EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward-looking are based on
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially. The forward-looking
statements relate to, among other things, operating results; anticipated cash
flows; capital expenditures; adequacy of resources to fund operations and
capital investments; our ability to transition to new process technologies; our
ability to produce AMD Athlon microprocessors in the volume required by
customers on a timely basis; our ability, and the ability of third parties, to
provide timely infrastructure solutions (motherboards and chipsets) to support
AMD Athlon microprocessors; our ability to increase customer and market
acceptance of AMD Athlon microprocessors; our ability to maintain average
selling prices for AMD Athlon microprocessors; our ability to increase
manufacturing capacity to meet the demand for Flash memory products; the effect
of foreign currency hedging transactions; our new submicron integrated circuit
manufacturing and design facility in Dresden, Germany (Dresden Fab 30); and the
Fujitsu AMD Semiconductor Limited (FASL) manufacturing facilities. See
"Financial Condition" and "Risk Factors" below, as well as such other risks and
uncertainties as are detailed in our Securities and Exchange Commission reports
and filings for a discussion of the factors that could cause actual results to
differ materially from the forward-looking statements.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes as of December 26, 1999 and
December 27, 1998 and for each of the three years in the period ended December
26, 1999.
RESULTS OF OPERATIONS
In 1997, 1998 and 1999, we participated in all three technology areas within the
digital integrated circuit (IC) market--microprocessors, memory circuits and
logic circuits--through (1) our AMD segment, which consists of our three product
groups--our Computation Products Group (CPG), our Memory Group and our
Communications Group and (2) our Vantis segment, up until June 15, 1999, which
consisted of our programmable logic subsidiary, Vantis Corporation (Vantis). CPG
products include microprocessors, core logic products and embedded processors.
Memory Group products include Flash memory devices and Erasable Programmable
Read-Only Memory (EPROM) devices. Communications Group products include
telecommunication products and networking products. Vantis products consisted of
complex and simple, high-performance complementary metal oxide semiconductor
(CMOS) programmable logic devices (PLDs).
On June 15, 1999, we completed the sale of Vantis to Lattice Semiconductor
Corporation. After the Vantis sale, we provided foundry and administrative
services to Vantis during 1999.
The following is a summary of the net sales of the AMD and Vantis segments
for 1999, 1998 and 1997:
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------
AMD segment:
CPG $1,657 $1,484 $ 938
Memory Group 773 561 724
Communications Group 298 292 451
Lattice service fees 43 -- --
- --------------------------------------------------------------------------------
2,771 2,337 2,113
Vantis segment 87 205 243
- --------------------------------------------------------------------------------
Total $2,858 $2,542 $2,356
================================================================================
Net Sales Comparison of Years Ended December 26, 1999 and December 27, 1998
Total net sales increased by $315 million, or 12 percent, to $2,858 million in
1999 from $2,542 million in 1998. Excluding sales from the Vantis segment and
Lattice service fees, net sales for 1999 increased by 17 percent compared to
1998.
CPG net sales of $1,657 million increased by 12 percent in 1999 compared to
1998. This increase was primarily due to the introduction of AMD Athlon
microprocessors, which are our seventh-generation Microsoft(R) Windows(R)
compatible microprocessors, at the end of the second quarter of 1999, and was
partially offset by a decrease in net sales of AMD-K6 microprocessors. Although
unit sales volumes of AMD-K6 microprocessors increased, net sales decreased due
to declines in average selling prices which were caused by aggressive Intel
pricing, including marketing rebates and product bundling of microprocessors,
motherboards, chipsets and combinations thereof. Overall CPG sales growth in
2000 is dependent upon a successful production ramp to 0.18-micron process
technology and copper interconnect technology, availability of chipsets and
motherboards from third-party suppliers and increasing market acceptance of AMD
Athlon microprocessors, as to which we cannot give any assurance.
6
Memory Group net sales of $773 million increased by 38 percent in 1999
compared to 1998 primarily as a result of strong growth in demand for Flash
memory devices, which was slightly offset by a decline in net sales of EPROMs.
Demand for Flash memory devices remained strong. However, our ability to achieve
further growth will depend upon our ability to increase our Flash memory
manufacturing capacity, as to which we cannot give any assurance.
Communications Group net sales of $298 million were relatively flat between
1999 and 1998. Increases in net sales from our new Ethernet controllers and
physical layer circuits, as well as increases in net sales of linecard circuits,
were offset by a weakness in the mature network products. In October 1999, we
announced our intention to sell certain assets of the Communications Group.
Through June 15, 1999, Vantis products contributed $87 million to our 1999
net sales. On June 15, 1999, we sold Vantis to Lattice Semiconductor Corporation
for approximately $500 million in cash. As a result, there were no sales from
Vantis in the third and fourth quarters of 1999. As part of the sale of Vantis,
we negotiated various service contracts with Lattice to continue to provide,
among other things, wafer fabrication and assembly, test, mark and pack services
to Vantis. Pursuant to these contracts, we received service fees of $43 million
from Lattice during 1999. We expect the wafer fabrication and assembly, test,
mark and pack service contracts to continue until September 2003.
Net Sales Comparison of Years Ended December 27, 1998 and December 28, 1997
Total net sales increased by $186 million, or eight percent, to $2,542 million
in 1998 from $2,356 million in 1997.
CPG net sales of $1,484 million increased by 58 percent in 1998 compared to
1997. This increase was primarily due to increased sales of microprocessors at a
higher speed grade mix and higher average selling prices.
Memory Group net sales of $561 million decreased by 23 percent in 1998
compared to 1997 primarily due to a significant decline in the average selling
price of Flash memory devices. This decrease was partially offset by an increase
in unit sales of Flash memory devices. Oversupply in the Flash market, combined
with an increase in competition, caused downward pressure on the average selling
price of Flash memory devices in 1998. In addition, average selling prices and
unit sales of EPROMs declined.
Communications Group net sales of $292 million decreased by 35 percent in
1998 compared to 1997 primarily due to a significant decrease in unit sales of
nearly all products. Our offerings of network products, which represented
approximately one-half of the decline in Communications Group net sales, did not
keep pace with the market shift towards higher performance products. Our sales
of telecommunication products were particularly impacted by the general economic
downturn in Asia.
Vantis net sales decreased 16 percent to $205 million from the prior year
due to a decrease in unit shipments and lower average selling prices of low-
density or simple PLD (SPLD) products. The total available market for SPLD
products decreased as older SPLD products were replaced by complex PLD (CPLD)
and field programmable gate array (FPGA) products in new designs.
Comparison of Expenses, Gross Margin Percentage and Interest Income and Other,
Net
The following is a summary of expenses, gross margin percentage and interest
income and other, net for 1999, 1998 and 1997:
(Millions except for gross margin percentage) 1999 1998 1997
- --------------------------------------------------------------------------------
Cost of sales $1,964 $1,719 $1,578
Gross margin percentage 31% 32% 33%
Research and development $ 636 $ 567 $ 468
Marketing, general and administrative 540 420 401
Restructuring and other special charges 38 -- --
Gain on sale of Vantis 432 -- --
Litigation settlement -- 12 --
Interest income and other, net 32 34 35
Interest expense 69 66 45
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7
We operate in an industry characterized by high fixed costs due to capital-
intensive manufacturing processes, particularly the state-of-the-art production
facilities required for microprocessors. As a result, our gross margin
percentage is significantly affected by fluctuations in product sales. Gross
margin percentage growth depends on continually increasing sales from
microprocessors and other products because fixed costs continue to rise due to
the ongoing capital investments required to expand production capacity and
capability.
Gross margin percentage decreased to 31 percent in 1999 compared to 32
percent in 1998. The decrease in gross margin percentage was primarily caused by
lower average selling prices of AMD K-6 microprocessors combined with higher
fixed costs. Fixed costs will continue to increase as we introduce equipment for
0.18-micron process technology capacity and facilitize Fab 25, our IC
manufacturing facility in Austin, Texas. As described below, Dresden Fab 30 will
also contribute to a significant increase in cost of sales when it begins
producing units for sale, which we anticipate to be no earlier than the second
quarter of 2000. Accordingly, absent significant increases in sales,
particularly with respect to microprocessors, we will continue to experience
pressure on our gross margin percentage.
Gross margin percentage decreased to 32 percent in 1998 compared to 33
percent in 1997. The lower gross margin percentage was primarily caused by a
decline in net sales of non-microprocessor products. In addition, our fixed
costs associated with our microprocessor products increased. During 1998, we
continued to invest in the transition from 0.35-micron to 0.25-micron process
technology and in the facilitization of Fab 25.
Research and development expenses of $636 million in 1999 increased 12
percent compared to 1998 due to a full year of expenses associated with the
Motorola alliance, which is described below, increases in spending for
facilitization and pre-production process development in Dresden Fab 30 and
research and development activities for the AMD Athlon microprocessor. These
additional costs were partially offset in 1999 by savings in our Submicron
Development Center (SDC) as a result of restructuring activities, savings
related to the absence of Vantis expenses in the second half of 1999 and the
recognition of deferred credits on foreign capital grants and interest subsidies
that were received for Dresden Fab 30. These credits of approximately $12
million per quarter (denominated in deutsche marks) will continue to be offset
against Dresden Fab 30 expenses in future quarters until June 2007. Beginning no
earlier than the second quarter of 2000, we expect Dresden Fab 30 to begin
producing units for sale. At that time, a significant portion of Dresden Fab 30
expenses, including the deferred credits referred to above, will shift from
research and development expense to cost of sales.
Research and development expenses of $567 million in 1998 increased 21
percent compared to 1997 due to an increase in spending in Dresden Fab 30 for
facilitization and pre-production process development, and in Fab 25 for new
product and process development.
In 1998, we entered into an alliance with Motorola for the development of
Flash memory and logic technology. Costs related to the alliance are included in
research and development expenses. The alliance includes a seven-year technology
development and license agreement, which was amended on January 21, 2000 to
include certain additional technology, and a patent cross-license agreement. The
agreements provide that we will co-develop with Motorola future generation logic
process and embedded Flash technologies. In addition, we will receive certain
licenses to Motorola's semiconductor logic process technologies, including
copper interconnect technology, which may be subject to variable royalty rates.
In exchange, we will develop and license to Motorola a Flash module design to be
used in Motorola's future embedded Flash products. Motorola will have additional
rights, subject to certain conditions, to make stand-alone Flash devices, and to
make and sell certain data networking devices. The rights to data networking
devices may be subject to variable royalty payment provisions.
Marketing, general and administrative expenses of $540 million in 1999
increased 29 percent compared to 1998 primarily as a result of marketing and
promotional activities for our launch of the AMD Athlon microprocessor,
increased costs and related depreciation expense associated with new information
systems and software put into production in 1999 and higher labor costs. These
increases were partially offset by savings related to the absence of Vantis
expenses in the third and fourth quarters of 1999.
Marketing, general and administrative expenses of $420 million in 1998
increased five percent compared to 1997 primarily due to depreciation expense
and labor costs associated with the installation of new order management and
accounts receivable systems and related software upgrades.
In the first quarter of 1999, we initiated a review of our cost structure.
Based upon this review, we recorded restructuring and other special charges of
$38 million in 1999 as a result of certain of our actions to better align our
cost structure with expected revenue growth rates.
8
The $38 million in restructuring and other special charges consisted of the
following:
. $25 million for the closure of a submicron development laboratory facility
in the SDC, the write-off of certain equipment in the SDC and the write-off of
equipment taken out of service in Fab 25 related to the 0.35-micron wafer
fabrication process;
. $6 million for the write-off of capitalized costs related to discontinued
system projects;
. $3 million for the disposal of equipment taken out of service in the SDC;
. $3 million for severance and employee benefits for 178 terminated employees
in the Information Technology department, the SDC and certain sales offices; and
. $1 million for costs of leases for vacated and unused sales offices.
As of December 26, 1999, the total cash outlay for restructuring and other
special charges was approximately $5 million. We anticipate that accruals of $1
million for sales office facilities will be utilized over the period through
lease terminations in the second quarter of 2002. Accruals of $2 million for the
disconnection and removal costs for equipment that has been taken out of service
will be fully discharged by the end of the first quarter of 2000. The payments
of the accruals are expected to be funded by cash from operations.
The remaining $30 million of restructuring and other special charges
consisted of non-cash charges primarily for asset write-offs. As a result of the
restructuring and other special charges, we expect to save a total of $30
million in depreciation expense over the next three to five years.
On June 15, 1999, we completed the sale of Vantis to Lattice Semiconductor
Corporation for approximately $500 million in cash. The actual cash received was
net of Vantis' cash and cash equivalent balance of approximately $46 million as
of the closing of the sale. Our pretax gain on the sale of Vantis was $432
million. The gain was computed based on Vantis' net assets as of June 15, 1999
and other direct expenses related to the sale. The applicable tax rate on the
gain was 40 percent, resulting in an after-tax gain of $259 million.
A litigation settlement of approximately $12 million was recorded in the
first quarter of 1998 for the settlement of a class action securities lawsuit
against us and certain of our current and former officers and directors. We paid
the settlement during the third quarter of 1998.
Interest income and other, net of $32 million in 1999 decreased seven
percent compared to 1998 primarily as a result of lower interest income from
lower invested cash balances during 1999. Interest expense of $69 million in
1999 increased four percent compared to 1998 due to a full year of interest
expense in 1999 on the $517.5 million of Convertible Subordinated Notes sold in
May 1998 (the Convertible Subordinated Notes). This increase was partially
offset by lower interest expense on the $250 million secured term loan received
under the 1996 syndicated bank loan agreement (the Credit Agreement), which was
paid in full in July 1999, as well as higher capitalized interest related to the
facilitization of Fab 25 and Dresden Fab 30.
Interest expense of $66 million in 1998 increased 47 percent compared to
1997 due to the increase in debt balances, including the Convertible
Subordinated Notes. There was no significant change in interest income and
other, net in 1998 compared to 1997.
Income Tax
We recorded an income tax provision of $167 million in 1999, and tax benefits of
$92 million in 1998 and $55 million in 1997. Excluding the gain on the sale of
Vantis and restructuring charges, the effective tax rate for the year ended
December 26, 1999 was zero. The effective tax benefit rate was approximately 44
percent for 1998 and 55 percent for 1997. No tax benefits were recorded for the
operating losses incurred during 1999 because the deferred tax assets arising
from such losses were offset by a valuation allowance. The tax benefit rates in
1998 and 1997 were greater than the federal statutory rate due to fixed tax
benefits that increase the benefit rate in a loss year.
We had net deferred tax liabilities of $5 million as of December 26, 1999
representing certain foreign deferred taxes.
Other Items
International sales as a percent of net sales were 60 percent in 1999, 55
percent in 1998 and 57 percent in 1997. During 1999, approximately eight percent
of our net sales were denominated in foreign currencies. We do not have sales
denominated in local currencies in those countries which have highly
inflationary economies (as defined by generally accepted accounting principles).
The impact on our operating results from changes in foreign currency rates
individually and in the aggregate has not been material.
