<PAGE>
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 September 27, 1998
---------------------
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
------- -------
The number of shares of $0.01 par value common stock outstanding as of October
30, 1998: 144,774,784
-----------
<PAGE>
ADVANCED MICRO DEVICES, INC.
- ----------------------------
INDEX
- -----
Part I.
Financial Information
- ---------------------
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations--Quarters and Nine Months Ended
September 27, 1998 and September 28, 1997 3
Condensed Consolidated Balance Sheets--
September 27, 1998 and December 28, 1997 4
Condensed Consolidated Statements of Cash
Flows--Nine Months Ended September 27, 1998
and September 28, 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 35
Part II. Other Information
-----------------
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 36
Signature 37
---------
2
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I. FINANCIAL INFORMATION
---------------------
ITEM 1.
-------
FINANCIAL STATEMENTS
--------------------
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(Thousands except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------------------- ---------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 685,927 $ 596,644 $ 1,753,321 $ 1,743,204
Expenses:
Cost of sales 422,985 428,240 1,236,716 1,149,582
Research and development 143,665 125,917 410,943 340,846
Marketing, general and administrative 109,768 100,915 299,180 298,417
--------- --------- ----------- -----------
676,418 655,072 1,946,839 1,788,845
--------- --------- ----------- -----------
Operating income (loss) 9,509 (58,428) (193,518) (45,641)
Litigation settlement - - (11,500) -
Interest income and other, net 10,071 5,532 24,170 28,572
Interest expense (21,182) (14,151) (51,317) (33,519)
--------- --------- ----------- -----------
Loss before income taxes and equity in joint venture (1,602) (67,047) (232,165) (50,588)
Benefit for income taxes (635) (30,072) (91,742) (25,294)
--------- --------- ----------- -----------
Loss before equity in joint venture (967) (36,975) (140,423) (25,294)
Equity in net income of joint venture 1,973 5,300 14,142 16,538
--------- --------- ----------- -----------
Net income (loss) $ 1,006 $ (31,675) $ (126,281) $ (8,756)
========= ========= =========== ===========
Net income (loss) per common share:
Basic $ .01 $ (0.22) $ (0.88) $ (0.06)
========= ========= =========== ===========
Diluted $ .01 $ (0.22) $ (0.88) $ (0.06)
========= ========= =========== ===========
Shares used in per share calculation:
Basic 143,915 141,055 143,249 139,975
========= ========= =========== ===========
Diluted 146,642 141,055 143,249 139,975
========= ========= =========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
ADVANCED MICRO DEVICES, INC
---------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS*
--------------------------------------
(Thousands)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
------------- ------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 135,693 $ 240,658
Short-term investments 444,817 226,374
----------- -----------
Total cash, cash equivalents and short-term investments 580,510 467,032
Accounts receivable, net 372,393 329,111
Inventories:
Raw materials 15,620 33,375
Work-in-process 128,639 96,712
Finished goods 27,972 38,430
----------- -----------
Total inventories 172,231 168,517
Deferred income taxes 168,554 160,583
Prepaid expenses and other current assets 71,915 50,024
----------- -----------
Total current assets 1,365,603 1,175,267
Property, plant and equipment, at cost 4,449,093 3,799,051
Accumulated depreciation and amortization (2,073,988) (1,808,362)
----------- -----------
Property, plant and equipment, net 2,375,105 1,990,689
Investment in joint venture 206,792 204,031
Other assets 168,618 145,284
----------- -----------
$ 4,116,118 $ 3,515,271
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to banks $ 5,167 $ 6,601
Accounts payable 312,543 359,536
Accrued compensation and benefits 83,763 63,429
Accrued liabilities 161,984 134,656
Income tax payable 20,386 12,676
Deferred income on shipments to distributors 86,790 83,508
Current portion of long-term debt and capital lease obligations 149,220 66,364
----------- -----------
Total current liabilities 819,853 726,770
Deferred income taxes 2,339 96,269
Long-term debt and capital lease obligations, less current portion 1,364,230 662,689
Commitments and contingencies - -
Stockholders' equity:
Capital stock:
Common stock, par value 1,453 1,428
Capital in excess of par value 1,051,619 1,018,884
Retained earnings 939,850 1,066,131
Accumulated other comprehensive loss (63,226) (56,900)
----------- -----------
Total stockholders' equity 1,929,696 2,029,543
----------- -----------
$ 4,116,118 $ 3,515,271
=========== ===========
</TABLE>
* Amounts as of September 27, 1998 are unaudited. Amounts as of December 28,
1997 are derived from the December 28, 1997 audited financial statements.
See accompanying notes
----------------------
4
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
Sept. 27, Sept. 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (126,281) $ (8,756)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 342,420 286,790
Net loss on disposal of property, plant and equipment 5,231 21,381
Net gain realized on sale of available-for-sale securities - (4,978)
Compensation recognized under employee stock plans 6,102 16,955
Undistributed income of joint venture (14,142) (16,538)
Changes in operating assets and liabilities:
Net increase in receivables, inventories,
prepaid expenses and other assets (87,623) (80,937)
Net increase in deferred income taxes (101,901) (35,300)
Increase (decrease) in income tax payable 7,710 (5,142)
Net increase in payables and accrued liabilities 1,164 28,071
----------- ---------
Net cash provided by operating activities 32,680 201,546
----------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (816,113) (468,375)
Proceeds from sale of property, plant and equipment 13,825 22,698
Purchase of available-for-sale securities (1,211,146) (442,416)
Proceeds from sale of available-for-sale securities 991,339 398,255
Investment in joint venture - (128)
----------- ---------
Net cash used in investing activities (1,022,095) (489,966)
----------- ---------
Cash flows from financing activities:
Proceeds from borrowings 819,222 287,930
Debt issuance costs (12,783) -
Payments on debt and capital lease obligations (40,002) (52,699)
Proceeds from foreign grants 91,355 -
Proceeds from issuance of stock 26,658 49,776
----------- ---------
Net cash provided by financing activities 884,450 285,007
----------- ---------
Net decrease in cash and cash equivalents (104,965) (3,413)
Cash and cash equivalents at beginning of period 240,658 166,194
----------- ---------
Cash and cash equivalents at end of period $ 135,693 $ 162,781
=========== =========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the first nine months for:
Interest $ 11,553 $ -
=========== =========
Income Taxes $ 33 $(101,047)
=========== =========
Non-cash financing activities:
Equipment capital leases $ - $ 16,768
=========== =========
</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.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December. The quarters ended September 27, 1998 and September 28, 1997 each
included 13 weeks. The nine months ended September 27, 1998 and September 28,
1997 each included 39 weeks.
Certain prior year amounts on the Condensed Consolidated Financial
Statements have been reclassified to conform to the 1998 presentation.
2. The following is a summary of available-for-sale securities as of September
27, 1998 (in thousands):
Cash equivalents:
Money market funds $ 33,502
=========
Short-term investments:
Treasury notes $ 14,439
Bank notes 32,243
Corporate notes 13,625
Federal agency notes 34,610
Money market auction rate preferred stocks 44,000
Certificates of deposit 130,035
Commercial paper 175,865
=========
Total short-term investments $444,817
=========
Long-term investments:
Equity investments $ 14,575
Treasury notes 2,002
=========
Total long-term investments $ 16,577
=========
3. Basic net income (loss) per share is based upon weighted-average common
shares outstanding. Diluted net income (loss) per share is computed using
the weighted-
6
<PAGE>
average common shares outstanding plus any potential dilutive securities.
Dilutive securities can include stock options, warrants, restricted stock and
convertible debt. The following table sets forth the computation of basic and
diluted net income (loss) per common share:
<TABLE>
<CAPTION>
(Thousands except per share data) Quarter Ended Nine Months Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,006 $ (31,675) $ (126,281) $ (8,756)
-------- --------- ----------- ---------
Numerator for basic and diluted net
income (loss) per common share $ 1,006 $ (31,675) $ (126,281) $ (8,756)
-------- --------- ----------- ---------
Denominator:
Denominator for basic net income (loss)
per common share - weighted-average shares 143,915 141,055 143,249 139,975
Effect of dilutive securities:
Employee stock options 2,472 - - -
Restricted stock 253 - - -
Warrants 2 - - -
-------- -------- -------- --------
Dilutive potential common shares 2,727 - - -
Denominator for diluted net income
(loss) per common share - adjusted
weighted-average shares 146,642 141,055 143,249 139,975
-------- -------- -------- --------
Basic net income (loss) per common share $ 0.01 $ (0.22) $ (0.88) $ (0.06)
======== ======== ======== ========
Diluted net income (loss) per common share $ 0.01 $ (0.22) $ (0.88) $ (0.06)
======== ======== ======== ========
</TABLE>
Options to purchase 7,474,446 shares of common stock at a weighted-average
price of $28.23 per share were outstanding during the quarter ended September
27, 1998 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 and, therefore, the effect would be
antidilutive. Options, warrants, and restricted stock were outstanding during
the quarter ended September 28, 1997 and the nine months in both of the
periods ended September 27, 1998 and September 28, 1997, 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. Convertible debt
was outstanding during the quarter and nine months ended September 27, 1998
but was not included in the computation of diluted net income (loss) per
common share because the effect would be antidilutive.
