<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 July 2, 2000
------------
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 August 7,
2000: 155,744,812
1
<PAGE>
INDEX
-----
Part I. Financial Information
---------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Quarters Ended July 2, 2000 and June 27, 1999 3
and Six Months Ended July 2, 2000 and June 27, 1999
Condensed Consolidated Balance Sheets -
July 2, 2000 and December 26, 1999 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended July 2, 2000 and June 27, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Part II. Other Information
-----------------
Item 1. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 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 Six Months Ended
-------------------------------- -----------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,170,437 $ 595,109 $2,262,466 $1,226,702
Expenses:
Cost of sales 612,567 458,339 1,218,324 908,770
Research and development 155,651 167,278 316,948 327,224
Marketing, general and administrative 152,022 124,520 296,328 251,830
Restructuring and other special charges - 17,514 - 32,530
---------- --------- ---------- ----------
920,240 767,651 1,831,600 1,520,354
---------- --------- ---------- ----------
Operating income (loss) 250,197 (172,542) 430,866 (293,652)
Gain on sale of Vantis - 432,059 - 432,059
Interest income and other, net 19,935 7,252 41,063 18,020
Interest expense (11,244) (18,087) (22,723) (38,850)
---------- --------- ---------- ----------
Income before income taxes and equity in joint
venture 258,888 248,682 449,206 117,577
Provision for income taxes 51,778 172,823 51,778 167,350
---------- --------- ---------- ----------
Income (loss) before equity in joint venture 207,110 75,859 397,428 (49,773)
Equity in net income (loss) of joint venture 32 4,037 (937) 1,302
---------- --------- ---------- ----------
Net income (loss) $ 207,142 $ 79,896 $ 396,491 $ (48,471)
========== ========= ========== ==========
Net income (loss) per common share:
Basic $ 1.34 $ 0.54 $ 2.60 $ (0.33)
========== ========= ========== ==========
Diluted $ 1.21 $ 0.53 $ 2.36 $ (0.33)
========== ========= ========== ==========
Shares used in per share calculation:
Basic 154,558 146,947 152,719 146,428
========== ========= ========== ==========
Diluted 176,218 149,540 174,080 146,428
========== ========= ========== ==========
</TABLE>
See accompanying notes
----------------------
3
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS*
--------------------------------------
(Thousands)
<TABLE>
<CAPTION>
July 2, December 26,
2000 1999
---------- ------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 709,523 $ 294,125
Short-term investments 370,370 302,386
----------- -----------
Total cash, cash equivalents and short-term investments 1,079,893 596,511
Accounts receivable, net 533,007 429,809
Inventories:
Raw materials 11,430 10,236
Work-in-process 162,101 97,143
Finished goods 82,048 90,834
----------- -----------
Total inventories 255,579 198,213
Deferred income taxes 63,440 55,956
Prepaid expenses and other current assets 127,472 129,389
----------- -----------
Total current assets 2,059,391 1,409,878
Property, plant and equipment, at cost 5,063,403 4,938,302
Accumulated depreciation and amortization (2,587,736) (2,415,066)
----------- -----------
Property, plant and equipment, net 2,475,667 2,523,236
Investment in joint venture 267,448 273,608
Other assets 160,988 170,976
----------- -----------
$ 4,963,494 $ 4,377,698
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 353,398 $ 387,193
Accrued compensation and benefits 155,779 91,900
Accrued liabilities 233,256 273,689
Income tax payable 18,763 17,327
Deferred income on shipments to distributors 99,590 92,917
Current portion of long-term debt, capital lease obligations and other 75,951 47,626
----------- -----------
Total current liabilities 936,737 910,652
Deferred income taxes 101,861 60,491
Long-term debt, capital lease obligations and other, less current portion 1,481,725 1,427,282
Commitments and contingencies
Stockholders' equity:
Common stock, par value 1,649 1,496
Capital in excess of par value 1,219,409 1,121,956
Retained earnings 1,269,726 873,235
Accumulated other comprehensive loss (47,613) (17,414)
----------- -----------
Total stockholders' equity 2,443,171 1,979,273
----------- -----------
$ 4,963,494 $ 4,377,698
=========== ===========
</TABLE>
* Amounts as of July 2, 2000 are unaudited. Amounts as of December 26, 1999
were derived from the December 26, 1999 audited financial statements.
See accompanying notes
4
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
July 2, June 27,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 396,491 $ (48,471)
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Gain on sale of Vantis - (432,059)
Depreciation and amortization 275,703 255,371
Net change in deferred income taxes 33,886 166,419
Restructuring and other special charges - 25,038
Foreign grant and subsidy income (22,155) (25,405)
Net loss on disposal of property, plant and equipment 3,414 5,336
Net gain realized on sale of available-for-sale securities - (4,250)
Undistributed loss (income) of joint venture 937 (1,302)
Recognition of deferred gain on sale of building (840) (840)
Net compensation recognized under employee stock options 2,508 (63)
Changes in operating assets and liabilities:
Net (increase) decrease in receivables, inventories,
prepaid expenses and other assets (150,241) 22,491
Net (decrease) increase in payables and accrued liabilities (15,740) 31,391
Increase (decrease) in income tax payable 1,436 (11,402)
Customer deposits under long-term purchase agreements 142,500 -
----------- -----------
Net cash provided by (used in) operating activities 667,899 (17,746)
Cash flows from investing activities:
Proceeds from sale of Vantis - 454,269
Purchase of property, plant and equipment (289,893) (347,446)
Proceeds from sale of property, plant and equipment 9,660 2,915
Purchase of available-for-sale securities (1,562,628) (1,041,084)
Proceeds from sale of available-for-sale securities 1,497,207 935,686
----------- -----------
Net cash (used in) provided by investing activities (345,654) 4,340
Cash flows from financing activities:
Proceeds from borrowings 6,924 5,835
Payments on debt and capital lease obligations (12,380) (149,398)
Proceeds from issuance of stock 95,099 27,256
----------- -----------
Net cash provided by (used in) financing activities 89,643 (116,307)
Effect of exchange rate changes on cash and cash equivalents 3,510 (11,557)
----------- -----------
Net increase (decrease) in cash and cash equivalents 415,398 (141,270)
Cash and cash equivalents at beginning of period 294,125 361,908
---------- ----------
Cash and cash equivalents at end of period $ 709,523 $ 220,638
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the first six months for:
Interest $ 23,542 $ 46,449
========== ==========
Income taxes $ 9,734 $ 9,768
========== ==========
</TABLE>
See accompanying notes
----------------------
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. The results of operations for the interim periods shown
in this report are not necessarily indicative of results to be expected for
the full fiscal year ending December 31, 2000. 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 26, 1999.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December. The quarters ended July 2, 2000 and June 27, 1999 each included 13
weeks.