9
Comparison of Segment Income (Loss)
In the first half of 1999 and in 1998 and 1997, we operated in two segments: (1)
the AMD segment and (2) the Vantis segment. For a comparison of segment net
sales, refer to the previous discussions on net sales by product group.
The following is a summary of operating income (loss) by segment for 1999,
1998 and 1997:
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------
AMD segment $(327) $(185) $(127)
Vantis segment 6 22 37
- --------------------------------------------------------------------------------
Total $(321) $(163) $ (90)
- --------------------------------------------------------------------------------
The AMD segment's operating loss increased by $142 million in 1999 compared to
1998 primarily due to an increase in fixed costs associated with the continued
facilitization of Fab 25 and research and development costs related to Dresden
Fab 30, the Motorola alliance and the AMD Athlon microprocessor. We also
incurred $38 million in restructuring and other special charges in 1999. The
increases in costs were partially offset by higher net sales in CPG and the
Memory Group.
The Vantis segment's operating income decreased in 1999 compared to 1998
due primarily to the sale of Vantis on June 15, 1999, resulting in sales
activity for 24 weeks in 1999. In addition to the shorter period for sales
activity in 1999, Vantis net sales for the first half of 1999 were also lower
compared to the first half of 1998 due to lower sales of SPLD products which
were partially offset by higher sales of CPLD products.
FINANCIAL CONDITION
Cash flow from operating activities was $260 million in 1999 compared to $142
million in 1998 and $399 million in 1997. Net operating cash flows in 1999
increased $118 million over 1998 primarily due to a decrease in net loss of $15
million and an increase in the net change in operating assets and liabilities of
$245 million, which was mainly due to higher payables and accrued liabilities.
The increase in net operating cash flows was partially offset by a decrease in
net non-cash adjustments to net loss of $142 million. This offset was primarily
due to the gain on the sale of Vantis which was partially offset by a larger
decrease in deferred income tax assets in 1999 compared to 1998.
Investing activities consumed $142 million in cash during 1999 compared to
$977 million in 1998 and $633 million in 1997. Cash used in investing activities
decreased in 1999 compared to 1998 primarily due to an offset from proceeds from
the sale of Vantis, as well as lower capital expenditures.
Our financing activities used cash of $174 million in 1999 compared to
providing cash of $950 million in 1998 and $309 million in 1997. In 1999, we
used cash primarily for payments on debt and capital lease obligations,
including repayment of the secured term loan under the Credit Agreement. Our
1998 sources of cash included proceeds from the Convertible Subordinated Notes,
borrowings from Dresdner Bank AG and capital investment grants and interest
subsidies from the Federal Republic of Germany and the State of Saxony.
Financing activities for all years presented include proceeds from the issuance
of common stock under employee stock plans.
The Credit Agreement provided for a $150 million three-year secured
revolving line of credit and a $250 million four-year secured term loan. On June
25, 1999, we terminated the secured revolving line of credit. On July 13, 1999,
we replaced the Credit Agreement with a new Loan and Security Agreement (the
Loan Agreement) with a consortium of banks led by Bank of America. On July 30,
1999, we repaid the outstanding principal balance of $86 million on the secured
term loan and terminated the Credit Agreement. Under the Loan Agreement, which
provides for a four-year secured revolving line of credit of up to $200 million,
we can borrow, subject to amounts which may be set aside by the lenders, up to
85 percent of our eligible accounts receivable from Original Equipment
Manufacturers (OEMs) and 50 percent of our eligible accounts receivable from
distributors. We must comply with certain financial covenants if the level of
domestic cash we hold declines to certain levels, or the amount of borrowings
under the Loan Agreement rises to certain levels. Our obligations under the Loan
Agreement are secured by a pledge of most of our accounts receivable, inventory,
general intangibles and the related proceeds. As of December 26, 1999, we had
not borrowed any funds under the Loan Agreement. In addition, we had available
unsecured, uncommitted bank lines of credit in the amount of $71 million.
We currently plan to make additional capital investments of approximately
$800 million in 2000, although actual expenditures may vary. These investments
include those relating to the continued facilitization of Dresden Fab 30 and Fab
25.
AMD Saxony, an indirect wholly owned German subsidiary of AMD, has
constructed and is installing equipment in Dresden Fab 30, a 900,000-square-foot
submicron integrated circuit manufacturing and design facility located in
Dresden, in the State of Saxony, Germany. AMD, the Federal Republic of Germany,
the State of Saxony and a consortium of banks are supporting the project. We
currently estimate that construction and facilitization costs of Dresden Fab 30
will be $1.9 billion (denominated in deutsche marks) when the facility is fully
equipped. In March 1997, AMD Saxony entered into a loan agreement and other
related agreements (the Dresden Loan Agreements) with a consortium of banks led
by Dresdner Bank AG. The Dresden Loan Agreements provide for the funding of the
construction and facilitization of Dresden Fab 30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of Germany
and the State of Saxony.
10
The Dresden Loan Agreements, which were amended in February 1998 to reflect
upgrades in wafer production technology as well as the decline in the deutsche
mark relative to the U.S. dollar, require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we have
invested $421 million as of December 26, 1999 in the form of subordinated loans
and equity in AMD Saxony (denominated in both deutsche marks and U.S. dollars).
The Dresden Loan Agreements were amended again in June 1999 to remove a
requirement that we sell at least $200 million of our stock by June 30, 1999 in
order to fund a $70 million loan to AMD Saxony. In lieu of the stock offering,
we funded the $70 million loan to AMD Saxony with proceeds from the sale of
Vantis.
In addition to support from AMD, the consortium of banks referred to above
has made available $850 million in loans (denominated in deutsche marks) to AMD
Saxony to help fund Dresden Fab 30 project costs. AMD Saxony had $270 million of
such loans outstanding as of December 26, 1999.
Finally, the Federal Republic of Germany and the State of Saxony are
supporting the Dresden Fab 30 project, in accordance with the Dresden Loan
Agreements, in the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount of
$850 million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $156 million.
Of these amounts (which are all denominated in deutsche marks), AMD Saxony
has received $275 million in capital investment grants and $23 million in
interest subsidies as of December 26, 1999. The grants and subsidies are subject
to conditions, including meeting specified levels of employment in December 2001
and maintaining those levels until June 2007. Non-compliance with the conditions
of the grants and subsidies could result in the forfeiture of all or a portion
of the future amounts to be received, as well as the repayment of all or a
portion of amounts, received to date. As of December 26, 1999, we were in
compliance with all of the conditions of the grants and subsidies.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, which
will be repaid to AMD as AMD Saxony receives the grants or subsidies from the
State of Saxony;
. fund shortfalls in government subsidies resulting from any default under
the subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $112 million (denominated in deutsche marks) until
Dresden Fab 30 has been completed;
. fund certain contingent obligations, including obligations to fund project
cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30, up
to approximately $75 million (denominated in deutsche marks) if AMD Saxony does
not meet its fixed charge coverage ratio covenant.
Because the amounts under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. At the end of 1999, the exchange rate was
approximately 1.94 deutsche marks to 1 U.S. dollar (which we used to calculate
the amounts denominated in deutsche marks).
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Holding, the parent company of AMD Saxony and
the wholly owned subsidiary of AMD, to comply with obligations in connection
with the Dresden Loan Agreements, including:
. material variances from the approved schedule and budget;
. our failure to fund equity contributions or shareholder loans or otherwise
comply with our obligations relating to the Dresden Loan Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings of proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
. the occurrence of default under the indenture pursuant to which the 11
percent Senior Secured Notes due 2003 were issued (the Indenture) or the Loan
Agreement.
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Generally, any such default which either (1) results from our noncompliance
with the Dresden Loan Agreements and is not cured by AMD or (2) results in
recourse to AMD of more than $10 million and is not cured by AMD, would result
in a cross-default under the Dresden Loan Agreements and the Indenture. Under
certain circumstances, cross-defaults result under the Convertible Subordinated
Notes, the Indenture and the Dresden Loan Agreements.
In the event we are unable to meet our obligation to make loans to, or
equity investments in, AMD Saxony as required under the Dresden Loan Agreements,
AMD Saxony will be unable to complete Dresden Fab 30 and we will be in default
under the Dresden Loan Agreements and the Indenture, which would permit
acceleration of certain indebtedness, which would have a material adverse effect
on our business. There can be no assurance that we will be able to obtain the
funds necessary to fulfill these obligations and any such failure would have a
material adverse effect on our business.
FASL, a joint venture formed by AMD and Fujitsu Limited in 1993, is
continuing the facilitization of its second Flash memory device wafer
fabrication facility, FASL II, in Aizu-Wakamatsu, Japan. We expect the facility,
including equipment, to cost approximately $1 billion (denominated in yen) when
fully equipped. As of December 26, 1999, approximately $434 million (denominated
in yen) of such costs have been funded. Capital expenditures for FASL II
construction to date have been funded by cash generated from FASL operations and
local borrowings by FASL. During 2000, we anticipate that FASL capital
expenditures will continue to be funded by cash generated from FASL operations
and local borrowings by FASL. However, to the extent that FASL is unable to
secure the necessary funds for FASL II, we may be required to contribute cash or
guarantee third-party loans in proportion to our 49.992 percent interest in
FASL. As of December 26, 1999, we had guarantees of $2 million (denominated in
yen) outstanding with respect to these loans. The planned FASL II costs are
denominated in yen and, therefore, are subject to change due to foreign exchange
rate fluctuations. At the end of fiscal 1999, the exchange rate was
approximately 103.51 yen to 1 U.S. dollar (which we used to calculate the
amounts denominated in yen).
We believe that cash flows from operations and current cash balances,
together with available external financing facilities, will be sufficient to
fund operations and capital investments through fiscal 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1999, the Financial Accounting Standards Board extended the implementation of
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 is required to be
adopted in years beginning after June 15, 2000. We expect to adopt SFAS 133 in
fiscal 2001. We have not completed our review of SFAS 133, and accordingly have
not evaluated the effect the adoption of the Statement may have on our
consolidated results of operations and financial position. SFAS 133 will require
AMD to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings or recog-
nized in other comprehensive income until the hedged item is recognized in
earnings. The portion of a derivative's change in fair value which is
ineffective as a hedge will be immediately recognized in earnings.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We have reviewed SAB 101 and have determined that we are in compliance with its
requirements. Therefore, application of SAB 101 will have no impact on our
consolidated results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio and long-term debt obligations. We
do not use derivative financial instruments in our investment portfolio. We
place our investments with high credit quality issuers and, by policy, limit the
amount of credit exposure to any one issuer. As stated in our investment policy,
we are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default risk and market risk.
We mitigate default risk by investing in only the highest credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
We use proceeds from debt obligations primarily to support general
corporate purposes, including capital expenditures and working capital needs. We
have no variable interest rate exposure on the Convertible Subordinated Notes
and the Senior Secured Notes. There were no interest rate swaps outstanding at
the end of fiscal 1999.
The table below presents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for our investment portfolio
and debt obligations as of December 26, 1999 and December 27, 1998.
12
1999 1998
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(Thousands) 2000 2001 2002 2003 2004 Thereafter Total Fair value Total
- ------------------------------------------------------------------------------------------------------------------------------
Cash equivalents
Fixed rate amounts $ 19,505 -- -- -- -- -- $ 19,505 $ 19,484 $ 22,434
Average rate 5.40% -- -- -- --
Variable rate amounts $143,000 -- -- -- -- -- $ 143,000 $ 143,000 $ 136,408
Average rate 5.36% -- -- -- --
Short-term investments
Fixed rate amounts $175,004 -- -- -- -- -- $ 175,004 $ 175,686 $ 219,085
Average rate 5.57% -- -- -- --
Variable rate amounts $126,700 -- -- -- -- -- $ 126,700 $ 126,700 $ 115,500
Average rate 6.58% -- -- -- --
Long-term investments
Equity investments -- $ 6,161 -- -- -- -- $ 6,161 $ 28,175 $ 7,027
Fixed rate amounts -- $ 1,907 -- -- -- -- $ 1,907 $ 1,875 $ 2,000
Average rate 4.93% -- -- -- --
Total investments
Securities $464,209 $ 8,068 -- -- -- -- $ 472,277 $ 494,920 $ 502,454
Average rate 5.77% 4.93% -- -- -- --
Notes payable
Fixed rate amounts -- -- -- -- -- -- -- -- $ 6,017
Long-term debt
Fixed rate amounts $ 5,127 $46,517 $154,684 $456,853 $13,097 $517,959 $1,194,237 $1,128,919 $1,218,836
Average rate 9.88% 5.41% 5.40% 10.30% 5.47% 6.00%
Variable rate amounts -- -- -- -- -- -- 218,750
==============================================================================================================================
Foreign Exchange Risk We use foreign currency forward and option contracts to
reduce our exposure to currency fluctuations on our foreign currency exposures
in our foreign sales subsidiaries, liabilities for products purchased from FASL
and for fixed asset purchase commitments. The objective of these contracts is to
minimize the impact of foreign currency exchange rate movements on our operating
results and on the cost of capital asset acquisition. Our accounting policy for
these instruments is based on our designation of such instruments as hedging
transactions. We do not use derivative financial instruments for speculative or
trading purposes.
We had $59 million (notional amount) of short-term foreign currency forward
contracts denominated in Japanese yen, British pound, Swiss franc, European
Union euro, Singapore dollar and Thai baht outstanding as of December 26, 1999.
In 1998, we entered into an intercompany no-cost collar agreement to hedge
Dresden Fab 30 project costs denominated in U.S. dollars. The no-cost collars
included purchased put option contracts and no-cost collar written call option
contracts, the contract rates of which were structured to avoid payment of any
option premium at the time of purchase. During 1999, we entered into various
option positions with various third-party banks to neutralize the exposures of
the outstanding put and call option contracts. As a result, all the options were
offset and canceled and we had no outstanding option contracts as of December
26, 1999.
In 1999, the $75 million foreign currency call option contracts remaining
from the $150 million call option contracts purchased in 1997 to hedge our
obligations to provide loans to, or invest equity in, AMD Saxony also expired.
Gains and losses related to the foreign currency forward and option
contracts for the year ended December 26, 1999 were not material. We do not
anticipate any material adverse effect on our consolidated financial position,
results of operations or cash flows resulting from the use of these instruments
in the future. We cannot give any assurance that these strategies will be
effective or that transaction losses can be minimized or forecasted accurately.
13
The table below provides information about our foreign currency forward and
option contracts as of December 26, 1999 and December 27, 1998. All of our
foreign currency forward contracts mature within the next 12 months.
