<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 March 28, 1999
-----------------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7882
-----------------------------
ADVANCED MICRO DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1692300
- -------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One AMD Place
Sunnyvale, California 94086
- ----------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 732-2400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
_______ _______
The number of shares of $0.01 par value common stock outstanding as of April 19,
1999: 146,584,830.
<PAGE>
ADVANCED MICRO DEVICES, INC.
- ----------------------------
INDEX
- -----
<TABLE>
<CAPTION>
Part I. Financial Information
---------------------
Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations--
Quarters Ended March 28, 1999 and March 29, 1998 3
Condensed Consolidated Balance Sheets--
March 28, 1999 and December 27, 1998 4
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 28, 1999 and March 29, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Part II. Other Information
-----------------
Item 1. Legal Proceedings 38
Item 2. Changes in Securities and Use of Proceeds 39
Item 6. Exhibits and Report on Form 8-K 40
Signature 41
---------
</TABLE>
2
<PAGE>
PART 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
---------------------------------------------
March 28, March 29,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Net sales $ 631,593 $ 540,856
Expenses:
Cost of sales 450,431 423,591
Research and development 159,946 128,120
Marketing, general and administrative 127,310 88,214
Restructuring and other special charges 15,016 -
----------------- ----------------
752,703 639,925
----------------- ----------------
Operating loss (121,110) (99,069)
Litigation settlement - (11,500)
Interest income and other, net 10,768 5,581
Interest expense (20,763) (12,472)
----------------- ----------------
Loss before income taxes and equity in joint venture (131,105) (117,460)
Benefit for income taxes (5,473) (46,997)
----------------- ----------------
Loss before equity in joint venture (125,632) (70,463)
Equity in net income (loss) of joint venture (2,735) 7,736
----------------- ----------------
Net loss $ (128,367) $ (62,727)
================= ================
Net loss per common share:
Basic $ (0.88) $ (0.44)
================= ================
Diluted $ (0.88) $ (0.44)
================= ================
Shares used in per share calculation:
Basic 145,909 142,503
================= ================
Diluted 145,909 142,503
================= ================
</TABLE>
See accompanying notes
- ----------------------
3
<PAGE>
ADVANCED MICRO DEVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
March 28, December 27,
1999 1998
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 163,575 $ 361,908
Short-term investments 325,570 335,117
------------------ -----------------
Total cash, cash equivalents and short-term investments 489,145 697,025
Accounts receivable, net 376,360 415,557
Inventories:
Raw materials 14,689 21,185
Work-in-process 132,516 129,036
Finished goods 35,465 24,854
------------------ -----------------
Total inventories 182,670 175,075
Deferred income taxes 206,745 205,959
Prepaid expenses and other current assets 73,701 68,411
------------------ -----------------
Total current assets 1,328,621 1,562,027
Property, plant and equipment, at cost 4,771,052 4,380,362
Accumulated depreciation and amortization (2,197,561) (2,111,894)
------------------ -----------------
Property, plant and equipment, net 2,573,491 2,268,468
Investment in joint venture 232,313 236,820
Other assets 171,068 185,653
------------------ ----------------
$ 4,305,493 $ 4,252,968
================== ================
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to banks $ 5,941 $ 6,017
Accounts payable 343,980 333,975
Accrued compensation and benefits 81,451 80,334
Accrued liabilities 133,468 168,280
Income tax payable 21,610 22,026
Deferred income on shipments to distributors 102,503 84,523
Current portion of long-term debt, capital lease obligations and other 174,663 145,564
------------------ ----------------
Total current liabilities 863,616 840,719
Deferred income taxes 28,226 34,784
Long-term debt, capital lease obligations and other, less current portion 1,539,957 1,372,416
Commitments and contingencies
Stockholders' equity:
Capital stock: 1,478 1,465
Common stock, par value 1,080,729 1,071,591
Capital in excess of par value 833,804 962,171
Retained earnings (42,317) (30,178
------------------ ----------------
Accumulated other comprehensive loss 1,873,694 2,005,049
------------------ ----------------
Total stockholders' equity $ 4,305,493 $ 4,252,968
================== ================
</TABLE>
See accompanying notes
----------------------
4
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
March 28, March 29,
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (128,367) $ (62,727)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 127,487 112,160
Restructuring charges 15,016 -
Deferred foreign grant and subsidy income (12,989) -
Net increase in net deferred income taxes assets (7,344) (54,701)
Net gain realized on sale of available-for-sale securities (4,250) -
Net loss on disposal of property, plant and equipment 3,179 528
Undistributed loss (income) of joint venture 2,735 (7,736)
Compensation (credits) expense recognized (1,102) 1,961
Deferred gain on sale of building (384) -
Changes in operating assets and liabilities:
Net decrease in receivables, inventories,
prepaid expenses and other assets 24,008 86,177
(Decrease) increase in income tax payable (416) 824
Net increase (decrease) in payables and accrued liabilities 4,298 (94,239)
---------------- ---------------
Net cash provided by (used in) operating activities 21,871 (17,753)
---------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (199,793) (184,288)
Proceeds from sale of property, plant and equipment 2,786 5,707
Purchase of available-for-sale securities (496,774) (248,361)
Proceeds from sale of available-for-sale securities 511,390 359,184
---------------- ---------------
Net cash used in investing activities (182,391) (67,758)
---------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings 5,835 51,036
Payments on debt and capital lease obligations (43,229) (16,457)
Proceeds from issuance of stock 10,253 5,475
---------------- ---------------
Net cash (used in) provided by financing activities (27,141) 40,054
---------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (10,672) (2,720)
---------------- ---------------
Net decrease in cash and cash equivalents (198,333) (48,177)
Cash and cash equivalents at beginning of period 361,908 240,658
---------------- ---------------
Cash and cash equivalents at end of period $ 163,575 $ 192,481
================ ===============
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the first three months for:
Interest $ 34,893 $ 33,399
================ ===============
Income Taxes $ 314 $ (1,498)
================ ===============
</TABLE>
See accompanying notes
- ----------------------
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, the results of operations for the interim
periods shown in this report are not necessarily indicative of results to be
expected for the fiscal year ending December 26, 1999. In the opinion of the
Company's management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on
Form 10-K for the year ended December 27, 1998.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December. The quarters ended March 28, 1999 and March 29, 1998 each included
13 weeks.
Certain prior year amounts on the condensed consolidated financial
statements have been reclassified to conform to the 1999 presentation.
2. Restructuring and Other Special Charges
In the first quarter of the current fiscal year the Company initiated a
review of its cost structure. Based upon this review, in the first quarter
of fiscal year 1999, the Company recorded restructuring and other special
charges of $15 million as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities and other special charges shown below primarily
relate to: 1) the elimination of job responsibilities in the Information
Technology department and the write-off of discontinued system projects; 2)
the closure of a submicron development laboratory facility and related asset
write-offs; and 3) the write-off of equipment utilized in the discontinued
0.35 micron wafer fabrication process. During the second quarter of the
current fiscal year, the Company expects to discharge its accrual balance of
$779 thousand relating to the severance costs for the termination of 50
employees.
<TABLE>
<CAPTION>
Cash/ Charge to Accrual balance
(Thousands)(unaudited) Non-cash operations as of 3/28/99
------------ -------------- -------------------
<S> <C> <C> <C>
Severance costs Cash $ 779 $ 779
Closure of research and development facility Non-cash 1,258 -
Fab 25 equipment write-off Non-cash 6,890 -
Discontinued system projects Non-cash 6,089 -
-------- -----------
$ 15,016 $ 779
======== ===========
</TABLE>
6
<PAGE>
The Company will continue to evaluate its cost structure and expects to
incur significant additional restructuring and other special charges during
the second and third quarters of the fiscal year.
3. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
March 28,
(Thousands)(unaudited) 1999
-------------
<S> <C>
Cash equivalents:
Money market funds $ 13,240
Certificates of deposit 2,000
Commercial paper 4,948
---------
Total cash equivalents $ 20,188
=========
Short-term investments:
Treasury notes $ 23,079
Bank notes 7,631
Federal agency notes 35,098
Money market auction rates preferred stocks 107,508
Certificates of deposit 97,625
Commercial paper 54,629
---------
Total short-term investments $ 325,570
=========
Long-term investments:
Equity investments $ 12,043
Commercial paper 9,999
Treasury notes 2,003
---------
Total long-term investments (included in other assets) $ 24,045
=========
</TABLE>
4. Net Loss per Common Share
Basic and diluted net loss per common share are computed using the weighted-
average common shares outstanding. The following table sets forth the
computation of basic and diluted net loss per common share:
7
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
March 28, March 29,
(Thousand except per share data)(unaudited) 1999 1998
------------- ------------
<S> <C> <C>
Numerator for basic and diluted net loss per common share $(128,367) $(62,727)
--------- --------
Denominator for basic and diluted net loss per common share-
weighted-average shares 145,909 142,503
--------- --------
Basic and diluted net loss per common share $ (0.88) $ (0.44)
========= ========
</TABLE>
Options, warrants, restricted stock and convertible debt were outstanding
during both of the quarters ended March 28, 1999, and March 29, 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.
5. Investment in Joint Venture
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD
Semiconductor Limited (FASL), for the development and manufacture of non-
volatile memory devices. FASL operates advanced integrated circuit (IC)
manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory
devices. The Company's share of FASL is 49.992 percent and the investment is
being accounted for under the equity method. At March 28, 1999, the
cumulative adjustment related to the translation of the FASL financial
statements into U.S. dollars resulted in a decrease to the investment in
FASL of $27 million. The following are the significant FASL related party
transactions and balances:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
March 28, March 29,
(Thousand)(unaudited) 1999 1998
------------- ------------
<S> <C> <C>
Royalty income $ 4,603 $ 5,901
Purchases 57,158 60,063
March 28, December 27,
(Thousand)(unaudited) 1999 1998
------------- --------------
Royalty receivable $ 10,563 $ 6,027
Accounts payable 45,939 39,424
</TABLE>
The following is condensed unaudited financial data of FASL:
8
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
March 28, March 29,
(Thousand)(unaudited) 1999 1998
------------- ------------
<S> <C> <C>
Net sales $ 97,272 $ 119,001
Gross profit (loss) (6,166) 16,714
Operating income (loss) (6,867) 13,929
Net income (loss) (4,154) 10,550
</TABLE>
The Company's share of the above FASL net income (loss) differs from the
equity in net income (loss) of joint venture reported on the condensed
consolidated statements of operations due to the elimination of intercompany
unrealized profits which are reflected on the Company's condensed
consolidated statements of operations.
6. Segment Reporting
Under Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," AMD has two
principal businesses and has two reportable segments: (1) the AMD segment,
which consists of three product groups Computation Products Group, Memory
Group and Communications Group and (2) the Vantis segment, which consists of
the Company's programmable logic subsidiary, Vantis Corporation (Vantis).
The reportable segments are organized as discrete and separate functional
units with separate management teams and separate performance assessment and
resource allocation processes. The AMD segment produces microprocessors,
core logic products, Flash memory devices, Erasable Programmable Read-Only
Memory (EPROM) devices, telecommunication products, networking and
input/output (I/O) products and embedded processors. The Vantis segment
produces complex and simple, high-performance complementary metal oxide
semiconductor (CMOS) programmable logic devices (PLDs).
On April 21, 1999, the Company entered into an agreement with Lattice
Semiconductor Corporation to sell the stock of the Vantis subsidiary for
$500 million in cash. The Company anticipates that the Vantis subsidiary
will have approximately $60 million of cash and cash equivalents at the
closing.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies contained in the Company's
financial statements in its annual report on Form 10-K for the year ended
December 27, 1998. The Company evaluates performance and allocates resources
based on segment operating income (loss).
9
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------
(Thousands)(unaudited) March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
Net sales:
AMD segment
External customers $ 584,436 $ 484,632
Intersegment 17,176 23,309
--------- ---------
601,612 507,941
Vantis segment external customers 47,157 56,224
Elimination of intersegment sales (17,176) (23,309)
--------- ---------
Net sales $ 631,593 $ 540,856
========= =========
Segment income (loss):
AMD segment $(127,478) $(110,713)
Vantis segment 6,368 11,644
--------- ---------
Total operating loss (121,110) (99,069)
Litigation settlement - (11,500)
Interest income and other, net 10,768 5,581
Interest expense (20,763) (12,472)
Benefit for income taxes 5,473 46,997
Equity in net income (loss) of FASL (AMD segment) (2,735) 7,736
--------- ---------
Net loss $(128,367) $ (62,727)
========= =========
</TABLE>
7. Comprehensive Loss
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments
are included in other comprehensive loss.
