<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 October 1, 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 94088
--------------------------------------- -------------
(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 November
2, 2000: 313,411,939
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Part I. Financial Information
---------------------
Page No.
---------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Quarter Ended October 1, 2000 and September 26, 1999 3
and Nine Months Ended October 1, 2000 and September 26, 1999
Condensed Consolidated Balance Sheets -
October 1, 2000 and December 26, 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended October 1, 2000 and September 26, 1999 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
Part II. Other Information
-----------------
Item 1. Legal Proceedings 37
Item 6. Exhibits and Reports on Form 8-K 37
Signature 38
</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 Nine Months Ended
-------------------------------- -------------------------------
October 1, September 26, October 1, September 26,
2000 1999 2000 1999
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales $ 1,206,549 $ 662,192 $ 3,469,015 $ 1,888,894
Expenses:
Cost of sales 639,010 474,119 1,857,334 1,382,889
Research and development 162,764 157,626 479,712 484,850
Marketing, general and administrative 141,931 129,437 438,259 381,267
Restructuring and other special charges - - - 32,530
----------- ------------- ----------- -------------
943,705 761,182 2,775,305 2,281,536
----------- ------------- ----------- -------------
Operating income (loss) 262,844 (98,990) 693,710 (392,642)
Gain on sale of Legerity 336,899 - 336,899 -
Gain on sale of Vantis - - - 432,059
Interest income and other, net 19,789 6,757 60,852 24,777
Interest expense (17,382) (18,033) (40,105) (56,883)
----------- ------------- ----------- -------------
Income (loss) before income taxes, equity in net income
of joint venture and extraordinary item 602,150 (110,266) 1,051,356 7,311
Provision for income taxes 175,009 - 226,787 167,350
----------- ------------- ----------- -------------
Income (loss) before equity in net income of joint venture
and extraordinary item 427,141 (110,266) 824,569 (160,039)
Equity in net income of joint venture 4,406 4,721 3,469 6,023
----------- ------------- ----------- -------------
Income (loss) before extraordinary item 431,547 (105,545) 828,038 (154,016)
Extraordinary item - loss on debt retirement net
of tax benefit 22,980 - 22,980 -
----------- ------------- ----------- -------------
Net income (loss) $ 408,567 $ (105,545) $ 805,058 $ (154,016)
=========== ============= =========== =============
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary item $ 1.38 $ (0.36) $ 2.69 $ (0.52)
=========== ============= =========== =============
Extraordinary item $ 0.07 $ - $ 0.08 $ -
=========== ============= =========== =============
Net income (loss) $ 1.31 $ (0.36) $ 2.61 $ (0.52)
=========== ============= =========== =============
Diluted:
Income (loss) before extraordinary item $ 1.24 $ (0.36) $ 2.42 $ (0.52)
=========== ============= =========== =============
Extraordinary item $ 0.06 $ - $ 0.06 $ -
=========== ============= =========== =============
Net income (loss) $ 1.18 $ (0.36) $ 2.36 $ (0.52)
=========== ============= =========== =============
Shares used in per share calculation:
Basic 311,943 295,223 307,942 293,934
=========== ============= =========== =============
Diluted 352,893 295,223 350,082 293,934
=========== ============= =========== =============
</TABLE>
See accompanying notes
----------------------
3
<PAGE>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Thousands)
<TABLE>
<CAPTION>
October 1, December 26,
2000 1999 *
-------------------- ----------------------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 582,299 $ 294,125
Short-term investments 651,198 302,386
-------------------- ----------------------
Total cash, cash equivalents and short-term investments 1,233,497 596,511
Accounts receivable, net 687,692 429,809
Inventories:
Raw materials 10,183 10,236
Work-in-process 173,613 97,143
Finished goods 106,630 90,834
-------------------- ----------------------
Total inventories 290,426 198,213
Deferred income taxes 73,981 55,956
Prepaid expenses and other current assets 167,253 129,389
-------------------- ----------------------
Total current assets 2,452,849 1,409,878
Property, plant and equipment, at cost 5,205,903 4,938,302
Accumulated depreciation and amortization (2,700,102) (2,415,066)
-------------------- ----------------------
Property, plant and equipment, net 2,505,801 2,523,236
Investment in joint venture 266,232 273,608
Other assets 147,110 170,976
-------------------- ----------------------
$ 5,371,992 $ 4,377,698
==================== ======================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 387,019 $ 387,193
Accrued compensation and benefits 175,458 91,900
Accrued liabilities 289,372 273,689
Income taxes payable 25,696 17,327
Deferred income on shipments to distributors 113,755 92,917
Current portion of long-term debt, capital lease obligations and other 73,026 47,626
-------------------- ----------------------
Total current liabilities 1,064,326 910,652
Deferred income taxes 182,977 60,491
Long-term debt, capital lease obligations and other, less current portion 1,223,475 1,427,282
Commitments and contingencies
Stockholders' equity:
Common stock, par value 3,226 2,992
Capital in excess of par value 1,311,042 1,120,460
Retained earnings 1,678,293 873,235
Accumulated other comprehensive loss (91,347) (17,414)
-------------------- ----------------------
Total stockholders' equity 2,901,214 1,979,273
-------------------- ----------------------
$ 5,371,992 $ 4,377,698
==================== ======================
</TABLE>
* Amounts as of December 26, 1999 were derived from the December 26, 1999
audited financial statements.