1999 1998
----------------------------------------- ---------------------------------------
Notional Average Estimated Notional Average Estimated
(Thousands except contract rates) amount contract rate fair value amount contract rate fair value
- --------------------------------------------------------------------------------------------------------------------
Foreign currency forward contracts:
Japanese yen $ 2,425 103.11 $ 4 $ 6,865 117.07 $ (22)
German mark -- -- -- 5,407 1.66 (7)
British pound 1,219 1.63 10 840 1.68 4
Swiss franc 318 1.57 (1) -- -- --
European Union euro 45,101 1.03 (611) -- -- --
Singapore dollar 8,382 1.67 17 -- -- --
Thai baht 1,245 40.18 48 -- -- --
--------------------------------------------------------------------------------------------------------------------
$58,690 $(533) $ 13,112 $ (25)
- --------------------------------------------------------------------------------------------------------------------
Purchased call options contracts:
German mark $ -- -- $ -- $ 75,000 1.45 $ 45
Purchased put options contracts:
German mark $ -- -- $ -- $220,000 1.85 $ 1,547
Written call options contracts:
German mark $ -- -- $ -- $220,000 1.69 $(13,469)
- --------------------------------------------------------------------------------------------------------------------
RISK FACTORS
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
Microprocessor Products
Future Dependence on the AMD Athlon Microprocessor. We will need to successfully
market the AMD Athlon microprocessor, our seventh-generation Microsoft Windows
compatible microprocessor, in order to increase our microprocessor product
revenues in 2000 and beyond, and to benefit fully from the substantial financial
investments and commitments we have made and continue to make related to
microprocessors. We commenced initial shipments of AMD Athlon microprocessors in
June 1999 and began volume shipments in the second half of 1999. Our production
and sales plans for AMD Athlon microprocessors are subject to numerous risks and
uncertainties, including:
. our ability to produce AMD Athlon microprocessors in the volume and with
the feature set required by customers on a timely basis;
. our ability to design, manufacture and deliver processor modules through
subcontractors;
. the availability and acceptance of motherboards and chipsets designed for
AMD Athlon microprocessors;
. market acceptance of AMD Athlon microprocessors;
. our ability to maintain average selling prices of AMD Athlon
microprocessors despite aggressive Intel pricing, including market rebates and
product bundling of microprocessors, motherboards, chipsets and combination
thereof, or customer relationships which affect market demand;
. the successful development and installation of 0.18-micron process
technology and copper interconnect technology;
. the pace at which we are able to transition production in Fab 25 from 0.25-
to 0.18-micron process technology and to ramp production in Dresden Fab 30 on
0.18-micron copper interconnect process technology;
. the use and market acceptance of a non-Intel processor bus (adapted by us
from Digital Equipment Corporation's EV6 bus) in the design of the AMD Athlon
microprocessor, and the availability of chipsets from vendors who will develop,
manufacture and sell chipsets with the EV6 interface in volumes required by us;
. our ability to expand our chipset and system design capabilities; and
. the availability to our customers of cost and performance competitive
Static Random Access Memories (SRAMs) (including Tag chips) if Intel controls
the market for SRAM production capacity through its relationships with SRAM
manufacturers.
If we fail to achieve market acceptance of AMD Athlon microprocessors, if our
subcontractors are unable to provide the processor modules we require or if
chipsets and motherboards which are compatible with AMD Athlon microprocessors
are not made available, our business will be materially and adversely affected.
14
Investment in and Dependence on K86(TM) AMD Microprocessor Products. Our
microprocessor product revenues have significantly impacted, and will continue
in 2000 and 2001 to significantly impact, our overall revenues,
profit margins and operating results. We plan to continue to make significant
capital expenditures to support our microprocessor products both in the near and
long term. These capital expenditures will be a substantial drain on our cash
flow and cash balances.
Our ability to increase microprocessor product revenues, and benefit fully
from the substantial financial investments and commitments we have made and
continue to make related to microprocessors, depends upon success of the AMD
Athlon microprocessor, which is our seventh-generation Microsoft Windows
compatible microprocessor, the AMD-K6 microprocessors with 3DNow! technology and
future generations of K86 microprocessors. The microprocessor market is
characterized by short product life cycles and migration to ever-higher
performance microprocessors. To compete successfully against Intel in this
market, we must transition to new process technologies at a faster pace than
before and offer higher performance microprocessors in significantly greater
volumes. We must achieve acceptable yields while producing microprocessors at
higher speeds. In the past, we have experienced significant difficulty in
achieving microprocessor yield and volume plans. Such difficulties have in the
past, and may in the future, adversely affect our results of operations and
liquidity. If we fail to offer higher performance microprocessors in
significant volume on a timely basis in the future, our business could be
materially and adversely affected. We may not achieve the production ramp
necessary to meet our customers' volume requirements for higher performance AMD
Athlon and AMD-K6 microprocessors. It is also possible that we may not increase
our microprocessor revenues enough to achieve sustained profitability.
To sell the volume of AMD Athlon and AMD-K6 microprocessors we currently plan
to make in 2000 and 2001, we must increase sales to existing customers and
develop new customers in both consumer and commercial markets. If we lose any
current top tier OEM customer, or if we fail to attract additional customers
through direct sales and through our distributors, we may not be able to sell
the volume of units planned. This result could have a material adverse effect on
our business.
Our production and sales plans for AMD Athlon and AMD-K6 microprocessors are
subject to other risks and uncertainties, including:
. market acceptance of AMD Athlon microprocessors, including the timely
availability of processor modules as well as motherboards and chipsets designed
for these processors;
. whether we can successfully fabricate higher performance AMD Athlon and
AMD-K6 microprocessors in planned volume and speed mixes;
. the effects of Intel's new product introductions, marketing strategies and
pricing;
. the continued market acceptance for AMD-K6 microprocessors and systems
based on them;
. whether we will have the financial and other resources necessary to
continue to invest in the microprocessor products, including leading-edge wafer
fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective;
. adverse market conditions in the personal computer (PC) market and
consequent diminished demand for our microprocessors; and
. unexpected interruptions in our manufacturing operations.
Because Intel has dominated the microprocessor market for many years and has
brand strength, we have in the past priced AMD-K6 microprocessors below the
published price of Intel processors offering comparable performance. Thus,
Intel's processor marketing and pricing can impact and have impacted the average
selling prices of the AMD-K6 and AMD Athlon microprocessors, and consequently
can impact and have impacted our overall margins. Our business could be
materially and adversely affected if we are unable to:
. achieve the product performance improvements necessary to meet customer
needs;
. continue to achieve market acceptance of our AMD-K6 and AMD Athlon
microprocessors and increase market share;
. maintain revenues of AMD-K6 microprocessors; and
. successfully ramp production and sales of AMD Athlon microprocessors.
See also the discussions below regarding Intel Dominance and Process
Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for many years. Because of its dominant market position, Intel has historically
set and controlled x86 microprocessor and PC system standards and, thus,
dictated the type of product the market requires of Intel's competitors. In
addition, Intel may vary prices on its microprocessors and other products at
will and thereby affect the margins and profitability of its competitors due to
its financial strength and dominant position. Intel exerts substantial influence
over PC manufacturers and their channels of distribution through the Intel
Inside advertising rebate program and other marketing programs. Intel invests
billions of dollars in, and as a result exerts influence over, many other
technology companies.
15
We expect Intel to continue to invest heavily in research and development, new
manufacturing facilities and other technology companies, and to remain dominant:
. through the Intel Inside and other marketing programs;
. through other contractual constraints on customers, retailers, industry
suppliers and other third parties;
. by controlling industry standards; and
. by controlling supply and demand of motherboards, chipsets and other system
components.
As an extension of its dominant microprocessor market share, Intel also
dominates the PC platform. As a result, it is difficult for PC manufacturers to
innovate and differentiate their product offerings. We do not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, we may be materially and adversely affected by its:
. product mix and introduction schedules;
. product bundling and pricing strategies;
. control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, chipset and BIOS suppliers; and
. customer brand loyalty.
As Intel expanded its dominance over the PC system platform, many PC
manufacturers reduced their system development expenditures and now purchase
microprocessors together with chipsets or in assembled motherboards. PC OEMs are
increasingly dependent on Intel, less innovative on their own and, to a large
extent, distributors of Intel technology. In marketing our microprocessors to
these OEMs and dealers, we depend on companies other than Intel for the design
and manufacture of core-logic chipsets, motherboards, basic input/output system
(BIOS) software and other components. In recent years, many of these third-party
designers and manufacturers have lost significant market share to Intel. In
addition, these companies produce chipsets, motherboards, BIOS software and
other components to support each new generation of Intel's microprocessors only
if Intel makes information about its products available to them in time to
address market opportunities. Delay in the availability of such information
makes, and will continue to make, it increasingly difficult for these third
parties to retain or regain market share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form closer relationships with third-party designers and
manufacturers of chipsets, motherboards, BIOS software and other components.
Similarly, we intend to expand our chipset and system design capabilities, and
to offer OEMs licensed system designs incorporating our microprocessors and
companion products. We cannot be certain, however, that our efforts will be
successful. We expect that, as Intel introduces future generations of
microprocessors, chipsets and motherboards, the design of chipsets, memory and
other semiconductor devices, and higher level board products which support Intel
microprocessors, will become increasingly dependent on the Intel microprocessor
design and may become incompatible with non-Intel processor-based PC systems.
Intel's Pentium(R) III and Celeron(TM) microprocessors are sold only in form
factors that are not physically or interface protocol compatible with "Socket 7"
motherboards currently used with AMD-K6 microprocessors. Thus, Intel no longer
supports the Socket 7 infrastructure as it did when it was selling its fifth-
generation Pentium processors. Because AMD-K6 microprocessors are designed to be
Socket 7 compatible, and will not work with motherboards designed for Pentium
II, III and Celeron processors, we intend to continue to work with third-party
designers and manufacturers of motherboards, chipsets and other products to
ensure the continued availability of Socket 7 infrastructure support for AMD-K6
microprocessors, including support for enhancements and features we add to our
microprocessors. Socket 7 infrastructure support for AMD-K6 microprocessors may
not endure over time as Intel moves the market to its infrastructure choices.
We do not currently plan to develop microprocessors that are bus interface
protocol compatible with the Pentium III and Celeron processors because our
patent cross-license agreement with Intel does not extend to microprocessors
that are bus interface protocol compatible with Intel's sixth and subsequent
generation processors. Thus, the AMD Athlon microprocessor is not designed to
function with motherboards and chipsets designed to work with Intel
microprocessors. Our ability to compete with Intel in the market for AMD Athlon
seventh-generation and future generation microprocessors will depend on our:
. success in designing and developing the microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support Intel's microprocessors and our microprocessors, or that
alternative platforms are available which are competitive with those used with
Intel processors.
A failure for any reason of the designers and producers of motherboards,
chipsets, processor modules and other system components to support our K86
microprocessor offerings would have a material adverse effect on our business.
16
Dependence on Microsoft and Logo License. Our ability to innovate beyond the x86
instruction set controlled by Intel depends on support from Microsoft in its
operating systems. If Microsoft does not provide support in its operating
systems for the x86 instructions that we innovate and design into our
processors, independent software providers may forego designing their software
applications to take advantage of our innovations. This would adversely affect
our ability to market our processors. In addition, we have entered into logo
license agreements with Microsoft that allow us to label our products as
"Designed for Microsoft Windows." We have also obtained appropriate
certifications from recognized testing organizations for our K86
microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our K86 microprocessors with the
Microsoft Windows logo. This could impair our ability to market the products and
could have a material adverse effect on our business.
Fluctuations in PC Market. Since most of our microprocessor products are used in
PCs and related peripherals, our future growth is closely tied to the growth of
the PC industry. Industry-wide fluctuations in the PC marketplace have in the
past and may in the future materially and adversely affect our business.
Financing Requirements
We currently plan to make capital investments of approximately $800 million in
2000 although the actual expenditures may vary. These investments include those
relating to the continued facilitization of Dresden Fab 30 and Fab 25.
In 1999, the building construction of FASL II was completed, equipment was
installed and production was initiated. We expect the facility, including
equipment, to cost approximately $1 billion when fully equipped. Capital
expenditures for FASL II construction to date have been funded by cash generated
from FASL operations and borrowings by FASL. If FASL is unable to secure the
necessary funds for FASL II, we may be required to contribute cash or guarantee
third-party loans in proportion to our 49.992 percent interest in FASL.
In 1996, we entered into the Credit Agreement, which provided for a $150
million three-year secured revolving line of credit and a $250 million four-year
secured term loan. On June 25, 1999, we terminated the secured revolving line of
credit. On July 13, 1999, we replaced the Credit Agreement with a new Loan and
Security Agreement (the Loan Agreement) with a consortium of banks led by Bank
of America. On July 30, 1999, we repaid the outstanding balance on the secured
term loan and terminated the Credit Agreement. Under the Loan Agreement, which
provides for a four-year secured revolving line of credit of up to $200 million,
we can borrow, subject to amounts which may be set aside by the lenders, up to
85 percent of our eligible accounts receivable from OEMs and 50 percent of our
eligible accounts receivable from distributors. We must comply with certain
financial covenants if the level of domestic cash we hold declines to certain
levels, or the amount of borrowings under the Loan Agreement rises to certain
levels. Our obligations under the Loan Agreement are secured by a pledge of most
of our accounts receivable, inventory, general intangibles and the related
proceeds.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into
the Dresden Loan Agreements with a consortium of banks led by Dresdner Bank AG.
The terms of the Dresden Loan Agreements required us to make subordinated loans
to AMD Saxony totaling $100 million in 1998, and to make additional subordinated
loans to, or equity investments in, AMD Saxony totaling $100 million in 1999.
The Dresden Loan Agreements, which were amended in February 1998 to reflect
planned upgrades in wafer production technology as well as the decline in the
deutsche mark relative to the U.S. dollar, require that we partially fund
Dresden Fab 30 project costs in the form of subordinated loans to, or equity
investments in, AMD Saxony. In accordance with the terms of the Dresden Loan
Agreements, we have invested $421 million as of December 26,1999 in the form of
subordinated loans and equity in AMD Saxony. The Dresden Loan Agreements were
amended again in June 1999 to remove a requirement that we sell at least $200
million of our stock by June 30, 1999 in order to fund a $70 million loan to AMD
Saxony. In lieu of the stock offering, we funded the $70 million loan to AMD
Saxony with proceeds from the sale of Vantis.
Because the amounts under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. As of the end of 1999, the exchange rate was
approximately 1.94 deutsche marks to 1 U.S. dollar (which we used to calculate
our obligations denominated in deutsche marks).
If we are unable to meet our obligation to make loans to, or equity
investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD
Saxony will be unable to complete Dresden Fab 30 and we will be in default under
the Dresden Loan Agreement, the Loan Agreement and the Indenture, which would
have a material adverse effect on our business. If we are unable to obtain the
funds necessary to fulfill these obligations, our business will be materially
and adversely affected.
17
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. Our operations related to
microprocessors have been particularly affected by this situation. If we
underutilize our manufacturing facilities in the future, our gross margins may
suffer. We are substantially increasing our manufacturing capacity by making
significant capital investments in Fab 25 and Dresden Fab 30. In addition, in
1999, the building construction of FASL II, a second Flash memory device
manufacturing facility, was completed, equipment was installed and production
was initiated. We have also built a new test and assembly facility in Suzhou,
China. We are basing our strategy of increasing our manufacturing capacity on
industry projections for future growth. If these industry projections are
inaccurate, or if demand for our products does not increase consistent with our
plans and expectations, we will likely underutilize our manufacturing facilities
and our business could be materially and adversely affected.
