MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net sales of $2.1 billion in 1994 rose by approximately 30 percent from 1993. This increase was primarily attributable to substantial growth in Am486(R) microprocessor sales. 1993 net sales increased by 9 percent from 1992, due to an increase in flash memory device sales and higher sales in most other product lines partially offset by a decline in Am386(R) microprocessor sales. Revenues of Am486 microprocessors have grown significantly since its introduction in the second quarter of 1993. While average selling prices of Am486 products have declined due to competitive pressures, unit shipments have grown significantly. As a result, a significant portion of the company's 1994 revenues, profits, and margins were attributable to Am486 products. Price declines are anticipated to continue in 1995. The company anticipates that microprocessor revenues will continue to represent a significant portion of the company's sales, profits, and margins in 1995. The future outlook for AMD's microprocessor business is highly dependent upon microprocessor market conditions, which are subject to price elasticity and changes in demand. The company anticipates that any growth in existing and future generation microprocessor products will depend on market demand and the company's ability to meet this demand. Sales of flash memory devices decreased in 1994 from 1993 primarily due to pricing pressures caused by increased competition, and secondarily due to the company's inability to increase production due to limited capacity. The company plans to meet projected long-term demand for flash memory devices through a manufacturing joint venture, Fujitsu AMD Semiconductor Limited (FASL), which is presently scheduled to begin volume production in the second half of 1995. EPROM sales increased in 1994 from 1993 mainly because of higher unit shipments in the first half of 1994. The company anticipates that EPROM sales may decline in 1995. Sales of programmable logic devices (PLDs) decreased slightly in 1994 from 1993. While sales of CMOS PLDs grew from 1993, this growth did not offset the decline in bipolar PLD sales. Revenues of communication products increased in 1994 from 1993. This increase was primarily attributable to growth in Ethernet products. International sales grew in 1994 in all geographic regions as compared to 1993. Sales to international customers were approximately 55 percent of total sales in 1994, 54 percent in 1993, and 55 percent in 1992. Gross margin was 54 percent in 1994 as compared to 52 percent in 1993, and 51 percent in 1992. The improvement in gross margin in 1994 was primarily attributable to increased sales from higher margin Am486 products. Gross margin is anticipated to decline in 1995, primarily due to pricing pressures particularly with respect to microprocessor products. Gross margin is also anticipated to decline due to products received from FASL, which are expected to be purchased at higher costs compared to similar products manufactured internally. The impact of gross margin declines, arising from purchases of products from FASL, may be partially offset by the company's share of income that may be generated by FASL, which is included in net income under the equity method of accounting. Research and development expense for 1994 increased to $280.0 million from $262.8 million in 1993 and $227.9 million in 1992. These increases were mainly due to higher spending in microprocessor development. The company anticipates that this trend will continue in 1995. Marketing, general, and administrative expense increased from 1992 through 1994. These increases were primarily due to increased legal expenses related to litigations with Intel (which were settled in January, 1995) and microprocessor advertising expenses. Operating expenses as a percentage of sales were on a downward trend from 1992 through 1994. However, operating expenses as a percentage of sales are anticipated to rise in 1995, primarily due to start-up costs and commencement of significant depreciation expenses related to Fab 25 and purchase of product from FASL, as well as pricing pressures, particularly with respect to microprocessor products. On January 11, 1995, the company and Intel Corporation reached an agreement to settle all previously outstanding legal disputes between the two companies. The major terms of the settlement are: (1) AMD will have a fully paid-up, nonexclusive, world-wide, royalty-free, perpetual license to copy and distribute the microcode and control code in the Intel287(TM), Intel386(TM) and Intel486(TM) microprocessor product families. (2) AMD agreed that it has no right to copy any other Intel microcode including the Pentium(TM) Processor, the P6 microcode and the 486 of ICE (in-circuit emulation) microcode. (3) The companies agreed to negotiate a new patent cross-license agreement to become effective January 1, 1996. (4) AMD agreed to pay Intel $58 million in settlement of claims for past damages related to AMD's distribution of Am486 microprocessors containing Intel's 486 ICE microcode. As ordered in a 1992 arbitration between the companies, Intel will pay AMD approximately $18 million in damages (which includes interest) awarded by the arbitrator for breach of contract and will not contest certain rights granted AMD in the arbitration. The company recorded both the ICE case damages and the arbitration award in 1994. (5) Intel and AMD will drop all cases against each other, including appeals, currently ADVANCED MICRO DEVICES, INC. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION pending in the courts. (6) AMD will have the right to use foundries for Am486 products containing Intel microcode for up to 20 percent of annual total unit shipments of Am486 microprocessors. (7) AMD and its customers will receive a license for Intel's "Crawford `338" patent, covering memory management. (8) The two companies agreed not to initiate legal action against one another for any activity occurring prior to January 6, 1995. The company recorded a $58 million litigation settlement in 1994 as a result of the forgoing settlement. Also, during 1994, interest income and other, net, included a net charge of approximately $5 million resulting from the securities class action lawsuit and stockholders' derivative action settlements, and damages awarded to the company in the arbitration proceeding with Intel Corporation. Interest expense decreased in 1994 and 1993 as compared to 1992, mainly due to lower average outstanding debt and lower interest rates. The income tax rate increased to approximately 33 percent in 1994 from 28 percent in 1993 and 10 percent in 1992. The higher tax rate in 1994 was primarily due to reduced benefits from low taxed foreign income and available tax credit carryforwards. The company anticipates that the income tax rate will be approximately 34 percent in 1995. 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. In 1994, 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 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 25, 1994, the company had approximately $33 million (notional amount) in foreign exchange forward contracts (see Notes 1, 2, and 3 to the Consolidated Financial Statements). In 1994, approximately 15 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. The impact on the company's operating results from changes in foreign currency rates individually and in the aggregate has not been material. The company has engaged in 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. At the end of 1994, the net outstanding notional amount of interest rate swaps was $40 million, which will mature in 1997. Gains and losses related to these interest rate swaps have been immaterial (see Notes 1, 2, and 3 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, foreign currency options, 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 continually monitors the credit ratings of such counterparties and limits the financial exposure and the amount of agreements entered into with any one financial institution. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS AND FINANCIAL CONDITION The semiconductor industry is generally characterized by a highly competitive and rapidly changing environment in which operating results are often subject to the effects of new product introductions, manufacturing technology innovations, rapid fluctuations in product demand, and the ability to maintain and secure intellectual property rights. While the company attempts to identify and respond to these changes as soon as possible, the rapidity of their onset makes prediction of and reaction to such events an ongoing challenge. The company believes that its future results of operations and financial condition could be impacted by any of the following factors: market acceptance and timing of new products; continued market acceptance of personal computer industry standards applicable to the company's products; trends in the personal computer marketplace; capacity constraints; intense price competition; interruption in procuring needed manufacturing materials; and changes in domestic and international economic conditions. The company's microproccessor products, and more specifically the company's current generation of 486 microprocessors, have significantly contributed, and are expected to significantly contribute in 1995 to the company's revenues, margins and profits. The company's 486 microprocessors are re-engineered versions of 486 microprocessors originally developed by Intel, and contain and use, under license with Intel, its 486 microcode. The company's next generation superscalar RISC-based K86(TM) products are being designed to be Microsoft(R) Windows(R)-compatible and compete with Intel's post-486 generations of X86 microprocessors including the Pentium and the P6. 8 ADVANCED MICRO DEVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The company's K86 products will not be re-engineered versions of microprocessors developed by Intel, and pursuant to the settlement agreement with Intel the company does not have the right to use Intel microcodes in AMD product generations following the 486. There can be no assurance that the company will be able to introduce its K86 products in a timely manner to meet competition, that these microprocessors will not face severe price competition, or that superior competitive products will not be introduced. There can be no assurance that the K86 products will achieve market acceptance or desired operating results, including but not limited to profitability. Any such failure could adversely affect the company's future operations. 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. In addition, an actual or anticipated shortfall in revenue, gross margins, or earnings from securities analysts' expectations could have an immediate adverse effect on the trading price of the company's common stock in any given period. FINANCIAL CONDITION Cash, cash equivalents, and short-term investments decreased by $110.3 million from 1993 to 1994. This decrease was primarily attributable to investments in expanding manufacturing capacity both directly through additional property, plant, and equipment, and indirectly through the FASL joint venture. The company also paid $34 million in settlement of a securities class action. The company plans to continue to make significant capital investments in 1995. Working capital decreased by $115.1 million from $509.6 million in 1993 to $394.5 million in 1994. This decrease was primarily due to lower cash, cash equivalents, and short-term investments resulting from capital acquisitions, and secondarily due to a liability recorded for the Intel settlement. The payment of this litigation liability is expected to be made in the first half of 1995. In 1993, the company commenced construction of its 700,000 square-foot submicron semiconductor manufacturing complex in Austin, Texas. Known as Fab 25, the new facility is expected to cost approximately $1.3 billion when fully equipped. The first phase of construction and initial equipment installation is expected to cost approximately $700 million through 1995, of which approximately $400 million was incurred through 1994. Volume production is presently scheduled to begin in late 1995. The company and Fujitsu Limited are cooperating in building and operating an approximately $800 million wafer fabrication facility in Aizu-Wakamatsu, Japan, through their joint venture (FASL). Each company will contribute equally toward funding and supporting FASL. AMD is expected to contribute approximately half of its share of funding in cash and may be required to guarantee third- party loans made to FASL for the remaining half. However, to the extent debt cannot be secured by FASL, AMD is required to contribute its portion in cash. The company is also required under the terms of the joint venture to contribute approximately one-half of any additional amounts as may be necessary to sustain FASL's operations. At the end of 1994, the company's total cash investment in FASL was $142.3 million as compared to $3.2 million at the end of 1993. The company anticipates that this investment will increase to approximately $162 million by the end of 1995. Volume production is presently scheduled to commence in the second half of 1995. The joint venture costs are denominated in yen and therefore are subject to change due to fluctuations of foreign exchange rates. Therefore, the company enters into foreign currency options to hedge its firm commitments relating to the company's FASL investment. The maturities of these currency options are generally less than six months. As of December 25, 1994, the company held approximately $13 million (notional amount) in foreign currency options (see Notes 1, 2, and 3 to the Consolidated Financial Statements). As of the end of 1994, the company had the following financing arrangements: unsecured committed bank lines of credit of $250 million, unutilized; long-term secured equipment lease lines of $110 million, of which $107 million were utilized; and short-term, unsecured uncommitted bank credit in the amount of $128 million, of which $32 million was utilized. On January 5, 1995, the company obtained a $150 million four-year term loan from a consortium of eight commercial banks. The company's current capital plan and requirements are based on various product-mix, selling-price and unit-demand assumptions and are, therefore, subject to revision due to future market conditions. ADVANCED MICRO DEVICES, INC. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. On February 10, 1995, the company called for redemption of all outstanding shares of its $30.00 Convertible Exchangeable Preferred Stock (the "Preferred Shares") on March 13, 1995 (the "Redemption Date"); and pursuant to the provisions of a depositary agreement between the company and The First National Bank of Boston as Depositary, the Depositary called for redemption, on the Redemption Date, all of the outstanding Depositary Convertible Exchangeable Preferred Shares (the "Depositary Shares"), each representing one-tenth of a Preferred Share. The redemption price is $50.90 per Depositary Share, plus $.73 of accrued and unpaid dividends from December 15, 1994 to the Redemption Date. Each group of ten Depositary Shares, representing one whole share of Preferred Stock, is convertible, at the option of the holders, into 19.873 shares of common stock of the company at any time prior to 5:00 p.m. Eastern Standard Time on the Redemption Date. No accrued dividends will be paid in respect of any Depositary Shares which are converted. If fewer than all of the outstanding Depositary Shares are properly surrendered for conversion, the company has arranged for Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc. to purchase directly from the company up to such whole number of shares of common stock as would have been issuable upon the conversion of any Depositary Shares not surrendered for conversion. The proceeds from any such sale will be used by the company to redeem the Depositary Shares which are not surrendered for conversion. The company believes that cash flows from operations and current cash balances, together with current and anticipated available long-term financing, will be sufficient to fund operations, capital investments, and research and development projects currently planned for the foreseeable future. Am386 and Am486 are registered trademarks of Advanced Micro Devices, Inc. K86 is a trademark of Advanced Micro Devices, Inc. 10 ADVANCED MICRO DEVICES, INC. CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------------------------------------- Three years ended December 25, 1994 (Thousands except per share amounts) 1994 1993 1992 ------------------------------------------- NET SALES $ 2,134,659 $ 1,648,280 $ 1,514,489 ----------- ----------- ----------- Expenses: Cost of sales 982,306 789,564 746,486 Research and development 279,984 262,802 227,860 Marketing, general, and administrative 359,230 290,861 270,198 ----------- ----------- ----------- 1,621,520 1,343,227 1,244,544 ----------- ----------- ----------- Operating income 513,139 305,053 269,945 Litigation settlement (58,000) - - Interest income and other, net 16,259 16,490 18,913 Interest expense (1,844) (2,910) (17,227) ----------- ----------- ----------- Income before income taxes and equity in joint venture 469,554 318,633 271,631 Provision for income taxes 153,703 89,218 26,620 ----------- ----------- ----------- Income before equity in joint venture 315,851 229,415 245,011 Equity in net income (loss) of joint venture (10,585) (634) - ----------- ----------- ----------- NET INCOME 305,266 228,781 245,011 Preferred stock dividends 10,350 10,350 10,350 ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCKHOLDERS $ 294,916 $ 218,431 $ 234,661 =========== =========== =========== NET INCOME PER COMMON SHARE: Primary $ 3.02 $ 2.30 $ 2.57 =========== =========== =========== Fully diluted $ 2.92 $ 2.24 $ 2.49 =========== =========== =========== Shares used in per share calculation: Primary 97,510 95,108 91,383 Fully diluted 104,570 102,063 98,475 - - ---------------------------------------------------------------------------------------------------------------
See accompanying notes ADVANCED MICRO DEVICES, INC. 11 CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------------------------------------------------- December 25, 1994, and December 26, 1993 (Thousands except share and per share amounts) 1994 1993 ---------------------------- ASSETS Current assets: Cash and cash equivalents $ 121,343 $ 60,423 Short-term investments 256,511 427,775 ----------- ----------- Total cash, cash equivalents, and short-term investments 377,854 488,198 Accounts receivable, net of allowance for doubtful accounts of $10,319 in 1994 and $7,492 in 1993 337,107 263,617 Inventories: Raw materials 21,604 15,371 Work-in-process 72,632 56,504 Finished goods 34,454 32,175 ----------- ----------- Total inventories 128,690 104,050 Deferred income taxes 98,675 77,922 Prepaid expenses and other current assets 44,293 30,399 ----------- ----------- Total current assets 986,619 964,186 Property, plant, and equipment: Land 28,820 26,272 Buildings and leasehold improvements 500,530 444,299 Equipment 1,442,787 1,335,251 Construction in progress 492,792 192,541 ----------- ----------- Total property, plant, and equipment 2,464,929 1,998,363 Accumulated depreciation and amortization (1,200,718) (1,094,037) ----------- ----------- Property, plant, and equipment, net 1,264,211 904,326 Investment in joint venture 124,588 2,086 Other assets 70,284 58,633 ----------- ----------- $ 2,445,702 $ 1,929,231 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 32,459 $ 30,994 Accounts payable 149,122 127,151 Accrued compensation and benefits 104,526 81,860 Accrued liabilities 82,570 83,982 Litigation settlement 58,000 - Income tax payable 53,795 34,991 Deferred income on shipments to distributors 83,800 74,436 Current portion of long-term debt and capital lease obligations 27,895 21,205 ----------- ----------- Total current liabilities 592,167 454,619 Deferred income taxes 42,518 42,837 Long-term debt and capital lease obligations, less current portion 75,752 79,504 Commitments and contingencies - - Stockholders' equity: Capital stock: Serial preferred stock, par value $.10; 1,000,000 shares authorized; 345,000 shares issued and 344,862 shares outstanding in 1994, and 345,000 shares issued and outstanding in 1993 ($172,431 aggregate liquidation preference in 1994) 34 35 Common stock, par value $.01; 250,000,000 shares authorized; 95,417,383 shares issued and outstanding in 1994, and 92,443,911 in 1993 956 926 Capital in excess of par value 698,673 619,733 Retained earnings 1,035,602 731,577 ----------- ----------- Total stockholders' equity 1,735,265 1,352,271 ----------- ----------- $ 2,445,702 $ 1,929,231 =========== =========== - - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes 12 ADVANCED MICRO DEVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------------------------- Three years ended December 25, 1994 (Thousands) 1994 1993 1992 ------------------------------------ Cash flows from operating activities: Net income $ 305,266 $ 228,781 $ 245,011 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 215,984 175,275 152,313 Litigation settlement 58,000 - - Net (gain) loss on sale of property, plant, and equipment 276 (2,943) 1,325 Write-down of property, plant, and equipment 2,230 366 222 Gain realized on available-for-sale securities - - (10,689) Compensation recognized under employee stock plans 1,971 1,313 3,039 Undistributed loss of joint venture 10,585 634 - Changes in operating assets and liabilities: Net increase in receivables, inventories, prepaid expenses, and other assets (114,566) (57,269) (2,471) Net increase in deferred income taxes (21,072) (27,021) (19,109) Increase in income tax payable 61,910 70,502 13,386 Net increase in payables and accrued liabilities 52,589 69,750 16,212 --------- --------- --------- Net cash provided by operating activities 573,173 459,388 399,239 --------- --------- --------- Cash flows from investing activities: Purchase of property, plant, and equipment (548,742) (323,669) (222,064) Proceeds from sale of property, plant, and equipment 2,058 4,648 1,261 Proceeds from available-for-sale securities - - 21,263 Purchase of held-to-maturity debt securities (1,245,167) (715,487) (594,801) Proceeds from sale of held-to-maturity debt securities 1,416,431 566,773 432,590 Investment in joint venture (139,175) (3,160) - --------- --------- --------- Net cash used in investing activities (514,595) (470,895) (361,751) --------- --------- --------- Cash flows from financing activities: Proceeds from borrowings 42,025 10,238 8,898 Principal payments on borrowings (68,898) (22,386) (153,094) Proceeds from issuance of stock 39,565 42,401 15,145 Payments of preferred stock dividends (10,350) (10,350) (10,350) --------- --------- --------- Net cash provided by (used in) financing activities 2,342 19,903 (139,401) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 60,920 8,396 (101,913) Cash and cash equivalents at beginning of year 60,423 52,027 153,940 --------- --------- --------- Cash and cash equivalents at end of year $ 121,343 $ 60,423 $ 52,027 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) $ 977 $ 2,123 $ 15,136 ========= ========= ========= Income taxes $ 111,704 $ 44,433 $ 32,149 ========= ========= ========= Non-cash financing activities: Equipment capital leases $ 34,202 $ 64,512 $ - ========= ========= ========= - - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes ADVANCED MICRO DEVICES, INC. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 25, 1994, December 26, 1993, and December 27, 1992 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal year. Advanced Micro Devices' fiscal year ends on the last Sunday in December, which resulted in a 52-week year ended December 25, 1994. This compares with a 52-week fiscal year for 1993 and 1992, which ended on December 26 and 27, respectively. Principles of consolidation. The consolidated financial statements include the accounts of Advanced Micro Devices, Inc. and its subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. 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 included 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. Effective December 27, 1993, the company adopted the Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Instruments in Debt and Equity Securities." Accordingly, the company has classified its marketable debt and equity securities into held-to-maturity and available-for-sale categories. Securities classified as held-to-maturity are reported at amortized cost and available-for-sale securities are reported at fair market value with 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 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. 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 investment (FASL). Realized gains and losses from these hedges are deferred and included in other assets or other 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. Additional disclosures regarding financial instruments, including SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," are included in Notes 2 and 3 to the 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 method for financial reporting purposes and on accelerated methods for tax purposes. Investment in joint venture. In 1993, the company and Fujitsu Limited established a joint venture, Fujitsu AMD Semiconductor Limited (FASL). AMD's share of FASL is 49.95 percent and the investment is being accounted for under the equity method. In 1994, the amount invested in FASL was $139.2 million, and the company's share of net loss during 1994 was $10.6 million, offset by income tax savings of approximately $5.7 million. 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. 14 ADVANCED MICRO DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Income taxes. Effective December 28, 1992, the company adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." 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. Financial presentation. Certain prior year amounts on the Consolidated Financial Statements have been reclassified to conform to the 1994 presentation. - - -------------------------------------------------------------------------------- 2. 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. The hedging transactions in 1994 were denominated in lira, yen, French franc, deutsche mark, and pound sterling. The maturities of these contracts are generally less than six months. Foreign currency options. The joint venture (FASL) investments are denominated in yen, and therefore, are subject to exposure due to fluctuations in yen exchange rate. 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. Interest rate swaps. The company engaged in interest rate swaps primarily to reduce its interest rate exposure on its building lease obligations. These interest rate swaps generally involve the payment of a fixed interest rate based on three to five year swap rates and the receipt of a floating interest rate based on six months LIBOR without exchanges of the underlying notional amounts. These interest rate swaps will mature in 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 25, 1994. In certain instances where judgment is required in estimating fair value, price quotes were obtained from certain of the company's counterparty financial institutions. - - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------- 1994 1993 - - --------------------------------------------------------------------------------------------------- Notional Carrying Fair Notional Carrying Fair (Thousands) amount amount value amount amount value - - --------------------------------------------------------------------------------------------------- Interest rate instruments: Swaps $40,000 $(518) $228 $40,000 $(1,122) $(3,384) Foreign exchange instruments: Foreign exchange forward contracts 32,651 536 536 37,341 22 22 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. ADVANCED MICRO DEVICES, INC. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying amounts and estimated fair values of the company's other financial instruments are as follows:
- - -------------------------------------------------------------------------------- 1994 1993 - - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair (Thousands) amount value amount value - - -------------------------------------------------------------------------------- Short-term debt: Notes payable $(32,459) $(32,459) $(30,994) $(30,994) Long-term debt (20,810) (20,132) (23,494) (24,321) - - --------------------------------------------------------------------------------
Securities held-to-maturity and available-for-sale. The following is a summary of held-to-maturity securities as of December 25, 1994.
- - -------------------------------------------------------------------------------- (Thousands) Cost -------- Certificates of deposit $ 4,997 Security repurchase agreements 50,800 Commercial paper 24,760 Money market preferred stock 36,700 Other debt securities 1,672 -------- Cash equivalents 118,929 Cash 2,414 -------- Total cash and cash equivalents $121,343 ======== Certificates of deposit $ 95,342 Corporate notes 101,850 Treasury notes 44,877 Commercial paper 14,442 -------- Total short-term investments $256,511 ======== - - --------------------------------------------------------------------------------
Since held-to-maturity securities are short-term in nature, changes in market interest rates would not have a significant impact on fair value of these securities. These securities are carried at amortized cost which approximates fair value. As of December 25, 1994, included in other assets, the company held $9.4 million of available-for-sale equity securities with fair value of $18.5 million. The net unrealized holding gain of $9.1 million on these equity securities is included in retained earnings since it is immaterial. As of December 25, 1994, the company did not own any securities classified as trading. 3. 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 of industrial firms and financial institutions are rated A1, P1 or better. 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 for 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 continually 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. 16 ADVANCED MICRO DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. STOCKHOLDERS' EQUITY The following is a summary of the changes in the components of consolidated stockholders' equity for the three years ended December 25, 1994.