6
<PAGE>
2. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
July 2,
2000
---------
(Thousands)
<S> <C>
Cash equivalents:
Bank note $ 10,000
Money market funds 35,301
Commercial paper 505,034
Certificates of deposit 10,000
Federal agency note 15,278
--------
Total cash equivalents $575,613
========
Short-term investments:
Federal agency notes $ 33,505
Floating rate note 5,000
Money market auction rate preferred stocks 224,358
Certificate of deposit 9,973
Corporate notes 16,232
Commercial paper 81,302
--------
Total short-term investments $370,370
========
Long-term investments:
Equity investments $ 22,935
Commercial paper 9,999
Treasury notes 1,350
--------
Total long-term investments (included in other
assets) $ 34,284
========
</TABLE>
7
<PAGE>
3. Net Income (Loss) per Common Share
Basic net income (loss) per common share is computed using the weighted-
average common shares outstanding. Diluted net income (loss) per common
share is computed using the weighted-average common shares outstanding plus
any potential dilutive securities. Dilutive securities include stock
options, restricted stock and convertible debt. The following table sets
forth the computation of basic and diluted net income (loss) per common
share:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------- ---------------------
July 2, June 27, July 2, June 27,
(Thousands except per share data) 2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic net income (loss) per common share $207,142 $ 79,896 $396,491 $(48,471)
Effect of adding back interest expense associated
with convertible debentures 6,207 - 13,970 -
-------- -------- -------- ---------
Numerator for diluted net income (loss) per common $213,349 $ 79,896 $410,462 $(48,471)
share
Denominator:
Denominator for basic net income (loss)
per common share - weighted-average shares 154,558 146,947 152,719 146,428
Effect of dilutive securities:
Employee stock options 7,680 2,538 7,380 -
Restricted stock - 55 - -
Convertible debentures 13,980 - 13,981 -
-------- -------- -------- ---------
Dilutive potential common shares 21,660 2,593 21,361 -
-------- -------- -------- ---------
Denominator for diluted net income (loss) per
common share - adjusted weighted-average shares 176,218 149,540 174,080 146,428
======== ======== ======== =========
Basic net income (loss) per common share $ 1.34 $ 0.54 $ 2.60 $ (0.33)
======== ======== ======== =========
Diluted net income (loss) per common share $ 1.21 $ 0.53 $ 2.36 $ (0.33)
======== ======== ======== =========
</TABLE>
On July 19, 2000, the Company announced a 2-for-1 stock split to be effected
as a stock dividend of one share of common stock for each share of AMD
common stock held on August 7, 2000. The payment date will be August 21,
2000.
4. 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
manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory
devices. FASL also uses a foundry facility in Iwate, Japan. The Company's
share of FASL is 49.992 percent, and the investment is being accounted for
under the equity method. At July 2, 2000, the cumulative adjustment related
to the translation of the FASL financial statements into U.S. dollars
resulted in an increase in the investment in FASL of $2,065,000. The
following are the significant FASL related-party transactions and balances:
8
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- ----------------------------
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
(Thousands) ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Royalty income $ 7,110 $ 6,134 $ 13,653 $ 10,737
Purchases 78,420 61,618 154,658 118,776
</TABLE>
<TABLE>
<CAPTION>
July 2, December 26,
(Thousands) 2000 1999
------------- -------------
<S> <C> <C>
Royalty receivable $ 6,709 $ 6,601
Accounts payable 57,354 35,701
</TABLE>
The following is condensed unaudited financial data of FASL:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------- ----------------------------
July 2, June 27, July 2, June 27,
(Thousands) 2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $156,587 $118,398 $302,029 $215,670
Gross profit 2,485 24,836 3,298 18,670
Operating income 1,806 24,310 1,677 17,443
Net income 1,092 14,034 845 9,880
</TABLE>
The Company's share of the above FASL net income differs from the equity in
net income of joint venture reported on the condensed consolidated
statements of operations. The difference is due to adjustments resulting
from the related party relationships between FASL and the Company which are
reflected on the Company's condensed consolidated statements of operations.
5. Segment Reporting
AMD operates in three reportable segments: the Core Products segment, the
Communications Group segment and the Other segment. AMD revised its segments
in the first quarter of fiscal 2000 to reflect the sale of its former
programmable logic devices subsidiary, Vantis, and a change in senior
management. Prior period segment information has been restated. The Core
Products segment includes microprocessors, core logic products, embedded
processors, Flash memory devices, and Erasable Programmable Read-Only Memory
(EPROM) devices. Communications Group products include telecommunication
products and networking products. As a result of AMD's sale of its
Communications Products Division on August 4, 2000, AMD is reevaluating
its reporting structure. The Other segment includes sales from Vantis and
fees for services provided to Vantis subsequent to its sale.
9
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------------------- ---------------------------
(Thousands) July 2, June 27, July 2, June 27,
2000 1999 2000 1999
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Core Products segment
External Customers $1,028,965 $ 483,155 $1,999,971 $1,004,254
Intersegment sales - 15,450 - 32,626
---------- --------- ---------- ----------
1,028,965 498,605 1,999,971 1,036,880
Communications Group segment external customers 117,300 69,946 218,459 133,285
Other segment external customers 24,172 42,006 44,036 89,163
Elimination of intersegment sales - (15,450) - (32,626)
---------- --------- ---------- ----------
Total Net sales $1,170,437 $ 595,107 $2,262,466 $1,226,702
========== ========= ========== ==========
Segment operating income (loss):
Core Products segment $ 208,894 $(176,460) $ 363,467 $ (303,546)
Communications Group segment 37,078 1,190 57,940 798
Other Segment 4,225 2,728 9,459 9,096
---------- --------- ---------- ----------
Total operating income (loss) 250,197 (172,542) 430,866 (293,652)
Interest income and other, net 19,935 7,252 41,063 18,020
Gain on sale of Vantis - 432,059 - 432,059
Interest expense (11,244) (18,087) (22,723) (38,850)
Provision for income taxes (51,778) (172,823) (51,778) (167,350)
Equity in net income (loss) of FASL 32 4,037 (937) 1,302
---------- --------- ---------- ----------
Net income (loss) $ 207,142 $ 79,896 $ 396,491 $ (48,471)
========== ========= ========== ==========
</TABLE>
6. Comprehensive Income (Loss)
Under Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments
are included in other comprehensive income (loss).
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
----------------------------- ---------------------------
July 2, June 27, July 2, June 27,
(Thousands) 2000 1999 2000 1999
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 207,142 $ 79,896 $ 396,491 $ (48,471)
Foreign currency translation adjustments (7,394) (19,679) (32,763) (29,990)
Unrealized gains on securities, net of tax:
Unrealized gains on investments arising
during the period 54 6,244 2,564 7,869
Less: Reclassification adjustment for gains
included in earnings - - - (3,453)
----------- -------------- ------------ -----------
Other comprehensive loss (7,340) (13,435) (30,199) (25,574)
----------- -------------- ------------ -----------
Comprehensive income (loss) $ 199,802 $ 66,461 $ 366,292 $ (74,045)
=========== ============== ============ ===========
</TABLE>
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
July 2, December 26,
(Thousands) 2000 1999
-------------- ------------------
<S> <C> <C>
Unrealized gain on investments, net of tax $ 16,842 $ 14,278
Cumulative translation adjustments (64,455) (31,692)
-------------- ------------------
$ (47,613) $ (17,414)
============== ==================
</TABLE>
10
<PAGE>
The components of accumulated other comprehensive loss are as follows:
7. Sale of the Communication Products Division
On May 21, 2000, the Company entered into definitive agreements with
Francisco Partners, L.P., a private equity investment firm, providing for a
recapitalization of the Communication Products Division (CPD), a portion of
the Communications Group that produces telecommunication products. On August
4, 2000, the Company completed the sale of 90 percent of the recapitalized
CPD for approximately $375 million in cash. The Company has retained a 10
percent ownership interest in the recapitalized CPD and also has a warrant
to acquire approximately an additional 10 percent. The new entity will do
business under the name of Legerity, Inc. As part of the transaction, the
Company negotiated various service contracts with Francisco Partners to
continue to provide, among other things, wafer fabrication and assembly,
test, mark and pack services to Legerity.
8. Restructuring and Other Special Charges
Restructuring and other special charges were zero in the first six months of
2000 and $38 million during the year ended December 26, 1999. These charges
were the result of the Company's efforts to better align its cost structure
with expected revenue growth rates.
