[LOGO OF AMD APPEARS HERE]
1995
ANNUAL
REPORT
CORPORATE
profile
As the front cover indicates, Advanced Micro Devices Inc. (AMD) recently changed
its logo. The new "AMD" logo more accurately reflects the way shareholders,
customers and employees refer to the company.
AMD, which focuses on the personal and networked computing and
communications markets, produces microprocessors and related peripherals, flash
memories, programmable logic devices, and circuits for telecommunications and
networking applications. AMD has sales offices worldwide and has manufacturing
facilities in Sunnyvale, California; Austin, Texas; Bangkok, Thailand; Penang,
Malaysia; Singapore; and Aizu-Wakamatsu, Japan.
AMD was founded in 1969. The company is headquartered in Sunnyvale,
California and employs approximately 12,700 people worldwide. AMD became a
publicly held company in 1972 and since 1979 has been listed on the New York
Stock Exchange with the trading sysmbol of AMD for its common shares.
FINANCIAL
highlights
Five Years Ended December 31, 1995
(Dollars in thousands except per share amounts, ratios, and
employment figures) 91 92 93 94 95
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Net sales $1,226,649 $1,514,489 $1,648,280 $2,134,659 $2,429,724
Operating income 109,160 269,945 305,053 513,139 348,277
Net income 145,287 245,011 228,781 305,266 300,521
Net income per common share:
Primary 1.53 2.57 2.30 3.02 2.85
Fully diluted 1.52 2.49 2.24 2.92 2.81
Working capital 170,862 385,114 509,567 394,452 475,032
Stockholders' equity 783,356 1,046,740 1,352,271 1,735,265 2,100,128
Capital additions 137,202 222,064 388,181 582,944 645,237
Depreciation and amortization 155,935 152,313 175,275 215,984 262,501
Research and development 213,765 227,860 262,802 279,984 397,555
Research and development as a
percentage of sales 17.4% 15.0% 15.9% 13.1% 16.4%
Return on equity 20.5 26.8 19.1 19.8 15.7
Debt as a percentage of capital 21.0% 6.0% 9.1% 7.5% 11.5%
Worldwide employment 11,254 11,554 12,065 11,793 12,730
[BAR CHARTS APPEAR HERE]
TO OUR FELLOW
shareholders
In 1995 the worldwide semiconductor industry experienced a remarkable 42
percent growth in revenues. Robust unit demand from a strong and
increasingly memory-hungry personal computer market led to shortages and
uncharacteristically stable prices for DRAMs (dynamic random-access
memories). Led by 70 percent growth in the DRAM sector, the semiconductor
industry had a strong wind at its back.
AMD developed a rip in its mainsail, and we didn't catch the wind. Our
revenue growth was an unremarkable 14 percent.
The rip in our mainsail was our tardiness in bringing to market our fifth-
generation, AMD-K5(TM) microprocessor, the first member of our K86 RISC
SUPERSCALAR(TM) family. In the first half of the year, sales of Am486(R)
microprocessors were robust and made substantial contributions to earnings.
In the second half, as demand shifted rapidly to the fifth-generation
Pentium processor, prices for 486 devices declined sharply, and more
importantly, unit demand dropped. Our difficulties in the microprocessor
arena masked the outstanding success we achieved in the remainder of our
businesses, which, in the aggregate, achieved a 36 percent growth rate over
the prior year.
Revenues of $2,429,724,000 resulted in net income of $300,521,000, or $2.81
per share on a fully diluted basis for 1995. For the prior year, AMD
reported revenues of $2,134,659,000 and net income of $305,266,000, or
$2.92 per share fully diluted.
Personal computers, with worldwide sales in excess of 65 million units in
1995 and projected to reach 100 million units in 1998, represent AMD's
greatest opportunity. Microsoft(R) Windows(R)-compatible microprocessors
are our strategic thrust in this market.
AMD has a singular opportunity in the PC market, where intellectual
property requirements impose high barriers to market entry and limit the
number of major
participants. In January of 1995, AMD and Intel concluded a landmark agreement
settling all outstanding legal disputes. In December, we concluded a second
landmark agreement with Intel when we negotiated a new, five-year cross-license
agreement. This agreement assures that AMD has legal rights to all the enabling
intellectual property necessary to continue providing our customers with
competitive products that are fully software compatible with the Intel
instruction set.
Success in the microprocessor arena, however, requires more than compatibility.
Customers want a high-volume supplier. If customers are to reap the benefits of
competition, an alternate source must be capable of manufacturing its products
in sufficient volume to affect supplies, prices, and the pace of technological
advances. Critical success factors include core competence in advanced
microprocessor design, leading-edge process technology, and manufacturing
capacity to capture a significant market share.
During the past year we took action on all fronts to fortify our position as the
only credible challenger to Intel in Windows-compatible microprocessors. We
achieved a successful startup at our new megafab for microprocessors and
advanced logic products -- Fab 25 in Austin, Texas -- and commenced volume
production. Today, we are producing all of our microprocessors in Fab 25 on
sixth-generation CS34 0.35-micron technology.
We plan to break ground in Dresden, Germany, by the end of 1996 for our next
megafab for future generations of Windows-compatible microprocessors and other
high-volume logic products. This facility, to be known as Fab 30, is scheduled
to commence production by the end of 1998 on 0.25-micron technology, and
subsequently migrate to 0.18-micron technology.
In January of this year we completed our acquisition of NexGen, Inc.,
significantly enhancing our core competency in advanced microprocessor design
and acquiring a sixth-generation microprocessor design in an advanced stage of
development.
With this design, the AMD-K6(TM) microprocessor, we expect to have--for the
first time in our history--microprocessor products competitive with Intel's
latest mainstream products in a contemporaneous time frame in 1997. The key to
achieving success, of course, is flawless execution.
We believe the future of computation is increasingly being driven by convergence
with communications. Communications networks, including the public and private
infrastructure and wireless technologies, present great opportunities for AMD.
AMD is now the world's number one supplier of integrated circuits for local area
network applications. In 1996 we expect to supply more than 10 million
networking devices to the manufacturers of adapter cards, backbones, routers,
and other devices. AMD is a leading supplier to industry leaders such as Cisco
Systems, whose products supply more than 80 percent of the backbone of the
Internet -- and virtually every Cisco product contains an AMD chip. Indeed, the
path to the Internet is paved with AMD silicon!
AMD's SLIC (subscriber line interface circuit) and SLAC(TM) (subscriber line
audio-processing circuit) products have made AMD the world's leading supplier of
circuits for linecards for the public communications infrastructure. We have a
similar credential in the private infrastructure (i.e., enterprise networks) as
well, where we are the leading supplier of Ethernet hubs and FDDI (Fiber
Distributed Data Interface) circuits.
Over the longer term, we expect that wireless networks will drive growth in the
communications sector. We are positioning ourselves to capitalize on this
opportunity.
In 1995 even a 70 percent year-to-year growth rate in revenues from our AMD
MACH(R) family of complex programmable logic devices (CPLDs) was insufficient to
keep pace with our principal competitors. We are looking to our new MACH 5 CPLD
products to reverse this trend. With densities as high as 20,000 gates,
architectural superiority and industry-leading speeds as fast as 7.5
nanoseconds, MACH 5 products have won high praise from beta site customers.
Volume production has commenced, and members of the product family will be
introduced throughout the year.
Our progress in flash memories has rewarded our commitment. Flash memory sales
exceeded $500 million--a year-to-year increase of more than 150 percent--as our
5-volt-only architecture continued to win customer acceptance. We successfully
started production at our Fujitsu AMD Semiconductor Limited (FASL) joint-venture
megafab at Aizu-Wakamatsu, Japan, and rapidly ramped production. By year-end AMD
had achieved a 30 percent market share with demand outstripping capacity. We
have just begun volume shipments of our industry-leading 2.7-volt-only flash
products, which we believe are essential to mobile computation and
communications.
Flash memory has proved to be an ideal solution for a broad array of
applications. AMD has achieved leadership in flash process technology and
products. Our near-term challenge is to add capacity to capitalize on the
expanding market opportunities. Consistent with our intention to be the lowest-
cost producer of flash memories, we are moving to 0.35-micron technology and
proceeding with construction of a second FASL megafab for flash memories in
Aizu-Wakamatsu. Early in 1996 we broke
ground at Suzhou, China, for an assembly and test facility for high-volume,
cost-sensitive products, including flash memories.
While the successes we have achieved across virtually all of our product lines
are gratifying, they are currently overshadowed by the absence of our
competitive response to the Pentium in the PC marketplace. For many, AMD is
defined by its microprocessor business, which in turn drives our participation
in the PC market. Our opportunity is enormous. The stakes are high. Our
commitment is total and irrevocable. The planned introduction of the first of
our K86 SUPERSCALAR microprocessors in the second quarter of this year, with
higher-performance versions expected in the second half of the year in volume
production, should enable us to achieve acceptable overall growth and post
improved operating results.
1996 will be a challenging year for us. We plan to meet the challenge.
Thank you for your continuing support
/s/ W.J.Sanders III /s/ Richard Previte
W.J.Sanders III Richard Previte
Chairman and President and
Chief Executive Officer Chief Operating Officer
February 22, 1996
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The forward looking statements contained in the above letter are subject to
risks and uncertainties, including those discussed in the Company's Form 10-K
for the fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission, that could cause actual results to differ materially from
those projected.
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FINANCIAL
contents
8 Management's Discussion and Analysis of Results
of Operations and Financial Condition
13 Consolidated Statements of Income
14 Consolidated Balance Sheets
15 Consolidated Statements of Cash Flows
16 Notes to Consolidated Financial Statements
29 Report of Ernst & Young LLP, Independent Auditors
30 Supplementary Financial Data
31 Financial Summary
32 Corporate Directory
MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
Net sales of $2.4 billion in 1995 rose by approximately 14 percent from 1994.
This increase was primarily attributable to substantial growth in Flash memory
sales and secondarily due to an increase in sales of communication products, the
combination of which more than offset a decline in microprocessor sales. Net
sales in 1994 increased by approximately 30 percent from 1993 due to substantial
growth in microprocessor sales.
Sales of Flash memory devices increased in 1995 from 1994 primarily due to
growth in unit shipments and secondarily due to a change in product mix
resulting in higher average selling prices. Prices may decline in 1996 due to
increased competition. The company plans to continue to meet projected long-term
demand for Flash memory devices primarily through its manufacturing joint
venture, Fujitsu AMD Semiconductor Limited (FASL), in which AMD has a 49.95
percent equity interest. During 1995, Flash memory devices contributed, and are
expected to continue to contribute in 1996, a significant and increased portion
of the company's revenues and profits.
Revenues from communication products rose from 1994 to 1995 primarily due
to growth in the Ethernet family of products. Sales of CMOS programmable logic
devices increased from 1994 to 1995 primarily due to increased unit shipments.
In 1995, EPROM sales decreased as compared to 1994 due to comparable declines in
both unit shipments and average selling prices.
In 1995, Am486(R) microprocessor sales decreased slightly primarily due to
average selling price declines, partially offset by increases in unit sales.
