<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 June 28, 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 August 6,
1998: 143,856,304.
<PAGE>
ADVANCED MICRO DEVICES, INC.
- ----------------------------
INDEX
- -----
Part I.
Financial Information
- ---------------------
Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations--
Quarters and Six Months Ended June 28, 1998 and
June 29, 1997 3
Condensed Consolidated Balance Sheets--
June 28, 1998 and December 28, 1997 4
Condensed Consolidated Statements of Cash Flows--
Six Months Ended June 28, 1998 and June 29, 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 34
Part II. Other Information
-----------------
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Report 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 Six Months Ended
--------------------------- -----------------------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $526,538 $594,561 $1,067,394 $1,146,560
Expenses:
Cost of sales 390,140 372,266 813,731 721,342
Research and development 139,158 110,021 267,278 214,929
Marketing, general and administrative 101,198 102,983 189,412 197,502
-------- -------- ---------- ----------
630,496 585,270 1,270,421 1,133,773
-------- -------- ---------- ----------
Operating income (loss) (103,958) 9,291 (203,027) 12,787
Litigation settlement - - (11,500) -
Interest income and other, net 8,518 9,718 14,099 23,040
Interest expense (17,663) (9,958) (30,135) (19,368)
-------- -------- ---------- ----------
Income (loss) before income taxes and equity in
joint venture (113,103) 9,051 (230,563) 16,459
Provision (benefit) for income taxes (44,110) 2,630 (91,107) 4,778
-------- -------- ---------- ----------
Income (loss) before equity in joint venture (68,993) 6,421 (139,456) 11,681
Equity in net income of joint venture 4,433 3,547 12,169 11,238
-------- -------- ---------- ----------
Net income (loss) $(64,560) $ 9,968 $ (127,287) $ 22,919
======== ======== ========== ==========
Net income (loss) per common share:
Basic $ (0.45) $ 0.07 $ (0.89) $ 0.16
======== ======== ========== ==========
Diluted $ (0.45) $ 0.07 $ (0.89) $ 0.16
======== ======== ========== ==========
Shares used in per share calculation:
Basic 143,462 140,255 142,983 139,435
======== ======== ========== ==========
Diluted 143,462 147,919 142,983 147,335
======== ======== ========== ==========
</TABLE>
See accompanying notes
- ----------------------
3
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS*
--------------------------------------
(Thousands)
<TABLE>
<CAPTION>
June 28, December 28,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 160,166 $ 240,658
Short-term investments 532,277 226,374
---------- ----------
Total cash, cash equivalents and short-term investments 692,443 467,032
Accounts receivable, net 239,602 329,111
Inventories:
Raw materials 22,057 33,375
Work-in-process 116,401 96,712
Finished goods 33,175 38,430
---------- ----------
Total inventories 171,633 168,517
Deferred income taxes 168,841 160,583
Prepaid expenses and other current assets 55,135 50,024
---------- ----------
Total current assets 1,327,654 1,175,267
Property, plant and equipment, at cost 4,146,744 3,799,051
Accumulated depreciation and amortization (1,983,735) (1,808,362)
---------- ----------
Property, plant and equipment, net 2,163,009 1,990,689
Investment in joint venture 201,560 204,031
Other assets 166,361 145,284
---------- ----------
$3,858,584 $3,515,271
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 5,027 $ 6,601
Accounts payable 340,911 359,536
Accrued compensation and benefits 82,266 63,429
Accrued liabilities 142,572 134,656
Income tax payable 16,787 12,676
Deferred income on shipments to distributors 81,284 83,508
Current portion of long-term debt and capital lease obligations 123,257 66,364
---------- ----------
Total current liabilities 792,104 726,770
Deferred income taxes 5,461 96,269
Long-term debt and capital lease obligations, less current
portion 1,142,568 662,689
Stockholders' equity:
Capital stock:
Common stock, par value 1,445 1,428
Capital in excess of par value 1,044,074 1,018,884
Retained earnings 938,844 1,066,131
Accumulated other comprehensive loss (65,912) (56,900)
---------- ----------
Total stockholders' equity 1,918,451 2,029,543
---------- ----------
$3,858,584 $3,515,271
========== ==========
</TABLE>
* Amounts as of June 28, 1998 are unaudited. Amounts as of December 28, 1997
were derived from the December 28, 1997 audited financial statements.
