1,998,363
Accumulated depreciation and amortization (1,134,014) (1,094,037)
------------ ------------
Net property, plant and equipment 962,645 904,326
Investment in joint venture 36,252 2,086
Other assets 60,394 58,633
------------ ------------
$2,174,399 $1,929,231
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 34,345 $ 30,994
Accounts payable 98,691 127,151
Accrued compensation and benefits 101,632 81,860
Accrued liabilities 89,857 83,982
Income tax payable 48,022 34,991
Deferred income on shipments to distributors 88,083 74,436
Long-term debt and capital lease
obligations due within one year 26,745 21,205
------------ ------------
Total current liabilities 487,375 454,619
Deferred income taxes 42,837 42,837
Long-term debt and capital lease obligations
due after one year 85,315 79,504
Stockholders' equity:
Capital stock:
Serial preferred stock, par value 34 35
Common stock, par value 940 926
Capital in excess of par value 653,675 619,733
Retained earnings 904,223 731,577
------------ ------------
Total stockholders' equity 1,558,872 1,352,271
------------ ------------
$2,174,399 $1,929,231
------------ ------------
------------ ------------
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
<CAPTION>
ADVANCED MICRO DEVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
-----------------------------------
June 26, June 27,
1994 1993
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 177,821 $ 125,804
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 104,588 91,443
Net gain on sale of property, plant and equipment (431) (3,846)
Write-down of property, plant and equipment 1,044 132
Compensation recognized on employee stock plans 810 624
Net increase in deferred income taxes (183) (26,670)
Increase in income tax payable 29,501 51,698
Changes in operating assets and liabilities:
Net increase in receivables, inventories,
prepaids and other assets (69,369) (3,343)
Net increase (decrease) in payables and accrued liabilities 10,834 (6,325)
Undistributed loss of joint venture 5,079 155
--------- --------
Net cash provided by operating activities 259,694 229,672
--------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (140,053) (162,912)
Proceeds from sale of property, plant and equipment 1,101 3,991
Purchase of held-to-maturity debt securities (349,157) (414,807)
Proceeds from sale of held-to-maturity debt securities 284,871 326,339
Investment in joint venture (39,245) (1,846)
--------- --------
Net cash used in investing activities (242,483) (249,235)
--------- --------
Cash flows from financing activities:
Proceeds from borrowings 30,387 -
Principal payments on borrowings and capital lease obligations (40,253) (5,282)
Net proceeds from issuance of stock 16,675 21,105
Payments of preferred stock dividends (5,175) (5,175)
--------- --------
Net cash provided by financing activities 1,634 10,648
--------- --------
Net increase (decrease) in cash and cash equivalents 18,845 (8,915)
Cash and cash equivalents-beginning of period 60,423 52,027
--------- --------
Cash and cash equivalents-end of period $ 79,268 $ 43,112
--------- --------
--------- --------
Supplemental disclosures of cash flow information:
Cash paid during the first quarter for:
Interest (net of amounts capitalized) $ 1,983 $ 829
--------- --------
--------- --------
Income taxes $ 56,272 $ 23,514
--------- --------
--------- --------
Non-cash financing activities:
Equipment capital leases $ 27,859 $ 11,382
--------- --------
--------- --------
</TABLE>
See accompanying notes
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of 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.
2. The company is currently involved in the following litigations with Intel
Corporation: (1) the Technology Agreement Arbitration, (2) the 287
Microcode Litigation, (3) the 386 Microcode Litigation, (4) the 486
Microcode Litigation, (5) the Business Interference Case, (6) the Antitrust
Case, and (7) the International Trade Commission Proceeding. These
litigations, except for the Antitrust Case, arise principally out of
disputes over the nature, scope and duration of the intellectual property
rights granted to the company under two agreements: (i) a 1976 Cross-
License Agreement and (ii) a 1982 Technology Exchange Agreement
(collectively, the "Agreements").
On March 10, 1994, a federal court jury in San Jose, California returned
verdicts in the 287 Microcode Litigation finding that a 1976 patent and
copyright agreement between AMD and Intel (the "1976 Agreement") granted
AMD rights to sell microchips containing Intel microcodes. The court
entered a judgment on the verdicts in AMD's favor on March 11, 1994. Prior
to the jury's determination, AMD and Intel agreed that the jury's verdicts
would be determinative of the question whether the 1976 Agreement grants
AMD the right to copy microcodes contained in Intel microprocessors and
peripheral microchips, including not only the 287 math co-processor, but
generally as to all microprocessors and peripheral microchips, specifically
including the 386 and 486 microprocessors.
Intel has moved for a new trial and has indicated that it intends to appeal
the verdicts in the 287 case and it is expected that the appeal process
will take at least one year. It is AMD's expectation that Intel,
notwithstanding the March 10, 1994 verdicts or any other ruling adverse to
Intel in the pending legal proceedings with AMD, will continue to pursue
the remaining intellectual property claims in the pending litigations
against the company.
An unfavorable ultimate decision in the 287, 386 or 486 Microcode
Litigation could result in a material monetary damages award to Intel
and/or preclude the company from continuing to produce those Am386 and
Am486 products adjudicated to contain any copyrighted Intel microcode.
Therefore, such litigations could have a materially adverse impact on
the financial condition and results of operations of the company.
The AMD/Intel Litigations involve multiple interrelated and complex issues
of fact and law. Therefore, the ultimate outcome of the AMD/Intel
Litigations cannot presently be determined. Accordingly, no provision for
any liability that may result upon the adjudication of the AMD/Intel
Litigations has been made in the company's financial statements.
3. Five class-action complaints and one stockholders' derivative action were
filed against the company, and certain officers and directors in the second
half of 1993. The complaints generally alleged violations of federal
securities laws and breaches of obligations, based on statements made by
the company regarding the development of its Am486 products and statements
contained in the company's 1993 third quarter earnings release.
6
<PAGE>
On July 8, 1994, the company announced that it has reached an agreement in
principle to settle the class action and derivative litigations.
The proposed settlement is subject to the approval of AMD's Board of
Directors and the confirmation by the Federal Court in San Jose,
California. If approved, the cost of the settlement to the company would
be $34 million. The company believes its financial results will not be
materially adversely affected because of previously recorded reserves for
these cases, insurance proceeds and an unrelated one-time gain resulting
from an award of damages in the Technology Agreement Arbitration.
4. AMD has three groundwater contamination sites that are on the Federal
Superfund list. The company is in the process of an extensive cleanup and
studies of its sites and believes it is meeting all regulatory
requirements. The company believes these matters will not have a material
adverse effect on the financial condition or the results of operations of
the company.
5. The effective tax rates used for the second quarters of 1994 and 1993 were
33 percent and 28 percent, respectively. The effective tax rates used for
the first half of 1994 and 1993 were 32 percent and 28 percent,
respectively. The higher provisions in 1994 were primarily due to reduced
benefits from low taxed foreign income and available tax credit
carryforwards.