Am486 microprocessor products contributed a significant portion of the company's
revenues and profits in 1994 and 1995. Price declines are anticipated to
continue in 1996 while unit shipments may be flat to down depending on market
demand. The company, therefore, expects Am486 microprocessor revenues and
profits in 1996 to be below those of 1995 as the product life cycle of the
fourth-generation x86 products draws to a close.
On January 17, 1996, NexGen, Inc. (NexGen) merged with and into AMD. The
company plans to bring to production status NexGen's sixth-generation design as
the AMD-K6(TM) microprocessor. The company does not expect any sales of AMD-K6
in 1996.
Gross margin was 47 percent in 1995 as compared to 54 percent in 1994 and
52 percent in 1993. The three main factors contributing to the decrease in gross
margin in 1995, in order of significance, were first, Am486 price declines;
second, purchase prices of FASL products, which are higher than the costs of
similar products manufactured internally; and third, the transition of Fab 25
costs from research and development to cost of sales when production commenced
in September 1995. The impact of gross margin declines caused by purchase of
FASL products during 1995 was mostly offset by the company's share of FASL
income. The increase in gross margin from 1993 to 1994 was primarily
attributable to increased sales from higher margin Am486 products during 1994.
Gross margin is anticipated to decline further in 1996 due to continuing
pricing pressures on Am486 microprocessors, increasing purchases from FASL, and
higher expenses and continuing transition of Fab 25 costs from research and
development to cost of sales as production volume increases.
Research and development expenses for 1995 increased to $398 million from
$280 million in 1994, and $263 million in 1993. These increases were primarily
due to higher Fab 25 expenses and secondarily due to increased microprocessor
development costs.
Marketing, general, and administrative expenses were $385 million for 1995,
$359 million for 1994, and $291 million for 1993. The increase from 1994 to 1995
was primarily attributable to higher advertising expenses. The incremental
change from 1993 to 1994 was mainly due to increased legal and microprocessor
advertising expenses. The company expects to incur transaction fees and other
costs incidental to the NexGen merger in the first quarter of 1996 estimated to
be approximately $10 million.
Interest income and other, net rose from 1994 to 1995 primarily due to
higher interest rates during 1995 and secondarily due to a realized gain of
approximately $3 million from equity securities sold during 1995. In 1994,
interest income and other, net included a net charge of approximately $5 million
resulting from the security class action lawsuit and stockholders' derivative
action settlements, and a gain from the damages award in an arbitration
proceeding with Intel Corporation. Interest expense decreased from 1993 through
1995. These decreases resulted from higher capitalized interest mainly related
to the construction of Fab 25.
The income tax rate was approximately 30, 33, and 28 percent in 1995, 1994,
and 1993, respectively. The lower tax rate in 1995 resulted from lower state
taxes and increased benefits from low taxed foreign income. The lower tax rate
in 1993 was primarily due to available tax credit carryforwards.
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MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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International sales were 56, 55, and 54 percent of total sales in 1995,
1994, and 1993, respectively. During 1995, approximately 17 percent of the
company's net sales were denominated in foreign currencies. The company does not
have sales denominated in local currencies in those countries which have highly
inflationary economies. (A highly inflationary economy is defined in accordance
with the Statement of Financial Accounting Standard No. 52 as one in which the
cumulative inflation over a three-year consecutive period approximates 100
percent.) The impact on the company's operating results from changes in foreign
currency rates individually and in the aggregate has not been material.
The company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of the company's foreign net monetary asset
position including the company's liabilities for products purchased from FASL.
In 1995, these hedging transactions were denominated in lira, yen, French franc,
deutsche mark, and pound sterling. The maturities of these contracts are
generally short-term in nature. The company believes its foreign exchange
contracts do not subject the company to material risk from exchange rate
movements because gains and losses on these contracts are designed to offset
losses and gains on the net monetary asset position being hedged. Net foreign
currency gains and losses have not been material. As of December 31, 1995, the
company had approximately $37 million (notional amount) of foreign exchange
forward contracts (see Notes 2, 3, and 4 to the Consolidated Financial
Statements).
The company has engaged in interest rate swaps primarily to reduce its
interest rate exposure by changing a portion of the company's interest rate
obligation from a floating rate to a fixed rate basis. At the end of 1995, the
net outstanding notional amount of interest rate swaps was $190 million, of
which $150 million will mature in 1996 and $40 million will mature in 1997.
Gains and losses related to these interest rate swaps have been immaterial (see
Notes 2, 3, and 4 to the Consolidated Financial Statements).
The company primarily addresses market risk by participating as an end user
in various derivative markets to manage its exposure to interest and foreign
currency exchange rate fluctuations. The counterparties to the company's foreign
exchange forward contracts and interest rate swaps consist of a number of major,
high credit quality, international financial institutions. The company does not
believe that there is significant risk of nonperformance by these counterparties
because the company monitors the credit ratings of such counterparties, and
reduces the financial exposure by limiting the amount of agreements entered into
with any one financial institution.
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of SFAS 121 is not expected to have a material
impact on the company's financial condition or results of operations.
The company accounts for its stock option plans and its employee stock
purchase plan in accordance with provisions of the Accounting Principles Board's
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In 1995,
the Financial Accounting Standards Board released the Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The company expects to continue
to account for its employee stock plans in accordance with the provisions of APB
25. Accordingly, SFAS 123 is not expected to have any material impact on the
company's financial condition or results of operations.
FINANCIAL CONDITION
Cash, cash equivalents, and short-term investments increased by $113 million
from 1994 to 1995. This increase was primarily attributable to a $150 million
term loan obtained in January of 1995. The $612 million of cash generated from
operating activities in 1995 was used to fund investments in property, plant,
and equipment to expand manufacturing capacity primarily related to Fab 25.
Working capital increased by $81 million from $394 million at the end of
1994 to $475 million at the end of 1995. This increase was primarily due to
higher cash, cash equivalents, and short-term investments.
At the end of 1995, the company's total cash investment in FASL was $160
million as compared to $142 million at the end of 1994. No additional cash
investment is currently planned for 1996. In 1995, FASL approved construction of
a second Flash memory fab, FASL II, at a site contiguous to the existing FASL
facility in Aizu-Wakamatsu, Japan. Groundbreaking on FASL II occurred in the
first quarter of 1996. The planned $1.1 billion in capital expenditures for FASL
II construction is expected to be
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MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
funded by the cash anticipated to be generated from FASL operations and, if
necessary, bank borrowings by FASL. However, in the event that FASL is unable to
secure the necessary funds for FASL II, AMD is required to contribute cash or
guarantee third-party loans in proportion to its percentage of interest in FASL.
The planned FASL II costs are denominated in yen and, therefore, are subject to
change due to foreign exchange rate fluctuations.
On January 11, 1995, the company and Intel Corporation reached an agreement
to settle all previously outstanding legal disputes between the two companies.
As part of the settlement, in December 1995, the company signed a five-year,
comprehensive patent cross-license agreement with Intel which expires on
December 31, 2000. The agreement provides that after December 31, 1999, the
parties will negotiate in good faith a patent cross-license agreement to be
effective January 1, 2001. Effective January 1, 1996, the new agreement gives
the company and Intel the rights to use each others' patents and certain
copyrights, exclusive of microprocessor microcode copyrights. The cross-license
is royalty-bearing for the company's products that use certain Intel
technologies. The company is required to pay Intel minimum non-refundable
royalties during the years 1997 through 2000.
As of the end of 1995, the company had the following financing
arrangements: unsecured committed bank lines of credit of $250 million,
unutilized; long-term secured equipment lease lines of $132 million, which were
fully utilized; short-term, unsecured uncommitted bank credit in the amount of
$96 million, of which $27 million was utilized; and an outstanding $150 million
four-year term loan.
The company's current capital plan and requirements are based on the
availability of external financing, various product-mix, selling-price, and
unit-demand assumptions and are, therefore, subject to revision due to future
market conditions.
On May 25, 1994, the Securities and Exchange Commission declared effective
the company's shelf registration statement covering up to $400 million of its
securities, which may be either debt securities, preferred stock, depositary
shares representing fractions of shares of preferred stock, common stock,
warrants to purchase common stock, or any combination of the foregoing which the
company may offer from time to time in the future. To date, the company has not
offered or sold any securities registered under the $400 million registration
statement. The nature and terms of the securities will be established at the
time of their sale. The company may offer the securities through underwriters to
be named in the future, through agents or otherwise. It is presently expected
that the net proceeds of any offering would be used for general corporate
purposes including but not limited to the reduction of outstanding indebtedness,
working capital increases, and capital expenditures.
The company is currently planning to build a submicron wafer fabrication
facility in Dresden, Germany, at an estimated cost of approximately $1.5 billion
over the next 5 years before German government financing. The company plans to
make capital investments estimated at $700 million throughout 1996, including
$350 million for Fab 25 and $75 million for the new facility in Dresden. The
company presently anticipates that it will augment its working capital and fund
a portion of its 1996 capital expenditures through external debt financing.
The company believes that cash flows from operations and current cash
balances, together with current and anticipated external financing, will be
sufficient to fund operations and capital investments currently planned for
1996.
CAUTIONARY STATEMENT
The statements in this Management's Discussion and Analysis that are forward
looking, for example, estimates of 1996 gross margin, microprocessor and Flash
memory business and prospects, capital spending, impact of the NexGen merger,
external financing plans, financial instruments, and FASL II, are based on
current expectations and actual results may differ materially. Forward looking
statements contained in this Management's Discussion and Analysis involve
numerous risks and uncertainties that could cause actual results to differ
materially, including but not limited to the timely development of and market
acceptance of new products, the impact of competitive products and pricing, the
timely development of wafer fabrication process technologies, the effect of
changing economic conditions, business conditions and growth in the personal
computer market, continued demand for the company's microprocessor and Flash
memory products, the company's ability to access external sources of capital,
and such risks and uncertainties detailed from time to time in the company's SEC
reports and filings, including the Form 10-K for the 1995 fiscal year and the
Registration Statement on Form S-4 (Registration Statement No. 33-64911) filed
by the company in connection with its acquisition of NexGen. Certain of these
risks and uncertainties are discussed below.
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MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
RISK FACTORS
The semiconductor industry is generally characterized by a highly competitive
and rapidly changing environment in which operating results are subject to the
effects of new product introductions, manufacturing technology innovations,
rapid fluctuations in product demand, the availability of manufacturing
capacity, and the ability to secure and maintain intellectual property rights.
While the company attempts to identify and respond to rapidly changing events
and conditions as soon as possible, the anticipation of and reaction to such
events are an ongoing challenge. The company's future results of operations and
financial condition may be adversely impacted by various factors. Certain of
these risk factors are detailed in the description of the company's business in
the company's Form 10-K for the fiscal year ended December 31, 1995 under the
caption "Business." In addition to those factors, the following risk factors
should be considered by holders of AMD common stock.