See accompanying notes
----------------------
4
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ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
June 28, June 29,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(127,287) $ 22,919
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 225,334 182,825
Net loss on disposal of property, plant and equipment 1,282 19,548
Net gain realized on sale of available-for-sale
securities - (4,978)
Compensation recognized under employee stock plans 3,632 12,867
Undistributed income of joint venture (12,169) (11,238)
Changes in operating assets and liabilities:
Net decrease (increase) in receivables, inventories,
prepaid expenses and other assets 75,737 (67,637)
Net (increase) decrease in deferred income taxes (99,066) 9,186
Decrease (increase) in income tax payable 4,111 (16,983)
Net increase in payables and accrued liabilities 4,314 31,476
--------- ---------
Net cash provided by operating activities 75,888 177,985
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (494,820) (310,890)
Proceeds from sale of property, plant and equipment 6,482 567
Purchase ofavailable-for-sale securities (951,087) (407,098)
Proceeds from sale of available-for-sale securities 645,535 258,746
Investment in joint venture - (128)
--------- ---------
Net cash used in investing activities (793,890) (458,803)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 571,912 271,644
Debt issuance costs (12,783) -
Payments on debt and capital lease obligations (34,549) (35,706)
Proceeds from foreign grants 91,355 -
Proceeds from issuance of stock 21,575 39,281
--------- ---------
Net cash provided by financing activities 637,510 275,219
--------- ---------
Net decrease in cash and cash equivalents (80,492) (5,599)
Cash and cash equivalents at beginning of period 240,658 166,194
--------- ---------
Cash and cash equivalents at end of period $ 160,166 $ 160,595
========= =========
Supplemental disclosures of cash flow information:
Cash refunded during the first six months for:
Income taxes $ (1,719) $(102,830)
========= =========
Non-cash financing activities:
Equipment capital leases $ - $ 1,005
========= =========
</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 June 28, 1998 and June 29, 1997 each included 13
weeks. The six months ended June 28, 1998 and June 29, 1997 each included 26
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 June 28,
1998 (in thousands):
Cash equivalents:
Commercial paper $ 4,943
Certificates of deposit 10,001
Federal agency notes 17,360
Money market funds 34,700
Other debt securities 407
--------
Total cash equivalents $ 67,411
========
Short-term investments:
Treasury notes $ 5,059
Bank notes 10,000
Corporate notes 17,972
Federal agency notes 33,893
Money market auction rate preferred stocks 132,500
Certificates of deposit 139,857
Commercial paper 192,996
--------
Total short-term investments $532,277
========
Long-term investment:
Equity investments $ 16,315
Treasury notes 2,000
--------
Total long-term investments $ 18,315
========
3. Basic income (loss) per share is based upon weighted-average common shares
outstanding. Diluted income (loss) per share is computed using the weighted-
average
6
<PAGE>
common shares outstanding plus any potential dilutive securities. Dilutive
securities 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 Six Months Ended
----------------------------- -----------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(64,560) $ 9,968 $(127,287) $ 22,919
-------- -------- --------- --------
Numerator for basic and diluted net
income (loss) per common share $(64,560) $ 9,968 $(127,287) $ 22,919
-------- -------- --------- --------
Demominator:
Denominator for basic net income (loss)
per common share - weighted-average shares 143,462 140,255 142,983 139,435
Effect of dilutive securities:
Employee stock options - 7,602 - 7,738
Warrants - 62 - 162
-------- -------- --------- --------
Dilutive potential common shares - 7,664 - 7,900
Denominator for diluted net income (loss)
per common share - adjusted weighted-
average shares 143,462 147,919 142,983 147,335
-------- -------- --------- --------
Basic net income (loss) per common share $ (0.45) $ 0.07 $ (0.89) $ 0.16
======== ======== ========= ========
Diluted net income (loss) per common share $ (0.45) $ 0.07 $ (0.89) $ 0.16
======== ======== ========= ========
</TABLE>
Options, warrants, restricted stock and convertible debt were outstanding
during the quarter and six months ended June 28, 1998, but were not included
in the computation of diluted net loss per common share because the effect in
periods with a net loss would be antidilutive. Options to purchase 57,162
and 196,571 shares of common stock at a weighted-average price of $43.10 and
$36.61 per share were outstanding during the quarter and six months ended
June 29, 1997, respectively, 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.
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
7
<PAGE>
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
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 June 28, 1998, the cumulative
adjustment related to the translation of the FASL financial statements into
U.S. dollars resulted in a decrease of approximately $61 million to the
investment in FASL. In the second quarter of 1998 and of 1997, the Company
purchased $51 million and $62 million, respectively, of Flash memory devices
from FASL. At June 28, 1998 and June 29, 1997, the Company had outstanding
payables of $16 million and $42 million, respectively, to FASL for Flash
memory device purchases. At June 28, 1998 and June 29, 1997, the Company had
outstanding royalty receivables of $4 million and $5 million, respectively,
as a result of FASL sales. The Company earned royalty income of $5 million in
the second quarter of 1998 and of 1997, as a result of FASL sales. For the
six months ended June 28, 1998 and June 29, 1997, these royalties were $11
million and $9 million, respectively.