11
<PAGE>
The charges against accruals for restructuring and other special charges
through the quarter ended July 2, 2000 are as follows:
<TABLE>
<CAPTION>
Severance
and Equipment Discontinued
Employee Disposal System
(Thousands) Benefits Facilities Equipment Costs Projects Total
--------- ---------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Q1 99 charges $ 779 $ - $ 8,148 $ - $ 6,089 $ 15,016
Non-cash charges - - (8,148) - (6,089) (14,237)
------ -------- --------- -------- -------- --------
Accruals at March 28, 1999 779 - - - - 779
Q2 99 charges 2,245 968 10,801 3,500 - 17,514
Cash charges (1,360) - - - - (1,360)
Non-cash charges - - (10,801) - - (10,801)
------ -------- --------- -------- -------- --------
Accruals at June 27, 1999 1,664 968 - 3,500 - 6,132
Cash charges (1,664) (35) - (1,067) - (2,766)
------ -------- --------- -------- -------- --------
Accruals at September 26, 1999 - 933 - 2,433 - 3,366
Q4 99 charges - - 4,820 880 - 5,700
Cash charges - (21) - (870) - (891)
Non-cash charges - - (4,820) - - (4,820)
------ -------- --------- -------- -------- --------
Accruals at December 26, 1999 - 912 - 2,443 - 3,355
Cash charges - (307) - (106) - (413)
------ -------- --------- -------- -------- --------
Accruals at April 2, 1999 - 605 - 2,337 - 2,942
Cash charges - - - (2,337) - (2,337)
------ -------- --------- -------- -------- --------
Accruals at July 2, 2000 $ - $ 605 $ - $ - $ - $ 605
====== ======== ========= ======== ======== ========
</TABLE>
The Company anticipates that the remaining accruals for sales office facilities
will be utilized over the period through lease termination in the second quarter
of 2002. The remaining accruals for the disposal costs for equipment that has
been taken out of service were fully discharged in the second quarter of 2000.
9. Debt
On July 6, 2000, the Company announced a cash tender offer and consent
solicitation for the outstanding $400 million aggregate principal amount of
the 11% Senior Secured Notes due 2003 (the Senior Secured Notes). On July 19,
2000, the consent solicitation period expired and the Company announced that
it had obtained consents and tenders from registered holders of the Senior
Secured Notes representing more than 85 percent of the principal amount. The
tender offer expired on August 2, 2000, and approximately $356 million
aggregate principal amounts had been tendered. In the third quarter of 2000,
the Company will incur a one time extraordinary cost of approximately $36
million in connection with retirement of the debt.
12
<PAGE>
10. Contingencies
Ellis Investment Co., Ltd., et al v. AMD, et al. Between March 10, 1999 and
April 22, 1999, AMD and certain individual officers of AMD were named as
defendants in a number of lawsuits that were consolidated under Ellis
Investment Co., Ltd., et al v. Advanced Micro Devices, Inc., et al.
Following appointment of lead counsel, the case was re-named Hall et al. v.
Advanced Micro Devices, Inc., et al. The class action complaints allege
various violations of Section 10(b) of the 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. 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.
13
<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 our
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially. The forward-looking
statements relate to, among other things, operating results; anticipated cash
flows; capital expenditures; adequacy of resources to fund operations and
capital investments; our ability to increase customer and market acceptance of
AMD Athlon microprocessors and AMD Duron microprocessors, our seventh generation
microprocessors; our ability to maintain average selling prices for our seventh
generation microprocessors; the effect of foreign currency hedging transactions;
our new submicron integrated circuit manufacturing and design facility located
in Dresden, Germany (Dresden Fab 30); our ability to ramp production in Dresden
Fab 30; and the Fujitsu AMD Semiconductor Limited (FASL) manufacturing
facilities. See "Financial Condition" and "Risk Factors" below, as well as such
other risks and uncertainties as are detailed in our other Securities and
Exchange Commission reports and filings for a discussion of the factors that
could cause actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes as of July 2, 2000, December 26, 1999,
and December 27, 1998, and for the quarter ended July 2, 2000 and each of the
three years in the period ended December 26, 1999.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, K86, AMD-
K6, AMD-K6-2, AMD-K6-III, AMD Athlon, AMD Duron and 3DNow! are either trademarks
or registered trademarks of Advanced Micro Devices, Inc. Vantis is a trademark
of Vantis Corporation. Microsoft and Windows are either registered trademarks
or trademarks of Microsoft Corporation. Pentium and Celeron are either
registered trademarks or trademarks of Intel Corporation. Other terms used to
identify companies and products may be trademarks of their respective owners.
14
<PAGE>
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
During the six months ended July 2, 2000, we participated in all three
technology areas within the digital integrated circuit market - memory circuits,
logic circuits and microprocessors - through our Core Products segment, our
Communications Group segment, and our Other segment. The Core Products segment
consists of two of our product groups - our Computation Products Group (CPG) and
our Memory Group. 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 and networking products. As a result
of the sale of our Communications Products Division on August 4, 2000, we are
reevaluating our reporting structure. The Other segment includes sales from our
former programmable logic devices subsidiary, Vantis, and service fees from
Vantis subsequent to its sale.
On June 15, 1999, we completed the sale of Vantis to Lattice Semiconductor
Corporation. As part of the sale of Vantis, we negotiated various service
contracts with Lattice to continue to provide, among other things, wafer
fabrication and assembly, test, mark and pack services to Vantis.
On May 21, 2000, we entered into definitive agreements with Francisco Partners,
L.P., a private equity investment firm, providing for a recapitalization of the
Communication Products Division (CPD), a portion of the Communications Group
that produces telecommunication products. On August 4, 2000, we completed the
sale of 90 percent of the recapitalized CPD for approximately $375 million in
cash. We have retained a 10 percent ownership interest in the recapitalized CPD
and also have a warrant to acquire approximately an additional 10 percent. The
new entity will do business under the name of Legerity, Inc. As part of the
transaction, we negotiated various service contracts with Francisco Partners to
continue to provide, among other things, wafer fabrication and assembly, test,
mark and pack services to Legerity.
On July 6, 2000, we announced a cash tender offer and consent solicitation for
the outstanding $400 million aggregate principal amount of our 11% Senior
Secured Notes due 2003 (the Senior Secured Notes). On July 19, 2000, the consent
solicitation period expired and we announced that we had obtained consents and
tenders from registered holders of the Senior Secured Notes representing more
than 85 percent of the principal amount. The tender offer expired on August 2,
2000, and approximately $356 million aggregate principal amounts had been
tendered. In the third quarter of 2000, we will incur a one time extraordinary
cost of approximately $36 million in connection with the retirement of the debt.
We use a 52- to 53-week fiscal year ending on the last Sunday in December. The
quarters ended July 2, 2000 and June 27, 1999 each included 13 weeks, and the
quarter ended April 2, 2000 included 14 weeks.
15
<PAGE>
The following is a summary of our net sales by segment for the periods presented
below:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------------------- ------------------------
July 2, April 2, June 27, July 2, June 27,
(Millions) 2000 2000 1999 2000 1999
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Core Products segment:
CPG $ 667 $ 644 $ 317 $1,311 $ 712
Memory Group 362 327 166 689 292
Communications Group segment 117 101 70 218 133
Other segment 24 20 42 44 89
------ ------ ----- ------ ------
$1,170 $1,092 $ 595 $2,262 $1,226
====== ====== ===== ====== ======
</TABLE>
Net Sales Comparison of Quarters Ended July 2, 2000 and April 2, 2000
Net sales of $1,170 million for the second quarter of 2000 increased by seven
percent compared to net sales of $1,092 million for the first quarter of 2000.