The company expects that its operating results will be subject to
potentially substantial quarterly and other fluctuations due to a variety of
factors, including competitive pricing pressures, anticipated decreases in unit
average selling prices of the company's products, fluctuations in manufacturing
yields, availability and cost of products from suppliers, the gain or loss of
significant customers, new product introductions by the company or its
competitors, changes in the mix of products sold and in the mix of sales by
distribution channels, market acceptance of new or enhanced versions of the
company's products, seasonal customer demand, the timing of significant orders,
and the timing and extent of product development costs. In addition, operating
results could be adversely affected by general economic and other conditions
affecting the timing of customer orders and capital spending, a downturn in the
market for PCs, and order cancellations or rescheduling. Customers may change
delivery schedules or cancel orders without significant penalty. Many of the
factors listed above are outside of the control of the company. These factors
are difficult to forecast, and these or other factors could materially adversely
affect quarterly or annual operating results.
A significant portion of the company's revenues and profits in 1995 have
been derived from Am486 products. The company expects Am486 microprocessor
revenues and profits in 1996 to be below those of 1995. As the product life
cycle of fourth-generation x86 products draws to a close, the company
anticipates that its ability to maintain or expand its current levels of
revenues and profits in the future will depend upon its success in developing
and marketing in a timely manner its next generation of microprocessor products,
the K86 RISC SUPERSCALAR(TM) products. The company expects 1996 to be a
transitional year in the development of its next generation of microprocessor
products and believes that the acquisition of NexGen is important to the
development and introduction of K86(TM) products. Future generations of K86
products will face competition not only from x86 products manufactured by Intel
and others, but also from products based upon an increasing number of different
architectures which have been developed or are under development by Hewlett-
Packard Company, IBM, Motorola, Inc., Sun Microsystems, Inc., and other
manufacturers of integrated circuits. No assurance can be given that the K86
products will achieve market acceptance or be introduced before the average
selling prices of comparable products have materially declined from their
initial levels. The company has an agreement with Compaq Computer Corporation
(Compaq) under which it supplies Compaq with microprocessor products, primarily
Am486 products; however, the agreement does not require Compaq to purchase
microprocessor products from the company. The company believes that Compaq will
consider the purchase of K86 microprocessors when they become available. No
assurance can be given that any purchases will be made or, if they are, that
they will not be terminated by Compaq due to the availability of competing
microprocessor products.
Numerous firms compete with the company in the manufacture and sale of
integrated circuits. Some of these firms have resources greater than those of
the company and do not depend upon integrated circuits as their principal source
of revenues. There is also significant captive production by certain large users
of integrated circuits, such as manufacturers of computers, telecommunications
equipment, and consumer electronics. The company competes for integrated circuit
market share with, among others, Intel, Texas Instruments, Motorola, IBM,
National Semiconductor Corporation, Philips, Nippon Electric Co., SGS-Thomson,
Hitachi, Toshiba, Fujitsu Ltd., Matsushita, Mitsubishi, Samsung, Hyundai, and
Siemens, all of whom are actively attempting to increase their respective and
collective worldwide market shares. Intel, in particular, has long held a
dominant position in the market for microprocessors used in PCs. Intel's
dominant market position has to date allowed it to set x86 microprocessor
standards and thus dictate the type of product that the market requires of
Intel's competitors. In addition, Intel's financial
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MANAGEMENT'S
discussion and analysis
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
strength has enabled it to reduce prices on its microprocessor products within a
short period of time following their introduction, which reduces the margins and
profitability of its competitors who are forced to reduce prices to maintain
competitiveness. The company expects Intel to continue to spend substantial sums
on research and development, on new manufacturing facilities, and to maintain
its dominant position through advertising campaigns designed to engender brand
loyalty to Intel among PC purchasers. As long as Intel remains in this dominant
position, its product introduction schedule and product pricing strategy may
adversely and materially affect AMD's business, operating results, and financial
condition.
The substantial resources which the company has devoted to the development
of the AMD-K5(TM) microprocessor, the first member of the K86 family, in 1995
has impacted the company's efforts to develop successive generation products,
such as those designed to compete with the Pentium Pro and Intel's subsequent
generation products. To the extent that the introduction of each generation of
K86 products is delayed, the company's revenues and profits will be materially
adversely affected.
On January 17, 1996, the company acquired NexGen in a tax-free
reorganization in which NexGen was merged directly into the company. The merger
will be accounted for under the pooling-of-interests method. The shareholders of
NexGen receive eight-tenths (0.8) of a share of the common stock of AMD for each
outstanding share of the common stock of NexGen. The company expects to issue
approximately 33.6 million shares of its common stock to the holders of NexGen
common stock, options, rights to purchase under the employee stock purchase plan
and warrants.
The dilution resulting from the merger could reduce the earnings per share
of common stock unless and until earnings growth or other business benefits
sufficient to offset the effect of the issuance can be achieved. There can be no
assurance that such benefits will be achieved. Achieving the anticipated
benefits of the merger will depend in part upon whether the integration of the
two companies' businesses is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The inability of management
to integrate the operations of the two companies successfully could have a
material adverse effect on the business and results of operations of the
company. As commonly occurs with mergers of technology companies, aggressive
competitors may undertake formal initiatives during the integration phase to
attract customers and to recruit key employees through various incentives.
Prior to the merger, NexGen granted limited manufacturing rights regarding
certain of its current and future products, including the Nx586(R) and
Nx686(TM), to IBM and Compaq. The rights of IBM and Compaq to produce NexGen
products for their own use and the rights of IBM to produce limited volumes of
NexGen products for sale to third parties could reduce the potential market for
NexGen products produced by the company, the profit margin achievable with
respect to such products, or both.
The company has entered into a number of licenses and cross-licenses
relating to several of the company's products. As is common in the semiconductor
industry, from time to time the company has been notified that it may be
infringing other parties' patents or copyrights. While patent and copyright
owners in such instances often express a willingness to resolve the dispute or
grant a license, no assurance can be given that all necessary licenses will be
honored or obtained on satisfactory terms, nor that the ultimate resolution of
any material dispute concerning the company's present or future products will
not have an adverse impact on the company's future results of operations or
financial condition.
Due to the factors noted above, the company's future operations, financial
condition, and stock price may be subject to volatility. Based on the trading
history of its stock, the company believes that factors such as quarterly
fluctuations in the company's financial results, announcements of new products
by the company or its competitors, and general conditions in the semiconductor
industry have caused and are likely to continue to cause the market price of AMD
common stock to fluctuate substantially. Technology company stocks in general
have experienced extreme price and volume fluctuations that often have been
unrelated to the operating performance of the companies. This market volatility
may adversely affect the market price of AMD common stock. In addition, an
actual or anticipated shortfall in revenue, gross margin, or earnings from
securities analysts' expectations could have an immediate effect on the trading
price of the company's common stock in any given period.
Am486, MACH, and Nx586 are registered trademarks of AMD.
K86, K86 RISC SUPERSCALAR, AMD-K5, AMD-K6, SLAC and Nx686
are trademarks of AMD.
Microsoft and Windows are registered trademarks of Microsoft Corporation.
- --------------------------------------------------------------------------------
CONSOLIDATED
statements of income
Three Years Ended December 31, 1995
(Thousands except per share amounts) 95 94 93
- --------------------------------------------------------------------------------
Net sales $2,429,724 $2,134,659 $1,648,280
Expenses:
Cost of sales 1,298,876 982,306 789,564
Research and development 397,555 279,984 262,802
Marketing, general, and
administrative 385,016 359,230 290,861
---------- ---------- ----------
2,081,447 1,621,520 1,343,227
---------- ---------- ----------
Operating income 348,277 513,139 305,053
Litigation settlement -- (58,000) --
Interest income and other, net 30,763 16,259 16,490
Interest expense (707) (1,844) (2,910)
---------- ---------- ----------
Income before income taxes and equity
in joint venture 378,333 469,554 318,633
Provision for income taxes 112,738 153,703 89,218
---------- ---------- ----------
Income before equity in joint venture 265,595 315,851 229,415
Equity in net income (loss) of joint
venture 34,926 (10,585) (634)
---------- ---------- ----------
Net income 300,521 305,266 228,781
Preferred stock dividends 10 10,350 10,350
---------- ---------- ----------
Net income applicable to common
stockholders $ 300,511 $ 294,916 $ 218,431
========== ========== ==========
Net income per common share:
Primary $2.85 $3.02 $2.30
========== ========== ==========
Fully diluted $2.81 $2.92 $2.24
========== ========== ==========
Shares used in per share calculation:
Primary 105,575 97,510 95,108
Fully diluted 107,035 104,570 102,063
- --------------------------------------------------------------------------------
See accompanying notes
CONSOLIDATED
balance sheets
December 31, 1995, and December 25, 1994
(Thousands except share and per share amounts) 95 94
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 113,354 $ 84,643
Short-term investments 377,293 293,211
---------- -----------
Total cash, cash equivalents, and
short-term investments 490,647 377,854
Accounts receivable, net of allowance for
doubtful accounts of $10,159 in 1995
and $10,319 in 1994 275,733 337,107
Inventories:
Raw materials 29,272 21,604
Work-in-process 68,827 72,632
Finished goods 56,571 34,454
---------- -----------
Total inventories 154,670 128,690
Deferred income taxes 108,989 98,675
Prepaid expenses and other current assets 66,729 44,293
---------- -----------
Total current assets 1,096,768 986,619
Property, plant, and equipment:
Land 28,851 28,820
Buildings and leasehold improvements 893,321 500,530
Equipment 1,828,059 1,442,787
Construction in progress 180,742 492,792
---------- -----------
Total property, plant, and equipment 2,930,973 2,464,929
Accumulated depreciation and
amortization (1,294,881) (1,200,718)
---------- -----------
Property, plant, and equipment, net 1,636,092 1,264,211
Investment in joint venture 176,821 124,588
Other assets 121,587 70,284
---------- -----------
$3,031,268 $ 2,445,702
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 27,070 $ 32,459
Accounts payable 223,708 149,122
Accrued compensation and benefits 105,651 104,526
Accrued liabilities 79,092 82,570
Litigation settlement -- 58,000
Income tax payable 56,297 53,795
Deferred income on shipments to distributors 100,057 83,800
Current portion of long-term debt and capital
lease obligations 29,861 27,895
---------- -----------
Total current liabilities 621,736 592,167
Deferred income taxes 94,439 42,518
Long-term debt and capital lease obligations, less
current portion 214,965 75,752
Commitments and contingencies -- --
Stockholders' equity:
Capital stock:
Serial preferred stock (redeemed March 13,
1995), par value $.10; 1,000,000 shares
authorized; 345,000 shares issued and
344,862 shares outstanding in 1994 -- 34
Common stock, par value $.01; 250,000,000
shares authorized; 104,519,457 shares
issued and outstanding in 1995 and
95,417,383 in 1994 1,047 956
Capital in excess of par value 735,825 698,673
Retained earnings 1,363,256 1,035,602
---------- -----------
Total stockholders' equity 2,100,128 1,735,265
---------- -----------
$3,031,268 $ 2,445,702
========== ===========
See accompanying notes
- --------------------------------------------------------------------------------
CONSOLIDATED
statements of cash flows
Three Years Ended December 31, 1995
(Thousands) 95 94 93
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 300,521 $ 305,266 $ 228,781
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 262,501 215,984 175,275
Accrual for litigation settlement -- 58,000 --
Net (gain) loss on sale of property, plant, and equipment 2,152 276 (2,943)
Write-down of property, plant, and equipment 611 2,230 366
Gain realized on sale of available-for-sale securities (2,707) -- --
Compensation recognized under employee stock plans 2,483 1,971 1,313
Undistributed (income) loss of joint venture (34,926) 10,585 634
Changes in operating assets and liabilities:
Net increase in receivables, inventories, prepaid expenses,
and other assets (2,606) (114,566) (57,269)
Payment of litigation settlement (58,000) -- --
Net (increase) decrease in deferred income taxes 41,607 (21,072) (27,021)
Increase in income tax payable 11,772 61,910 70,502
Net increase in payables and accrued liabilities 88,490 52,589 69,750
--------- ----------- ---------
Net cash provided by operating activities 611,898 573,173 459,388
--------- ----------- ---------
Cash flows from investing activities:
Purchase of property, plant, and equipment (620,815) (548,742) (323,669)
Proceeds from sale of property, plant, and equipment 4,834 2,058 4,648
Purchase of available-for-sale securities (678,071) (36,700) --
Proceeds from sale of available-for-sale securities 603,772 -- --
Purchase of held-to-maturity debt securities (648,012) (1,245,167) (715,487)
Proceeds from maturities of held-to-maturity debt securities 642,229 1,416,431 566,773
Investment in joint venture (18,019) (139,175) (3,160)
--------- ----------- ---------
Net cash used in investing activities (714,082) (551,295) (470,895)
--------- ----------- ---------
Cash flows from financing activities:
Proceeds from borrowings 236,982 42,025 10,238
Payments on capital lease obligations and other debt (125,614) (68,898) (22,386)
Proceeds from issuance of stock 23,073 39,565 42,401
Redemption of preferred stock and stockholder rights (3,536) -- --
Payments of preferred stock dividends (10) (10,350) (10,350)
--------- ----------- ---------
Net cash provided by financing activities 130,895 2,342 19,903
--------- ----------- ---------
Net increase in cash and cash equivalents 28,711 24,220 8,396
Cash and cash equivalents at beginning of year 84,643 60,423 52,027
--------- ----------- ---------
Cash and cash equivalents at end of year $ 113,354 $ 84,643 $ 60,423
========= =========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ -- $ 977 $ 2,123
========= =========== =========
Income taxes $ 60,329 $ 111,704 $ 44,433
========= =========== =========
Non-cash financing activities:
Equipment capital leases $ 24,422 $ 34,202 $ 64,512
========= =========== =========
Conversion of preferred stock to common stock $ 164,127 $ -- $ --
========= =========== =========
- ----------------------------------------------------------------------------------------------------------
See accompanying notes
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1995, December 25, 1994, and December 26, 1993
NOTE 1 NATURE OF OPERATIONS
AMD is a semiconductor manufacturer with manufacturing facilities in the U.S.