The following is condensed unaudited financial data of FASL:
<TABLE>
<CAPTION>
(Thousands) Quarter Ended Six Months Ended
----------------------------- -----------------------------
(Unaudited) June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $97,908 $103,895 $216,909 $182,732
Gross profit 16,737 30,925 33,451 43,274
Operating income 16,044 27,758 29,973 40,082
Net income 7,814 10,959 18,364 17,006
</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 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
8
<PAGE>
securities and foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income.
Total comprehensive loss for the quarter ended June 28, 1998 amounted to
approximately $65 million, and total comprehensive income for the quarter
ended June 29, 1997 amounted to approximately $27 million. Total
comprehensive loss for the six months ended June 28, 1998 amounted to
approximately $136 million, and total comprehensive income for the six months
ended June 29, 1997 amounted to approximately $17 million. The following are
the components of comprehensive income (loss):
<TABLE>
<CAPTION>
(Thousands) Quarter Ended Six Months Ended
----------------------------- -----------------------------
June 28, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $(64,560) $ 9,968 $(127,287) $22,919
Foreign currency translation adjustments (8,368) 15,973 (15,681) (6,595)
Unrealized gains on securities, net of tax:
Unrealized holding gains arising during the
period 7,897 1,244 6,669 3,717
Less: Reclassification adjustment for gains
included in earnings - - - (3,534)
-------- ------- --------- -------
Other comprehensive income (loss) (471) 17,217 (9,012) (6,412)
-------- ------- --------- -------
Comprehensive income (loss) $(65,031) $27,185 $(136,299) $16,507
======== ======= ========= =======
</TABLE>
The components of accumulated other comprehensive loss, net of related tax
are as follows:
<TABLE>
<CAPTION>
(Thousands) June 28, 1998 December 28, 1997
------------- -----------------
<S> <C> <C>
Unrealized gain on investments 8,676 2,007
Cumulative translation adjustments (74,588) (58,907)
------- -------
(65,912) (56,900)
======= =======
</TABLE>
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 is accrued as of June 28, 1998.
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. 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 operation of the Company.
8. In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in 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. The Statement 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
9
<PAGE>
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 Statement 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 growth; Year 2000 expenses; the effect of
foreign currency hedging transactions; the effect of adverse economic conditions
in Asia; and the Dresden Fab 30 and FASL manufacturing facilities. See Financial
Condition 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 integrated
circuit (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
Corporation (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>
Quarters Ended Six Months Ended
(Millions) June 28, 1998 March 29, 1998 June 29, 1997 June 28, 1998 June 29, 1997
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CPG $220 $169 $174 $ 388 $ 302
Memory Group 132 167 181 299 365
Communications Group 123 149 183 272 354
Vantis 52 56 57 108 126
---- ---- ---- ------ ------
Total $527 $541 $595 $1,067 $1,147
==== ==== ==== ====== ======
</TABLE>
Results of operations for the quarter and six months ended June 28, 1998 were
negatively impacted by the current economic conditions in Asia. Additionally,
there is a general downturn in the worldwide semiconductor market due to the
Asian economic conditions as well as other factors. The Company's results will
be negatively affected in the third quarter of 1998 by these factors and may be
negatively affected beyond the third quarter if there is no improvement in the
economic condition in Asia.
REVENUE COMPARISON OF QUARTERS ENDED JUNE 28, 1998 AND JUNE 29, 1997
Net sales of $527 million in the second quarter of 1998 decreased
approximately 11 percent compared to the second quarter of 1997 due to a 27
percent decrease in combined Communications Group, Memory Group and Vantis sales
offset by a 26 percent increase in CPG net sales.
The increase in CPG net sales in the second quarter of 1998 as compared to the
second quarter of 1997 was due to the increase in unit shipments of
microprocessors at higher average selling prices. CPG sales growth is dependent
on increased unit shipments at higher speed grades, as to which no assurance can
be given.
12
<PAGE>
Memory Group net sales decreased 27 percent primarily due to a significant
decline in prices of both Flash and EPROM memory devices offset 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 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 33 percent compared to the same
quarter in the previous year primarily due to a significant decrease in unit
volume in all products. The Company's offerings of network products, which
comprise approximately half of the decline in Communications Group net sales,
have not kept pace with the market shift towards higher performance products.
Sales of network products are likely to continue to decline until the Company
introduces new competitive products in volume, which the Company anticipates
will occur no earlier than the fourth quarter of 1998. In addition, these
Communications Group products were particularly impacted by the general economic
downturn in Asia in the first half of the year. The Company expects the other
Communications Group products to have flat to lower sales in the third quarter
of 1998.
Vantis net sales decreased 9 percent primarily due to a decline in the average
selling price of SPLD products reflecting an increase in competition in the PLD
market over the last year. The decrease in prices was partially offset by an
increase in unit volume.