In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to obtain sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the risk is that we will have insufficient capacity to meet demand
for Flash memory products and significant underutilized capacity relative to
demand for our microprocessor offerings.
Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these investments might not be fully
recovered if we fail to continue to gain market acceptance or if the market for
our Flash memory products should significantly deteriorate. Likewise, we are
making a substantial investment in Dresden Fab 30. The business plan for Dresden
Fab 30 calls for the successful development and installation of 0.18-micron
process technology and copper interconnect technology in order to manufacture
AMD Athlon microprocessors in Dresden Fab 30. We have entered into a strategic
alliance with Motorola to co-develop logic process and embedded Flash
technologies. The logic process technology which is the subject of the alliance
includes the copper interconnect technology that is required for AMD Athlon
microprocessors and subsequent generations of microprocessors. We cannot be
certain that the strategic alliance will be successful or that we will be able
to develop or obtain the leading-edge process technologies that will be required
in Fab 25 or Dresden Fab 30 to fabricate AMD Athlon microprocessors
successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been and may in the future be materially and adversely
affected by fluctuations in manufacturing yields. For example, our results in
the past have been negatively affected by disappointing AMD-K6 microprocessor
yields. The design and manufacture of ICs is a complex process. Normal
manufacturing risks include errors and interruptions in the fabrication process
and defects in raw materials, as well as other risks, all of which can affect
yields. Additional manufacturing risks incurred in ramping up new fabrication
areas and/or new manufacturing processes include equipment performance and
process controls, as well as other risks, all of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products are shipped
in volume, we could be materially adversely affected. It is also possible that
we may be unsuccessful in correcting any such compatibility problems that are
discovered or that corrections will be unacceptable to customers or made in an
untimely manner. In addition, the mere announcement of an incompatibility
problem relating to our products could have a material adverse effect on our
business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could impose
substantial costs on us and have a material and adverse effect on our business.
18
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, a few foreign companies principally supply several types of the IC
packages purchased by us, as well as by the majority of other companies in the
semiconductor industry. Interruption of supply or increased demand in the
industry could cause shortages in various essential materials. We would have to
reduce our manufacturing operations if we were unable to procure certain of
these materials. This reduction in our manufacturing operations could have a
material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and final
testing of our products are performed at our manufacturing facilities in Penang,
Malaysia; Bangkok, Thailand; Suzhou, China; and Singapore; or by subcontractors
in the United States and Asia. We also depend on foreign foundry suppliers and
joint ventures for the manufacture of a portion of our finished silicon wafers.
Foreign manufacturing and construction of foreign facilities entail political
and economic risks, including political instability, expropriation, currency
controls and fluctuations, changes in freight and interest rates, and loss or
modification of exemptions for taxes and tariffs. For example, if we were unable
to assemble and test our products abroad, or if air transportation between the
United States and our overseas facilities were disrupted, there could be a
material adverse effect on our business.
Flash Memory Products
The demand for Flash memory devices has recently increased due to the increasing
use of equipment and other devices requiring non-volatile memory such as:
. cellular telephones;
. routers which transfer data between local area networks; and
. PC cards which are inserted into notebook and subnotebook computers or
personal digital assistants.
As a result, the demand for Flash memory devices currently exceeds the
available supply. In order to meet this demand, we must increase our production
of Flash memory devices through FASL and FASL II or through foundry or similar
arrangements with others. We cannot be certain that the demand for Flash memory
products will remain at current or greater levels, or that we will have
sufficient capacity to meet the demand for Flash memory devices. Our inability
to meet the demand for Flash memory devices could have a material adverse effect
on our business.
Competition in the market for Flash memory devices will increase as existing
manufacturers introduce new products and industry-wide production capacity
increases, and as Intel continues to aggressively price its Flash memory
products. We expect competition in the marketplace for Flash memory devices to
continue to increase in 2000 and beyond. It is possible that we will be unable
to maintain or increase our market share in Flash memory devices as the market
develops and as existing and potential new competitors introduce competitive
products. A decline in our Flash memory device business or decline in the gross
margin percentage in this product line could have a material adverse effect on
our business.
Key Personnel
Our future success depends upon the continued service of numerous key
engineering, manufacturing, marketing, sales and executive personnel. We may or
may not be able to continue to attract, retain and motivate qualified personnel
necessary for our business. Loss of the service of, or failure to recruit, key
engineering design personnel could be significantly detrimental to our product
development programs or otherwise have a material adverse effect on our
business.
Demand for Our Products Affected by Asian and Other Domestic and International
Economic Conditions
While general industry demand is currently strengthening, the demand for our
products during the last few years has been weak due to the general downturn in
the worldwide semiconductor market and an economic crisis in Asia. A renewed
decline of the worldwide semiconductor market or economic condition in Asia
could decrease the demand for microprocessors and other ICs. A significant
decline in economic conditions in any significant geographic area, either
domestically or internationally, could decrease the overall demand for our
products which could have a material adverse effect on our business.
19
Fluctuations in Operating Results
Our operating results are subject to substantial quarterly and annual
fluctuations due to a variety of factors, including:
. the effects of competition with Intel in microprocessor and Flash memory
device markets;
. competitive pricing pressures;
. decreases in unit average selling prices of our products;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. the gain or loss of significant customers;
. new product introductions by us or our competitors;
. changes in the mix of products produced and sold and in the mix of sales by
distribution channels;
. market acceptance of new or enhanced versions of our products;
. seasonal customer demand; and
. the timing of significant orders and the timing and extent of product
development costs.
Our operating results also tend to vary seasonally due to vacation and holiday
schedules. Our revenues are generally lower in the first, second and third
quarters of each year than in the fourth quarter. This seasonal pattern is
largely a result of decreased demand in Europe during the summer months and
higher demand in the retail sector of the personal computer market during the
winter holiday season.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Other Risk Factors
Debt Restrictions. The Loan Agreement and the Indenture contain significant
covenants that limit our ability and our subsidiaries' ability to engage in
various transactions and require satisfaction of specified financial performance
criteria. In addition, the occurrence of certain events, including, among other
things, failure to comply with the foregoing covenants, material inaccuracies of
representations and warranties, certain defaults under or acceleration of other
indebtedness and events of bankruptcy or insolvency, would in certain cases
after notice and grace periods, constitute events of default permitting
acceleration of indebtedness. The limitations imposed by the Loan Agreement and
the Indenture are substantial, and failure to comply with such limitations could
have a material adverse effect on our business.
In addition, the Dresden Loan Agreements substantially prohibit AMD Saxony
from transferring assets to us, which will prevent us from using current or
future assets of AMD Saxony other than to satisfy obligations of AMD Saxony.
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition.
Currently accepted industry standards may change. Our success depends
substantially on our ability, on a cost-effective and timely basis, to continue
to enhance our existing products and to develop and introduce new products that
take advantage of technological advances and adhere to evolving industry
standards. An unexpected change in one or more of the technologies related to
our products, in market demand for products based on a particular technology or
of accepted industry standards could materially and adversely affect our
business. We may or may not be able to develop new products in a timely and
satisfactory manner to address new industry standards and technological changes,
or to respond to new product announcements by others. In addition, new products
may or may not achieve market acceptance.
Competition. The IC industry is intensely competitive and, historically, has
experienced rapid technological advances in product and system technologies.
After a product is introduced, prices normally decrease over time as production
efficiency and competition increase, and as successive generations of products
are developed and introduced for sale. Technological advances in the industry
result in frequent product introductions, regular price reductions, short
product life cycles and increased product capabilities that may result in
significant performance improvements.
20
Competition in the sale of ICs is based on:
. performance;
. product quality and reliability;
. price;
. adherence to industry standards;
. software and hardware compatibility;
. marketing and distribution capability;
. brand recognition;
. financial strength; and
. ability to deliver in large volumes on a timely basis.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most
instances, our agreements with distributors protect their inventory of our
products against price reductions, as well as products that are slow moving or
have been discontinued. These agreements, which may be canceled by either party
on a specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could materially
and adversely affect us if there is an unexpected significant decline in the
price of our products.
Intellectual Property Rights; Potential Litigation. It is possible that:
. we will be unable to protect our technology or other intellectual property
adequately through patents, copyrights, trade secrets, trademarks and other
measures;
. patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual
property rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide competitive
advantages to us; and
. others will independently develop similar products, duplicate our products
or design around our patents and other rights.
From time to time, we have been notified that we may be infringing
intellectual property rights of others. If any such claims are asserted against
us, we may seek to obtain a license under the third party's intellectual
property rights. We could decide, in the alternative, to resort to litigation to
challenge such claims. Such challenges could be extremely expensive and time-
consuming and could have a material adverse effect on our business. We cannot
give any assurance that all necessary licenses can be obtained on satisfactory
terms, or whether litigation may always be avoided or successfully concluded.
Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Our failure to
control the use of, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
Year 2000. We have previously discussed the nature and progress of our plans to
become Year 2000 ready. Pursuant to our plans, we completed our remediation and
testing of systems. We have not experienced any material system failures,
disruptions of operations or interruptions of our ability to process
transactions, send invoices or engage in other normal business activities as a
result of Year 2000 issues. In addition, we are not aware of any material
problems resulting from Year 2000 issues with our products and services.
Although we have not experienced any material problems related to the Year 2000,
we cannot give any assurance that issues will not arise in the future or that we
will be able to adequately address any issues that may arise. We will continue
to monitor our critical computer applications in the year 2000 to ensure that
any Year 2000 issues that may arise are addressed as promptly as possible. Our
inability to adequately address all Year 2000-related issues that may arise
could have a material adverse impact on our operations.
21
The actual costs incurred as of December 26, 1999 in connection with our Year
2000 readiness plan were approximately $18 million, the majority of which was
expensed. The expenses of the Year 2000 readiness plan were funded through
operating cash flows.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused and are
likely to continue to cause the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our operating and financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new process technology and product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology company
stocks in general have experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of the companies. This market
volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current business plan envisions substantial cash outlays which may require
external capital financing. It is possible that capital and/or long-term
financing will be unavailable on terms favorable to us or in sufficient amounts
to enable us to implement our current plan.
Earthquake Danger. Our corporate headquarters, a portion of our manufacturing
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. We
could be materially and adversely affected in the event of a major earthquake.
Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their existing
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that date. The transition period will last through
January 1, 2002. We are assessing the potential impact to us that may result
from the euro conversion. We do not expect the introduction and use of the euro
to materially affect our foreign exchange activities, to affect our use of
derivatives and other financial instruments or to result in any material
increase in costs to us. We will continue to assess the impact of the
introduction of the euro currency over the transition period, as well as the
period subsequent to the transition, as applicable.