See accompanying notes
----------------------
4
<PAGE>
<TABLE>
<CAPTION>
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
Nine Months Ended
-----------------------------
October 1, September 26,
2000 1999
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 805,058 $ (154,016)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of Legerity (336,899) -
Gain on sale of Vantis - (432,059)
Extraordinary item - loss on debt retirement
net of tax benefit 22,981 -
Depreciation and amortization 429,461 385,590
Net change in deferred income taxes 104,461 164,343
Restructuring and other special charges - 25,038
Foreign grant and subsidy income (27,975) (37,852)
Net loss on disposal of property, plant and equipment 7,354 8,305
Net gain realized on sale of available-for-sale securities - (4,250)
Undistributed income of joint venture (3,469) (6,023)
Recognition of deferred gain on sale of building (1,261) (1,260)
Net compensation recognized under employee stock plans 3,712 399
Changes in operating assets and liabilities:
Customer deposits under purchase agreements 142,500 -
Net increase in receivables, inventories,
prepaid expenses and other assets (368,774) (104,551)
Income tax benefits from employee stock option exercises 71,197 -
Net increase in payables and accrued liabilities 98,332 89,749
Increase (decrease) in income tax payable 8,369 (12,793)
----------- ----------
Net cash provided by (used in) operating activities 955,047 (79,380)
Cash flows from investing activities:
Proceeds from sale of Legerity 375,000 -
Proceeds from sale of Vantis - 454,269
Purchase of property, plant and equipment (577,177) (495,044)
Proceeds from sale of property, plant and equipment 12,243 3,342
Purchase of available-for-sale securities (2,709,408) (1,274,591)
Proceeds from sale of available-for-sale securities 2,359,185 1,315,617
---------- ---------
Net cash (used in) provided by investing activities (540,157) 3,593
Cash flows from financing activities:
Proceeds from borrowings 145,910 22,864
Retirement of debt and payments on debt and capital lease obligations (394,306) 239,392
Proceeds from issuance of stock 115,907 33,143
----------- ----------
Net cash used in financing activities (132,489) (183,385)
Effect of exchange rate changes on cash and cash equivalents 5,773 (9,469)
----------- -----------
Net increase (decrease) in cash and cash equivalents 288,174 (268,641)
Cash and cash equivalents at beginning of period 294,125 361,908
----------- -----------
Cash and cash equivalents at end of period $ 582,299 $ 93,267
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 84,831 $ 68,159
=========== ===========
Income taxes $ 20,908 $ 10,220
=========== ===========
</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 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 October 1, 2000 and September 26, 1999 each
included 13 weeks.
2. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
October 1,
(Thousands) 2000
-------------
Cash equivalents:
Bank note $ 46,970
Money market funds 315,891
Federal agency note 9,678
-------------
Total cash equivalents $ 372,539
=============
Short-term investments:
Federal agency notes $ 33,331
Money market auction rate preferred stocks 246,537
Certificates of deposit 19,965
Corporate notes 9,412
Commercial paper 341,953
-------------
Total short-term investments $ 651,198
=============
Long-term investments:
Equity investments $ 23,372
Commercial paper 9,999
Treasury notes 2,105
-------------
Total long-term investments (included in other assets) $ 35,476
=============
6
<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 shares issuable upon the conversion of
convertible debt. These potential common shares are not included in the
computation of net loss per share for the periods ended September 26, 1999
as their effect is antidilutive. The following table sets forth the
components of basic and diluted income (loss) per common share:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------------------- ----------------------------
October 1, September 26, October 1, September 26,
(Thousands except per share data) 2000 1999 2000 1999
-------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic income (loss) per common share
before extraordinary item $431,547 $(105,545) $828,038 $(154,016)
Numerator for basic extraordinary item per common share 22,980 - 22,980 -
-------- --------- -------- ---------
Numerator for basic net income (loss) per common share $408,567 $(105,545) $805,058 $(154,016)
Numerator for basic income (loss) per common share
before extraordinary item $431,547 $(105,545) $828,038 $(154,016)
Effect of adding back interest expense associated with
convertible debentures 6,410 - 20,381 -
-------- --------- -------- ---------
Numerator for diluted income (loss) per common share
before extraordinary item 437,957 (105,545) 848,419 (154,016)
Numerator for diluted extraordinary loss per common share 22,980 - 22,980 -
-------- --------- -------- ---------
Numerator for diluted net income (loss) per common share $414,977 $(105,545) $825,439 $(154,016)
-------- --------- -------- ---------
Denominator:
Denominator for basic income (loss) per common share
--weighted-average shares 311,943 295,223 307,942 293,934
Effect of dilutive securities:
Employee stock options 12,996 - 14,172 -
Convertible debentures 27,954 - 27,969 -
-------- --------- -------- ---------
Dilutive potential common shares 40,950 - 42,141 -
-------- --------- -------- ---------
Denominator for diluted income (loss) per common share
--adjusted weighted-average shares 352,893 295,223 350,083 293,934
======== ========= ======== =========
Income (loss) per common share:
Basic:
Income (loss) before extraordinary item $ 1.38 $ (0.36) $ 2.69 $ (0.52)
======== ========= ======== =========
Extraordinary item; debt $ 0.07 $ - $ 0.08 $ -
======== ========= ======== =========
Net income (loss) $ 1.31 $ (0.36) $ 2.61 $ (0.52)
======== ========= ======== =========
Diluted:
Income (loss) before extraordinary item $ 1.24 $ (0.36) $ 2.42 $ (0.52)
======== ========= ======== =========
Extraordinary item: debt $ 0.06 $ - $ 0.06 -
======== ========= ======== =========
Net income (loss) $ 1.18 $ (0.36) $ 2.36 $ (0.52)
======== ========= ======== =========
</TABLE>
On August 21, 2000, the Company effected a two-for-one stock split in the
form of a stock dividend of one share of common stock for each share of AMD
common stock held on August 7, 2000. Share and per share amounts have been
adjusted for all prior periods presented to give effect to the stock split.