and Asia, and sales offices throughout the world. Focusing on the personal and
networked computing and communications markets, AMD is a global company that
derives more than half of its revenues from international sales, mainly in
Europe and Asia. The company provides programmable products in concert with
applications solutions to the manufacturers of equipment for personal and
networked computation and communications.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal year. The company uses a 52- to 53-week fiscal year ending on the last
Sunday in December, which resulted in a 53-week year ended December 31, 1995.
This compares with a 52-week fiscal year for 1994 and 1993, which ended on
December 25 and 26, respectively.
Principles of consolidation. The consolidated financial statements include the
accounts of the company and its subsidiaries. Upon consolidation, all
significant intercompany accounts and transactions are eliminated. Also included
in the financial statements of the company, under the equity method of
accounting, is the company's 49.95 percent investment in Fujitsu AMD
Semiconductor Limited (FASL).
Foreign currency translation. The U.S. dollar is the functional currency for the
company's wholly-owned foreign subsidiaries. Translation adjustments, resulting
from the process of translating foreign currency financial statements into U.S.
dollars, are included in operations. The functional currency of the company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements have not been material, and
therefore, are not disclosed as a separate component of stockholders' equity.
Cash equivalents. Cash equivalents consist of financial instruments which are
readily convertible to cash and have original maturities of three months or less
at the time of acquisition.
Investments. The company classifies its marketable debt and equity securities
into held-to-maturity and available-for-sale categories in accordance with the
provisions of the Statement of Financial Accounting Standard No. 115 (SFAS No.
115), "Accounting for Certain Instruments in Debt and Equity Securities." In
accordance with the FASB staff Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the company chose to reclassify, as of December 31, 1995, cash
equivalents and short-term investments from held-to-maturity to available-for-
sale. Securities classified as available-for-sale are reported at fair market
value with the related unrealized gains and losses included in retained
earnings. Realized gains and losses and declines in value of securities judged
to be other than temporary are included in interest income and other, net.
Interest and dividends on all securities are included in interest income and
other, net.
Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consist of money market auction
preferred stocks and debt securities such as commercial paper, time deposits,
certificates of deposit, bankers' acceptances, and marketable direct obligations
of the United States Treasury.
Foreign exchange forward contracts. Foreign exchange forward contracts are used
to hedge the company's net monetary asset positions in its foreign subsidiaries
and the company's liabilities for products purchased from FASL. Realized gains
and losses from these hedges are included in operations. Premiums and discounts,
if any, are amortized over the life of the contract and included in operations.
Foreign currency options. Foreign currency options are used to hedge firm
commitments with respect to the company's joint venture (FASL) investment.
Realized gains and losses from these hedges are deferred and included in other
assets or accrued liabilities, respectively. They are recognized in operations
in the same period as the hedged transactions. Premiums and discounts, if any,
are amortized over the life of the contract and included in operations.
Interest rate swaps. The company enters into interest rate swaps primarily to
reduce its interest rate exposure by changing a portion of the company's
interest rate exposure from a floating rate to a fixed rate basis. The
differential between fixed and floating rates to be paid or received is accrued
and recognized as an adjustment to interest expense. Accordingly, the related
amount payable to or receivable from counterparties is included in other current
assets or accrued liabilities.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Inventories. Inventories are stated principally at standard cost adjusted to
approximate the lower of cost (first-in, first-out method) or market (net
realizable value).
Property, plant, and equipment. Property, plant, and equipment is stated at
cost. Depreciation and amortization are provided principally on the straight-
line basis over the estimated useful lives of the assets for financial reporting
purposes and on accelerated methods for tax purposes. Estimated useful lives for
financial reporting purposes are as follows: machinery and equipment 3 to 5
years; buildings up to 26 years; and leasehold improvements are the shorter of
the remaining terms of the leases or the estimated economic useful lives of the
improvements.
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 121 (SFAS 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of SFAS 121 is not expected to have a material
impact on the company's financial position or results of operations.
Deferred income on shipments to distributors. A portion of sales is made to
distributors under terms allowing certain rights of return and price protection
on unsold merchandise held by the distributors. These agreements can be canceled
by either party upon written notice, at which time the company generally
repurchases unsold inventory. Accordingly, recognition of sales to distributors
and related gross profits are deferred until the merchandise is resold by the
distributors.
Advertising expenses. The company accounts for advertising costs as expense in
the period in which they are incurred. Advertising expense for 1995, 1994, and
1993 was approximately $40 million, $31 million, and $22 million, respectively.
Net income per common share. Primary net income per common share is based upon
weighted average common and dilutive common equivalent shares outstanding using
the treasury stock method. Dilutive common equivalent shares include stock
options and restricted stock. Fully diluted net income per common share is
computed using the weighted average common and dilutive common equivalent shares
outstanding, plus other dilutive shares outstanding which are not common
equivalent shares. Other dilutive shares which are not common equivalent shares
include convertible preferred stock.
Employee stock plans. The company accounts for its stock option plans and its
employee stock purchase plan in accordance with provisions of the Accounting
Principles Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." In 1995, the Financial Accounting Standards Board released the
Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for
Stock Based Compensation." SFAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The company
expects to continue to account for its employee stock plans in accordance with
the provisions of APB 25. Accordingly, SFAS 123 is not expected to have any
material impact on the company's financial position or results of operations.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
Financial presentation. Certain prior year amounts on the Consolidated Financial
Statements have been reclassified to conform to the 1995 presentation.
NOTE 3 FINANCIAL INSTRUMENTS
Financial instruments with off-balance-sheet risk.
As part of the company's asset and liability management, the company enters into
various types of transactions that involve financial instruments with off-
balance-sheet risk. These instruments are entered into in order to manage
financial market risk, including interest rate and foreign exchange risk. The
notional values, carrying amounts, and fair values are tabled below.
Foreign exchange forward contracts. The company enters into foreign exchange
forward contracts to buy and sell currencies as economic hedges of its net
monetary asset positions in its foreign subsidiaries and liabilities for
products purchased from FASL. The hedging transactions in 1995 were denominated
in lira, yen, French franc, deutsche mark, and pound sterling. The maturities of
these contracts are generally less than six months.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Foreign currency options. The joint venture (FASL) investments are denominated
in yen, and therefore, are subject to exposure due to fluctuations in yen
exchange rates. Thus, the company hedges its exposures on certain firm
commitments relating to the FASL investment with foreign currency options
denominated in yen. The maturities of these options are generally less than six
months. No foreign currency options were outstanding as of December 31, 1995.
Interest rate swaps. The company engaged in interest rate swaps primarily to
reduce its interest rate exposure on its term loan and on a building lease
obligation by changing a portion of the company's interest rate obligation from
a floating rate to a fixed rate basis without exchanges of the underlying
notional amounts. The fixed interest rates are based on one to five year swap
rates, and the floating interest rates are based on three or six month LIBOR.
These interest rate swaps will mature in 1996 and 1997.
Fair value of financial instruments with off-balance-sheet risk. The estimates
of fair value were obtained using prevailing financial market information as of
December 31, 1995. In certain instances where judgment is required in estimating
fair value, price quotes were obtained from certain of the company's
counterparty financial institutions.
95 94
-----------------------------------------------------------
Notional Carrying Fair Notional Carrying Fair
(Thousands) Amount Amount Value Amount Amount Value
- --------------------------------------------------------------------------------
Interest rate
instruments:
Swaps $190,000 $(518) $(1,694) $40,000 $(518) $ 228
Foreign
exchange
instruments:
Foreign
exchange
forward
contracts 36,670 (102) (102) 32,651 536 536
Foreign
currency
options - - - 12,662 - (200)
Fair value of other financial instruments.
The carrying value of short-term debt approximates fair value due to its short-
term maturity. The fair value for long-term debt was estimated using discounted
cash flow analysis based on estimated interest rates for similar types of
borrowing arrangements.
The carrying amounts and estimated fair values of the company's other
financial instruments are as follows:
95 94
------------------------------------
Carrying Fair Carrying Fair
(Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------
Short-term debt:
Notes payable $ 27,070 $ 27,070 $32,459 $32,459
Long-term debt
(excluding capital leases) 167,527 169,146 20,933 20,255
- -----------------------------------------------------------------------
Securities held-to-maturity and available-for-sale.
The following is a summary of held-to-maturity and
available-for-sale securities included in cash and cash equivalents and short-
term investments as of December 31, 1995 and December 25, 1994.