On September 10, 1998, the Compensation Committee of the Board of Directors
of the Company approved a stock option repricing program pursuant to which
employees of the Company (excluding officers and vice presidents) could elect
to cancel certain unexercised stock options in exchange for new stock options
with an exercise price of $19.43, which was equal to twenty percent above the
closing price of the Company's common stock on the New York Stock Exchange on
September 10, 1998. Approximately 2 million options
7
<PAGE>
were eligible for repricing, of which approximately 1.7 million were
repriced. The vesting schedules and expiration dates of repriced stock
options were extended by one year. The repricing of such options had no
impact on the diluted net income (loss) per common share for both the quarter
and nine-months ended September 27, 1998, as the effect of the repriced
options would be antidilutive.
4. In May 1998, the Company sold $517.5 million of Convertible Subordinated
Notes due May 15, 2005 under its $1 billion shelf registration declared
effective by the Securities and Exchange Commission on April 20, 1998.
Interest on the Convertible Subordinated Notes accrues at the rate of 6
percent per annum and is payable semiannually in arrears on May 15 and
November 15 of each year, commencing November 15, 1998. The Convertible
Subordinated Notes are redeemable at the Company's option on and after May
15, 2001. The Notes are convertible at the option of the holder at any time
prior to the close of business on the maturity date, unless previously
redeemed or repurchased, into shares of common stock at a conversion price of
$37.00 per share, subject to adjustment in certain circumstances.
5. 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 advanced integrated circuit (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. At September 27, 1998, the
cumulative adjustment related to the translation of the FASL financial
statements into U.S. dollars resulted in a decrease to the investment in FASL
of $57 million. The following are the significant FASL related party
transactions and balances:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------------- ---------------------------------
September 27, September 28, September 27, September 28,
(Thousands) (Unaudited) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Royalty income $ 4,893 $ 5,564 $ 15,566 $ 14,864
Purchases 43,377 61,296 153,741 173,963
<CAPTION>
Balance at
September 27,
(Thousands) (Unaudited) 1998
-------------
<S> <C>
Royalty receivable $ 9,060
Accounts payable 10,808
</TABLE>
The following is condensed unaudited financial data of FASL:
8
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(Thousands) (Unaudited) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 98,295 $ 116,249 $ 315,204 $ 298,980
Gross profit 5,575 30,847 39,026 69,133
Operating income 5,114 26,005 35,087 61,100
Net income 2,616 12,511 20,980 29,517
</TABLE>
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 adjustments resulting from the related party
relationship between FASL and the Company which are reflected on the
Company's Condensed Consolidated Statements of Operations.
6. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of comprehensive
income (loss) and its components; however, the adoption of this Statement had
no impact on the Company's net loss or stockholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income (loss).
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
(Thousands) Quarter Ended Nine Months Ended
------------------------------ ------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,006 $ (31,675) $ (126,281) $ (8,756)
Foreign currency translation adjustments 4,401 (16,276) (11,280) (22,873)
Unrealized gains (losses) on securities, net of tax:
Unrealized holding gains (losses) arising
during the period (1,715) (533) 4,954 3,180
Less: Reclassification adjustment for gains
included in earnings - - - (3,534)
------- --------- ---------- ---------
Other comprehensive income (loss) 2,686 (16,809) (6,326) (23,227)
------- --------- ---------- ---------
Comprehensive income (loss) $ 3,692 $ (48,484) $ (132,607) $ (31,983)
======= ========= ========== =========
</TABLE>
The components of accumulated other comprehensive loss are as follows:
9
<PAGE>
September 27, December 28,
(Thousands) 1998 1997
------------- ------------
Unrealized gain on investments, net of tax $ 6,961 $ 2,007
Cumulative translation adjustments (70,187) (58,907)
--------- ---------
$ (63,226) $ (56,900)
========= =========
7. On April 23, 1998, the Company announced it had reached an agreement in
principle to settle the class action securities lawsuit against the Company
and certain of its current and former officers and directors. The settlement
amount of $11,500,000 was paid in the third quarter.
The Company has been informed that a complaint was filed on July 31, 1998 in
the United States District Court for the District of Arizona by Lemelson
Medical, Education & Research Foundation, Limited Partnership, as plaintiff,
against 26 semiconductor companies, including the Company's subsidiary
Vantis Corporation (Vantis). The complaint alleges infringement of numerous
patents held by Mr. Jerome H. Lemelson relating to "machine vision" and
semiconductor processing technology. Based upon information presently known
to management, the Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the financial condition
or results of operations of the Company.
8. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in fiscal years beginning after June 15, 1999. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance.
The Company is currently evaluating whether to adopt the new Statement
earlier than is required. SFAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through earnings. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in the fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivative's change in fair value
will be immediately recognized in earnings.
The Company has not yet determined what the effect of SFAS 133 will be on
the earnings and financial position of the Company.
10
<PAGE>
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 operating results; anticipated cash flows; realization of
net deferred tax assets; capital expenditures; adequacy of resources to fund
operations and capital investments; the Company's ability to access external
sources of capital; the Company's ability to transition to new process
technologies; anticipated market and sales growth; Year 2000 exposures; the
effect of foreign currency hedging transactions; the effect of adverse economic
conditions in Asia; and the FASL and Dresden Fab 30 manufacturing facilities.
Dresden Fab 30 is a new production facility in Dresden, Germany, currently under
construction and anticipated to begin manufacturing by the end of 1999. See
Liquidity and Capital Resources and Risk Factors below, as well as such other
risks and uncertainties as are detailed in the Company's 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 included
Condensed Consolidated Financial Statements and Notes thereto, and with the
Company's Consolidated Financial Statements and Notes thereto at December 28,
1997 and December 29, 1996 and for each of the three years in the period ended
December 28, 1997.
AMD, the AMD logo, Advanced Micro Devices, Vantis, NexGen, K86, AMD-K6, AMD-K6-
2, AMD-K7, Nx586 and Nx686 and combinations thereof, are either trademarks or
registered trademarks of Advanced Micro Devices, Inc. Microsoft, Windows,
Windows 95 and Windows NT are registered trademarks of Microsoft Corporation.
Pentium and Celeron are registered trademarks of Intel Corporation. Other terms
used to identify companies and products may be trademarks of their respective
owners.
11
<PAGE>
RESULTS OF OPERATIONS
AMD participates in all three technology areas within the digital IC market--
memory circuits, logic circuits and microprocessors--through, collectively, its
Computation Products Group (CPG), its Memory Group, its Communications Group,
and its programmable logic subsidiary, Vantis. CPG products include
microprocessors and core logic products. 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, and embedded processors. Vantis products are
complex and simple, high-performance CMOS (complementary metal oxide
semiconductor) programmable logic devices (PLDs).
The following is a summary of the net sales of the CPG, Memory Group,
Communications Group and Vantis for the periods presented below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
-------------------------------------- -----------------------
Sept. 27, June 28, Sept. 28, Sept. 27, Sept. 28,
(Millions) 1998 1998 1997 1998 1997
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CPG $ 381 $ 220 $ 178 $ 770 $ 479
Memory Group 129 132 178 428 543
Communications Group 126 123 179 397 533
Vantis 50 52 62 158 188
----- ----- ----- ------- -------
Total $ 686 $ 527 $ 597 $ 1,753 $ 1,743
===== ===== ===== ======= =======
- --------------------------------------------------------------------------------------------------------
</TABLE>
The current economic conditions in Asia and the general downturn in the
worldwide semiconductor market negatively impacted results of operations for the
quarter and nine months ended September 27, 1998. The Company's results
continue to be negatively affected by these factors in the fourth quarter of
1998 and may be negatively affected into 1999 if there is no improvement in the
economic condition in Asia and the worldwide semiconductor market.
REVENUE COMPARISON OF QUARTERS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
Net sales of $686 million in the third quarter of 1998 increased approximately
15 percent compared to the third quarter of 1997 as CPG net sales more than
doubled. This increase was partially offset by a 27 percent decrease in
combined Communications Group, Memory Group and Vantis net sales.
The increase in CPG net sales in the third quarter of 1998 as compared to the
third quarter of 1997 was due to a substantial increase in unit shipments of
microprocessors, as unit shipments nearly tripled. Much of the increase in unit
volume was due to unit shipment growth in the sub-$1,500 personal computer
(PC) market, where average selling prices of microprocessors are
12
<PAGE>
significantly lower. CPG sales growth is dependent on increased unit shipments
at higher speed grades, as to which no assurance can be given.
Memory Group net sales decreased 27 percent compared to the same period in the
previous year primarily due to a significant decline in prices of both Flash and
EPROM memory devices offset in part by increases in Flash unit volume. The
Company expects future EPROM sales to be flat or down due to a general shift to
Flash memory devices. Oversupply in the Flash market combined with the increase
in competition has caused downward pressure on the average selling price of
Flash memory devices. The Company expects continued price pressure from intense
competition in Flash memory devices.
Communications Group net sales decreased 29 percent compared to the same
quarter in the previous year primarily due to a significant decrease in unit
volume in nearly all products. The Company's sales of telecommunication
products, which represent approximately half of the decline in Communications
Group net sales, were particularly impacted by the general economic downturn in
Asia. The Company's offerings of network products, which comprise approximately
one-third of the decline in Communications Group net sales, have not kept pace
with the market shift towards higher performance products. The Company expects
the Communications Group products to have essentially flat sales in the fourth
quarter of 1998.