22
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 26, 1999
(Thousands except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Net sales $2,857,604 $2,542,141 $2,356,375
Expenses:
Cost of sales 1,964,434 1,718,703 1,578,438
Research and development 635,786 567,402 467,877
Marketing, general and administrative 540,070 419,678 400,713
Restructuring and other special charges 38,230 -- --
- -----------------------------------------------------------------------------------------------------
3,178,520 2,705,783 2,447,028
- -----------------------------------------------------------------------------------------------------
Operating loss (320,916) (163,642) (90,653)
Gain on sale of Vantis 432,059 -- --
Litigation settlement -- (11,500) --
Interest income and other, net 31,735 34,207 35,097
Interest expense (69,253) (66,494) (45,276)
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in joint venture 73,625 (207,429) (100,832)
Provision (benefit) for income taxes 167,350 (91,878) (55,155)
- -----------------------------------------------------------------------------------------------------
Loss before equity in joint venture (93,725) (115,551) (45,677)
Equity in net income of joint venture 4,789 11,591 24,587
- -----------------------------------------------------------------------------------------------------
Net loss $ (88,936) $ (103,960) $ (21,090)
- -----------------------------------------------------------------------------------------------------
Net loss per common share:
Basic $ (0.60) $ (0.72) $ (0.15)
- -----------------------------------------------------------------------------------------------------
Diluted $ (0.60) $ (0.72) $ (0.15)
- -----------------------------------------------------------------------------------------------------
Shares used in per share calculation:
Basic 147,068 143,668 140,453
Diluted 147,068 143,668 140,453
=====================================================================================================
See accompanying notes
23
CONSOLIDATED BALANCE SHEETS
December 26, 1999 and December 27, 1998
(Thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 294,125 $ 361,908
Short-term investments 302,386 335,117
- -------------------------------------------------------------------------------------------------------
Total cash, cash equivalents and short-term investments 596,511 697,025
Accounts receivable, net of allowance for doubtful accounts
of $15,378 in 1999 and $12,663 in 1998 429,809 415,557
Inventories:
Raw materials 10,236 21,185
Work-in-process 97,143 129,036
Finished goods 90,834 24,854
- -------------------------------------------------------------------------------------------------------
Total inventories 198,213 175,075
Deferred income taxes 55,956 205,959
Prepaid expenses and other current assets 129,389 68,411
- -------------------------------------------------------------------------------------------------------
Total current assets 1,409,878 1,562,027
Property, plant and equipment:
Land 35,872 36,273
Buildings and leasehold improvements 1,187,712 823,287
Equipment 2,851,315 2,776,336
Construction in progress 863,403 744,466
- -------------------------------------------------------------------------------------------------------
Total property, plant and equipment 4,938,302 4,380,362
Accumulated depreciation and amortization (2,415,066) (2,111,894)
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 2,523,236 2,268,468
Investment in joint venture 273,608 236,820
Other assets 170,976 185,653
- -------------------------------------------------------------------------------------------------------
$ 4,377,698 $ 4,252,968
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ -- $ 6,017
Accounts payable 387,193 333,975
Accrued compensation and benefits 91,900 80,334
Accrued liabilities 273,689 168,280
Income tax payable 17,327 22,026
Deferred income on shipments to distributors 92,917 84,523
Current portion of long-term debt, capital lease obligations and other 47,626 145,564
- -------------------------------------------------------------------------------------------------------
Total current liabilities 910,652 840,719
Deferred income taxes 60,491 34,784
Long-term debt, capital lease obligations and other, less current portion 1,427,282 1,372,416
Commitments and contingencies
Stockholders' equity:
Capital stock:
Common stock, par value $0.01; 250,000,000 shares
authorized; 148,656,278 shares issued and
outstanding in 1999 and 145,477,376 in 1998 1,496 1,465
Capital in excess of par value 1,121,956 1,071,591
Retained earnings 873,235 962,171
Accumulated other comprehensive loss (17,414) (30,178)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,979,273 2,005,049
- -------------------------------------------------------------------------------------------------------
$ 4,377,698 $ 4,252,968
=======================================================================================================
See accompanying notes
24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Capital in other Total
------------
Number excess of Retained comprehensive stockholders'
Three Years Ended December 26, 1999 (Thousands) of shares Amount par value earnings loss equity
- ------------------------------------------------------------------------------------------------------------------------------
December 29, 1996 137,580 $1,380 $ 957,226 $1,087,221 $(23,949) $2,021,878
Comprehensive loss:
Net loss -- -- -- (21,090) -- (21,090)
Other comprehensive loss:
Net change in unrealized gain on investments,
net of tax benefit of $1,230 -- -- -- -- 2,094 2,094
Less: Reclassification adjustment for gains
included in earnings (4,907) (4,907)
Net change in cumulative translation
adjustments -- -- -- -- (30,138) (30,138)
- ------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss (32,951)
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (54,041)
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for employee stock plans 4,113 44 38,013 -- -- 38,057
Compensation recognized under employee stock plans -- -- 21,232 -- -- 21,232
Warrants exercised 430 4 2,413 -- -- 2,417
- ------------------------------------------------------------------------------------------------------------------------------
December 28, 1997 142,123 1,428 1,018,884 1,066,131 (56,900) 2,029,543
==============================================================================================================================
Comprehensive loss:
Net loss -- -- -- (103,960) -- (103,960)
Other comprehensive income:
Net change in unrealized gain on investments,
net of tax benefit of $355 -- -- -- -- 4,753 4,753
Net change in cumulative translation
adjustments -- -- -- -- 21,969 21,969
- ------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income 26,722
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (77,238)
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of shares:
Employee stock plans 2,354 27 25,656 -- -- 25,683
Fujitsu Limited 1,000 10 18,395 -- -- 18,405
Compensation recognized under employee stock plans -- -- 8,645 -- -- 8,645
Warrants exercised -- -- 11 -- -- 11
- ------------------------------------------------------------------------------------------------------------------------------
December 27, 1998 145,477 1,465 1,071,591 962,171 (30,178) 2,005,049
==============================================================================================================================
Comprehensive loss:
Net loss -- -- -- (88,936) -- (88,936)
Other comprehensive income:
Net change in unrealized gain on investments,
net of tax benefit of $2,635 -- -- -- -- 12,121 12,121
Less: Reclassification adjustment for
gains included in earnings (4,603) (4,603)
Net change in cumulative translation
adjustments -- -- -- -- 5,246 5,246
- ------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income 12,764
- ------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss (76,172)
- ------------------------------------------------------------------------------------------------------------------------------
Issuance of shares:
Employee stock plans 2,679 26 31,153 -- -- 31,179
Fujitsu Limited 500 5 12,593 -- -- 12,598
Compensation recognized under employee stock plans -- -- 6,619 -- -- 6,619
- ------------------------------------------------------------------------------------------------------------------------------
December 26, 1999 148,656 $1,496 $1,121,956 $ 873,235 $(17,414) $1,979,273
==============================================================================================================================
See accompanying notes
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 26, 1999 (Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (88,936) $ (103,960) $ (21,090)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Gain on sale of Vantis (432,059) -- --
Depreciation and amortization 515,520 467,521 394,465
(Increase) decrease in deferred income tax assets 160,668 (106,861) (18,566)
Restructuring and other special charges 29,858 -- --
Foreign grant subsidy income (50,178) -- --
Net loss on disposal of property, plant and equipment 10,665 11,515 19,763
Net gain realized on sale of available-for-sale securities (4,250) -- (4,978)
Compensation recognized under employee stock plans 2,655 8,645 21,232
Undistributed income of joint venture (4,789) (11,591) (24,587)
Recognition of deferred gain on sale of building (1,680) -- --
Changes in operating assets and liabilities:
Net increase in receivables, inventories,
prepaid expenses and other assets (113,965) (151,998) (184,966)
Increase (decrease) in tax refund receivable
and tax payable (4,992) 9,350 61,209
Net increase in payables and accrued liabilities 241,403 19,195 156,333
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 259,920 141,816 398,815
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (619,772) (975,105) (685,100)
Proceeds from sale of Vantis 454,269 -- --
Proceeds from sale of property, plant and equipment 3,996 106,968 43,596
Purchase of available-for-sale securities (1,579,813) (1,591,802) (537,275)
Proceeds from sale and maturity of available-for-sale securities 1,598,946 1,482,890 545,478
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (142,374) (977,049) (633,301)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings 12,101 816,448 283,482
Debt issuance costs -- (14,350) (13,080)
Payments on debt and capital lease obligations (243,762) (92,601) (79,791)
Proceeds from foreign grants and subsidies 14,341 196,651 77,865
Proceeds from issuance of stock 43,777 44,099 40,474
- -----------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (173,543) 950,247 308,950
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (11,786) 6,236 --
Net increase (decrease) in cash and cash equivalents (67,783) 121,250 74,464
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 361,908 240,658 166,194
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 294,125 $ 361,908 $ 240,658
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest, net of amounts capitalized $ 51,682 $ 58,517 $ 34,600
- -----------------------------------------------------------------------------------------------------------
Income taxes $ 15,466 $ 2,732 $(100,016)
- -----------------------------------------------------------------------------------------------------------
Non-cash financing activities:
Equipment capital leases $ 2,307 $ 13,908 $ 44,770
- -----------------------------------------------------------------------------------------------------------
See accompanying notes
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 26, 1999, December 27, 1998 and December 28, 1997
Note 1: Nature of Operations
AMD (the Company) is a semiconductor manfacturer with manufacturing facilities
in the U.S., Europe and Asia and sales offices throughout the world. The
Company's products include a wide variety of industry-standard integrated
circuits (ICs) which are used in many diverse product applications such as
telecommunications equipment, data and network communications equipment,
consumer electronics, personal computers (PCs) and workstations.
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. Fiscal 1999, 1998 and 1997 were 52-week years which ended on
December 26, December 27 and December 28, respectively. Fiscal 2000 will be a
53-week year ending on December 31, 2000.
Principles of Consolidation. The consolidated financial statements include the
Company's accounts and those of its wholly owned subsidiaries. Upon
consolidation, all significant intercompany accounts and transactions are
eliminated. Also included in the consolidated financial statements, under the
equity method of accounting, is the Company's 49.992 percent investment in
Fujitsu AMD Semiconductor Limited (FASL).
Foreign Currency Translation. Translation adjustments resulting from the process
of translating into the U.S. dollars the foreign currency financial statements
of the Company's wholly owned foreign subsidiaries for which the U.S. dollar is
the functional currency are included in operations. The translation adjustments
relating to the translation of the financial statements of the Company's
indirect wholly owned German subsidiary in Dresden, in the State of Saxony (AMD
Saxony), and the Company's unconsolidated joint venture, FASL, for which the
local currencies are the functional currencies, are included in stockholders'
equity.
Cash Equivalents. Cash equivalents consist of financial instruments which are
readily convertible into 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 at
the date of acquisition, into held-to-maturity and available-for-sale
categories. Currently, the Company classifies its securities as available-for-
sale. These securities are reported at fair market value with the related
unrealized gains and losses included in stockholders' equity. 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 also included in interest income and other, net. The cost of
securities sold is based on the specific identification method.
The Company considers investments with maturities between three and 12 months
as short-term investments. Short-term investments consist of money market
auction rate preferred stocks and debt securities such as commercial paper,
corporate notes, certificates of deposit and marketable direct obligations of
the United States governmental agencies.
Derivative Financial Instruments. The Company utilizes derivative financial
instruments to reduce financial market risks. The Company uses these instruments
to hedge foreign currency and interest rate market exposures of underlying
assets, liabilities and other obligations. The Company does not use derivative
financial instruments for speculative or trading purposes. The Company's
accounting policies for these instruments are based on whether such instruments
are designated as hedging transactions. The criteria the Company uses for
designating an instrument as a hedge includes the instrument's effectiveness in
risk reduction and one-to-one matching of derivative instruments to underlying
transactions. Gains and losses on foreign currency forward and option contracts
that are designated and effective as hedges of anticipated transactions, for
which a firm commitment has been attained, are deferred and either recognized in
income or included in the basis of the transaction in the same period that the
underlying transactions are settled. Gains and losses on foreign currency
forward and option contracts and interest rate swap contracts that are
designated and effective as hedges of existing transactions are recognized in
income in the same period as losses and gains on the underlying transactions are
recognized and generally offset. Gains and losses on any instruments not meeting
the above criteria are recognized in income in the current period. If an
underlying hedged transaction is terminated earlier than initially anticipated,
the offsetting gain or loss on the related derivative instrument is recognized
in income in the same period. Subsequent gains or losses on the related
derivative instrument are recognized in income in each period until the
instrument matures, is terminated or is sold. Premiums paid for foreign currency
forward and option contracts are generally amortized over the life of the
contracts and are not material to our results of operations. Unamortized
premiums are included in prepaid expenses and other current assets.
27
Inventories. Inventories are stated 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 are stated at cost.
Depreciation and amortization are provided on a 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, three to five years;
. buildings, up to 26 years; and
. leasehold improvements, the shorter of the remaining terms of the leases or
the estimated economic useful lives of the improvements.
Revenue Recognition. The Company recognizes revenue from product sold direct to
customers when the contract is in place, the price is fixed or determinable,
shipment is made and collectibility is reasonably assured. The Company sells to
distributors under terms allowing the distributors certain rights of return and
price protection on unsold merchandise held by them. The distributor agreements,
which may be canceled by either party upon specified notice, generally contain a
provision for the return of the Company's products in the event the agreement
with the distributor is terminated. Accordingly, the Company defers recognition
of revenue and related profits from sales to distributors with agreements that
have the aforementioned terms until the merchandise is resold by the
distributors.
Foreign Grants and Subsidies. The Federal Republic of Germany and the State of
Saxony have agreed to support the Dresden Fab 30 project in the amount of $443
million (denominated in deutsche marks) consisting of capital investment grants
and interest subsidies. Dresden Fab 30 is the Company's new integrated circuit
manufacturing and design facility in Dresden, Germany. The grants and subsidies
are subject to conditions, including meeting specified levels of employment in
December 2001 and maintaining those levels until June 2007. The grants and
subsidies will be recognized as a reduction of operating expense ratably over
the life of the project. In 1999, grants and subsidies recognized as a reduction
to operating expenses amounted to $50 million. As of December 26, 1999, AMD
Saxony had received grants and subsidies totaling approximately $298 million
(denominated in deutsche marks). Noncompliance with the conditions of the grants
and subsidies could result in the forfeiture of all or a portion of the future
amounts to be received, as well as the repayment, of all or a portion of the
amounts received to date.
Advertising Expenses. The Company accounts for advertising costs as expense in
the period in which they are incurred. Advertising expense for 1999, 1998 and
1997 was approximately $101 million, $74 million and $74 million, respectively.
Net Loss Per Common Share. Basic and diluted net loss per share are computed
using weighted-average common shares outstanding.
The following table sets forth the computation of basic and diluted net loss
per common share:
(Thousands except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------
Numerator for basic and diluted net
loss per common share $(88,936) $(103,960) $(21,090)
- ---------------------------------------------------------------------------
Denominator for basic and
diluted net loss per common
share -- weighted-average shares 147,068 143,668 140,453
- ---------------------------------------------------------------------------
Basic and diluted net loss
per common share $ (0.60) $ (0.72) $ (0.15)
- ---------------------------------------------------------------------------
28
Options and restricted stock were outstanding during 1999, 1998 and 1997.
Convertible debt was outstanding during 1999 and 1998. Warrants were outstanding
in 1998 and 1997. All of these instruments were not included in the computation
of diluted net loss per common share because the effect in years with a net loss
would be antidilutive.
Accumulated Other Comprehensive Loss. As required under Statement of Financial
Accounting Standards No. 130 (SFAS 130), unrealized gains or losses on the
Company's available-for-sale securities and the foreign currency translation
adjustments, are included in other comprehensive loss.
The following are the components of accumulated other comprehensive loss:
(Thousands) 1999 1998
- -------------------------------------------------------------------
Unrealized gain on investments, net of tax $ 14,278 $ 6,760
Cumulative translation adjustments (31,692) (36,938)
- -------------------------------------------------------------------
$(17,414) $(30,178)
- -------------------------------------------------------------------
Cumulative translation adjustments are not tax affected.
Employee Stock Plans. As allowed under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the
Company continues to account 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." See Note
10.
Use of Estimates. The preparation of the consolidated 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 periods. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
Financial Presentation. The Company has reclassified certain prior year amounts
on the consolidated financial statements to conform to the 1999 presentation.
New Accounting Pronouncements. In 1999, the Financial Accounting Standards Board
extended the adoption of the Statement of Financial Accounting Standards No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 is required to be adopted in years beginning after June 15, 2000. The
Company expects to adopt SFAS 133 in fiscal 2001. The Company has not completed
its review of SFAS 133, and accordingly has not evaluated the effect the
adoption of the statement may have on its consolidated results of operations and
financial position. SFAS 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
portion of a derivative's change in fair value which is ineffective as a hedge
will be immediately recognized in earnings.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company has reviewed SAB 101 and has determined that it is in compliance
with its requirements. Therefore, the application of SAB 101 will have no impact
on the Company's consolidated results of operations.
Note 3: Sale of Vantis Corporation
On June 15, 1999, the Company sold Vantis to Lattice Semiconductor Corporation
for approximately $500 million in cash. The actual cash received was net of
Vantis' cash and cash equivalents balance of approximately $46 million as of the
closing of the sale. The Company's pretax gain on the sale of Vantis was $432
million. The gain was computed based upon Vantis' net assets as of June 15, 1999
and other direct expenses related to the sale. The applicable tax rate on the
gain was 40 percent, resulting in an after-tax gain of $259 million.
As part of the sale of Vantis, the Company negotiated various service
contracts with Lattice to continue to provide services to Vantis after the sale.
Pursuant to the service contracts, the Company will continue to provide, among
other things, wafer fabrication and assembly, test, mark and pack services to
Vantis. The Company expects the wafer fabrication and assembly, test, mark and
pack service contracts to continue until September 2003. Approximately $43
million of revenue was generated from the above service contracts in 1999.
29
Note 4: Financial Instruments
Available-for-sale Securities
Available-for-sale securities as of December 26, 1999 and December 27, 1998 were
as follows:
Gross Gross Fair
unrealized unrealized market
(Thousands) Cost gains losses value
- ----------------------------------------------------------------------------------------------
1999
Cash equivalents:
Commercial paper $ 19,505 -- $ (21) $ 19,484
Money market funds 143,000 -- -- 143,000
- ----------------------------------------------------------------------------------------------
Total cash equivalents $162,505 -- $ (21) $162,484
- ----------------------------------------------------------------------------------------------
Short-term investments:
Money market auction rate preferred stocks $126,700 -- -- $126,700
Certificates of deposit 27,454 -- $ (26) 27,428
Corporate notes 30,759 -- (13) 30,746
Federal agency notes 61,541 -- (170) 61,371
Commercial paper 55,250 $ 891 -- 56,141
- ----------------------------------------------------------------------------------------------
Total short-term investments $301,704 $ 891 $(209) $302,386
- ----------------------------------------------------------------------------------------------
Long-term investments:
Equity investments $ 6,161 $22,014 -- $ 28,175
Federal agency notes 1,907 -- $ (32) 1,875
- ----------------------------------------------------------------------------------------------
Total long-term investments $ 8,068 $22,014 $ (32) $ 30,050
- ----------------------------------------------------------------------------------------------
1998
Cash equivalents:
Commercial paper $ 22,434 -- $ (40) $ 22,394
Money market funds 136,408 -- -- 136,408
- ----------------------------------------------------------------------------------------------
Total cash equivalents $158,842 -- $ (40) $158,802
- ----------------------------------------------------------------------------------------------
Short-term investments:
Money market auction rate preferred stocks $115,500 -- -- $115,500
Certificates of deposit 100,230 $ 58 $ (50) 100,238
Treasury notes 7,696 -- (18) 7,678
Corporate notes 32,657 30 -- 32,687
Federal agency notes 34,616 50 (153) 34,513
Commercial paper 43,886 704 (89) 44,501
- ----------------------------------------------------------------------------------------------
Total short-term investments $334,585 $ 842 $(310) $335,117
- ----------------------------------------------------------------------------------------------
Long-term investments:
Equity investments $ 7,027 $ 6,265 -- $ 13,292
Treasury notes 2,000 3 -- 2,003
- ----------------------------------------------------------------------------------------------
Total long-term investments $ 9,027 $ 6,268 -- $ 15,295
- ----------------------------------------------------------------------------------------------
30
The Company realized a net gain on the sales of available-for-sale securities of
$4.3 million for 1999. The Company did not sell any available-for-sale
securities in 1998.
