MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
--------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
The statements in this Management's Discussion and Analysis of Results of
Operations and Financial Condition 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 operating results, cash flows, realization of net deferred tax assets,
capital expenditures and adequacy of resources to fund operations and capital
investments; future business prospects for microprocessors, Flash memory device
products and other product lines; the effect of foreign exchange contracts and
interest rate swaps; the development, validation, certification, introduction,
market acceptance and pricing of the K86/(TM)/ products; the Company's
commitment to research and development; the effective utilization of Fab 25 (as
defined below); the proposed Dresden and FASL manufacturing facilities (which
are defined below); and the assembly and test facility to be constructed in
Suzhou, China. See Financial Condition and Risk Factors below, as well as such
other risks and uncertainties as are detailed in the Company's Securities and
Exchange Commission reports and filings for a discussion of the factors that
could cause the actual results to differ materially from the forward-looking
statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto at December 29, 1996 and December 31,
1995, and for each of the three years in the period ended December 29, 1996. On
January 17, 1996, the Company acquired NexGen, Inc. (NexGen) in a transaction
accounted for as a pooling-of-interests. All financial data and footnote
information of the Company, including the Company's previously issued financial
statements for the periods discussed herein, have been restated to give
retroactive effect to the merger with NexGen.
RESULTS OF OPERATIONS
- ---------------------
AMD participates in the digital integrated circuit (IC) market - memory
circuits, microprocessors and logic circuits - through, collectively, its
Communications and Components Group (CCG), its Computation Products Group (CPG)
and its Programmable Logic Division (Vantis). CCG products include Flash memory
devices, Erasable Programmable Read-Only Memory (EPROM) devices, voice and data
communications products, embedded processors, input/output (I/O) devices and
network products. CPG products include microprocessors. Vantis products are
high-speed programmable logic devices. The Company's operations relating to I/O
devices and network products are currently included in the operations of CCG.
The Company previously reported such results as part of CPG. All results for CCG
and CPG for prior periods have been revised to conform to the new
classification.
The following is a summary of the net sales of CCG, CPG and Vantis in 1996, 1995
and 1994:
(Millions) 1996 1995 1994
---------- ----------- ----------
CCG $ 1,364 $ 1,434 $ 1,147
CPG 341 778 821
Vantis 248 256 187
---------- ----------- ----------
Total $ 1,953 $ 2,468 $ 2,155
========== =========== ==========
1996 net sales of $2.0 billion declined approximately 21 percent from 1995.
This decrease was primarily due to a decline in Am486/(R)/ microprocessor sales,
as both unit volume and average selling prices decreased significantly. These
decreases were partially offset by sales of AMD-K5/(TM)/ microprocessors which
were introduced in 1996. Net sales of $2.5 billion in 1995 increased
approximately 15 percent from 1994 primarily due to substantial growth in Flash
memory sales and secondarily due to an increase in sales of communications
products, the combination of which more than offset a decline in microprocessor
sales.
CCG net sales decreased from 1995 to 1996, as net sales of Flash memory devices
were flat and unit shipments of other CCG products declined. Flash memory
devices contributed a significant portion of the Company's revenues in 1996 and
1995. In 1996, the market for the Company's Flash memory devices saw increasing
competition and falling prices. The increase in CCG net sales in 1995 was due to
increased sales of Flash memory devices, primarily due to growth in unit
shipments and secondarily due to a change in product mix resulting in higher
average selling prices.
8
CPG net sales decreased from 1995 to 1996 as well as from 1994 to 1995. The
decline in CPG net sales was in each case due to increased market acceptance of
higher performance fifth-generation microprocessors from Intel Corporation
(Intel), coupled with the Company's delay in introducing competitive fifth-
generation microprocessors. The Company's fifth-generation microprocessor, the
AMD-K5 microprocessor, was introduced relatively late in the life cycle of
fifth-generation products. As such, the Company believes the AMD-K5
microprocessor will be a transitional product and will not generate levels of
sales achieved by the Am486 microprocessor over its product life. The Company
intends to begin volume shipments of the AMD-K6/(TM)/ products in the second
quarter of 1997, although no assurance can be made that such shipments will
occur.
Vantis net sales decreased in 1996 due to lower unit shipments. The Company
believes this decrease was caused by decreased market demand in the simple
programmable logic market. The increase from 1994 to 1995 was primarily due to
higher unit shipments. The Company is in the process of transferring its
programmable logic device operations to a wholly owned subsidiary, Vantis
Corporation. Vantis Corporation will rely upon the Company for manufacturing
services. A dedicated programmable logic device sales force was formed and began
operating as a separate unit in the second half of 1996.
All of the Company's products are in markets characterized by rapid
technological change and significant competition. As such, there can be no
assurance that trends, including falling prices for Flash memory devices,
reduced microprocessor sales and decreased unit shipments of programmable logic
devices, will not continue. See Risk Factors below.
Gross margin was 26 percent, 43 percent and 53 percent in 1996, 1995 and 1994,
respectively. The decline in gross margin in 1996 was primarily due to lower
sales, the underutilization of certain production facilities, and increased
purchases by the Company of Flash memory devices from its manufacturing joint
venture with Fujitsu Limited, Fujitsu AMD Semiconductor Limited (FASL), at
prices higher than the costs of similar products manufactured internally. The
decline in gross margin in 1995 was due to Am486 processor price declines;
increased purchases from FASL at prices higher than the costs of similar
products manufactured internally; negative gross margin, inventory and
manufacturing loss accruals associated with significantly reduced demand for
NexGen products; and the transition of Fab 25 costs from research and
development to cost of sales when production commenced in September 1995. The
impact of gross margin declines caused by purchases of FASL products during 1996
and 1995 was mostly offset by the Company's share of FASL income.
Research and development expenses were $401 million, $417 million and $295
million in 1996, 1995 and 1994, respectively. The decrease from 1995 to 1996
was due to the commencement of production at Fab 25 in the third quarter of
1995, when Fab 25 costs transitioned from research and development to cost of
sales. The increase from 1994 to 1995 was primarily due to higher Fab 25
research and development expenses and secondarily due to increased
microprocessor development costs.
Marketing, general and administrative expenses were $365 million, $413 million
and $378 million in 1996, 1995 and 1994, respectively. The decrease from 1995
to 1996 was primarily due to the cessation of expenses associated with products
from NexGen, which the Company no longer offers, coupled with effective expense
controls. The increase from 1994 to 1995 was primarily attributable to expenses
for the sale of Nx586/(R)/and other related products from NexGen, and
secondarily to higher advertising expenses.
Interest income and other, net was $59 million, $32 million and $17 million in
1996, 1995 and 1994, respectively. The increase from 1995 to 1996 was due to
realized gains of approximately $41 million from equity securities sold in
1996, which were partially offset by lower interest income as a result of lower
cash balances and lower interest rates during 1996. The increase from 1994 to
1995 was due to higher interest rates and a realized gain of approximately $3
million from equity securities. Interest expense was $15 million, $3 million
and $4 million in 1996, 1995 and 1994, respectively. The increase from 1995 to
1996 was primarily due to interest expense incurred on the Company's Senior
Secured Notes sold in August, 1996. Gross interest expense increased in 1996
and is expected to increase in the future, primarily due to interest expense
incurred on the Company's Senior Secured Notes and a four-year secured term
loan, as discussed below. Interest expense in 1995 decreased from 1994 due to
higher capitalized interest mainly related to the construction of Fab 25.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITIONS
The Company recorded a tax credit of $85 million in 1996, resulting in an
effective tax rate (benefit) of approximately 41 percent. The income tax rate
was approximately 28 percent for 1995 and 34 percent for 1994. The lower tax
rate in 1995 resulted from lower state taxes and increased benefits from foreign
income taxed at a lower rate. Realization of the Company's net deferred tax
assets ($46 million at December 29, 1996) is dependent on future taxable income.
While the Company believes that it is more likely than not that such assets will
be realized, other factors, including those mentioned in the discussion of Risk
Factors, may impact the ultimate realization of such assets.
International sales were 53, 56 and 55 percent of total sales in 1996, 1995 and
1994, respectively. During 1996, approximately 16 percent of the Company's net
sales were denominated in foreign currencies. The Company does not have sales
denominated in local currencies in those countries which have highly
inflationary economies. (A highly inflationary economy is defined in accordance
with the Statement of Financial Accounting Standards No. 52 as one in which the
cumulative inflation over a three-year consecutive period approximates 100
percent or more.) The impact on the Company's operating results from changes in
foreign currency rates individually and in the aggregate has not been material.
The Company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of the Company's foreign net monetary asset
position including the Company's liabilities for products purchased from FASL.
In 1996 and 1995, these hedging transactions were denominated in lira, yen,
French franc, deutsche mark (DM) and pound sterling. The maturities of these
contracts are generally short-term in nature. The Company believes its foreign
exchange contracts do not subject the Company to material risk from exchange
rate movements because gains and losses on these contracts are designed to
offset losses and gains on the net monetary asset position being hedged. Net
foreign currency gains and losses have not been material. As of December 29,
1996, the Company had approximately $25 million (notional amount) of foreign
exchange forward contracts (see Notes 3, 4 and 5 to the Consolidated Financial
Statements).
The Company has engaged in interest rate swaps primarily to reduce its interest
rate exposure by changing a portion of the Company's interest rate obligation
from a floating rate to a fixed rate basis. At the end of 1996, the net
outstanding notional amount of interest rate swaps was $40 million, which will
mature in 1997. Gains and losses related to these interest rate swaps have not
been material (see Notes 3, 4 and 5 to the Consolidated Financial Statements).
The Company participates as an end user in various derivative markets to manage
its exposure to interest and foreign currency exchange rate fluctuations. The
counterparties to the Company's foreign exchange forward contracts and interest
rate swaps consist of a number of major, high credit quality, international
financial institutions. The Company does not believe that there is significant
risk of nonperformance by these counterparties because the Company monitors
their credit ratings, and reduces the financial exposure by limiting the
notional amount of agreements entered into with any one financial institution.
FINANCIAL CONDITION
- -------------------
The Company's working capital balance decreased to $446 million at December 29,
1996 from $462 million at December 31, 1995 primarily due to continued capital
spending, particularly on Fab 25, repayment of the Company's $150 million four-
year term bank loan, and the net loss in 1996, which were offset by the net
proceeds from the sale of $400 million of the Company's Senior Secured Notes in
the third quarter of 1996. The Company's cash, cash equivalents and short-term
investments balance was approximately $386 million at December 29, 1996 compared
to $510 million at December 31, 1995.
Excluding the cash received from the sale of the Senior Secured Notes, the
Company's capital investments and its recent operating performance have resulted
in significant negative cash flow. In 1996 the Company made substantial capital
investments in its process technology and manufacturing capacity based, in part,
upon Company and industry projections regarding future growth in the market for
ICs. The Company plans to make capital investments of approximately $500 million
in 1997, excluding those relating to the Dresden Facility (as defined below) and
FASL. The Company's current capital plan and requirements are based on the
availability of financial resources and various product-mix, selling-price, and
unit-demand assumptions and are, therefore, subject to revision.
10
AMD Saxony Manufacturing GmbH (AMD Saxony), a German subsidiary wholly owned by
the Company through a German holding company, is building a 900,000 square foot
submicron integrated circuit manufacturing and design facility in Dresden, in
the State of Saxony, Germany (the Dresden Facility) over the next five years at
a presently estimated cost of approximately $1.5 billion. The Dresden Facility
is being designed for the production of microprocessors and other advanced logic
products. The Federal Republic of Germany and the State of Saxony have agreed to
support the project in the form of (i) a guarantee of 65% of the bank debt to be
incurred by AMD Saxony up to a maximum of DM1.65 billion, (ii) investment grants
and subsidies totaling DM500.5 million, and (iii) interest subsidies from the
State of Saxony totaling DM300 million. In March, 1997 AMD Saxony will be
entering into a loan agreement with a consortium of banks led by Dresdner Bank
AG under which facilities totaling DM1.65 billion will be made available. In
connection with the financing, the Company has agreed to invest in AMD Saxony
over the next three years equity and subordinated loans in an amount totaling
approximately DM507.5 million. Until the Dresden Facility has been completed,
AMD has also agreed to guarantee AMD Saxony's obligations under the loan
agreement up to a maximum of DM217.5 million. After completion of the Dresden
Facility, AMD has agreed to make available to AMD Saxony up to DM145 million if
the subsidiary does not meet its fixed charge coverage ratio covenant. Finally,
AMD has agreed to undertake certain contingent obligations, including various
obligations to fund project cost overruns. The Company began site preparation of
the Dresden Facility in the fourth quarter of 1996, and plans to commence
construction during the second quarter of 1997. The planned Dresden Facility
costs are denominated in deutsche marks and, therefore, are subject to change
due to foreign exchange rate fluctuations. The Company plans to hedge future
foreign exchange exposure for the Dresden Facility.