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 foundry facilities in Iwate, Japan and Gresham,
Oregon. The Company's share of FASL is 49.992 percent, and the investment is
being accounted for under the equity method. At October 1, 2000, the
cumulative adjustment related to the translation of the FASL financial
statements into U.S. dollars
7
<PAGE>
resulted in a decrease in the investment in FASL of $3,549,000. The
following are the significant FASL related-party transactions and balances
recorded by AMD:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
October 1, September 26, October 1, September 26,
(Thousands) 2000 1999 2000 1999
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Royalty income $ 8,236 $ 5,731 $ 20,139 $ 16,468
Purchases 107,318 73,159 261,977 191,935
<CAPTION>
October 1, December 26,
(Thousands) 2000 1999
---------- ------------
<S> <C> <C>
Royalty receivable $ 14,736 $ 6,601
Accounts payable 65,499 35,701
</TABLE>
The following is condensed unaudited financial data of FASL:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
October 1, September 26, October 1, September 26,
(Thousands) 2000 1999 2000 1999
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales $ 200,809 $ 139,868 $ 502,838 $ 355,538
Gross profit 19,513 12,335 22,811 31,005
Operating income 18,599 11,430 20,276 28,873
Net income 11,270 6,589 12,115 16,469
</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 transactions between FASL and the Company which are
reflected on the Company's condensed consolidated statements of operations.
5. Segment Reporting
In the third quarter of 2000, AMD operated in three reportable segments:
the Core Products segment, the Voice Communications segment and the Foundry
Services segment. AMD revised its segments in the third quarter of fiscal
2000 to reflect the sale of 90 percent of its former voice communications
products business, Legerity, Inc., formerly a wholly owned subsidiary of
AMD. Prior period segment information has been restated to conform to the
current period presentation. The Core Products segment includes
microprocessors, core logic products, embedded processors, Flash memory
devices, networking products and Erasable Programmable Read-Only Memory
(EPROM) devices. The Voice Communications segment included
telecommunication products. Following the sale of Legerity on August 4,
2000, the Company will not have any further sales in the Voice
Communications segment. The Foundry Services segment includes sales by
Vantis, AMD's former programmable logic subsidiary,
8
<PAGE>
prior to its sale and fees for services provided to Legerity and Vantis
subsequent to their sales. After the third quarter of 2000, Voice
Communications will no longer be a reportable segment as a result of its
sale.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
--------------------------- ---------------------------
(Thousands) October 1, September 26, October 1, September 26,
Net sales: 2000 1999 2000 1999
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Core Products segment
External customers $1,143,488 $ 602,143 $ 3,239,035 $ 1,759,189
Intersegment sales - - - 32,626
---------- ------------- ----------- -------------
1,143,488 602,143 3,239,035 1,791,815
Voice Communications segment external customers 17,427 41,774 140,309 108,966
Foundry Services segment external customers 45,634 18,273 89,671 20,739
Elimination of intersegment sales - - - (32,626)
---------- --------- ---------- ----------
Total Net sales $1,206,549 $ 662,190 $3,469,015 $1,888,894
========== ========= ========== ==========
Segment operating income (loss):
Core Products segment $ 267,883 $ (99,414) $ 640,591 $ (398,591)
Voice Communications segment (3,560) 1,996 32,387 (501)
Foundry Services segment (1,479) (1,572) 20,732 6,450
---------- --------- ---------- ----------
Total segment operating income (loss) 262,844 (98,990) 693,710 (392,642)
Interest income and other, net 19,789 6,757 60,852 24,777
Gain on sale of Legerity 336,899 - 336,899 -
Gain on sale of Vantis - - - 432,059
Interest expense (17,382) (18,033) (40,105) (56,883)
Provision for income taxes (175,009) - (226,787) (167,350)
Equity in net income of FASL 4,406 4,721 3,469 6,023
Extraordinary item - loss on debt
retirement net of tax benefit (22,980) - (22,980) -
---------- --------- ---------- ----------
Net income (loss) $ 408,567 $(105,545) $ 805,058 $ (154,016)
========== ========= ========== ==========
</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).