The following are the components of comprehensive loss:
10
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
March 28, March 29,
(Thousand)(unaudited) 1999 1998
------------- ------------
<S> <C> <C>
Net loss $ (128,367) $ (62,727)
---------- ---------
Foreign currency translation adjustments (10,311) (7,313)
Unrealized losses on securities, net of tax:
Unrealized holding gains (losses) arising during the period 1,625 (1,228)
Less: Reclassification adjustment for gains
included in earnings (3,453) -
---------- ---------
Other comprehensive loss (12,139) (8,541)
---------- ---------
Comprehensive loss $ (140,506) $ (71,268)
========== =========
</TABLE>
The components of accumulated other comprehensive loss, net of related tax
are as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
----------------- ---------------
March 28, December 27,
(Thousands) 1999 1998
----------------- ---------------
<S> <C> <C>
Unrealized gain on investments, net of tax $ 4,932 $ 6,760
Cumulative translation adjustments (47,249) (36,938)
--------- ---------
$ (42,317) $ (30,178)
========= =========
</TABLE>
8. Contingencies
AMD V. ALTERA CORPORATION. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to AMD's
and Altera Corporation's programmable logic devices. In a trial held in May
1996, a jury found that at least five of the eight AMD patents-in-suit were
licensed to Altera. As a result of the bench trial held in August 1997, the
Court held that Altera was licensed to the three remaining AMD patents-in-
suit. Seven patents were asserted by Altera in its counterclaim against AMD.
The Court determined that the Company is licensed to five of the seven
patents and two remain in suit. Altera filed a motion to recover attorneys'
fees in November 1997. The Company then filed, and the Court granted, a
motion to stay determination of the attorneys' fees motion until resolution
of its appeal. The Company filed an appeal of the rulings of the jury and
Court determinations that Altera is licensed to each of our eight
patents-in-suit. Both parties filed briefs and the Federal Court of Appeal
heard oral argument on our appeal in November 1998. In April 1999, the
Federal Court of Appeal reversed the earlier jury and Court decisions and
held that Altera is not licensed to the eight AMD patents-in-suit. Also in
April 1999, and following the decision of the Federal Court of Appeal,
Altera filed a petition for rehearing.
11
<PAGE>
SHAREHOLDER LITIGATION. Between March 10, 1999 and April 22, 1999, AMD and
certain individual officers of AMD were named as defendants in the following
lawsuits: Arthur S. Feldman v. Advanced Micro Devices, Inc., et al.; Pamela
Lee v. Advanced Micro Devices, Inc., et al.; Izidor Klein v. Advanced Micro
Devices, Inc., et al.; Nancy P. Steinman v. Advanced Micro Devices, Inc., et
al.; Robert L. Dworkin v. Advanced Micro Devices, Inc., et al.; Howard M.
Lasker v. Advanced Micro Devices, Inc., et al.; John K. Thompson v. Advanced
Micro Devices, Inc., et al.; Dan Schwartz v. Advanced Micro Devices, Inc.,
et al.; Serena Salamon and Norman Silverberg v. Advanced Micro Devices,
Inc., et al.; David Wu and Hossein Mizraie v. Advanced Micro Devices, Inc.,
et al.; Eidman v. Advanced Micro Devices, Inc., et al.; Nold v. Advanced
Micro Devices, Inc., et al.; Freeland v. Advanced Micro Devices, Inc., et
al.; and Fradkin v. Advanced Micro Devices, Inc. et al. In addition, we are
aware of the following actions, although AMD has not been served with the
complaints: Ellis Investment Co. v. Advanced Micro Devices, Inc., et al.;
Dezwareh v. Advanced Micro Devices, Inc., et al.; and Tordjman v. Advanced
Micro Devices, Inc., et al. These class action complaints allege various
violations of federal securities law, including violations of Section 10(b)
of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Most
of the complaints purportedly were filed on behalf of all persons, other
than the defendants, who purchased or otherwise acquired common stock of AMD
during the period from October 6, 1998 to March 8, 1999. Two of the
complaints allege a class period from July 13, 1998 to March 9, 1999. All of
the complaints allege that materially misleading statements and/or material
omissions were made by AMD and certain individual officers of AMD concerning
design and production problems relating to high-speed versions of the
AMD-K6-2 and AMD-K6-III microprocessors. The complaints seek unspecified
damages, equitable relief, interest, fees and other litigation costs.
The Company currently expects that these suits will be consolidated into one
action within the next several months. AMD intends to contest the litigation
vigorously. Based upon information presently known to management, the
Company does not believe that the ultimate resolution of these lawsuits will
have a material adverse effect on the Company's financial condition or
results of operations.
12
<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, among other things, operating results; anticipated cash
flows; realization of net deferred tax assets; capital expenditures; adequacy of
resources to fund operations and capital investments; our ability to access
external sources of capital; our ability to transition to new process
technologies; our ability to increase unit shipments of microprocessors at
higher speed grades; anticipated market growth; strengthening demand for Flash
memory devices; Year 2000 costs; the impact on our business as a result of Year
2000 issues; the impact on customers and suppliers as they prepare for the Year
2000; the effect of foreign currency hedging transactions; our new integrated
circuit manufacturing and design facility in Dresden, Germany (Dresden Fab 30);
and the Fujitsu AMD Semiconductor Limited (FASL) manufacturing facilities. See
"Financial Condition" and "Risk Factors" below, as well as such other risks and
uncertainties as are detailed in our Securities and Exchange Commission reports
and filings for a discussion of the factors that could cause actual results to
differ materially from the forward-looking statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto at December 27, 1998, and December 28,
1997, and for each of the three years in the period ended December 27, 1998.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, Vantis,
K86, AMD-K6, AMD-K6-2, AMD-K6-III, AMD-K7, 3DNow! and PCnet are either
trademarks or registered trademarks of Advanced Micro Devices, Inc. Microsoft
and Windows are either registered trademarks or trademarks of Microsoft
Corporation. Pentium is a registered trademark and Celeron is a trademark of
Intel Corporation. Other terms used to identify companies and products may be
trademarks of their respective owners.
13
<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 (1) our AMD segment, which consists of our three product groups -
Computation Products Group (CPG), Memory Group and Communications Group and (2)
our Vantis segment, which consists of our programmable logic subsidiary, Vantis
Corporation (Vantis). CPG products include microprocessors, core logic products
and embedded processors. Memory Group products include Flash memory devices and
Erasable Programmable Read-Only Memory (EPROM) devices. Communications Group
products include telecommunication products, networking, and input/output (I/O)
products. Vantis products are complex and simple high-performance CMOS
(complementary metal oxide semiconductor) programmable logic devices (PLDs).
On April 21, 1999, we entered into an agreement with Lattice Semiconductor
Corporation to sell the stock of the Vantis subsidiary for $500 million in cash.
We anticipate that the Vantis subsidiary will have approximately $60 million
of net cash and cash equivalents at the closing.
The following is a summary of the net sales of the CPG, the Memory Group, the
Communications Group and Vantis for the periods presented below:
Quarter Ended
-----------------------------------------
March 28, December 27, March 29,
(Millions) 1999 1998 1998
------------- ------------- -------------
AMD Segment:
CPG $ 395 $ 546 $ 230
Memory Group 126 132 167
Communications Group 64 64 88
------------- ------------- -------------
585 742 485
Vantis Segment 47 47 556
------------- ------------- -------------
Total $ 632 $ 789 $ 541
============= ============= =============
Net Sales Comparison of Quarters Ended March 28, 1999 and December 27, 1998
Net sales of $632 million in the first quarter of 1999 decreased by 20 percent
compared to the fourth quarter of 1998. This decrease was almost entirely
attributable to the decrease in net sales of CPG products.
CPG net sales of $395 million in the first quarter of 1999 decreased by 28
percent compared to the fourth quarter of 1998. Shipments of our AMD-K6(R)
family of microprocessors substantially declined from the previous quarter
primarily due to lower than expected yields in the first eight weeks of the
quarter on wafers started prior to the implementation of design enhancements
which improved the yield of higher-speed versions of AMD-K6-2 microprocessors in
the last five weeks of the quarter. In addition, severe price competition
contributed to a decline of
14
<PAGE>
approximately 12 percent in the average selling price for our AMD-K6 family of
microprocessors compared to the previous quarter. CPG sales growth during the
remainder of 1999 is dependent on increasing unit shipments of microprocessors
at higher speed grades and higher average selling prices, as to which we
cannot give any assurance.
Memory Group net sales of $126 million in the first quarter of 1999 decreased by
five percent compared to the fourth quarter of 1998. Unit shipments declined by
three percent in the first quarter of 1999, which contributed to the majority of
the decrease in Memory Group sales. The remaining decrease in Memory Group
sales was due to further deterioration in the average selling price of EPROM
devices as market demand continues to shift away from EPROM devices to Flash
memory devices. As a result of this ongoing trend, we expect future EPROM sales
to decline.
Communications Group net sales of $64 million in the first quarter of 1999 were
flat compared to the fourth quarter of 1998. Overall, a slight decrease in
product unit shipments was offset by an increase in the average selling price in
the first quarter of 1999 compared to the fourth quarter of 1998.
Vantis net sales of $47 million in the first quarter of 1999 were flat compared
to the fourth quarter of 1998. Unit shipments of simple PLD (SPLD) products
declined five percent and unit shipments of complex PLD (CPLD) products improved
five percent compared to the fourth quarter of 1998, which reflected the general
shift from SPLD products to CPLD products.
Net Sales Comparison of Quarters Ended March 28, 1999 and March 29, 1998
Net sales of $632 million in the first quarter of 1999 increased by 17 percent
compared to the first quarter of 1998, which was primarily due to sales growth
of our AMD-K6 family of microprocessors.
CPG net sales of $395 million in the first quarter of 1999 increased by 72
percent compared to the same quarter in the previous year as sales of our AMD-K6
family of microprocessors doubled during this period. Growth in our AMD-K6
family of microprocessors was primarily driven by a 180 percent increase in unit
shipments which resulted from our development of a stronger customer base and
more competitive products. Severe price competition in the first quarter of
1999 hampered sales growth as the average selling price of our AMD-K6 family of
microprocessors declined by 27 percent from the same period in 1998. CPG sales
growth during the remainder of 1999 is dependent on increased unit shipments of
microprocessors at higher speed grades and higher average selling prices, as to
which we cannot give any assurance.
Memory Group net sales of $126 million in the first quarter of 1999 decreased by
24 percent compared to the first quarter of 1998. The highly competitive nature
of the Flash memory device market caused the average selling price of Flash
memory devices to decrease significantly between the two quarters, which
resulted in a decrease in Flash memory device sales. In addition, the average
selling price of EPROM devices has deteriorated as market demand continues to
shift away from EPROM devices to Flash memory devices. As a result of this
ongoing trend, we expect future EPROM sales to decline. These decreases were
slightly offset by a 10 percent increase in unit shipments in Flash memory
devices.
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Communications Group net sales of $64 million in the first quarter of 1999
decreased by 27 percent compared to the first quarter of 1998. This decrease was
a result of depressed levels of unit shipments of telecommunication products
compared to the first quarter of 1998 primarily due to the economic downturn in
Asia.
Vantis net sales of $47 million in the first quarter of 1999 decreased by
16 percent compared to the first quarter of 1998. This decrease was primarily
due to the general shift from SPLD products to higher performing CPLD products,
and included a decrease in both units and average selling prices of SPLD
product.
Comparison of Expenses, Gross Margin Percentage and Interest
The following is a summary of expenses, gross margin percentage and interest
income and other, net for the periods presented below:
Quarter Ended
-------------------------------------------
(Millions except for gross March 28, December 27, March 29,
margin percentage) 1999 1998 1998
------------- ------------- -------------
Cost of sales $ 450 $ 482 $ 424
Gross margin percentage 29% 39% 22%
Research and development 160 156 128
Marketing, general and
administrative 127 120 88
Restructuring and other
special charges 15 - -
Litigation settlement - - 12
Interest income and other, net 11 10 6
Interest expense 21 15 12
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly due to the state-of-the-art
production facilities required for microprocessors. As a result, gross margin
is significantly affected by fluctuations in product sales. Gross margin
percentage growth is dependent on increased sales from microprocessor and other
products as fixed costs continue to rise due to additional capital investments
made as we continue to expand production capacity.
Gross margin percentage of 29 percent in the first quarter of 1999 decreased
from 39 percent in the fourth quarter of 1998. The decrease in gross margin
percentage reflected lower levels of sales on higher fixed costs. Fixed costs
will continue to increase as we facilitize Fab 25, our IC manufacturing facility
in Austin, Texas, and as we introduce equipment for 0.18-micron process
technology capacity in Fab 25. Accordingly, absent significant increases in
sales, particularly with respect to microprocessors, we will continue to
experience pressure on our gross margin percentage. Gross margin percentage of
29 percent in the first quarter of 1999 increased from 22 percent in the same
quarter in 1998. This increase was primarily due to higher levels of sales,
particularly in microprocessors.
Research and development expenses of $160 million in the first quarter of 1999
increased 3 percent compared to the fourth quarter of 1998 and 25 percent
compared to the first quarter of
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1998. Increased costs related to the facilitization of Dresden Fab 30, AMD-
K7(TM) microprocessor research and development activities and the 1998 alliance
with Motorola for the development of Flash memory and logic process technology
were partially offset by the commencement in the first quarter of 1999 of the
recognition of deferred credits on foreign capital grants and interest
subsidies, which related to the costs of Dresden Fab 30. These credits of
approximately $13 million per quarter will continue to be offset against
Dresden Fab 30 expenses in future quarters until June 2007. Beginning no
earlier than the first quarter of 2000, we expect Dresden Fab 30 to begin
producing units for sale. At that time, a significant portion of Dresden Fab
30 expenses, including the deferred credits referred to above, will shift from
research and development expense to cost of sales.