Financial Instruments With Off-balance-sheet Risk
As part of the Company's asset and liability management strategy, AMD uses
financial instruments with off-balance-sheet risk to manage financial market
risk, including interest rate and foreign exchange risk. The notional amounts,
carrying amounts and fair values of these instruments as of December 26, 1999
and December 27, 1998 are included in the table below:
Notional Carrying Fair
(Thousands) amount amount value
- ----------------------------------------------------------------------
1999
Foreign exchange instruments:
Foreign currency forward contracts $ 58,690 $ (102) $ (533)
- ----------------------------------------------------------------------
1998
Foreign exchange instruments:
Purchased foreign currency
call option contracts 75,000 289 45
Purchased foreign currency
put option contracts 220,000 -- 1,547
Written foreign currency
call option contracts 220,000 (3,416) (13,469)
Foreign currency forward contracts 13,112 (32) (25)
- ----------------------------------------------------------------------
The Company used prevailing financial market information and price quotes from
certain of its counterparty financial institutions as of the respective dates to
obtain the estimates of fair value.
Foreign Exchange Forward Contracts
The Company uses foreign exchange forward contracts to hedge the exposure to
currency fluctuations on its foreign currency exposures in its foreign sales
subsidiaries, liabilities for products purchased from FASL and fixed asset
purchase commitments. The hedging transactions in 1999 were denominated in
Italian lira, Japanese yen, French franc, German mark, British pound, Dutch
guilder, Thailand baht, Singapore dollar, Swiss franc and European Union euro.
The maturities of these contracts were generally less than twelve months.
Foreign Currency Option Contracts
In 1998, the Company entered into an intercompany no-cost collar arrangement to
hedge Dresden Fab 30 project costs denominated in U.S. dollars. The no-cost
collars included purchased put option contracts and written call option
contracts, the contract rates of which were structured so as to avoid payment of
any option premium at the time of purchase. In March 1999, the Company entered
into various option positions with several third party banks to neutralize the
exposure of the outstanding put and call option contracts. As a result, all the
options were offset and canceled. As of December 26, 1999, there were no
outstanding foreign currency option contracts.
In 1999, the $75 million foreign currency call option contracts remaining from
the $150 million call option contracts purchased in 1997 to hedge our
obligations to provide loans to or invest equity in, AMD Saxony also expired.
Fair Value of Other Financial Instruments
The fair value of 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:
1999 1998
Carrying Fair Carrying Fair
(Thousands) amount value amount value
- ------------------------------------------------------------------------------------------------------------------
Short-term debt:
Notes payable -- -- $ 6,017 $ 6,017
Current portion of long-term debt (excluding capital leases) $ 5,127 $ 4,974 125,283 148,178
Long-term debt (excluding capital leases) 1,189,110 1,123,945 1,312,303 1,336,768
- ------------------------------------------------------------------------------------------------------------------
31
Note 5: 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. The Company acquires
investments in time deposits and certificates of deposit from banks having
combined capital, surplus and undistributed profits of not less than $200
million. Investments in commercial paper and money market auction rate 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.
The Company's bad debt expenses have not been material.
The counterparties to the agreements relating to the Company derivative
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
their credit ratings, 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 Company's obligations
to the counterparties.
Note 6: Income Taxes
Provision (benefit) for income taxes consists of:
(Thousands) 1999 1998 1997
- -------------------------------------------------------------------------
Current:
U.S. Federal $ (7,072) $ 1,706 $(43,053)
U.S. State and Local 363 1,772 (1,959)
Foreign National and Local 14,095 11,505 8,423
Deferred:
U.S. Federal 134,050 (89,997) (12,902)
U.S. State and Local 26,178 (16,869) (7,872)
Foreign National and Local (264) 5 2,208
- -------------------------------------------------------------------------
Provision (benefit) for income taxes $167,350 $(91,878) $(55,155)
- -------------------------------------------------------------------------
Tax benefits generated from stock option deductions in 1999, 1998 and 1997 did
not reduce taxes currently payable.
Deferred income taxes reflect the net tax effects of tax carryovers 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 26, 1999 and December 27, 1998 are as follows:
(Thousands) 1999 1998
- ----------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryovers $ 231,542 $ 237,767
Deferred distributor income 32,759 28,940
Accrued expenses not currently deductible 28,149 29,462
Federal and state tax credit carryovers 115,396 92,879
Other 95,660 112,550
- ----------------------------------------------------------------------
Total deferred tax assets 503,506 501,598
Less: valuation allowance (249,116) (73,243)
- ----------------------------------------------------------------------
254,390 428,355
- ----------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (188,879) (196,293)
Other (70,046) (60,887)
- ----------------------------------------------------------------------
Total deferred tax liabilities (258,925) (257,180)
- ----------------------------------------------------------------------
Net deferred tax assets (liabilities) $ (4,535) $ 171,175
- ----------------------------------------------------------------------
32
The valuation allowance for deferred tax assets increased $176 million in 1999
from 1998 primarily to offset tax benefits from operating losses incurred during
1999. The valuation allowance for deferred tax assets includes $38 million
attributable to stock option deductions, the benefit of which will be credited
to equity when realized.
Pretax income from foreign operations was approximately $62 million in 1999.
Pretax loss from foreign operations was approximately $36 million in 1998.
Pretax income from foreign operations was approximately $10 million in 1997.
The federal and state tax credit and net operating loss carryovers expire
beginning in the year 2002 through 2019.
The table below displays a reconciliation between statutory federal income
taxes and the total benefit for income taxes.
(Thousands except percent) Tax Rate
- ----------------------------------------------------------------------
1999
Statutory federal income tax expense $ 25,766 35.0%
State taxes, net of federal benefit 17,252 23.4
Foreign income at other than U.S. rates (4,952) (6.7)
Net operating losses not currently benefitted 126,684 172.1
Other 2,600 3.5
- ----------------------------------------------------------------------
$167,350 227.3%
- ----------------------------------------------------------------------
1998
Statutory federal income tax benefit $(72,598) (35.0)%
State taxes, net of federal benefit (8,000) (3.9)
Tax-exempt Foreign Sales Corporation income (940) (0.5)
Foreign income at other than U.S. rates (3,949) (1.9)
Tax credits (6,200) (3.0)
Other (191) --
- ----------------------------------------------------------------------
$(91,878) (44.3)%
- ----------------------------------------------------------------------
1997
Statutory federal income tax benefit $(35,291) (35.0)%
State taxes, net of federal benefit (7,500) (7.4)
Tax-exempt Foreign Sales Corporation income (1,369) (1.4)
Foreign income at other than U.S. rates (10,228) (10.1)
Tax credits (4,077) (4.0)
Other 3,310 3.2
- ----------------------------------------------------------------------
$(55,155) (54.7)%
- ----------------------------------------------------------------------
The Company has made no provision for income taxes on approximately $394
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, the Company would accrue additional taxes of
approximately $125 million.
Note 7: Debt
Significant elements of revolving lines of credit are:
(Thousands except percent) 1999 1998
- ---------------------------------------------------------------------------------------------------
Committed:
Three-year secured revolving line of credit $ 200,000 $ 150,000
33
Uncommitted:
Portion of unsecured lines of
credit available to foreign subsidiaries 71,032 68,980
Amounts outstanding at year-end under lines of credit:
Short-term 4,831 6,017
Short-term borrowings:
Average daily borrowings 5,441 5,386
Maximum amount outstanding at any month-end 6,166 6,017
Weighted-average interest rate 0.76% 1.18%
Average interest rate on amounts
outstanding at year-end 0.78% 1.06%
- ---------------------------------------------------------------------------------------------------
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, capital lease
obligations and other at year-end is:
(Thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------
6% Convertible Subordinated Notes with
interest payable semiannually and
principal due in April 2005 $ 517,500 $ 517,500
11% Senior Secured Notes with interest payable
semiannually and principal due on
August 1, 2003, secured by the Fab 25
facility and equipment 400,000 400,000
Term loans under the Dresden Loan Agreement
with weighted-average interest of 5.39% and
principal due between February 2001 and
December 2004, secured by the Dresden Fab 30
facility and equipment 270,374 299,679
Secured term loan with interest at LIBOR plus
2.5% (8.06% as of December 27, 1998)
payable quarterly and principal payable quarterly
from October 1998 through May 2000,
secured by the Fab 25 facility and equipment -- 218,750
Obligations under capital leases 27,805 42,812
Mortgage with principal and 9.88% interest payable
in monthly installments through April 2007 1,532 1,657
- -------------------------------------------------------------------------------------------------------
1,217,211 1,480,398
Other 257,697 37,582
- -------------------------------------------------------------------------------------------------------
1,474,908 1,517,980
Less: current portion (47,626) (145,564)
- -------------------------------------------------------------------------------------------------------
Long-term debt, capital lease obligations
and other, less current portion $1,427,282 $1,372,416
- -------------------------------------------------------------------------------------------------------
The 1996 syndicated bank loan agreement (the Credit Agreement) provided for a
$150 million three-year secured revolving line of credit and a $250 million
four-year secured term loan. On June 25, 1999, the Company terminated the
secured revolving line of credit. On July 13, 1999, the Company replaced the
Credit Agreement with a new Loan and Security Agreement (the Loan Agreement)
with a consortium of banks led by Bank of America. On July 30, 1999, the Company
repaid the outstanding principal balance of $86 million on the secured term loan
and terminated the Credit Agreement. Under the Loan Agreement, which provides
for a four-year secured revolving line of credit of up to $200 million, the
Company can borrow, subject to amounts which may be set aside by the lenders, up
to 85 percent of its eligible accounts receivable from Original Equipment
Manufacturers (OEMs) and 50 percent of its eligible accounts receivable from
distributors. The Company must comply with certain financial covenants if the
levels of domestic cash it holds declines to certain levels, or the amount of
borrowing under the Loan Agreement rises to certain levels. The Company's
obligations under the Loan Agreement are secured by a pledge of most of its
accounts receivable, inventory,
34
general intangibles and the related proceeds. As of December 26, 1999, the
Company had not borrowed any funds under the Loan Agreement.
In May 1998, the Company sold $517.5 million of Convertible Subordinated Notes
due May 15, 2005 under its $1 billion shelf registration declared effective by
the Securities and Exchange Commission on April 20, 1998. Interest on the
Convertible Subordinated Notes accrues at the rate of six percent per annum and
is payable semiannually in arrears on May 15 and November 15 of each year,
commencing November 15, 1998. The Convertible Subordinated Notes are redeemable
at the Company's option on and after May 15, 2001. The Notes are convertible at
the option of the holder at any time prior to the close of business on the
maturity date, unless previously redeemed or repurchased, into shares of common
stock at a conversion price of $37.00 per share, subject to adjustment in
certain circumstances.
Included in other is $221 million of deferred grants and subsidies related to
the Dresden Fab 30 project. See Note 2. Also included in other is a deferred
gain of $32 million as of December 26, 1999, as a result of the sale and
leaseback of the Company's corporate marketing, general and administrative
facility in 1998. The Company is amortizing the deferred gain ratably over the
lease term, which is 20 years. See Note 12.
For each of the next five years and beyond, the Company's long-term debt and
capital lease obligations are:
Long-term debt Capital
(Thousands) (Principal only) leases
- ------------------------------------------------------------------
2000 $ 5,127 $13,756
2001 46,517 9,352
2002 154,684 4,197
2003 456,853 3,374
2004 13,097 916
Beyond 2004 517,959 --
- ------------------------------------------------------------------
Total 1,194,237 31,595
Less: amount representing interest -- (3,790)
- ------------------------------------------------------------------
Total at present value $1,194,237 $27,805
- ------------------------------------------------------------------
Obligations under the lease agreements are collateralized by the assets leased.
The Company leased assets totaling approximately $64 million and $97 million as
of December 26, 1999 and December 27, 1998, respectively. Accumulated
amortization of these leased assets was approximately $39 million and $60
million as of December 26, 1999 and December 27, 1998, respectively.
The above debt agreements limit the Company and its subsidiaries' ability to
engage in various transactions and require satisfaction of specified financial
performance criteria. As of December 26, 1999, 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.
Under certain circumstances, cross-defaults result under the Convertible
Subordinated Notes, the Indenture for the Senior Secured Notes and the Dresden
Loan Agreements, which consist of a loan agreement and other related agreements
between AMD Saxony and a consortium of banks led by Dresdner Bank AG.
Note 8: Interest Expense & Interest Income and Other, Net
Interest Expense
(Thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Total interest charges $116,255 $ 96,206 $ 74,716
Less: interest capitalized (47,002) (29,712) (29,440)
- ----------------------------------------------------------------------------------------------
Interest expense $ 69,253 $ 66,494 $ 45,276
- ----------------------------------------------------------------------------------------------
In 1999 and 1998, interest expense primarily consisted of interest incurred on
the Company's Senior Secured Notes sold in August 1996, interest on the
Company's Convertible Subordinated Notes sold in May 1998 and interest on the
Company's $250 million four-year secured term loan, net of interest capitalized
primarily related to the facilitization of Fab 25 and Fab 30. In 1997, interest
expense primarily consisted of interest expense incurred on the Company's Senior
Secured Notes sold in August 1996 and interest on the Company's $250 million
four-year secured term loan, net of interest capitalized primarily related to
the second phase of construction of Fab 25 and Dresden Fab 30.
35
Interest Income and Other, Net
(Thousands) 1999 1998 1997
- --------------------------------------------------------------
Interest income $26,461 $31,478 $28,975
Other income, net 5,274 2,729 6,122
- --------------------------------------------------------------
$31,735 $34,207 $35,097
- --------------------------------------------------------------
Other income consists of gains from the sales of investments, other assets and
fixed assets.