The Company's total cash investment in FASL was $160 million at the end of 1996
and at the end of 1995. No additional cash investment is currently planned for
1997. In March of 1996, FASL began construction of a second Flash memory device
wafer fabrication facility (FASL II) at a site contiguous to the existing FASL
facility in Aizu-Wakamatsu, Japan. The facility is expected to cost
approximately $1.1 billion when fully equipped. Capital expenditures for FASL II
construction are expected to be funded by cash generated from FASL operations
and, if necessary, borrowings by FASL. To the extent that FASL is unable to
secure the necessary funds for FASL II, AMD may be required to contribute cash
or guarantee third-party loans in proportion to its percentage interest in FASL.
At December 29, 1996, AMD had loan guarantees of $39 million outstanding with
respect to such loans. The planned FASL II costs are denominated in yen and,
therefore, are subject to change due to foreign exchange rate fluctuations.
In August, 1996, the Company sold $400 million of Senior Secured Notes due
August 1, 2003 under its shelf registration declared effective by the Securities
and Exchange Commission on May 17, 1994. Due to the sale of the Senior Secured
Notes, the Company fully utilized this shelf registration. Interest on the
Senior Secured Notes accrues at the rate of 11 percent per annum and is payable
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1997. The Senior Secured Notes are secured by substantially all of
the assets of Fab 25 and its ancillary facilities, and are redeemable at the
Company's option after August 1, 2001.
The net proceeds to the Company from the sale of Senior Secured Notes, after
deducting underwriting discounts and commissions and estimated expenses of the
sale of Senior Secured Notes, were approximately $389 million. The Company used
$150 million of the net proceeds to repay its existing four-year term bank loan
which was to mature on January 5, 1999. The Company expects to use the balance
of the net proceeds of approximately $239 million for general corporate
purposes.
On July 19, 1996, the Company entered into a syndicated bank loan agreement (the
Credit Agreement) which provides for a new $400 million term loan and revolving
credit facility which became available concurrently with the sale of the Senior
Secured Notes. The Credit Agreement replaced the Company's unsecured and unused
$250 million line of credit and its unsecured $150 million four-year term loan.
The Credit Agreement provides for a $150 million three-year secured revolving
line of credit (which can be extended for one additional year, subject to
approval of the lending banks) and a $250 million four-year secured term loan
which the Company fully utilized in January, 1997. Additionally, as of December
29, 1996, the Company has available unsecured uncommitted bank lines of credit
in the amount of $85 million, of which $15 million was utilized.
The Company believes that current cash balances, together with cash flows, will
be sufficient to fund operations and capital investments currently planned
through 1997.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RISK FACTORS
- ------------
The Company's business, results of operations and financial condition are
subject to the following risk factors:
MICROPROCESSOR PRODUCTS
Intel Dominance. Intel has long held a dominant position in the market for
- ---------------
microprocessors used in personal computers (PCs). Intel Corporation's dominant
market position has to date allowed it to set and control x86 microprocessor
standards and thus dictate the type of product the market requires of Intel
Corporation's competitors. In addition, Intel Corporation's financial strength
has enabled it to reduce prices on its microprocessor products within a short
period of time following their introduction, which reduces the margins and
profitability of its competitors, and to exert substantial influence and control
over PC manufacturers through the Intel Inside advertising rebate program. The
Company expects Intel to continue to invest heavily in research and development
and new manufacturing facilities and to maintain its dominant position through
advertising campaigns designed to engender brand loyalty to Intel among PC
purchasers. As an extension of its dominant microprocessor market share, Intel
also increasingly dominates the PC platform. The Company does not have the
financial resources to compete with Intel on such a large scale. As long as
Intel remains in this dominant position, its product introduction schedule,
product pricing strategy and customer brand loyalty may continue to have a
material adverse effect on the Company.
As Intel has expanded its dominance in designing and setting standards for PC
systems, many PC original equipment manufacturers (OEMs) have reduced their
system development expenditures and have begun to purchase microprocessors in
conjunction with chip sets or in assembled motherboards. In marketing its
microprocessors to these OEMs and dealers, AMD is dependent upon companies other
than Intel for the design and manufacture of core-logic chip sets, motherboards,
basic input/output system (BIOS) software and other components. In recent years,
these third-party designers and manufacturers have lost significant market share
to Intel. In addition, these companies are able to produce chip sets,
motherboards, BIOS software and other components to support each new generation
of Intel Corporation's microprocessors only to the extent that Intel makes its
related proprietary technology available. Any delay in the availability of such
technologies would make it increasingly difficult for them to retain or regain
market share. To compete with Intel in this market in the future, the Company
intends to continue to form closer relationships with third-party designers and
manufacturers of core-logic chip sets, motherboards, BIOS software and other
components. The Company similarly intends to expand its chip set and system
design capabilities, and offer to OEMs a portion of the Company's processors
together with chip sets and licensed system designs incorporating the Company's
processors and companion products. There can be no assurance, however, that such
efforts by the Company will be successful. The Company expects that as Intel
introduces future generations of microprocessors, chip sets and motherboards,
the design of chip sets 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. If
the infrastructure of third-party designers and manufacturers which supports
non-Intel PC platforms were to fail to continue to support the Company's
products or to offer products competitive with Intel Corporation's, the Company
could experience difficulties marketing its microprocessors, which could have a
material adverse effect on the Company.
Dependence on New AMD Microprocessor Products. Am486 microprocessor products
- ---------------------------------------------
contributed a significant portion of the Company's revenues, profits and margins
in 1994 and 1995. Am486 microprocessor revenues in 1996 were significantly below
those of 1995. As the product life cycle of fourth-generation x86 products has
declined, the Company's ability to maintain or expand its current levels of
revenues from microprocessor products, and its ability to benefit fully from the
substantial financial commitments it has made to process technologies and
integrated circuit manufacturing facilities dedicated to the production of
microprocessors, has depended upon its success in developing and marketing in a
timely manner its future generations of microprocessor products, the K86 RISC
SUPERSCALAR/(TM)/products. The Company is currently shipping its
fifth-generation K86 products including the PR 133/1/, PR 150 and
PR 166 AMD-K5 processors which are designed to be competitive with the Pentium,
Intel Corporation's fifth-generation microprocessor. The Company anticipates
that the AMD-K5 microprocessor, which was introduced relatively late in the life
cycle of fifth-generation microprocessor products, will be a
______________________
/1/ "PR" refers to the performance rating assigned to the microprocessors by AMD
based upon tests conducted employing the Ziff-Davis Winstone 96 benchmark, which
compares the systems performance provided by a microprocessor to the systems
performance provided by Pentium processors of various clock speeds. A
performance rating of 166, for example, indicates that the microprocessor has
been determined to deliver systems performance equal to or greater than that
provided by a 166 Megahertz Pentium.
12
transitional product, and will not result in the levels of revenue that the
Company realized from the Am486 microprocessor. The Company's AMD-K5 products
have not, to date, achieved substantial market acceptance, which has had and
continues to have a material adverse effect on the Company. The Company intends
to begin volume shipments of its sixth-generation microprocessor, the AMD-K6
processor, in the second quarter of 1997, although no assurance can be made that
such shipments will occur. The Company's production and sales plans for K86
microprocessors are subject to numerous risks and uncertainties, including the
introduction and volume production of higher performance AMD-K5 products and of
AMD-K6 products, the possibility that volume shipments of the AMD-K6 may be
delayed due to the time required to verify operating systems and application
software compatibility, the development of market acceptance for the AMD-K5 and
the AMD-K6 products particularly with leading PC OEMs, the effects of marketing
and pricing strategies adopted by Intel, the possible adverse effects of
existing and future customer inventory levels, the pace at which the Company is
able to ramp production of fifth- and sixth-generation microprocessors in Fab
25, the possibility that products newly introduced by the Company may be found
to be defective, possible adverse conditions in the personal computer market and
unexpected interruptions in the Company's manufacturing operations. A failure of
the Company's K86 products, particularly the AMD-K6 processor, to be timely
introduced or to achieve market acceptance, would have a material adverse effect
on the Company. AMD is also devoting substantial resources to the development of
its seventh-generation Microsoft(R) Windows(R) compatible microprocessor, the
AMD-K7 processor.
Dependence on Market Acceptance of x86 Standard and Dominance of Windows.
- ------------------------------------------------------------------------
Customer acceptance of the Company's K86 products will depend upon the continued
demand for x86-based personal computers, including the continued development of
application software programs for such computers. There can be no assurance of
the continued acceptance of the x86 standard or that software developers will
continue to develop software compatible with this standard. The Company's K86
products will face competition not only from x86 products manufactured by Intel
and others but also from products based upon an increasing number of different
architectures which have been developed or are under development by IBM,
Motorola, Silicon Graphics, Sun Microsystems, Digital Equipment Corporation and
other manufacturers of integrated circuits. Several of these manufacturers, such
as Motorola, Digital Equipment Corporation, Silicon Graphics and Sun
Microsystems, produce microprocessors which are designed to be compatible with
such operating systems as Windows NT(R) and UNIX but not with Windows
or Windows 95. Currently, as a result of the dominance of the Windows operating
system, which operates with x86-based PCs, AMD is able to market its
microprocessors without significant competition from these manufacturers. AMD
would lose much of this advantage if the Microsoft Windows operating system
should be displaced as the dominant operating system software by one or more
other systems, such as Windows NT or UNIX. A reduction in the market acceptance
of either the x86 standard or the Windows operating system could have a material
adverse effect on the Company.
Compatibility Certifications. For its future generations of K86 microprocessors,
- ----------------------------
AMD intends to obtain Windows, Windows 95 and Windows NT certifications from
Microsoft and other appropriate certifications from recognized testing
organizations. A failure to obtain certifications from Microsoft would prevent
the Company from describing and labeling its K86 microprocessors as Microsoft
Windows compatible. This could substantially impair the Company's ability to
market the products and could have a material adverse effect on the Company.
Fluctuation in PC Market. Since most of the Company's microprocessor products
- ------------------------
are used in personal computers and related peripherals, the Company's future
growth is closely tied to the performance of the PC industry. The Company could
be materially and adversely affected by industry-wide fluctuations in the PC
marketplace in the future.
Possible Rights of Others. Prior to its acquisition by AMD, NexGen granted
- -------------------------
limited manufacturing rights regarding certain of its current and future
microprocessors, including the Nx586 and Nx686(TM), to other companies. The
Company does not intend to produce any NexGen products. The Company believes
that its forthcoming AMD-K6 processors are AMD products and not NexGen products.
There can be no assurance that another company will not seek to establish rights
with respect to the processors. If another company were deemed to have rights to
produce the Company's AMD-K6 processors for its own use or for sale to third
parties, such production could reduce the potential market for microprocessor
products produced by AMD, the profit margin achievable with respect to such
products, or both.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FLASH MEMORY PRODUCTS
Importance of Flash Memory Device Business; Increasing Competition. In 1996, the
- ------------------------------------------------------------------
market for Flash memory devices experienced rapid growth and increased
competition as additional manufacturers introduced competitive products and
industry-wide production capacity increased. The Company expects that the
marketplace for Flash memory devices will continue to be increasingly
competitive. A substantial portion of the Company's revenues are derived from
sales of Flash memory devices, and the Company expects that this will continue
to be the case for the forseeable future. During 1996, the Company experienced
declines in the selling prices of Flash memory devices. There can be no
assurance that the Company will be able to maintain its market share in Flash
memory devices or that price declines may not accelerate as the market develops
and as new competitors emerge. A decline in the Company's Flash memory device
business could have a material adverse effect on the Company.