9
<PAGE>
The following are the components of comprehensive income (loss):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------- -----------------------------
October 1, September 26, October 1, September 26,
(Thousands) 2000 1999 2000 1999
----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $408,567 $(105,545) $805,058 $(154,016)
Foreign currency translation adjustments (39,760) 49,423 (72,523) 19,433
Unrealized gains on securities, net of tax:
Unrealized gains (losses) on investments arising
during the period (3,974) 6,377 (1,410) 14,246
Less: Reclassification adjustment for
gains included in earnings - - - (3,453)
-------- --------- -------- ---------
Other comprehensive gain (loss) (43,734) 55,800 (73,933) 30,226
-------- --------- -------- ---------
Comprehensive income (loss) $364,833 $ (49,745) $731,125 $(123,790)
======== ========= ======== =========
</TABLE>
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
October 1, December 26,
(Thousands) 2000 1999
---------- ------------
<S> <C> <C>
Unrealized gain on investments, net of
tax $ 12,868 $ 14,278
Cumulative translation adjustments (104,215) (31,692)
--------- --------
$ (91,347) $(17,414)
========= ========
</TABLE>
7. Sale of Legerity
On August 4, 2000, the Company completed the sale of 90 percent of Legerity
for approximately $375 million in cash. Prior to the sale, Legerity was a
wholly owned subsidiary of AMD, engaging in voice communication products
business. Net assets sold totaled $30 million and the Company incurred $8
million in selling expenses resulting in a gain on the sale of $337
million. The Company has retained a 10 percent ownership interest in the
business and also has a warrant to acquire approximately an additional 10
percent. As part of the transaction, the Company negotiated various service
contracts with Legerity 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 nine 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.
10
<PAGE>
The charges against accruals for restructuring and other special charges
through the quarter ended October 1, 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 provision $ 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 provision 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 provision - - 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, 2000 - 605 - 2,337 - 2,942
Cash charges - - - (2,337) - (2,337)
------- ----- -------- ------- ------------ --------
Accruals at July 2, 2000 - 605 - - - 605
Cash charges - (72) - - - (72)
------- ----- -------- ------- ------------ --------
Accruals at October 1, 2000 $ - $ 533 $ - $ - $ - $ 533
======= ===== ======== ======= ============ ========
</TABLE>
The Company anticipates that the remaining accruals for closed sales office
facilities will be utilized over the period through lease termination in
the second quarter of 2002.
9. Debt
On August 2, 2000, the Company repurchased $356 million of the $400 million
aggregate principal amount of its 11% Senior Secured Notes due 2003 (the
Senior Secured Notes) at a premium of $36 million. This amount has been
recorded as an extraordinary loss of approximately $23 million net of a tax
benefit of $13 million.
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. On September 5, 2000, the parties
stipulated to and the United States District Court for the Northern
District of California entered an order whereby all plaintiffs' claims and
causes of action against all defendants were voluntarily dismissed without
prejudice.
11
<PAGE>
11. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards, or SFAS, No. 133,"Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137 and 138, establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be
required to implement SFAS No. 133 as of the beginning of the Company's
fiscal year 2001. The Company's foreign currency exchange rate hedging
activities have been insignificant to date and the Company does not believe
that SFAS No. 133 will have a material impact on its financial position,
results of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" or SAB 101. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements. In recent actions, the SEC has further delayed the
required implementation date which, for the Company, is the fourth quarter
of 2000, retroactive to the beginning of the fiscal year. The SEC has
recently issued implementation guidance in the form of "Frequently Asked
Questions and Answers." The Company's preliminary conclusion is that the
implementation of SAB 101 will not have a material impact on its financial
position, results of operations or cash flows for the year ending December
31, 2000.
In March 2000, FASB Interpretation, or FIN, No. 44, "Accounting for Certain
Transactions Involving Stock Compensation-An Interpretation of APB Opinion
No. 25," was issued. FIN 44 clarifies the application of APB No. 25 for
certain issues. FIN 44 clarifies the definition of employee for purposes of
applying APB No. 25, the criteria for determining whether a plan qualifies
as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed option or award, and the
accounting for an exchange of share compensation awards in a business
combination, among others. FIN 44 was effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company's
management believes that FIN 44 will not have a significant effect on the
Company's financial position or results of operations.
12
<PAGE>
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward-looking are based on 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 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 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 Unaudited
Condensed Consolidated Financial Statements and related notes included in this
report and our audited Financial Statements and related notes as of December 26,
1999, and December 27, 1998, and for each of the three years in the period ended
December 26, 1999 as filed in the Company's Annual Reports on Form 10-K.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, K86, AMD-
K6, 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.
13
<PAGE>
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
During the nine months ended October 1, 2000, we participated in all three
technology areas within the digital integrated circuit (IC) market - memory
circuits, logic circuits and microprocessors - through (1) our Core Products
segment, which consists of PC Processor products, Flash Memory products and
Other IC products, (2) our Voice Communications segment, which consisted of our
former Voice Communications products, and (3) our Foundry Services segment,
which includes sales by our former programmable logic devices subsidiary,
Vantis, prior to its sale, and service fees from Vantis and Legerity, our former
Voice Communications business, subsequent to their sales. PC Processor products
include AMD seventh-generation microprocessors and AMD-K6(R) family
microprocessors. The Other IC products include Embedded Processors, Platform
products and Networking products. The Voice Communications segment included the
voice telecommunication products of Legerity.