CPG net sales of $667 million increased four percent in the second quarter of
2000 compared to the first quarter of 2000. The increase in net sales was
primarily due to higher unit sales of our seventh generation microprocessors,
partially offset by lower unit sales of AMD-K6(R) microprocessors. In June 2000,
we introduced and began shipping the AMD Duron(TM) microprocessor, a derivative
of the AMD Athlon(TM) microprocessor designed to provide a solution for value
conscious PC buyers. Overall CPG sales growth in 2000 is dependent upon a
successful production ramp in Dresden Fab 30, availability of chipsets and
motherboards from third-party suppliers and increasing market acceptance of our
seventh generation microprocessors, as to which we cannot give any assurance.
Memory Group net sales of $362 million increased 11 percent in the second
quarter of 2000 compared to the first quarter of 2000 primarily as a result of
continued strong demand for Flash memory devices. Although demand for Flash
memory devices has remained strong, achieving further growth in net sales of
Flash memory devices will depend upon our ability to execute our plans to
increase our Flash memory manufacturing capacity, and continuing market
acceptance of our flash memory products as to which we cannot give any
assurance.
Communications Group net sales amounted to $117 million, of which $63 million
related to CPD, our Communications Products Division that was sold on August 4,
2000. The net sales increased 16 percent in the second quarter of 2000 compared
to the first quarter of 2000 primarily due to increased net sales of
telecommunications line-card circuits, Asymmetric Digital Subscriber Line (ADSL)
chips, and devices for physical layer Ethernet. Therefore, the second quarter of
2000 will be the last full quarter to report sales from CPD.
16
<PAGE>
In the Other segment, we received service fees of $24 million from Lattice in
the second quarter of 2000 compared to $20 million in the first quarter of 2000.
Net Sales Comparison of Quarters Ended July 2, 2000 and June 27, 1999
Net sales of $1,170 million for the second quarter of 2000 increased by 97
percent compared to net sales of $595 million for the second quarter of 1999.
Excluding net sales from the Other segment, net sales for the second quarter of
2000 increased 107 percent compared to the second quarter of 1999.
CPG net sales of $667 million increased 110 percent in the second quarter of
2000 compared to the same quarter of 1999 primarily due to increased net sales
of our seventh generation microprocessors. Although unit sales of AMD-K6
microprocessors increased, net sales decreased due to declines in average
selling prices which were caused by aggressive Intel pricing.
Memory Group net sales of $362 million increased by 118 percent in the second
quarter of 2000 compared to the second quarter of 1999 as a result of strong
growth in demand for Flash memory devices. This increase was slightly offset by
lower net sales of EPROMs.
Communications Group net sales of $117 million increased 68 percent in the
second quarter of 2000 compared to the second quarter of 1999 primarily due to
increased net sales of telecommunications line-card circuits, ADSL chips, and
devices for physical layer Ethernet.
In the Other segment, we received service fees of $24 million from Lattice in
the second quarter of 2000. Net sales from our former Vantis subsidiary in the
second quarter of 1999 were $40 million. Due to the sale of Vantis on June 15,
1999, we did not record any sales for Vantis in the second quarter of 2000.
Net Sales Comparison of Six months Ended July 2, 2000 and June 27, 1999
Net Sales of $2,262 million for the first half of 2000 increased by 85 percent
compared to net sales of $1,226 million for the first half of 1999. Excluding
net sales from the Other segment, net sales for the first half of 2000 increased
95 percent compared to the first half of 1999.
CPG net sales of $1,311 million increased by 84 percent in the first half of
2000 compared to the first half of 1999 primarily due to increased net sales
from our seventh generation microprocessors. This increase was partially offset
by decreased net sales of AMD-K6 microprocessors. Although unit sales of AMD-K6
microprocessors increased, net sales decreased due to declines in average
selling prices which were caused by aggressive Intel pricing.
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<PAGE>
Memory Group net sales of $689 million increased by 136 percent in the first
half of 2000 compared to the first half of 1999 as a result of strong growth in
demand for Flash memory devices. This increase was slightly offset by lower net
sales of EPROMs.
Communications Group net sales of $218 million increased 64 percent in the first
half of 2000 compared to the first half of 1999 primarily due to increased net
sales of telecommunications line-card circuits, ADSL chips, and devices for
physical layer Ethernet.
In the Other segment, we received service fees of $44 million from Lattice in
the first half of 2000. Net sales from our former Vantis subsidiary in the first
half of 1999 were $87 million. Due to the sale of Vantis on June 15, 1999, we
did not record any sales for Vantis in the first half of 2000.
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:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------- ----------------
July 2, April 2, June 27, July 2, June 27,
2000 2000 1999 2000 1999
-------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
(Millions except for gross margin percentage)
Cost of sales $613 $606 $458 $1,218 $909
Gross Margin percentage 48% 45% 23% 46% 26%
Research and development $156 $161 $167 $ 317 $327
Marketing; general and administrative 152 144 125 296 252
Restructuring and other special charges - - 18 - 33
Gain on sale of Vantis - - 432 - 432
Interest income and other, net 20 21 7 41 18
Interest expense 11 11 18 23 39
</TABLE>
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly the state-of-the-art production
facilities, required for microprocessors. As a result, our gross margin
percentage is significantly affected by fluctuations in product sales. Gross
margin percentage growth depends on continually increasing sales because fixed
costs continue to rise due to the ongoing capital investments required to expand
production capacity and capability.
The gross margin percentage of 48 percent in the first quarter of 2000 increased
from 45 percent in the first quarter of 2000 and 23 percent in the second
quarter of 1999. Gross margin percentage of 46 percent in the first half of 2000
increased from 26 percent in the first half of 1999. The increases were
primarily due to higher net sales of microprocessors and Flash memory devices,
which more than offset the increases in fixed costs. Fixed costs will continue
to increase as we ramp production in Dresden Fab 30. As described in the
paragraph immediately below, Dresden Fab 30 went into production in the second
quarter of 2000, which contributed to, and will continue to contribute to,
increases in cost of sales.
Research and development expenses of $156 million in the second quarter of 2000
decreased three percent compared to the immediate-prior quarter. Research and
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<PAGE>
development expenses in the second quarter of 2000 decreased seven percent
compared to the same quarter in 1999. Research and development expenses of $317
million in the first half of 2000 decreased three percent compared to the first
half of 1999. The decreases were primarily a result of shifting a portion of
Dresden Fab 30 expenses from research and development to cost of sales in the
second quarter of 2000 as Dresden Fab 30 began shipping products. Offsetting
Dresden Fab 30 expenses are the recognition of deferred credits on foreign
capital grants and interest subsidies that we received for Dresden Fab 30. These
credits of approximately $11 million per quarter (denominated in deutsche marks)
will continue to be offset against Dresden Fab 30 expenses in future quarters
until June 2007. The decreases in research and development expenses were also
due to the absence of Vantis expenses in the second quarter of 2000, savings in
our Submicron Development Center (SDC) as a result of restructuring activities
in 1999 and a decrease in expenses related to our technology development
alliance with Motorola.
Marketing, general and administrative expenses of $152 million in the second
quarter of 2000 increased six percent compared to the first quarter of 2000 as a
result of increased advertising and marketing expenses related to the AMD Athlon
and AMD Duron microprocessors. Marketing, general and administrative expenses in
the second quarter of 2000 increased twenty-two percent compared to the second
quarter of 1999. Marketing, general and administrative expenses of $296 million
in the first half of 2000 increased 17 percent compared to the first half of
1999. The increases were due to increased advertising and marketing for the AMD
Athlon microprocessor and higher expenses associated with employee bonuses and
profit sharing.