Vantis net sales decreased 20 percent primarily due to decreased unit
shipments of simple PLD (SPLD) products and lower average selling prices,
reflecting the shift in the PLD market away from SPLD products and towards
complex PLD (CPLD) and Field Programmable Gate Array (FPGA) products. CPLD
net sales were flat compared to the same quarter in the previous year as
increases in unit shipments were offset by a decline in average selling
prices.
REVENUE COMPARISON OF QUARTERS ENDED SEPTEMBER 27, 1998 AND JUNE 28, 1998
Net sales in the third quarter of 1998 increased approximately 30 percent
compared to the second quarter of 1998 due to a 73 percent increase in CPG
sales. Combined Communications Group, Memory Group and Vantis net sales were
flat compared to the second quarter of 1998.
The increase in CPG net sales was primarily due to a 41 percent increase in
combined AMD-K6(TM) and AMD-K6-2(TM) microprocessor unit volume over the
preceding quarter. In addition, average selling prices were significantly
higher primarily because the Company produced parts with higher performance as a
result of the shift to production on 0.25-micron process technology. CPG sales
growth is dependent on increased unit shipments at higher speed grades, as to
which no assurance can be given.
Memory Group net sales decreased 2 percent in the third quarter of 1998
compared to the second quarter of 1998 due to a decline in prices of both Flash
and EPROM memory devices offset in part by increases in Flash unit volume. The
Company expects future EPROM sales to be flat or down due to a general shift to
Flash memory devices. Oversupply in the Flash market combined with the increase
in competition has caused downward pressure on the average selling price of
Flash memory devices. The Company expects continued price pressure from intense
competition in Flash memory devices.
13
<PAGE>
Communications Group net sales increased 3 percent compared to the previous
quarter primarily due to an increase in prices of embedded processor products,
resulting from the Company's shift towards manufacturing more advanced embedded
processors which consequently have a higher average selling price. Sales of
Communications Group products remained at depressed levels due to both the
continuing impact of the general economic downturn in Asia, and the Company's
offerings of aging network products. The Company expects the Communications
Group products to have essentially flat sales in the fourth quarter of 1998.
Vantis net sales decreased 5 percent due to a decrease in unit shipments of
SPLD products and lower average selling prices reflecting the shift in the PLD
market away from SPLD products and towards CPLD and FPGA products. This was
partially offset by an increase in unit shipments of CPLD products.
REVENUE COMPARISON OF NINE MONTHS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28,
1997
Net sales of $1.8 billion in the first nine months of 1998 increased slightly
compared to the first nine months of 1997 due to a 61 percent increase in CPG
net sales offset by a 22 percent decrease in combined Communications Group,
Memory Group and Vantis net sales.
The increase in CPG net sales in the first nine months of 1998 as compared
with the first nine months of 1997 was primarily due to an increase in unit
shipments of microprocessors at higher average selling prices due to a higher
speed grade mix. CPG sales growth is dependent on increased unit shipments at
higher speed grades, as to which no assurance can be given.
Memory Group net sales decreased 21 percent primarily due to a significant
decline in the average selling price of Flash memory devices partially offset by
an increase in unit volume of Flash memory devices. In addition, average selling
prices and unit volume of EPROMs declined. The Company expects future EPROM
sales to be flat or down due to a general shift to Flash memory devices.
Oversupply in the Flash market combined with the increase in competition has
caused downward pressure on the average selling price of Flash memory devices.
The Company expects continued price pressure from intense competition in Flash
memory devices.
Communications Group net sales decreased 26 percent primarily due to a
significant decrease in unit volume in nearly all products. The Company's
offerings of network products, which comprise approximately one-half of the
decline in Communications Group net sales, have not kept pace with the market
shift towards higher performance products. The Company's sales of
telecommunication products, which represent approximately one-third of the
decline in Communications Group net sales, were particularly impacted by the
general economic downturn in Asia. The Company expects the Communications Group
products to have essentially flat sales in the fourth quarter of 1998.
Vantis net sales decreased 16 percent due to a decrease in unit shipments of
SPLD products and lower average selling prices reflecting the shift in the PLD
market away from SPLD
14
<PAGE>
products and towards CPLD and FPGA products. In addition, CPLD net sales
decreased due to a decrease in unit shipments and lower average selling prices.
COMPARISON OF EXPENSES, GROSS MARGIN PERCENTAGE AND INTEREST INCOME AND OTHER,
NET
The following is a summary of expenses, gross margin percentage and interest
income and other, net for the periods presented below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------------- ------------------------
Sept. 27, June 28, Sept. 28, Sept. 27, Sept. 28,
1998 1998 1997 1998 1997
--------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Millions except for gross
margin percentage)
Cost of sales $423 $390 $428 $1,237 $1,150
Gross margin percentage 38 % 26 % 28 % 29 % 34 %
Research and development $144 $139 $126 $411 $341
Marketing, general and
administrative 110 101 101 299 298
Litigation settlement - - - 12 -
Interest income and other, net 10 9 6 24 29
Interest expense 21 18 14 51 34
</TABLE>
The Company operates 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. For this reason gross
margin is significantly affected by short-term fluctuations in unit sales.
Gross margin percentage growth is dependent on increased volume shipments of
microprocessor and other products as fixed costs continue to rise due to
continuing capital investments to expand production capacity.
The increase in gross margin percentage in the third quarter of 1998 as
compared to the third quarter of 1997 was due to a substantial increase in
microprocessor sales partially offset by a decrease in non-microprocessor
product revenue. During the third quarter of 1998, the microprocessor
manufacturing process was more efficient compared to the third quarter of 1997
due to improvements in Fab 25. Fab 25 is a production facility in Austin, Texas
undergoing significant capital additions to increase manufacturing capacity. As
the Company continued to ramp production during the third quarter of 1998, and
as former production problems were resolved in the first half of 1998, Fab 25
experienced higher yields per wafer and higher wafer production levels. In
addition, the Company shifted from 0.35-micron process technology to 0.25-micron
process technology in Fab 25 in the second quarter of 1998 which produced
smaller die sizes. As a result, there were higher yields per wafer as well as
faster clock speeds which increased average selling prices.
The increase in gross margin percentage in the third quarter of 1998 as
compared to the second quarter of 1998 was due to a substantial increase in
microprocessor sales volume as well as higher average selling prices. The
increase in sales volume was made possible by higher microprocessor yields
with its continued ramp on the 0.25-micron process technology.
15
<PAGE>
The higher average selling prices were a result of production on 0.25-micron
process technology which produced a higher speed grade mix.
Gross margin percentage decreased in the first nine months of 1998 as
compared to the first nine months of 1997. Throughout this period the Company
has continued to invest in the facilitization of Fab 25 and, during the first
nine months of 1998, in the transition from 0.35-micron to 0.25-micron process
technology in Fab 25. These investments have led to significant increases in
the Company's fixed costs associated with its microprocessor products. The
decline in gross margin percentage was caused by increases in fixed costs in
Fab 25, increased back-end assembly costs in support of AMD-K6 microprocessor
production and a decline in non-microprocessor product revenue. Fixed costs
will continue to increase as the Company adds equipment to bring Fab 25 to its
full 0.25-micron process technology capacity. Accordingly, absent significant
increases in revenue, particularly with respect to microprocessors, the
Company will continue to experience pressure on its gross margin percentage.
Research and development expenses increased for all periods presented due to
the increase in spending in Dresden Fab 30 for pre-production development and
in Fab 25 for new product and process development. In addition, research and
development expenses increased in the first nine months of 1998 as compared to
the first nine months of 1997 due to higher research and development activities
in the Submicron Development Center in Sunnyvale, California, primarily to
support CPG and the Memory Group.
On July 20, 1998 the Company and Motorola's Semiconductor Products Sector
announced plans for a far-reaching strategic alliance that includes a patent
cross-license agreement and collaborative development of common process
technology platforms for microprocessors and embedded flash memory. The
companies will collaborate on the development of future logic process technology
platforms featuring copper interconnects. As a result, the Company expects
research and development spending related to this alliance to be approximately
$20 million in the fourth quarter of 1998 and to remain at this level
throughout 1999. There can be no assurance that the Company will benefit from
this additional research and development spending through future copper
interconnect-based product offerings, and any such failure could have a
material adverse effect on the Company.
Marketing, general and administrative expenses increased in the third quarter
of 1998 as compared to the third quarter of 1997 and the second quarter of 1998
due to increased spending on advertising and marketing expenses associated with
the AMD-K6 family of microprocessors. Marketing, general and administrative
expenses in the first nine months of 1998 compared to the first nine months of
1997 were relatively flat. The Company expects advertising and promotional
expenses associated with the AMD-K6 family of microprocessors to increase during
the fourth quarter of 1998.
The litigation settlement of $11.5 million occurred in the first quarter of
1998 and represented the costs to settle the class action securities lawsuit
against the Company and certain of its current and former officers and
directors, announced by the Company on April 23, 1998. The settlement was paid
during the third quarter of 1998.