Marketing, general and administrative expenses of $127 million in the first
quarter of 1999 increased 6 percent compared to the fourth quarter of 1998 and
44 percent compared to the first quarter of 1998. The increase from the fourth
quarter of 1998 was primarily due to increased depreciation expense and costs
associated with the new order management and accounts receivable systems. The
increase from the first quarter of 1999 was due to significantly higher
marketing and promotional activities, along with increased depreciation expense
and costs associated with the installation of new order management and
accounts receivable systems.
In the first quarter of the current fiscal year we initiated a review of our
cost structure. Based upon this review, in the first quarter of fiscal year
1999, we recorded restructuring and other special charges of $15 million as a
result of certain of our actions to better align our cost structure with
expected revenue growth rates. The restructuring activities and other special
charges primarily relate to: 1) the elimination of job responsibilities in the
Information Technology department and the write-off of discontinued system
projects; 2) the closure of a submicron development laboratory facility and
related asset write-offs; and 3) the write-off of equipment utilized in the
discontinued 0.35 micron wafer fabrication process. During the second quarter
of the current fiscal year, we expect to discharge our accrual balance of $779
thousand relating to the severance costs for the termination of 50 employees.
We will continue to evaluate our cost structure and expect to incur significant
additional restructuring and other special charges during the second and third
quarters of the fiscal year.
A litigation settlement of approximately $12 million was recorded in the first
quarter of 1998 for the settlement of a class action securities lawsuit against
AMD and certain current and former officers and directors. We paid the
settlement during the third quarter of 1998.
Interest income and other, net of $11 million in the first quarter of 1999
increased $1 million compared to the fourth quarter of 1998. This increase was
due to a $4 million gain realized in the first quarter of 1999 on the sale of
our investment in COM 21. This gain was partially offset by a decrease in
interest income from lower cash balances. Interest income and other, net
increased $5 million compared to the same quarter in the previous year. This
increase was primarily due to the $4 million gain referred to above. In
addition, interest income increased based on higher cash balances.
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Interest expense of $21 million in the first quarter of 1999 increased $6
million compared to the fourth quarter of 1998. This increase was primarily due
to interest that was expensed during the first quarter of 1999 which was
previously capitalized. Interest expense increased $8 million compared to the
same quarter in the previous year. This increase was primarily related to the
$517.5 million of Convertible Subordinated Notes sold in May 1998 (the
Convertible Subordinated Notes).
Income Tax
We recorded income tax benefits of $5 million in the first quarter of 1999 and
$47 million in the first quarter of 1998. Excluding the restructuring and other
special charges, the effective tax benefit rate was zero percent for the first
quarter of 1999 and 40 percent for the first quarter of 1998. The tax benefit
recorded in the first quarter of 1999 was attributable solely to the benefit
resulting from the restructuring and other special charges. The zero tax rate
in the first quarter of 1999 was attributable to the tax benefits of foreign
operations and tax credits offsetting computed tax on projected full year
income. Realization of our net deferred tax assets, $179 million at March 28,
1999, is dependent on future taxable income. While we believe 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 as a percent of net sales were 58 percent in the first
quarter of 1999, 60 percent in the fourth quarter of 1998 and 55 percent in the
first quarter of 1998. During the first quarter of 1999, approximately 10
percent of our net sales were denominated in foreign currencies. We do not have
sales denominated in local currencies in those countries which have highly
inflationary economies (as defined by generally accepted accounting principles).
The impact on our operating results from changes in foreign currency rates
individually and in the aggregate has not been material.
Comparison of Segment Income (Loss)
For a comparison of segment net sales, refer to the previous discussions on net
sales by product group.
The following is a summary of operating income (loss) by segment for the periods
presented below:
Quarter Ended
-------------------------------------------
March 28, December 27, March 29,
(Millions) 1999 1998 1998
------------- ------------- -------------
AMD segment $ (127) $ 26 $ (111)
Vantis segment 6 4 12
------------- ------------- -------------
Total $ (121) $ 30 $ (99)
============= ============= =============
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The AMD segment sustained an operating loss in the first quarter of 1999
compared to operating income in the fourth quarter of 1998 primarily due to a
significant decrease in net sales and the incurring of the restructuring and
other special charges. In addition, increases in marketing, general and
administrative expenses and research and development expenses accounted for a
small portion of the operating loss. The AMD segment's operating loss increased
in the first quarter of 1999 compared to the same quarter in 1998 due to
increased costs associated with the new order management and accounts receivable
systems, facilitization of Fab 25 and Dresden Fab 30, research and development
on the AMD-K7 microprocessor, the alliance with Motorola and the restructuring
and other special charges. This increase in expense was partially offset by
higher net sales.
The Vantis segment's operating income increased in the first quarter of 1999
compared to the fourth quarter of 1998 despite flat sales due to decreased cost
of sales and research and development expenses. Cost of sales were lower as a
result of less manufacturing activity for SPLDs which was only partially offset
by higher manufacturing activity for CPLDs. Research and development expenses
decreased due to the use of internal software engineers at lower costs for
development of software fitters. The Vantis segment's operating income
decreased in the first quarter of 1999 compared to the first quarter of 1998
primarily due to lower net sales in the Vantis segment along with higher
marketing, general and administrative expenses. These expenses resulted from
additional sales and marketing employees and costs incurred for implementing the
new order management and accounts receivable systems. These increases were
partially offset by lower cost of sales as a result of lower per unit wafer
fabrication expenses.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Cash and cash equivalents in the first quarter of 1999 decreased by $198 million
from the fourth quarter of 1998 compared to a $48 million decrease from the
first quarter of 1998. The main uses of cash during the first quarter of 1999
consisted primarily of capital expenditures of $200 million and payment of $31
million on our $250 million four-year secured term loan. Positive cash sources
included $22 million generated through operations and $10 million from the
issuance of stock to employees.
Operating activities provided cash of $22 million in the first quarter of 1999
as net operating cash flows increased $40 million from the same quarter of 1998.
This increase was the result of increases in both net non-cash adjustments to
net loss of $70 million and net changes in operating assets and liabilities of
$35 million, which were partially offset by the increase in net loss of $66
million. The increase in net non-cash adjustments to net loss primarily
consisted of a smaller increase in deferred income taxes in the first quarter of
1999 compared to the first quarter of 1998, an increase in depreciation and
amortization and restructuring charges incurred in the first quarter of 1999.
The increase in net changes in operating assets and liabilities consisted of an
increase in payables and accrued liabilities partially offset by a smaller
decrease in receivables, inventories, prepaid expenses and other assets in the
first quarter of 1999 compared to the first quarter of 1998.
Investing activities consumed $182 million in cash during the first quarter of
1999 compared to $68 million in the first quarter of 1998. The increase in net
investing cash uses of $115 million
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was primarily due to a decrease in net proceeds from the sale of short-term
investments of $96 million reflecting larger purchases of short-term
investments in the first quarter of 1999 compared to the first quarter of
1998. In addition, capital expenditures increased $16 million during the same
periods.
Our financing activities consumed cash of $27 million in the first quarter of
1999 and provided cash of $40 million in the first quarter of 1998. The change
in financing activities was due to a decrease in borrowings and an increase in
payments on debt and capital lease obligations. Borrowings in the first quarter
of 1998 included $49 million to partially finance the construction and
facilitization of Dresden Fab 30. Payments in the first quarter of 1999
included $31 million on our four-year secured term loan under the 1996
syndicated bank loan agreement, which also provides for a currently unused $150
million revolving line of credit (the Credit Agreement).
On April 21, 1999, we entered into an agreement with Lattice Semiconductor
Corporation to sell the stock of our Vantis subsidiary for $500 million in cash.
We anticipate that the Vantis subsidiary will have approximately $60 million of
cash and cash equivalents at the closing.
We plan to continue to make significant capital investments in 1999. These
investments include those relating to the continued facilitization of Dresden
Fab 30 and Fab 25.
AMD Saxony Manufacturing GmbH (AMD Saxony), an indirect wholly owned German
subsidiary of AMD, has constructed and is installing equipment in Dresden Fab
30, a 900,000-square-foot submicron integrated circuit manufacturing and design
facility located in Dresden, in the State of Saxony, Germany. AMD, the Federal
Republic of Germany, the State of Saxony and a consortium of banks are
supporting the project. We currently estimate construction and facilitization
costs of Dresden Fab 30 to be $1.9 billion. In March 1997, AMD Saxony entered
into a loan agreement and other related agreements (the Dresden Loan Agreements)
with a consortium of banks led by Dresdner Bank AG. The Dresden Loan Agreements
provide for the funding of the construction and facilitization of Dresden Fab
30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of Germany
and the State of Saxony.
The Dresden Loan Agreements, which were amended in February 1998 to reflect
planned upgrades in wafer production technology as well as the decline in the
deutsche mark relative to the U.S. dollar, require that we partially fund
Dresden Fab 30 project costs in the form of subordinated loans to, or equity
investments in, AMD Saxony. In accordance with the terms of the Dresden Loan
Agreements, we have invested $264 million to date in the form of subordinated
loans and equity in AMD Saxony. We are required to make additional subordinated
loans to, or equity investments in, AMD Saxony totaling $170 million in 1999,
$70 million of which must be funded through the sale of at least $200 million of
our stock by June 30, 1999. We are presently negotiating with Dresdner Bank to
amend the provision requiring us to sell $200 million of our stock prior to June
30, 1999. We cannot give any assurance that the requisite external financing
will be available on favorable terms, if at all.
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<PAGE>
Additionally, the consortium of banks referred to above has made available $921
million in loans (denominated in deutsche marks) to AMD Saxony to help fund
Dresden Fab 30 project costs. AMD Saxony had $279 million of such loans
outstanding as of March 28, 1999.
Finally, the Federal Republic of Germany and the State of Saxony are supporting
the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in
the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount of
$921 million;
. capital investment grants and allowances totaling $289 million; and
. interest subsidies totaling $168 million.
Of these amounts (which are all denominated in deutsche marks), AMD Saxony has
received $275 million in capital investment grants and $8 million in interest
subsidies as of March 28, 1999. The grants and subsidies are subject to
conditions, including meeting specified levels of employment in December 2001
and maintaining those levels until June 2007. Noncompliance with the conditions
of the grants and subsidies could result in the forfeiture of all or a portion
of the future amounts to be received as well as the repayment of all or a
portion of amounts received to date. As of March 28, 1999, we were in
compliance with all of the conditions of the grants and subsidies.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed,
which will be repaid to AMD as AMD Saxony receives the grants or
subsidies from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under
the subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $121 million (denominated in deutsche
marks) until Dresden Fab 30 has been completed;
. fund certain contingent obligations including obligations to fund project
cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30,
up to approximately $81 million (denominated in deutsche marks) if AMD
Saxony does not meet its fixed charge coverage ratio covenant.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth above are subject to change based
on applicable conversion rates. We used the exchange rate at the end of the
first quarter of 1999, which was approximately 1.79 deutsche marks to 1 U.S.
dollar, to value our obligations denominated in deutsche marks.
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Saxony Holding GmbH (AMD Holding), the parent
company of AMD Saxony and a wholly owned subsidiary of AMD, to comply with
obligations in connection with the Dresden Loan Agreements, including:
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<PAGE>
. material variances from the approved schedule and budget;
. our failure to fund equity contributions or shareholder loans or otherwise
comply with our obligations relating to the Dresden Loan Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings or proceedings in
bankruptcy of insolvency with respect to us, AMD Saxony or AMD Holding; and
. the occurrence of default under the indenture dated August 1, 1996
between AMD and the United States Trust Company of New York (the
Indenture) pursuant to which our $400,000,000 aggregate principal amount
of 11% Senior Secured Notes due 2003 (the Senior Secured Notes) were
issued or the Credit Agreement.
Generally, any such default which either (1) results from our non-compliance
with the Dresden Loan Agreements and is not cured by AMD or (2) results in
recourse to AMD of more than $10 million and is not cured by AMD, would result
in a cross-default under the Dresden Loan Agreements, the Indenture and the
Credit Agreement. Under certain circumstances, cross-defaults result under the
Convertible Subordinated Notes, the Indenture and the Dresden Loan Agreements.
In the event we are unable to meet our obligation to make loans to, or equity
investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD
Saxony will be unable to complete Dresden Fab 30 and we will be in default under
the Dresden Loan Agreements, the Indenture and the Credit Agreement, which would
permit acceleration of certain indebtedness, which would have a material adverse
effect on our business. We cannot give any assurance that we will be able to
obtain the funds necessary to fulfill these obligations. Any such failure would
have a material adverse effect on our business.
We are required to repay the $250 million four-year secured term loan in eight
equal quarterly installments of approximately $31 million which commenced in
October 1998. At the end of the first quarter of 1999, the outstanding balance
of the four-year secured term loan was $188 million. As of March 28, 1999, we
also had available unsecured uncommitted bank lines of credit in the amount of
$69 million, of which $6 million was outstanding.
In February and June 1998, and also in March 1999, certain of the covenants
under the Credit Agreement, including those relating to the modified quick
ratio, minimum tangible net worth, the leverage ratio, the fixed charge coverage
ratio, minimum cash and cash equivalents balance and profitability were amended.