Note 9: Segment Reporting
For purposes of the disclosure required by the Statement of Financial Accounting
Standards SFAS 131, the Company operated in two reportable segments in the first
half of 1999, and in 1998 and 1997: (1) the AMD segment and (2) through June 15,
1999, the Vantis segment. The Company's reportable segments were organized as
discrete and separate functional units with separate management teams and
separate performance assessment and resource allocation processes. The AMD
segment produces microprocessors, core logic products, Flash memory devices,
EPROMs, telecommunication products, networking products and embedded processors.
The Vantis segment produced complex and simple, high performance complementary
metal oxide semiconductor (CMOS) programmable logic devices (PLDs).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
and allocates resources based on segment operating income (loss).
The AMD segment did not have intersegment sales prior to the fourth quarter of
1997. The Vantis segment did not have intersegment sales for any of the years
presented below.
(Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------
Net sales:
AMD segment
External customers $2,770,912 $2,337,144 $2,113,276
Intersegment 32,626 88,455 25,896
- -----------------------------------------------------------------------------------------
2,803,538 2,425,599 2,139,172
Vantis segment external customers 86,692 204,997 243,099
Elimination of intersegment sales (32,626) (88,455) (25,896)
- -----------------------------------------------------------------------------------------
Net sales $2,857,604 $2,542,141 $2,356,375
- -----------------------------------------------------------------------------------------
Segment income (loss):
AMD segment $ (326,555) $ (185,242) $ (127,406)
Vantis segment 5,639 21,600 36,753
- -----------------------------------------------------------------------------------------
Total operating loss (320,916) (163,642) (90,653)
Gain on sale of Vantis 432,059 -- --
Litigation settlement -- (11,500) --
Interest income and other, net 31,735 34,207 35,097
Interest expense (69,253) (66,494) (45,276)
Benefit (provision) for income taxes (167,350) 91,878 55,155
Equity in net income of FASL (AMD segment) 4,789 11,591 24,587
- -----------------------------------------------------------------------------------------
Net loss $ (88,936) $ (103,960) $ (21,090)
- -----------------------------------------------------------------------------------------
Total assets:
AMD segment
Assets excluding investment in FASL $4,104,090 $3,881,268 $3,187,506
Investment in FASL 273,608 236,820 204,031
- -----------------------------------------------------------------------------------------
4,377,698 4,118,088 3,391,537
Vantis segment assets -- 134,880 123,734
- -----------------------------------------------------------------------------------------
Total assets $4,377,698 $4,252,968 $3,515,271
- -----------------------------------------------------------------------------------------
Expenditures for long-lived assets:
AMD segment $ 613,631 $ 993,679 $ 683,346
Vantis segment 6,141 2,491 1,754
- -----------------------------------------------------------------------------------------
Total expenditures for long-lived assets $ 619,772 $ 996,170 $ 685,100
- -----------------------------------------------------------------------------------------
Depreciation and amortization expense:
AMD segment $ 513,247 $ 463,719 $ 390,577
36
Vantis segment 2,273 3,802 3,888
- -----------------------------------------------------------------------------------------
Total depreciation and amortization expense $ 515,520 $ 467,521 $ 394,465
- -----------------------------------------------------------------------------------------
The Company's operations outside the United States include both manufacturing
and sales. The Company's manufacturing subsidiaries are located in Germany,
Malaysia, Thailand, Singapore and China. Its sales subsidiaries are in Europe,
Asia Pacific and Brazil.
The following is a summary of operations by entities within geographic areas
for the three years ended December 26, 1999:
(Thousands) 1999 1998 1997
- -------------------------------------------------------------------
Sales to external customers:
United States $1,131,983 $1,148,610 $1,024,718
Europe 835,673 730,189 683,360
Asia Pacific 889,948 663,342 648,297
- -------------------------------------------------------------------
$2,857,604 $2,542,141 $2,356,375
- -------------------------------------------------------------------
Long-lived assets:
United States $1,469,412 $1,718,435 $1,705,084
Germany 812,773 333,851 102,810
Other Europe 3,847 3,927 3,735
Asia Pacific 237,204 212,255 179,060
- -------------------------------------------------------------------
$2,523,236 $2,268,468 $1,990,689
- -------------------------------------------------------------------
Sales to external customers are based on the customer's billing location. Long-
lived assets are those assets used in each geographic area.
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 OEMs accounted
for approximately 13 and 12 percent of 1999 and 1998 net sales, respectively.
One of the Company's distributors accounted for approximately 12 percent of 1997
net sales.
Note 10: Stock-Based 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 vest and
become exercisable over the 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
on the date of grant. Exercise prices of NSOs range from $0.01 to the fair
market value of the common stock on the date of grant. As of December 26, 1999,
2,884 employees were eligible and participating in the plans.
In 1998, the Compensation Committee of the Company's Board of Directors
approved a stock option repricing program pursuant to which the Company's
employees (excluding officers and vice presidents) could elect to cancel certain
unexercised stock options in exchange for new stock options with an exercise
price of $19.43, which was equal to 20 percent above the closing price of the
Company's common stock on the New York Stock Exchange on September 10, 1998.
Approximately two million options were eligible for repricing, of which the
Company repriced approximately 1.7 million. The Company extended the vesting
schedules and expiration dates of repriced stock options by one year.
The following is a summary of stock option activity and related information
(the repriced options are shown as canceled and granted options in 1998 when
they were repriced):
1999 1998 1997
Number Weighted-average Number Weighted-average Number Weighted-average
(Shares in thousands) of shares exercise price of shares exercise price of shares exercise price
- -----------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning
of year 20,275 $ 16.71 17,780 $17.07 18,651 $12.17
Granted 4,903 16.70 6,555 19.84 3,392 34.33
Canceled (2,355) 20.90 (2,666) 31.17 (782) 16.05
Exercised (1,829) 10.91 (1,394) 8.38 (3,481) 8.03
- --------------------------------------- ------- -------
Outstanding at end of year 20,994 16.74 20,275 16.71 17,780 17.07
- -----------------------------------------------------------------------------------------------------------------------------------
37
Exercisable at end of year 10,704 15.93 9,697 14.60 8,299 13.28
Available for grant at
beginning of year 5,653 966 3,845
Available for grant at end
of year 3,057 5,653 966
- ----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about options outstanding as of
December 26, 1999.
(Shares in thousands) Options outstanding Options exerciseable
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average
Range of Number remaining contractual Weighted-average Number Weighted-average
exercise prices of shares life (years) exercise price of shares exercise price
- --------------------------------------------------------------------------------------------------------------------------------
$ 0.01 - $13.00 5,530 4.44 $ 9.89 4,768 $10.31
13.38 - 16.44 7,267 7.62 15.25 2,843 14.42
16.50 - 22.38 5,561 8.64 18.77 1,404 18.77
22.56 - 43.25 2,636 6.74 30.92 1,689 31.98
------ ------
$ 0.01 - $43.25 20,994 6.94 16.74 10,704 15.93
- --------------------------------------------------------------------------------------------------------------------------------
Stock Purchase Plan. The Company has an employee stock purchase plan (ESPP) that
allows participating U.S. employees to purchase, through payroll deductions,
shares of our common stock at 85 percent of the fair market value at specified
dates. As of December 26, 1999, 1,566,766 common shares remained available for
issuance under the plan. A summary of stock purchased under the plan is shown
below:
(Thousands except employee participants) 1999 1998 1997
- -----------------------------------------------------------------------
Aggregate purchase price $13,294 $14,949 $14,470
Shares purchased 861 952 673
Employee participants 2,273 3,037 3,046
- -----------------------------------------------------------------------
Stock Appreciation Rights. The Company may grant stock appreciation rights
(SARs) to key employees under the 1992 stock incentive plan. 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. The Company may
grant SARs 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 plan 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 in the event of certain changes in control of AMD.
Restricted Stock Awards. The Company established the 1987 restricted stock award
plan under which the Company was authorized to issue up to two million shares of
common stock to employees, subject to terms and conditions determined at the
discretion of the Board of Directors. The Company entered into agreements to
issue 15,000 shares in 1997. The 1987 plan expired in 1997. To date, the Company
has canceled agreements covering 316,239 shares without issuance and the Company
has issued 1,874,922 shares pursuant to prior agreements. As of December 26,
1999, agreements covering 46,051 shares were outstanding. Outstanding awards
vest under varying terms within five years.
In 1998, the Company adopted the 1998 stock incentive plan under which the
Company was authorized to issue one million shares of common stock to employees
who are not covered by Section 16 of the Securities Exchange Act of 1934, as
amended (the Exchange Act), subject to terms and conditions determined at the
discretion of the Board of Directors. During the fiscal year, the Company issued
90,900 shares. As of December 26, 1999, all the shares issued were outstanding.
Shares Reserved for Issuance. The Company had a total of approximately
40,245,000 shares of common stock reserved as of December 26, 1999 for issuance
related to our Convertible Subordinated Notes, the employee stock option plans,
the ESPP and the restricted stock awards.
Stock-Based Compensation. As permitted under SFAS 123, the Company has elected
to follow APB 25 and related Interpretations in accounting for stock-based
awards to employees. Pro forma information regarding net income (loss) and net
income (loss) per share is required by SFAS 123 for awards granted after
December 31, 1994, as if the Company had
38
accounted for its stock-based awards to employees under the fair value method of
SFAS 123. The Company estimated the fair value of its stock-based awards to
employees using a Black-Scholes option pricing model. The Black-Scholes model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, the Black-
Scholes model requires the input of highly subjective assumptions including the
expected stock price volatility. Because our stock-based awards to employees
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of our stock-
based awards to employees. The fair value of our stock-based awards to employees
was estimated assuming no expected dividends and the following weighted-average
assumptions:
Options ESPP
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------
Expected life (years) 3.45 3.33 3.35 0.25 0.25 0.25
Expected stock price volatility 68.72% 64.34% 54.69% 67.10% 76.09% 68.41%
Risk-free interest rate 5.48% 5.42% 6.21% 4.77% 5.18% 5.37%
- -------------------------------------------------------------------------------------
For pro forma purposes, the estimated fair value of our stock-based awards to
employees is amortized over the options' vesting period (for options) and the
three-month purchase period (for stock purchases under the ESPP). Pro forma
information follows:
(Thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------
Net loss--as reported $ (88,936) $(103,960) $(21,090)
Net loss--pro forma (122,497) (129,721) (44,304)
Basic and diluted net loss
per share--as reported (0.60) (0.72) (0.15)
Basic and diluted net loss
per share--pro forma (0.83) (0.90) (0.32)
- --------------------------------------------------------------------------
Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect was not fully reflected until 1999. The Company
granted a total of 4,701,114 stock-based awards during 1999 with exercise prices
equal to the market price of the stock on the grant date. The weighted-average
exercise price and weighted-average fair value of these awards were $17.15 and
$8.80, respectively. The Company granted a total of 7,625 stock-based awards
during 1999 with exercise prices greater than the market price of the stock on
the grant date. The weighted-average exercise price and weighted-average fair
value of these awards were $23.83 and $0.07, respectively. The Company granted a
total of 193,966 stock-based awards during 1999 with exercise prices less than
the market price of the stock on the grant date. The weighted-average exercise
price and weighted-average fair value of these awards were $5.51 and $15.31,
respectively. The Company granted a total of 4,342,824 stock-based awards during
1998 with exercise prices equal to the market price of the stock on the grant
date. The weighted-average exercise price and weighted-average fair value of
these awards were $20.16 and $9.80, respectively. The Company granted a total of
2,060,591 stock-based awards during 1998 with exercise prices greater than the
market price of the stock on the grant date. The weighted-average exercise price
and weighted-average fair value of these awards were $20.44 and $3.51,
respectively. The Company granted a total of 150,990 stock-based awards during
1998 with exercise prices less than market price of the stock on the grant date.
The weighted-average exercise price and weighted-average fair value of these
awards were $3.36 and $17.88, respectively.
The weighted-average fair value of stock purchase rights during 1999, 1998 and
1997 was $4.77 per share, $6.21 per share and $8.42 per share, respectively.
Note 11: Other Employee Benefit Plans
Profit Sharing Program. The Company had a profit sharing program to which the
Board of Directors authorized semiannual contributions. Effective January 2000,
profit sharing is based on the Company's quarterly results, instead of semi-
annual results, and payable quarterly to eligible employees. There were no
profit sharing contributions in 1999. Profit sharing contributions were
approximately $5 million in 1998 and $4 million in 1997.
39
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 one percent to 15 percent of their pretax salary subject to
I.R.S. limits. Before December 26, 1999, the Company made a matching
contribution calculated at 50 cents on each dollar of the first three percent of
participant contributions, to a maximum of 1.5 percent of eligible compensation.
After December 26, 1999, the Company revised the contribution rate and
contributes 50 cents on each dollar of the first six percent of participants'
contributions, to a maximum of three percent of eligible compensation. The
contributions to the 401(k) plan were approximately $5 million in 1999 and $5
million in both 1998 and 1997.
Note 12: Commitments
The Company leases certain of its facilities under agreements which expire at
various dates through 2018. The Company also leases certain of its manufacturing
and office equipment for terms ranging from one to five years. Rent expense was
approximately $52 million, $54 million and $48 million in 1999, 1998 and 1997,
respectively.
For each of the next five years and beyond, noncancelable long-term operating
lease obligations and commitments to purchase manufacturing supplies and
services are as follows:
Operating Purchase
(Thousands) leases commitments
- ------------------------------------------------------------------------------
2000 $ 43,462 $ 50,579
2001 34,267 38,938
2002 32,395 11,226
2003 26,821 5,245
2004 25,075 5,091
Beyond 2004 198,467 14,843
- ------------------------------------------------------------------------------
$360,487 $125,922
- ------------------------------------------------------------------------------
The operating lease of the Company's corporate marketing, general and
administrative facility expired in December 1998. At the end of the lease term,
the Company was obligated to either purchase the facility or to arrange for its
sale to a third party with a guarantee of residual value to the seller equal to
the option purchase price. In December 1998, the Company arranged for the sale
of the facility to a third party and leased it back under a new operating lease.
The Company has deferred the gain and is amortizing it over a period of 20
years, the life of the lease. The lease expires in December 2018. At the
beginning of the fourth lease year and every three years thereafter, the rent
will be adjusted by 200% of the cumulative increase in the consumer price index
over the prior three-year period.
In addition to the purchase commitments above, the Company had commitments of
approximately $2.6 million for the construction or acquisition of additional
property, plant and equipment as of December 26, 1999.
AMD Saxony has constructed and is installing equipment in Dresden Fab 30. AMD,
the Federal Republic of Germany, the State of Saxony and a consortium of banks
are supporting the project. In March 1997, AMD Saxony entered into the Dresden
Loan Agreements which provide for the funding of the construction and
facilitization of Dresden Fab 30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of Germany
and the State of Saxony.
The Dresden Loan Agreements, which were amended in February 1998 to reflect
upgrades in wafer production technology as well as the decline in the deutsche
mark relative to the U.S. dollar, require that the Company partially fund
Dresden Fab 30 project costs in the form of subordinated loans to, or equity
investments in, AMD Saxony. In accordance with the terms of the Dresden Loan
Agreements, the Company has invested $421 million as of December 26, 1999 in the
form of subordinated loans and equity in AMD Saxony (denominated in both
deutsche marks and U.S. dollars).