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<PAGE>
Interest income and other, net increased in the third quarter of 1998 as
compared to the third quarter of 1997 primarily due to higher average cash
balances resulting from the $517.5 million convertible debt financing in May
1998. Interest income and other, net decreased in the first nine months of
1998 as compared to the first nine months of 1997 primarily due to a pre-tax
gain on the sale of equity securities of $5 million in the first nine months
of 1997. Interest expense increased in all period comparisons due to higher
average debt balances, including the convertible debt financing of $517.5
million.
INCOME TAX
The Company's effective tax benefit rate was approximately 40 percent for all
periods in 1998 as compared to a tax benefit rate of 45 percent and 50 percent
for the third quarter of 1997 and the first nine months of 1997, respectively.
The tax benefit rate in 1998 is greater than the federal statutory rate due to
fixed tax benefits that increase the benefit rate in a loss year. The lower
tax benefit rate in 1998 as compared to 1997 reflects a lesser impact of these
fixed benefits relative to a larger pre-tax loss in 1998 compared to 1997.
Realization of the Company's net deferred tax assets ($166 million at
September 27, 1998) is dependent on future taxable income. While the Company
believes that it is more likely than not that such assets will be realized,
other factors, including those mentioned in the discussion of Risk Factors,
may impact the ultimate realization of such assets.
OTHER ITEMS
International sales were 52 percent of net sales in the third quarter of 1998
as compared to 60 percent for the same period in 1997 and 48 percent for the
immediately prior quarter. For the first nine months of 1998, international
sales decreased to 52 percent of net sales from 57 percent for the same period
in 1997. In the first nine months of 1998, approximately 8 percent of the
Company's net sales were denominated in foreign currencies. The Company does
not have sales denominated in local currencies in those countries that have
highly inflationary economies (as defined by generally accepted accounting
principles). The impact on the Company's operating results from changes in
foreign currency rates individually and in the aggregate has not been material.
See "Risk Factors - International Sales." The Company has recently experienced
lower demand in Asia. To the extent the economic conditions in Asia continue
to deteriorate, the Company may experience significant further declines in
Asia sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments increased $113
million during the first nine months of 1998 to $581 million at September 27,
1998. The increase was primarily due to net proceeds from the $517.5 million
convertible debt offering in May 1998, working capital line of credit borrowings
for Dresden activities from Dresdner Bank AG of $297 million, grants for Dresden
capital expenditures from the German government of $91 million, and net cash
provided by operations of $33 million offset by capital additions of $816
million during the period.
17
<PAGE>
Cash provided by operating activities was $33 million and $202 million for the
first nine months of 1998 and 1997, respectively. The decrease in net operating
cash flows was primarily due to a decrease in earnings of $118 million combined
with an increase in the net change in operating assets and liabilities of $87
million, offset by an increase in depreciation and amortization of $56 million.
Investing activities consumed cash of $1,022 million and $490 million during
the first nine months of 1998 and 1997, respectively. The increase in investing
activities was mainly due to the increase in capital expenditures of $348
million in the first nine months of 1998 as the Company continued to invest in
property, plant and equipment primarily for Fab 25 and Dresden Fab 30. An
increase in net purchases of available-for-sale securities contributed to the
remaining increase in investing activities.
The Company's financing activities provided cash of $884 million and $285
million during the first nine months of 1998 and 1997, respectively. Financing
activities for the first nine months of 1998 included net proceeds from the
$517.5 million convertible debt financing, borrowings from Dresdner Bank AG in
the amount of DM500 million ($297 million), and capital investment grants from
the German government of $91 million. Financing sources of cash for the first
nine months of 1997 were primarily borrowings from a $250 million four-year
secured term loan.
The Company plans to continue to make significant capital investments in the
fourth quarter of 1998 and into 1999. These investments include those relating
to the construction and facilitization of Dresden Fab 30 and the continued
facilitization of Fab 25.
AMD Saxony, an indirect wholly owned German subsidiary of the Company, is
constructing Dresden Fab 30. This 900,000-square-foot submicron IC
manufacturing and design facility is to be completed and fully equipped over the
next four years. The Company together with the Federal Republic of Germany, the
State of Saxony and a consortium of banks is supporting the project. The present
estimated construction cost of Dresden Fab 30 is approximately $1.9 billion. In
March 1997, AMD Saxony entered into a Loan Agreement (the Dresden Loan
Agreement), denominated in deutsche marks, with a consortium of banks led by
Dresdner Bank AG under which loan facilities totaling $983 million will be made
available for the Dresden Fab 30 project. In connection with the Dresden Loan
Agreement, as amended, the Company has agreed to invest in AMD Saxony equity and
subordinated loans in an amount totaling approximately $270 million ($100
million in 1998 and $170 million in 1999), and to guarantee a portion of AMD
Saxony's obligations under the Dresden Loan Agreement up to a maximum of
approximately $130 million until Dresden Fab 30 has been completed. AMD is
required to fund $70 million of the $170 million due in 1999 on an accelerated
basis as follows: (i) if the Company undertakes a sale or other placement of its
stock in the capital markets in 1998, the $70 million will be funded upon
receipt of the offering proceeds; (ii) if the Company generates $140 million of
net income (as defined in the Indenture for the 11 percent Senior Secured Notes
due 2003 (the Indenture)) in 1998, the $70 million will be funded prior to
January 31, 1999; (iii) if the Company does not fund through (i) or (ii) above,
the Company will fund the maximum amount allowed under the Indenture by January
31, 1999 and will fund the remaining amount through the sale of at least $200
million of the Company's stock by June 30, 1999.
18
<PAGE>
However, there can be no assurance that any requisite external financing will be
available on favorable terms, if at all. Because the Company's obligations under
the Dresden Loan Agreement are denominated in deutsche marks, the dollar amounts
set forth herein are subject to change based on applicable conversion rates. At
the end of the third quarter of 1998, the exchange rate was 1.68 deutsche marks
to 1 U.S. dollar.
In addition, after completion of Dresden Fab 30, the Company has agreed to
make funds available to AMD Saxony up to approximately $86 million if AMD Saxony
does not meet its fixed charge coverage ratio covenant. The Company has also
agreed to fund certain contingent obligations, including various obligations to
fund project cost overruns, if any, and to fund shortfalls in government
subsidies resulting from a default under the subsidy agreements caused by AMD
Saxony or its affiliates, if any.
The Federal Republic of Germany and the State of Saxony have agreed to support
the Dresden Fab 30 project in the form of (i) guarantees of 65 percent of bank
debt to be incurred by AMD Saxony up to a maximum of $983 million, (ii)
investment grants and subsidies totaling $298 million and (iii) interest
subsidies from the State of Saxony totaling $179 million, all of which are
denominated in deutsche marks in the applicable agreements. In the event the
grants or subsidies are delayed, the Company is obligated, as requested by AMD
Saxony, to provide interim funding; such interim funding will be repaid to the
Company as AMD Saxony receives the grants and subsidies. As of September 27,
1998, the Company has invested $170 million in AMD Saxony. Cash will also be
generated by AMD Saxony, through the sale of wafers to the Company. The
Company has in place foreign currency hedging transactions for Dresden Fab 30
and anticipates entering into additional such foreign currency hedging
transactions in the future.
The definition of defaults under the Dresden Loan Agreement includes the
failure of the Company, AMD Saxony or AMD Holding, the parent company of AMD
Saxony, to comply with obligations under the Dresden Loan Agreement, the
government subsidy and grant agreements and related documents, including
material variances from the approved schedule and budget, the Company's failure
to fund equity contributions or shareholder loans or otherwise comply with its
obligations relating to the Dresden Loan Agreement, 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 the Company, AMD Saxony or AMD Holding and the
occurrence of a default under the Credit Agreement (as defined below) or the
Indenture. Generally, any such default which either (i) results from the
Company's non-compliance with the Dresden Loan Agreement and is not cured by the
Company or (ii) results in recourse to the Company of more than $10 million and
is not cured by the Company, would result in a cross-default under the Credit
Agreement and the Indenture.
Under certain circumstances, cross-defaults result under the convertible
notes, the Indenture, and the Dresden Loan Agreement.
19
<PAGE>
The FASL joint venture completed construction of the building for a second
Flash memory device wafer fabrication facility, FASL II, in the third quarter of
1997 at a site contiguous to the existing FASL facility in Aizu-Wakamatsu,
Japan. Equipment installation is in progress. The facility, including
equipment, is expected to cost approximately $1 billion and is anticipated to
be completed in the second quarter of 2000. Approximately $353 million of such
cost has been funded as of September 27, 1998. Capital expenditures for FASL II
construction to date have been funded by cash generated from FASL operations and
local borrowings by FASL. During the remainder of 1998, the Company presently
anticipates that such 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, the
Company may be required to contribute cash or guarantee third-party loans in
proportion to its 49.992 percent interest in FASL. At September 27, 1998, AMD
had loan guarantees of $72 million outstanding with respect to such loans. The
planned FASL II costs are denominated in yen and are therefore subject to change
due to foreign exchange rate fluctuations.
In 1996, the Company entered into a syndicated bank loan agreement (the Credit
Agreement), which provides for a $150 million three-year secured revolving line
of credit (which is currently unused) and a $250 million four-year secured term
loan. The entire secured term loan is outstanding at September 27, 1998. The
secured loan is repayable in eight equal quarterly installments of approximately
$31 million commencing in October 1998. As of September 27, 1998, the Company
also had available unsecured uncommitted bank lines of credit in the amount of
$66 million, of which $5 million was outstanding.