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 August 4, 2000, we completed the sale of 90 percent of Legerity for
approximately $375 million in cash. Prior to the sale, Legerity was a wholly
owned subsidiary of AMD, engaging in voice communication products business. We
have retained a 10 percent ownership interest in the business and also have a
warrant to acquire approximately an additional 10 percent. As part of the
transaction, we negotiated various service contracts with Legerity to continue
to provide, among other things, wafer fabrication and assembly, test, mark and
pack services to Legerity.
On August 2, 2000, we retired approximately $356 million aggregate principal
amount of our Senior Secured Notes in connection with a tender offer for those
notes. We incurred a one-time extraordinary loss of $23 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 October 1, 2000, July 2, 2000, and September 26, 1999 each
included 13 weeks.
14
<PAGE>
The following is a summary of our net sales by segment for the periods presented
below:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
------------- -----------------
October 1, July 2, September 26, October 1, September 26,
(Millions) 2000 2000 1999 2000 1999
---------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Core Products Segment:
PC Processors $ 625 $ 583 $ 296 $ 1,771 $ 892
Memory Products 420 362 206 1,109 499
Other IC Products 99 138 100 359 282
---------- ---------- ---------- --------- ----------
1,144 1,083 602 3,239 1,673
Voice Communications Segment 17 63 42 140 109
Foundry Services Segment 46 24 18 90 107
---------- ---------- ---------- --------- ----------
$ 1,207 $ 1,170 $ 662 $ 3,469 $ 1,889
========== ========== ========== ========= ==========
</TABLE>
Net Sales Comparison of Quarters Ended October 1, 2000 and July 2, 2000
Net sales of $1,207 million for the third quarter of 2000 increased by 3 percent
compared to net sales of $1,170 million for the second quarter of 2000.
PC Processor products net sales of $625 million increased 7 percent in the third
quarter of 2000 compared to the second 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 microprocessors.
Overall PC Processor products sales growth in the fourth quarter of 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 products net sales of $420 million increased 16 percent in the third
quarter of 2000 compared to the second quarter of 2000 primarily as a result of
strong demand for Flash memory devices, which was offset by a decline in net
sales of EPROMs. Although demand for Flash memory devices has remained strong,
achieving further growth in net sales of Flash memory devices in the fourth
quarter of 2000 will depend upon our ability to increase our Flash memory
manufacturing capacity, as to which we cannot give any assurance.
The Other IC products net sales of $99 million decreased 28 percent in the third
quarter of 2000 compared to the second quarter of 2000 primarily due to
decreased net sales of chipsets products and home networking products. The
chipsets products decreased 88 percent when compared to the second quarter of
2000 as a result of the availability of superior chipset solutions from third-
party suppliers. We plan to continue to cooperate with third-party chipset
suppliers to bring superior chipset solutions to the market to support our
seventh-generation microprocessors.
Voice Communications segment net sales of $17 million decreased 73 percent in
the third quarter of 2000 compared to the second quarter of 2000, primarily
because there were only 4 weeks of sales in the third quarter due to the sale of
Legerity on August 4, 2000, as compared to a full 13 weeks of sales in the prior
quarter. This will be the last quarter we will report sales by the Voice
Communications segment.
15
<PAGE>
In the Foundry Services segment, we received service fees of $24 million from
Lattice and $22 million from Legerity in the third quarter of 2000 for a total
of $46 million compared to $24 million from Lattice in the second quarter of
2000. The increase was primarily due to the service fees received from Legerity
in the third quarter of 2000 as a result of the sale of Legerity on August 4,
2000.
Net Sales Comparison of Quarters Ended October 1, 2000 and September 26, 1999
Net sales of $1,207 million for the third quarter of 2000 increased by 82
percent compared to net sales of $662 million for the third quarter of 1999.
PC Processor products net sales of $625 million increased 111 percent in the
third quarter of 2000 compared to the same quarter of 1999 primarily due to
increased net sales of our seventh-generation microprocessors offset by a
decrease in net sales of AMD-K6 microprocessors. Although unit sales of our
seventh-generation microprocessors increased, average selling prices decreased
as we offered versions over a broader range of performance and price points.
Memory products net sales of $420 million increased by 104 percent in the third
quarter of 2000 compared to the same 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.
The Other IC products net sales of $99 million in the third quarter of 2000
decreased slightly when compared to the same quarter of 1999 as a result of
decreased net sales from Embedded Processors products and chipsets offset by an
increase in net sales in networking products.
Voice Communications segment net sales of $17 million decreased 60 percent
in the third quarter of 2000 compared to the same quarter of 1999. The decrease
was primarily due to only 4 weeks of sales in the third quarter of 2000 because
of the sale of Legerity on August 4, 2000, as compared to a full 13 weeks of
sales in the third quarter of 1999.