In addition to AMD's support, the consortium of banks referred to above has
made available $850 million in loans (denominated in deutsche marks) to AMD
Saxony to help fund Dresden Fab 30 project costs. AMD Saxony had $270 million of
such loans outstanding as of December 26, 1999.
Finally, the Federal Republic of Germany and the State of Saxony are
supporting the Dresden Fab 30 project, in accordance with the Dresden Loan
Agreements, in the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount of
$850 million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $156 million.
40
Of these amounts (which are all denominated in deutsche marks), AMD Saxony has
received $275 million in capital investment grants and $23 million in interest
subsidies as of December 26, 1999.
The Dresden Loan Agreements also require that the Company:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, which
will be repaid to AMD as AMD Saxony receives the grants or subsidies from the
State of Saxony;
. fund shortfalls in government subsidies resulting from any default under the
subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreement up to a maximum of $112 million (denominated in deutsche marks) until
Dresden Fab 30 has been completed;
. fund certain contingent obligations including various obligations to fund
project cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30, up
to approximately $75 million (denominated in deutsche marks) if AMD Saxony does
not meet its fixed charge coverage ratio covenant.
Because the amounts under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. At the end of 1999, the exchange rate was
approximately 1.94 deutsche marks to 1 U.S. dollar (which the Company used to
calculate the amounts denominated in deutsche marks).
In December 1995, the Company signed a five-year, comprehensive 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 nonrefundable royalties through 2000.
Note 13: Investment in Joint Venture
In 1993, the Company formed a joint venture (FASL) with Fujitsu Limited for the
development and manufacture of non-volatile memory devices. FASL operates
advanced IC manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash
memory devices. The Company's share of FASL is 49.992 percent and the investment
is being accounted for under the equity method. The Company's share of FASL net
income during 1999 was $5 million, net of income taxes of approximately $3
million. As of December 26, 1999, the cumulative adjustment related to the
translation of the FASL financial statements into U.S. dollars resulted in an
increase of approximately $7 million to the investment in FASL. The following
tables present the significant FASL related party transactions and balances:
Three years ended December 26, 1999 (Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------
Royalty income $ 23,214 $ 21,136 $ 19,322
Purchases 264,344 211,640 242,161
- --------------------------------------------------------------------------------------
December 26, 1999 and December 27, 1998 (Thousands) 1999 1998
- --------------------------------------------------------------------------------------
Royalty receivable $ 6,601 $ 6,027
Accounts payable 35,701 39,424
- --------------------------------------------------------------------------------------
Pursuant to a cross-equity provision between the Company and Fujitsu, the
Company purchased and owned 0.5 million shares of Fujitsu Limited common stock
as of December 26, 1999. Under the same provision, Fujitsu Limited purchased 4.5
million shares of the Company's common stock, of which 0.5 million shares were
purchased in 1999.
In the third quarter of 1997, FASL completed construction of the building for
a second Flash memory device wafer fabrication facility, FASL II, at a site
contiguous to the existing FASL facility in Aizu-Wakamatsu, Japan. Equipment
installation is in progress and the facility is expected to cost approximately
$1 billion (denominated in yen) when fully equipped. Capital expenditures for
FASL II construction to date have been funded by cash generated from FASL
operations and local borrowings by FASL. To the extent that FASL is unable to
secure the necessary funds for FASL II, the Company may be required to
contribute cash or guarantee third-party loans in proportion to our 49.992
percent interest in FASL. As of December 26, 1999, the Company had loan
guarantees of $2 million (denominated in yen) outstanding with respect to such
loans. At the end of 1999, the exchange rate was approximately 103.51 yen to 1
U.S. dollar (which was used to calculated the amounts denominated in yen).
The following is condensed financial data of FASL:
41
Three years ended December 26, 1999 (Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
Net sales $501,797 $427,140 $423,251
Gross profit 20,415 25,432 105,691
Operating income 17,724 20,758 94,863
Net income 9,977 13,104 46,000
- ------------------------------------------------------------------------------------
December 26, 1999 and December 27, 1998 (Thousands) 1999 1998
- ------------------------------------------------------------------------------------
Current assets $166,391 $118,140
Non-current assets 594,031 640,040
Current liabilities 206,532 278,309
Non-current liabilities 1,488 1,774
- ------------------------------------------------------------------------------------
The Company's share of the above FASL net income differs from the equity in net
income of joint venture reported on the consolidated statements of operations.
The difference is due to adjustments resulting from the related party
relationship between FASL and the Company which are reflected on the Company's
consolidated statements of operations.
Note 14: Restructuring and Other Special Charges
In 1999, restructuring and other special charges were $38 million. These charges
were the result of the Company's efforts to better align its cost structure with
the expected revenue growth rates. The restructuring efforts resulted in non-
cash charges for the following:
. closure of a submicron development laboratory facility in the SDC;
. write-off of equipment in the Submicron Development Center (SDC);
. write-off of equipment taken out of service in Fab 25, our integrated
circuit (IC) manufacturing facility located in Austin, Texas, related to the
0.35-micron wafer fabrication process; and write-off of capitalized costs
related to discontinued system projects.
Cash charges consisted of:
. severance and employee benefits for 178 terminated employees in the
Information Technology department, the SDC and certain sales offices;
. costs for leases of vacated and unused sales offices; and
. costs for the disposal of equipment taken out of service in the SDC.
The restructuring and other special charges for the year ended December 26,
1999 are reflected in the table below.
The Company anticipates that the accruals for sales office facilities will be
utilized over the period through lease termination in the second quarter of
2002. The remaining accruals for the disposal costs for equipment that have been
taken out of service will be fully discharged by the end of the first quarter of
2000.
Severance and Equipment Discontinued
(Thousands) employee benefits Facilities Equipment disposal costs system projects Total
- ----------------------------------------------------------------------------------------------------------------------------
Q1 99 charges $ 779 $ -- $ 8,148 $ -- $ 6,089 $ 15,016
Non-cash charges -- -- (8,148) -- (6,089) (14,237)
- ----------------------------------------------------------------------------------------------------------------------------
Accruals at March 28, 1999 779 -- -- -- -- 779
Q2 99 charges 2,245 968 10,801 3,500 -- 17,514
Cash charges (1,360) -- -- -- -- (1,360)
Non-cash charges -- -- (10,801) -- -- (10,801)
- ----------------------------------------------------------------------------------------------------------------------------
Accruals at June 27, 1999 1,664 968 -- 3,500 -- 6,132
Cash charges (1,664) (35) -- (1,067) -- (2,766)
- ----------------------------------------------------------------------------------------------------------------------------
Accruals at September 26, 1999 -- 933 -- 2,433 -- 3,366
Q4 99 charges -- -- 4,820 880 -- 5,700
Cash charges -- (21) -- (870) -- (891)
Non-cash charges -- -- (4,820) -- -- (4,820)
- ----------------------------------------------------------------------------------------------------------------------------
Accruals at December 26, 1999 $ -- $912 $ -- $ 2,443 $ -- $ 3,355
- ----------------------------------------------------------------------------------------------------------------------------
42
Note 15: Contingencies
I. Litigation
Ellis Investment Co., Ltd., et al v. AMD, et al. Between March 10, 1999 and
April 22, 1999, AMD and certain individual officers of AMD were named as
defendants in a number of lawsuits that have been consolidated under Ellis
Investment Co., Ltd., et al v. Advanced Micro Devices, Inc., et al. The class
action complaints allege various violations of Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder. Most of the complaints purportedly were
filed on behalf of all persons, other than the defendants, who purchased or
otherwise acquired common stock of AMD during the period from October 6, 1998 to
March 8, 1999. Two of the complaints allege a class period from July 13, 1998 to
March 9, 1999. All of the complaints allege that materially misleading
statements and/or material omissions were made by AMD and certain individual
officers of AMD concerning design and production problems relating to high-speed
versions of the AMD-K6-2 and AMD-K6-III microprocessors. Based upon information
presently known to management, the Company does not believe that the ultimate
resolution of these lawsuits will have a material adverse effect on the
Company's financial condition.
II. 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 our
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 the Company no longer uses) 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, relating to the three sites. One of the orders named us as well as TRW
Microwave, Inc. and Philips Semiconductors Corporation. In January 1999, the
Company entered into a settlement agreement with Philips whereby Philips will
assume costs allocated to us under this order, although the Company would be
responsible for these costs in the event that Philips does not fulfill its
obligations under the settlement agreement. Another of the orders named AMD 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 (1) can bring an
action to enforce compliance or (2) 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. The statute
of limitations has been tolled on the claims of landowners adjacent to the Santa
Clara County Superfund sites for causes of action such as negligence, nuisance
and trespass.
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 cleanup. The
amount of environmental charges to earnings has not been material during any of
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 Company's
financial condition or results of operations.
The Company received a notice dated October 14, 1998 from the Environmental
Protection Agency (EPA) indicating that the EPA has determined AMD to be a
potentially responsible party that arranged for disposal of hazardous substances
at a site located in Santa Barbara County, California. The Company is currently
in settlement discussions with the EPA and believes that any settlement will not
have a material adverse effect on the Company's financial condition or results
of operations.
III. 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
Company's financial condition or results of operations.
43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Advanced Micro Devices, Inc.
We have audited the accompanying consolidated balance sheets of Advanced Micro
Devices, Inc. as of December 26, 1999 and December 27, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 26, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. 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 26, 1999 and December 27, 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 26, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
January 14, 2000
44
SUPPLEMENTARY FINANCIAL DATA
1999 and 1998 by Quarter (Unaudited)
(Thousands except per share and market price amounts) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Dec. 26 Sept. 26 June 27 Mar. 28 Dec. 27 Sept. 27 June 28 Mar. 29
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $968,710 $ 662,192 $ 595,109 $ 631,593 $788,820 $685,927 $ 526,538 $ 540,856
Expenses:
Cost of sales 581,545 474,119 458,339 450,431 481,987 422,985 390,140 423,591
Research and development 150,936 157,626 167,278 159,946 156,459 143,665 139,158 128,120
Marketing, general and
administrative 158,803 129,437 124,520 127,310 120,498 109,768 101,198 88,214
Restructuring and other
special charges 5,700 -- 17,514 15,016 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
896,984 761,182 767,651 752,703 758,944 676,418 630,496 639,925
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 71,726 (98,990) (172,542) (121,110) 29,876 9,509 (103,958) (99,069)
Gain on sale of Vantis -- -- 432,059 -- -- -- -- --
Litigation settlement -- -- -- -- -- -- -- (11,500)
Interest income and other, net 6,958 6,757 7,252 10,768 10,037 10,071 8,518 5,581
Interest expense (12,370) (18,033) (18,087) (20,763) (15,177) (21,182) (17,663) (12,472)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes and
equity in joint venture 66,314 (110,266) 248,682 (131,105) 24,736 (1,602) (113,103) (117,460)
Provision (benefit) for
income taxes -- -- 172,823 (5,473) (136) (635) (44,110) (46,997)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity
in joint venture 66,314 (110,266) 75,859 (125,632) 24,872 (967) (68,993) (70,463)
Equity in net income (loss)
of joint venture (1,234) 4,721 4,037 (2,735) (2,551) 1,973 4,433 7,736
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 65,080 $(105,545) $ 79,896 $(128,367) $ 22,321 $ 1,006 $ (64,560) $ (62,727)
=================================================================================================================================
Net income (loss) per share:
Basic $ 0.44 $ (0.72) $ 0.54 $ (0.88) $ 0.15 $ 0.01 $ (0.45) $ (0.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.43 $ (0.72) $ 0.53 $ (0.88) $ 0.15 $ 0.01 $ (0.45) $ (0.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Shares used in per share
calculation:
Basic 148,029 147,388 146,947 145,909 144,926 143,915 143,462 142,503
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted 152,750 147,388 149,540 145,909 149,949 146,642 143,462 142,503
- ---------------------------------------------------------------------------------------------------------------------------------
Common stock market price
range:
High $ 31.75 $ 23.25 $ 21.63 $ 31.88 $ 32.00 $ 20.94 $ 30.50 $ 25.13
Low $ 16.44 $ 16.13 $ 14.75 $ 15.69 $ 14.00 $ 13.00 $ 16.88 $ 17.13
=================================================================================================================================
45
Financial summary
Five Years Ended December 26, 1999
(Thousands except per share amounts) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Net sales $2,857,604 $2,542,141 $2,356,375 $1,953,019 $2,468,379
Expenses:
Cost of sales 1,964,434 1,718,703 1,578,438 1,440,828 1,417,007
Research and development 635,786 567,402 467,877 400,703 416,521
Marketing, general and administrative 540,070 419,678 400,713 364,798 412,651
Restructuring and other special charges 38,230 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
3,178,520 2,705,783 2,447,028 2,206,329 2,246,179
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) (320,916) (163,642) (90,653) (253,310) 222,200
Gain on sale of Vantis 432,059 -- -- -- --
Litigation settlement -- (11,500) -- -- --
Interest income and other, net 31,735 34,207 35,097 59,391 32,465
Interest expense (69,253) (66,494) (45,276) (14,837) (3,059)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and equity in joint venture 73,625 (207,429) (100,832) (208,756) 251,606
Provision (benefit) for income taxes 167,350 (91,878) (55,155) (85,008) 70,206
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in joint venture (93,725) (115,551) (45,677) (123,748) 181,400
Equity in net income of joint venture 4,789 11,591 24,587 54,798 34,926
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) (88,936) (103,960) (21,090) (68,950) 216,326
Preferred stock dividends -- -- -- -- 10
Net income (loss) applicable to common stockholders $ (88,936) $ (103,960) $ (21,090) $ (68,950) $ 216,316
=====================================================================================================================
Net income (loss) per common share:
Basic $ (0.60) $ (0.72) $ (0.15) $ (0.51) $ 1.69
=====================================================================================================================
Diluted $ (0.60) $ (0.72) $ (0.15) $ (0.51) $ 1.57
=====================================================================================================================
Shares used in per share calculation:
Basic 147,068 143,668 140,453 135,126 127,680
=====================================================================================================================
Diluted 147,068 143,668 140,453 135,126 137,698
=====================================================================================================================
Long-term debt, capital lease obligations
and other, less current portion $1,427,282 $1,372,416 $ 662,689 $ 444,830 $ 214,965
Total assets $4,377,698 $4,252,968 $3,515,271 $3,145,283 $3,078,467
=====================================================================================================================
The Company's common stock (symbol AMD) is listed on the New York Stock
Exchange. The Company has never paid cash dividends on common stock and is
restricted from doing so. Refer to the notes to consolidated financial
statements. The number of stockholders of record at January 31, 2000 was 8,739.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, K86, AMD-
K6, AMD Athlon and 3DNow! are either trademarks or registered trademarks of
Advanced Micro Devices, Inc. Vantis is a trademark of Vantis Corporation.
Microsoft and Windows are registered trademarks of Microsoft Corporation.
Pentium is a registered trademark and Celeron is a trademark of Intel
Corporation. Other terms used to identify companies and products may be
trademarks of their respective owners.
46