- - ------------------------------------------------------------------------------------------------------------------------------------ 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 29, 1991 345 $35 84,031 $842 $503,994 $278,485 $ 783,356 Issuance of shares: Employee stock plans - - 4,195 43 15,102 - 15,145 Compensation recognized under employee stock plans - - - - 3,039 - 3,039 Income tax benefits realized from employee stock option exercises - - - - 10,539 - 10,539 Preferred stock dividends - - - - - (10,350) (10,350) Net income - - - - - 245,011 245,011 ---- ---- ------- ----- --------- ---------- ----------- 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 ==== ==== ======= ===== ========= ========== =========== - - ------------------------------------------------------------------------------------------------------------------------------------
5. SERIAL PREFERRED STOCK In March 1987, the company sold 345,000 shares of Convertible Exchangeable Preferred Stock, $.10 par value. Dividends at an annual rate of $30 per share (6 percent) on the preferred stock are cumulative from the date of original issue and are payable quarterly in arrears, when and as declared by the company's Board of Directors. Voluntary and involuntary liquidation value of each preferred share is approximately $500 plus unpaid dividends. The preferred stock is 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 pre- ADVANCED MICRO DEVICES, INC. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ferred share. The preferred stock is exchangeable at the option of the company, in whole but not in part, on any dividend payment date commencing March 15, 1989, for 6 percent Convertible Subordinated Debentures due 2012 at the rate of $500 principal amount of debentures for each preferred share. If exchanged, commencing the first March 15 following the date of initial issuance of the debentures, the company is required to make annual payments into a sinking fund to provide for the redemption of the debentures. The preferred stock is redeemable for cash at any time at the option of the company, in whole or in part, at prices declining to approximately $500 per share at March 15, 1997, plus unpaid dividends. Holders of preferred stock are entitled to limited voting rights under certain conditions. The preferred stock is held by a depositary and 3,450,000 depositary shares, which are listed on the New York Stock Exchange, have been issued and 3,448,620 shares were outstanding as of December 25, 1994. Each depositary share represents one-tenth of a preferred share, with the holder entitled, proportionately, to all the rights and preferences of the underlying preferred stock. On February 10, 1995, the company called for redemption of all outstanding shares of its preferred stock on March 13, 1995. The redemption price is $50.90 per depositary share, plus $.73 of accrued and unpaid dividends from December 15, 1994 to the redemption date. Each group of ten depositary shares, representing one whole share of preferred stock, is convertible into 19.873 shares of the company's common stock at any time prior to the redemption date. If fewer than all of the outstanding depositary shares are surrendered for conversion, the company has arranged for certain institutions to purchase directly from the company the whole number of shares of common stock as would have been issuable upon the conversion of any depositary shares not surrendered for conversion. The proceeds from any such sale will be used by the company to redeem the depositary shares which are not surrendered for conversion. 6. STOCKHOLDER RIGHTS PLAN In February 1990, the company adopted a stockholder rights plan. In accordance with this plan, the company 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. Each right entitles the registered holder to purchase from the company a unit consisting of one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $.10 per share, at a purchase price of $65, subject to adjustment. The rights will not be exercisable, or transferable apart from the common stock, until certain events occur. The rights are redeemable by the company and expire on December 31, 2000. At a meeting on February 16, 1995, the Board of Directors of the company authorized and directed a committee of its members to cause the company to redeem the preferred stock purchase rights under the Stockholders Rights Plan at a time to be determined by the committee, subject to the right of the committee to request that the Board reconsider its action should a change in circumstances occur. No decision concerning the date of the planned redemption has been announced. 7. INCOME TAXES Provision for income taxes consists of:
- - -------------------------------------------------------------------------------- 1994 1993 1992 SFAS 109 SFAS 109 SFAS 96 (Thousands) Method Method Method ------------------------------------- Current: U.S. Federal $154,425 $83,598 $48,161 U.S. State and Local 13,001 3,640 7,835 Foreign National and Local 7,350 2,332 1,863 Deferred: U.S. Federal (18,239) (1,947) (31,239) U.S. State and Local (2,820) 1,798 - Foreign National and Local (14) (203) - -------- ------- ------- Provision for income taxes $153,703 $89,218 $26,620 ======== ======= ======= - - --------------------------------------------------------------------------------
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 $37.4 million, $43.4 million, and $10.5 million in 1994, 1993, and 1992, respectively. Such benefits were credited to capital in excess of par value when realized. 18 ADVANCED MICRO DEVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 25, 1994, December 26, 1993, and December 28, 1992 as restated under SFAS No. 109, are as follows:
- - ------------------------------------------------------------------------------------------------- (Thousands) 1994 1993 1992 -------- -------- -------- Deferred tax assets: Deferred distributor income $31,396 $31,349 $22,402 Inventory reserves 18,809 14,935 16,690 Accrued expenses not currently deductible 39,467 21,799 33,995 Federal tax credit carryovers 2,873 30,888 52,208 Other 39,081 27,569 31,600 -------- -------- -------- Total deferred tax assets 131,626 126,540 156,895 Less: valuation allowance - (26,415) (47,427) -------- -------- -------- Net deferred tax assets 131,626 100,125 109,468 -------- -------- -------- Deferred tax liabilities: Depreciation (59,614) (44,886) (43,742) Other (15,855) (20,154) (30,993) -------- -------- -------- Total deferred tax liabilities (75,469) (65,040) (74,735) -------- -------- -------- Net deferred tax assets $56,157 $35,085 $34,733 ======== ======== ======== - - -------------------------------------------------------------------------------------------------
The 1993 and 1992 valuation allowances for deferred tax assets, attributable to stock option deductions, were credited to equity upon realization in 1994 and 1993. Under SFAS No. 96, the components of the deferred taxes for 1992 consisted of:
- - ----------------------------------------------------------------------- (Thousands) 1992 -------- Deferred distributor income $(22,402) Inventory reserves (16,690) Accrued expenses not currently deductible (31,686) Depreciation 41,502 Other (1,963) -------- $(31,239) ======== - - -----------------------------------------------------------------------
Pretax income from foreign operations was $45.7 million in 1994, $40.0 million in 1993, and $32.0 million in 1992. The following is a reconciliation between statutory federal income taxes and the total provision for income taxes.