In the first quarter of 1999, we initiated an internal review to better align
our cost structure with expected revenue growth rates. Based upon this review,
we recorded restructuring and other special charges of $38 million during 1999,
$15 million of which was recorded in the first quarter of 1999, $17 million of
which was recorded in the second quarter of 1999 and $6 million of which was
recorded in the fourth quarter of 1999.
The $38 million in restructuring and other special charges consisted of the
following:
. $25 million for the closure of a submicron development laboratory facility in
the SDC, the write-off of certain equipment in the SDC and the write-off of
equipment taken out of service in Fab 25 related to the 0.35-micron wafer
fabrication process;
. $6 million for the write-off of capitalized costs related to discontinued
system projects;
. $3 million for the disposal of equipment taken out of service in the SDC;
. $3 million for severance and employee benefits for 178 terminated employees
in the Information Technology department, the SDC and certain sales offices;
and
. $1 million for costs of leases for vacated and unused sales offices.
As of July 2, 2000, the total cash outlay for restructuring and other special
charges was approximately $8 million. We anticipate that accruals of $600,000
for sales office facilities will be utilized over the period through lease
terminations in the second quarter of 2002. The accruals for the disposal costs
for equipment that has been taken out of sevice were fully discharged during the
second quarter of 2000.
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<PAGE>
The remaining $30 million of restructuring and other special charges consisted
of non-cash charges primarily for asset write-offs. As a result of the
restructuring and other special charges, we expect that depreciation otherwise
incurred will be reduced by $30 million over the next several years.
Interest income and other, net of $20 million in the second quarter of 2000 was
relatively flat compared to the first quarter of 2000 and increased 175 percent
compared to the same quarter of 1999 primarily due to higher average cash
balances and an insurance settlement from environmental litigation. Interest
income and other, net of $41 million in the first half of 2000 increased $23
million compared to the first half of 1999. The increase was primarily due to
gains of $9 million on the sale of real property, an insurance settlement from
environmental litigation, and higher average cash balances.
Interest expense of $11 million in the second quarter of 2000 was flat compared
to the first quarter of 2000. Interest expense in the second quarter of 2000
decreased 38 percent as compared to the same quarter in 1999 primarily due to
lower average debt balances resulting from our repayment in July 1999 of the
outstanding principal balance on our $250 million four-year secured term loan.
Interest expense of $23 million in the first half of 2000 decreased 42 percent
compared to the first half of 1999. This decrease was primarily due to the
lower average debt balances resulting from our repayment in July 1999 of the
outstanding principal balance on our $250 million four-year secured term loan.
Beginning in the third quarter of 2000, interest expense will be reduced by the
retirement of $356 million of our Senior Secured Notes. In addition, we will no
longer capitalize interest relating to Dresden Fab 30 since Dresden Fab 30
became a production facility in the second quarter of 2000 which will offset
the reduction in interest on the Senior Secured Notes.
Income Tax
We recorded a $52 million income tax provision in the second quarter of 2000 and
a $173 million income tax provision in the second quarter of 1999. The tax
provision recorded in the second quarter of 1999 was attributable to the gain on
the sale of Vantis. The effective tax rates for the three and six months ended
July 2, 2000 (20 percent and 12 percent) reflect the realization of previously
unbenefitted deferred tax assets, and are higher than the equivalent tax rates
on income excluding gain on the sale of Vantis in 1999 (0 percent) due to the
projected 2000 income amount exceeding the amount able to be offset through the
realization of such deferred tax assets.
Other Items
International sales as a percent of net sales were 61 percent in the second
quarter of 2000 compared to 59 percent in the first quarter of 2000 and 58
percent in the second quarter of 1999. International sales were 60 percent of
net sales in the first half of 2000 and 58 percent in the first half of 1999.
During the second quarter of 2000, approximately six percent of our net sales
were denominated in foreign currencies. We do not have sales denominated in
local currencies in countries that have highly inflationary economies, as
defined by generally accepted accounting principles. The impact on our
operating results
20
<PAGE>
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:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------- ----------------
July 2, April 2, June 27, July 2, June 27,
(Millions) 2000 2000 1999 2000 1999
--------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
Core Products segment $ 209 $ 155 $ (177) $ 364 $ (304)
Communications Group segment 37 21 1 58 1
Other segment 4 5 3 9 9
------ ----- ------ ----- ------
Total $ 250 $ 181 $ (173) $ 431 $ (294)
====== ===== ====== ===== ======
</TABLE>
The Core Products' operating income in the second quarter of 2000 increased 38
percent compared to the first quarter of 2000. The increase was mainly due to an
increase in net sales of AMD Athlon microprocessors and Flash memory devices
which more than offset higher fixed costs. The Core Products segment had an
operating income of $250 million in the second quarter of 2000 and operating
income of $431 million in the first half of 2000 compared to a loss of $173
million in the same quarter of 1999 and a loss of $294 million in the first half
of 1999 mainly due to higher net sales of our seventh generation microprocessors
and Flash memory devices in 2000 and restructuring expenses in the first quarter
of 1999. The Communications Group's operating income increased in the second
quarter of 2000 compared to the first quarter of 2000 and the same quarter of
1999, and in the second half of 2000 to the second half of 1999 mainly due to an
increase in net sales of our telecommunications line-card circuits, ADSL chips,
and devices for physical layer Ethernet solutions. As a result of the sale of
our Communications Products Division on August 4, 2000, we are reevaluating our
reporting structure.
21
<PAGE>
-------------------------------------------------------------------------------
FINANCIAL CONDITION
Net cash provided by (used in) operating activities was $668 million in the
first half of 2000 compared to ($18 million) in the same period of 1999. Net
operating cash flows in the first half of 2000 increased $686 million over the
same period in 1999 primarily due to an increase in net income of $445 million
and the following changes in noncash adjustments to net income:
. a nonrecurring $432 million reduction to net income from the gain on the sale
of Vantis in 1999,
. an increase of $20 million in depreciation and amortization,
. a $142 million increase in customer deposits under long-term purchase
agreements, and
. $13 million more of an increase in income tax payable.
These were partially offset by:
. $132 million less of a decrease in deferred income tax assets,
. a nonrecurring $25 million addition to net income from restructuring charges
in 1999,
. $173 million more of an increase in receivables, inventories, prepaid
expenses and other assets, and
. $47 million more of a decrease in payables and accrued liabilities.
Net cash provided by (used in) investing activities was ($346 million) during
the first half of 2000 compared to $4 million during the first half of 1999.
The increase in cash used in investing activities of $350 million was primarily
due to the nonrecurring $454 million we received in 1999 from the sale of
Vantis, which was partially offset by a $57 million decrease in capital
expenditures.
Net cash provided by (used in) financing activities was $90 million during the
first half of 2000 compared to ($116 million) in the same period of 1999. This
increase of $206 million was primarily the result of a $137 million decrease in
the payment of debt as well as a $68 million increase in proceeds from issuance
of stock in connection with the exercise of employee stock options.
Under our Loan and Security Agreement (the Loan Agreement), which provides for a
four-year secured revolving line of credit of up to $200 million, we can borrow,
subject to amounts which may be set aside by the lenders, up to 85 percent of
our eligible accounts receivable from Original Equipment Manufacturers (OEMs)
and 50 percent of our eligible accounts receivable from distributors. We must
comply with certain financial covenants if the level of domestic cash we hold
declines to certain levels, or the amount of borrowings under the Loan Agreement
rises to certain levels. Our obligations
22
<PAGE>
under the Loan Agreement are secured by a pledge of most of our accounts
receivable, inventory, general intangibles and the related proceeds. As of July
2, 2000, no funds were drawn under the Loan Agreement. In addition, we had
available unsecured, uncommitted bank lines of credit in the amount of $71
million, none of which was outstanding.