As of March 28, 1999, we were in compliance with all covenants under the Credit
Agreement.
FASL, a joint venture formed by AMD and Fujitsu Limited in 1993, is continuing
the facilitization of its second Flash memory device wafer fabrication facility,
FASL II, in Aizu-Wakamatsu, Japan. We expect the facility, including equipment,
to cost approximately $1 billion when fully equipped. As of March 28, 1999,
approximately $368 million of this cost had been funded. Capital expenditures
for FASL II construction to date have been funded by cash generated from FASL
operations and local borrowings by FASL. We currently anticipate that during
1999 FASL capital expenditures will continue to be funded by cash generated from
FASL operations and local borrowings by FASL. However, to the extent that FASL
is unable to secure
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<PAGE>
the necessary funds for FASL II, we may be required to contribute cash or
guarantee third-party loans in proportion to our 49.992 percent interest in
FASL. As of March 28, 1999, we had loan guarantees of $59 million outstanding
with respect to these loans. The planned FASL II costs are denominated in yen
and are, therefore, subject to change due to foreign exchange rate
fluctuations.
We believe that cash flows from operations and current cash balances, together
with external financing activities, will be sufficient to fund operations and
capital investments through 1999.
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
Microprocessor Products
Investment in and Dependence on K86(TM) AMD Microprocessor Products. Our
microprocessor product revenues have significantly impacted, and will continue
in 1999 and 2000 to significantly impact, our revenues, profit margins and
operating results. We plan to continue to make significant capital expenditures
to support our microprocessor products both in the near and long term. These
capital expenditures will be a substantial drain on our cash flow and cash
balances.
Our ability to increase microprocessor product revenues, and benefit fully from
the substantial financial investments and commitments we have made and continue
to make related to microprocessors, depends upon the success of the AMD-K6-2 and
AMD-K6-III microprocessors with 3DNow!(TM) technology (the AMD-K6 family of
microprocessors or the AMD-K6 microprocessors), the AMD-K7 microprocessor, which
is our seventh-generation Microsoft Windows compatible microprocessor and future
generations of K86 microprocessors. The microprocessor market is characterized
by short product life cycles and migration to ever-higher performance
microprocessors. To compete successfully against Intel in this market, we must
transition to new process technologies at a faster pace than before and offer
higher performance microprocessors in significantly greater volumes. We must
achieve acceptable yields while producing microprocessors at higher speeds. In
the past, we have experienced significant difficulty in achieving microprocessor
yield and volume plans. Such difficulties have in the past, and may in the
future, adversely affect our results of operations and liquidity. If we fail to
offer higher performance microprocessors in significant volume on a timely basis
in the future, our business could be materially and adversely affected. We may
not achieve the production ramp necessary to meet our customers' volume
requirements for higher performance AMD-K6 and AMD-K7 microprocessors. It is
also possible that we may not increase our microprocessor revenues enough to
achieve sustained profitability in the AMD segment of our business.
To sell the volume of AMD-K6 and AMD-K7 microprocessors we currently plan to
make in 1999 and 2000, we must increase sales to existing customers and develop
new customers. If we lose any current top tier Original Equipment Manufacturer
(OEM) customer, or if we fail to attract additional customers through direct
sales and through our distributors, we may not be able to sell the volume of
units planned. This result could have a material adverse effect on our
business.
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Our production and sales plans for the AMD-K6 and AMD-K7 microprocessors are
subject to other risks and uncertainties, including:
. the timing of introduction and market acceptance of the AMD-K7
microprocessor, including the timely availability of motherboards and
chipsets designed for this processor;
. whether we can successfully fabricate higher performance AMD-K6 and AMD-K7
microprocessors in planned volume mixes;
. the effects of Intel's new product introductions, marketing strategies and
pricing;
. the continued development of worldwide market acceptance for the AMD-K6
microprocessors and systems based on them;
. whether we will have the financial and other resources necessary to
continue to invest in the microprocessor products, including leading-edge
wafer fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective;
. adverse market conditions in the personal computer (PC) market and
consequent diminished demand for our microprocessors; and
. unexpected interruptions in our manufacturing operations.
Because Intel dominates the industry and has brand strength, we price the AMD-K6
microprocessors below the published price of Intel processors offering
comparable performance. Thus, Intel's decisions on processor prices can impact
and have impacted the average selling prices of the AMD-K6 microprocessors, and
consequently can impact and have impacted our margins. Our business could be
materially and adversely affected if we fail to:
. achieve the product performance improvements necessary to meet customer
needs;
. continue to achieve market acceptance of our AMD-K6 microprocessors and
increase market share;
. substantially increase revenues of the AMD-K6 family of microprocessors;
and
. successfully introduce and ramp production of the AMD-K7 microprocessor.
See also discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for a long time. Because of its dominant market position, Intel sets and
controls x86 microprocessor and PC system standards and, thus, dictates the type
of product the market requires of Intel's competitors. In addition, Intel can
vary prices on its microprocessors and other products at will and thereby affect
the margins and profitability of its competitors due to its financial strength
and dominant position. Intel exerts substantial influence over PC manufacturers
through the Intel Inside advertising rebate program. Intel invests hundreds of
millions of dollars in, and as a result exerts influence over, many other
technology companies. We expect Intel to continue to invest heavily in research
and development, new manufacturing facilities and other technology companies,
and to remain dominant:
. through the Intel Inside program;
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. 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. As a result, it is difficult for PC manufacturers to
innovate and differentiate their product offerings. We do not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, we may be materially and adversely affected by its:
. product introduction schedule;
. product pricing strategy;
. control over industry standards, PC manufacturers and other PC industry
participants; and
. customer brand loyalty.
As Intel has expanded its dominance over the PC system platform, many PC
manufacturers have reduced their system development expenditures and have
purchased microprocessors in conjunction with chipsets or in assembled
motherboards. PC OEMs have become increasingly dependent on Intel, less
innovative on their own and more of a distribution channel for Intel technology.
In marketing our microprocessors to these OEMs and dealers, we depend on
companies other than Intel for the design and manufacture of core-logic
chipsets, motherboards, basic input/output system (BIOS) software and other
components. In recent years, these third-party designers and manufacturers have
lost significant market share to Intel. In addition, these companies produce
chipsets, motherboards, BIOS software and other components to support each new
generation of Intel's microprocessors only if Intel makes information about its
products available to them in time to address market opportunities. Delay in the
availability of such information makes, and will continue to make, it
increasingly difficult for these third parties to retain or regain market share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form closer relationships with third-party designers and
manufacturers of core-logic chipsets, motherboards, BIOS software and other
components. Similarly, we intend to expand our chipset and system design
capabilities, and to offer OEMs licensed system designs incorporating our
microprocessors and companion products. We cannot be certain, however, that our
efforts will be successful. We expect that, as Intel introduces future
generations of microprocessors, chipsets and motherboards, the design of
chipsets, memory and other semiconductor devices, and higher level board
products which support Intel microprocessors, will become increasingly dependent
on the Intel microprocessor design and may become incompatible with non-Intel
processor-based PC systems.
Intel's Pentium(R) II, III and Celeron(TM) microprocessors are sold only in form
factors that are not physically or interface protocol compatible with "Socket 7"
motherboards currently used with AMD-K6 microprocessors. Thus, Intel no longer
supports the Socket 7 infrastructure as it has transitioned away from its
Pentium processors. Because the AMD-K6 microprocessors are designed to be Socket
7 compatible, and will not work with motherboards designed for Pentium II, III
and Celeron processors, we intend to continue to work with third-party designers
and manufacturers of motherboards, chipsets and other products to ensure the
continued availability
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of Socket 7 infrastructure support for the AMD-K6 microprocessors, including
support for enhancements and features we add to our microprocessors. Socket 7
infrastructure support for the AMD-K6 microprocessors may not endure over time
as Intel moves the market to its infrastructure choices. We do not currently
plan to develop microprocessors that are bus interface protocol compatible
with the Pentium II, Pentium III and Celeron processors because our patent
cross-license agreement with Intel does not extend to microprocessors that are
bus interface protocol compatible with Intel's sixth and subsequent generation
processors. Similarly, our ability to compete with Intel in the market for
seventh-generation and future generation microprocessors will depend on our:
. success in designing and developing the microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support Intel's microprocessors and our microprocessors, or
that alternative platforms are available which are competitive with those
used with Intel processors.
A failure for any reason of the designers and producers of motherboards,
chipsets and other system components to support our K86(TM) microprocessor
offerings would have a material adverse effect on our business.
Dependence on Microsoft and Logo License. Our ability to innovate beyond the x86
instruction set controlled by Intel depends on support from Microsoft in its
operating systems. If Microsoft does not provide support in its operating
systems for the x86 instructions that we innovate and design into our
processors, independent software providers may forego designing their software
applications to take advantage of our innovations. This would adversely affect
our ability to market our processors. In addition, we have entered into logo
license agreements with Microsoft that allow us to label our products as
"Designed for Microsoft Windows." We have also obtained appropriate
certifications from recognized testing organizations for our K86
microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our K86 microprocessors with the
Microsoft Windows logo. This could impair our ability to market the products and
could have a material adverse effect on our business.
Future Dependence on Planned AMD-K7 Microprocessor. We will need to successfully
develop and market in a timely manner our seventh-generation microprocessor, the
AMD-K7, in order to increase our microprocessor product revenues in 1999 and
beyond, and to benefit fully from the substantial financial investments and
commitments we have made and continue to make related to microprocessors. We
currently plan to introduce the AMD-K7 microprocessor by the end of the first
half of 1999. We cannot be certain that the introduction will occur on
schedule. Our 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 we are able to transition production in Fab 25 from
0.25 to 0.18-micron process technology and to ramp production in Dresden
Fab 30 on 0.18-micron copper interconnect process technology;
. the use and market acceptance of a non-Intel processor bus (adapted by us
from Digital Equipment Corporation's EV6 pin bus) in the design of the
AMD-K7, and the availability
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of chipset vendors who will develop, manufacture and sell chipsets with
the EV6 interface in volumes required by us;
. our ability to expand our chipset and system design capabilities;
. the availability to our customers of cost and performance competitive
Static Random Access Memories (SRAMs) (including Tag chips) if Intel
corners the market for SRAM production capacity through its relationship
with SRAM manufacturers;
. our ability to design and manufacture processor modules through
subcontractors; and
. the availability and acceptance of motherboards designed for the AMD-K7
microprocessor.
If we fail to introduce the AMD-K7 microprocessor in a timely manner or achieve
market acceptance, our business will be materially and adversely affected.
Fluctuations in PC Market. Since most of our microprocessor products are used in
PCs and related peripherals, our future growth is closely tied to the
performance of the PC industry. Industry-wide fluctuations in the PC
marketplace have in the past and may in the future materially and adversely
affect our business.
Financing Requirements
We plan to continue to make significant capital investments in 1999. These
investments include those relating to the continued facilitization of Dresden
Fab 30 and Fab 25.
In 1998, equipment was installed and production was initiated in FASL II. We
expect the facility, including equipment, to cost approximately $1 billion when
fully equipped. Capital expenditures for FASL II construction to date have been
funded by cash generated from FASL operations and borrowings by FASL. If FASL is
unable to secure the necessary funds for FASL II, we may be required to
contribute cash or guarantee third-party loans in proportion to our 49.992
percent interest in FASL.
In 1996, we entered into the Credit Agreement, which provided for a $150 million
three-year secured revolving line of credit, which is currently unused, and a
$250 million four-year secured term loan. Approximately $188 million of the
secured term loan was outstanding as of March 28, 1999. We are required to
repay the secured loan in eight equal quarterly installments of approximately
$31 million which commenced in October 1998.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into
the Dresden Loan Agreements with a consortium of banks led by Dresdner Bank AG.
The terms of the Dresden Loan Agreements required us to make subordinated loans
to AMD Saxony totaling $100 million in 1998. The Dresden Loan Agreements, which
were amended in February 1998 to reflect planned upgrades in wafer production
technology as well as the decline in the deutsche mark relative to the U.S.
dollar, require that we partially fund Dresden Fab 30 project costs in the form
of subordinated loans to, or equity investments in, AMD Saxony. In accordance
with the terms of the Dresden Loan Agreements, we have invested $264 million to
date in the form of subordinated loans and equity in AMD Saxony. We are required
to make additional subordinated loans to, or equity investments in, AMD Saxony
totaling $170 million in 1999, $70 million of which must be funded through the
sale of at least $200 million of our stock by June 30, 1999. We are presently
negotiating with Dresdner Bank to amend the provision requiring us
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to sell $200 million of our stock prior to June 30, 1999. We cannot give any
assurance that the requisite external financing will be available on favorable
terms, if at all.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. As of the end of the first quarter of 1999, the
exchange rate was approximately 1.79 deutsche marks to 1 U.S. dollar (which we
used to calculate our obligations denominated in deutsche marks).
If we are unable to meet our obligation to make loans to, or equity investments
in, AMD Saxony as required under the Dresden Loan Agreements, AMD Saxony will be
unable to complete Dresden Fab 30 and we will be in default under the Dresden
Loan Agreements, the Credit Agreement and the Indenture, which would permit
acceleration of indebtedness, which would have a material adverse effect on our
business. If we are unable to obtain the funds necessary to fulfill these
obligations, our business will be materially and adversely affected.