- - ------------------------------------------------------------------------------------------------------------------------------ 1994 1993 1992 SFAS 109 Method SFAS 109 Method SFAS 96 Method -------------------------------------------------------------------------- (Thousands except percent) Tax Rate Tax Rate Tax Rate -------------------------------------------------------------------------- Statutory federal income tax provision $164,344 35.0% $111,522 35.0% $92,355 34.0% Operating losses utilized - - - - (46,534) (17.1) State taxes net of federal benefit 6,601 1.4 3,535 1.1 5,228 1.9 Tax exempt foreign sales corporation income (8,955) (1.9) (7,236) (2.3) (6,175) (2.3) Tax credits utilized - - (5,004) (1.5) (12,306) (4.5) Foreign income at other than U.S. rates (9,633) (2.1) (10,398) (3.3) (5,948) (2.2) Other 1,346 0.3 (3,201) (1.0) - - -------- ---- -------- ---- ------- ----- $153,703 32.7% $ 89,218 28.0% $26,620 9.8% ======== ==== ======== ==== ======= ===== - - ------------------------------------------------------------------------------------------------------------------------------
ADVANCED MICRO DEVICES, INC. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS No provision has been made for income taxes on approximately $231.5 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 $81.0 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 of net income of approximately $5.2 million ($.05 per share) in 1994. 8. 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 25, 1994, 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) 1994 1993 1992 ------------------------------------ Total lines of credit $378,182 $188,200 $100,946 Portion of lines of credit available to foreign subsidiaries 128,182 83,200 100,946 Amounts outstanding at year-end: Short-term 32,459 30,994 40,659 Short-term borrowings: Average daily borrowings 33,449 35,783 45,381 Maximum amount outstanding at any month-end 35,384 38,009 52,026 Weighted monthly average interest rate 4.32% 5.81% 7.84% Average interest rate on amounts outstanding at year-end 4.42% 4.54% 6.94% - - -------------------------------------------------------------------------------------------------------------
Interest on foreign and short-term domestic borrowings is negotiated at the time of the borrowing. On January 5, 1995, the company obtained a $150 million single term four- year loan with a consortium of eight commercial banks. The loan has a variable interest rate starting at 8.06 percent and requires quarterly interest payments with the principal to be paid at the end of the term in 1998. Information with respect to the company's long-term debt and capital lease obligations at year-end is:
- - ------------------------------------------------------------------------------------------------------ (Thousands) 1994 1993 ---------------------- 6.88% promissory notes with principal and interest payable annually through January 2000, secured by a partnership interest $11,946 $12,920 9.88% mortgage with principal and interest payable in monthly installments through April 2007 2,382 2,577 Obligations under capital leases 82,714 76,392 Obligations secured by equipment 6,482 7,997 Other 123 823 -------- -------- 103,647 100,709 Less: current portion (27,895) (21,205) -------- -------- Long-term debt and capital lease obligations, less current portion $75,752 $79,504 ======== ======== - - ------------------------------------------------------------------------------------------------------
20 ADVANCED MICRO DEVICES, INC. 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 --------------------------- 1995 $ 3,396 $27,600 1996 3,646 21,727 1997 3,802 21,015 1998 4,033 15,447 1999 2,326 2,177 Beyond 1999 3,730 - -------- -------- Total 20,933 87,966 Less: Amount representing interest - 5,252 -------- -------- Total at present value $20,933 $82,714 ======== ======== - - -------------------------------------------------------------------
Obligations under the lease agreements are collateralized by the assets leased. Total assets under lease were approximately $131.3 million and $97.7 million at December 25, 1994 and December 26, 1993, respectively. Accumulated amortization of these leased assets was approximately $60.2 million and $27.1 million at December 25, 1994 and December 26, 1993, respectively. 9. INTEREST INCOME AND OTHER, NET
- - -------------------------------------------------------------------- (Thousands) 1994 1993 1992 ------- ------- ------- Interest income $22,456 $15,990 $16,571 Other income (loss) (6,197) 500 2,342 ------- ------- ------- $16,259 $16,490 $18,913 ======= ======= ======= - - --------------------------------------------------------------------
In 1994, other income (loss) consisted of primarily the net $33 million settlement cost related to the class action lawsuits and stockholder's derivative action offset by an $18 million gain resulting from an award of damages in the arbitration proceedings with Intel Corporation. Also included in other income (loss) for all years presented is the net gain (loss) on the sale of assets. 10. INTEREST EXPENSE
- - ---------------------------------------------------------------------------- (Thousands) 1994 1993 1992 ------------------------------------ Interest expense $10,138 $9,994 $23,253 Interest capitalized (8,294) (7,084) (6,026) ------- ------ ------- $ 1,844 $2,910 $17,227 ======= ====== ======= - - ----------------------------------------------------------------------------
11. FOREIGN AND DOMESTIC OPERATIONS The company is currently engaged in a single line of business: The design, development, manufacture, and sale of complex monolithic integrated circuits for use by manufacturers of a broad range of electronic equipment and systems. Operations outside the United States include both manufacturing and sales. Manufacturing subsidiaries are located in Malaysia, Singapore, Thailand, and the United Kingdom. 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 25, 1994:
- - ---------------------------------------------------------------------------------------------------- (Thousands) 1994 1993 1992 --------------------------------------------------------- Sales to unaffiliated customers: United States $1,524,050 $1,174,410 $1,106,245 Europe 483,632 343,600 279,430 Asia 126,977 130,270 128,814 ---------- ---------- ---------- $2,134,659 $1,648,280 $1,514,489 ========== ========== ========== Transfers between geographic areas (eliminated in consolidation): United States $ 563,303 $ 444,378 $ 360,844 Asia 323,050 277,496 300,773 ---------- ---------- ---------- $ 886,353 $ 721,874 $ 661,617 ========== ========== ========== Operating income: United States $ 467,131 $ 265,676 $ 235,802 Europe 15,860 8,376 5,165 Asia 30,148 31,001 28,940 Eliminations - - 38 ---------- ---------- ---------- $ 513,139 $ 305,053 $ 269,945 ========== ========== ========== Identifiable assets: United States $2,090,080 $1,647,477 $1,193,543 Europe 122,316 90,582 71,510 Asia 394,474 362,108 311,481 Eliminations (161,168) (170,936) (128,439) ---------- ---------- ---------- $2,445,702 $1,929,231 $1,448,095 ========== ========== ========== U.S. export sales: Asia $ 436,120 $ 314,268 $ 360,357 Europe 117,811 109,226 99,635 ---------- ---------- ---------- $ 553,931 $ 423,494 $ 459,992 ========== ========== ========== - - ----------------------------------------------------------------------------------------------------
ADVANCED MICRO DEVICES, INC. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales to unaffiliated customers are based on the company location. 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. 12. 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 25, 1994, 2,795 employees were eligible and participating in the plans. The following is a summary of stock option exercises.