In February and June 1998, certain of the covenants under the Credit
Agreement, including those related to the modified quick ratio, minimum tangible
net worth and fixed charge coverage ratio, were amended. As of September 27,
1998, the Company is in compliance with all covenants under the Credit
Agreement.
In the event the Company is unable to meet its obligation to make loans to, or
equity investments in, AMD Saxony as required under the Dresden Loan Agreement,
AMD Saxony will be unable to complete Dresden Fab 30 and the Company will be in
default under the Dresden Loan Agreement, the Credit Agreement and the
Indenture, which would permit acceleration of indebtedness, which would have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to obtain the funds necessary to fulfill these obligations
and any such failure would have a material adverse effect on the Company.
As a result of the alliance with Motorola, the Company expects research and
development spending related to this alliance to be approximately $20 million
in the fourth quarter of 1998 and to remain at this level throughout 1999.
The Company believes that cash flows from operations and current cash
balances, together with external financing activities, will be sufficient to
fund operations and capital investments through at least 1999.
20
<PAGE>
RISK FACTORS
The Company's business, results of operations and financial condition are
subject to a number of risk factors, including the following:
Asian and Other Domestic and International Economic Conditions
The current economic crisis in Asia has led to weak demand for the Company's
products in certain Asian economies - notably Korea and Japan. The Company
anticipates that the Asian economic crisis may continue to affect adversely the
Company's results of operations, and the further decline of the economic
condition in Asia could in the future affect demand for microprocessors and
other ICs, which would have a material adverse effect on the Company's sales and
operating results. The Company's business is also subject to general economic
conditions in other international areas and in the United States. A significant
decline in economic conditions in any significant geographic area could in the
future have a material adverse effect on the Company.
Microprocessor Products
Fluctuations in PC Market. Since most of the Company's microprocessor products
are used in PCs and related peripherals, the Company's future growth is closely
tied to the performance of the PC industry. The Company has recently and could
in the future be materially and adversely affected by industry-wide fluctuations
in the PC marketplace. For example, economic conditions in Asia could continue
to lead to reduced worldwide demand for PCs and the Company's microprocessors.
Investment in and Dependence on K86 /TM/ AMD Microprocessor Products. The
Company's microprocessor business has in the past, and will in 1998 and 1999,
continue to significantly impact the Company's revenues, margins and operating
results. The Company plans to continue to make significant capital expenditures
to support its microprocessor products both in the near and long term, which
will be a substantial drain on the Company's cash flow and cash balances.
The Company's ability to increase microprocessor product revenues, and benefit
fully from the substantial financial investments and commitments it has made and
continues to make related to microprocessors, depends upon the success of the
AMD-K6 and AMD-K6-2 microprocessors (collectively the AMD-K6 family of
microprocessors or the AMD-K6 microprocessors) in the remainder of 1998 and
through 1999 and future generations of K86 microprocessors in 1999 and beyond.
Very short product life cycles and migration to ever-higher performance
microprocessors characterize the microprocessor market. To compete successfully
against Intel Corporation in this market, the Company must transition to new
process technologies at a faster pace than before and offer higher performance
microprocessors in significantly greater volumes. This will require the Company
to achieve acceptable yields while producing microprocessors at higher speeds.
The Company in the past experienced significant difficulty in achieving its
microprocessor yield and volume plans on 0.35-micron process technology, which
in turn adversely affected the Company's results of operations and liquidity.
Any future failure to offer higher performance microprocessors in significant
volume on a timely basis could have a
21
<PAGE>
material adverse effect on the Company. There can be no assurance that the
Company will achieve the production ramp necessary to meet customer needs for
higher performance AMD-K6 microprocessors in the volume customers require, or
that the Company will increase revenues sufficient to achieve profitability in
the microprocessor business.
The Company's ability to sell the volume of AMD-K6 microprocessors it
currently plans to make in 1998 and 1999 depends on increasing sales to existing
customers and developing new customers. The loss of any current top tier
Original Equipment Manufacturer (OEM) customer, or the Company's failure to
attract additional customers through direct sales and through the Company's
distributors, would affect the Company's ability to sell the volume of units
planned, which could have a material adverse effect on the Company.
The Company's production and sales plans for the AMD-K6 family of
microprocessors are subject to other risks and uncertainties, including: whether
the Company can continue to successfully fabricate higher performance AMD-K6
microprocessors in planned volume mixes; the effects of Intel new product
introductions, marketing strategies and pricing; the continued development of
worldwide market acceptance for the AMD-K6 family of microprocessors and systems
based on it; whether the Company will have the financial and other resources
necessary to continue to invest in the microprocessor business, including
leading-edge wafer fabrication equipment and advanced process technologies; the
possibility that products newly introduced by the Company may be found to be
defective; continued adverse market conditions in the PC market and consequent
diminished demand for the Company's microprocessors; and unexpected
interruptions in the Company's manufacturing operations.
In view of Intel Corporation's industry dominance and brand strength, AMD
prices the AMD-K6 microprocessors at least 25 percent below the published price
of Intel processors offering comparable performance. Thus, Intel Corporation'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 the Company's margins. A failure to achieve the product performance
improvements necessary to meet customer needs, continue to achieve market
acceptance of the Company's AMD-K6 microprocessors and increase market share, or
increase AMD-K6 microprocessors revenues substantially would have a material
adverse effect on the Company.
AMD is also devoting substantial resources to the development of its seventh-
generation Microsoft Windows compatible microprocessor. The success of the AMD-
K7 /TM/ and future generation microprocessors depends greatly on the Company
achieving success and increasing market share with the AMD-K6 family of
microprocessors. See also discussions below regarding Intel Dominance and
Process Technology.
Intel Dominance. Intel has long held a dominant position in the market for
microprocessors used in PCs. Intel Corporation's dominant market position has
enabled it to set and control x86 microprocessor and PC system standards and
thus dictate the type of product the market requires of Intel Corporation's
competitors. In addition, Intel Corporation's financial strength and dominant
position enable it to vary prices on its microprocessors and other products at
will and thereby affect the margins and profitability of its competitors. Intel
Corporation's strength also
22
<PAGE>
enables it to exert substantial influence and control over PC manufacturers
through the Intel Inside advertising rebate program and to invest hundreds of
millions of dollars in, and as a result exert influence over, many other
technology companies. The Company expects Intel to continue to invest heavily in
research and development, new manufacturing facilities, and other technology
companies and to maintain its dominant position through the Intel Inside
program, through other contractual constraints on customers, industry suppliers
and other third parties, and by controlling industry standards. As an extension
of its dominant microprocessor market share, Intel also now dominates the PC
platform, which has made it difficult for PC manufacturers to innovate and
differentiate their product offerings. The Company does not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, its product introduction schedule, product pricing
strategy, customer brand loyalty and control over industry standards, PC
manufacturers and other PC industry participants, may have a material adverse
effect on the Company.
As Intel has expanded its dominance over the entirety of the PC system
platform, many PC manufacturers have reduced their system development
expenditures and have begun to purchase microprocessors in conjunction with
chipsets or in assembled motherboards. The trend has been for PC OEMs to be
increasingly dependent on Intel, less innovative on their own, and more of a
distribution channel for Intel technology. In marketing its microprocessors to
these OEMs and dealers, AMD depends upon 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 are able to produce chipsets, motherboards, BIOS
software and other components to support each new generation of Intel
Corporation'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 them to retain or regain market share. To compete with Intel in
this market in the future, the Company intends to continue to form closer
relationships with third-party designers and manufacturers of core-logic
chipsets, motherboards, BIOS software and other components. The Company
similarly intends to expand its chipset and system design capabilities, and to
offer OEMs licensed system designs incorporating the Company's microprocessors
and companion products. There can be no assurance, however, that such efforts by
the Company will be successful. The Company expects 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 Corporation's Pentium II is sold only in the form of a "Slot 1"
daughtercard that is not physically or interface protocol compatible with
"Socket 7" motherboards currently used with Intel Pentium and AMD-K6
microprocessors. Thus, Intel has decreased its support of 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 Slot 1 Pentium II and Celeron processors,
the Company intends to continue to work with third-party designers and
manufacturers of motherboards, chipsets and other products to assure the
continued availability of Socket 7 infrastructure support for the AMD-K6
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<PAGE>
microprocessors, including support for enhancements and features the Company
plans to add to its microprocessors. There can be no assurance that Socket 7
infrastructure support for the AMD-K6 microprocessors will endure over time as
Intel moves the market to its Slot 1 designs. AMD has no plans to develop
microprocessors that are bus interface protocol compatible with the Pentium II
and Celeron processors, because the Company's patent cross-license agreement
with Intel does not extend to AMD microprocessors that are bus interface
protocol compatible with Intel Corporation's sixth and subsequent generation
processors. Similarly, the Company's ability to compete with Intel in the market
for seventh-generation and future generation microprocessors will depend, not
only upon its success in designing and developing the microprocessors, but also
in ensuring either that the microprocessors can be used in PC platforms designed
to support Intel microprocessors as well as AMD 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 the Company's x86
microprocessor offerings would have a material adverse effect on the Company.