We plan to make capital investments of approximately $800 million during 2000.
These investments include those relating to the continued facilitization of
Dresden Fab 30 and Fab 25.
AMD Saxony, an indirect wholly owned German subsidiary of AMD, has constructed a
fab and is installing equipment in Dresden Fab 30. 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 will be $2.2 billion when fully equipped. 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 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 $424 million to date in the form of subordinated loans to and
equity in AMD Saxony. In addition to support from AMD, the consortium of banks
referred to above has made available $796 million in loans to AMD Saxony to
help fund Dresden Fab 30 project costs. AMD Saxony had $253 million of such
loans outstanding as of July 2, 2000.
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 the lesser of 65 percent of AMD Saxony bank debt or $796
million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $148 million.
Of these amounts, AMD Saxony had received $284 million in capital investment
grants and allowances and $22 million in interest subsidies as of July 2, 2000.
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 July 2, 2000, we were in compliance with all of the conditions of
the grants and subsidies.
23
<PAGE>
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, such
funding to be repaid to AMD as AMD Saxony receives the grants or subsidies
from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under the
subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $105 million 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 $70 million if AMD Saxony does not meet its fixed charge
coverage ratio covenant.
Because most of the amounts under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth above are subject to change based
on applicable conversion rates. We used the exchange rate at the end of the
second quarter of 2000, which was approximately 2.07 deutsche marks to 1 U.S.
dollar, to value the amounts denominated in deutsche marks.
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Holding, the parent company of AMD Saxony and
a wholly owned subsidiary of AMD, to comply with obligations in connection with
the Dresden Loan Agreements, including:
. material variances from the approved schedule and budget;
. our failure to fund equity contributions or shareholder loans or otherwise
comply with our obligations relating to the Dresden Loan Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings or proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
. the occurrence of default under the indenture dated August 1, 1996 between
AMD and the United States Trust Company of New York (the Indenture) pursuant
to which our Senior Secured Notes were issued or the Loan Agreement.
Generally, any default with respect to borrowings made or guaranteed by AMD
results in recourse to us of more than $10 million and is not cured by us, would
result in a cross-default under the Dresden Loan Agreements and the Loan
Agreement. Under certain circumstances, cross-defaults result under our
Convertible Subordinated Notes due 2005 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
24
<PAGE>
complete Dresden Fab 30, and we will be in default under the Dresden Loan
Agreements and the Loan Agreement, which would permit acceleration of certain
indebtedness, which would have a material adverse effect on us. We cannot assure
that we will be able to obtain the funds necessary to fulfill these obligations.
Any such failure would have a material adverse effect on us.
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. The facility, including equipment, is
expected to cost approximately $1 billion when fully equipped. As of July 2,
2000, approximately $568 million (denominated in yen) of this cost had been
funded. In July 2000, FASL broke ground for a third fabrication facility for the
manufacture of Flash memory devices in Aizu-Wakamatsu, Japan. The facility,
designated as JV3, is expected to cost approximately $1.5 billion when fully
equipped. Capital expenditures for FASL II and JV3 construction to date have
been funded by cash generated from FASL operations and borrowings by FASL.
FASL capital expenditures in 2000 will continue to be funded by cash generated
from FASL operations and local borrowings by FASL. However, to the extent that
FASL is unable to secure the necessary funds for FASL II or JV3, we may be
required to contribute cash or guarantee third-party loans in proportion to our
49.992 percent interest in FASL. As of July 2, 2000, we had no loan guarantees
outstanding with respect to these loans. These planned costs are denominated in
yen and are, therefore, subject to change due to foreign exchange rate
fluctuations. At the end of the second quarter of 2000, the exchange rate was
approximately 105.41 yen to 1 U.S. dollar, which we used to calculate the
amounts denominated in yen.
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 for the next 12 months.
On August 4, 2000, we received approximately $375 million for the sale of 90
percent of the recapitalized CPD. The proceeds of the sale were subsequently
used to redeem approximately $356 million aggregate principal amount of the
Senior Secured Notes.
25
<PAGE>
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
Microprocessor Products
Future Dependence on AMD Seventh-Generation Microprocessors. We will need to
successfully market our seventh-generation Microsoft Windows compatible
microprocessors, the AMD Athlon and AMD Duron microprocessors, in order to
increase our microprocessor product revenues in 2000 and beyond, and to benefit
fully from the substantial financial investments and commitments we have made
and continue to make related to microprocessors. We commenced initial shipments
of AMD Athlon microprocessors in June 1999 and began volume shipments in the
second half of 1999. We introduced and began shipments of the AMD Duron
processor, a derivative of the AMD Athlon processor designed to provide an
optimized solution for value conscious business and home users, in June 2000.
Our production and sales plans for AMD Athlon and AMD Duron microprocessors are
subject to numerous risks and uncertainties, including:
. our ability to produce seventh-generation microprocessors in the volume and
with the feature set required by customers on a timely basis;
. our ability to design, manufacture and deliver processor modules through
subcontractors;
. the availability and acceptance of motherboards and chipsets designed for our
seventh-generation microprocessors;
. market acceptance of our seventh-generation microprocessors;
. our ability to maintain average selling prices of seventh-generation
microprocessors despite aggressive Intel pricing, including market rebates
and product bundling of microprocessors, motherboards, chipsets and
combination thereof;
. the successful development and installation of 0.18-micron process technology
and copper interconnect technology;
. our ability to ramp production in Dresden Fab 30;
. the pace at which we are able 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 bus) in the design of our seventh-
generation microprocessors, and the availability of chipsets from 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;
. our ability to successfully offer new higher performance versions of the AMD
Athlon microprocessor; and
. the availability to our customers of cost and performance competitive Static
Random Access Memories (SRAMs) (including Tag chips) if Intel controls the
market for SRAM production capacity through its relationships with SRAM
manufacturers.
26
<PAGE>
If we fail to achieve market acceptance of our seventh-generation
microprocessors, if our subcontractors are unable to provide the processor
modules we require or if chipsets and motherboards which are compatible with our
seventh-generation microprocessors are not made available, our business will be
materially and adversely affected.
Investment in and Dependence on K86(TM) AMD Microprocessor Products. Our
microprocessor product revenues have significantly impacted, and will continue
in 2000 and 2001 to significantly impact, our overall 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 success of the AMD Athlon and
AMD Duron microprocessors, which are our seventh-generation Microsoft Windows
compatible microprocessors, the AMD-K6 microprocessors with 3DNow! technology
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 microprocessors. It is
also possible that we may not increase our microprocessor revenues enough to
achieve sustained profitability.
To sell the volume of AMD Athlon, AMD Duron and AMD-K6 microprocessors we
currently plan to make in 2000 and 2001, we must increase sales to existing
customers and develop new customers in both consumer and commercial markets. If
we lose any current top tier OEM customer, or if we fail to attract additional
customers through direct sales and through our distributors, we may not be able
to sell the volume of units planned. This result could have a material adverse
effect on our business.
Our production and sales plans for AMD Athlon, AMD Duron and AMD-K6
microprocessors are subject to other risks and uncertainties, including:
. market acceptance of AMD Athlon and AMD Duron microprocessors, including the
timely availability of processor modules as well as motherboards and chipsets
designed for these processors;
. whether we can successfully fabricate higher performance microprocessors in
planned volume and speed mixes;
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. the effects of Intel's new product introductions, marketing strategies and
pricing;
. the continued market acceptance for 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 has dominated the microprocessor market for many years and has
brand strength, we have in the past priced AMD-K6 microprocessors below the
published price of Intel processors offering comparable performance. Thus,
Intel's processor marketing and pricing can impact and have impacted the average
selling prices of our microprocessors, and consequently can impact and have
impacted our overall margins. Our business could be materially and adversely
affected if we are are unable to:
. achieve the product performance improvements necessary to meet customer
needs;
. continue to achieve market acceptance of our microprocessors and increase
market share;
. maintain revenues of AMD-K6 microprocessors; and
. successfully ramp production and sales of AMD Athlon and AMD Duron
microprocessors.