Demand for Our Products Affected by Asian and Other Domestic and International
Economic Conditions
The demand for our products has been weak due to the general downturn in the
worldwide semiconductor market and the current economic crisis in Asia. The
economic crisis in Asia may continue to adversely affect our business. A
further decline of the worldwide semiconductor market and economic condition in
Asia could decrease the demand for microprocessors and other ICs. A significant
decline in economic conditions in any significant geographic area, both
domestically and internationally, could decrease the overall demand for our
products.
Flash Memory Products
Increasing Competition and Price Decline. Competition in the market for Flash
memory devices continues to increase as existing manufacturers introduce new
products and industry-wide production capacity increases, and as Intel continues
to aggressively price its Flash memory products. We expect competition in the
marketplace for Flash memory devices to continue to increase. The selling prices
of Flash memory devices declined through the first quarter of 1999. It is
possible that we will be unable to maintain our market share in Flash memory
devices and that price declines may accelerate as the market develops and as
existing and potential new competitors introduce competitive products. A
continued decline in our Flash memory device business or continued declines in
the gross margin percentage in this product line could have a material adverse
effect on this product line.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. Our operations related to
microprocessors have been particularly affected by this situation. If we
underutilize our manufacturing facilities in the future, our revenues may
suffer. We are increasing our manufacturing capacity by making significant
capital investments in Fab 25 and Dresden Fab 30. In addition, the building
construction of FASL II, a second Flash memory device manufacturing facility, is
complete and equipment installation is in progress. We have also built a new
test and assembly facility in Suzhou, China. We are basing our strategy of
increasing our manufacturing capacity on industry projections for future growth.
If these industry projections are inaccurate and demand for our products does
not
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increase, we will likely underutilize our manufacturing facilities and our
business could be materially and adversely affected.
In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to generate sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the greater risk is that we will have surplus capacity.
Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these investments might not be fully
recovered if we fail to continue to gain market acceptance or if the market for
our Flash memory products should significantly deteriorate. Likewise, we are
making a substantial investment in Dresden Fab 30. The business plan for
Dresden Fab 30 calls for the successful development and installation of 0.18-
micron process technology and copper interconnect technology in order to
manufacture the AMD-K7 microprocessor in Dresden Fab 30. We have entered into a
strategic alliance with Motorola to co-develop the copper interconnect
technology required for the AMD-K7 and subsequent generations of
microprocessors. We cannot be certain that the strategic alliance will be
successful or that we will be able to develop or obtain the leading-edge process
technologies that will be required in Dresden Fab 30 to fabricate the AMD-K7
microprocessor successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been, and may in the future be, materially and
adversely affected by fluctuations in manufacturing yields. For example, our
results in the past have been negatively affected by disappointing AMD-K6
microprocessor yields. The manufacture of ICs is a complex process. Normal
manufacturing risks include errors and interruptions in the fabrication process
and defects in raw materials, as well as other risks, all of which can affect
yields. Additional manufacturing risks incurred in ramping up new fabrication
areas and/or new manufacturing processes include equipment performance and
process controls as well as other risks, all of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products is shipped in
volume, we could be materially adversely affected. It is also possible that we
may be unsuccessful in correcting any such compatibility problems that are
discovered or that corrections will be unacceptable to customers or made in an
untimely manner. In addition, the mere announcement of an incompatibility
problem relating to our products could have a material adverse effect on our
business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall, or a software fix which would cure such defect but
impede performance. We may also be subject to
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product returns which could impose substantial costs on us and have a material
and adverse effect our business.
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, a few foreign companies principally supply several types of the IC
packages purchased by us, as well as by the majority of other companies in the
semiconductor industry. Interruption of supply or increased demand in the
industry could cause shortages in various essential materials. We would have to
reduce our manufacturing operations if we were unable to procure certain of
these materials. This reduction in our manufacturing operations could have a
material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and final
testing of our products are performed at our manufacturing facilities in Penang,
Malaysia; Bangkok, Thailand; and Singapore; or by subcontractors in Asia. We
have also constructed an additional assembly and test facility in Suzhou, China.
We also depend on foreign foundry suppliers and joint ventures for the
manufacture of a portion of our finished silicon wafers. Foreign manufacturing
and construction of foreign facilities entail political and economic risks,
including political instability, expropriation, currency controls and
fluctuations, changes in freight and interest rates, and loss or modification of
exemptions for taxes and tariffs. For example, if we were unable to assemble and
test our products abroad, or if air transportation between the United States and
our overseas facilities were disrupted, there could be a material adverse effect
on our business.
Impact of Year 2000
General. The Year 2000 issue is the result of computer software and firmware
being written using two digits rather than four to define the applicable year.
If our computer software and firmware with date-sensitive functions are not Year
2000 capable, they may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions in
manufacturing operations or in the ability to process transactions, send
invoices or engage in other normal business activities.
Our multi-step Year 2000 readiness plan includes development of corporate
awareness, assessment of internal systems, project planning, project
implementation (including remediation, upgrading and replacement), validation
testing and contingency planning for both information technology (IT) and non-IT
internal systems.
The Plan. Our plan covers four areas that are critical to our business
operations:
. Information Technology, which includes application software, infrastructure
and network engineering and telecommunications;
. Manufacturing, which includes wafer fabrication facilities, assembly and
test facilities and third-party foundries;
. Products and product design, which includes our commercial products and the
hardware and software tools used specifically for product design; and
. Organizational support, which includes non-fabrication facilities,
security, corporate supply management, shipping, quality and
environmental health and safety (EHS) departments.
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. Information Technology. We will be required to modify or replace significant
portions of our application software so that our systems will function properly
with respect to dates in the year 2000 and thereafter. Application software
consists of business software required for our corporate business systems,
including our accounts payable and receivable, payroll, order management,
general ledger and shipping applications. In December 1998, we installed new
Year 2000 capable order management and accounts receivable systems. In
addition, we are utilizing internal resources and have contracted with a
software reengineering company which specializes in Year 2000 remediation to
remediate noncompliant code in our other application systems. The reengineering
company has completed remediation of approximately 85 percent of the remaining
application systems. Our goal is to complete remediation by July 31, 1999. It
also our goal to complete testing and put all application systems into
production by September 30, 1999. If required modifications to existing
software are not made, or are not completed in a timely manner, the Year 2000
issue could have a material impact on our business.
IT infrastructure consists of hardware and software other than application
software that supports our mainframe and distributed computer systems, including
PCs, operating systems and system utilities. We have tested Year 2000 capable
versions of all our infrastructure software and are in the process of
transitioning such software into productive use. Approximately 95 percent of our
Year 2000 capable infrastructure hardware and software was installed and in
production as of March 28, 1999. Our goal is for the remaining five percent to
be completed by September 30, 1999. If we are unable to successfully transition
our infrastructure software or to install and put our infrastructure hardware
and software into production as anticipated, our business could be materially
and adversely affected.
Network engineering and telecommunications consists of components in our data
and voice communication networks. Approximately 95 percent of the data
components and the voice components in our communication networks were Year 2000
capable as of March 28, 1999. Our goal is for the remaining data and network
components to be Year 2000 capable by September 30, 1999. However, we do not
currently have all of the information necessary to determine if certain of our
international network service providers will be Year 2000 capable in a timely
manner. If they are not Year 2000 capable, our business could be materially and
adversely affected.
. Manufacturing. We are dedicating substantial resources to Year 2000 issues
with respect to our wafer fabrication facilities worldwide to ensure continued
operation of all critical wafer fabrication systems in the year 2000 and
thereafter. We have retained an outside firm to provide Year 2000 program
management and implementation assistance in connection with problem assessment,
remediation and compliance testing. Approximately 70 percent of the critical
wafer fabrication equipment was made Year 2000 capable as of March 28, 1999. It
is our goal that 85 percent of the critical wafer fabrication equipment will be
Year 2000 capable by June 30, 1999, 95 percent of the critical wafer
fabrication equipment will be Year 2000 capable by September 30, 1999 and the
remaining critical equipment will be Year 2000 capable by year-end 1999.
Fabrication equipment software testing and installation is ongoing and will
continue through the fourth quarter of 1999. However, some vendors have
indicated that Year 2000 capable upgrades will not be available until mid to
late 1999. If these vendors do not provide Year 2000 capable upgrades in time
for us to install the products and to do adequate testing, or if the products do
not
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adequately address the Year 2000 problem, our business could be materially
and adversely affected.
Our assembly and test facilities are located in Malaysia, Thailand, China and
Singapore. The remediation and replacement process for noncompliant systems and
equipment in these facilities was approximately 90 percent complete as of March
28, 1999. Our goal is to complete this remediation by June 30, 1999.
We believe that all critical Year 2000-related manufacturing areas, including
our wafer fabrication facilities and assembly and test facilities, will be Year
2000 capable by year-end 1999. We have begun contingency planning for critical
areas of manufacturing and will continue developing and refining these plans
throughout 1999.
However, we cannot give any assurance that we will be successful in our efforts
to resolve any Year 2000 issues and to continue operations in our wafer
fabrication facilities in the year 2000. Our failure to successfully resolve
such issues could result in a shutdown of some or all of our operations, which
would have a material adverse effect on our business.
. Products and Product Design. We have reviewed the status of our current
products and have not identified any critical products with Year 2000 problems.
Our goal is that the hardware and software we use for product design will be
Year 2000 capable by June 30, 1999. Testing of these systems is ongoing and
will continue through the end of the year. If we fail to make the hardware and
software we use for product design Year 2000 capable by year-end 1999, our
business could be materially and adversely affected.
. Organizational Support. Since organizational support consists of several
functional divisions that provide administrative support to us as a whole, and
this support overlaps in many areas, we are unable to quantify the overall
progress of this group. However, some divisions have commenced significant
projects aimed at Year 2000 readiness. For example, the facilities department
is in the process of upgrading the building management system at our corporate
marketing, general and administrative facility located in Sunnyvale, California.
Our goal is to install all software upgrades required by facilities for Year
2000 readiness by June 30, 1999. EHS provides another example. Upgrades are
being scheduled and performed on gas detection systems, acid neutralization
systems and groundwater cleanup controls. EHS' remaining Year 2000 readiness
activities were approximately 95 percent complete as of March 28, 1999 and our
goal is to be 100 percent complete by June 30, 1999. Similarly, our security
department has completed our plan to ensure Year 2000 compliance of the fire,
intrusion and industrial process alarms in our China, Thailand and Germany
sites. Our goal is to have our domestic alarm systems upgraded and tested for
Year 2000 compliance by September 30, 1999, and to have all remaining alarm
system upgrades and testing complete by October 31, 1999. However, if we are
unable to make our organizational support systems Year 2000 capable before year-
end 1999, our business could be materially and adversely affected.
Third-Party Suppliers and Customers. We have initiated communication with our
significant suppliers and customers to determine the extent to which our
operations are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. Suppliers of hardware, software or other products that might
contain embedded processors were asked to provide information
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regarding the Year 2000 compliance status of their products. We contacted
additional suppliers in the first quarter of 1999 and will continue to seek
information from non-responsive suppliers in the second quarter of 1999. In
addition, in order to protect against the acquisition of additional non-
compliant products, we now require suppliers to warrant that products sold or
licensed to us are Year 2000 capable. We are currently assessing our
customers' Year 2000 readiness plans. In the event that any of our significant
customers and suppliers do not successfully and timely achieve Year 2000
compliance, our business or operations could be adversely affected. We cannot
give any assurance that the systems of other companies on which our systems
rely will be converted in a timely manner and will not have an adverse effect
on our operations. We are currently assessing the extent to which our
customers' exposure to contingencies related to the Year 2000 will affect the
products we sell; however, we do not expect these to have a material impact on
our operations.
Overall our goal is to resolve our critical Year 2000 issues by June 30, 1999,
which is prior to any anticipated impact on our operating systems. We expect
some testing and verification activities, as well as some upgrading of the wafer
fabrication equipment, to continue through the end of the year. We also expect
some aspects of the Year 2000 plan to continue beyond January 1, 2000 with
respect to resolution of non-critical issues. However, these dates are
contingent upon the timeliness and accuracy of software and hardware upgrades
from vendors, adequacy and quality of resources available to work on completion
of the project and any other unforeseen factors.
Costs. The total expense of the Year 2000 plan is currently estimated to be
approximately $35 million, although actual expenditures may differ. Actual
costs incurred through the end of the first quarter of 1999 were approximately
$13 million, the majority of which was expensed. The expenses of the Year 2000
project are being funded through operating cash flows.
Estimates. The costs of the Year 2000 plan and the dates on which we believe we
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. We cannot give any assurance that these
estimates will be achieved. Consequently, actual results could differ
materially from those anticipated.