Financing Requirements
The Company plans to continue to make significant capital investments in the
fourth quarter of 1998 and into 1999. These investments include those relating
to the construction and facilitization of Dresden Fab 30 and the continued
facilitization of Fab 25.
Equipment installation is in progress at FASL II. The facility, including
equipment, is expected to cost approximately $1 billion and is anticipated to be
completed in the second quarter of 2000. Capital expenditures for FASL II
construction to date have been funded by cash generated from FASL operations and
local borrowings by FASL. To the extent that FASL is unable to secure the
necessary funds for FASL II, the Company may be required to contribute cash or
guarantee third-party loans in proportion to its 49.992 percent interest in
FASL.
In 1996, the Company entered into the Credit Agreement, which provided for a
$150 million three-year secured revolving line of credit (which is currently
unused) and a $250 million four-year secured term loan. All of the secured term
loan is outstanding at September 27, 1998. The secured loan is repayable in
eight equal quarterly installments of approximately $31 million which commenced
in October 1998.
In March 1997, the Company's indirect wholly owned subsidiary, AMD Saxony,
entered into the Dresden Loan Agreement with a consortium of banks led by
Dresdner Bank AG. Under the terms of the Dresden Loan Agreement, the Company is
required to make subordinated loans to, or equity investments in, AMD Saxony,
totaling $100 million in 1998 and $170 million in 1999. AMD is required to fund
$70 million of the 1999 amount on an accelerated basis as follows: (i) if the
Company undertakes a sale or other placement of its stock in the capital markets
in 1998, the $70 million will be funded upon receipt of the offering proceeds;
(ii) if the Company generates $140 million of net income (as defined in the
Indenture) in 1998, the $70 million will be funded prior to January 31, 1999;
(iii) if the Company does not fund through (i) or (ii) above, the Company will
fund the maximum amount allowed under the Indenture by January 31, 1999 and will
fund the remaining amount through the sale of at least $200 million of
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the Company's stock by June 30, 1999. However, there can be no assurance that
any requisite external financing will be available on favorable terms, if at
all.
In the event the Company is unable to meet its obligation to make loans to, or
equity investments in, AMD Saxony as required under the Dresden Loan Agreement,
AMD Saxony will be unable to complete Dresden Fab 30 and the Company will be in
default under the Dresden Loan Agreement, the Credit Agreement and the
Indenture, which would permit acceleration of indebtedness, which would have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to obtain the funds necessary to fulfill this obligation
and any such failure would have a material adverse effect on the Company.
Dependence on Microsoft and Logo License. The Company's ability to innovate
beyond the x86 instruction set controlled by Intel depends on support from
Microsoft in its operating systems. There can be no assurance that Microsoft
will provide support in its operating systems for x86 instructions innovated by
the Company and designed into its processors but not used by Intel in its
processors. This uncertainty may cause independent software providers to forego
designing their software applications to take advantage of AMD innovations,
which would adversely affect the Company's ability to market its processors. In
addition, AMD has entered into logo license agreements with Microsoft that allow
the Company to label its products as "Designed for Microsoft Windows." The
Company has also obtained appropriate certifications from recognized testing
organizations for its K86 microprocessors. A failure to maintain the logo
license agreements with Microsoft would prevent the Company from labeling its
K86 microprocessors with the Microsoft Windows logo. This could impair the
Company's ability to market the products and could have a material adverse
effect on the Company.
Future Dependence on Planned AMD-K7 Microprocessor. The Company's ability to
increase microprocessor product revenues in 1999 and beyond, and to benefit
fully from the substantial financial investments and commitments it has made and
continues to make related to microprocessors, including the substantial
investment the Company is making in Fab 30 in Dresden, Germany, depends upon its
success in developing and marketing in a timely manner in 1999 its seventh-
generation microprocessor, the AMD-K7. The Company currently plans to begin
volume production of the AMD-K7 by the end of the first half of 1999. No
assurance can be made that such production will begin on the current planned
schedule. The Company's production and sales plans for the AMD-K7 are subject
to numerous risks and uncertainties, including: the successful development and
installation of 0.18-micron process technology and copper interconnect
technology; the pace at which the Company is able to ramp production in Fab 25
and Dresden Fab 30 on 0.18-micron process technology; the use and market
acceptance of a non-Intel processor bus (adapted by the Company from Digital
Equipment Corporation's EV6 pin bus) in the design of the AMD-K7, and the
availability of chipset vendors who will develop, manufacture and sell chipsets
with the EV6 interface in volumes required by the Company; the Company's ability
to expand its chipset and system design capabilities; the availability to the
Company's 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; the
Company's ability to design and manufacture processor modules through
subcontractors; and the availability and acceptance of motherboards designed for
the AMD-K7 microprocessor. A failure of the AMD-
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K7 microprocessor to be timely introduced or achieve market acceptance would
have a material adverse effect on the Company.
Possible Rights of Others. Prior to its acquisition by AMD, NexGen granted
limited manufacturing rights regarding certain of its current and future
microprocessors, including the Nx586/TM/ and Nx686/TM/, to other companies. The
Company does not intend to produce any NexGen products. The Company believes
that its AMD-K6 family of microprocessors are AMD products and not NexGen
products because, among other things, the technology acquired in the NexGen
merger was significantly modified using the Company's design, verification and
manufacturing technologies. No NexGen licensee or other party has asserted any
rights with respect to the AMD-K6 family of microprocessors; however, there can
be no assurance that another company will not seek to establish rights with
respect to the microprocessors. If another company were deemed to have rights to
produce any of the Company's AMD-K6 family of microprocessors for its own use or
for sale to third parties, such production could reduce the potential market for
microprocessor products produced by AMD, the profit margin achievable with
respect to such products, or both.
Flash Memory Products
Importance of Flash Memory Device Business; Increasing Competition. The market
for Flash memory devices continues to experience increased competition as
existing manufacturers introduce competitive products and industry-wide
production capacity increases, and as Intel continues to price its flash memory
products at aggressive levels. The Company expects that the marketplace for
Flash memory devices will continue to be increasingly competitive. A significant
portion of the Company's revenues is derived from sales of Flash memory devices,
and the Company expects that this will continue to be the case for the
foreseeable future. From 1996 through the third quarter of 1998, the Company
experienced declines in the selling prices of Flash memory devices. There can
be no assurance that the Company will be able to maintain its market share in
Flash memory devices or that price declines may not accelerate as the market
develops and as existing and potential new competitors introduce competitive
products. Continued decline in the Company's Flash memory device business or
continued declines in the gross margin percentage in this business could have a
material adverse effect on the Company.
Manufacturing
Capacity. The Company's manufacturing facilities are underutilized from time
to time as a result of reduced demand for certain of the Company's products. The
Company's operations related to microprocessors have been particularly affected
by this situation. Any future underutilization of the Company's manufacturing
facilities could have a material adverse effect on the Company. The Company is
increasing its manufacturing capacity by making significant capital investments
in Fab 25 and in 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. The Company is also building a new test
and assembly facility in Suzhou, China. There can be no assurance that the
industry projections for future growth upon
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which the Company is basing its strategy of increasing its manufacturing
capacity will prove to be accurate. If demand for the Company's products does
not increase, underutilization of the Company's manufacturing facilities will
likely occur and could have a material adverse effect on the Company.
In contrast to the above, there also have been situations in the past in which
the Company's manufacturing facilities were inadequate to enable the Company to
meet demand for certain of its products. Any inability of AMD to generate
sufficient manufacturing capacities to meet demand, either in its own facilities
or through foundry or similar arrangements with others, could have a material
adverse effect on the Company. At this time, the greater risk is that the
Company will have surplus capacity.
Process Technology. In order to remain competitive, the Company must make
continuing substantial investments in improving its process technologies. In
particular, the Company has made and continues to make significant research and
development investments in the technologies and equipment used to fabricate its
microprocessor products and its Flash memory devices. Portions of these
investments might not be fully recovered if the Company fails to continue to
gain market acceptance or if the market for its Flash memory products should
significantly deteriorate. This could have a material adverse effect on the
Company. Likewise, the Company is 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-K7 microprocessor in Dresden Fab 30
beginning in late 1999. The Company has entered into a strategic alliance with
Motorola's Semiconductor Products Sector to co-develop copper interconnect
technology for the AMD-K7 and subsequent generations of microprocessors. There
can be no assurance that the strategic alliance will be successful or that
Company will be able to develop or obtain the leading-edge process technologies
that will be required in Dresden Fab 30 to fabricate the AMD-K7 microprocessor
successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of the
Company's manufacturing operations, either as a result of a labor dispute,
equipment failure or other cause, could have a material adverse effect on the
Company. For example, the Company's results in the past have been negatively
affected by disappointing AMD-K6 microprocessor yields. The Company may in the
future be materially adversely affected by fluctuations in manufacturing yields.
The 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 errors and interruptions in the fabrication
process, equipment performance, process controls as well as other risks, all of
which can affect yields.
Product Incompatibility. There can be no assurance that the Company's products
will be compatible with all industry-standard software and hardware. Any
inability of the Company's customers to achieve such compatibility or
compatibility with other software or hardware after the Company's products are
shipped in volume could have a material adverse effect on the Company. There can
be no assurance that AMD will be successful in correcting any such
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compatibility problems that are discovered or that such corrections will be
acceptable to customers or made in a timely manner. In addition, the mere
announcement of an incompatibility problem relating to the Company's products
could have a material adverse effect on the Company.