95 94
-------------------------------------
(Thousands) Available-for-sale Held-to-maturity
- ------------------------------------------------------------------------------
Certificates of deposit $ 15,002 $ 4,997
Treasury notes 10,437 -
Federal agency notes 9,202 -
Security repurchase agreements 53,370 50,800
Commercial paper 14,914 24,760
Other debt securities 434 1,672
---------- ----------
Total cash equivalents $103,359 $ 82,229
========== ==========
Certificates of deposit $ 70,551 $ 95,342
Municipal notes and bonds 52,256 -
Corporate notes 37,898 101,850
Treasury notes 54,933 44,877
Commercial paper 46,656 14,442
Money market auction preferred stocks 114,999 36,700
---------- ----------
Total short-term investments $377,293 $293,211
========== ==========
- ------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On November 15, 1995, the FASB staff issued the Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the company chose to reclassify cash equivalents and short-term investments from
held-to-maturity to available-for-sale. At the date of the transfer, the
amortized cost of those securities was approximately $480.7 million. Since the
securities transferred on December 31, 1995 are short-term in nature, changes in
market interest rates did not have a significant impact on the fair value of
these securities. The net unrealized gain on these securities was immaterial.
The available-for-sale equity securities that the company held, included in
other assets, had a cost and fair value of $14.5 million and $75.1 million,
respectively, as of December 31, 1995, and a cost and fair value of $9.4 million
and $18.5 million, respectively as of December 25, 1994. At December 31, 1995,
the total net unrealized holding gain on these equity securities, net of tax,
was approximately $42.5 million, of which $33.4 million was recorded in 1995.
The entire, net of tax, unrealized holding gain is included in retained
earnings.
As of December 31, 1995, the company did not own any securities classified
as trading.
NOTE 4 CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to concentrations of
credit risk consist primarily of cash equivalents, short-term investments, trade
receivables, and financial instruments used in hedging activities.
The company places its cash equivalents and short-term investments with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in time deposits
and certificates of deposit are acquired from banks having combined capital,
surplus and undistributed profits of not less than $200 million. Investments in
commercial paper and money market auction preferred stocks of industrial firms
and financial institutions are rated A1, P1 or better, investments in tax-exempt
securities including municipal notes and bonds are rated AA, Aa or better, and
investments in repurchase agreements must have securities of the type and
quality listed above as collateral.
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the company's
customer base, thus spreading the trade credit risk. The company controls credit
risk through credit approvals, credit limits, and monitoring procedures. The
company performs in-depth credit evaluations of all new customers and requires
letters of credit, bank guarantees and advance payments, if deemed necessary.
Bad debt expenses have not been material.
The counterparties to the agreements relating to the company's foreign
exchange and interest rate instruments consist of a number of major, high credit
quality, international financial institutions. The company does not believe that
there is significant risk of nonperformance by these counterparties because the
company monitors the credit ratings of such counterparties, and limits the
financial exposure and the amount of agreements entered into with any one
financial institution. While the notional amounts of financial instruments are
often used to express the volume of these transactions, the potential accounting
loss on these transactions if all counterparties failed to perform is limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed the obligations of the company to the counterparties.
NOTE 5 CONCENTRATIONS OF OTHER RISKS
Products. Microprocessor products and Flash memory devices contributed a
significant portion of the company's revenues and profits in 1995. The company
expects that its ability to maintain or expand its current levels of revenues
and profits in the future will depend upon, among other things, its success in
developing and marketing, in a timely manner, its next generation of
microprocessor products, the K86 RISC SUPERSCALAR products, and future
generations of Flash memory devices.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Markets. The markets for the company's products are characterized by rapid
technological developments, evolving industry standards, changes in customer
requirements, frequent new product introductions and enhancements, and short
product life cycles. The market for microprocessors and Flash memory devices is
primarily dependent upon the market for personal computers. From time to time,
the PC industry has experienced significant downturns, often in connection with,
or in anticipation of, declines in general economic conditions. These downturns
have been characterized by diminished product demand, production overcapacity,
and resultant accelerated erosion of average selling prices. The company's
business could be materially and adversely affected by industry-wide
fluctuations in the PC marketplace in the future.
Inventories. Given the volatility of the market, the company makes inventory
provisions for potentially excess and obsolete inventory based on backlog and
forecasted demand. However, such backlog demand is subject to revisions,
cancellations, and rescheduling. Actual demand will inevitably differ from such
anticipated demand, and such differences may have a material effect on the
financial statements.
Customers. The company markets and sells its products primarily to a broad base
of customers comprised of Distributors and Original Equipment Manufacturers
(OEMs) of computation and communication equipment. One of the company's
distributors, Arrow Electronics, Inc., accounted for approximately 12 percent of
1995 net sales. No other Distributor or OEM customer constituted 10 percent or
more of net sales in 1995.
International operations. The company derives more than half of its revenues
from international sales. However, only a portion of the company's international
sales were denominated in foreign currencies. Further, the company does not have
any sales denominated in the local currencies of those countries which have
highly inflationary economies.
Nearly all product assembly and final testing of the company's products are
performed at its manufacturing facilities in Penang, Malaysia; Singapore; and
Bangkok, Thailand; or by subcontractors in Asia. Wafer fabrication of certain
products is performed at foundries in Asia. FASL wafer fabrication facilities
are located in Aizu-Wakamatsu, Japan. Foreign manufacturing entails political
and economic risks, including political instability, expropriation, currency
controls and fluctuations, changes in freight and interest rates, and exemptions
for taxes and tariffs. For example, if the company were unable to assemble and
test its products abroad, or if air transportation between the United States,
the company's overseas facilities and customers worldwide were disrupted, there
could be a material adverse effect on the company's operations.
Materials. Certain of the raw materials used by the company in the manufacture
of its products are available from a limited number of suppliers. For example,
several types of integrated circuit packages purchased by the company, as well
as by the majority of other companies in the semiconductor industry, are
principally supplied by Japanese companies. Shortages could occur in various
essential materials due to interruption of supply or increased demand in the
industry. If the company were unable to procure certain of such materials, it
would be required to reduce its manufacturing operations, which could have a
material adverse effect upon its results of operations.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 STOCKHOLDERS' EQUITY
The following is a summary of the changes in the components of consolidated
stockholders' equity for the three years ended December 31, 1995.
Preferred Stock Common Stock
------------------- ------------------
Number Number Capital in Total
of of Excess of Retained Stockholders'
(Thousands) Shares Amount Shares Amount Par Value Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
December 27, 1992 345 $ 35 88,226 $ 885 $532,674 $ 513,146 $1,046,740
Issuance of shares:
Employee stock plans - - 3,218 31 19,408 - 19,439
Fujitsu Limited - - 1,000 10 22,952 - 22,962
Compensation recognized under
employee stock plans - - - - 1,313 - 1,313
Income tax benefits realized from
employee stock option exercises - - - - 43,386 - 43,386
Preferred stock dividends - - - - - (10,350) (10,350)
Net income - - - - - 228,781 228,781
------- ----- ------- ------ ---------- ---------- ----------
December 26, 1993 345 35 92,444 926 619,733 731,577 1,352,271
Issuance of shares:
Employee stock plans - - 1,970 19 16,911 - 16,930
Fujitsu Limited - - 1,000 10 22,625 - 22,635
Compensation recognized under
employee stock plans - - - - 1,971 - 1,971
Conversion of preferred stock to
common stock - (1) 3 1 - - -
Income tax benefits realized from
employee stock option
exercises - - - - 37,433 - 37,433
Preferred stock dividends - - - - - (10,350) (10,350)
Net income - - - - - 305,266 305,266
Unrealized gain from
available-for-sale investments - - - - - 9,109 9,109
------- ----- ------- ------ ---------- ---------- ----------
December 25, 1994 345 34 95,417 956 698,673 1,035,602 1,735,265
Issuance of shares:
Employee stock plans - - 2,249 22 23,051 - 23,073
Compensation recognized under
employee stock plans - - - - 2,483 - 2,483
Conversion of preferred stock to
common stock (345) (34) 6,853 69 (2,536) - (2,501)
Income tax benefits realized from
employee stock option
exercises - - - - 15,189 - 15,189
Preferred stock dividends - - - - - (10) (10)
Redemption of stockholder rights
plan - - - - (1,035) - (1,035)
Net income - - - - - 300,521 300,521
Unrealized gain from
available-for-sale investments
and translation adjustment
for joint venture - - - - - 27,143 27,143
------- ----- ------- ------ ---------- ---------- ----------
December 31, 1995 - $ - 104,519 $1,047 $735,825 $1,363,256 $2,100,128
======= ===== ======= ====== ========== ========== ==========
- --------------------------------------------------------------------------------
NOTE 7 SERIAL PREFERRED STOCK
In March 1987, the company sold 345,000 shares of Convertible Exchangeable
Preferred Stock, $.10 par value. Dividends were payable quarterly in arrears at
an annual rate of $30 per share (6 percent) cumulative from the date of original
issue. The preferred stock was redeemable for cash at any time at the option of
the company, in whole or in part, at prices declining to $500 per share at March
15, 1997, plus unpaid dividends. The preferred stock was convertible at any time
at the option of the holder into common stock at the initial conversion rate of
19.873 common shares for each preferred share.
On February 10, 1995, the company called all outstanding shares of its
preferred stock for redemption on March 13, 1995, at a redemption price of
$509.00 per share, plus $7.30 of accrued and unpaid dividends. Prior to the
redemption date, 343,427 shares of preferred stock
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
were surrendered for conversion which resulted in the issuance of 6,824,694
shares of the company's common stock. Pursuant to previous arrangements, on
March 14, 1995, the company sold 28,518 shares of its common stock to certain
institutions and used the proceeds to fund the redemption of 1,435 shares of
preferred stock which were not converted.
NOTE 8 STOCKHOLDER RIGHTS PLAN
In February 1990, the company adopted a stockholder rights plan and declared a
dividend distribution of preferred stock purchase rights at the rate of one
right for each share of common stock held as of the close of business on
February 20, 1990. The rights were not exercisable, or transferable apart from
the common stock, until certain events occurred. The rights were redeemable at
any time at the option of the company.
On May 3, 1995, the company redeemed all its preferred stock purchase
rights for a redemption price of $.01 per right (approximately $1 million) paid
on May 24, 1995, to the holders of the company's common stock as of the
redemption date.
NOTE 9 INCOME TAXES
Provision for income taxes consists of:
(Thousands) 95 94 93
- -----------------------------------------------------------------
Current:
U.S. Federal $ 58,683 $154,425 $83,598
U.S. State and Local 1,855 13,001 3,640
Foreign National and
Local 10,594 7,350 2,332
Deferred:
U.S. Federal 43,827 (18,239) (1,947)
U.S. State and Local (3,167) (2,820) 1,798
Foreign National and
Local 946 (14) (203)
-------- -------- -------
Provision for income taxes $112,738 $153,703 $89,218
======== ======== =======
Tax benefits resulting from the exercise of nonqualified stock options and the
disqualifying disposition of shares acquired under the company's incentive stock
option and stock purchase plans reduced taxes currently payable as shown above
by $15.2 million, $37.4 million, and $43.4 million in 1995, 1994, and 1993,
respectively. Such benefits were credited to capital in excess of par value when
realized.