MANUFACTURING
Capacity. The Company's manufacturing facilities have been underutilized from
- --------
time to time as a result of reduced demand for certain of the Company's
products. The Company's operations related to microprocessors have been
particularly affected by this situation. Any future underutilization of the
Company's manufacturing facilities could have a material adverse effect on the
Company. The Company plans to increase its manufacturing capacity by making
significant capital investments in Fab 25 and in Fab 30 in Dresden, Germany. In
addition, FASL has begun construction of a second Flash memory device
manufacturing facility (FASL II). There can be no assurance that the industry
projections for future growth upon which the Company is basing its strategy of
increasing its manufacturing capacity will prove to be accurate. If demand for
the Company's products does not increase, underutilization of the Company's
manufacturing facilities will likely occur and have a material adverse effect on
the Company.
There have been situations in the past in which the Company's manufacturing
facilities were inadequate to enable the Company to meet demand for certain of
its products. In addition to having its own fabrication facilities, AMD has
foundry arrangements for the production of its products by third parties. Any
inability of AMD to generate sufficient manufacturing capabilities to meet
demand, either in its own facilities or through foundry or similar arrangements
with others, could have a material adverse effect on the Company.
Process Technology. Manufacturers of integrated circuits are constantly seeking
- ------------------
to improve the process technologies used to manufacture their products. In order
to remain competitive, the Company must make continuing substantial investments
in improving its process technologies. In particular, the Company has made and
continues to make significant research and development investments in the
technologies and equipment used to fabricate its microprocessor products and its
Flash memory devices. Portions of these investments might not be recoverable if
the Company's microprocessors fail to gain market acceptance or if the market
for its Flash memory products should significantly deteriorate. This could have
a material adverse effect on the Company. In addition, any inability of the
Company to remain competitive with respect to process technology could have a
material adverse effect on the Company.
Manufacturing Interruptions. Any substantial interruption with respect to any of
- ---------------------------
the Company's manufacturing operations, either as a result of a labor dispute,
equipment failure or other cause, could have a material adverse effect on the
Company. The Company may also be materially adversely affected by fluctuations
in manufacturing yields.
Essential Manufacturing Materials. Certain of the raw materials used by the
- ---------------------------------
Company in the manufacture of its products are available from a limited number
of suppliers. For example, several types of the integrated circuit packages
purchased by AMD, as well as by the majority of other companies in the
semiconductor industry, are principally supplied by Japanese companies.
Shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. If AMD were unable to procure
certain of such materials, it would be required to reduce its manufacturing
operations which could have a material adverse effect on the Company. To date,
AMD has not experienced significant difficulty in obtaining the necessary raw
materials.
14
International Manufacturing. Nearly all product assembly and final testing of
- ---------------------------
the Company's products are performed at the Company's manufacturing facilities
in Penang, Malaysia; Bangkok, Thailand; and Singapore; or by subcontractors in
Asia. AMD has a 50-year land lease in Suzhou, China, to be used for the
construction and operation of an additional assembly and test facility. 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 AMD were
unable to assemble and test its products abroad, or if air transportation
between the United States and the Company's overseas facilities were disrupted,
there could be a material adverse effect on the Company.
OTHER RISK FACTORS
Debt Restrictions. The Credit Agreement and the Indenture related to the
- -----------------
Senior Secured Notes contain significant covenants that limit the Company's and
its subsidiaries' ability to engage in various transactions and require
satisfaction of specified financial performance criteria. In addition, the
occurrence of certain events (including, without limitation, 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 Credit Agreement and the Indenture
are substantial, and failure to comply with such limitations could have a
material adverse effect on the Company.
Dependence on Third Parties for Programmable Logic Software. Customers utilizing
- -----------------------------------------------------------
programmable logic devices must use special software packages, generally
provided by the suppliers of the programmable logic devices, to program these
devices. AMD provides its programmable logic device customers with software
which it licenses from third parties and is dependent upon third parties for
the software and continuing improvements in the quality of the software. No
assurance can be made that the Company will be able to maintain its existing
relationships with these third parties. An inability of AMD to continue to
obtain appropriate software and improvements from third parties or to develop
its own software internally could materially adversely affect the Company's
Vantis business, including the timing of new or improved product introductions,
which could have a material adverse effect on the Company.
Technological Change and Industry Standards. The market for the Company's
- -------------------------------------------
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. The establishment of industry standards is a function of
market acceptance. Currently accepted industry standards may change. The
Company's success depends substantially upon its ability, on a cost-effective
and timely basis, to continue to enhance its 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 its products, in market demand for products based on
a particular technology or on accepted industry standards could have a material
adverse effect on the Company. There can be no assurance that AMD will 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, or that any such new products will achieve market
acceptance.
Product Incompatibility. While AMD submits its products to rigorous internal and
- -----------------------
external testing, there can be no assurance that the Company's products will be
compatible with all industry-standard software and hardware. Any inability of
the Company's customers to achieve such compatibility or compatibility with
other software or hardware after the Company's products are shipped in volume
could have a material adverse effect on the Company. There can be no assurance
that AMD will be successful in correcting any such compatibility problems that
are discovered or that such corrections will be acceptable to customers or made
in a timely manner. In addition, the mere announcement of an incompatibility
problem relating to the Company's products could have a material adverse effect
on the Company.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Competition. The IC industry is intensely competitive and, historically, has
- -----------
experienced rapid technological advances in product and system technologies
together with substantial price reductions in maturing products. After a product
is introduced, prices normally decrease over time as production efficiency and
competition increase, and as a successive generation of products is 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 performance. Competition in the sale of ICs is
based on performance, product quality and reliability, price, compatibility with
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.
Fluctuations in Operating Results. The Company's operating results are subject
- ---------------------------------
to substantial quarterly and annual fluctuations due to a variety of factors,
including the effects of competition with Intel in the microprocessor industry,
competitive pricing pressures, anticipated decreases in unit average selling
prices of the Company's products, production capacity levels and fluctuations in
manufacturing yields, availability and cost of products from the Company's
suppliers, the gain or loss of significant customers, new product introductions
by AMD or its competitors, changes in the mix of products sold and in the mix of
sales by distribution channels, market acceptance of new or enhanced versions of
the Company's products, seasonal customer demand, the timing of significant
orders and the timing and extent of product development costs. In addition,
operating results could be adversely affected by general economic and other
conditions causing a downturn in the market for semiconductor devices, or
otherwise affecting the timing of customer orders or causing order cancellations
or rescheduling. The Company's customers may change delivery schedules or cancel
orders without significant penalty. Many of the factors listed above are
outside of the Company's control. These factors are difficult to forecast, and
these or other factors could materially adversely affect the Company's quarterly
or annual operating results.
Order Revision and Cancellation Policies. AMD manufactures and markets 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
are frequently subject to revision and cancellation without penalty. As a
result, AMD must commit resources to the production of products without having
received advance purchase commitments from customers. Any inability to sell
products to which it had devoted significant resources could have a material
adverse effect on the Company. Distributors typically maintain an inventory of
the Company's products. Pursuant to the Company's agreements with distributors,
AMD protects its distributors' inventory of the Company's 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 contain a provision for the return of the Company's products in the
event the agreement with the distributor is terminated. The price protection and
return rights AMD offers to its distributors may materially adversely affect the
Company.
Key Personnel. The Company's future success depends upon the continued service
- -------------
of numerous key engineering, manufacturing, sales and executive personnel. There
can be no assurance that AMD will be able to continue to attract and retain
qualified personnel necessary for the development and manufacture of its
products. Loss of the service of, or failure to recruit, key engineering design
personnel could be significantly detrimental to the Company's product
development programs or otherwise have a material adverse effect on the Company.
Product Defects. One or more of the Company's products may possibly be found to
- ---------------
be defective after AMD has already shipped such products in volume, requiring a
product replacement, recall, or a software fix which would cure such defect but
impede performance. Product returns could impose substantial costs on AMD and
have a material adverse effect on the Company.
16
Intellectual Property Rights; Potential Litigation. Although the Company
- --------------------------------------------------
attempts to protect its intellectual property rights through patents,
copyrights, trade secrets, trademarks and other measures, there can be no
assurance that the Company will be able to protect its technology or other
intellectual property adequately or that competitors will not be able to develop
similar technology independently. There can be no assurance that any patent
applications that the Company may file will be issued or that foreign
intellectual property laws will protect the Company's intellectual property
rights. There can be no assurance that any patent licensed by or issued to the
Company will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages to the Company.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate the Company's products or design around the
Company's patents and other rights.
From time to time, AMD has been notified that it may be infringing intellectual
property rights of others. If any such claims are asserted against the Company,
the Company may seek to obtain a license under the third party's intellectual
property rights. AMD could decide, in the alternative, to resort to litigation
to challenge such claims. Such challenges could be extremely expensive and time-
consuming and could materially adversely affect the Company. No assurance can be
given that all necessary licenses can be obtained on satisfactory terms, or that
litigation may always be avoided or successfully concluded.
Environmental Regulations. The failure 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 could result in fines being imposed on the Company,
suspension of production, alteration of the Company's manufacturing processes or
cessation of operations. Such regulations could require the Company to acquire
expensive remediation equipment or to incur other expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous
substances could subject the Company to future liabilities and could have a
material adverse effect on the Company.
International Sales. AMD derives a substantial portion of its revenues from its
- -------------------
sales subsidiaries located in Europe and Asia Pacific. The Company's
international sales operations entail political and economic risks, including
expropriation, currency controls, exchange rate fluctuations, changes in freight
rates and changes in rates for taxes and tariffs.
Domestic and International Economic Conditions. The Company's business is
- ----------------------------------------------
subject to general economic conditions, both in the United States and abroad. A
significant decline in economic conditions in any significant geographic area
could have a material adverse effect on the Company.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
- ----------------------------------------------------
history of its stock, AMD believes factors such as quarterly fluctuations in the
Company's financial results, announcements of new products by AMD or its
competitors and general conditions in the semiconductor industry have caused and
are likely to continue to cause the market price of AMD common stock to
fluctuate substantially. Technology company stocks in general have experienced
extreme price and volume fluctuations that often have been unrelated to the
operating performance of the companies. This market volatility may adversely
affect the market price of the Company's common stock and consequently limit the
Company's ability to raise capital. 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 AMD common
stock in any given period.
Earthquake Danger. The Company's corporate headquarters, a portion of its
- -----------------
manufacturing facilities, assembly and research and development activities and
certain other critical business operations are located near major earthquake
fault lines. The Company could be materially adversely affected in the event of
a major earthquake.