6. In 1993, the company and Fujitsu Limited established a joint venture,
"Fujitsu-AMD Semiconductor Limited (FASL)." AMD's share of FASL is 49.95
percent, and this investment is being accounted for under the equity
method. In the second quarter of 1994, the company invested $28 million in
FASL and AMD's share of FASL's net loss was $2.9 million.
7. Effective December 27, 1993, the company adopted the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No.
115, all affected debt and equity securities must be stated at fair
value and classified as held-to-maturity, trading, or available-for-
sale.
The company determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. Debt securities are classified as held-
to-maturity when the company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
7
<PAGE>
Cash and cash equivalents and temporary cash investments include the
following held-to-maturity debt securities as of June 26, 1994 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Certificates of deposit $ 14,998
Security repurchase agreements 7,900
Other 6,996
----------
29,894
Cash 49,374
----------
Total cash and cash equivalents $ 79,268
----------
----------
Certificates of deposit $ 199,099
Corporate notes 173,373
Treasury notes 85,433
Commercial paper 34,156
----------
Total temporary cash investments $ 492,061
----------
----------
</TABLE>
The market value of the above held-to-maturity debt securities
approximates amortized cost as of June 26, 1994.
8. Shares used in the primary net income per common share computation are the
weighted average number of common shares outstanding plus dilutive common
share equivalents. The fully diluted computation also includes other
dilutive convertible securities. Shares used in the per share computations
are as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
---------------------- -------------------
June 26, June 27, June 26, June 27,
1994 1993 1994 1993
--------- --------- -------- -------
(Thousands)
<S> <C> <C> <C> <C>
Primary:
Common shares outstanding 93,617 90,257 93,096 89,596
Employee stock plans 3,777 4,822 3,718 4,819
---------- --------- --------- -------
97,394 95,079 96,814 94,415
---------- --------- --------- -------
---------- --------- --------- -------
Fully diluted:
Common shares outstanding 93,617 90,257 93,096 89,596
Employee stock plans 3,778 4,824 4,008 4,927
Preferred stock 6,854 6,856 6,855 6,856
---------- --------- --------- -------
104,249 101,937 103,959 101,379
---------- --------- --------- -------
---------- --------- --------- -------
</TABLE>
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
company's audited financial statements and notes thereto for the fiscal year
ended December 26, 1993.
RESULTS OF OPERATIONS
AMD reported record sales and operating income for the second quarter of 1994.
Net sales of $533.3 million for the second quarter of 1994, rose by 30 percent
from sales of $409.1 million for the second quarter of 1993. For the first half
of 1994, the company reported net sales of $1,046.4 million, a $229.9 million
increase from net sales of $816.5 million for the first six months of 1993.
These increases were primarily attributable to substantial growth in
Am486 (Registered Trademark) microprocessor sales, partially offset by lower
sales of Am386 (Registered Trademark) products. Net sales grew slightly as
compared to the immediate prior quarter due to an increase in non-micropro-
cessor sales while microprocessor sales remained relatively flat.
International sales grew for the first six months of 1994 in all geographic
regions except Japan as compared to the same period a year ago. Sales to
international customers for the first half of 1994 and 1993 were 53 percent and
56 percent, respectively.
Due to their maturing life cycle, sales of Am386 microprocessors decreased
substantially as compared to the second quarter of 1993, resulting primarily
from average selling price declines, and secondarily from unit shipment
declines. For the first six months of 1994, Am386 sales decreased significantly
as compared to the same period in 1993, primarily due to unit shipment declines
and secondarily due to average selling price declines. The company anticipates
Am386 microprocessor revenues will continue on its downward trend for the
remainder of 1994.
Revenues of Am486 microprocessors for the second quarter and the first half of
1994 grew significantly from the comparable periods a year ago due to increased
unit volume. Am486 microprocessor sales increased slightly in the second
quarter of 1994, as compared to the immediate prior quarter due to increased
unit shipments. Sales of Am486 microprocessors are expected to decline in the
third quarter of 1994 due to continuing price erosion.
In February 1994, the company and Digital Equipment Corporation (Digital)
entered into a two year foundry agreement for AMD's Am486 microprocessors. Both
parties have certain rights to terminate this agreement earlier in the event of
adverse developments of the company's microprocessor-related litigations.
Shipments of Am486 products from wafers manufactured by Digital are expected in
the fourth quarter of 1994. The company expects Am486 product demand to
continue to exceed production capacity for the remainder of 1994. The company
may enter into additional foundry arrangements in order to supplement internal
capacity based on business conditions. Regardless of these foundry
arrangements, the company's production capacity is expected to increase in
late 1995 due to the completion of its 700,000 square-foot submicron
semiconductor manufacturing complex in Austin, Texas (Fab 25).
The Am386 and Am486 are registered trademarks of Advanced Micro Devices, Inc.
9
<PAGE>
The company's Am386 and Am486 products have been the subject of litigation with
Intel Corporation (see Footnote 2 of the consolidated financial statements, Part
II, Item 1, Legal Proceedings). On March 10, 1994, a federal court jury in San
Jose, California returned verdicts in the 287 microcode litigation finding that
a 1976 patent and copyright agreement between AMD and Intel (the "1976
Agreement") granted AMD rights to sell integrated circuits containing Intel
microcodes. The court entered a judgment on the verdicts in AMD's favor on March
11, 1994. Prior to the jury's determination, AMD and Intel agreed that the
jury's verdicts would be determinative of the question whether the 1976
Agreement grants AMD the right to copy microcodes contained in Intel
microprocessors and peripheral microchips, including not only the 287 math co-
processor, but generally as to all microprocessors and peripheral microchips,
specifically including the 386 and 486 microprocessors.
Intel has moved for a new trial and has indicated that it intends to appeal the
verdicts in the 287 case and it is expected that the appeal process will take at
least one year. It is AMD's expectation that Intel, notwithstanding the March
10, 1994 verdicts or any other ruling adverse to Intel in the pending legal
proceedings with AMD, will continue to pursue the remaining intellectual
property claims in the pending litigations against the company.
However, since the microcode litigations are still pending, an unfavorable
ultimate decision in the 287, 386 or 486 Microcode Litigation could result in a
material monetary damages award to Intel and/or preclude the company from
continuing to produce those Am386 and Am486 products adjudicated to contain any
copyrighted Intel microcode. Therefore, such litigations could have a
materially adverse impact on the financial condition and results of operations
of the company.
Further, an unfavorable ultimate decision in the 287 or the 486 Microcode
Litigations could affect the company's ability to continue to ship and produce
its Am486DX products or, in the case of the 486 Microcode Litigation, could
result in a material monetary damages award to Intel, either of which could have
an immediate, material adverse impact on the company's results of operations and
financial condition. The AMD/Intel legal proceedings involve multiple
interrelated and complex issues of fact and law. The ultimate outcome of such
proceedings cannot presently be determined. Accordingly, no provision for any
liability that may result upon the adjudication of the AMD/Intel legal
proceedings has been made in the company's financial statements.