Contingency Planning. We have not yet fully developed a comprehensive
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. Development of
contingency plans is in progress and will develop in detail and expand during
the remainder of 1999. We cannot give any assurance that we will be able to
develop a contingency plan that will adequately address all issues that may
arise in the year 2000. Our failure to develop and implement, if necessary, an
appropriate contingency plan could have a material adverse impact on our
operations. Finally, we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
Other Risk Factors
Debt Restrictions. The Credit Agreement and the Indenture contain significant
covenants that limit our ability and our subsidiaries' ability to engage in
various transactions and require
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satisfaction of specified financial performance criteria. In addition, the
occurrence of certain events, including, among other things, failure to comply
with the foregoing covenants, material inaccuracies of representations and
warranties, certain defaults under or acceleration of other indebtedness and
events of bankruptcy or insolvency would, in certain cases after notice and
grace periods, constitute events of default permitting acceleration of
indebtedness. The limitations imposed by the Credit Agreement and the
Indenture are substantial, and failure to comply with such limitations could
have a material adverse effect on our business.
In addition, the Dresden Loan Agreements substantially prohibit AMD Saxony from
transferring assets to us, which will prevent us from using current or future
assets of AMD Saxony other than to satisfy obligations of AMD Saxony.
Programmable Logic Software Risks. Historically, our programmable logic
subsidiary, Vantis, has depended primarily on third parties to develop and
maintain software that allows electrical circuit designs to be implemented using
Vantis' CPLD products. Vantis initiated efforts to manage and control the
development and maintenance of software for Vantis' products internally. As a
result, in January 1999, Vantis shipped its first internally-developed software
for its CPLD products. In addition, Vantis acquired rights to MINC, Inc.'s
(MINC) software and hired selected MINC development personnel to support
previous-generation software and assist with development of new software.
Accordingly, Vantis no longer required software development from MINC, which
subsequently ceased business operation. Vantis' continued efforts to develop
and maintain internally the software needed to sell and support its products may
or may not be successful. If Vantis is unable to successfully develop and
maintain software internally in a cost-effective manner, Vantis' business could
be materially and adversely affected.
If the third-party software were subject to errors or "bugs," or if the
internally developed software is subject to delays in development, errors, or
"bugs" or is not accepted by the market, then Vantis would need to find another
alternative for such services. It is possible that Vantis could be unable to
locate additional software development tool vendors with the available capacity
and technology necessary for the development and maintenance of software fitter
tools. Even if an additional vendor or vendors were identified, Vantis may
still be unable to enter into contracts with those vendors on terms acceptable
to Vantis. Vantis' inability to find an acceptable alternative vendor for
software services in a timely manner could materially and adversely affect
Vantis' business.
Vantis' Field Programmable Gate Array (FPGA) Products. Vantis continues to
develop FPGA products and has begun to develop FPGA software internally. The
market for FPGA products is highly competitive. The design, marketing and sale
of FPGA products are subject to many risks, including risks of delays in product
development. Vantis does not anticipate significant sales from FPGA products.
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition.
Currently accepted industry standards may change. Our success depends
substantially on our ability, on a cost-effective and timely basis, to continue
to enhance our existing products and to develop and introduce new products that
take advantage of
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technological advances and adhere to evolving industry standards. An
unexpected change in one or more of the technologies related to our products,
in market demand for products based on a particular technology or of accepted
industry standards could materially and adversely affect our business. We may
or may not be able to develop new products in a timely and satisfactory manner
to address new industry standards and technological changes, or to respond to
new product announcements by others. In addition, new products may or may not
achieve market acceptance.
Competition. The IC industry is intensely competitive and, historically, has
experienced rapid technological advances in product and system technologies.
After a product is introduced, prices normally decrease over time as production
efficiency and competition increase, and as successive generations of products
are developed and introduced for sale. Technological advances in the industry
result in frequent product introductions, regular price reductions, short
product life cycles and increased product capabilities that may result in
significant performance improvements. Competition in the sale of ICs is based
on:
. performance;
. product quality and reliability;
. price;
. adherence to industry standards;
. software and hardware compatibility;
. marketing and distribution capability;
. brand recognition;
. financial strength; and
. ability to deliver in large volumes on a timely basis.
Fluctuations in Operating Results. Our operating results are subject to
substantial quarterly and annual fluctuations due to a variety of factors,
including:
. the effects of competition with Intel in microprocessor and Flash memory
device markets;
. competitive pricing pressures;
. anticipated decreases in unit average selling prices of our products;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. the gain or loss of significant customers;
. new product introductions by us or our competitors;
. changes in the mix of products produced and sold and in the mix of sales by
distribution channels;
. market acceptance of new or enhanced versions of our products;
. seasonal customer demand due to vacation and holiday schedules (for
example, decreased demand in Europe during the summer); and
. the timing of significant orders and the timing and extent of product
development costs.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or
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rescheduling. Our customers may change delivery schedules or cancel orders
without significant penalty. Many of the factors listed above are outside of
our control. These factors are difficult to forecast, and these or other
factors could materially and adversely affect our quarterly or annual
operating results.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery, or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most instances
our agreements with distributors protect their inventory of our products against
price reductions, as well as products that are slow moving or have been
discontinued. These agreements, which may be canceled by either party on a
specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could materially
and adversely affect us if there is an unexpected significant decline in the
price of our products.
Key Personnel. Our future success depends upon the continued service of numerous
key engineering, manufacturing, sales and executive personnel. We may or may
not be able to continue to attract and retain qualified personnel necessary for
the development and manufacture of our products. Loss of the service of, or
failure to recruit, key engineering design personnel could be significantly
detrimental to our product development programs or otherwise have a material
adverse effect on our business.
Intellectual Property Rights; Potential Litigation. It is possible that:
. we will be unable to protect our technology or other intellectual property
adequately through patents, copyrights, trade secrets, trademarks and other
measures;
. patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual
property rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide
competitive advantages to us; and
. others will independently develop similar products, duplicate our
products or design around our patents and other rights.
From time to time, we have been notified that we may be infringing intellectual
property rights of others. If any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
We could decide, in the alternative, to resort to litigation to challenge such
claims. Such challenges could be extremely expensive and time-consuming and
could materially and adversely affect our business. We cannot give any
assurance that all necessary licenses can be obtained on satisfactory terms, or
whether litigation may always be avoided or successfully concluded.
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Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Our failure to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused and are
likely to continue to cause the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology
company stocks in general have experienced extreme price and volume fluctuations
that are often unrelated to the operating performance of the companies. This
market volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current business plan envisions substantial cash outlays requiring external
capital financing. It is possible that capital and/or long-term financing will
be unavailable on terms favorable to us or in sufficient amounts to enable us to
implement our current plan.
Earthquake Danger. Our corporate headquarters, a portion of our manufacturing
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. We
could be materially and adversely affected in the event of a major earthquake.
Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their existing
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that date. The transition period will last through
January 1, 2002. We are assessing the potential impact to us that may result
from the euro conversion. We do not expect the introduction and use of the euro
to materially affect our foreign exchange activities, to affect our use of
derivatives and other financial instruments, or to result in any material
increase in costs to us. We will continue to assess the impact of the
introduction of the euro currency over the transition period as well as the
period subsequent to the transition, as applicable.
37
<PAGE>
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-K for the year ended December 27, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. AMD v. Altera Corporation. This litigation, which began in 1994,
involves multiple claims and counterclaims for patent
infringement relating to AMD's and Altera Corporation's
programmable logic devices. In a trial held in May 1996, a jury
found that at least five of the eight AMD patents-in-suit were
licensed to Altera. As a result of the bench trial held in August
1997, the Court held that Altera was licensed to the three
remaining AMD patents-in-suit. Seven patents were asserted by
Altera in its counterclaim against AMD. The Court determined that
we are licensed to five of the seven patents and two remain in
suit. Altera filed a motion to recover attorneys' fees in
November 1997. We then filed, and the Court granted, a motion to
stay determination of the attorneys' fees motion until resolution
of its appeal. We filed an appeal of the rulings of the jury and
Court determinations that Altera is licensed to each of our eight
patents-in-suit. Both parties filed briefs and the Federal Court
of Appeal heard oral argument on our appeal in November 1998. In
April 1999, the Federal Court of Appeal reversed the earlier jury
and Court decisions and held that Altera is not licensed to the
eight AMD patents-in-suit. Also in April 1999, and following the
decision of the Federal Court of Appeal, Altera filed a petition
for rehearing.
2. Shareholder Litigation. Between March 10, 1999 and April 22,
1999, AMD and certain individual officers of AMD were named as
defendants in the following lawsuits: Arthur S. Feldman v.
Advanced Micro Devices, Inc., et al. (Case No. C-99-1133-MMC,
N.D. Cal.); Pamela Lee v. Advanced Micro Devices, Inc., et al.
(Case No. C-99-1155-SI, N.D. Cal.); Izidor Klein v. Advanced
Micro Devices, Inc., et al. (Case No. C-99-1156-SC, N.D. Cal.);
Nancy P. Steinman v. Advanced Micro Devices, Inc., et al. (Case
No. C-99-20230-EAI, N.D. Cal.); Robert L. Dworkin v. Advanced
Micro Devices, Inc., et al. (Case No. C-99-1320-EDL, N.D. Cal.);
Howard M. Lasker v. Advanced Micro Devices, Inc., et al. (Case
No. C-99-1345-JL, N.D. Cal.); John K. Thompson v. Advanced Micro
Devices, Inc., et al. (Case No. C-99-1383-PJH, N.D. Cal.); Dan
Schwartz v. Advanced Micro Devices, Inc., et al. (Case No. C-99-
1402-MMC, N.D. Cal.); Serena Salamon and Norman Silverberg v.
Advanced Micro Devices, Inc., et al. (Case No. C-99-1435-SI, N.D.
Cal.); David Wu and Hossein Mizraie v. Advanced Micro Devices,
Inc., et al. (Case No. C-99-1664-WHO, N.D. Cal.); Eidman v.
Advanced Micro Devices, Inc., et al.
38
<PAGE>
(Case No. C-99-1782-SI, N.D. Cal.); Nold v. Advanced Micro
Devices, Inc., et al. (Case No. C-99-1858-SI, N.D. Cal.);
Freeland v. Advanced Micro Devices, Inc., et al. (Case No. C-99-
1879-FMS, N.D. Cal.); and Fradkin v. Advanced Micro Devices, Inc.
et al. (Case No. C-99-1959-SI, N.D. Cal.). In addition, we are
aware of the following actions, although AMD has not been served
with the complaints: Ellis Investment Co. v. Advanced Micro
Devices, Inc., et al. (Case No. C-99-01102-BZ, N.D. Cal.);
Dezwareh v. Advanced Micro Devices, Inc., et al. (Case No. C-99-
1131-FM, N.D. Cal.); and Tordjman v. Advanced Micro Devices,
Inc., et al. (Case No. C-99-1501-FM, N.D. Cal.). These class
action complaints allege various violations of federal securities
law, including violations of Section 10(b) of the Securities
Exchange Act and Rule 10b-5 promulgated thereunder. Most of the
complaints purportedly were filed on behalf of all persons, other
than the defendants, who purchased or otherwise acquired common
stock of AMD during the period from October 6, 1998 to March 8,
1999. Two of the complaints allege a class period from July 13,
1998 to March 9, 1999. All of the complaints allege that
materially misleading statements and/or material omissions were
made by AMD and certain individual officers of AMD concerning
design and production problems relating to high-speed versions of
the AMD-K6-2 and AMD-K6-III microprocessors. The complaints seek
unspecified damages, equitable relief, interest, fees and other
litigation costs.
We currently expect that these suits will be consolidated into one
action within the next several months. We intend to contest the
litigation vigorously. Based upon information presently known to
management, we do not believe that the ultimate resolution of these
lawsuits will have a material adverse effect on our business.
ITEM 2. CHANGES IN SECURITIES AND OTHER USE OF PROCEEDS
In January and April 1999, we completed consent solicitations
from registered holders of our Senior Secured Notes, which were
issued pursuant to the Indenture. Upon receipt of the required
consents in connection with the first consent solicitation, we
adopted amendments to the Indenture which, among other things,
permit (1) the planned sale of Vantis, (2) an initial public
offering of all or any portion of our equity interests in Vantis
or an issuance or exchange of Vantis' equity interests for the
interests in other entities without compliance with certain
financial tests previously set forth in the Indenture, and (3)
Vantis to adopt equity-based incentive plans for its directors,
officers and employees. Upon receipt of the required consents in
connection with the second solicitation, we adopted amendments to
the Indenture which give AMD greater flexibility with regard to
restrictions imposed by the Indenture on amounts available for
investment purposes. These amendments permit AMD to (1)
reallocate an existing specific exception for investments of up
$50 million to general investment purposes and (2) make
additional investments of up to $70 million for general
investment purposes,
39
<PAGE>
without additional restrictions, making a total of $120 million
available for general investment purposes.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
4.2(c) Second Supplemental Indenture, dated as of April 8, 1999, between
AMD and United States Trust Company of New York, as trustee.
10.24(h) Seventh Amendment to the Credit Agreement, dated as of April 8,
1999, among AMD, Bank of America NT & SA, as administrative
agent and lender, ABN AMRO Bank N.V., as syndicated agent and
lender, and Canadian Imperial Bank of Commerce, as
documentation agent and lender.
27.1 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:
A current report on Form 8-K dated January 13, 1999 reporting under Item 5-
Other Events was filed announcing the financial results for the fourth
quarter ended December 27, 1998.