17
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
Three Years Ended December 29, 1996
(Thousands except per share amounts) 1996 1995 1994
-------------------------------------------
Net sales ................................................... $ 1,953,019 $ 2,468,379 $ 2,155,453
Expenses:
Cost of sales ............................................. 1,440,828 1,417,007 1,013,589
Research and development .................................. 400,703 416,521 295,326
Marketing, general and administrative ..................... 364,798 412,651 377,503
----------- ----------- -----------
2,206,329 2,246,179 1,686,418
----------- ----------- -----------
Operating income (loss) ..................................... (253,310) 222,200 469,035
Litigation settlement ....................................... -- -- (58,000)
Interest income and other, net .............................. 59,391 32,465 17,134
Interest expense ............................................ (14,837) (3,059) (4,410)
----------- ----------- -----------
Income (loss) before income taxes and equity in joint venture (208,756) 251,606 423,759
Provision (benefit) for income taxes ........................ (85,008) 70,206 142,232
----------- ----------- -----------
Income (loss) before equity in joint venture ................ (123,748) 181,400 281,527
Equity in net income (loss) of joint venture ................ 54,798 34,926 (10,585)
----------- ----------- -----------
Net income (loss) ........................................... (68,950) 216,326 270,942
Preferred stock dividends ................................... -- 10 10,350
----------- ----------- -----------
Net income (loss) applicable to common stockholders ......... $ (68,950) $ 216,316 $ 260,592
=========== =========== ===========
Net income (loss) per common share:
Primary ................................................... $ (0.51) $ 1.59 $ 2.06
=========== =========== ===========
Fully diluted ............................................. $ (0.51) $ 1.57 $ 2.02
=========== =========== ===========
Shares used in per share calculation:
Primary ................................................... 135,687 136,208 126,674
Fully diluted ............................................. 135,687 137,815 134,142
- ----------------------------------------------------------------------------------------------------------
See accompanying notes
18
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
DECEMBER 29, 1996, AND DECEMBER 31, 1995 1996 1995
(THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) ------------------------------
Assets
Current assets:
Cash and cash equivalents .................................................. $ 166,194 $ 126,316
Short-term investments ..................................................... 220,004 383,349
----------- -----------
Total cash, cash equivalents, and short-term investments ................. 386,198 509,665
Accounts receivable, net of allowance for doubtful accounts
of $9,809 in 1996, and $15,618 in 1995 ................................... 220,028 284,238
Inventories:
Raw materials ............................................................... 22,050 29,494
Work-in-process ............................................................. 83,853 68,827
Finished goods .............................................................. 48,107 57,665
----------- -----------
Total inventories ....................................................... 154,010 155,986
Deferred income taxes ....................................................... 140,850 147,489
Tax refund receivable ....................................................... 99,909 2,107
Prepaid expenses and other current assets ................................... 28,082 38,457
----------- -----------
Total current assets .................................................... 1,029,077 1,137,942
Property, plant, and equipment:
Land ........................................................................ 32,244 28,851
Buildings and leasehold improvements ........................................ 938,573 893,646
Equipment ................................................................... 1,963,808 1,843,662
Construction in progress .................................................... 392,143 180,742
----------- -----------
Total property, plant, and equipment .................................... 3,326,768 2,946,901
Accumulated depreciation and amortization ................................... (1,539,366) (1,305,267)
----------- -----------
Property, plant, and equipment, net ......................................... 1,787,402 1,641,634
Investment in joint venture..................................................... 197,205 176,821
Other assets.................................................................... 131,599 122,070
----------- -----------
$ 3,145,283 $ 3,078,467
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks ...................................................... $ 14,692 $ 26,770
Accounts payable ............................................................ 224,139 241,916
Accrued compensation and benefits ........................................... 66,745 106,347
Accrued liabilities ......................................................... 103,436 103,404
Income tax payable .......................................................... 51,324 56,297
Deferred income on shipments to distributors ................................ 95,466 100,057
Current portion of long-term debt and capital lease obligations ............. 27,671 41,642
----------- -----------
Total current liabilities ............................................... 583,473 676,433
Deferred income taxes........................................................... 95,102 84,607
Long-term debt and capital lease obligations, less current portion.............. 444,830 214,965
Commitments and contingencies................................................... - -
Stockholders' equity:
Capital stock:
Common stock, par value $.01; 250,000,000 shares authorized;
137,580,296 shares issued and outstanding in 1996,
and 132,182,019 in 1995 ............................................... 1,380 1,050
Capital in excess of par value ................................................. 957,226 908,989
Retained earnings .............................................................. 1,063,272 1,192,423
----------- -----------
Total stockholders' equity .................................................. 2,021,878 2,102,462
----------- -----------
$ 3,145,283 $ 3,078,467
=========== ===========
See accompanying notes
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Years Ended December 29, 1996
(Thousands)
Preferred Stock Common Stock
------------------- --------- -------
Number Number Capital in Total
of of Excess of Retained Stockholders'
Shares Amount Shares Amount Par Value Earnings Equity
------- -------- ------- -------- ----------- -------- -------------
December 26, 1993 ....................... 16,422 $ 74,844 94,300 $1,236 $ 620,266 $ 655,460 $ 1,351,806
Issuance of common stock ................ -- -- 4,676 316 65,170 -- 65,486
Issuance of shares:
Employee stock plans ................. -- -- 1,970 19 16,911 -- 16,930
Fujitsu Limited ...................... -- -- 1,000 10 22,625 -- 22,635
Compensation recognized under
employee stock plans ................. -- -- -- -- 1,971 -- 1,971
Conversion of preferred stock to
common stock ......................... (16,078) (74,810) 19,973 3 106,199 -- 31,392
Income tax benefits realized from
employee stock option exercises ...... -- -- -- -- 37,433 -- 37,433
Preferred stock dividends ............... -- -- -- -- -- (10,350) (10,350)
Reincorporation into a
Delaware Corporation ................. -- -- -- (625) 625 -- --
Net income .............................. -- -- -- -- -- 270,942 270,942
Net change in unrealized gain/loss from
available-for-sale investments ....... -- -- -- -- -- 9,109 9,109
------- --------- ------- -------- ----------- ---------- -----------
December 25, 1994 ....................... 344 34 121,919 959 871,200 925,161 1,797,354
Changes in stockholders' equity of
NexGen in the six months ended
June 30, 1995 ........................ 18,161 93,548 (24,530) 352 (171,994) 23,803 (54,291)
Issuance of NexGen preferred stock ...... 1,376 12,653 -- -- -- -- 12,653
Conversion of preferred stock to
common stock - NexGen ................ (19,537) (106,201) 19,970 2 106,199 -- --
Issuance of NexGen common stock
in connection with Initial
Public Offering ...................... -- -- 4,542 271 65,340 -- 65,611
NexGen warrants exercised ............... -- -- 1,178 -- -- -- --
Issuance of shares for
employee stock plans ................. -- -- 2,283 22 23,518 -- 23,540
Compensation recognized under
employee stock plans ................. -- -- -- -- 2,483 -- 2,483
Conversion of preferred stock to
common stock ......................... (344) (34) 6,853 69 (2,536) -- (2,501)
Reincorporation into a Delaware
Corporation .......................... -- -- (33) (625) 625 -- --
Income tax benefits realized from
employee stock option exercises ...... -- -- -- -- 15,189 -- 15,189
Preferred stock dividends ............... -- -- -- -- -- (10) (10)
Redemption of stockholder rights ........ -- -- -- -- (1,035) -- (1,035)
Net income .............................. -- -- -- -- -- 216,326 216,326
Net change in unrealized gain/loss from
available-for-sale investments and
translation adjustment ............... -- -- -- -- -- 27,143 27,143
------- --------- ------- -------- ----------- ---------- -----------
December 31, 1995 ....................... -- -- 132,182 1,050 909,989 1,192,423 2,102,462
Issuance of shares:
Employee stock plans ................. -- -- 3,838 315 27,433 -- 27,748
Fujitsu Limited ...................... -- -- 1,000 10 16,525 -- 16,535
Compensation recognized under
employee stock plans ................. -- -- -- -- 24 -- 24
Warrants exercised ...................... -- -- 560 5 2,755 -- 2,760
Income tax benefits realized from
employee stock option exercises ...... -- -- -- -- 1,500 -- 1,500
Net loss ................................ -- -- -- -- -- (68,950) (68,950)
Net change in unrealized gain/loss from
available-for-sale investments and
translation adjustment ............... -- -- -- -- -- (60,201) (60,201)
------- --------- ------- ------ ---------- ---------- -----------
December 29, 1996 ....................... -- $ -- 137,580 $1,380 $ 957,226 $1,063,272 $ 2,021,878
======= ========= ======= ====== ========== ========== ===========
See accompanying notes
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Three Years Ended December 29, 1996
(Thousands) 1996 1995 1994
------------------------------------------------
Cash flows from operating activities:
Net income (loss) ......................................................... $ (68,950) $ 216,326 $ 270,942
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .......................................... 332,640 264,675 217,665
Accrual for litigation settlement ...................................... -- -- 58,000
Net loss on sale of property, plant, and equipment ..................... 11,953 2,152 276
Write-down of property, plant, and equipment ........................... 1,081 611 2,230
Net gain realized on sale of available-for-sale securities ............. (41,022) (2,707) --
Compensation recognized under employee stock plans ..................... 24 2,483 1,971
Undistributed (income) loss of joint venture ........................... (54,798) (34,926) 10,585
Changes in operating assets and liabilities:
Net (increase) decrease in receivables, inventories,
prepaid expenses, and other assets .............................. 28,096 19,548 (128,914)
Payment of litigation settlement .................................... -- (58,000) --
Net (increase) decrease in deferred income taxes .................... 17,134 (925) (32,543)
Increase (decrease) in tax refund receivable and income ............. (110,058) 11,772 61,910
tax payable
Net increase (decrease) in payables and accrued liabilities ......... (42,863) 124,058 63,737
----------- ----------- -----------
Net cash provided by operating activities .................................... 73,237 545,067 525,859
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant, and equipment ................................ (485,018) (625,900) (552,271)
Proceeds from sale of property, plant, and equipment ...................... 2,489 4,834 2,058
Purchase of available-for-sale securities ................................. (633,476) (817,888) (56,328)
Proceeds from sale of available-for-sale securities ....................... 840,492 756,373 4,849
Purchase of held-to-maturity debt securities .............................. -- (648,012) (1,245,167)
Proceeds from maturities of held-to-maturity debt securities .............. -- 642,229 1,416,431
Investment in joint venture ............................................... -- (18,019) (139,175)
----------- ----------- -----------
Net cash used in investing activities ........................................ (275,513) (706,383) (569,603)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings .................................................. 447,877 246,345 42,025
Payments on debt and capital lease obligations ............................ (252,766) (142,937) (70,288)
Proceeds from issuance of stock ........................................... 47,043 101,804 136,443
Expenses for conversion of preferred stock and
redemption of stockholder rights ....................................... -- (3,536) --
Payments of preferred stock dividends ..................................... -- (10) (10,350)
----------- ----------- -----------
Net cash provided by financing activities .................................... 242,154 201,666 97,830
----------- ----------- -----------
Net increase in cash and cash equivalents .................................... 39,878 40,350 54,086
Cash and cash equivalents at beginning of year ............................... 126,316 85,966 63,911
----------- ----------- -----------
Cash and cash equivalents at end of year ..................................... $ 166,194 $ 126,316 $ 117,997
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized) .................................. $ -- $ 2,541 $ 4,125
=========== =========== ===========
Income taxes ........................................................... $ 375 $ 60,329 $ 111,704
=========== =========== ===========
Non-cash financing activities:
Equipment capital leases ............................................... $ 8,705 $ 24,422 $ 34,202
=========== =========== ===========
Conversion of preferred stock to common stock .......................... $ -- $ 270,328 $ 106,201
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1996, December 31, 1995 and December 25, 1994
NOTE 1. NATURE OF OPERATIONS
AMD is a semiconductor manufacturer with manufacturing facilities in the U.S.
and Asia and sales offices throughout the world. 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. BUSINESS COMBINATION
On January 17, 1996, the Company acquired NexGen, Inc. (NexGen) in a tax-free
reorganization in which NexGen was merged directly into the Company. At the date
of the merger, the Company reserved approximately 33.6 million total shares to
be exchanged, which represented eight-tenths (0.8) of a share of the common
stock of AMD for each share of the common stock of NexGen outstanding or subject
to an assumed warrant or option. The merger has been accounted for under the
pooling-of-interests method. The Consolidated Financial Statements have been
prepared to give retroactive effect to the merger of NexGen with and into AMD on
January 17, 1996.
Prior to its merger with AMD, NexGen reported on a fiscal year ending June 30.
In the accompanying Consolidated Financial Statements and the Notes thereto,
NexGen, Inc.'s financial position and operating results as of and for the year
ended June 30, 1995 have been combined with the Company's financial position and
operating results as of and for the year ended December 25, 1994. NexGen, Inc.'s
financial position and operating results for 1995, which were restated to a
December 31, 1995 year-end, have been combined with the Company's financial
position and operating results as of and for the year ended December 31, 1995.
Accordingly, NexGen, Inc.'s operating results for the six months ended June 30,
1995 were duplicated in each of the years ended December 25, 1994 and December
31, 1995. NexGen, Inc.'s revenues and net loss for that six-month period were
approximately $20 million and $34 million, respectively. Consolidated
stockholders' equity was reduced by approximately $54 million, which represents
NexGen, Inc.'s net stockholders' equity activity for the six months ended June
30, 1995 in order to eliminate the duplication of stockholders' equity activity
during that period. As a result of the combination of NexGen, Inc.'s financial
position as of June 30, 1995 with the financial position of AMD as of December
25, 1994, the beginning cash and cash equivalents balance in 1995 in the
accompanying 1996 Consolidated Statements of Cash Flows does not equal the
December 25, 1994 cash and cash equivalents balance.