The company is developing its next generation of Microsoft (Registered
Trademark) Windows (Trademark) compatible microprocessors, referred to as the
K-series, based on superscalar RISC-type architecture. Development of the
initial K-series products is expected to be completed in the fourth quarter
of 1994 or early 1995.
In addition to the above-mentioned litigations, the future outlook for AMD's
microprocessor business is highly dependent upon microprocessor market
conditions, which are subject to both demand and price elasticity. The company
anticipates that future growth will depend on the market demand for Am486
products and AMD's future generation microprocessors, and the company's
ability to meet this demand.
10
<PAGE>
For the second quarter and the first half of 1994, revenues of network, data and
telecommunication products remained relatively flat as compared to similar
periods a year ago. However, sales increased from the immediate prior quarter
primarily driven by Ethernet products.
Sales of flash memory devices for the second quarter and the first six months of
1994 decreased substantially as compared to the corresponding periods a year ago
due to pricing pressures from increased competition. However, flash sales
increased moderately in the second quarter of 1994 as compared to the immediate
prior quarter due to an increase in unit shipments. The company expects that
flash memory product demand will exceed capacity for the remainder of 1994.
The company plans to meet projected long-term demand for flash memory devices
through a manufacturing joint venture with Fujitsu Limited of Japan, which is
expected to begin volume production in the first half of 1995.
Revenues of erasable programmable read-only memories (EPROMs) in the second
quarter of 1994 grew substantially from the same quarter a year ago, resulting
equally from higher unit volume and average selling prices. For the first half
of 1994, EPROM sales also increased significantly as compared to the same period
in 1993, primarily due to increases in average selling prices. The company
expects EPROM sales to decline slightly from second quarter levels for the
remainder of 1994 as more internal capacity is allocated to producing flash
memory devices.
Sales of programmable logic devices (PLDs) decreased in the second quarter of
1994 as compared to the second quarter of 1993 due to average selling price
declines. For the first six months of 1994, PLD sales remained relatively flat
as compared to the same period a year ago. The company expects flat PLD sales
in the third quarter of 1994.
Cost of sales of $235.6 million for the second quarter of 1994 contributed to a
gross margin of 56 percent as compared to a gross margin of 54 percent in the
second quarter of 1993. Cost of sales of $466.1 million for the first six
months of 1994 contributed to a gross margin of 55 percent, compared to a gross
margin of 53 percent for the same period last year. These increases in gross
margins were primarily attributable to increased sales from high margin Am486
products. Gross margin is expected to decline from the second quarter to the
third quarter of 1994 due to lower Am486 sales.
Research and development expenses in the second quarter of 1994 were relatively
flat as compared to the same quarter last year. Research and development
expenses for the first six months of 1994 rose $5.0 million from the first six
months of 1993 due to higher research and development spending in Fab 25 and
microprocessor development, offset by lower research and development expenses in
SDC due to the manufacturing ramp of Am486 products. The company expects
research and development expenses to increase slightly from second quarter
levels for the remainder of 1994.
Marketing, general and administrative expenses grew by $24.4 million to $91.7
million for the second quarter of 1994 from the same quarter a year ago.
Marketing, general and administrative expenses increased by $48.9 million from
the first six months of 1993. These increases were primarily due to increased
legal and related expenses, and to a lesser extent microprocessor advertising
expenses.
11
<PAGE>
In summary, total operating expenses for the second quarter of 1994 were $395.2
million, a $71.7 million increase over the $323.5 million operating expenses for
the second quarter of 1993. However, operating expenses as a percentage of
sales decreased in the second quarter of 1994 as compared to the same quarter a
year ago. Consequently, operating income as a percentage of sales increased to
26 percent in the second quarter of 1994 as compared to 21 percent in the same
quarter last year. Although the company is continuing to focus on cost
containment, the company anticipates that operating expenses may rise through
1994 in both absolute dollars and as a percentage of sales due to start-up
manufacturing costs for Fab 25, further increases in depreciation, and higher
foundry expenses which are dependent on product demand.
Interest and other income increased in the second quarter and the first half of
1994 as compared to similar periods in 1993, due to higher cash available for
investment.
Income tax rates were 33 percent for the second quarter of 1994 and 28 percent
for the same quarter a year ago. For the first six months of 1994 and 1993,
income tax rates were 32 percent and 28 percent, respectively. The higher tax
rates in 1994 were primarily due to reduced benefits from low taxed foreign
income and available tax credit carryforwards. The company expects that the
provision for taxes on income will remain at approximately 33 percent through
1994.
Equity in the net loss of joint venture was $2.9 million, up from $.1 million in
the second quarter of 1993, due to increased costs in building and operating the
Fujitsu AMD Semiconductor Limited (FASL) wafer fabrication facility. The
company expects a further increase in the net loss from FASL for the remainder
of 1994 as the FASL operations ramp up (see discussion in Financial Condition).
The company recorded net income before preferred stock dividends of $93.2
million in the second quarter of 1994, up from $64.4 million in the second
quarter of 1993. Net income for the first six months of 1994 was $177.8 million
as compared to $125.8 million for the same period in 1993. After preferred
stock dividends of $2.6 million for both quarters, the primary net income per
common share was $.93 for the second quarter of 1994 and $.65 for the same
quarter a year ago.
AMD enters into foreign exchange contracts as economic hedges of the company's
foreign net monetary asset position. The company's foreign exchange contracts
do not subject the company to risk from exchange rate movements because gains
and losses on these contracts are designed to offset losses and gains on the net
monetary asset position being hedged. Net foreign currency gains and losses
were not significant for the first half of 1994. As of June 26, 1994, the
company had approximately $34 million (notional amount) of foreign exchange
forward contracts.
12
<PAGE>
In the second quarter and the last six months of 1994, approximately 15 percent
of the company's net sales were denominated in foreign currencies. AMD does
not currently have sales denominated in local currencies in those countries
which have highly inflationary economies.
The company also engages in interest rate swaps to reduce its interest rate
exposure by effectively changing a portion of the company's interest rate
exposure from a floating rate to a fixed rate basis. At the end of the second
quarter of 1994, the net outstanding notional amount of interest rate swaps was
$40 million. For the second quarter and the first half of 1994, gains and
losses related to these interest rate swaps were immaterial.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The semiconductor industry is generally characterized by a highly competitive
and rapidly changing environment in which operating results are often subject to
the effects of new product introductions, manufacturing technology innovations,
rapid fluctuations in product demand, and the ability to secure intellectual
property rights. While the company attempts to identify and respond to these
changes as soon as possible, the rapidity of their onset makes prediction of and
reaction to such events an ongoing challenge.
The company believes that its future results of operations and financial
condition could be impacted by the following factors: market acceptance and
timing of new products, trends in the personal computer marketplace, capacity
constraints, intense price competition, interruption of manufacturing materials
supply, negative changes in international economic conditions and decisions in
legal disputes relating to intellectual property rights.