- - ------------------------------------------------------------------------------ (Thousands) 1994 1993 1992 --------------------------------- Aggregate exercise price $10,149 $14,029 $13,803 Options exercised 1,589 2,749 3,119 - - ------------------------------------------------------------------------------
A summary of the stock option plans at December 25, 1994 is shown below.
- - -------------------------------------------------------------------------------- (Thousands except per share amounts) Options: Outstanding at beginning of year 10,961 Granted 2,789 Canceled (242) Exercised (1,589) -------- Outstanding at end of year 11,919 ======== Exercisable at beginning of year 4,852 Exercisable at end of year 5,878 Available for grant at beginning of year 963 Available for grant at end of year 2,960 Aggregate exercise price of options outstanding at end of year $193,000 Average exercise price of options outstanding at end of year $ 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 25, 1994, 6,038 employees were eligible to participate in the plan and 948,778 common shares remained available for issuance under the plan. A summary of stock purchased under the plan is shown below.
- - ------------------------------------------------------------------------------ (Thousands except employee participants) 1994 1993 1992 ------------------------------- Aggregate purchase price $8,115 $6,413 $4,614 Shares purchased 412 387 483 Employee participants 1,941 1,684 1,349 - - ------------------------------------------------------------------------------
Profit sharing program. The company has a profit sharing program to which the Board of Directors has authorized semiannual contributions. Profit sharing contributions were $57.0 million in 1994, $33.9 million in 1993 and $30.0 million in 1992. 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 I.R.S. 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 $3.7 million, $3.2 million and $2.7 million for 1994, 1993 and 1992, respectively. There are four investment funds in which each employee may invest contributions in increments of 10 percent. 22 ADVANCED MICRO DEVICES, INC. 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 180,000 and 19,000 shares in 1994 and 1992, respectively. To date, agreements covering 210,212 shares have been canceled without issuance and 1,142,964 shares have been issued pursuant to prior agreements. At December 25, 1994, agreements covering 322,000 shares were outstanding under the plan and 535,036 shares remained available for future awards. Outstanding awards vest under varying terms within five years. - - -------------------------------------------------------------------------------- 13. COMMITMENTS The company leases certain of its facilities under agreements which expire at various dates through 2001. The company also leases certain of its manufacturing and office equipment for terms ranging from three to six years. Rent expense was $31.9 million, $31.9 million and $29.4 million in 1994, 1993 and 1992, 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 ---------------------------- 1995 $22,296 $ 6,641 1996 19,187 6,549 1997 15,586 6,649 1998 12,752 6,489 1999 11,559 6,068 Beyond 1999 10,856 25,197 - - --------------------------------------------------------------------------------
The operating lease of the company's corporate sales and marketing facility expires in December 1995. 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 25, 1994, the company had commitments of approximately $230 million for the construction or acquisition of additional property, plant, and equipment. As of December 25, 1994, the company also had commitments to make cash investments in FASL amounting to approximately $20 million in 1995. 14. CONTINGENCIES I. AMD/Intel Litigations. On January 11, 1995, the company and Intel Corporation reached an agreement to settle all previously outstanding legal disputes between the two companies. The major terms of the settlement are: (1) AMD will have a fully paid-up, nonexclusive, world-wide, royalty-free, perpetual license to copy and distribute the microcode and control code in the Intel287(TM), Intel386(TM) and Intel486(TM) microprocessor product families. (2) AMD agreed that it has no right to copy any other Intel microcode including the Pentium(TM) Processor, the P6 microcode and the 486 ICE (in-circuit emulation) microcode. (3) The companies agreed to negotiate a new patent cross-license agreement to become effective January 1, 1996. (4) AMD agreed to pay Intel $58 million in settlement of claims for past damages related to AMD's distribution of Am486 microprocessors containing Intel's 486 ICE microcode. As ordered in a 1992 arbitration between the companies, Intel will pay AMD approximately $18 million in damages (which includes interest) awarded by the arbitrator for breach of contract and will not contest certain rights granted AMD in the arbitration. The company recorded both the ICE case damages and the arbitration award in 1994. (5) Intel and AMD will drop all cases against each other, including appeals, currently pending in the courts. (6) AMD will have the right to use foundries for Am486 products containing Intel microcode for up to 20 percent of annual total unit shipments of Am486 microprocessors. (7) AMD and its customers will receive a license for Intel's "Crawford `338" patent, covering memory management. (8) The two companies agreed not to initiate legal action against one another for any activity occurring prior to January 6, 1995. II. Shareholders and Securities Class Actions. During 1994, the company reached an agreement to settle the securities class action lawsuits and stockholder's derivative action. The net cost of the settlements was approximately $33 million. III. SEC Investigation. The Securities and Exchange Commission (SEC) has notified the company that it is conducting an informal investigation of the company concerning the company's disclosures relating to the development of microcode for one of its Am486 products. The company is cooperating fully with the SEC. IV. Environmental Matters. A. 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 ADVANCED MICRO DEVICES, INC. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The orders named the company as well as TRW Microwave, Inc., and Philips Semiconductor, (formerly Signetics Corporation) in various combinations and degrees of responsibility. A notice dated October 3, 1994 was received by the company from the Department of Ecology of the State of Washington indicating that the Department had determined the corporation to be a potentially liable person for the release of hazardous substances on a site located in Yakima, Washington. The company is currently investigating this claim. The company has not yet determined to what extent the costs of any related remedial actions will be covered by insurance. 