A reconciliation of net sales, net income (loss), and net income per common
share of the Company, as previously reported, NexGen and combined, including the
NexGen income tax benefit, is as follows:
(Thousands except per share amounts) 1995 1994
---------- ----------
Net Sales:
AMD, as previously reported $2,429,724 $2,134,659
NexGen 38,655 20,794
---------- ----------
Combined $2,468,379 $2,155,453
========== ==========
Net Income (Loss):
AMD, as previously reported $ 300,521 $ 305,266
NexGen (126,727) (45,795)
NexGen income tax benefit 42,532 11,471
---------- ----------
Combined $ 216,326 $ 270,942
========== ==========
Net Income Per Common Share (Primary):
AMD, as previously reported $ 2.85 $ 3.02
========== ==========
Combined $ 1.59 $ 2.06
========== ==========
Net Income Per Common Share (Fully Diluted):
AMD, as previously reported $ 2.81 $ 2.92
========== ==========
Combined $ 1.57 $ 2.02
========== ==========
22
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December, which resulted in a 52-week year ended December 29, 1996. This
compares with a 53-week fiscal year for 1995 and a 52-week fiscal year for 1994,
which ended on December 31 and 25, respectively.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries. Upon consolidation, all significant intercompany accounts and
transactions are eliminated. Also included in the financial statements of the
Company, under the equity method of accounting, is the Company's 49.95 percent
investment in Fujitsu AMD Semiconductor Limited (FASL).
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency for the Company's wholly owned
foreign subsidiaries. Translation adjustments, resulting from the process of
translating foreign currency financial statements into U.S. dollars, are
included in operations. The functional currency of the Company's unconsolidated
joint venture is the Japanese yen. The translation adjustment relating to the
translation of these statements was approximately $28 million and $6 million at
December 29, 1996 and December 31, 1995, respectively, and is included in
stockholders' equity.
CASH EQUIVALENTS
Cash equivalents consist of financial instruments which are readily convertible
to cash and have original maturities of three months or less at the time of
acquisition.
INVESTMENTS
The Company classifies its marketable debt and equity securities into held-to-
maturity and available-for-sale categories in accordance with the provisions of
the Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with the FASB staff Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company chose to reclassify, as of December 31, 1995, all cash
equivalents and short-term investments that were classified as held-to-maturity
at that time from held-to-maturity to available-for-sale. Securities classified
as available-for-sale are reported at fair market value with the related
unrealized gains and losses included in retained earnings. Realized gains and
losses and declines in value of securities judged to be other than temporary are
included in interest income and other, net. Interest and dividends on all
securities are included in interest income and other, net.
Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consist of money market auction
preferred stocks and debt securities such as commercial paper, time deposits,
certificates of deposit, bankers' acceptances, and marketable direct obligations
of the United States Treasury.
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign exchange forward contracts are used to hedge the Company's net monetary
asset positions in its foreign subsidiaries and the Company's liabilities for
products purchased from FASL. Realized gains and losses from these hedges are
included in operations. Premiums and discounts, if any, are amortized over the
life of the contract and included in operations.
INTEREST RATE SWAPS
The Company enters into interest rate swaps primarily to reduce its interest
rate exposure by changing a portion of the Company's interest rate exposure from
a floating rate to a fixed rate basis. The differential between fixed and
floating rates to be paid or received is accrued and recognized as an adjustment
to interest expense. Accordingly, the related amount payable to or receivable
from counterparties is included in other current assets or accrued liabilities.
INVENTORIES
Inventories are stated principally at standard cost adjusted to approximate the
lower of cost (first-in, first-out method) or market (net realizable value).
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. Depreciation and amortization
are provided principally on the straight-line basis over the estimated useful
lives of the assets for financial reporting purposes and on accelerated methods
for tax purposes. Estimated useful lives for financial reporting purposes are as
follows: machinery and equipment 3 to 5 years; buildings up to 26 years; and
leasehold improvements are the shorter of the remaining terms of the leases or
the estimated economic useful lives of the improvements.
Effective January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. Adoption of SFAS 121 has not had a material impact on the Company's
financial position or results of operations.
DEFERRED INCOME ON SHIPMENTS TO DISTRIBUTORS
A portion of sales is made to distributors under terms allowing certain rights
of return and price protection on unsold merchandise held by the distributors.
Pursuant to the Company's agreements with distributors, AMD protects its
distributors' inventory of the Company's 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 contain a provision for the return of the Company's products in the
event the agreement with the distributor is terminated. Accordingly, recognition
of sales to distributors and related gross profits are deferred until the
merchandise is resold by the distributors.
ADVERTISING EXPENSES
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for 1996, 1995 and 1994 was approximately
$44 million, $44 million and $32 million, respectively.
NET INCOME (LOSS) PER COMMON SHARE
Primary net income per common share is based upon weighted-average common and
dilutive common equivalent shares outstanding using the treasury stock method.
Dilutive common equivalent shares include stock options, warrants, and
restricted stock. Fully diluted net income per common share is computed using
the weighted-average common and dilutive common equivalent shares outstanding,
plus other dilutive shares outstanding which are not common equivalent shares.
Other dilutive shares which are not common equivalent shares include convertible
preferred stock. Primary net loss per common share excludes common equivalent
shares as their effect on the net loss per share would be anti-dilutive. All
share information has been adjusted on a retroactive basis herein to give effect
to the merger with NexGen and the conversion of NexGen shares on a 0.8 to one
share of AMD common stock.
EMPLOYEE STOCK PLANS
The Company accounts for its stock option plans and its employee stock purchase
plan in accordance with provisions of the Accounting Principles Board's Opinion
No. 25 (APB 25), "Accounting For Stock Issued to Employees." In 1995, the
Financial Accounting Standards Board released the Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. As allowed under SFAS 123, the
Company continues to account for its employee stock plans in accordance with the
provisions of APB 25. See Note 12.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
YEAR-END ADJUSTMENTS (UNAUDITED)
The Company made certain year-end adjustments in 1995, resulting from changes in
estimates related to the Nx586 product which was developed by NexGen. These
adjustments were material to the results of the fourth quarter. These
adjustments, related to accounts receivable and inventory, were charged
primarily to net sales and cost of sales and reduced 1995 operating income by
approximately $52 million. These adjustments had no impact on the Company's
operating results in 1996.
FINANCIAL PRESENTATION.
Certain prior year amounts on the Consolidated Financial Statements have been
reclassified to conform to the 1996 presentation.
24
NOTE 4. FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
As part of the Company's asset and liability management, the Company enters into
various types of transactions that involve financial instruments with off-
balance-sheet risk. These instruments are entered into in order to manage
financial market risk, including interest rate and foreign exchange risk. The
notional values, carrying amounts and fair values are tabled below.
Foreign exchange forward contracts
- ----------------------------------
The Company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of its net monetary asset positions in its foreign
subsidiaries and liabilities for products purchased from FASL. The hedging
transactions in 1996 were denominated in lira, yen, French franc, deutsche mark
and pound sterling. The maturities of these contracts are generally less than
six months.
Interest rate swaps
- -------------------
Approximately $150 million of interest rate swaps matured in 1996 when the
Company repaid its $150 million four-year term loan. Additionally, during 1996
the Company engaged in interest rate swaps primarily to reduce its interest rate
exposure on a building lease obligation by changing a portion of the Company's
interest rate obligation from a floating rate to a fixed rate basis without
exchanges of the underlying notional amounts. The fixed interest rates are based
on one to five year swap rates, and the floating interest rates are based on
three or six months LIBOR. These remaining interest rate swaps with a notional
amount of $40 million will mature in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The estimates of fair value were obtained using prevailing financial market
information as of December 29, 1996. In certain instances where judgment is
required in estimating fair value, price quotes were obtained from certain of
the Company's counterparty financial institutions.
(Thousands) 1996 1995
-------------------------------- -------------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------------------------------- -------------------------------
Interest rate instruments:
Swaps $40,000 $(1,011) $(437) $190,000 $(1,186) $(1,694)
Foreign exchange instruments:
Foreign exchange forward contracts 25,340 138 121 36,670 (192) (102)
-------------------------------- --------------------------------
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities included in cash and
cash equivalents and short-term investments as of December 29, 1996 and December
31, 1995:
(Thousands) 1996 1995
-------- --------
Certificates of deposit $ -- $ 15,002
Treasury notes 2,017 10,437
Federal agency notes 32,698 14,065
Security repurchase agreements 12,000 53,370
Commercial paper 42,551 14,914
Other debt securities 458 434
-------- --------
Total cash equivalents $ 89,724 $108,222
======== ========
Certificates of deposit $ 48,112 $ 70,551
Municipal notes and bonds -- 52,256
Corporate notes 18,954 37,898
Treasury notes 52,744 60,989
Commercial paper 95,194 46,656
Money market auction preferred stocks 5,000 114,999
-------- --------
Total short-term investments $220,004 $383,349
======== ========
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with provisions in that Special Report,
the Company chose to reclassify cash equivalents and short-term investments from
held-to-maturity to available-for-sale. At the date of the transfer, the
amortized cost of those securities was approximately $481 million. Since the
securities transferred on December 31, 1995 were short-term in nature, changes
in market interest rates did not have a significant impact on the fair value of
these securities. The net unrealized gains on these securities at December
29,1996 and December 31,1995 were immaterial.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The available-for-sale equity securities that the Company held, included in
other assets, had a cost and fair value of approximately $15 million and $23
million, respectively, as of December 29, 1996, and a cost and fair value of
approximately $15 million and $75 million, respectively, as of December 31,
1995. At December 29, 1996, the total net unrealized gain on these equity
securities, net of tax, was approximately $5 million. During 1996, pre-tax gains
of $41 million were recognized, and the unrealized gain decreased by
approximately $14 million, net of tax, from December 31, 1995. The entire, net
of tax, unrealized gain is included in retained earnings.
As of December 29, 1996, the Company did not own any securities classified as
trading.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The carrying value of short-term debt approximates fair value due to its short-
term maturity. The fair value of long-term debt was estimated using discounted
cash flow analysis based on estimated interest rates for similar types of
borrowing arrangements.
The carrying amounts and estimated fair values of the Company's other financial
instruments are as follows:
(Thousands) 1996 1995
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- --------------------
Short-term debt:
Notes payable $ 14,692 $ 14,692 $ 26,770 $ 26,770
Long-term debt
(excluding capital leases) 413,870 451,293 179,301 180,920
--------------------- --------------------
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. Investments in time deposits
and certificates of deposit are acquired from banks having combined capital,
surplus, and undistributed profits of not less than $200 million. Investments in
commercial paper and money market auction preferred stocks of industrial firms
and financial institutions are rated A1, P1 or better, investments in tax-exempt
securities including municipal notes and bonds are rated AA, Aa or better, and
investments in repurchase agreements must have securities of the type and
quality listed above as collateral.
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade credit risk. The Company controls credit
risk through credit approvals, credit limits, and monitoring procedures. The
Company performs in-depth credit evaluations of all new customers and requires
letters of credit, bank guarantees and advance payments, if deemed necessary.
Bad debt expenses have not been material.
The counterparties to the agreements relating to the Company's foreign exchange
and interest rate instruments consist of a number of major, high credit quality,
international financial institutions. The Company does not believe that there is
significant risk of nonperformance by these counterparties because the Company
monitors 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 obligations of
the Company to the counterparties.
NOTE 6. OTHER RISKS
PRODUCTS
Flash memory devices contributed a significant portion of the Company's revenues
in 1996. The Company expects that its ability to maintain or expand its total
current levels of revenues in the future will depend upon, among other things,
its success in developing and marketing in a timely manner its future
generations of K86 RISC SUPERSCALAR microprocessor products, and future
generations of Flash memory devices.
26
MARKETS
The markets for the Company's products are characterized by rapid technological
developments, evolving industry standards, changes in customer requirements,
frequent new product introductions and enhancements, and short product life
cycles. The market for microprocessors is primarily dependent upon the market
for PCs, and the market for Flash memory devices is primarily dependent upon the
market for communications devices. From time to time, the PC industry has
experienced significant downturns, often in connection with, or in anticipation
of, declines in general economic conditions. These downturns have been
characterized by diminished product demand, production overcapacity, and
resultant accelerated erosion of average selling prices. The Company's business
could be materially and adversely affected by industry-wide fluctuations in the
PC marketplace in the future.
INVENTORIES
Given the volatility of the market, the Company makes inventory provisions for
potentially excess and obsolete inventory based on backlog and forecasted
demand. However, such backlog demand is subject to revisions, cancellations, and
rescheduling. Actual demand will inevitably differ from such anticipated demand,
and such differences may have a material effect on the financial statements.