Due to the factors noted above, the company's future operations, financial
condition and stock price may be subject to volatility. In addition, a
shortfall in revenue, gross margins, or earnings from securities analysts'
expectations could have an immediate adverse effect on the trading price of the
company's common stock in any given period.
FINANCIAL CONDITION
Cash, cash equivalents and temporary cash investments increased by $83.1 million
to $571.3 million from December 26, 1993 to June 26, 1994. This increase was
primarily attributable to cash generated from operations, partially offset by
investments in property, plant and equipment to expand manufacturing capacity.
Working capital grew by $118.1 million from $509.6 million at the end of 1993 to
$627.7 million in the second quarter of 1994. This growth was primarily due to
an increase in cash and cash equivalents, temporary cash investments and
accounts receivable resulting from higher sales.
On July 8, 1994, the company announced that it has reached an agreement, in
principle, to settle the class action and derivative litigations that had been
filed against the company. The proposed settlement is subject to the approval
of AMD's Board of Directors and the confirmation by the Federal Court in
San Jose, California. If approved, the cost of the settlement to the company
would be approximately $34 million. The company believes its financial results
will not be materially adversely affected because of previously recorded
reserves for these cases, insurance proceeds and an unrelated one-time gain
resulting from an award of damages in the Technology Agreement Arbitration
(see Part II, Item 1, Legal Proceedings).
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The company is currently involved in litigations with Intel. While it is
impossible to predict the resolutions of the AMD/Intel litigations, there could
be material adverse effect on the financial condition, or in results of
operations of the company, or the ability to raise necessary capital, or some
combination of the foregoing if the outcome of the Intel litigations either
results in an award to Intel of material monetary damages, or if the company's
intellectual property rights are not sustained with regard to certain
microprocessor products currently the subject of litigation with Intel (see
footnote 2 of the consolidated financial statements, Part II, Item 1, Legal
Proceedings).
In July 1993, the company commenced construction of its 700,000 square-foot
submicron semiconductor manufacturing complex in Austin, Texas. Known as
Fab 25, the new facility is expected to cost approximately $1 billion when fully
equipped. The first phase of construction and initial equipment installation is
expected to cost approximately $400 million through 1994. Volume production is
scheduled to begin in late 1995.
The company and Fujitsu Limited are cooperating in building and operating an
approximately $800 million wafer fabrication facility in Aizu-Wakamatsu, Japan,
through their joint venture (FASL). The forecasted joint venture costs are
denominated in yen and therefore are subject to change due to fluctuations of
foreign exchange rates. However, the company hedges foreign currency exposures
on certain firm commitments relating to the company's FASL investment with
foreign currency options. As of June 26, 1994, the company had approximately
$44 million (notional amount) in foreign currency options relating to its FASL
investment. Unhedged 1994 FASL related commitments at the end of the second
quarter of 1994 were approximately $65 million. Each company will contribute
equally toward funding and supporting FASL. AMD is expected to contribute
approximately half of its share of funding in cash and may be required to
guarantee third-party loans made to FASL for the remaining half. However, to
the extent debt cannot be secured by FASL, AMD is required to contribute its
portion in cash. Through the second quarter of 1994, the company's total cash
investment in FASL was $41.4 million as compared to $1.9 million at the end of
1993. The company anticipates this investment will increase substantially, to
approximately $150 million by the end of 1994. The company is also required
under the terms of the joint venture to contribute approximately one-half of
such additional amounts as may be necessary to sustain FASL's operations.
Volume production is expected to commence in the first half of 1995.
As of the end of the second quarter of 1994, the company had the following
financing arrangements: unsecured committed bank lines of credit of $105
million, unutilized; long-term secured equipment lease lines of $110 million, of
which $100 million were utilized; and short-term, unsecured uncommitted bank
credit in the amount of $84 million, of which $34 million was utilized.
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The company's current capital plan and requirements are based on various
product-mix, selling-price and unit-demand assumptions and are, therefore,
subject to revision due to future market changes and litigation outcomes.
On April 1, 1994, the company filed a shelf Registration Statement with the
Securities and Exchange Commission covering up to $400 million of its
securities, which may be either debt securities, preferred stock, depositary
shares representing fractions of shares of preferred stock, common stock,
warrants to purchase common stock or any combination of the foregoing which the
company may offer from time to time in the future. Such Registration Statement
is currently effective. The nature and terms of the securities will be
established at the time of their sale. The company may offer the securities
through underwriters to be named in the future, through agents or otherwise.
The net proceeds of any offering will be used for general corporate
purposes, which may include the reduction of outstanding indebtedness, working
capital increases and capital expenditures.
On April 4, 1994, the company announced that, given its current business
prospects, it intends to call all of its outstanding $30.00 Convertible
Exchangeable Preferred Shares ("Preferred Shares") for redemption when market
conditions permit. In such event, all of the company's outstanding Depositary
Convertible Exchangeable Preferred Shares ("Depositary Shares") would also be
redeemed. Each Depositary Share represents one-tenth of a Preferred Share, and
each ten Depositary Shares are convertible into 19.873 shares of the company's
common stock.
If the redemption occurs prior to March 15, 1995, the redemption price would be
$50.90 per Depositary Share, plus accrued and unpaid dividends. Based on the
last reported sales price of $25.63 per share of common stock on July 26, 1994,
ten Depositary Shares could have been converted into common stock (including
cash in lieu of any fractional share) having a market value of $50.93 for each
Depositary Share.
The company presently intends to redeem the Preferred Shares when it has
obtained a satisfactory commitment from underwriters to purchase from the
company the number of shares of common stock as would have been issuable upon
conversion of any Depositary Shares which are not converted. Any offering of
securities related to a redemption of the Preferred Shares would be made only by
means of a prospectus contained in a registration statement filed with the
Securities and Exchange Commission separate from the $400 million shelf
registration statement which the company filed on April 1, 1994. The company is
not certain when or if market conditions will permit the company to call the
Preferred Shares for redemption.
The company believes that, absent unfavorable litigation outcomes, cash flows
from operations and current cash balances, together with current and anticipated
available long-term financing, will be sufficient to fund operations, capital
investments, and research and development projects currently planned for the
foreseeable future.
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II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A. INTEL
GENERAL
Advanced Micro Devices, Inc. ("AMD" or "company") and Intel
Corporation ("Intel") are engaged in a number of legal proceedings
involving AMD's X86 products. The current status of such legal
proceedings are described below. An unfavorable ultimate decision in
the 287, 386 or 486 microcode cases could result in a material
monetary award to Intel and/or preclude AMD from continuing to produce
those Am386 (Registered Trademark) and Am486 (Registered Trademark)
products adjudicated to contain any copyrighted Intel microcode.
The Am486 products are a material part of the company's business and
profits and such an unfavorable decision could have an immediate,
materially adverse impact on the financial condition and results of
the operations of AMD.