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. Certain class actions related to this matter have been settled or the statute of limitations has been tolled. It is expected that the foregoing environmental matters or any related litigation will not have a material adverse effect on the financial condition or results of operations of the company. V. 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. 15. 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. 24 ADVANCED MICRO DEVICES, INC. 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 25, 1994 and December 26, 1993 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 25, 1994. 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 25, 1994 and December 26, 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period December 25, 1994, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California January 5, 1995, except for the first paragraph of Note 14, as to which the date is January 11, 1995; the fourth paragraph of Note 5, as to which the date is February 10, 1995; and the fourth paragraph of Note 6, as to which the date is February 16, 1995. ADVANCED MICRO DEVICES, INC. 25 SUPPLEMENTARY FINANCIAL DATA
- - ----------------------------------------------------------------------------------------------------------------------------------- 1994 and 1993 by quarter (unaudited) Dec. 25, Sept. 25, June 26, Mar. 27, Dec. 26, Sept. 26, June 27, Mar. 28, (Thousands except per share amounts) 1994 1994 1994 1994 1993 1993 1993 1993 -------------------------------------------------------------------------------------------- Net sales $545,168 $543,114 $533,297 $513,080 $413,404 $418,351 $409,092 $407,433 Expenses: Cost of sales 263,837 252,409 235,623 230,437 208,552 199,999 186,931 194,082 Research and development 76,115 67,759 67,889 68,221 66,747 64,905 69,323 61,827 Marketing, general, and administrative 87,236 87,369 91,731 92,894 83,148 71,979 67,253 68,481 -------- -------- -------- -------- -------- -------- -------- -------- 427,188 407,537 395,243 391,552 358,447 336,883 323,507 324,390 -------- -------- -------- -------- -------- -------- -------- -------- Operating income 117,980 135,577 138,054 121,528 54,957 81,468 85,585 83,043 Litigation settlement (58,000) - - - - - - - Interest income and other, net 5,317 394 6,366 4,182 4,647 4,413 4,043 3,387 Interest expense (1) (205) (899) (739) (1,391) (346) (91) (1,082) -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes and equity in joint venture 65,296 135,766 143,521 124,971 58,213 85,535 89,537 85,348 Provision for income taxes 21,548 44,803 47,362 39,990 16,300 23,949 25,072 23,897 -------- -------- -------- -------- -------- -------- -------- -------- Income before equity in joint venture 43,748 90,963 96,159 84,981 41,913 61,586 64,465 61,451 Equity in net income (loss) of joint venture (2,989) (4,277) (2,925) (394) (274) (248) (112) - -------- -------- -------- -------- -------- -------- -------- -------- Net income 40,759 86,686 93,234 84,587 41,639 61,338 64,353 61,451 Preferred stock dividends 2,588 2,587 2,587 2,588 2,588 2,587 2,588 2,587 -------- -------- -------- -------- -------- -------- -------- -------- Net income applicable to common stockholders $ 38,171 $ 84,099 $ 90,647 $ 81,999 $ 39,051 $ 58,751 $ 61,765 $ 58,864 ======== ======== ======== ======== ======== ======== ======== ======== Net income per common share -Primary $ .39 $ .86 $ .93 $ .85 $ .41 $ .61 $ .65 $ .63 ======== ======== ======== ======== ======== ======== ======== ======== -Fully diluted $ .39 $ .83 $ .89 $ .82 $ .41 $ .60 $ .63 $ .61 ======== ======== ======== ======== ======== ======== ======== ======== Shares used in per share calculation -Primary 98,636 97,778 97,394 96,233 95,895 95,706 95,079 93,751 ======== ======== ======== ======== ======== ======== ======== ======== -Fully diluted 105,490 104,872 104,249 103,670 102,751 102,743 101,937 100,820 ======== ======== ======== ======== ======== ======== ======== ======== Common stock market price range -High $ 30.50 $ 31.00 $ 31.75 $ 31.75 $ 30.25 $ 32.63 $ 32.88 $ 24.50 -Low $ 22.25 $ 24.00 $ 22.63 $ 16.75 $ 17.00 $ 21.50 $ 20.38 $ 17.50 - - -----------------------------------------------------------------------------------------------------------------------------------
Advanced Micro Devices, Inc.'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 31, 1995 was 9,465. 26 ADVANCED MICRO DEVICES, INC. FINANCIAL SUMMARY
- - --------------------------------------------------------------------------------------------------------------------------------- Five years ended December 25, 1994 (Thousands except per share amounts) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------ Net sales $2,134,659 $1,648,280 $1,514,489 $1,226,649 $ 1,059,242 Expenses: Cost of sales 982,306 789,564 746,486 658,824 678,507 Research and development 279,984 262,802 227,860 213,765 203,651 Marketing, general, and administrative 359,230 290,861 270,198 244,900 228,204 ---------- ---------- ---------- ---------- ----------- 1,621,520 1,343,227 1,244,544 1,117,489 1,110,362 ---------- ---------- ---------- ---------- ----------- Operating income (loss) 513,139 305,053 269,945 109,160 (51,120) Litigation settlement (58,000) - - - (27,738) Interest income and other, net 16,259 16,490 18,913 57,007 33,588 Interest expense (1,844) (2,910) (17,227) (20,880) (8,282) ---------- ---------- ---------- ---------- ----------- Income (loss) before income taxes and equity in joint venture 469,554 318,633 271,631 145,287 (53,552) Provision for income taxes 153,703 89,218 26,620 - - ---------- ---------- ---------- ---------- ----------- Income (loss) before equity in joint venture 315,851 229,415 245,011 145,287 (53,552) Equity in net income (loss) of joint venture (10,585) (634) - - - ---------- ---------- ---------- ---------- ----------- Net income (loss) 305,266 228,781 245,011 145,287 (53,552) Preferred stock dividends 10,350 10,350 10,350 10,350 10,350 ---------- ---------- ---------- ---------- ----------- Net income (loss) applicable to common stockholders $ 294,916 $ 218,431 $ 234,661 $ 134,937 $ (63,902) ========== ========== ========== ========== =========== Net income (loss) per common share -Primary $ 3.02 $ 2.30 $ 2.57 $ 1.53 $ (.78) ========== ========== ========== ========== =========== -Fully diluted $ 2.92 $ 2.24 $ 2.49 $ 1.52 $ (.78) ========== ========== ========== ========== =========== Shares used in per share calculation -Primary 97,510 95,108 91,383 88,196 81,878 ========== ========== ========== ========== =========== -Fully diluted 104,570 102,063 98,475 95,540 81,878 ========== ========== ========== ========== =========== Long-term debt and capital lease obligations, less current portion $ 75,752 $ 79,504 $ 19,676 $ 42,039 $ 131,307 Total assets $2,445,702 $1,929,231 $1,448,095 $1,291,758 $1,111,692 - - ---------------------------------------------------------------------------------------------------------------------------------
ADVANCED MICRO DEVICES, INC. 27