REVENUE COMPARISON OF QUARTERS ENDED JUNE 28, 1998 AND MARCH 29, 1998
Net sales in the second quarter of 1998 decreased approximately 3 percent
compared to the first quarter of 1998 due to a 17 percent decrease in combined
Communications Group, Memory Group and Vantis sales offset by a 30 percent
increase in CPG net sales.
The increase in CPG net sales was primarily due to a 70 percent increase in
combined AMD-K6(TM) and AMD-K6-2(TM) microprocessor unit volume over the
immediately preceding quarter. During the second quarter of 1998, the Company
began volume shipments of AMD-K6-2 microprocessors using the 0.25-micron process
technology in Fab 25. However, much of the product sold in the second quarter
was manufactured on the 0.35-micron process at speed grades for which there is
severe price competition. 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 in the second quarter of 1998
compared to the first quarter of 1998 due to a decline in both the average
selling price and unit volume. During the second quarter of 1998, one of the
Company's major customers for Flash memory devices lost market share to one of
its competitors that does not use AMD Flash memory devices, which contributed to
the decrease in 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
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 decreased 17 percent compared to the previous
quarter primarily due to a decrease in unit volume in all products. The
Company's offerings of network products have not kept pace with the market shift
towards higher performance products. Sales of network products are likely to
continue to decline until the Company introduces new competitive products in
volume, which the Company anticipates will occur no earlier than the fourth
quarter of 1998. In addition, these Communications Group products were
particularly impacted by the general economic downturn in Asia in the first half
of the year. The Company expects the other Communications Group products to
have flat to lower sales in the third quarter of 1998.
Vantis net sales decreased 7 percent due to a slight decline in the average
selling price of both SPLD and CPLD products reflecting softer market demand.
Unit volume remained relatively flat.
REVENUE COMPARISON OF SIX MONTHS ENDED JUNE 28, 1998 AND JUNE 29, 1997
Net sales of $1.1 billion in the first half of 1998 decreased 7 percent
compared to the first half of 1997 due to a 20 percent decrease in combined
Communications Group, Memory Group and Vantis sales offset by a 29 percent
increase in CPG net sales.
The increase in CPG net sales in the first half of 1998 as compared with the
first half of 1997 was due to the significant increase in the average selling
price. 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 18 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. The Company expects future
EPROM sales to be flat or down due to a general shift to Flash memory devices.
Oversupply in the 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 23 percent primarily due to a
significant decrease in unit volume in network products. The Company's offerings
of network products, which comprise almost two-thirds of the decline in
Communications Group net sales, have not kept pace with the market shift towards
higher performance products. Sales of network products are likely to continue
to decline until the Company introduces new competitive products in volume,
which the Company anticipates will occur no earlier than the fourth quarter of
1998. In addition, these Communications Group products were particularly
impacted by the general economic downturn in Asia in the first half of the year.
The Company expects the other Communications Group products to have flat to
lower sales in the third quarter of 1998.
Vantis net sales decreased 14 percent due to a decline in the average selling
price of SPLD products reflecting an increase in competition in the PLD market
over the last year. The decrease in prices was coupled with a slight decrease in
unit volume for CPLD products.
14
<PAGE>
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>
Quarters Ended Six Months Ended
--------------------------------------------- -----------------------------
(Millions except for gross June 28, 1998 March 29, 1998 June 29, 1997 June 28, 1998 June 29, 1997
margin percentage) ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cost of sales $390 $424 $372 $814 $721
Gross margin percentage 26% 22% 37% 24% 37%
Research and development $139 $128 $110 $267 $215
Marketing, general and administrative 101 88 103 189 198
Litigation settlement - 12 - 12 -
Interest income and other, net 8 6 10 14 23
Interest expense 18 12 10 30 19
</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 fabs required for microprocessors. For this reason gross margin is
significantly affected by short-term unit volume fluctuations. Gross margin
percentage growth is dependent on increased volume shipments of microprocessor
and other products as fixed costs continue to increase due to the implementation
of new process technologies.
The increase in gross margin percentage in the second quarter of 1998 as
compared to the immediately previous quarter was due to an increase in
microprocessor sales partially offset by a decrease in non-microprocessor
product revenue. During the second quarter of 1998, the microprocessor
manufacturing process was more efficient compared to the previous quarter as the
Company successfully completed its transition from the 0.35-micron to the 0.25-
micron process technology in Fab 25 resulting in smaller die sizes and faster
clock speeds. In addition, Fab 25 experienced higher production yields in the
second quarter as compared to the first quarter. These effects were offset by
0.35-micron process fabricated products which were sold in the current quarter
at discounted prices due to a shift in market demand to higher performing
products.