In the Foundry Services segment, we received service fees of $24 million from
Lattice and $22 million from Legerity in the third quarter of 2000 for a total
of $46 million compared to $18 million in the same quarter of 1999. The increase
in service fees was primarily due to the service fees received from Legerity in
the third quarter of 2000 as a result of the sale of Legerity on August 4, 2000.
16
<PAGE>
Net Sales Comparison of Nine Months Ended October 1, 2000 and September 26, 1999
Net sales of $3,469 million for the first nine months of 2000 increased by 84
percent compared to net sales of $1,889 million for the first nine months of
1999.
PC Processor products net sales of $1,771 million increased by 99 percent in
the first nine months of 2000 compared to the first nine months 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.
Memory products net sales of $1,109 million increased by 122 percent in the
first nine months of 2000 compared to the first nine months 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.
The Other IC products net sales of $359 million increased by 27 percent in the
first nine months of 2000 compared to the first nine months of 1999. The
increase was primarily due to an increase in net sales of chipsets and
networking products.
Voice Communications segment net sales of $140 million increased 28 percent
in the first nine months of 2000 compared to the first nine months of 1999. The
increase was primarily due to increased net sales of telecommunications line-
cards, ADSL chips, and internet access applications offset by 31 weeks of sales
in the first nine months of 2000 due to the sale of Legerity on August 4, 2000,
as compared to a full 39 weeks of sales in the first nine months of 1999.
In the Foundry Services segment, we received service fees of $68 million from
Lattice and $22 million from Legerity in the first nine months of 2000 for a
total of $90 million. In the first nine months of 1999, Foundry Services
revenues totaled $107 million resulting primarily from sales generated by
Vantis.
17
<PAGE>
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 Nine Months Ended
------------- -----------------
October 1, July 2, September 26, October 1, September 26,
(Millions except for gross margin 2000 2000 1999 2000 1999
percentage) ---------- ------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Cost of sales $ 639 $ 613 $ 474 $ 1,857 $ 1,383
Gross margin percentage 47% 48% 28% 46% 27%
Research and development $ 163 $ 156 $ 158 $ 480 $ 485
Marketing, general and administrative 142 152 129 438 381
Restructuring and other special charges - - - - 33
Gain on sale of Vantis - - - - 432
Gain on sale of Legerity 337 - - 337 -
Interest income and other, net 20 20 7 61 25
Interest expense 17 11 18 40 57
</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. The
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 47 percent in the third quarter of 2000 decreased
slightly from the second quarter of 2000 and increased from 28 percent in the
same quarter of 1999. Gross margin percentage of 46 percent in the first nine
months of 2000 increased from 27 percent in the first nine months of 1999. The
slight decrease in gross margin percentage in the third quarter of 2000 compared
to the second quarter of 2000 was due to the sale of Legerity. The increase in
gross margin percentage in the third quarter of 2000 compared to the same
quarter in 1999 and the increase in gross margin percentage in the first nine
months of 2000 compared to the first nine months of 1999 were due to higher net
sales of microprocessors and Flash memory devices. Higher net sales were
partially offset by an increase in fixed costs. Fixed costs will continue to
increase as we ramp production in Dresden Fab 30. As described 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 $163 million in the third quarter of 2000
increased 4 percent compared to the immediately prior quarter, and increased 3
percent compared to the same quarter in 1999. The increased costs related to
research and development activities for PC microprocessors. Research and
development expenses of $480 million in the first nine months of 2000 decreased
slightly compared to the first nine months of 1999. The decrease was primarily a
result of shifting 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.
Included in research and development and cost of sales are the recognition of
deferred credits on foreign capital grants and interest subsidies that were
received for Dresden Fab 30. These credits of approximately $10
18
<PAGE>
million per quarter (denominated in deutsche marks) will continue to be offset
against Dresden Fab 30 expenses in future quarters until June 2007.
Marketing, general and administrative expenses of $142 million in the third
quarter of 2000 decreased 7 percent compared to the second quarter of 2000 as
a result of spending controls and discontinued discrete marketing programs.
Marketing, general and administrative expenses in the third quarter of 2000
increased 10 percent compared to the third quarter of 1999. Marketing, general
and administrative expenses of $438 million in the first nine months of 2000
increased 15 percent compared to the first nine months of 1999. The increases
were due to increased advertising and marketing for the AMD Athlon
microprocessor and retention bonuses paid in connection with the sale of
Legerity.
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:
. $24 million for the closure of a submicron development laboratory facility in
the SDC, the write-off of certain equipment in the Submicron Development
Center (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;
. $4 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 October 2, 2000, the total cash outlay for these restructuring and other
special charges was approximately $8 million.
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 that
otherwise would have been incurred will be reduced by $30 million over the
next several years. We anticipate that the remaining accruals of $500,000 for
sales office facilities will be utilized through the second quarter of 2002.
On August 4, 2000, we completed the sale of 90 percent of Legerity for
approximately $375 million in cash. Our pre-tax gain on the sale of Legerity
was $337 million. We currently expect the applicable tax rate on the gain to
be 37 percent.
Interest income and other, net of $20 million in the third quarter of 2000 was
relatively flat compared to the second quarter of 2000 and increased 186 percent
compared to the same quarter of 1999. Interest income and other, net of $61
million in the first nine months of 2000 increased 144 percent compared to the
first nine months of 1999. The increase was primarily due to higher average
cash balances.