Product Defects. One or more of the Company's products may possibly be found
to be defective after AMD has already shipped such products in volume, requiring
a product replacement, recall, or a software fix which would cure such defect
but impede performance. Product returns could impose substantial costs on AMD
and have a material adverse effect on the Company.
Essential Manufacturing Materials. Certain raw materials used by the Company
in the manufacture of its 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 AMD, as well as by the majority of other
companies in the semiconductor industry. Shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry. If AMD were unable to procure certain of such materials, it would be
required to reduce its manufacturing operations, which could have a material
adverse effect on the Company.
International Manufacturing and Foundries. Nearly all product assembly and
final testing of the Company's products are performed at the Company's
manufacturing facilities in Penang, Malaysia; Bangkok, Thailand; and Singapore;
or by subcontractors in Asia. AMD has a 50-year land lease in Suzhou, China, to
be used for the construction and operation of an additional assembly and test
facility. The Company also depends on foreign foundry suppliers and joint
ventures for the manufacture of a portion of its 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 AMD were
unable to assemble and test its products abroad, or if air transportation
between the United States and the Company's overseas facilities were disrupted,
there could be a material adverse effect on the Company.
OTHER RISK FACTORS
Debt Restrictions. The Credit Agreement and the Indenture contain significant
covenants that limit the Company's and its subsidiaries' ability to engage in
various transactions and require satisfaction of specified financial performance
criteria. In addition, the occurrence of certain events (including, without
limitation, 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
Credit Agreement and the Indenture are substantial, and failure to comply with
such limitations could have a material adverse effect on the Company.
In addition, the agreements entered into by AMD Saxony in connection with the
Dresden Fab 30 loan substantially prohibit the transfer of assets from AMD
Saxony to the Company,
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which will prevent the Company from using current or future assets of AMD Saxony
other than to satisfy obligations of AMD Saxony.
Programmable Logic Software Risks. Historically, the Company's programmable
logic subsidiary, Vantis, depended primarily on third parties to develop and
maintain software "fitters" that allow electrical circuit designs to be
implemented using Vantis' CPLDs. In particular, Vantis has contracted with MINC,
Inc. (MINC) to develop and maintain software fitters. During 1998, Vantis has
increasingly managed and controlled the development and maintenance of software
fitters for its products internally, and in the third quarter of 1998 Vantis
acquired rights to MINC's software and hired selected MINC development
personnel. MINC will therefore no longer be supplying software development
services to Vantis. No assurance can be given that Vantis' efforts to develop
and maintain internally the software needed to sell and support its products
will be successful. Any inability of Vantis to successfully develop and maintain
software internally in a cost-effective manner could have a material adverse
effect on Vantis.
If such software is subject to delays in development, errors or "bugs," or
fails to gain market acceptance, Vantis may be forced to find another vendor for
such services. No assurance can be given that Vantis would be able to locate
additional software development tool vendors with the available capacity and
technology necessary for the development and maintenance of software fitter
tools, or, if an additional vendor or vendors were identified, that Vantis would
be able to enter into contracts with such vendors on terms acceptable to Vantis.
Vantis' inability to find an acceptable alternative vendor for software services
in a timely manner could have a material adverse effect on Vantis.
Introduction of Vantis' FPGA Products. In January of 1998, Vantis announced
its intention to introduce its first FPGA products, which it intends to sell
under the VF1 name beginning in the first half of 1999. The market for FPGAs is
highly competitive. The design, marketing and sale of FPGA products is subject
to many risks, including risks of delays, errors, and customer resistance to
change. Vantis does not anticipate significant sales of the VF1 family of
products until 2000, and no assurance can be given that its VF1 FPGA products
will be available as scheduled or will gain market acceptance. Inadequate
forecasts of customer demand, delays in responding to technological advances or
to limitations of the VF1 FPGA products, and delays in commencing volume
shipments of the VF1 FPGA products each could have a material adverse effect on
Vantis. Failure to compete successfully in this highly competitive FPGA market
would restrict Vantis' ability to offer products across all major segments of
the PLD market and could have a material adverse effect on Vantis.
In addition, Vantis has contracted with a number of developers of FPGA
software tools, including AutoGate Logic, Inc. (AGL), to develop and maintain
software for the Company's VF1 family of FPGAs. If any of these developers were
to stop developing and maintaining software for the VF1 family, or if the
software developed by these developers were subject to delays, errors or "bugs,"
then Vantis would need to find an alternative developer or developers
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for these services or rely on its own internal software development efforts to
address this need. No assurance can be given that Vantis' internal development
efforts would be satisfactory or that Vantis would be able to locate available
and acceptable alternative software developers. Any interruption in the timely
development of FPGA software for the VF1 family could have a material adverse
effect on Vantis. A competitor of Vantis has signed a letter of intent to
acquire AGL. AGL continues, however, to develop software pursuant to its
agreements with Vantis. Despite such agreements, the acquisition of AGL may
impact Vantis' relationship with AGL, and Vantis' ability to offer software in
connection with its new VF1 family could be materially adversely affected.
Vantis' Dependence on FAE Staff. Vantis depends on a relatively new network of
field application engineers (FAEs) to support Vantis' products and to enhance
customer satisfaction with those products. FAEs service larger customer accounts
by consulting with customers on specific product issues, by communicating
customer's needs and concerns to Vantis, and by conducting technical training
seminars for customers, independent manufacturers' representatives and
distributors and their FAEs. During the first three quarters of 1998, Vantis
significantly increased the size of its network of FAEs. The future success of
Vantis may be affected by its ability to effectively manage and develop this
network of FAEs and to continue to attract and retain qualified technical
personnel to fill these positions. Currently, availability of such qualified
technical personnel for FAE positions is limited, and competition among
companies for experienced FAEs is intense. During strong business cycles, Vantis
expects to experience difficulty in filling its needs for FAEs. No assurance can
be given that Vantis will be able to effectively manage and develop its network
of FAEs, and the failure to do so could delay or limit customer acceptance of
Vantis products and otherwise have a material adverse effect on Vantis.
Technological Change and Industry Standards. The market for the Company's
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. The
Company's success depends substantially upon its ability, on a cost-effective
and timely basis, to continue to enhance its 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 its products, in market demand for products based on
a particular technology or of accepted industry standards could have a material
adverse effect on the Company. There can be no assurance that AMD will 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, or that any such new products will 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 a successive generation of products
is developed and introduced for sale. Technological advances in the industry
result in frequent product introductions, regular price reductions, short
product
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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. The Company's operating results are subject
to substantial quarterly and annual fluctuations due to a variety of factors,
including the effects of competition with Intel in the microprocessor and Flash
memory industries, competitive pricing pressures, anticipated decreases in unit
average selling prices of the Company's products, production capacity levels and
fluctuations in manufacturing yields, availability and cost of products from the
Company's suppliers, the gain or loss of significant customers, new product
introductions by AMD or its 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 the Company's products, seasonal customer demand due
to vacation and holiday schedules (for example, decreased demand in Europe
during the summer), the timing of significant orders and the timing and extent
of product development costs. In addition, operating results have recently 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. The Company's customers may change delivery schedules or cancel
orders without significant penalty. Many of the factors listed above are outside
of the Company's control. These factors are difficult to forecast, and these or
other factors could materially adversely affect the Company's quarterly or
annual operating results.
Order Revision and Cancellation Policies. AMD manufactures and markets
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 are frequently subject to revision and cancellation without penalty. As a
result, AMD must commit resources to the production of products without having
received advance purchase commitments from customers. Any inability to sell
products to which it had devoted significant resources could have a material
adverse effect on the Company. Distributors typically maintain an inventory of
the Company's products. Pursuant to the Company's agreements with distributors,
in most instances AMD protects its distributors' inventory of the Company's
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 contain a provision for the return of the
Company's products in the event that the agreement with the distributor is
terminated. The market for the Company's products is generally characterized by,
among other things, severe price competition. The price protection and return
rights AMD offers to its distributors could materially adversely affect the
Company if there is an unexpected significant decline in the price of the
Company's products.
Key Personnel. The Company's future success depends upon the continued service
of numerous key engineering, manufacturing, sales and executive personnel. There
can be no assurance that AMD will be able to continue to attract and retain
qualified personnel necessary for the development and manufacture of its
products. Loss of the service of, or failure to recruit,
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key engineering design personnel could be significantly detrimental to the
Company's product development programs or otherwise have a material adverse
effect on the Company.
Intellectual Property Rights; Potential Litigation. There can be no assurance
that the Company will be able to protect its technology or other intellectual
property adequately through patents, copyrights, trade secrets, trademarks and
other measures or that competitors will not be able to develop similar
technology independently. There can be no assurance that any patent applications
that the Company may file will be issued or that foreign intellectual property
laws will protect the Company's intellectual property rights. There can be no
assurance that any patent licensed by or issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or design around the Company's patents and other rights.
From time to time, AMD has been notified that it may be infringing
intellectual property rights of others. If any such claims are asserted against
the Company, the Company may seek to obtain a license under the third party's
intellectual property rights. AMD 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 adversely affect the Company.