The AMD/Intel legal proceedings involve multiple interrelated and
complex issues of fact and law. The ultimate outcome of such legal
proceedings cannot presently be determined. Accordingly, no provision
for any liability that may result upon an adjudication of any of the
AMD/Intel legal proceedings has been made in the company's financial
statements.
On March 10, 1994, a federal court jury in San Jose, California
returned verdicts in the 287 microcode litigation discussed in A.2
below finding that a 1976 patent and copyright agreement between AMD
and Intel (the "1976 Agreement") granted AMD rights to sell microchips
containing Intel microcodes. The court entered a judgment on the
verdicts in AMD's favor on March 11, 1994. Prior to the jury's
determination, AMD and Intel agreed that the jury's verdicts would be
determinative of the question whether the 1976 Agreement grants AMD
the right to copy microcodes contained in Intel microprocessors and
peripheral microchips, including not only the 287 math co-processor,
but generally as to all microprocessors and peripheral microchips,
specifically including the 386 and 486 microprocessors.
Intel has indicated that it intends to appeal the verdicts in the 287
case and it is expected that the appeal process will take at least one
year. It is AMD's expectation that Intel, notwithstanding the March
10, 1994 verdicts or any other ruling adverse to Intel in the pending
legal proceedings with AMD, will continue to pursue the remaining
intellectual property claims in the pending litigations against the
company.
STATUS OF CASES
1. AMD/Intel Technology Agreement Arbitration.
A 1982 technology exchange agreement (the "1982 Agreement") between
AMD and Intel has been the subject of a dispute which was submitted to
Arbitration through the Superior Court of Santa Clara County,
California and the matter is now at the California Supreme Court on
appeal. The dispute centers around issues relating to whether Intel
breached its agreement with AMD and whether that breach injured AMD,
as well as the remedies available to AMD for such a breach.
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In February 1992, the Arbitrator awarded AMD several remedies
including the following: a permanent, royalty-free, nonexclusive,
nontransferable worldwide right to all Intel copyrights, patents,
trade secrets and mask work rights, if any, contained in the
then-current version of AMD's Am386 family of microprocessors; and a
two-year extension, until December 31, 1997, of the copyright and
patent rights granted to AMD. Intel appealed this decision as it
relates to the technology award. On May 22, 1992, the Superior Court
in Santa Clara County confirmed the Arbitrator's award and entered
judgment in the company's favor on June 1, 1992. Intel appealed the
decision confirming the Arbitrator's award in state court. On June 4,
1993, the California Court of Appeal affirmed in all respects the
Arbitrator's determinations that Intel breached the 1982 Agreement.
However, the Court of Appeal held that the Arbitrator exceeded his
powers in awarding to AMD a license to Intel intellectual property, if
any, in AMD's Am386 microprocessor and in extending the 1976 Agreement
between AMD and Intel by two years. As a result, the Court of Appeal
ordered the lower court to correct the award to remove these rights
and then confirm the award as so corrected.
On September 2, 1993, the California Supreme Court granted the
company's petition for review of the California Court of Appeal
decision that the Arbitrator exceeded his authority. The company has
requested that the California Supreme Court affirm the judgment
confirming the Arbitrator's award to the company, which includes the
right to the Intel 386 microcode.
If the California Supreme Court reverses the decision of the
California Court of Appeal and affirms the Arbitrator's award, the
company would assert the Arbitrator's award as well as the verdicts in
the 287 Microcode case discussed below as defenses against Intel's
intellectual property claims in the 386 and 486 Microcode Litigations
discussed below. If sustained, both these defenses could preclude
Intel from continuing to pursue its pending intellectual property and
related damages claims regarding the Am386 microprocessors, and the
Arbitrator's award also could preclude claims respecting the Am486SX
microprocessors. If the Supreme Court does not reverse the decision of
the California Court of Appeal it could among other things: (i) decide
to remand the matter for a new Arbitration proceeding either on the
merits or solely on the issue of relief including the damages due to
the company, or (ii) order no further proceedings which would affirm
the decision of the Court of Appeal and prevent AMD from using the
Arbitration award as a defense in the 386 or 486 Microcode Litigations
discussed below. The California Supreme Court is expected to decide
the case by the end of 1994.
The company believes it has the right to use Intel technology to
manufacture and sell AMD's microprocessor products based on a variety
of factors, including: (i) the 1982 Agreement, (ii) the Arbitrator's
award in the Arbitration which is pending review by the California
Supreme Court, and (iii) the 1976 Agreement. An unfavorable decision
by the California Supreme Court could materially adversely affect
other AMD/Intel microcode legal proceedings discussed herein. Such
matters involve multiple interrelated and complex issues of fact and
law. The ultimate outcome of the AMD/Intel legal proceedings cannot
presently be determined. Accordingly, no provision for any liability
that may result upon the adjudication of the AMD/Intel legal
proceedings has been made in the company's financial statements.
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2. 287 MICROCODE LITIGATION (CASE NO. C-90-20237, N.D. CAL.)
On April 23, 1990, Intel Corporation filed an action against the
company in the U.S. District Court, Northern District of California,
seeking an injunction and damages with respect to the company's
80C287, a math coprocessor designed to function with the 80286.
Intel's suit alleges several causes of action, including infringement
of Intel copyright on the Intel microcode used in its 287 math
coprocessor, mask work infringement, unfair competition by means of
false advertising and unauthorized copying of the Intel 287 microcode
by the third party developer of the AMD 80C287 microchips.
In June 1992, a jury determined that the company did not have the
right to use Intel microcode in the 80C287. On December 2, 1992, the
court denied the company's request for declaratory relief to the
effect it has the right, under the 1976 Agreement with Intel to
distribute products containing Intel microcode. The company filed a
motion on February 1, 1993, for a new trial based upon the discovery
by AMD of evidence improperly withheld by Intel at the time of trial.
In April, 1993, the court granted AMD a new trial on the issue of
whether the 1976 Agreement with Intel Corporation granted AMD a
license to use Intel microcode in its products. The ruling vacated
both an earlier jury verdict holding that the 1976 Agreement did not
cover the rights to microcode contained in the Intel 80287 math
coprocessor and the December 2, 1992 ruling (discussed above). A new
trial commenced in January, 1994 and jury verdicts were returned in
AMD's favor on March 10, 1994 finding that the 1976 Agreement granted
AMD rights to sell microchips containing Intel microcodes. The court
entered a judgment on the verdicts in AMD's favor on March 11, 1994.
Prior to the jury's determination, AMD and Intel agreed that the
jury's verdicts would be determinative of the question whether the
1976 Agreement grants AMD the right to copy microcodes contained in
Intel microprocessors and peripheral microchips, including not only
the 287 math co-processor, but generally as to all microprocessors and
peripheral microchips, specifically including the 386 and 486
microprocessors. Intel filed a motion for a new trial. Intel also
filed a motion requesting that the judgment be amended to state that
there remained additional claims to be tried that had not been decided
by the jury, and that the record be reopened to allow the parties to
adduce further evidence on those claims and issues that have not yet
been tried. On April 26, 1994, the court held a hearing on Intel's
motion and denied its motion for a new trial. The court also stated
that it would amend the judgment to reflect that the judgment is
limited only to those claims that were tried before the jury.