19
<PAGE>
Interest expense of $17 million in the third quarter of 2000 increased 55
percent compared to the second quarter of 2000. During the construction of
Dresden Fab 30, we capitalized interest expense attributable to the construction
in progress. Dresden Fab 30 began production at the end of the second quarter of
2000 and, consequently, we did not capitalize interest costs in the third
quarter of 2000, causing our reported interest expense to increase. This
increase was offset by a reduction in interest expense of $6.2 million due to
retirement of a portion of our Senior Secured Notes in August 2000. Interest
expense of $17 million in the third quarter of 2000 decreased 6 percent compared
to the same quarter of 1999. Interest expense of $40 million in the first nine
months of 2000 decreased 30 percent compared to the first nine months of 1999.
The decreases were 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, reduction in interest expenses due to
retirement of a portion of our Senior Secured Notes, offset by cessation of
capitalization of interest costs relating to Dresden Fab 30 as related assets
have been placed into service and Dresden Fab 30 has begun manufacturing
products.
Income Tax
We recorded a $175 million income tax provision in the third quarter of 2000 and
no income tax provision in the third quarter of 1999. Excluding the gain on the
sale of Legerity, the effective tax rates for the three and nine months ended
October 1, 2000, 19 percent and 14 percent respectively, reflect the realization
of previously unbenefited deferred tax assets and are higher than the equivalent
tax rates on income, excluding the gain on the sale of Vantis in 1999, zero
percent, as we project that income in 2000 will exceed the amount we could
offset through the realization of such deferred tax assets.
Other Items
International sales as a percent of net sales were 57 percent in the third
quarter of 2000 compared to 61 percent in the second quarter of 2000 and 63
percent in the third quarter of 1999. International sales were 57 percent of
net sales in the first nine months of 2000 and 59 percent in the first nine
months of 1999. During the third quarter of 2000, approximately 6 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 from changes in foreign currency rates individually and
in the aggregate has not been significant.
20
<PAGE>
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 Nine Months Ended
------------- -----------------
October 1, July 2, September 26, October 1, September 26,
(Millions) 2000 2000 1999 2000 1999
---------- ------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Core Products $ 268 $ 230 $ (99) $ 641 $(398)
Voice Communications (4) 20 2 32 (1)
Foundry Services (1) - (2) 21 6
----- ----- ----- ----- -----
Total $ 263 $ 250 $ (99) $ 694 $(393)
===== ===== ===== ===== =====
</TABLE>
The Core Products segment operating income in the third quarter of 2000
increased 17 percent compared to the second quarter of 2000. The increase was
mainly due to an increase in net sales of our seventh-generation
microprocessors and Flash memory devices which more than offset higher fixed
costs. The Core Products segment had operating income of $268 million in the
third quarter of 2000 and operating income of $641 million in the first nine
months of 2000 compared to a loss of $99 million in the third quarter of 1999
and a loss of $398 million in the first nine months 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
Voice Communications segment incurred an operating loss of $4 million in the
third quarter of 2000 compared to operating income of $20 million in the second
quarter of 2000 and operating income of $2 million in the third quarter of 1999.
The Voice Communications segment operating income increased in the first nine
months of 2000 compared to an operating loss in the first nine months of 1999.
The loss in the first nine months of 1999 was a result of decreased net sales
from telecommunications line-cards, ADSL chips, and internet access
applications. AMD revised its segments in the third quarter of fiscal 2000 to
reflect the sale of 90 percent of its former voice communications products
business, Legerity, Inc., formerly a wholly owned subsidiary of AMD. We will not
have any further sales in the Voice Communications segment.
21
<PAGE>
________________________________________________________________________________
FINANCIAL CONDITION
Net cash provided by operating activities was $955 million in the first nine
months of 2000 primarily due to net income of $805 million, a nonrecurring
$337 million reduction to operating cash flows from the gain on the sale of
Legerity in 2000, an increase of $429 million from depreciation and
amortization, an increase of $71 million from income tax benefits from
employee stock option exercises, and a decrease of $28 million from foreign
grant and subsidy income.
Net cash used in operating activities was $79 million in the first nine months
of 1999 primarily due to the net loss of $154 million, a nonrecurring $432
million reduction in operating cash flows from the gain on the sale of Vantis
in 1999, an increase of $386 million from depreciation and amortization, an
increase of $164 million from deferred income taxes a decrease of $38 million
from foreign grant and subsidy income not received in cash.
Net cash used in investing activities was $540 million during the first nine
months of 2000 primarily due to the nonrecurring $375 million we received in
2000 from the sale of Legerity offset by $577 million from purchase of property,
plant and equipment and $350 million of net purchases of available-for-sale
securities. Net cash provided by investing activities was $4 million during the
first nine months of 1999 primarily due to the nonrecurring $454 million we
received from the sale of Vantis offset by $41 million in net proceeds from
sales of available for sale securities and $3 million from proceeds from sales
of property, plant and equipment.