40
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC.
Date: May 12, 1999 By: /s/ Francis P. Barton
--------------------------
Francis P. Barton
Senior Vice President, Chief
Financial Officer
Signing on behalf of the
registrant and as the principal
accounting officer
41
<PAGE>
EXHIBIT INDEX
-------------
(a) Exhibits
4.2(c) Second Supplemental Indenture, dated as of April 8, 1999, between
AMD and United States Trust Company of New York, as trustee.
10.24(h) Seventh Amendment to the Credit Agreement, dated as of April 8,
1999, among AMD, Bank of America NT & SA, as administrative
agent and lender, ABN AMRO Bank N.V., as syndicated agent and
lender, and Canadian Imperial Bank of Commerce, as
documentation agent and lender.
27.1 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:
A current report on Form 8-K dated January 13, 1999 reporting under Item 5-
Other Events was filed announcing the financial results for the fourth
quarter ended December 27, 1998.
42
<PAGE>
Exibit 4-2c
SEVENTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this
"Amendment"), is entered into as of April 8, 1999, among Advanced Micro Devices,
---------
Inc., a Delaware corporation (the "Company"), the "Banks" party to the Credit
-------
Agreement referenced below (collectively, the "Banks"), ABN AMRO Bank N.V., as
-----
Syndication Agent for the Banks (the "Syndication Agent"), Canadian Imperial
-----------------
Bank of Commerce, as Documentation Agent for the Banks (the "Documentation
-------------
Agent"), and Bank of America National Trust and Savings Association, as
- ------
Administrative Agent for the Banks (the "Agent").
-----
WHEREAS, the Company, the Banks, the Syndication Agent, the
Documentation Agent and the Agent are parties to a Credit Agreement dated as of
July 19, 1996, as amended by a First Amendment to Credit Agreement dated as of
August 7, 1996, a Second Amendment to Credit Agreement dated as of September 9,
1996, a Third Amendment to Credit Agreement dated as of October 1, 1997, a
Fourth Amendment to Credit Agreement dated as of January 26, 1998, a Fifth
Amendment to Credit Agreement dated as of February 26, 1998, and a Sixth
Amendment to Credit Agreement dated as of June 30, 1998 (as so amended, the
"Credit Agreement");
- -----------------
WHEREAS, the Company has requested that the Majority Banks agree to
certain amendments to the Credit Agreement;
WHEREAS, the Majority Banks have agreed to such request, subject to
the terms and conditions hereof;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties hereto agree as follows:
1. Definitions; Interpretation.
(a) Terms Defined in Credit Agreement. All capitalized terms used in
---------------------------------
this Amendment (including in the recitals hereof) and not otherwise defined
herein shall have the meanings assigned to them in the Credit Agreement.
(b) Interpretation. The rules of interpretation set forth in Section
--------------
1.02 of the Credit Agreement shall be applicable to this Amendment and are
incorporated herein by this reference.
2. Amendments to the Credit Agreement.
(a) Amendments. The Credit Agreement is hereby amended as follows:
----------
(i) The definition of Applicable Fee Amount set forth in
Section 1.01 of the Credit Agreement is hereby amended and restated in its
entirety as follows:
<PAGE>
"Applicable Fee Amount" means, for purposes of calculating the commitment
---------------------
fee hereunder for any date, 0.50% per annum.
(ii) The definition of Applicable Margin set forth in Section
1.01 of the Credit Agreement is hereby amended and restated in its entirety as
follows:
"Applicable Margin" means, for any day, (i) 1.50% per annum with respect to
-----------------
any Base Rate Loan and (ii) 2.75% per annum with respect to any Offshore
Rate Loan.
(iii) A new Section 5.21 is hereby added to the Credit Agreement
as follows
"5.21 Year 2000. On the basis of a comprehensive review and
---------
assessment undertaken by the Company of the Company's and its Subsidiaries'
computer applications and an assessment by the Company of the Company's and its
Subsidiaries' material suppliers, vendors and customers, the Company reasonably
believes that the "Year 2000 problem" (that is, the risk that the computer
applications used by any Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date after
December 31, 1999) will not result in a Material Adverse Effect."
(iv) Section 7.04(g) is hereby amended and restated in its
entirety as follows:
"(g) Investments (i) by the Company in the capital stock of the Vantis
Subsidiary, made in exchange for asset transfers permitted under Section
7.02(d), (ii) by the Vantis Subsidiary in the capital stock of one or more of
its Wholly-Owned Subsidiaries, made in exchange for asset transfers permitted
under Section 7.02(d) and (iii) in connection with the Disposition of the
capital stock or assets of the Vantis Subsidiary (the "Vantis Disposition"), as
permitted by waiver in the Seventh Amendment to Credit Agreement and Waiver
dated as of April 8, 1999 (the "Seventh Amendment"), by the Company in the
capital stock of Vantis Corporation or in the entity acquiring the Vantis
Subsidiary as a portion of the consideration for the sale or transfer of the
assets or capital stock of the Vantis Subsidiary, to the extent such Investments
are permitted by waiver as set forth in the Seventh Amendment."
(v) Section 7.15 is hereby amended and restated in its entirety
as follows:
"7.15 Modified Quick Ratio. The Company shall not as of the end of
--------------------
any fiscal quarter suffer or permit its ratio (determined on a Consolidated
basis) of (a) cash plus the value (valued in accordance with GAAP) of all
Cash Equivalents, other than Cash Equivalents subject to a Lien securing
Indebtedness, plus net Receivables, plus Fujitsu Receivables, to (b)
Consolidated Current Liabilities, to be less than (i) 0.75 to 1.00 at the
end of each of the first, second and third fiscal quarters of 1999, (ii)
0.80 to 1.00 at fiscal year-end 1999, (iii) 0.90 to 1.00 at the end of the
first fiscal quarter of 2000, and (iv) 1.00 to 1.00 at the end of the
second fiscal quarter of 2000 and thereafter."
(vi) Section 7.16 of the Credit Agreement is hereby amended and
restated in its entirety as follows:
2
<PAGE>
"7.16 Minimum Tangible Net Worth. The Company shall not suffer or
--------------------------
permit its Consolidated Tangible Net Worth as of the end of any fiscal
quarter to be less than 90% of the Company's Consolidated Tangible Net
Worth at the end of the first fiscal quarter of 1999 plus (i) (without
----
duplication for amounts included under clause (iv) below) 85% of net income
for the Company and its Restricted Subsidiaries computed from the first day
of the Company's second fiscal quarter of 1999 through the end of such
fiscal quarter for which the determination is being made, determined
quarterly on a Consolidated basis and not reduced by any quarterly loss,
plus (ii) 100% of the Net Issuance Proceeds of any sale of capital stock of
----
the Company by or for the account of the Company occurring on or after the
first day of the Company's second fiscal quarter of 1999, plus (iii) any
----
increase in stockholders' equity of the Company resulting from the
conversion of debt securities of the Company to equity securities of the
Company on or after the first day of the Company's second fiscal quarter of
1999, plus (iv) 100% of the Net Issuance Proceeds (net of Taxes payable in
----
respect thereof) of any sale of capital stock of the Vantis Subsidiary by
or for the account of the Company occurring on or after the first day of
the Company's second fiscal quarter of 1999."
(vii) Section 7.17 of the Credit Agreement is hereby amended and
restated in its entirety as follows:
"7.17 Leverage Ratio. The Company shall not as of the end of any
--------------
fiscal quarter suffer or permit its Leverage Ratio to be greater than (i)
1.05 to 1.00 at the end of any fiscal quarter ending in 1999, (ii) 1.00 to
1.00 at the end of the first fiscal quarter of 2000, and (iii) 0.90 to 1.00
at the end of the second fiscal quarter of 2000 and thereafter."
(viii) Section 7.19 is hereby amended and restated in its
entirety as follows:
"7.19 Profitability. The Company shall not suffer or permit (a) a
-------------
net loss of greater than $150,000,000 for the first fiscal quarter of 1999,
(b) a net loss of greater than $45,000,000 for the second fiscal quarter of
1999, and (c) net income to be less than $1.00 for the third fiscal quarter
of 1999 and for each fiscal quarter thereafter, in each case determined for
the Company on a Consolidated basis."
(ix) A new Section 7.20 is hereby added to the Credit Agreement
as follows:
"7.20 Minimum Cash and Cash Equivalents. The Company shall not at
---------------------------------
any time suffer or permit the value of its (a) cash plus the value (valued
----
in accordance with GAAP) of all Cash Equivalents, other than cash and Cash
Equivalents subject to a Lien securing Indebtedness, minus (b) the
-----
aggregate principal amount of all Revolving Loans outstanding at such time,
to be less than $200,000,000, determined for the Company on a Consolidated
basis."
(b) References Within Credit Agreement. Each reference in the
----------------------------------
Credit Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
Credit Agreement as amended by this Amendment.
3
<PAGE>
3. Waivers. The Majority Banks hereby irrevocably waive the
-------
restrictions (i) set forth in subsection 7.02(e)(iii) which would otherwise
prohibit a sale by the Company of the Vantis Subsidiary (or the assets thereof)
insofar as the sale of the Vantis Subsidiary, together with the aggregate value
of all other assets sold by the Company and its Restricted Subsidiaries after
the Effective Date, would exceed 20% of the Company's Consolidated Tangible Net
Worth measured as of the Effective Date, (ii) set forth in Section 7.02(e)(ii)
which would otherwise prohibit a percentage of the sales price to be paid in
capital stock of the Vantis Subsidiary, any entity into which the Vantis
Subsidiary is merged or the entity who acquires the Vantis Subsidiary; provided
--------
that the percentage of the sales price so paid in capital stock may not exceed
25% of the total sales price, and (iii) set forth in the last paragraph of
Section 7.02 insofar as the sale of the Vantis Subsidiary (or the assets
thereof) may include the disposition of Receivables of the Vantis Subsidiary.
The Majority Banks further hereby waive the restrictions set forth in Section
7.03 which would otherwise prohibit the merger, consolidation, or conveyance,
transfer or other disposal of all or substantially all of the assets of the
Vantis Subsidiary to the extent such merger, consolidation, conveyance, transfer
or other disposal would be permitted under the waiver of Section 7.02 set forth
in the immediately preceding sentence. The Majority Banks further hereby waive
the restrictions set forth in Sections 7.02(e) and 7.10 which would otherwise
prohibit the issuance by the Company of up to 15% of the existing capital stock
of the Vantis Subsidiary outstanding on the date hereof to directors, employees,
officers, consultants and advisors of the Vantis Subsidiary pursuant to stock
option plans (the "Employee Stock") and the repurchase or acquisition of such
Employee Stock by the Company in connection with a Disposition of 50% or more of
the capital stock of the Vantis Subsidiary.
4. Irrevocable Notice of Prepayment. The Company hereby gives notice
--------------------------------
to the Agent (which notice shall be irrevocable) that, within thirty (30)
Business Days of the Company's or any Subsidiary's receipt of any cash Net
Issuance Proceeds or any cash Net Proceeds of any Disposition (including any
Disposition of the Vantis Subsidiary or any assets thereof), except for any
Disposition permitted under subsections 7.02(a), (b) or (c), the Company shall
make a prepayment, in accordance with Section 2.06, in an amount equal to at
least 25% of such cash Net Issuance Proceeds or cash Net Proceeds, as the case
may be, up to a maximum amount, together with all such prepayments to the Agent
made pursuant to this notice, of $50,000,000 in the aggregate, for application
to the principal balance of the Term Loans then outstanding. The Company's
failure to make any such payment within any such 30-Business Day period
referenced above shall constitute an Event of Default under the Credit
Agreement. For purposes of this Section 4 and the prepayments contemplated
hereby, cash Net Issuance Proceeds and cash Net Proceeds shall be deemed to
include (and shall not be reduced by) any amounts paid or payable to the holders
of the Employee Stock in connection with the repurchase or acquisition of such
Employee Stock by the Company as contemplated in the preceding Section 3.
5. Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Agent, the Syndication Agent, the Documentation Agent and the
Banks as follows:
a. No Default or Event of Default has occurred and is
continuing.
4
<PAGE>
b. The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable.
c. This Amendment and the Loan Documents, as amended by this
Amendment, constitute the legal, valid and binding obligations of the Company,
enforceable against it in accordance with their respective terms, without
defense, counterclaim or offset.
6. Amendment Effective Date. This Amendment will become effective as
------------------------
of March 18, 1999, provided that the Agent has received (a) from each of the
--------
Company and the Majority Banks an executed counterpart of this Amendment,
(b) from the Company a nonrefundable amendment fee equal to 0.25% of the
aggregate Commitments to be distributed to each Bank in accordance with its Pro
Rata Share.
7. Miscellaneous.
(a) Credit Agreement Otherwise Not Affected. Except as expressly
---------------------------------------
amended pursuant hereto, the Credit Agreement shall remain unchanged and in full
force and effect and is hereby ratified and confirmed in all respects. The
Banks', the Agent's, the Syndication Agent's and the Documentation Agent's
execution and delivery of, or acceptance of, this Amendment shall not be deemed
to create a course of dealing or otherwise create any express or implied duty by
any of them to provide any other or further amendments, consents or waivers in
the future.