Under SFAS No. 109, deferred income taxes reflect the net tax effects of
tax carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the company's deferred tax assets
and liabilities as of December 31, 1995, December 25, 1994, and December 26,
1993 are as follows:
(Thousands) 95 94 93
- ------------------------------------------------------------------
Deferred tax assets:
Deferred distributor
income $ 40,583 $ 31,396 $ 31,349
Inventory reserves 29,665 18,809 14,935
Accrued expenses not
currently deductible 16,717 39,467 21,799
Federal and state tax
credit carryovers 6,249 2,873 30,888
Other 49,850 39,081 27,569
--------- -------- --------
Total deferred tax assets 143,064 131,626 126,540
Less: valuation allowance -- -- (26,415)
--------- -------- --------
Net deferred tax assets 143,064 131,626 100,125
--------- -------- --------
Deferred tax liabilities:
Depreciation (109,141) (59,614) (44,886)
Other (19,373) (15,855) (20,154)
--------- -------- --------
Total deferred tax
liabilities (128,514) (75,469) (65,040)
--------- -------- --------
Net deferred tax assets $ 14,550 $ 56,157 $ 35,085
========= ======== ========
The 1993 valuation allowance for deferred tax assets, attributable to stock
option deductions, were credited to equity upon realization in 1994.
Pretax income from foreign operations was $60.6 million in 1995, $45.7
million in 1994, and $40.0 million in 1993.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following is a reconciliation between statutory federal income taxes and the
total provision for income taxes:
95 94 93
-----------------------------------------------------
(Thousands except percent) Tax Rate Tax Rate Tax Rate
- ---------------------------------------------------------------------------------------------------
Statutory federal income tax provision $132,417 35.0% $164,344 35.0% $111,522 35.0%
State taxes net of federal benefit 216 0.1 6,601 1.4 3,535 1.1
Tax exempt Foreign Sales Corporation income (6,848) (1.8) (8,955) (1.9) (7,236) (2.3)
Tax credits utilized -- -- -- -- (5,004) (1.5)
Foreign income at other than U.S. rates (11,503) (3.1) (9,633) (2.1) (10,398) (3.3)
Other (1,544) (0.4) 1,346 0.3 (3,201) (1.0)
------- ---- ------- ---- ------- ----
$112,738 29.8% $153,703 32.7% $ 89,218 28.0%
======= ==== ======= ==== ======= ====
- ---------------------------------------------------------------------------------------------------
No provision has been made for income taxes on approximately $264.6 million of
cumulative undistributed earnings of certain foreign subsidiaries because it is
the company's intention to permanently invest such earnings. If such earnings
were distributed, additional taxes of $92.6 million would accrue.
The company's Far East assembly and test plants in Singapore and Thailand
are operated under various tax holidays which expire in whole or in part during
1996 and 1998. Possible extensions of the holiday period, as well as other tax
incentives, are anticipated to result in minimal tax liabilities in these
countries through 1998. The net impact of these tax holidays was an increase in
net income of approximately $6.2 million ($0.06 per share) in 1995.
NOTE 10 DEBT
The company has certain debt agreements that contain provisions regarding
restrictions on cash dividends, maintenance of specified working capital and net
worth levels, and specific financial ratio requirements. At December 31, 1995,
the company was in compliance with all restrictive covenants of such debt
agreements and all retained earnings were restricted as to payments of cash
dividends on common stock.
Significant elements of uncommitted, unsecured revolving lines of credit
are:
(Thousands except percent) 95 94
- --------------------------------------------------------------------------------
Total lines of credit $345,801 $378,182
Portion of lines of credit available to
foreign subsidiaries 95,801 128,182
Amounts outstanding at year-end:
Short-term 27,070 32,459
Short-term borrowings:
Average daily borrowings 29,666 33,449
Maximum amount outstanding at
any month-end 36,105 35,384
Weighted monthly average interest rate 4.19% 4.32%
Average interest rate on amounts
outstanding at year-end 4.41% 4.42%
- --------------------------------------------------------------------------------
Interest on foreign and short-term domestic borrowings is negotiated at the time
of the borrowing.
Information with respect to the company's long-term debt and capital lease
obligations at year-end is:
(Thousands) 95 94
- --------------------------------------------------------------------------------
Term loan with variable interest at 7.06%
at December 31, 1995 payable quarterly
through 1998 $150,000 $ --
Promissory notes with principal and
6.88% interest payable annually
through January 2000, secured by a
partnership interest 10,276 11,946
Mortgage with principal and 9.88%
interest payable in monthly installments
through April 2007 2,167 2,382
Obligations under capital leases 77,299 82,714
Obligations secured by equipment 4,990 6,482
Other 94 123
------- -------
244,826 103,647
Less: current portion (29,861) (27,895)
------- -------
Long-term debt and capital lease
obligations, less current portion $214,965 $ 75,752
======= =======
- --------------------------------------------------------------------------------
On January 5, 1995, the company obtained a $150 million four-year term loan with
a consortium of eight commercial banks. The loan has a floating interest rate
that resets on the one, two, three, or six month LIBOR and requires quarterly
interest payments with the principal to be paid at the end of the term in 1998.
The interest rate on the loan at December 31, 1995 was 7.06 percent.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
For each of the next five years and beyond, long-term debt and capital lease
obligations are:
Long-term
Debt Capital
(Thousands) (Principal only) Leases
- ---------------------------------------------------------------
1996 $ 3,646 $27,297
1997 3,802 26,255
1998 154,033 21,532
1999 2,326 6,949
2000 2,493 1,182
Beyond 2000 1,227 -
-------- -------
Total 167,527 83,215
Less: Amount representing interest - 5,916
-------- -------
Total at present value $167,527 $77,299
======== =======
Obligations under the lease agreements are collateralized by the assets leased.
Total assets leased were approximately $141.5 million and $131.3 million at
December 31, 1995 and December 25, 1994, respectively. Accumulated amortization
of these leased assets was approximately $95.3 million and $60.2 million at
December 31, 1995 and December 25, 1994, respectively.
NOTE 11 INTEREST EXPENSE & INTEREST INCOME AND OTHER, NET
Interest expense
(Thousands) 95 94 93
- --------------------------------------------------------------------
Interest expense $ 18,750 $10,138 $ 9,994
Interest capitalized (18,043) (8,294) (7,084)
-------- ------- -------
$ 707 $ 1,844 $ 2,910
======== ======= =======
- --------------------------------------------------------------------
In 1995, interest expense primarily consisted of interest payments on the $150
million four-year term loan the company entered into on January 5, 1995; and
interest capitalized primarily related to the construction of Fab 25.
Interest income and other, net
(Thousands) 95 94 93
- --------------------------------------------------
Interest income $27,816 $22,456 $15,990
Other income (loss) 2,947 (6,197) 500
------- ------- -------
$30,763 $16,259 $16,490
======= ======= =======
- --------------------------------------------------
In 1995, other income (loss) primarily consisted of the $2.7 million realized
gain on an equity investment in Seeq Corporation. In 1994, other income (loss)
primarily consisted of the $33 million settlement cost related to the class
action lawsuits and stockholders' derivative action offset by an $18 million
gain resulting from an award of damages in the arbitration proceedings with
Intel. Also included in other income (loss) for all years presented is the net
gain (loss) on the sale of assets.
NOTE 12 FOREIGN AND DOMESTIC OPERATIONS
The company is currently engaged in a single line of business: The design,
development, manufacture, and sale of programmable products in concert with
applications solutions to the manufacturers of equipment for personal and
networked computation and communications.
Operations outside the United States include both manufacturing and sales.
Manufacturing subsidiaries are located in Malaysia, Singapore, and Thailand.
Sales subsidiaries are in Europe and Asia.
The following is a summary of operations by entities within geographic
areas for the three years ended December 31, 1995:
(Thousands) 95 94 93
- ----------------------------------------------------------------
Sales to unaffiliated
customers:
North America $1,741,585 $1,524,050 $1,174,410
Europe 491,293 483,632 343,600
Asia 196,846 126,977 130,270
---------- ---------- ----------
$2,429,724 $2,134,659 $1,648,280
========== ========== ==========
Transfers between
geographic areas
(eliminated in
consolidation):
North America $ 743,117 $ 563,303 $ 444,378
Asia 396,158 323,050 277,496
---------- ---------- ----------
$1,139,275 $ 886,353 $ 721,874
========== ========== ==========
Operating income:
North America $ 290,626 $ 467,131 $ 265,676
Europe 18,922 15,860 8,376
Asia 38,729 30,148 31,001
---------- ---------- ----------
$ 348,277 $ 513,139 $ 305,053
========== ========== ==========
Identifiable assets:
North America $2,589,476 $2,090,080 $1,647,477
Europe 85,664 120,070 88,003
Asia 463,530 361,144 312,529
Eliminations (107,402) (125,592) (118,778)
---------- ---------- ----------
$3,031,268 $2,445,702 $1,929,231
========== ========== ==========
U.S. export sales:
Asia $ 485,625 $ 436,120 $ 314,268
Europe 190,866 117,811 109,226
---------- ---------- ----------
$ 676,491 $ 553,931 $ 423,494
========== ========== ==========
- ----------------------------------------------------------------
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Sales to unaffiliated customers are based on the location of the company's
subsidiary. Transfers between geographic areas consist of products and services
that are sold at amounts generally above cost and are consistent with governing
tax regulations. Operating income is total sales less operating expenses.
Identifiable assets are those assets used in each geographic area. Export sales
are United States foreign direct sales to unaffiliated customers primarily in
Europe and Asia.
NOTE 13 EMPLOYEE BENEFIT PLANS
Stock option plans. The company has several stock option plans under which key
employees have been granted incentive (ISOs) and nonqualified (NSOs) stock
options to purchase the company's common stock. Generally, options are
exercisable within four years from the date of grant and expire five to ten
years after the date of grant. ISOs granted under the plans have exercise prices
of not less than 100 percent of the fair market value of the common stock at the
date of grant. Exercise prices of NSOs may not be less than 50 percent of the
fair market value of the common stock at the date of grant. At December 31,
1995, 2,940 employees were eligible and participating in the plans.
The following is a summary of stock option exercises:
(Thousands) 95 94 93
- ------------------------------------------------------------------------------
Aggregate exercise price $ 14,770 $ 10,149 $14,029
Options exercised 1,635 1,589 2,749
- --------------------------------------------------------------------------------
A summary of the stock option plans at December 31, 1995 and December 25, 1994
are shown below.