On May 11, 1994, Intel filed a motion for discovery precedent to a
potential second motion for a new trial. Intel's motion is based on
assertions that the company had not provided certain documents during
discovery in the 287 case. AMD is vigorously opposing Intel's motion.
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Several of Intel's claims and its defense to the company's
counterclaim remain to be decided in this action. Intel asserts that
the company does not have the right to have third parties copy the
microcode for it ("third party rights") and is seeking a declaration
from the court to that effect, including a declaration that AMD may
not use foundries to produce AMD chips containing Intel copyrighted
microcode. The court has set a schedule for briefing on this issue,
which is to be completed by August 5, 1994. The hearing on this issue
has been set for August 12, 1994.
The impact of the ultimate outcome of the 287 Microcode Litigation is
highly uncertain and dependent upon the scope and breadth of the final
result in the case. A decision of broad scope could not only result
in a damages award but also impact the company's ability to continue
to ship and produce its Am486 products or other microprocessor
products containing any copyrighted Intel microcode. The company's
inability to ship such products could have an immediate, material
adverse impact on the company's results of operations and financial
condition. The outcome of the 287 litigation could also materially
impact the outcomes in the other AMD/Intel microcode legal
proceedings. Such matters involve multiple interrelated and complex
issues of fact and law. The ultimate outcome of the AMD/Intel legal
proceedings cannot presently be determined. Accordingly, no
provisions for any liability that may result upon the adjudication of
the AMD/Intel legal proceedings has been made in the company's
financial statements.
3. 386 MICROCODE LITIGATION (CASE NO. A-91-CA-800, W.D. TEXAS AND
CASE NO. C-92-20039, N.D. CAL.)
On October 9, 1991, Intel Corporation filed an action against the
company in the U.S. District Court for the Western District of Texas
(Case No. A-91-CA-800, W.D. Texas), alleging the separate existence
and copyrightability of the logic programming in a microprocessor and
characterizing that logic as a "control program", and further alleging
that the company violated copyrights on this material and on the Intel
microcode contained in the Am386 microprocessor. This action has been
transferred to the U.S. District Court, Northern District of
California (Case No. C-92-20039, N.D. Cal.). The complaint asserts
claims for copyright infringement of what Intel describes as:
(1) its 386 microprocessor microcode program and revised programs, (2)
its control program stored in a 386 microprocessor programmable logic
array and (3) Intel In-Circuit Emulation (ICE) microcode.
The complaint seeks damages and injunctive relief arising out of the
company's development, manufacture and sale of its Am386
microprocessors and seeks a declamatory judgment as to the Intel/AMD
license agreements (1976 and 1982 Agreements), including a claim for
a declaratory judgment that AMD's license rights to Intel's microcodes
expire on December 31, 1995, and that AMD may no longer sell product
containing Intel microcode after that date. The monetary relief sought
by Intel is unspecified. The company has answered and counterclaimed
seeking declaratory relief.
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The company believes that Intel's microcode copyright claims are
substantively the same as claims made in the 287 Microcode Litigation
(Case No. C-90-20237, N.D. Cal.) (discussed above). Intel has also
asserted that federal law prevents the company from asserting as a
defense the intellectual property rights that were awarded in the
Intel Arbitration (discussed above). On October 29, 1992, the court in
the 386 Microcode Litigation granted the company's motion to stay
further proceedings pending resolution of the state court Arbitration
appeal. On December 28, 1993, the U.S. Court of Appeals for the Ninth
Circuit reversed the stay order and the case was remanded for further
proceedings. On April 20, 1994, the company filed a petition for writ
of certiorari in the Supreme Court of the United States. The United
States Supreme Court denied the company's petition for writ of
certiorari on June 13, 1994. The 386 case is no longer stayed and the
company expects Intel to argue that the Arbitration is not a defense
in this action. As discussed above, the jury verdicts in the 287 case
resolve the issue of whether AMD has the right to use Intel's
microcodes in AMD's Am386 microprocessor. However, the company expects
Intel to argue that the verdicts do not resolve the claims in the 386
Microcode Litigation that AMD is not licensed to use (1) Intel's
"control program" stored in Intel's 386 microprocessor's programmable
logic array or (2) what Intel characterizes as "ICE microcode".
An unfavorable final decision in the 386 Microcode Litigation could
result in a material monetary damages award to Intel and/or preclude
the company from continuing to produce the Am386 and any other
microprocessors which contain any copyrighted Intel microcode, either
of which could have an immediate, material adverse impact on the
company's results of operations and financial condition. The AMD/Intel
legal proceedings involve multiple interrelated and complex issues of
fact and law. The ultimate outcome of such proceedings cannot
presently be determined. Accordingly, no provision for any liability
that may result upon the adjudication of the AMD/Intel legal
proceedings has been made in the company's financial statements.
4. 486 MICROCODE LITIGATION (CASE NO. C-93-20301 PVT, N.D. CAL.)
On April 28, 1993, Intel Corporation filed an action against AMD in
the U.S. District Court, Northern District of California, seeking an
injunction and damages with respect to the company's Am486
microprocessor. The suit alleges several causes of action, including
infringement of various Intel copyrighted computer programs.
Intel's Fourth Amended Complaint was filed on November 2, 1993. The
Fourth Amended Complaint seeks damages and injunctive relief based on
the following claims: (1) AMD's alleged copying and distribution of
486 "Processor Microcode Programs" and "Control Programs"; (2) AMD's
alleged copying of 486 "Processor Microcode" as an intermediate step
in creating proprietary microcodes for the AMD version of the 486. The
Fourth Amended Complaint also seeks a declaratory judgment that (1)
AMD has induced third party copyright infringement through encouraging
third parties to import Am486-based products ("Third Party Inducement
Claim"); (2) AMD's license rights to Intel microcode expire as of
December 31, 1995 and AMD may no longer sell any products containing
Intel microcode after that date ("License Expiration Claim"); (3)
AMD's license rights to Intel microcodes do not extend to In-Circuit
Emulation (ICE) microcode ("ICE Claim"); and (4) AMD is not licensed
to authorize third parties to copy the Intel microcode ("Have Copied
Claim"). Intel's Fourth Amended Complaint further seeks damages and
injunctive relief based on AMD's alleged copying and distribution of
Intel's "386 Processor Microcode Program" in AMD's 486SX
microprocessor. The company answered the complaint in January, 1994.
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On December 1, 1993, Intel moved for partial summary judgment on its
claim for copyright infringement of what Intel terms its 486 ICE
microcode. The parties tried the ICE claim during May and June, 1994,
and the case is under submission and awaiting decision by the court.
The company anticipates that the court's ruling in the 287 microcode
litigation on third party rights will resolve the similar claim in
the 486 case as well.