Gross margin percentage decreased in the second quarter and first half of 1998
compared to the second quarter and first half of 1997, respectively. The
Company has throughout this period continued to invest in the facilitization of
Fab 25 and, during the first half 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. The Company intends to continue to invest in 0.25-micron process
technology capacity that will increase its fixed costs. Accordingly, absent
15
<PAGE>
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 in all period comparisons due to
the increase in spending in Dresden Fab 30 combined with a higher proportion of
research and development activities in the Submicron Development Center in
Sunnyvale, California, primarily to support CPG and the Memory Group.
Marketing, general and administrative expenses increased in the second quarter
of 1998 compared to the first 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 second
quarter and first half of 1998 compared to the second quarter and first half of
1997, respectively, were relatively flat. The Company expects advertising and
promotional expenses associated with the AMD-K6 family of microprocessors to
increase during the remainder of 1998 as the Company seeks to expand its share
of the microprocessor market through new product introductions and focused
marketing efforts.
The litigation settlement of $11.5 million in the first quarter of 1998
represents the estimated costs associated with an agreement in principle 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 is accrued as of June 28, 1998.
Interest income and other, net decreased in the second quarter and first half
of 1998 as compared to the second quarter and first half of 1997, respectively,
primarily due to a pre-tax gain on the sale of equity securities of $5 million
in the first half of 1997 and lower average cash balances. Interest income and
other, net increased in the second quarter of 1998 compared to the previous
quarter due to higher average cash balances. Interest expense increased in all
period comparisons due to higher average debt balances, including the
convertible debt financing for $517.5 million completed in May 1998, and lower
capitalized interest related to the ongoing facilitization of Fab 25 and
construction of Dresden Fab 30.
INCOME TAX
The Company's effective tax benefit rate was approximately 40 percent for the
second quarter and first half of 1998 compared to a tax provision rate of 29
percent for the similar periods of 1997. The tax benefit rate in 1998 is greater
than the federal statutory rate due to fixed foreign tax benefits that increase
the benefit rate in a loss year. The increase in the effective tax rate in 1998
as compared to 1997 reflects the greater impact of these fixed benefits on the
decrease in profitability in 1998 compared to 1997. Realization of the Company's
net deferred tax assets ($163 million at June 28, 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 48 percent of net sales in the second quarter of 1998
as compared to 54 percent for the same period in 1997 and 55 percent for the
immediately prior quarter. For the
16
<PAGE>
first half of 1998, international sales decreased to 52 percent of net sales
from 55 percent for the same period in 1997. In the first half of 1998,
approximately 9 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. (A highly inflationary
economy is defined in accordance with the Statement of Financial Accounting
Standards No. 52 as one in which the cumulative inflation over a three-year
consecutive period approximates 100 percent or more.) The impact on the
Company's operating results from changes in foreign currency rates individually
and in the aggregate has not been material. The Company has recently experienced
lower demand in Asia, particularly in its telecommunication products. The
Company anticipates that the current economic setback in Asia will continue to
adversely affect the Company's results of operations at least through the third
quarter of 1998, and further deterioration of the economic condition in the Asia
market could have a material adverse effect on the Company's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments increased $225
million during the first half of 1998 to $692 million at June 28, 1998. The
increase was primarily due to net convertible debt proceeds of $505 million,
grants for Dresden capital expenditures from the German government of $91
million, working capital line of credit borrowings for Dresden activities from
Dresdner Bank AG of $49 million and net cash provided by operations of $76
million offset by capital expenditures of $495 million during the period.
Cash provided by operating activities was $76 million and $178 million for the
first half of 1998 and 1997, respectively. The decrease in net operating cash
flows was primarily due to decreased earnings of $150 million offset by an
increase in depreciation and amortization of $42 million.
Investing activities consumed cash of $794 million and $459 million during the
first half of 1998 and 1997, respectively. The increase in investing activities
was partially due to the increase in capital expenditures of $184 million in the
first half of 1998 as the Company continued to invest in property, plant and
equipment primarily for Dresden Fab 30 and Fab 25. 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 $638 million and $275
million during the first half of 1998 and 1997, respectively. The increase in
financing activities was due to the increase in financing sources. Financing
sources of cash for the first half of 1998 included net convertible debt
borrowings of $505 million, capital investment grants from the German government
of $91 million as part of the Dresden Loan Agreement, as defined below, and
borrowings from Dresdner Bank AG in the amount of DM90 million ($49 million),
also as part of the Dresden Loan Agreement. Financing sources of cash for the
first half of 1997 included borrowings from a $250 million four-year secured
term loan.
The Company plans to continue to make significant capital investments, at a
significantly higher rate than in previous years. These investments include
those relating to the conversion of
17
<PAGE>
Fab 25 to 0.25-micron process technology and the construction and facilitization
of Dresden Fab 30.