(Thousands except per share amounts) 95 94
- --------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 11,919 10,961
Granted 2,627 2,789
Canceled (386) (242)
Exercised (1,635) (1,589)
-------- -------
Outstanding at end of year 12,525 11,919
======== =======
Exercisable at beginning of year 5,878 4,852
Exercisable at end of year 6,570 5,878
Available for grant at beginning of year 2,960 963
Available for grant at end of year 701 2,960
Aggregate exercise price of options
outstanding at end of year $247,913 $193,000
Average exercise price of options
outstanding at end of year $19.79 $16.19
- --------------------------------------------------------------------------------
Stock appreciation rights plans. The company maintains three stock appreciation
rights plans under which stock appreciation rights (SARs) either have been or
may be granted to key employees. The number of SARs exercised plus common stock
issued under the stock option plans may not exceed the number of shares
authorized under the stock option plans. SARs may be granted in tandem with
outstanding stock options, in tandem with future stock option grants, or
independently of any stock options. Generally, the terms of SARs granted under
the plans are similar to those of options granted under the stock option plans,
including exercise prices, exercise dates, and expiration dates. To date, the
company has granted only limited SARs, which become exercisable only in the
event of certain changes in control of the company.
Stock purchase plan. The company has a stock purchase plan that allows
participating employees to purchase, through payroll deductions, shares of the
company's common stock at 85 percent of the fair market value at specified
dates. At December 31, 1995, 6,723 employees were eligible to participate in the
plan and 482,182 common shares remained available for issuance under the plan. A
summary of stock purchased under the plan is shown below.
(Thousands except
employee participants) 95 94 93
- -----------------------------------------------------
Aggregate purchase price $10,873 $8,115 $6,413
Shares purchased 467 412 387
Employee participants 2,720 1,941 1,684
- -----------------------------------------------------
Profit sharing program. The company has a profit sharing program to which the
Board of Directors has authorized semiannual contributions. Profit sharing
contributions were $44.7 million in 1995, $57.0 million in 1994, and $33.9
million in 1993.
Retirement savings plan. The company has a retirement savings plan, commonly
known as a 401(k) plan, that allows participating United States employees to
contribute from 1 percent to 15 percent of their pre-tax salary subject to IRS
limits. The company makes a matching contribution calculated at 50 cents on each
dollar of the first 3 percent of participant contributions, to a maximum of 1.5
percent of eligible compensation. The company's contributions to the 401(k) plan
were $4.3 million, $3.7 million, and $3.2 million for 1995, 1994, and 1993,
respectively. There are four investment funds in which each employee may invest
contributions in whole percentage increments.
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Restricted stock award plan. The company established the 1987 restricted stock
award plan under which up to two million shares of common stock may be issued to
employees, subject to terms and conditions determined at the discretion of the
Board of Directors. The company entered into agreements to issue 226,427,
180,000, and 19,000 shares in 1995, 1994, and 1992, respectively. To date,
agreements covering 212,212 shares have been canceled without issuance and
1,252,964 shares have been issued pursuant to prior agreements. At December 31,
1995, agreements covering 436,427 shares were outstanding under the plan and
310,609 shares remained available for future awards. Outstanding awards vest
under varying terms within five years.
NOTE 14 COMMITMENTS
The company leases certain of its facilities under agreements which expire at
various dates through 2011. The company also leases certain of its manufacturing
and office equipment for terms ranging from one to six years. Rent expense was
$36.1 million, $31.9 million, and $31.9 million in 1995, 1994, and 1993,
respectively.
For each of the next five years and beyond, noncancelable long-term
operating leases obligations and commitments to purchase manufacturing supplies
and services are as follows:
Operating Purchase
(Thousands) Leases Commitments
- -----------------------------------------------
1996 $28,996 $ 5,074
1997 22,298 4,868
1998 17,123 4,868
1999 11,426 4,868
2000 11,144 3,797
Beyond 2000 11,503 27,900
- -----------------------------------------------
The operating lease of the company's corporate sales and marketing facility
expires in December 1998. The company has the option of extending the lease
agreement or purchasing the building for $40 million. The company may also
consider alternative financing arrangements.
At December 31, 1995, the company had commitments of approximately $93
million for the construction or acquisition of additional property, plant, and
equipment.
The company is currently planning to build a submicron wafer fabrication
and design facility in Dresden, Germany at an estimated cost of approximately
$1.5 billion over 5 years. The German federal and state governments will provide
financing assistance to the facility through grants and allowances, loan
guarantees, and loan interest subsidies. As of December 31, 1995, the company
had commitments to make cash investments and loans, in aggregate, in this
facility amounting to approximately $350 million over the next 4 years.
In December 1995, the company signed a five-year, comprehensive patent
cross-license agreement with Intel. The cross-license is royalty-bearing for the
company's products that use certain Intel technologies. The company is required
to pay Intel minimum non-refundable royalties during the years 1997 through
2000.
NOTE 15 INVESTMENT IN JOINT VENTURE
In 1993, the company and Fujitsu Limited established a joint venture, Fujitsu
AMD Semiconductor Limited (FASL), to manufacture Flash memory devices. The
company's share of FASL is 49.95 percent and the investment is being accounted
for under the equity method. In 1995, the company invested an additional $18.0
million in FASL, and the company's share of FASL net income during 1995 was
$34.9 million, net of income taxes of approximately $18.8 million. At December
31, 1995, the adjustment related to the translation of the FASL financial
statements into U.S. dollars resulted in a decrease of approximately $6.2
million to the investment in FASL.
Pursuant to a cross-equity provision between AMD and Fujitsu Limited, the
company purchased $12.7 million of Fujitsu Limited shares, with certain resale
restrictions. Under the same provision, Fujitsu Limited has purchased 2 million
shares of AMD common stock, and is required to purchase an additional 2.5
million shares over the next several years, for a total investment not to exceed
$100 million. No purchases were made in 1995.
The following are condensed unaudited financial data of FASL:
Three Years Ended December 31, 1995
(Unaudited) (Thousands) 95 94 93
- -----------------------------------------------------------------
Net sales $252,069 $ - $ -
Operating income (loss) 117,411 (32,203) (1,772)
Net income (loss) 107,563 (32,293) (1,772)
- -----------------------------------------------------------------
Dec. 31, 1995 and Dec. 25, 1994
(Unaudited) (Thousands) 95 94
- -------------------------------------------------------
Current assets $161,810 $ 10,907
Non-current assets 326,252 263,380
Current liabilities 107,524 29,362
Non-current liabilities 284 60
- -------------------------------------------------------
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 CONTINGENCIES
I. Litigations
A. Class action lawsuits. On November 3 and 15, 1995, two class action lawsuits
were filed, purportedly on behalf of purchasers of the company's stock from
April 11, 1995, to September 25, 1995, alleging that the company and various of
its officers and directors violated sections of the Securities Exchange Act of
1934 Rule 10b-5 promulgated thereunder by issuing allegedly false and misleading
statements concerning the development and production of the AMD-K5
microprocessor. The complaints seek damages in an unspecified amount. Based upon
information presently known to management, the company does not believe that the
ultimate resolution of these lawsuits will have a material adverse effect upon
the financial condition or results of operations of the company.
B. AMD v. Altera Corporation. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to the
company's and Altera Corporation's programmable logic devices. Based upon
information presently known to management, the company does not believe that the
ultimate resolution of this lawsuit will have a material adverse effect upon the
financial condition or results of operations of the company.
C. Thorn EMI North America, Inc. v. AMD. This litigation was filed in 1995 and
alleges that AMD is infringing a patent owned by Thorn EMI North America, Inc.
relating to the processes used by AMD to manufacture microprocessors. Based upon
information presently known to management, the company does not believe that the
ultimate resolution of this lawsuit will have a material adverse effect upon the
financial condition or results of operations of the company.
II. SEC Investigation
The Securities and Exchange Commission (SEC) began an informal investigation of
the company in 1993 concerning the company's disclosures relating to the
development of microcode for one of its Am486 products. The company has been
cooperating fully with the SEC.
III. Environmental Matters
Clean-Up Orders. Since 1981, the company has discovered, investigated, and begun
remediation of three sites where releases from underground chemical tanks at its
facilities in Santa Clara County, California adversely affected the groundwater.
The chemicals released into the groundwater were commonly in use in the
semiconductor industry in the wafer fabrication process prior to 1979. At least
one of the released chemicals (which is no longer used by the company) has been
identified as a probable carcinogen.
In 1991, the company received four Final Site Clean-up Requirements Orders
from the California Regional Water Quality Control Board, San Francisco Bay
Region (RWQCB) relating to the three sites. One of the orders named the company
as well as TRW Microwave, Inc. and Philips Semiconductors Corporation. Another
of the orders named the company as well as National Semiconductor Corporation.
The three sites in Santa Clara County are on the National Priorities List
(Superfund). If the company fails to satisfy federal compliance requirements or
inadequately performs the compliance measures, the government (a) can bring an
action to enforce compliance, or (b) can undertake the desired response actions
itself and later bring an action to recover its costs, and penalties, which is
up to three times the costs of clean-up activities, if appropriate. With regard
to certain claims related to this matter the statute of limitations has been
tolled.
The company has computed and recorded the estimated environmental liability
in accordance with applicable accounting rules and has not recorded any
potential insurance recoveries in determining the estimated costs of the clean-
up. The amount of environmental charges to earnings has not been material during
the last three fiscal years. The company believes that the potential liability,
if any, in excess of amounts already accrued with respect to the foregoing
environmental matters will not have a material adverse effect on the financial
condition or results of operations of the company.
- --------------------------------------------------------------------------------
notes
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IV. Other matters
The company is a defendant or plaintiff in various other actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
financial condition or results of operations of the company.
NOTE 17 SHELF REGISTRATION STATEMENT
On May 25, 1994, the Securities and Exchange Commission declared effective the
company's shelf registration statement covering up to $400 million of its
securities, which may be either debt securities, preferred stock, depositary
shares representing fractions of shares of preferred stock, common stock,
warrants to purchase common stock, or any combination of the foregoing which the
company may offer from time to time in the future. The nature and terms of the
securities will be established at the time of their sale. The company may offer
the securities through underwriters to be named in the future, through agents or
otherwise. The net proceeds of any offering will be used for general corporate
purposes, which may include the reduction of outstanding indebtedness, working
capital increases, and capital expenditures. To date, the company has not
offered or sold any securities registered under the $400 million registration
statement.
NOTE 18 SUBSEQUENT EVENT
On January 17, 1996, the company acquired NexGen, Inc. (NexGen) in a tax-free
reorganization in which NexGen was merged directly into the company. The
shareholders of NexGen receive eight-tenths (0.8) of a share of the common stock
of AMD for each outstanding share of the common stock of NexGen. The company
expects to issue approximately 33.6 million shares of common stock to the
holders of NexGen common stock, options, rights to purchase under the employee
stock purchase plan, and warrants.
Pursuant to the merger, AMD extended NexGen a $60 million revolving line of
credit, of which $30 million has been used as of December 31, 1995.
The merger will be accounted for under the pooling-of-interests method and,
accordingly, historical financial data in future reports will be restated to
include NexGen data. The following unaudited pro forma data summarizes the
combined results of operations of the company and NexGen as though the merger
had occurred at the beginning of fiscal 1993.
Three Years Ended December 31, 1995
(Unaudited, pro forma)
(Thousands, except per share amounts) 95 94 93
- --------------------------------------------------------------------------------
Net sales $2,468,379 $2,135,515 $1,648,280
Net income 216,326 281,247 216,589
Net income per
common share:
Primary $ 1.59 $ 2.18 $ 1.79
Fully diluted $ 1.57 $ 2.14 $ 1.77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF
Ernst & Young LLP
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
Advanced Micro Devices, Inc.