See also the discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for many years. Because of its dominant market position, Intel has historically
set and controlled x86 microprocessor and PC system standards and, thus,
dictated the type of product the market requires of Intel's competitors. In
addition, Intel may vary prices on its microprocessors and other products at
will and thereby affect the margins and profitability of its competitors due to
its financial strength and dominant position. Intel exerts substantial influence
over PC manufacturers and their channels of distribution through the Intel
Inside advertising rebate program and other marketing programs. Intel invests
billions of dollars in, and as a result exerts influence over, many other
technology companies. We expect Intel to continue to invest heavily in research
and development, new manufacturing facilities and other technology companies,
and to remain dominant:
. through the Intel Inside and other marketing programs;
. through other contractual constraints on customers, retailers, industry
suppliers and other third parties;
. by controlling industry standards; and
. by controlling supply and demand of motherboards, chipsets and other system
components.
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As an extension of its dominant microprocessor market share, Intel also
dominates the PC platform. As a result, it is difficult for PC manufacturers to
innovate and differentiate their product offerings. We do not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, we may be materially and adversely affected by its:
. product mix and introduction schedules;
. product bundling and pricing strategies;
. control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, chipset and basic input/output system
(BIOS) suppliers; and
. customer brand loyalty.
As Intel expanded its dominance over the PC system platform, many PC
manufacturers reduced their system development expenditures and now purchase
microprocessors together with chipsets or in assembled motherboards. PC OEMs are
increasingly dependent on Intel, less innovative on their own and, to a large
extent, distributors of 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, BIOS software and other
components. In recent years, many of 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 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) 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 did when it was selling its fifth-
generation Pentium processors. Because AMD-K6 microprocessors are designed to be
Socket 7 compatible, and will not work with motherboards designed for Pentium
II, III and Celeron processors, we intend to continue to work with third-party
designers and manufacturers of motherboards, chipsets and other products to
ensure the continued availability of Socket 7 infrastructure support for AMD-K6
microprocessors, including support for enhancements and features
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we add to our microprocessors. Socket 7 infrastructure support for 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 III and Celeron processors because our
patent cross-license agreement with Intel does not extend to microprocessors
that are bus interface protocol compatible with Intel's sixth and subsequent
generation processors. Thus, the AMD Athlon microprocessor is not designed to
function with motherboards and chipsets designed to work with Intel
microprocessors. Our ability to compete with Intel in the market for AMD Athlon
seventh-generation and future generation microprocessors will depend on our:
. success in designing and developing the microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support Intel's microprocessors and our microprocessors, or that
alternative platforms are available which are competitive with those used
with Intel processors.
A failure for any reason of the designers and producers of motherboards,
chipsets, processor modules and other system components to support our K86
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.
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 growth 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 will have significant capital requirements over the next 12 months. To the
extent that we cannot generate the required capital internally or obtain such
capital externally, our business could be materially adversely affected. We
cannot assure the availability of such capital on terms favorable to us, or at
all. We currently plan to make capital
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investments of approximately $800 million in 2000 although the actual
expenditures may vary. These investments include those relating to the continued
facilitization of Dresden Fab 30 and Fab 25.
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, or equity investments in, AMD Saxony totaling $100 million in 1999. The
Dresden Loan Agreements 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 $424 million as of July 2, 2000 in the form of subordinated loans and
equity in AMD Saxony. If we are unable to meet our obligation to make loans to,
or equity investments in, AMD Saxony as required under the Dresden Loan
Agreements, AMD Saxony will be unable to complete Dresden Fab 30 and we will be
in default under the Dresden Loan Agreement and the Loan Agreement, which would
permit acceleration of indebtedness, which would have a material adverse effect
on our business.
In 1999, the building construction of FASL II was completed, equipment was
installed and production was initiated. We expect the facility, including
equipment, to cost approximately $1 billion when fully equipped. In July 2000,
FASL broke ground for a third fabrication facility for the manufacture of Flash
memory devices in Aizu-Wakamatsu, Japan. The facility, designated as JV3, is
expected to cost approximately $1.5 billion when fully equipped. Capital
expenditures for FASL II and JV3 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 or JV3, we may be required to contribute
cash or guarantee third-party loans in proportion to our 49.992 percent interest
in FASL.
If we are unable to obtain the funds necessary to fulfill our obligations to AMD
Saxony or FASL, our business will be materially and adversely affected.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. Our operations related to
microprocessors have been particularly affected by this situation. If we
underutilize our manufacturing facilities in the future, our gross margins may
suffer. We are substantially increasing our manufacturing capacity by making
significant capital investments in Fab 25 and Dresden Fab 30. In addition, in
1999, the building construction of FASL II, a second Flash memory device
manufacturing facility, was completed, equipment was installed and production
was initiated. In July 2000, FASL broke ground for a third fabrication facility
for the manufacture of Flash memory devices in Aizu-Wakamatsu, Japan. 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, or if demand for
our products does not increase
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consistent with our plans and expectations, 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 obtain sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the risk is that we will have insufficient capacity to meet demand
for Flash memory products and underutilized capacity relative to demand for our
microprocessor offerings.
Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these 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
AMD Athlon microprocessors in Dresden Fab 30. We have entered into a strategic
alliance with Motorola to co-develop logic process and embedded Flash
technologies. The logic process technology which is the subject of the alliance
includes the copper interconnect technology that is required for AMD Athlon
microprocessors and subsequent generations of microprocessors. We cannot be
certain that the strategic alliance will be successful or that we will be able
to develop or obtain the leading-edge process technologies that will be required
in Fab 25 or Dresden Fab 30 to fabricate AMD Athlon microprocessors
successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been and may in the future be materially and adversely
affected by fluctuations in manufacturing yields. For example, our results in
the past have been negatively affected by disappointing AMD-K6 microprocessor
yields. The design and manufacture of integrated circuits is a complex process.
Normal manufacturing risks include errors and interruptions in the fabrication
process and defects in raw materials, as well as other risks, all of which can
affect yields. Additional manufacturing risks incurred in ramping up new
fabrication areas and/or new manufacturing processes include 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 are 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
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unacceptable to customers or made in an untimely manner. In addition, the mere
announcement of an incompatibility problem relating to our products could have a
material adverse effect on our business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could impose
substantial costs on us and have a material and adverse effect on 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
integrated circuit 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; Suzhou, China; and Singapore; or by subcontractors
in the United States and Asia. 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.
Flash Memory Products
The demand for Flash memory devices has recently increased due to the increasing
use of equipment and other devices requiring non-volatile memory such as:
. cellular telephones;
. routers which transfer data between local area networks; and
. PC cards which are inserted into notebook and subnotebook computers or
personal digital assistants.
As a result, the demand for Flash memory devices currently exceeds the available
supply. In order to meet this demand, we must increase our production of Flash
memory devices through FASL, FASL II and JV3 and through foundry or similar
arrangements with others. We cannot be certain that the demand for Flash memory
products will remain at current or greater levels, or that we will have
sufficient capacity to meet the demand for
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Flash memory devices. Currently we are expanding production capacity of Flash
memory devices through foundry arrangments. We can not be certain that we will
be able to ramp production of Flash memory devices in foundries successfully in
order to meet demand. Our inability to meet the demand for Flash memory devices
could have a material adverse effect on our business.