The continued facilitization of Fab 25 is anticipated to cost approximately
$351 million for the remainder of 1998, although there can be no assurance that
the actual amount will not vary materially.
Dresden Fab 30 is being constructed by AMD Saxony, an indirect wholly owned
German subsidiary of the Company. This 900,000-square-foot submicron integrated
circuit manufacturing and design facility is to be completed and fully
facilitized over the next four years. The project is being supported by the
Company together with the Federal Republic of Germany, the State of Saxony and a
consortium of banks. 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
$932 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 over the next two years 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 $123 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 Senior Secured Notes) 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 for the
Senior Secured Notes 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. 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.
In addition, after completion of Dresden Fab 30, the Company has agreed to
make funds available to AMD Saxony up to approximately $82 million if the
subsidiary 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 $932 million, (ii)
investment grants and subsidies totaling $283 million and (iii) interest
subsidies from the State of Saxony totaling $169 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 the grants and subsidies
18
<PAGE>
are received by AMD Saxony. As of June 28, 1998, the Company has invested $170
million in AMD Saxony. The remaining $161 million required to complete Dresden
Fab 30 is to be provided from cash generated by AMD Saxony from 1999 to 2001,
which will be derived from sales 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.
Defaults under the Dresden Loan Agreement include the failure of the Company,
AMD Saxony or AMD Holding 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 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.
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 and the facility, including
equipment, is expected to cost approximately $1.1 billion, which is
anticipated in the second quarter of 2000. Approximately $383 million of such
cost has been funded as of June 28, 1998. Capital expenditures for FASL II
construction to date have been funded by cash generated from FASL operations
and 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 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 June 28, 1998, AMD had loan guarantees
of $77 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. All of the secured term loan is outstanding at June 28, 1998. The secured
loan is repayable in eight equal quarterly installments of approximately $31
million commencing in October 1998. As of June 28, 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
19
<PAGE>
ratio, were amended at the request of the Company. The Company sought to amend
the covenants because otherwise it risked violating certain of the covenants
unless it scaled back on its business and capital investment plan. As of June
28, 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.
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 the second quarter of
1999.
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 integrated circuits, 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 personal computers 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, continue to
significantly impact the Company's revenues, margins and operating results. The
Company plans to continue to make
20
<PAGE>
significant capital expenditures to support the microprocessor business 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. The microprocessor market is characterized by very short product
life cycles and migration to ever higher performance microprocessors. 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 has 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 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 volumes 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 depends on increasing sales to existing
customers and developing new customers. The loss of any current top tier 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 personal computer 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
21
<PAGE>
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 to 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-
K7TM 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 personal computers. Intel Corporation's dominant market
position enables 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 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, 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
22
<PAGE>
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 is decreasing its support of the Socket 7
infrastructure as it transitions 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 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
could have a material adverse effect on the Company.
Financing Requirements
The Company plans to continue to make significant capital investments, at a
significantly higher rate than in previous years. These investments include
those relating to the continued facilitization of Fab 25 and the construction
and facilitization of Dresden Fab 30.
Equipment installation is in progress at FASL II and the facility, including
equipment, is expected to cost approximately $1.1 billion, which is
anticipated in the second quarter of 2000. Capital expenditures for FASL II
construction to date have been funded by cash generated from FASL operations
and 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.
23
<PAGE>
In 1996, the Company entered into a syndicated bank loan agreement (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 June 28, 1998. The secured
loan is repayable in eight equal quarterly installments of approximately $31
million commencing in October 1998.
In March 1997, the Company's indirect wholly owned subsidiary, AMD Saxony,
entered into a Loan Agreement (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 for the Senior Secured Notes) 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 for the Senior Secured Notes 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.
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
24
<PAGE>
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 in 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
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 process modules
internally or through subcontractors; and the availability and acceptance of
motherboards designed for the AMD-K7 as Intel moves the market to its Slot 1
proprietary interface. A failure of the AMD-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
additional manufacturers introduce competitive products and industry-wide
production capacity increases, and as Intel prices its flash memory products at
increasingly aggressive levels. The Company expects that the marketplace for
Flash memory devices will continue to be increasingly competitive. A substantial
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 second quarter of 1998, the Company
experienced declines in the selling prices of Flash memory devices. During the
second quarter of 1998, the Company also experienced declines in unit volumes 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 more competitors emerge.