CUSTOMERS
The Company markets and sells its products primarily to a broad base of
customers comprised of distributors and OEMs of computation and communication
equipment. One of the Company's distributors, Arrow Electronics, Inc., accounted
for approximately 13 percent of 1996 net sales. No other distributor or OEM
customer accounted for 10 percent or more of net sales in 1996.
INTERNATIONAL OPERATIONS
The Company derives more than half of its revenues from international sales.
However, only a portion of the Company's international sales were denominated in
foreign currencies. Further, the Company does not have any sales denominated in
the local currencies of those countries which have highly inflationary
economies.
Nearly all product assembly and final testing of the Company's products are
performed at the Company's manufacturing facilities in Penang, Malaysia;
Bangkok, Thailand; and Singapore; or by subcontractors in Asia. Wafer
fabrication of certain products is performed at foundries in Asia. FASL wafer
fabrication facilities are located in Aizu-Wakamatsu, Japan. Foreign
manufacturing entails political and economic risks, including political
instability, expropriation, currency controls and fluctuations, changes in
freight and interest rates, and loss or modification of exemptions for taxes and
tariffs. For example, if AMD were unable to assemble and test its products
abroad, or if air transportation between the United States and the Company's
overseas facilities were disrupted, there could be a material adverse effect on
the Company's operations.
MATERIALS
Certain of the raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. For example, several
types of the integrated circuit packages purchased by AMD, as well as by the
majority of other companies in the semiconductor industry, are principally
supplied by Japanese companies. Shortages could occur in various essential
materials due to interruption of supply or increased demand in the industry. If
AMD were unable to procure certain of such materials, it would be required to
reduce its manufacturing operations, which could have a material adverse effect
on the Company. To date, AMD has not experienced significant difficulty in
obtaining the necessary raw materials.
NOTE 7. WARRANTS
On May 24, 1995, the effective date of NexGen, Inc.'s initial public offering,
all previously issued preferred series warrants were converted into warrants to
purchase common stock. The following summarizes the warrants outstanding as of
December 29, 1996:
Warrants Warrant Price
-------- --------------
Warrants issued in connection with Promissory
Notes and Preferred Stock Offering, expiring
on January 17, 20000 93,280 $9.38
Warrants issued in connection with consulting
services, expiring on July 15, 1997 331,808 5.00
Warrants issued to sales agent, expiring
on August 17, 1998 14,140 6.25
------- -------------
Total warrants issued and outstanding
as of December 29, 1996 439,228 $5.00 - $9.38
======= =============
For the year ended December 29, 1996 warrants previously issued to purchase
136,944 shares of common stock were exercised on a cashless basis for 79,849
shares of common stock. All warrants are currently exercisable at December 29,
1996.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Provision (benefit) for income taxes consists of:
(Thousands) 1996 1995 1994
--------- ------- --------
Current:
U.S. Federal $(102,213) $58,683 $154,448
U.S. State and Local (1,026) 1,855 13,001
Foreign National and Local 1,097 10,594 7,350
Deferred:
U.S. Federal 16,280 1,295 (29,733)
U.S. State and Local 854 (3,167) (2,820)
Foreign National and Local -- 946 (14)
--------- ------- --------
Provision (benefit) for income taxes $ (85,008) $70,206 $142,232
========= ======= ========
Tax benefits resulting from the exercise of nonqualified stock options and the
disqualifying disposition of shares acquired under the Company's incentive stock
option and stock purchase plans reduced taxes currently payable as shown above
by approximately $2 million, $15 million and $37 million in 1996, 1995 and 1994,
respectively. Such benefits were credited to capital in excess of par value when
realized.
Under SFAS No. 109, deferred income taxes reflect the net tax effects of tax
carryforwards and temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 29, 1996 and December 31, 1995 are as follows:
(Thousands) 1996 1995
-----------------------
Deferred tax assets:
Net operating loss carryovers
subject to limitation $ 50,225 $ 62,796
Deferred distributor income 45,594 40,583
Inventory reserves 30,145 29,665
Accrued expenses not currently deductible 17,297 35,639
Federal and state tax credit carryovers 57,959 6,249
Other 61,957 49,850
--------- ---------
Total deferred tax assets 263,177 224,782
Less: valuation allowance (22,062) (33,386)
--------- ---------
Net deferred tax assets 241,115 191,396
--------- ---------
Deferred tax liabilities:
Depreciation (154,217) (109,141)
Other (41,150) (19,373)
--------- ---------
Total deferred tax liabilities (195,367) (128,514)
--------- ---------
Net deferred tax assets $ 45,748 $ 62,882
========= =========
Realization of the Company's net deferred tax assets is dependent on future
taxable income. The Company believes that it is more likely than not that such
assets will be realized, however, ultimate realization could be negatively
impacted by market conditions and other variables not known or anticipated at
this time.
Pretax income from foreign operations was approximately $33 million in 1996, $61
million in 1995 and $46 million in 1994.
The net operating loss carryovers subject to limitation described above are the
result of certain ownership changes as defined in Section 382 of the Internal
Revenue Code. Availability of these carryovers generally occurs ratably from
1996 through 2001. The federal and state tax credit carryovers expire beginning
in the year 2003 through 2011.
28
The following is a reconciliation between statutory federal income taxes and the
total provision (benefit) for income taxes:
1996 1995 1994
-----------------------------------------------------------------
(Thousands except percent) Tax Rate Tax Rate Tax Rate
-----------------------------------------------------------------
Statutory federal
income tax provision (benefit) $(73,065) (35.0)% $88,062 35.0% $148,316 35.0%
State taxes net of federal benefit (520) (0.2) 216 0.1 6,601 1.6
Tax exempt Foreign Sales
Corporation income (2,283) (1.1) (6,848) (2.7) (8,955) (2.1)
Foreign income at other than
U.S. rates (9,782) (4.7) (11,503) (4.6) (9,633) (2.3)
Other 642 0.3 279 0.1 5,903 1.4
-------- ----- ------- ---- -------- ----
$(85,008) (40.7)% $70,206 27.9% $142,232 33.6%
======== ===== ======= ==== ======== ====
No provision has been made for income taxes on approximately $296 million of
cumulative undistributed earnings of certain foreign subsidiaries because it is
the Company's intention to permanently invest such earnings. If such earnings
were distributed, additional taxes of approximately $102 million would accrue.
The Company's assembly and test plant in Thailand is operated under a tax
holiday which expires in 1998. The net impact of this tax holiday was a decrease
in the net loss of approximately $3 million ($0.02 per share) in 1996.
NOTE 9. DEBT
Significant elements of uncommitted, unsecured revolving lines of credit are:
(Thousands except percent) 1996 1995
-------------------------
Total lines of credit $234,501 $345,801
Portion of lines of credit available to
foreign subsidiaries 84,501 95,801
Amounts outstanding at year-end:
Short-term 14,692 26,770
Short-term borrowings:
Average daily borrowings 15,389 29,666
Maximum amount outstanding at any month-end 22,971 36,105
Weighted-average interest rate 2.36% 4.19%
Average interest rate on amounts outstanding
at year-end 1.47% 4.41%
-------------------------
Interest on foreign and short-term domestic borrowings is negotiated at the time
of the borrowing.
Information with respect to the Company's long-term debt and capital lease
obligations at year-end is:
(Thousands) 1996 1995
---------------------
11% Senior Secured Notes with interest payable semiannually
and principal on August 1, 2003 $400,000 $ --
Term loan with variable interest paid in August, 1996 -- 150,000
10%-11% Convertible notes paid in March, 1996 -- 1,774
Promissory notes with principal and 6.88% interest payable
annually through January, 2000, secured by a partnership interest 8,489 10,276
12% Note paid in May, 1996 -- 10,000
Mortgage with principal and 9.88% interest payable in monthly
installments through April, 2007 1,930 2,167
Obligations under capital leases 58,631 77,306
Obligations secured by equipment 3,388 4,990
Other 63 94
-------- --------
472,501 256,607
Less: current portion (27,671) (41,642)
-------- --------
Long-term debt and capital lease obligations, less
current portion $444,830 $214,965
======== ========
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August, 1996 the Company sold $400 million of Senior Secured Notes due
August 1, 2003 under its shelf registration declared effective by the Securities
and Exchange Commission on May 17, 1994. Due to the sale of the Senior Secured
Notes, the Company fully utilized this shelf registration. Interest on the
Senior Secured Notes accrues at the rate of 11 percent per annum and is payable
semiannually in arrears on February 1 and August 1 of each year, commencing
February 1, 1997. The Senior Secured Notes are secured by substantially all of
the assets of Fab 25 and its ancillary facilities, and are redeemable at the
Company's option after August 1, 2001.
On July 19, 1996, the Company entered into a syndicated bank loan agreement (the
Credit Agreement) which provides for a new $400 million term loan and revolving
credit facility which became available concurrently with the sale of the Senior
Secured Notes. The Credit Agreement replaced the Company's unsecured and unused
$250 million line of credit and its unsecured $150 million four-year term loan.
The Credit Agreement provides for a $150 million three-year secured revolving
line of credit (which can be extended for one additional year, subject to
approval of the lending banks) and a $250 million four-year secured term loan
available to the Company for a period of six months after the closing of the
sale of Senior Secured Notes and which the Company utilized fully in January,
1997.
For each of the next five years and beyond, long-term debt and capital lease
obligations are:
Long-term
Debt
(Principal Capital
(Thousands) only) Leases
-----------------------
1997 $ 3,802 $28,085
1998 4,033 23,370
1999 2,326 8,911
2000 2,493 2,511
2001 167 --
Beyond 2001 401,049 --
-------- -------
Total 413,870 62,877
Less: amount representing interest -- 4,246
-------- -------
Total at present value $413,870 $58,631
======== =======
Obligations under the lease agreements are collateralized by the assets leased.
Total assets leased were approximately $134 million and $142 million at December
29, 1996 and December 31, 1995, respectively. Accumulated amortization of these
leased assets was approximately $72 million and $71 million at December 29, 1996
and December 31, 1995, respectively.
The above debt agreements contain provisions regarding limits on the Company's
and its subsidiaries' ability to engage in various transactions and require
satisfaction of specified financial performance criteria. At December 29, 1996,
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.
NOTE 10. INTEREST EXPENSE & INTEREST INCOME AND OTHER, NET
INTEREST EXPENSE
1996 1995 1994
----------------------------------
Interest expense $ 32,507 $ 21,102 $12,704
Interest capitalized (17,670) (18,043) (8,294)
-------- -------- -------
$ 14,837 $ 3,059 $ 4,410
======== ======== =======
In 1996, interest expense primarily consisted of interest expense incurred on
the Company's Senior Secured Notes sold in August, 1996 and interest
capitalized primarily related to equipment installation in Fab 25. In 1995,
interest expense primarily consisted of interest payments on the $150 million
four-year term loan the Company entered into on January 5, 1995, and interest
capitalized primarily related to the construction of Fab 25.
INTEREST INCOME AND OTHER, NET
(Thousands) 1996 1995 1994
---------------------------------
Interest income $19,564 $29,518 $23,331
Other income (loss) 39,827 2,947 (6,197)
------- ------- -------
$59,391 $32,465 $17,134
======= ======= =======
30
In 1996 and 1995, other income primarily consisted of gains resulting from the
sales of equity investments. In 1994, other loss primarily consisted of the $33
million settlement cost related to the class action lawsuits and stockholders'
derivative action offset by an $18 million gain resulting from an award of
damages in the arbitration proceedings with Intel. Also included in other income
(loss) for all years presented is the net gain (loss) on the sale of assets.
NOTE 11. FOREIGN AND DOMESTIC OPERATIONS
AMD manufactures and markets standard lines of products. The Company's products
include a wide variety of industry-standard ICs which are used in many diverse
product applications such as telecommunications equipment, data and network
communications equipment, consumer electronics, PCs and workstations.
Operations outside the United States include both manufacturing and sales.
Manufacturing subsidiaries are located in Malaysia, Thailand and Singapore.
Sales subsidiaries are in Europe and Asia Pacific.