Net cash used in financing activities was $132 million during the first nine
months of 2000 primarily due to $394 million in payments on debt and capital
lease obligations offset by $146 million in proceeds from borrowing activities
and $116 million in proceeds from issuance of stock. Net cash used in financing
activities was $183 million during the first nine months of 1999 primarily due
to $239 million in payments on debt and capital lease obligations offset by $23
million in proceeds from borrowings and $33 million in proceeds from issuance
of stock.
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 under the Loan Agreement are secured by
a pledge of most of our accounts receivable, inventory, general intangibles and
the related proceeds. As of October 1, 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.
22
<PAGE>
We plan to make capital investments of approximately $850 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
fabrication facility and has installed equipment in Dresden Fab 30, which began
production in the second quarter of 2000. 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 $2.3 billion when fully equipped by the end of 2003. We have invested $1.2
billion as of October 1, 2000. 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 $407 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 $742 million in loans to AMD Saxony to help fund
Dresden Fab 30 project costs. AMD Saxony had $371 million of such loans
outstanding as of October 1, 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 $742
million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $139 million.
Of these amounts, AMD Saxony had received $284 million in capital investment
grants and allowances and $29 million in interest subsidies as of October 1,
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 October 1, 2000, we were in compliance with all of the conditions of
the grants and subsidies.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, such
funding to be repaid to AMD as AMD Saxony receives the grants or subsidies
from the State of Saxony;
23
<PAGE>
. 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 $98 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 $65 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
third quarter of 2000, which was approximately 2.22 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 under 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 if 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 complete the continued facilitization of 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.
24
<PAGE>
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 $1.2 billion when fully equipped. As of October
1, 2000, approximately $646 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 $1.4 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 October 1, 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 third quarter of 2000, the exchange rate
was approximately 107.64 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 available external financing and the extension of existing facilities, will
be sufficient to fund operations and capital investments for at least the next
12 months.
On August 4, 2000, we received approximately $375 million for the sale of 90
percent of Legerity. The proceeds of the sale were subsequently used to
repurchase approximately $356 million aggregate principal amount of our Senior
Secured Notes.
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:
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. commercial and consumer market acceptance of our seventh-generation
microprocessors;
. our ability to produce seventh-generation microprocessors in the volume and
with the performance and feature set required by customers on a timely basis;
. the availability and acceptance of motherboards and chipsets designed for 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
combinations thereof;
. the successful development and installation of 0.18-micron process technology
and copper interconnect technology;
. 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 competitive with Intel's Pentium III and Pentium IV
processors; 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.
If we fail to achieve continued market acceptance of our seventh-generation
microprocessors, or if chipsets and motherboards which are compatible with our
seventh-generation microprocessors are not made available in volume on a timely
basis, 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 possibly on our cash balances as well.
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,
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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 motherboards and chipsets designed for these
processors;
. whether we can successfully fabricate higher performance microprocessors in
planned volume and speed mixes;
. 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 processors 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; 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
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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.
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
. brand strength.
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, graphic chips, 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, graphics chips, 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
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microprocessors and companion products. We cannot be certain, however, that our
efforts will be successful.
We do not currently plan to develop microprocessors that are bus interface
protocol compatible with the Pentium III, Pentium IV 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 our microprocessors, or that platforms are available
which support both Intel processors and our 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 investments of approximately $850 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.
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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 $407 million as of October 1, 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 $1.2 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 $1.4 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 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 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
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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. 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 Duron and 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 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.
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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 Dresden Fab 30,
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;
. Consumer electronic items such as set top boxes, personal digital assistants
and digital cameras.
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 Flash memory devices. Currently we
are expanding production capacity of Flash memory devices through foundry
arrangments. We cannot 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. 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
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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, including next generation processors and Flash memory
devices, or otherwise have a material adverse effect on our business.
Demand for Our Products Affected by International Economic Conditions
While general industry demand is currently strong, a decline of the worldwide
semiconductor market 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;
. 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
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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
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 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;
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. 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 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.
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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 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.
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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 on our 11% Senior Secured Notes ($400 million) due 2003. The
swap converts 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 swap is cancelable at the option of the counter-party (Bank of
America) on August 1, 2001. We have maintained the swap as an undesignated
hedge that is being marked-to-market through earnings.
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 of lead counsel, the case was re-named Hall et al. v. Advanced
Micro Devices, Inc., et al. On September 5, 2000, the parties stipulated to
and the United States District Court for the Northern District of California
entered an order whereby all plaintiffs' claims and causes of action against
all defendants were voluntarily dismissed without prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.2(d) Third Supplemental Indenture, dated as of July 28, 2000, between
AMD and the United States Trust Company, as trustee.
10.57 Employment Agreement, dated as of September 27, 2000, between AMD and
Robert J. Rivet.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated July 19, 2000 reporting under Item 5 -
Other Events was filed announcing AMD's second quarter earnings.
2. A Current Report on Form 8-K dated August 4, 2000 reporting under Item 2 -
Acquisition or Disposition of Assets was filed announcing the completion of
the sale of 90 percent of Legerity to Francisco Partners, L.P.
37
<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: November 9, 2000 By: /s/ Robert J. Rivet
____________________________
Robert J. Rivet
Senior Vice President, Chief Financial Officer
Signing on behalf of the registrant and as
the principal accounting officer
38