25
<PAGE>
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 have been 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 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 recoverable if the Company fails to successfully ramp
production in Fab 25 of higher performance products produced on 0.25-micron
process technology, if the Company's microprocessors fail 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. For example, the Company's ability to generate sufficient revenue to
achieve profitability in the microprocessor business in the near future and the
Company's success in competing with Intel, and producing higher performance AMD-
K6 microprocessors in volumes sufficient to increase market share depends on,
among other things, the Company's ability to expand capacity on 0.25-micron
process technology. There can be no assurance that the Company will be able to
fabricate product in sufficient volume to generate revenue necessary to offset
investments in Fab 25 and meet the anticipated needs and demands of its
customers. 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 announced
26
<PAGE>
its intent to enter into a strategic alliance with Motorola's Semiconductor
Products Sector to co-develop the copper interconnect technology required for
the AMD-K7. 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 integrated circuits 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 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, several types of the integrated circuit packages
purchased by AMD, as well as by the majority of other companies in the
semiconductor industry, are principally supplied by a few foreign companies.
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
27
<PAGE>
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 for the Senior
Secured Notes 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, 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, has depended on third parties to develop and maintain
software "fitters" that allow electrical circuit designs to be implemented using
Vantis' complex programmable logic devices. Currently, Vantis has contracted
with MINC, Inc. (MINC), a vendor of complex programmable logic device software
development tools, to develop and maintain software fitters for Vantis'
products. If MINC were to stop developing and maintaining software fitters for
Vantis' products, or if the software developed by MINC was subject to delays,
errors or "bugs," and Vantis was not able to internally develop and maintain
such software fitters, then Vantis would need 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.
Any interruption in the MINC services, or Vantis' inability to find an
acceptable alternative vendor for software services in a timely manner, could
have a material adverse effect on Vantis.
Vantis has initiated efforts to manage and control the development and
maintenance of software fitters for Vantis' products internally. Undertaking
significant software development
28
<PAGE>
projects is a new effort for Vantis and is subject to many risks, including
risks of delays, errors and "bugs," and customer resistance to change. If
Vantis' internally-developed software is not available as scheduled or fails to
gain market acceptance, Vantis would need to contract on acceptable terms with
vendors having the available capacity and technology to develop and maintain
such software. No assurance can be given that Vantis' efforts to internally
develop and maintain 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.
Vantis' Dependence on Effective Deployment and Management of Newly-Created FAE
Staff. Vantis' major competitors each have a well established network of field
application engineers (FAEs). In comparison, Vantis has only recently created
its own network of FAEs in order to support its products more effectively and to
enhance customer satisfaction with those products. FAEs service larger customer
accounts by consulting with customers on specific product issues and providing
feedback to Vantis as to customer needs. The future success of Vantis may be
affected by its ability to deploy and manage such FAEs and to continue to
attract and retain qualified technical personnel to fill these positions.
Currently, availability of such qualified technical personnel 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
deploy or manage its new 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.
Recent Introduction of Vantis' FPGA Products. In January of 1998, Vantis
introduced its first field programmable gate array (FPGA) products, which it
intends to sell under the VF1 name beginning in the second half of 1998. 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 1999 at the earliest, 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 high
performance products across all major segments of the PLD market and could 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
29
<PAGE>
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 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
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<PAGE>
a specified notice, generally contain a provision for the return of the
Company's products in the event 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, 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.
31
<PAGE>
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 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 its
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 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 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.
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<PAGE>
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.
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 will continue to seek information from non-
responsive suppliers and plans to contact additional suppliers during the third
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
has sold; 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, is in the inventory and assessment phase. 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 the manufacturing plants in Asia and engineering equipment
used in the Company for product development.
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<PAGE>
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. 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 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.
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.
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<PAGE>
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 Corporation. 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 operation of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on April
30, 1998. The following are the results of the voting on the
proposals submitted to stockholders at the annual meeting.
Proposal No. 1 Election of Directors. The following individuals
were elected as directors:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
<S> <C> <C>
W.J. Sanders III 117,309,377 3,719,591
Friedrich Baur 117,418,870 3,610,098
Charles M. Blalack 117,419,322 3,609,646
R. Gene Brown 117,460,506 3,568,462
Richard Previte 117,445,715 3,583,253
S. Atiq Raza 117,430,427 3,598,193
Joe L. Roby 117,087,337 3,941,631
Leonard Silverman 117,479,775 3,549,193
</TABLE>
Proposal No. 2 The proposal to ratify the appointment of Ernst &
Young LLP, as the Company's independent auditors for the current
fiscal year was approved.
For: 119,947,380 Against: 860,709 Abstain: 220,879
Proposal No. 3 The proposal to approve the amendment to the 1996
Stock Incentive Plan was approved.
For: 90,014,727 Against: 29,275,481 Abstain: 1,738,760
Proposal No. 4 The stockholder proposal regarding an independent
Chairperson was defeated.
For: 23,485,398 Against: 56,428,859 Abstain: 1,315,164
Broker Non-Votes: 39,799,547
Proposal No. 5 The stockholder proposal regarding the
Compensation Committee was defeated.