By order dated December 21, 1993, the court granted the company's
motion to stay Intel's claim that AMD's 486SX infringes Intel
copyrights on its 386 microcode. In light of the Ninth Circuit
decision discussed above in the 386 Microcode Litigation reversing the
court's order staying the case, the stay order in this action may be
vacated and/or appealed and the litigation concerning this claim may
proceed.
AMD believes that the microcode copyright infringement claims made by
Intel in the 486 Microcode Litigation are substantively the same as
claims: (i) made in the 287 Microcode Litigation with regard to the
Intel microcode, discussed above and (ii) made in the 386 Microcode
Litigation with regard to AMD's rights to utilize the so-called Intel
microcode, "control programs" and ICE microcode. Intel's License
Expiration Claim contained in the 486 Microcode Litigation is also
contained in the 386 but not the 287 Microcode Litigation.
As discussed above, the jury verdicts in the 287 case resolve the
issue whether AMD has the right to use Intel's microcode in AMD's
Am486 microprocessor. The company expects Intel to argue that the
verdicts do not resolve the claims in the 486 Microcode Litigation
that AMD is not licensed to use (1) Intel's "control program" stored
in Intel's 486 microprocessor's programmable logic array or (2) what
Intel characterizes as "ICE microcode".
An unfavorable ultimate decision in the 287 or the 486 Microcode
Litigations could affect the company's ability to continue to produce
and ship its Am486DX products or, in the case of the 486 Microcode
Litigation, could result in a material monetary damages award to
Intel, either of which could have an immediate, material adverse
impact on the company's results of operations and financial condition.
The AMD/Intel legal proceedings involve multiple interrelated and
complex issues of fact and law. The ultimate outcome of such
proceedings cannot presently be determined. Accordingly, no
provisions for any liability that may result upon the adjudication of
the AMD/Intel legal proceedings has been made in the company's
financial statements.
5. ANTITRUST CASE AGAINST INTEL
On August 28, 1991, the company filed an antitrust complaint against
Intel Corporation in the U.S. District Court for the Northern District
of California (Case No. C-91-20541-JW-EAI), alleging that Intel
engaged in a series of unlawful acts designed to secure and maintain
a monopoly in iAPX microprocessor chips. The complaint alleges that
Intel illegally coerced customers to purchase Intel chips through
selective allocations of Intel products and tying availability of
the Intel 80386 to purchases of other products from Intel, and that
Intel filed baseless lawsuits against AMD in order to eliminate AMD
as a competitor and intimidate AMD customers. The complaint requests
significant monetary damages (which may be trebled), and an injunction
requiring Intel to license the 80386 and 80486 to AMD, or other
appropriate relief. On December 17, 1991, the Court dismissed certain
of AMD's claims relating to Intel's past practices on statute of
limitations grounds. Intel filed a motion for partial summary judgment
on a single AMD claim that Intel filed a baseless trademark lawsuit
against AMD and this motion has been granted. The trial date of
October 4, 1994 has been vacated and no new date has been set. With
the Court's permission, AMD filed an amended complaint on March 9,
1994, alleging monopolization and attempted monopolization by Intel in
connection with the sale of the 286, 386, 486 and Pentium
microprocessors. On April 29, 1994, Intel filed a motion seeking to
dismiss and strike portions of the first amended complaint filed by
the company. Intel's motion to dismiss and strike is currently set
for hearing on August 26, 1994.
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6. BUSINESS INTERFERENCE CASE AGAINST INTEL
On November 12, 1992, the company filed a proceeding against Intel in
the Superior Court of Santa Clara County, California (Case No.
726343), for tortious interference with prospective economic
advantage, violation of California's Unfair Competition Act, breach of
contract and declaratory relief arising out of Intel's efforts to
require AMD's customers to pay to Intel patent royalties if they
purchased 386 and 486 microprocessors from AMD. The patent involved,
referred to as the Crawford 338 patent, covers various aspects of how
the Intel 386 microprocessor, the Intel 486 microprocessor and future
X86 processors manage memory and how these microprocessors generate
memory pages and page tables when combined with external memory and
multi-tasking software such as Microsoft (Registered Trademark)
Windows (Trademark), OS/2 (Registered Trademark) or UNIX (Registered
Trademark). The action was subsequently removed to the Federal
District Court where AMD amended its complaint to include causes of
action for violation of the Lanham Act and a declaration of patent
invalidity and unenforceability. The complaint alleges that Intel is
demanding royalties for the use of the Intel patents from the
company's customers, without informing the company's customers that
the company's license arrangement with Intel protects the company's
customers from an Intel patent infringement lawsuit. No royalties for
the license are charged to customers who purchase these
microprocessors from Intel. This case had been stayed pending
resolution of the International Trade Commission Proceeding, discussed
below. Now that the International Trade Commission proceeding has
been completed, AMD intends to pursue this case vigorously.
7. INTERNATIONAL TRADE COMMISSION PROCEEDING
The United States International Trade Commission Proceeding (the "ITC
Proceeding") (Investigation No. 337-TA-352) was filed by Intel
Corporation on May 7, 1993, against two respondents, Twinhead
International and its U.S. subsidiary, Twinhead Corporation.
Twinhead is a Taiwan-based manufacturer which is a customer of both
AMD and Intel. Twinhead purchases microprocessors from AMD and Intel,
and incorporates these microprocessors into computers sold by
Twinhead. Intel claims that the respondents induce computer end-users
to infringe on what is known as the Crawford 338 patent when the
computers containing AMD microprocessors are used with multi-tasking
software such as Windows, Unix or OS/2. Intel seeks a permanent
exclusion order from entry into the United States of certain Twinhead
personal computers and an order directing Twinhead to cease and
desist from demonstrating, testing or otherwise using such computers
in the United States.
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AMD's dispute with Intel in the Intel Business Interference Case (Case
No. C-92-20789, N.D. Cal) (discussed above) requests a declaration
that the Crawford 338 patent is invalid; accordingly, AMD intervened
in the ITC Proceeding as a real party in interest by filing a motion
with the ITC to intervene on the side of the respondents. On July 2,
1993, the ITC granted AMD's motion to intervene in the ITC Proceeding
on the side of respondents and to participate fully in all proceedings
as a party. The company has vigorously contested the relief Intel
seeks. Any decision by an administrative judge would then be confirmed
or not be confirmed by the International Trade Commission (ITC).