We have audited the accompanying consolidated balance sheets of Advanced Micro
Devices, Inc. at December 31, 1995 and December 25, 1994 and the related
consolidated statements of income and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Advanced Micro
Devices, Inc. at December 31, 1995 and December 25, 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
January 9, 1996, except for note 18, as to which the date is January 17, 1996
- --------------------------------------------------------------------------------
SUPPLEMENTARY
financial data
1995 and 1994 by Quarter (Unaudited) Dec. 31, Oct. 1, July 2, Apr. 2, Dec. 25, Sept. 25, June 26, Mar. 27,
(Thousands except per share amounts) 95 95 95 95 94 94 94 94
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $593,029 $590,385 $626,214 $620,096 $545,168 $543,114 $533,297 $513,080
Expenses:
Cost of sales 362,801 344,344 300,959 290,772 263,837 252,409 235,623 230,437
Research and development 104,009 100,014 101,032 92,500 76,115 67,759 67,889 68,221
Marketing, general, and
administrative 95,181 95,525 97,364 96,946 87,236 87,369 91,731 92,894
-------- -------- -------- -------- -------- -------- -------- --------
561,991 539,883 499,355 480,218 427,188 407,537 395,243 391,552
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 31,038 50,502 126,859 139,878 117,980 135,577 138,054 121,528
Litigation settlement -- -- -- -- (58,000) -- -- --
Interest income and other, net 7,526 9,867 6,657 6,713 5,317 394 6,366 4,182
Interest expense (706) -- -- (1) (1) (205) (899) (739)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes
and equity in joint venture 37,858 60,369 133,516 146,590 65,296 135,766 143,521 124,971
Provision for income taxes 3,786 16,517 44,060 48,375 21,548 44,803 47,362 39,990
-------- -------- -------- -------- -------- -------- -------- --------
Income before equity in
joint venture 34,072 43,852 89,456 98,215 43,748 90,963 96,159 84,981
Equity in net income (loss)
of joint venture 21,500 12,311 2,529 (1,414) (2,989) (4,277) (2,925) (394)
-------- -------- -------- -------- -------- -------- -------- --------
Net income 55,572 56,163 91,985 96,801 40,759 86,686 93,234 84,587
Preferred stock dividends -- -- -- 10 2,588 2,587 2,587 2,588
-------- -------- -------- -------- -------- -------- -------- --------
Net income applicable to
common stockholders $ 55,572 $ 56,163 $ 91,985 $ 96,791 $ 38,171 $ 84,099 $ 90,647 $ 81,999
======== ======== ======== ======== ======== ======== ======== ========
Net income per common share
Primary $ .52 $ .52 $ .86 $ .96 $ .39 $ .86 $ .93 $ .85
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted $ .52 $ .52 $ .86 $ .91 $ .39 $ .83 $ .89 $ .82
======== ======== ======== ======== ======== ======== ======== ========
Shares used in per share
calculation
Primary 106,799 107,318 107,170 101,012 98,636 97,778 97,394 96,233
======== ======== ======== ======== ======== ======== ======== ========
Fully diluted 106,799 107,319 107,306 106,717 105,490 104,872 104,249 103,670
======== ======== ======== ======== ======== ======== ======== ========
Common stock market price range
High $ 29.25 $ 36.50 $ 39.25 $ 35.88 $ 30.50 $ 31.00 $ 31.75 $ 31.75
Low $ 16.13 $ 28.00 $ 32.13 $ 23.50 $ 22.25 $ 24.00 $ 22.63 $ 16.75
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL
summary
Five Years Ended December 31, 1995
(Thousands except per share amounts) 95 94 93 92 91
- -------------------------------------------------------------------------------------------------------------------
Net sales $2,429,724 $2,134,659 $1,648,280 $1,514,489 $1,226,649
Expenses:
Cost of sales 1,298,876 982,306 789,564 746,486 658,824
Research and development 397,555 279,984 262,802 227,860 213,765
Marketing, general, and administrative 385,016 359,230 290,861 270,198 244,900
---------- ---------- ---------- ----------- ----------
2,081,447 1,621,520 1,343,227 1,244,544 1,117,489
---------- ---------- ---------- ----------- ----------
Operating income 348,277 513,139 305,053 269,945 109,160
Litigation settlement -- (58,000) -- -- --
Interest income and other, net 30,763 16,259 16,490 18,913 57,007
Interest expense (707) (1,844) (2,910) (17,227) (20,880)
---------- ---------- ---------- ----------- ----------
Income before income taxes and equity
in joint venture 378,333 469,554 318,633 271,631 145,287
Provision for income taxes 112,738 153,703 89,218 26,620 --
---------- ---------- ---------- ----------- ----------
Income before equity in joint venture 265,595 315,851 229,415 245,011 145,287
Equity in net income (loss) of joint venture 34,926 (10,585) (634) -- --
---------- ---------- ---------- ----------- ----------
Net income 300,521 305,266 228,781 245,011 145,287
Preferred stock dividends 10 10,350 10,350 10,350 10,350
---------- ---------- ---------- ----------- ----------
Net income applicable to common stockholders $ 300,511 $ 294,916 $ 218,431 $ 234,661 $ 134,937
========== ========== ========== =========== ==========
Net income per common share
Primary $2.85 $3.02 $2.30 $2.57 $1.53
========== ========== ========== =========== ==========
Fully diluted $2.81 $2.92 $2.24 $2.49 $1.52
========== ========== ========== =========== ==========
Shares used in per share calculation
Primary 105,575 97,510 95,108 91,383 88,196
========== ========== ========== =========== ==========
Fully diluted 107,035 104,570 102,063 98,475 95,540
========== ========== ========== =========== ==========
Long-term debt and capital lease obligations,
less current portion $ 214,965 $ 75,752 $ 79,504 $ 19,676 $ 42,039
Total assets $3,031,268 $2,445,702 $1,929,231 $1,448,095 $1,291,758
- ------------------------------------------------------------------------------------------------------------------
AMD's common stock (symbol AMD) is listed on the New York Stock Exchange. The
company has never paid cash dividends on common stock and has no present plans
to do so.
The number of stockholders of record at January 28, 1996 was 10,008.
CORPORATE
directory
- --------------------------------------------------------------------------------
DIRECTORS
W. J. Sanders III
Chairman of the Board and
Chief Executive Officer, AMD, and
a Director of Donaldson, Lufkin & Jenrette, Inc.
Dr. Friedrich Baur
President and Managing Partner, MST Beteiligungs und Unternehmensberatungs GmbH
Charles M. Blalack
Chairman of the Board and
Chief Executive Officer of Blalack and Company, Investment Advisors
Dr. R. Gene Brown
Private Investor and a Managing Director
of Putnam, Hayes and Bartlett, Inc.,
an Economic Consulting Firm
Anthony B. Holbrook
Vice Chairman of the Board, AMD
Richard Previte
President and Chief Operating Officer, AMD
S. Atiq Raza
Corporate Vice President and
Chief Technical Officer, AMD
Joe L. Roby
Chief Operating Officer, Donaldson,
Lufkin & Jenrette, Inc., a Securities
Brokerage and Investment Banking Firm
Dr. Leonard M. Silverman
Dean, School of Engineering,
University of Southern California
CORPORATE OFFICERS
W. J. Sanders III
Chief Executive Officer and
Chairman of the Board
Richard Previte
President and Chief Operating Officer
Marvin Burkett
Senior Vice President, Chief Financial
and Administrative Officer and Treasurer
Gene Conner
Senior Vice President, Operations
S. Atiq Raza
Corporate Vice President and
Chief Technical Officer, AMD
Stanley Winvick
Senior Vice President, Human Resources
Stephen Zelencik
Senior Vice President and
Chief Marketing Executive
Thomas M. McCoy
Vice President, General Counsel and Secretary
GROUP VICE PRESIDENTS
John Bourgoin
Group Vice President,
Computation Products Group
Vinod Dham
Group Vice President,
Computation Products Group
Richard Forte
Group Vice President,
Communications and Components Group
Terryll R. Smith
Group Vice President, Sales
VICE PRESIDENTS
Benjamin M. Anixter
Vice President, External Affairs
Gary Ashcraft
Vice President and General Manager,
Communication Products Division
Frank Barone
Vice President and General Manager,
Programmable Logic Division and
Bipolar Operations
Kathryn Brandt
Vice President, Business Systems
Donald M. Brettner
Vice President, Manufacturing Services Division
David Chavoustie
Vice President and General Manager,
Embedded Processor Division
Susan T. Daniel
Vice President, Human Resource Operations
James Doran
Vice President, Technical Operations
Curt Francis
Vice President, Corporate Planning
and Development
Al F. Frugaletti
Vice President,
Worldwide Distribution and Headquarters Sales
Clive Ghest
Vice President, Business Development
Gary O. Heerssen
Vice President and Group Executive,
Austin Wafer Fabrication Operations
Robert R. Herb
Vice President, Group Strategic Marketing,
Computation Products Group
Larry Hollatz
Vice President and General Manager,
Texas Microprocessor Division
Robert M. Krueger
Vice President and General Manager,
I/O and Network Products Division
Gerald A. Lynch
Vice President, Asia Pacific Sales and Marketing
Walid Maghribi
Vice President and General Manager,
Non-Volatile Memory Division
Robert McConnell
Vice President
Giuliano Meroni
Vice President, Europe Sales and Marketing
K.C. Murphy
Vice President,
Systems and Platform Development
Daryl Ostrander
Vice President, Austin Wafer Fabrication
Joseph Proctor
Vice President, Information Systems
Geoff Ribar
Vice President, Corporate Controller
Douglas Ritchie
Vice President,
Information Integration and Access
Jack Saltich
Vice President, Fab 25
William Siegle
Vice President, Integrated Technology Division
and Submicron Development Center,
and Chief Scientist
Danne Smith
Vice President, Corporate Quality
Tom Stites
Vice President, Communications
TRANSFER AGENT AND REGISTRAR
The First National Bank of Boston
P.O. Box 644
Boston, Massachusetts 02102
LEGAL COUNSEL
Bronson, Bronson & McKinnon
505 Montgomery Street
San Francisco, California 94111-2514
INDEPENDENT AUDITORS
Ernst & Young LLP
55 Almaden Boulevard
San Jose, California 95113
- --------------------------------------------------------------------------------
Corporate Address
AMD
One AMD Place
P.O. Box 3453
Sunnyvale, California 94088-3453
Financial Information
Copies of the annual report, 10-K and quarterly financial news releases are
available without charge from the
company's literature department at
(800) 222-9323. A faxed copy of the financial news release can also be requested
using this phone number.
For other investor-related information, interested parties should contact the
Investor Relations Department at
(408) 749-3127.
Manufacturing Facilities
Aizu-Wakamatsu, Japan
Austin, Texas
Bangkok, Thailand
Penang, Malaysia
Singapore
Sunnyvale, California
AMD
One AMD Place
P.O. Box 3453
Sunnyvale, California 94088-3453
(C) Advanced Micro Devices, Inc., 1996 Printed in U.S.A.
AMD-90264
RKD-AL- 130K-3/96-0