Competition in the market for Flash memory devices will 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 in 2000 and beyond. It is possible that we will be unable
to maintain or increase our market share in Flash memory devices as the market
develops and as existing and potential new competitors introduce competitive
products. A decline in our Flash memory device business or decline in the gross
margin percentage in this product line could have a material adverse effect on
our business.
Key Personnel
Our future success depends upon the continued service of numerous key
engineering, manufacturing, marketing, sales and executive personnel. We may or
may not be able to continue to attract, retain and motivate qualified personnel
necessary for our business. 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.
Demand for Our Products Affected by Asian and Other Domestic and International
Economic Conditions
While general industry demand is currently strengthening, the demand for our
products during the last few years has been weak due to the general downturn in
the worldwide semiconductor market and an economic crisis in Asia. A renewed
decline of the worldwide semiconductor market or economic condition in Asia
could decrease the demand for microprocessors and other ICs. A significant
decline in economic conditions in any significant geographic area, either
domestically or internationally, could decrease the overall demand for our
products which could have a material adverse effect on our business.
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;
. decreases in unit average selling prices of our products;
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. production capacity levels and fluctuations in manufacturing yields,
particularly in the early stages of production at new facilities, such as
Dresden Fab 30;
. 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; and
. the timing of significant orders and the timing and extent of product
development costs.
Our operating results also tend to vary seasonally due to vacation and holiday
schedules. Our revenues are generally lower in the first, second and third
quarters of each year than in the fourth quarter. This seasonal pattern is
largely a result of decreased demand in Europe during the summer months and
higher demand in the retail sector of the personal computer market during the
winter holiday season.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Other Risk Factors
Debt Restrictions. The Loan Agreement contains significant covenants that limit
our ability and our subsidiaries' ability to engage in various transactions and
require 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 Loan Agreement are substantial, and
failure to comply with such limitations could have a material adverse effect on
our business.
In addition, the Dresden Loan Agreements substantially prohibit AMD Saxony from
transferring assets to us, which will prevent us from using current or future
assets of AMD Saxony other than to satisfy obligations of AMD Saxony.
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short
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product life cycles and severe price competition. Currently accepted industry
standards may change. Our success depends substantially on our ability, on a
cost-effective and timely basis, to continue to enhance our existing products
and to develop and introduce new products that take advantage of technological
advances and adhere to evolving industry standards. An unexpected change in one
or more of the technologies related to our products, in market demand for
products based on a particular technology or of accepted industry standards
could materially and adversely affect our business. We may or may not be able to
develop new products in a timely and satisfactory manner to address new industry
standards and technological changes, or to respond to new product announcements
by others. In addition, new products may or may not achieve market acceptance.
Competition. The integrated circuit 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 integrated
circuits 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.
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
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materially and adversely affect us if there is an unexpected significant decline
in the price of our products.
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 have a material adverse effect on our business. We cannot give any
assurance that all necessary licenses can be obtained on satisfactory terms, or
whether litigation may always be avoided or successfully concluded.
Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Our failure to
control the use of, 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.
Year 2000. We have not experienced any material system failures, disruptions of
operations or interruptions of our ability to process transactions, send
invoices or engage in other normal business activities as a result of Year 2000
issues. In addition, we are not aware of any material problems resulting from
Year 2000 issues with our products and services.
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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 operating and financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new process technology and 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 which may require
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On March 22, 2000, we entered into an interest rate swap agreement to reduce
interest expense of our 11% Senior Secured Notes ($400 million) due 2003. The
swap converts
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our 11% fixed rate notes into a floating rate instrument. The variable rate
component of the swap will be fixed from inception through August 1, 2001. The
notes are cancelable at the option of the counter-party (Bank of America) on
August 1, 2001. After August 1, 2001, the swap will be marked-to-market to
determine on-going effectiveness.
For additional Quantitative and Qualitative Disclosures about Market Risk,
including other foreign exchange risks associated with Dresden Fab 30, reference
is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, in our Annual Report on Form 10-K for the year ended December 26,
1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Ellis Investment Co., Ltd., et al v. AMD, et al. Between March 10, 1999 and
April 22, 1999, AMD and certain individual officers of AMD were named as
defendants in a number of lawsuits that were consolidated under Ellis Investment
----------------
Co., Ltd., et al v. Advanced Micro Devices, Inc., et al. Following appointment
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of lead counsel, the case was re-named Hall et al. v. Advanced Micro Devices,
-------------------------------------
Inc., et al. The class action complaints allege various violations of federal
-----------
securities law, including violations of Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder. Most of the complaints purportedly were filed
on behalf of all persons, other than the defendants, who purchased or otherwise
acquired common stock of AMD during the period from October 6, 1998 to March 8,
1999. Two of the complaints allege a class period from July 13, 1998 to March
9, 1999. All of the complaints allege that materially misleading statements
and/or material omissions were made by AMD and certain individual officers of
AMD concerning design and production problems relating to high-speed versions of
the AMD-K6(R)-2 and AMD-K6-III microprocessors. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AMD's annual meeting of stockholders was held on April 27, 2000. The following
are the results of the voting on the proposals submitted to stockholders at the
annual meeting.
Proposal No. 1 Election of Directors. The following individuals were elected as
directors:
Name For Withheld
W.J. Sanders III 115,865,626 9,618,078
Friedrich Baur 124,489,326 994,378
Charles M. Blalack 123,280,520 2,203,184
R. Gene Brown 123,290,730 2,192,974
Robert B. Palmer 124,314,725 1,168,979
Joe L. Roby 123,329,165 2,154,539
Hector de J. Ruiz 122,561,376 2,922,328
Leonard Silverman 124,518,947 964,757
Proposal No. 2 The proposal to ratify the appointment of Ernst & Young LLP as
AMD's independent auditors for the current fiscal year was approved.
For: 125,066,320 Against: 240,827 Abstain: 176,557
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Proposal No. 3 The proposal to approve the amendment to the 1996 Stock
Incentive Plan was approved.
For: 95,852,803 Against: 29,125,755 Abstain: 505,146
Proposal No. 4 The proposal to approve the 2000 Employee Stock Purchase Plan
was approved.
For: 122,822,403 Against: 2,244,510 Abstain: 416,791
Proposal No. 5 The stockholder proposal to amend the Bylaws was defeated.
For: 15,897,704 Against: 61,974,429 Abstain: 1,613,982
No Vote: 45,997,589
The annual meeting of the stockholders was reconvened on May 25, 2000. The
following are the results of the voting on the proposal submitted to the
stockholders at the reconvened annual meeting.
Proposal No. 1 The proposal to restate the Certificate of Incorporation to
increase the number of shares of Common Stock from 250,000,000 to 750,000,000
shares was approved.
For: 108,396,496 Against: 17,534,577 Abstain: 1,150,157
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
* 10.25(b) Amendment 2 to the Technology Development and License Agreement,
entered into as of October 1, 1998 by AMD and its subsidiaries and
Motorola, Inc. and its subsidiaries.
27.1 Financial Data Schedule
* Confidential treatment has been requested with respect to certain
portions of this Exhibit.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated March 30, 2000 reporting under Item 5 -
Other Events was filed announcing that AMD will retain our Network Products
Division.
2. A Current Report on Form 8-K dated April 5, 2000 reporting under Item 5 -
Other Events was filed announcing expected sales in the first quarter.
3. A Current Report on Form 8-K dated April 12, 2000 reporting under Item 5 -
Other Events was filed announcing our first quarter earnings.
4. A Current Report on Form 8-K dated May 21, 2000 reporting under Item 5 -
Other Events was filed announcing the execution of definitive agreements
with respect to the recapitalization of our Communications Products
Division.
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: August 15, 2000 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