On February 4, 1994, the company filed a motion to suspend immediately
and thereafter to terminate the ITC proceeding on the ground that
Intel is collaterally estopped from pursuing the relief it seeks by
reason of a judgment soon to be entered in favor of Cyrix Corporation
(also an intervenor in the ITC Proceeding) and against Intel in a
trial involving the Crawford 338 patent in Texas federal court. Intel
opposed the motion, and filed a motion of its own requesting that the
ITC proceeding be suspended, not terminated, pending appellate review
of the Cyrix Judgment. On February 22, 1994, the ITC Administrative
Law Judge granted AMD's motion to suspend, and indicated his intent to
grant AMD's request to terminate the ITC Proceeding upon entry of the
judgment in the Texas federal court. The Judge denied Intel's motion
to suspend the ITC Proceeding until its appeal of the judgment in
favor of Cyrix has been resolved. The Texas District Court entered
judgment for Cyrix on April 6, 1994. On April 12, 1994, AMD moved for
summary determination and termination of the ITC proceeding based on
Cyrix's judgment in Texas. On June 6, 1994, the Administrative Law
Judge granted AMD's motion. Intel filed a petition for review of the
order on June 15, 1994. The commission denied Intel's petition on
July 11, 1994. AMD does not know whether Intel intends to appeal.
An unfavorable outcome before the ITC could have an adverse effect on
the company's ability to sell microprocessors to Twinhead and other
computer manufacturers in Taiwan and potentially, other countries. An
unfavorable outcome could have an immediate, material adverse impact
on the company's results of operations and financial condition.
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B. OTHER
1. IN RE ADVANCED MICRO DEVICES SECURITIES LITIGATION
Between September 8 and September 10, 1993, five class actions were
filed, purportedly on behalf of purchasers of the company's stock,
alleging that the company and various of its officers and directors
violated Sections 10(b) and 20(a) of the Securities and Exchange Act
of 1934, 15 U.S.C. (S)(S) 78j(b) and 78t(a), respectively, and Rule
10b-5 promulgated thereunder, 17 C.F.R. (S) 240.10b-5, by issuing
allegedly false and misleading statements about the company's
development of its 486SX personal computer microprocessor products,
and the extent to which that development process included access to
Intel's 386 microcode. Some or all of the complaints alleged that the
company's conduct also constituted fraud, negligent misrepresentations
and violations of the California Corporations Code.
By order dated October 13, 1993, these five cases, as well as any
cases that might be subsequently filed, were consolidated under the
caption "In Re Advanced Micro Devices Securities Litigation," with the
--------------------------------------------------
lead case for the consolidated actions being "Samuel Sinay V.
----------------
Advanced Micro Devices, Inc., et al." (No. C-93-20662-JW, N.D. Cal). A
-------------------------------------
consolidated amended class action complaint was filed on December 3,
1993, containing all the claims described above and additional
allegations that the company made false and misleading statements
about its revenues and earnings during the third quarter of its 1993
fiscal year as well as about potential foundry arrangements. The
amended complaint seeks damages in an unspecified amount.
On July 8, 1994, the parties reached an agreement in principle to
settle these class actions for $34 million to be funded by the
company. The agreement is subject to the approval of the company's
Board of Directors and the federal court. The company believes its
financial results will not be materially adversely affected.
2. GEORGE A. BILUNKA, ET AL. V. SANDERS, ET AL. (93-20727JW, N.D.
--------------------------------------------
CAL.)
On September 30, 1993, an AMD shareholder, George A. Bilunka,
purported to commence an action derivatively on the company's behalf
against all of the company's directors and certain of the company's
officers. The company is named as a nominal defendant. This
purported derivative action essentially alleges that the individual
defendants breached their fiduciary duties to the company by causing,
or permitting, the company to make allegedly false and misleading
statements described in In re Advanced Micro Devices Securities
---------------------------------------
Litigation above about the company's development of its 486SX personal
----------
computer microprocessor products, and the extent to which that
development process included access to Intel's 386 microcode. This
action alleges that a pre-suit demand on the company's Board of
Directors would have been futile because of alleged director
involvement. Damages are sought against the individual defendants in
an unspecified amount.
On November 10, 1993, the company, as nominal defendant, filed a
motion to dismiss the action for failure to make a demand upon the
company's Board of Directors. The plaintiff then filed an amended
derivative complaint on December 17, 1993. The company again moved to
dismiss the complaint. The motion was heard on February 4, 1994, and
on March 1, 1994 the court granted in part and denied in part the
motion.
24
<PAGE>
By the order of the court, this case was consolidated for settlement
purposes with the securities class actions discussed above. On July
8, 1994, the parties reached an agreement in principle to settle this
case for $2.25 million less legal and other fees to be paid to the
company and to be funded by the company's director and office's
liability insurance carrier. The agreement is subject to the approval
of the company's Board of Directors and the federal court. The
company believes its financial results will not be materially
adversely affected.
3. SEC INVESTIGATION
The Securities and Exchange Commission ("SEC") has notified the
company that it is conducting an informal investigation of the company
regarding the company's disclosures about the development of its
Am486SX products. See items 1 and 2 of Section (B) hereof. The
company is cooperating fully with the SEC.
4. OTHER MATTERS.
The company is a defendant or plaintiff in various other actions which
arose in the normal course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the financial condition or the results of operations
of the company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The AMD Annual Meeting of Stockholders was held on Wednesday, April
27, 1994. The following eight persons were elected to the Board of
Directors of the company with the following votes cast:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
<S> <C> <C>
W. J. Sanders III 80,535,729 417,329
Charles M. Blalack 80,575,937 377,121
Dr. R. Gene Brown 80,586,486 366,572
Anthony B. Holbrook 80,527,399 425,659
Richard Previte 80,585,234 367,824
Joe L. Roby 80,563,596 389,462
Dr. Leonard Silverman 80,558,114 394,944
Dr. Friedrich Baur 80,577,536 375,522
</TABLE>
A Management Proposal to ratify the appointment of Ernst & Young as
independent auditors for the company for the current year was
approved. The vote was 80,659,846 shares in favor, 96,283 shares
against, and 196,929 shares abstained.
A Management Proposal to approve the company's 1992 Stock Incentive
Plan, as amended, and an increase in the number of shares authorized,
to be issued under the Plan was approved. The vote was 51,050,071 in
favor, 29,647,390 against, and 255,597 abstained.
25
<PAGE>
A Stockholder Proposal concerning the composition of the Nominating
Committee of the Board of Directors was defeated. The vote was
8,594,441 in favor, 53,444,862 against, 1,043,906 abstained, and
17,869,849 withheld.
A Stockholder Proposal concerning the composition of the Board of
Directors was defeated. The vote was 6,703,686 in favor, 55,408,517
against, 971,006 abstained and 17,869,849 withheld.
A Stockholder Proposal passed requesting the Board of Directors to
redeem the preferred Stock purchases rights issued in 1990 under the
Corporation's Stockholder Rights Plan unless such Plan is approved by
the stockholders. The vote was 41,592,497 in favor, 20,236,688
against, 1,254,199 abstained and 17,869,674 withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
1. None
B. FORM 8-K
1. The company filed a Form 8-K, dated July 8, 1994, regarding the
proposed settlement of the securities and derivative
litigation matters described in items 1 and 2 of Part II-Item 1B.
26
<PAGE>
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: July 28,1994 By: /s/ Marvin Burkett
------------ ------------------
Marvin Burkett
Senior Vice President
Chief Financial Officer
Treasurer
Signing on behalf of the
registrant and as principal
financial officer
27