(b) No Reliance. The Company hereby acknowledges and confirms to
-----------
the Agent, the Syndication Agent, the Documentation Agent and the Banks that the
Company is executing this Amendment on the basis of its own investigations and
for its own reasons without reliance upon any agreement, representation,
understanding or communication by or on behalf of the Agent, the Syndication
Agent, the Documentation Agent, any Bank or any other Person.
(c) Amendments and Waivers. The provisions of this Amendment may
----------------------
only be amended or waived, and any consent with respect to any departure by the
Company therefrom may only be granted, in accordance with the terms of Section
10.01 of the Credit Agreement.
(d) Costs and Expenses. The Company shall, whether or not the
------------------
amendments contemplated hereby shall become effective, pay or reimburse the
Agent, within five Business Days after demand, for all costs and expenses
incurred by the Agent in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to, this Amendment and the consummation of the transactions
contemplated hereby and thereby, including the Attorney Costs incurred by the
Agent with respect thereto.
(e) Successors and Assigns. The provisions of this Amendment
----------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
5
<PAGE>
(f) Counterparts. This Amendment may be executed by one or more
------------
of the parties to this Amendment in any number of separate counterparts, each of
which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the same
instrument. The parties hereto agree that the Agent and the Company may accept
and rely on facsimile transmissions of executed signature pages of this
Amendment.
(g) Severability. The illegality or unenforceability of any
------------
provision of this Amendment or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Amendment or any instrument or agreement required
hereunder.
(h) No Third Parties Benefited. This Amendment is made and
--------------------------
entered into for the sole protection and legal benefit of the Company, the
Syndication Agent, the Documentation Agent, the Banks and the Agent, and their
successors and assigns, and no other Person shall be a direct or indirect legal
beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Amendment. Each of the Agent, the Syndication Agent, the
Documentation Agent and the Banks shall not have any obligation to any Person
not a party to this Amendment.
(i) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT
THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(j) Entire Agreement. This Amendment embodies the entire
----------------
agreement and understanding among the Company, the Banks, the Syndication Agent,
the Documentation Agent and the Agent, and supersedes all prior or
contemporaneous agreements and understandings of such Persons, verbal or
written, relating to the subject matter hereof and thereof.
(k) Interpretation. This Amendment is the result of negotiations
--------------
between and has been reviewed by counsel to the Agent, the Company and other
parties, and is the product of all parties hereto. Accordingly, this Amendment
shall not be construed against the Banks, the Syndication Agent, the
Documentation Agent or the Agent merely because of the Agent's or such other
Person's involvement in the preparation of such documents and agreements.
[Signature pages follow.]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered in San Francisco, California, by their proper and
duly authorized officers as of the day and year first above written.
THE COMPANY
-----------
ADVANCED MICRO DEVICES, INC.
By: /s/ Francis P. Barton
------------------------
Title: Sr. Vice President and Chief Financial
--------------------------------------
Officer
-------
THE AGENT
---------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Administrative Agent
By: /s/ Roger Fleischmann
---------------------
Title:
---------------------
THE SYNDICATION AGENT
---------------------
ABN AMRO BANK N.V., as Syndication Agent
By: /s/ Nanci H. Meyer
-------------------------------------
Title: Vice President
----------------------------------
By: /s/ Thomas R. Wagner
-------------------------------------
Title: Group Vice President
----------------------------------
7
<PAGE>
THE DOCUMENTATION AGENT
-----------------------
CANADIAN IMPERIAL BANK OF COMMERCE, as
Documentation Agent
By:
-------------------------------------
Title:
----------------------------------
THE BANKS
---------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank
By: /s/ Roger Fleischmann
-------------------------------------
Title:
----------------------------------
ABN AMRO BANK N.V., as a Bank
By: /s/ Nanci H. Meyer
-------------------------------------
Title: Vice President
----------------------------------
By: /s/ Thomas R. Wagner
-------------------------------------
Title: Group Vice President
----------------------------------
8
<PAGE>
CANADIAN IMPERIAL BANK OF
COMMERCE, as a Bank
By:
-------------------------------------
Title:
----------------------------------
BANKBOSTON, N.A.
By: /s/ John B. Desmond
-------------------------------------
Title:
----------------------------------
THE BANK OF NOVA SCOTIA
By: /s/ Chris Osborne
-------------------------------------
Title:
----------------------------------
BANQUE PARIBAS
By: /s/ Lee S. Buckner
-------------------------------------
Title: Managing Director
----------------------------------
By: /s/ Jonathan Leon
-------------------------------------
Title: Vice President
----------------------------------
THE DAI-ICHI KANGYO BANK, LTD.
By: /s/ Masaaki Ishikura
-------------------------------------
Title:
----------------------------------
9
<PAGE>
FLEET NATIONAL BANK
By: /s/ Matt Glauninger
-------------------------------------
Title:
----------------------------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By: /s/ K. Iwata
-------------------------------------
Title: Deputy General Manager
----------------------------------
KEYBANK NATIONAL ASSOCIATION
By: /s/ Mary K. Young
-------------------------------------
Title: Assistant Vice President
----------------------------------
THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED
By: /s/ Noboiu Akahane
-------------------------------------
Title:
----------------------------------
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
By: /s/ Douglas A. Lindstrom
----------------------------------
Title: Assistant Vice President
----------------------------------
10
<PAGE>
ROYAL BANK OF CANADA
By:
-------------------------------------
Title:
----------------------------------
UNION BANK OF CALIFORNIA, N.A.
By:
-------------------------------------
Title:
----------------------------------
11
<PAGE>
================================================================================
EXHIBIT 10.24H
ADVANCED MICRO DEVICES, INC.
ISSUER
11% Senior Secured Notes due 2003
________________________________________
SECOND SUPPLEMENTAL INDENTURE
Dated as of April 8, 1999
________________________________________
United States Trust Company of New York
TRUSTEE
===============================================================================
<PAGE>
SECOND SUPPLEMENTAL INDENTURE
-----------------------------
This SECOND SUPPLEMENTAL INDENTURE (this "Second Supplemental
Indenture"), dated as of April 8, 1999, by and between Advanced Micro Devices,
Inc., a Delaware corporation (the "Company"), and United States Trust Company of
New York, as trustee (the "Trustee").
RECITALS
--------
A. Pursuant to that certain Indenture (the "Original Indenture"),
dated as of August 1, 1996 by and between the Company and the Trustee, the
Company issued and sold $400,000,000 in aggregate principal amount of its 11%
Senior Secured Notes due 2003 (the "Notes").
B. Pursuant to the provisions of the Indenture and with the consent of
the holders of at least a majority in principal amount of the outstanding Notes,
the Company and the Trustee have amended, modified and supplemented the Original
Indenture by that certain First Supplemental Indenture dated as of January 13,
1999 (the Original Indenture, as amended by the First Supplemental Indenture,
being the "Indenture"). Capitalized terms used herein without definition shall
have the same meanings herein as set forth in the Indenture.
C. Under the Indenture, unless certain financial tests can be met, the
Company is only permitted to make Restricted Investments up to specified amounts
and/or for certain purposes, and may not reallocate or adjusts the amounts of
such permitted exceptions. One such permitted exception (which has not been
utilized to date) permits the Company to make Investments of up to $50 million,
but restricts those Investments to the FASL Unrestricted Subsidiary.
D. The Company expects it may need to make certain Restricted
Investments outside of the existing permitted exceptions and, in particular, to
use the $50 million currently allocated to the FASL Unrestricted Subsidiary for
other Restricted Investments (including, without limitation, Investments in the
Dresden, Germany Unrestricted Subsidiary).
E. The Company and the Trustee now desire to amend, modify and
supplement the Indenture, in the respects hereinafter set forth, to specifically
permit, absent an Event of Default, additional Investments of up to $70 million,
without additional restrictions and to reallocate $50 million (which is
currently restricted to investment in the FASL Unrestricted Subsidiary) to
general investment purposes, making a total of $120 million available for such
general investments.
F. The Indenture further provides that the Company may, at its option,
apply the Net Proceeds from any Asset Sale to certain uses, including, without
limitation, the permanent reduction of amounts outstanding under the New Credit
Agreement (and to correspondingly reduce commitments with respect thereto).
1
<PAGE>
G. The Company and the Trustee now desire to amend, modify and
supplement the Indenture, the respects hereinafter set forth, to provide that,
from and after the date of this Second Supplemental Indenture, the Company
shall, following receipt of the Net Proceeds from Asset Sales (including,
without limitation, Asset Sales of the capital stock or assets of the PLD
Subsidiary), apply the cash portion of such aggregate Net Proceeds to the
reduction of outstanding term loans made pursuant to the New Credit Agreement,
until such term loans shall have been reduced by at least $70 million in the
aggregate.
H. In accordance with Section 9.02 of the Indenture, the holders of at
least a majority in principal amount of the outstanding Notes have consented to
the amendments to the Indenture set forth in this Second Supplemental Indenture.
NOW, THEREFORE, in consideration of the foregoing and in consideration
of the mutual covenants herein contained, the parties hereto make this Second
Supplemental Indenture intending to be legally bound hereby.
Section 1. Incorporation of the Indenture. Except as specifically
------------------------------
amended hereby, the terms and conditions of the Indenture remain in full force
and effect as if fully rewritten herein.
Section 2. Amendment to Section 1.01 of the Indenture. Section 1.01
------------------------------------------
of the Indenture is hereby amended by adding the following definition of "Second
Supplemental Indenture":
"`Second Supplemental Indenture' means that certain Second
Supplemental Indenture, dated as of April 8, 1999, by and between the
Company and the Trustee."
Section 3. Amendment to Section 4.07 of the Indenture. Section 4.07
------------------------------------------
of the Indenture is hereby amended by deleting the paragraph immediately
following subparagraph (c) in its entirety and inserting in lieu thereof the
following text:
"Provided that no Event of Default shall have occurred and be
continuing, the foregoing provisions will not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at
said date of declaration such payment would have complied with the
provisions of this Indenture; (ii) the redemption, repurchase, retirement
or other acquisition of any Equity Interests of the Company in exchange
for, or out of the proceeds of, the substantially concurrent sale (other
than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock) or the substantially concurrent
conversion of such Equity Interests for other Equity Interests of the
Company (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the making of any principal
payment on, or the purchase,
2
<PAGE>
redemption, defeasance or other acquisition or retirement for value of any
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock) or the substantially concurrent
conversion of such Indebtedness into Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement
or other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (iv) the making of a Guarantee (but not the payment of such
Guarantee) by the Company of up to $175.0 million of the FASL Unrestricted
Subsidiary's Indebtedness; (v) any payments by the Company required
pursuant to the CIBC Guarantee; (vi) Restricted Payments in an aggregate
amount not to exceed $10.0 million; and (vii) Investments by the Company of
up to $120.0 million."
Section 4. Amendment to Section 4.10(a) of the Indenture. Section
---------------------------------------------
4.10(a) of the Indenture is hereby amended by deleting the second paragraph of
subparagraph (a) in its entirety and inserting in lieu thereof the following
text:
"Within 24 months after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply, or may cause the applicable Restricted
Subsidiary to apply, such Net Proceeds to (i) the acquisition by the
Company of all of the Capital Stock of any Person in the same or a
substantially similar line of business as that conducted by the Company or
any of its Subsidiaries as of the Issue Date, (ii) the making of a capital
expenditure, (iii) the acquisition of other long-term Tangible Assets, (iv)
the permanent reduction of amounts outstanding under the New Credit
Agreement (and to correspondingly reduce commitments with respect thereto)
and (v) the making of a Restricted Strategic Investment which is a
Permitted Investment. Notwithstanding anything to the contrary in this
Indenture, from and after the date of the Second Supplemental Indenture,
within 30 Business Days after the receipt by the Company of Net Proceeds
from Asset Sales (including without limitation, Asset Sales of all or any
portion of the assets or Equity Interests in the PLD Subsidiary), the
Company shall apply the cash portion of such aggregate Net Proceeds to the
reduction of the amounts outstanding under the term loans made pursuant to
the New Credit Agreement, until the amounts outstanding under such term
loans shall have been reduced by an aggregate amount of at least $70
million. Pending the final application of any such Net Proceeds, the
Company shall hold such Net Proceeds in the form of cash or Cash
Equivalents. Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the first or second sentences of this paragraph
will be deemed to constitute "Excess Proceeds.""
3
<PAGE>
Section 5. Counterparts. This Second Supplemental Indenture may be
------------
executed in several counterparts, each of which shall be deemed an original but
shall constitute one and the same instrument.
Section 6. Effectiveness. This Second Supplemental Indenture shall
-------------
become effective as of the date first written above.
Section 7. Headings. The Section references herein are for
--------
convenience of reference only and shall not affect the construction hereof.
[Remainder of page intentionally left blank]
4
<PAGE>
SIGNATURES
----------
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed by their duly authorized officers and
attested, all as of the day and year first above written.
ADVANCED MICRO DEVICES, INC.
/s/ Francis P. Barton
---------------------
By: Francis P. Barton
Title: Senior Vice President and Chief Financial
Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee
/s/ Louis P. Young
------------------
By: Louis P. Young
Title: Vice President
S-1
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<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> MAR-28-1999
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