For: 24,661,358 Against: 55,097,643 Abstain: 1,470,520
Broker Non-Votes: 39,799,447
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<PAGE>
Item 6. Exhibits and Report on Form 8-K
(a). Exhibits
10.14 Bonus Agreement between the Company and Richard Previte,
effective March 11, 1997.
27 Financial Data Schedule
(b). Report on Form 8-K
The following reports on Form 8-K were filed during the quarter
for which this report is filed:
1. Current Report on Form 8-K dated April 7, 1998 reporting
under Item 5 - Other Events - first quarter earnings.
2. Current Report on Form 8-K dated May 8, 1998 reporting
under Item 5 - Other Events - Convertible Debt Offering.
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<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: August 11 , 1998 By: /s/ James P. Ashby
---------------- -------------------
James P. Ashby
Vice President and
Corporate Controller
Signing on behalf of the
registrant and as the principal
accounting officer
37
<PAGE>
EXHIBIT INDEX
-------------
Exhibits
- --------
10.14 Bonus Agreement between the Company and Richard Previte,
effective March 11, 1997.
27 Financial Data Schedule.
38
<PAGE>
EXHIBIT 10.14
Mr. Richard Previte
President & Chief Operating Officer
Advanced Micro Devices, Inc.
Dear Rich:
I am pleased to confirm your participation in a special bonus program to reflect
your contributions as President & Chief Operating Officer of Advanced Micro
Devices, Inc. (the "Company"), effective March 11, 1997. The substantive terms
of your bonus are described below. If you agree to the terms outlined in this
letter, please countersign the enclosed copy of this letter and return it to the
Corporate Secretary.
1. The amount of your bonus under the Company's 1996 Executive Incentive Plan
will be equal to three-tenths of one percent (.3%) of "Adjusted Operating
Profits" of the Company for each respective fiscal year of the Company in excess
of twenty percent (20%) of the Adjusted Operating Profits for the Company's
immediately preceding fiscal year. "Adjusted Operating Profits" of the Company
are defined as operating income, as reported on the Company's financial
statements, increased for any pre-tax operating income and decreased for any
pre-tax operating loss from the Fujitsu Joint Venture (and by subsequent joint
ventures approved by the Board of Directors of the Company for these purposes)
and increased by any expenses accrued for profit sharing plan contributions and
bonuses under the Company's Executive Bonus Plan, including the bonus calculated
hereunder.
2. You will earn a bonus for 1997 and future years, so long as you remain
President & Chief Operating Officer, except as otherwise set forth in this
letter. The provisions of this letter supersede any other bonus arrangements
that may be applicable to you.
3. The maximum amount payable with respect to any one fiscal year shall be
limited to 300% of your base salary payable during that year. Any amount earned
in excess of the maximum amount shall be carried over for up to three years.
Notwithstanding the foregoing, the total amount payable with respect to each
such fiscal year may not exceed the maximum amount payable pursuant to the
Company's 1996 Executive Incentive Plan for any fiscal year.
4. In case of retirement, death or disability, or a change in title or current
responsibilities, your bonus will be prorated for the fiscal year only if you
served as President & Chief Operating Officer for less than six months. If you
served as President & Chief Operating Officer for six months or more, you will
earn an amount based on operating results for the full fiscal year. For these
purposes, "disability" has the same meaning as under the Executive Disability
Plan at the time your disability commences.
<PAGE>
Mr. Richard Previte
Page 2
5. The bonus will be paid following release of the Company's financial results
for the last quarter of each fiscal year referred to above. You must be
employed on the distribution date in order to receive your bonus or any
carryover amount then payable. The bonus will be paid provided you are still an
employee on the distribution date, even if you are no longer President & Chief
Operating Officer.
6. The Company reserves the right to modify or terminate this arrangement at
its sole discretion with respect to future services.
I look forward to continuing to work closely with you as we achieve our shared
vision of an AMD that is truly world class in every respect.
Sincerely,
_________________________________
W. J. Sanders III
Chairman and Chief Executive Officer
AGREED:
_________________________________
Richard Previte
President & Chief Operating Officer
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> MAR-30-1998
<PERIOD-END> JUN-28-1998
<CASH> 160,166
<SECURITIES> 532,277
<RECEIVABLES> 239,602
<ALLOWANCES> (11,865)
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<CURRENT-ASSETS> 1,327,654
<PP&E> 4,146,744
<DEPRECIATION> (1,983,735)
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1,445
0
<COMMON> 0
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<SALES> 1,067,174
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<CGS> 813,731
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<OTHER-EXPENSES> 456,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,135
<INCOME-PRETAX> (230,563)
<INCOME-TAX> (91,107)
<INCOME-CONTINUING> (127,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,287)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
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