The following is a summary of operations by entities within geographic areas for
the three years ended December 29, 1996:
(Thousands) 1996 1995 1994
----------------------------------------
Sales to unaffiliated customers:
North America $1,418,871 $1,780,240 $1,544,844
Europe 378,136 491,293 483,632
Asia Pacific 156,012 196,846 126,977
---------- ---------- ----------
$1,953,019 $2,468,379 $2,155,453
========== ========== ==========
Transfers between geographic areas
(eliminated in consolidation):
North America $ 578,581 $ 743,117 $ 563,303
Asia Pacific 383,684 396,158 323,050
---------- ---------- ----------
$ 962,265 $1,139,275 $ 886,353
========== ========== ==========
Operating income (loss):
North America $ (289,324) $ 164,549 $ 423,027
Europe (3,905) 18,922 15,860
Asia Pacific 39,919 38,729 30,148
---------- ---------- ----------
$ (253,310) $ 222,200 $ 469,035
========== ========== ==========
Identifiable assets:
North America $2,644,368 $2,636,675 $2,170,099
Europe 154,288 85,664 120,070
Asia Pacific 514,880 463,530 361,144
Eliminations (168,253) (107,402) (125,592)
---------- ---------- ----------
$3,145,283 $3,078,467 $2,525,721
========== ========== ==========
U.S. export sales:
Asia Pacific $ 344,050 $ 485,625 $ 436,120
Europe 157,647 206,328 126,752
---------- ---------- ----------
$ 501,697 $ 691,953 $ 562,872
========== ========== ==========
Sales to unaffiliated customers are based on the location of the Company's
subsidiary. Transfers between geographic areas consist of products and services
that are sold at amounts generally above cost and are consistent with governing
tax regulations. Operating income (loss) is total sales less operating expenses.
Identifiable assets are those assets used in each geographic area. Export sales
are United States foreign direct sales to unaffiliated customers primarily in
Europe and Asia Pacific.
NOTE 12. STOCK-BASED BENEFITPLANS
STOCK OPTION PLANS
The Company has several stock option plans under which key employees have been
granted incentive (ISOs) and nonqualified (NSOs) stock options to purchase the
Company's common stock. Generally, options are exercisable within four years
from the date of grant and expire five to ten years after the date of grant.
ISOs granted under the plans have exercise prices of not less
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
than 100 percent of the fair market value of the common stock at the date of
grant. Exercise prices of NSOs range from $0.01 to the fair market value of the
common stock at the date of grant. At December 29, 1996, 2,970 employees were
eligible and participating in the plans.
On July 10, 1996, the Compensation Committee of the Board of Directors of AMD
approved a stock option repricing program pursuant to which employees of the
Company (excluding officers) could elect to cancel certain unexercised stock
options in exchange for new stock options with an exercise price of $11.88,
equal to the closing price of the Company's common stock on the New York Stock
Exchange on July 15, 1996. Approximately 6.1 million options were eligible for
repricing, of which 5.3 million were repriced. The vesting schedules and
expiration dates of repriced stock options were extended by one year, and
certain employees canceled stock options for four shares of common stock in
exchange for repriced options for three shares of common stock.
The following is a summary of stock option activity and related information:
(Shares in thousands)
1996 1995 1994
-----------------------------------------------------------------------------
Weighted-
Average
Exercise Price Price
Options Price Options Per Share Options Per Share
-----------------------------------------------------------------------------
Options:
Outstanding at beginning of year 16,329 $16.77 14,825 $0.50 - $30.25 13,957 $0.50 - $30.25
Granted 11,245 12.96 4,327 3.13 - 35.88 4,389 0.63 - 30.25
Canceled (7,042) 26.64 (510) 0.50 - 35.75 (376) 4.13 - 30.25
Exercised (1,881) 4.07 (2,313) 0.50 - 30.25 (2,218) 4.13 - 24.38
------ ------ ------ -------------- ------ --------------
Outstanding at end of year 18,651 $12.17 16,329 $0.50 - $35.88 15,752 $0.50 - $30.25
====== ====== ====== ============== ====== ==============
Available for grant at beginning of year 751 3,386 1,419
Available for grant at end of year 3,845 751 3,150
----------------- ------------------------- -------------------------
The following table summarizes information about options outstanding at December
29, 1996:
(Shares Options Outstanding Options Exercisable
in thousands) ----------------------------------------------------------------
Weighted-
Average
Remaining Weighted-
Number Contractual Weighted- Number Average
Range of Outstanding Life Average Exercisable Exercise
Exercise Prices at 12/29/96 (Years) Price at 12/29/96 Price
- -----------------------------------------------------------------------------------
$0.01 - $9.38 4,873 5.75 $ 5.33 4,216 $ 5.13
$9.50 - $11.88 6,251 8.46 11.68 1,032 10.92
$12.13 - $14.75 5,083 8.78 13.98 905 12.97
$14.88 - $35.88 2,444 7.37 23.34 1,287 21.96
------ ---- ------ ----- ------
$0.01 - $35.88 18,651 7.69 $12.17 7,440 $ 9.80
====== ==== ====== ===== ======
STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (ESPP) that allows participating
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85 percent of the fair market value at specified dates. At
December 29, 1996, 6,700 employees were eligible to participate in the plan and
551,765 common shares remained available for issuance under the plan. A summary
of stock purchased under the plan is shown below.
(Thousands except 1996 1995 1994
employee participants) ---------------------------------
Aggregate purchase price $13,138 $11,457 $ 8,115
Shares purchased 1,035 501 412
Employee participants 2,963 2,825 1,941
------- ------- -------
32
STOCK APPRECIATION RIGHTS PLANS
The Company maintains three stock appreciation rights plans under which stock
appreciation rights (SARs) either have been or may be granted to key employees.
The number of SARs exercised plus common stock issued under the stock option
plans may not exceed the number of shares authorized under the stock option
plans. SARs may be granted in tandem with outstanding stock options, in tandem
with future stock option grants or independently of any stock options.
Generally, the terms of SARs granted under the plans are similar to those of
options granted under the stock option plans, including exercise prices,
exercise dates and expiration dates. To date, the Company has granted only
limited SARs, which become exercisable only in the event of certain changes in
control of the Company.
RESTRICTED STOCK AWARD PLAN
The Company established the 1987 restricted stock award plan under which up to
two million shares of common stock may be issued to employees, subject to terms
and conditions determined at the discretion of the Board of Directors. The
Company entered into agreements to issue 320,609 and 226,427 shares in 1996 and
1995, respectively. To date, agreements covering 230,212 shares have been
canceled without issuance and 1,333,891 shares have been issued pursuant to
prior agreements. At December 29, 1996, agreements covering 656,109 shares were
outstanding under the plan and 10,000 shares remained available for future
awards. Outstanding awards vest under varying terms within five years.
STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25), and related Interpretations, in accounting for stock-
based awards to employees. Under APB 25, the Company generally recognized no
compensation expense with respect to such awards.
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 accounted for its stock-based awards to employees under the fair
value method of SFAS 123. The fair value of the Company's stock-based awards to
employees was estimated using a Black-Scholes option pricing model. The Black-
Scholes option valuation 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
the Company's 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 its stock-based awards to employees. The fair value
of the Company's stock-based awards to employees was estimated assuming no
expected dividends and the following weighted-average assumptions:
Options ESPP
------------------------------------------
1996 1995 1996 1995
------------------------------------------
Expected life (years) 3.16 2.43 0.25 0.25
Expected stock price volatility 48.02% 53.29% 47.81% 42.15%
Risk-free interest rate 6.44% 5.88% 5.29% 5.69%
----- ----- ----- -----
For pro forma purposes, the estimated fair value of the Company's 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). The
Company's pro forma information follows:
(Thousands except per share amounts) 1996 1995
---------------------
Net income (loss) -- as reported $(68,950) $216,326
Net income (loss) -- pro forma (89,451) 205,047
Primary net income (loss) per share -- as reported (0.51) 1.59
Primary net income (loss) per share -- pro forma (0.66) 1.51
Fully diluted net income (loss) per share -- as reported (0.51) 1.57
Fully diluted net income (loss) per share -- pro forma (0.66) 1.49
-------- --------
Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until approximately 1999.
A total of 10,332,224 options were granted during 1996 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
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of these options were $13.44 and $5.15, respectively. A total of 912,994 options
were granted during 1996 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 options were $7.49 and $12.14, respectively.
The weighted-average fair value of stock purchase rights during 1996 was $4.07
per share.
NOTE 13. OTHER EMPLOYEE BENEFIT PLANS
PROFIT SHARING PROGRAM
The Company has a profit sharing program to which the Board of Directors has
authorized semiannual contributions. There were no profit sharing contributions
in 1996. Profit sharing contributions were approximately $45 million in 1995 and
$57 million in 1994.
RETIREMENT SAVINGS PLAN
The Company has a retirement savings plan, commonly known as a 401(k) plan, that
allows participating United States employees to contribute from 1 percent to 15
percent of their pre-tax salary subject to I.R.S. limits. The Company makes a
matching contribution calculated at 50 cents on each dollar of the first 3
percent of participant contributions, to a maximum of 1.5 percent of eligible
compensation. The Company's contributions to the 401(k) plan were approximately
$5 million, $4 million and $4 million for 1996, 1995 and 1994, respectively.
There are four investment funds in which each employee may invest contributions
in whole percentage increments. NexGen had a 401(k) plan which allowed employees
to contribute from one percent to ten percent of their pre-tax salary subject to
I.R.S. limits. NexGen did not match employee contributions.
NOTE 14. COMMITMENTS
The Company leases certain of its facilities under agreements which expire at
various dates through 2011. The Company also leases certain of its
manufacturing and office equipment for terms ranging from one to five years.
Rent expense was approximately $40 million, $37 million and $32 million in 1996,
1995 and 1994, 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
------------------------------
1997 $30,943 $4,945
1998 22,721 4,945
1999 15,779 4,745
2000 11,180 3,674
2001 4,384 2,977
Beyond 2001 10,017 8,392
------- ------
The operating leases of the Company's corporate marketing, general and
administrative facility expire in December, 1998. The leases provide the
Company with an option to purchase the facility for $40 million during the lease
term. At the end of the lease term, the Company is 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.
At December 29, 1996, the Company had commitments of approximately $105 million
for the construction or acquisition of additional property, plant, and
equipment.
AMD Saxony Manufacturing GmbH (AMD Saxony), a German subsidiary wholly owned by
the Company through a German holding company, is building a 900,000 square foot
submicron integrated circuit manufacturing and design facility in Dresden, in
the State of Saxony, Germany (the Dresden Facility) over the next five years at
a presently estimated cost of approximately $1.5 billion. The Dresden Facility
is being designed for the production of microprocessors and other advanced logic
products. The Federal Republic of Germany and the State of Saxony have agreed to
support the project in the form of (i) a guarantee of 65% of the bank debt to be
incurred by AMD Saxony up to a maximum of DM1.65 billion, (ii) investment grants
and subsidies totaling DM500.5 million, and (iii) interest subsidies from the
State of Saxony totaling DM300 million. In March, 1997 AMD Saxony will be
entering into a loan agreement with a consortium of banks led by Dresdner Bank
AG under which facilities totaling DM1.65 billion will be made available. In
connection with the financing, the Company has agreed to invest
34
in AMD Saxony over the next three years equity and subordinated loans in an
amount totaling approximately DM507.5 million. Until the Dresden Facility has
been completed, AMD has also agreed to guarantee AMD Saxony's obligations under
the loan agreement up to a maximum of DM217.5 million. After completion of the
Dresden Facility, AMD has agreed to make available to AMD Saxony up to DM145
million if the subsidiary does not meet its fixed charge coverage ratio
covenant. Finally, AMD has agreed to undertake certain contingent obligations,
including various obligations to fund project cost overruns. The Company began
site preparation of the Dresden Facility in the fourth quarter of 1996, and
plans to commence construction during the second quarter of 1997. The planned
Dresden Facility costs are denominated in deutsche marks and, therefore, are
subject to change due to foreign exchange rate fluctuations. The Company plans
to hedge future foreign exchange exposure for the Dresden Facility.
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 non-refundable royalties during the years 1997 through 2000.
NOTE 15. INVESTMENT IN JOINT VENTURE
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD
Semiconductor Limited (FASL), for the development and manufacture of non-
volatile memory devices. Through FASL, the two companies have constructed and
are operating an advanced integrated circuit manufacturing facility in Aizu-
Wakamatsu, Japan, to produce Flash memory devices. The Company's share of FASL
is 49.95 percent and the investment is being accounted for under the equity
method. In 1995, the Company invested an additional $18 million in FASL. The
Company's share of FASL net income during 1996 was $55 million, net of income
taxes of approximately $30 million. At December 29, 1996, the adjustment related
to the translation of the FASL financial statements into U.S. dollars resulted
in a decrease of approximately $28 million to the investment in FASL. In 1996
and 1995, the Company made Flash memory device purchases of $234 million and
$128 million, respectively, from FASL. There were no purchases in 1994. At
December 29, 1996 and December 31, 1995, amounts owed to FASL for Flash memory
device purchases were $27 million and $39 million, respectively. In 1996 and
1995, the Company earned royalty revenue, as a result of purchases from FASL, of
$21 million and $11 million, respectively.