No assurance can be given that all necessary licenses can be obtained on
satisfactory terms, or that litigation may always be avoided or successfully
concluded.
Environmental Regulations. The failure 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 could result in fines being imposed on the Company,
suspension of production, alteration of the Company's manufacturing processes or
cessation of operations. Such regulations could require the Company to acquire
expensive remediation equipment or to incur other expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous
substances could subject the Company to future liabilities and could have a
material adverse effect on the Company.
International Sales. AMD derives a substantial portion of its revenues from
its sales subsidiaries located in Europe and Asia Pacific. The Company's
international sales operations entail political and economic risks, including
expropriation, currency controls, exchange rate fluctuations, changes in freight
rates and changes in rates for taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of its stock, AMD believes factors such as quarterly fluctuations in the
Company's financial results, announcements of new products and/or pricing by AMD
or its competitors, the pace of new product manufacturing ramps, production
yields of key products and general conditions in the semiconductor industry have
caused and are likely to continue to cause the market price of AMD common stock
to fluctuate substantially. 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 AMD common stock in any given
period. Technology company stocks in general have experienced extreme price and
volume fluctuations that often have been unrelated
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to the operating performance of the companies. This market volatility may
adversely affect the market price of the Company's common stock and consequently
limit the Company's ability to raise capital or to make acquisitions. The
Company's current business plan envisions substantial cash outlays requiring
external capital financing. There can be no assurance that capital and/or long-
term financing will be available on terms favorable to the Company or in
sufficient amounts to enable the Company to implement its current plan.
Earthquake Danger. The Company's corporate headquarters, a portion of its
manufacturing facilities, assembly and research and development activities and
certain other critical business operations are located near major earthquake
fault lines. The Company could be materially adversely affected in the event of
a major earthquake.
Impact of Year 2000. The "Year 2000 Issue" is typically the result of software
and firmware being written using two digits rather than four to define the
applicable year. If the Company's software and firmware with date-sensitive
functions are not Year 2000 compliant, 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, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
The Company has developed a multi-step Year 2000 readiness plan for both its
information technology (IT) and non-IT internal systems. The plan includes
development of corporate awareness, assessment of internal systems, project
planning, project implementation (including remediation, upgrading and
replacement), validation testing and contingency planning.
The Company will be required to modify or replace significant portions of its
software so that its systems will function properly with respect to dates in the
year 2000 and thereafter. The Company is in the process of replacing its order
management system and general ledger with a Year 2000 compliant system and has
contracted with a software reengineering company specializing in services to
resolve the Year 2000 problem to remediate non-compliant code in other older
applications and systems. The Company is also utilizing internal resources to
reprogram or replace and test the software for Year 2000 modifications. If
required modifications to existing software and conversions to new software are
not made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The Company is dedicating substantial resources to Year 2000 issues with
respect to its wafer fabrication and wafer sort facilities worldwide to ensure
continued operation of all critical wafer fabrication systems in the year 2000
and thereafter. The Company has retained an outside contractor to provide Year
2000 program management and implementation assistance in connection with problem
assessment, remediation and compliance testing. There can be no assurance that
the Company will be successful in its efforts to resolve any Year 2000 issues
and to continue operations in its wafer fabrication and sort facilities in the
year 2000. The failure of the Company to successfully resolve such issues could
result in a shut-down of some or all of the Company's operations, which would
have a material adverse effect on the Company.
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The Company has initiated formal communication with significant suppliers to
determine the extent to which the Company's operations are vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Suppliers of
hardware, software or other products that might contain embedded processors were
requested to provide information regarding the Year 2000 compliance status of
their products. The Company contacted additional suppliers in the third quarter
of 1998 and will continue to seek information from non-responsive suppliers in
the fourth quarter of 1998. In addition, in order to protect against the
acquisition of additional non-compliant products, the Company now requires
suppliers to warrant that products sold or licensed to the Company are Year 2000
compliant. The Company does not currently have any information concerning the
Year 2000 compliance status of its customers. In the event that any of the
Company's significant customers and suppliers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected. There can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's operations. The Company is currently
assessing its exposure to contingencies related to the Year 2000 Issue for the
products it sells; however, it does not expect these to have a material impact
on the operations of the Company.
The Company's divisions are continuing to evaluate the Year 2000 issues that
may impact the Company and are in different phases of assessment and completion.
For example, the Company's Information Technology Management division is in the
implementation phase of its Year 2000 efforts and the Manufacturing division,
which includes wafer fabrication and wafer sort areas other than those in Asia,
has completed a comprehensive physical inventory and has begun installing Year
2000 compliant upgrades in all areas. The Company anticipates completing the
critical Year 2000 issues by the first half of 1999, which is prior to any
anticipated impact on its operating systems and expects the Year 2000 project to
continue beyond the year 2000 with respect to resolution of non-critical issues.
These dates are contingent upon the timeliness and accuracy of software and
hardware upgrades from vendors, adequacy and quality of resources available to
work on completion of the project and any other unforeseen factors. The total
expense of the Year 2000 project is currently estimated at approximately $35
million, which is not material to the Company's business operations or financial
condition. The Company has not yet estimated all the Year 2000 costs, in
particular those associated with engineering equipment used in the Company for
product development. There can be no assurance that these costs will not be
material to the Company or that the Company will be able to resolve in a
timely manner any issues that may arise in these areas. Actual costs incurred
through the end of the third quarter 1998 were approximately $5 million, the
majority of which was expensed. The expenses of the Year 2000 project are
being funded through operating cash flows.
The Company has not yet fully developed a comprehensive contingency plan to
address situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations. Development of contingency plans is in
progress and will develop in detail and expand during the remainder of 1998.
There can be no assurance that the Company will be able to develop a contingency
plan that will adequately address issues that may arise in the year 2000. The
failure of the Company to develop and implement, if necessary, an appropriate
contingency plan could have a material impact on the operations of the Company.
Finally, the Company is
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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.
The costs of the project and the date on which the Company believes it 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. There can be no assurance that these estimates will be
achieved and actual results could differ materially from those anticipated.
Euro Conversion. On January 1, 1999, eleven of the fifteen member
countries of the European Union are scheduled to establish fixed conversion
rates between their existing currencies and the euro. The participating
countries have agreed to adopt the euro as their common legal currency on that
date, with a transition period lasting through January 1, 2002.
The Company has initiated an assessment of the potential impact to the
Company that may result from the euro conversion. The Company expects that the
internal systems that will be affected by the initial introduction of the euro
will be euro capable by January 1, 1999, and does not expect the costs of any
system modification to be material. The Company does not expect that
introduction and use of the euro will materially affect its foreign exchange
activities, or its use of derivatives and other financial instruments, or will
result in any material increase in costs to the Company. The Company 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
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-KA
for the year ended December 28, 1997.
II. Other Information
Item 1. Legal Proceedings.
The Company has been informed that a complaint was filed on July
31, 1998 in the United States District Court for the District of
Arizona by Lemelson Medical, Education & Research Foundation,
Limited Partnership, as plaintiff, against 26 semiconductor
companies, including the Company's subsidiary Vantis. The
complaint alleges infringement of numerous patents held by Mr.
Jerome H. Lemelson relating to "machine
35
<PAGE>
vision" and semiconductor processing technology. Based upon
information presently known to management, the Company does not
believe that the ultimate resolution of this matter will have a
material adverse effect on the financial condition or results of
operation of the Company.
A notice dated October 14, 1998, was received by the Company from
the United States Environmental Protection Agency (EPA)
indicating that the EPA has determined the Company to be a
potentially responsible party that had arranged for disposal of
hazardous substances at a site located in Santa Barbara County,
California. The Company believes that this matter will not have
a material adverse effect on the financial condition or results
of operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 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 July 8, 1998 reporting under Item 5
Other Events second quarter earnings.
2. Current Report on Form 8-K dated July 20, 1998 reporting under Item 5
Other Events the strategic alliance between the Company and the
Semiconductor Products Sector of Motorola.
36
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly earned this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC.
Date: November 10, 1998 By: /s/ Fran Barton
----------------- ----------------
Fran Barton
Senior Vice President and Chief
Financial Officer Signing on
behalf of the registrant and as
the principal accounting
officer
37
<PAGE>
EXHIBIT INDEX
-------------
Exhibits
- --------
27 Financial Data Schedule
38
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 135,693
<SECURITIES> 444,817
<RECEIVABLES> 384,879
<ALLOWANCES> (12,486)
<INVENTORY> 172,231
<CURRENT-ASSETS> 1,365,603
<PP&E> 4,449,093
<DEPRECIATION> (2,073,988)
<TOTAL-ASSETS> 4,116,118
<CURRENT-LIABILITIES> 819,853
<BONDS> 0
1,453
0
<COMMON> 0
<OTHER-SE> 1,928,243
<TOTAL-LIABILITY-AND-EQUITY> 4,116,118
<SALES> 1,753,073
<TOTAL-REVENUES> 1,753,321
<CGS> 1,236,716
<TOTAL-COSTS> 1,236,716
<OTHER-EXPENSES> 710,123
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<INTEREST-EXPENSE> 51,317
<INCOME-PRETAX> (232,165)
<INCOME-TAX> (91,742)
<INCOME-CONTINUING> (126,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,281)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