Pursuant to a cross-equity provision between AMD and Fujitsu Limited, the
Company purchased approximately $13 million of Fujitsu Limited shares. Under the
same provision, Fujitsu Limited has purchased 3 million shares of AMD common
stock, and is required to purchase an additional 1.5 million shares over the
next several years, for a total investment not to exceed $100 million.
In March of 1996, FASL began construction of a second Flash memory device wafer
fabrication facility (FASL II) at a site contiguous to the existing FASL
facility in Aizu-Wakamatsu, Japan. The facility is expected to cost
approximately $1.1 billion when fully equipped. Capital expenditures for FASL II
construction are expected to be funded by cash generated from FASL operations
and, if necessary, borrowings by FASL. To the extent that FASL is unable to
secure the necessary funds for FASL II, AMD may be required to contribute cash
or guarantee third-party loans in proportion to its percentage interest in FASL.
At December 29, 1996, AMD had loan guarantees of $39 million outstanding with
respect to such loans.
The following is condensed unaudited financial data of FASL:
Three years ended December 29, 1996
(Unaudited)
(Thousands)
1996 1995 1994
----------------------------------------
Net sales $400,099 $252,069 $ -
Gross profit 223,035 145,226 -
Operating income (loss) 168,562 117,411 (32,203)
Net income (loss) 121,973 107,563 (32,293)
-------- -------- --------
December 29, 1996 and
December 31, 1995
(Unaudited)
(Thousands)
1996 1995
------------------------
Current assets $ 97,693 $161,810
Non-current assets 542,684 326,252
Current liabilities 215,524 107,524
Non-current liabilities 474 284
-------- --------
The Company's share of the above FASL net income (loss) differs from the equity
in net income (loss) of joint venture reported on the Consolidated Statements of
Operations due to differences in tax rates, as the above table reflects the FASL
tax expense (benefit) and the Statements of Operations reflects the tax AMD
would expect to pay if the Company's share of FASL profits were remitted to AMD
as a dividend.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. CONTINGENCIES
LITIGATION
MCDAID V. SANDERS, ET AL.; KOZLOWSKI, ET AL. V. SANDERS, ET AL. The McDaid
complaint was filed November 3, 1995 and the Kozlowski complaint was filed
November 15, 1995. Both actions allege violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against
the Company and certain individual officers and directors (the Individual
Defendants), and purportedly were filed on behalf of all persons who purchased
or otherwise acquired common stock of the Company during the period April 11,
1995 through September 22, 1995. The complaints seek damages allegedly caused by
alleged materially misleading statements and/or material omissions by the
Company and the Individual Defendants regarding the Company's development of its
AMD-K5, -K6 and -K7 microprocessors, which statements and omissions, the
plaintiffs claim, allegedly operated to inflate artificially the price paid for
the Company's common stock during the period. The complaints seek compensatory
damages in an amount to be proven at trial, fees and costs, and extraordinary
equitable and/or injunctive relief. The court has consolidated both actions into
one. Defendants filed answers in the consolidated action in May, 1996 and
discovery has begun. Based upon information presently known to management, the
Company does not believe that the ultimate resolution of this lawsuit will have
a material adverse effect on the financial condition or results of operations of
the Company.
AMD V. ALTERA CORPORATION. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to the
Company's and Altera Corporation's programmable logic devices. On June 27, 1996,
a jury returned a verdict and found that four of the eight patents-in-suit were
licensed to Altera. The parties have stipulated that the court, not a jury, will
decide which of the remaining AMD patents-in-suit fall within the scope of the
license that the jury found. The court will hear the first of two phases
regarding the remaining patents in April, 1997. Based upon information presently
known to management, the Company does not believe that the ultimate resolution
of this lawsuit will have a material adverse effect on the financial condition
or results of operations of the Company.
ENVIRONMENTAL MATTERS
CLEAN-UP ORDERS. Since 1981, the Company has discovered, investigated and begun
remediation of three sites where releases from underground chemical tanks at its
facilities in Santa Clara County, California adversely affected the ground
water. The chemicals released into the ground water were commonly in use in the
semiconductor industry in the wafer fabrication process prior to 1979. At least
one of the released chemicals (which is no longer used by the Company) has been
identified as a probable carcinogen.
In 1991, the Company received four Final Site Clean-up Requirements Orders from
the California Regional Water Quality Control Board, San Francisco Bay Region
relating to the three sites. One of the orders named the Company as well as TRW
Microwave, Inc. and Philips Semiconductors Corporation. Another of the orders
named the Company as well as National Semiconductor Corporation.
The three sites in Santa Clara County are on the National Priorities List
(Superfund). If the Company fails to satisfy federal compliance requirements or
inadequately performs the compliance measures, the government (a) can bring an
action to enforce compliance, or (b) can undertake the desired response actions
itself and later bring an action to recover its costs, and penalties, which is
up to three times the costs of clean-up activities, if appropriate. With regard
to certain claims related to this matter the statute of limitations has been
tolled.
The Company has computed and recorded the estimated environmental liability in
accordance with applicable accounting rules and has not recorded any potential
insurance recoveries in determining the estimated costs of the cleanup. The
amount of environmental charges to earnings has not been material during the
last three fiscal years. The Company believes that the potential liability, if
any, in excess of amounts already accrued with respect to the foregoing
environmental matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
OTHER MATTERS
The Company is a defendant or plaintiff in various other actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
financial condition or results of operations of the Company.
36
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. at December 29, 1996 and December 31, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Advanced Micro Devices, Inc. at December 29, 1996 and December 31, 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 29, 1996, in conformity with
generally accepted accounting principles.
/s/ERNST & YOUNG LLP
--------------------
San Jose, California
January 9, 1997
37
SUPPLEMENTARY FINANCIAL DATA
---------------------------------------------------------------------------------------------------------------------------------
1996 and 1995 by Quarter (Unaudited) Dec. 29, Sep. 29, Jun. 30, Mar. 31, Dec. 31, Oct. 1, Jul. 2, Apr. 2,
(Thousands except per share and market 1996 1996 1996 1996 1995 1995 1995 1995
price amounts) ------------------------------------------------------------------------------------
Net sales ................................... $496,868 $456,862 $ 455,077 $544,212 $595,178 $606,953 $638,867 $627,381
Expenses:
Cost of sales ............................ 354,622 337,692 379,779 368,735 427,058 368,359 315,905 305,685
Research and development ................. 107,499 105,656 92,768 94,780 107,715 106,237 105,695 96,874
Marketing, general and administrative .... 88,292 90,432 83,063 103,011 100,766 102,549 106,602 102,734
-------- -------- --------- -------- --------- -------- -------- --------
550,413 533,780 555,610 566,526 635,539 577,145 528,202 505,293
-------- -------- --------- -------- --------- -------- -------- --------
Operating income (loss) ..................... (53,545) (76,918) (100,533) (22,314) (40,361) 29,808 110,665 122,088
Interest income and other, net .............. 4,079 4,214 23,039 28,059 8,024 10,408 6,975 7,058
Interest expense ............................ (7,601) (3,443) (1,812) (1,981) (1,665) (315) (501) (578)
-------- -------- --------- --------- --------- -------- -------- --------
Income (loss) before income taxes and
equity in joint venture ................... (57,067) (76,147) (79,306) 3,764 (34,002) 39,901 117,139 128,568
Provision (benefit) for income taxes ........ (22,826) (30,459) (31,723) -- (21,846) 10,212 39,016 42,824
-------- -------- --------- --------- --------- -------- -------- --------
Income (loss) before equity in joint venture (34,241) (45,688) (47,583) 3,764 (12,156) 29,689 78,123 85,744
Equity in net income (loss) of joint venture 12,998 7,326 12,911 21,563 21,500 12,311 2,529 (1,414)
-------- -------- --------- --------- -------- -------- -------- --------
Net income (loss) ........................... (21,243) (38,362) (34,672) 25,327 9,344 42,000 80,652 84,330
Preferred stock dividends ................... -- -- -- -- -- -- -- 10
-------- -------- --------- --------- -------- -------- -------- --------
Net income (loss) applicable to
common stockholders ...................... $(21,243) $(38,362) $ (34,672) $ 25,327 $ 9,344 $ 42,000 $ 80,652 $ 84,320
======== ======== ========= ========= ======== ======== ======== ========
Net income (loss) per common share
-- Primary ..................... $ (0.15) $ (0.28) $ (0.26) $ 0.18 $ 0.07 $ 0.30 $ 0.59 $ 0.66
======== ======== ========= ========= ======== ======== ======== ========
-- Fully diluted ............... $ (0.15) $ (0.28) $ (0.26) $ 0.18 $ 0.07 $ 0.30 $ 0.59 $ 0.63
======== ======== ========= ========= ======== ======== ======== ========
Shares used in per share calculation
-- Primary ..................... 137,693 136,082 135,266 138,399 138,941 139,288 136,950 127,181
======== ======== ========= ========= ======== ======== ======== ========
-- Fully diluted ............... 137,693 136,082 135,266 138,399 139,085 139,434 137,647 134,421
======== ======== ========= ========= ======== ======== ======== ========
Common stock market price range
-- High......................... $ 28.38 $ 16.25 $ 19.88 $ 21.25 $ 29.25 $ 36.50 $ 39.25 $ 35.88
-- Low ......................... $ 14.13 $ 10.25 $ 12.88 $ 16.13 $ 16.13 $ 28.00 $ 32.13 $ 23.50
FINANCIAL SUMMARY
- --------------------------------------------------------------------------------------------------------------------------------
Five Years Ended December 29, 1996
(Thousands except per share amounts) 1996 1995 1994 1993 1992
------------------------------------------------------------------------
Net sales ............................................ $ 1,953,019 $ 2,468,379 $ 2,155,453 $ 1,648,280 $ 1,514,489
Expenses:
Cost of sales ..................................... 1,440,828 1,417,007 1,013,589 789,564 746,486
Research and development .......................... 400,703 416,521 295,326 279,412 237,679
Marketing, general and administrative ............. 364,798 412,651 377,503 296,912 272,962
----------- ----------- ----------- ----------- -----------
2,206,329 2,246,179 1,686,418 1,365,888 1,257,127
----------- ----------- ----------- ----------- -----------
Operating income (loss) .............................. (253,310) 222,200 469,035 282,392 257,362
Litigation settlement ................................ -- -- (58,000) -- --
Interest income and other, net ....................... 59,391 32,465 17,134 16,931 18,913
Interest expense ..................................... (14,837) (3,059) (4,410) (4,398) (17,677)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and equity in
joint venture....................................... (208,756) 251,606 423,759 294,925 258,598
Provision (benefit) for income taxes ................. (85,008) 70,206 142,232 85,935 24,979
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in joint venture ......... (123,748) 181,400 281,527 208,990 233,619
Equity in net income (loss) of joint venture ......... 54,798 34,926 (10,585) (634) --
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................... (68,950) 216,326 270,942 208,356 233,619
Preferred stock dividends ............................ -- 10 10,350 10,350 10,350
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders .. $ (68,950) $ 216,316 $ 260,592 $ 198,006 $ 223,269
=========== =========== =========== =========== ===========
Net income (loss) per common share -- Primary......... $ (0.51) $ 1.59 $ 2.06 $ 1.65 $ 2.02
=========== =========== =========== =========== ===========
-- Fully diluted $ (0.51) $ 1.57 $ 2.02 $ 1.64 $ 1.99
=========== =========== =========== =========== ===========
Shares used in per share calculation -- Primary....... 135,687 136,208 126,674 119,925 110,339
=========== =========== =========== =========== ===========
-- Fully diluted 135,687 137,815 134,142 127,167 117,576
=========== =========== =========== =========== ===========
Long-term debt and capital lease obligations,
less current portion .............................. $ 444,830 $ 214,965 $ 75,752 $ 90,066 $ 22,213
Total assets ......................................... $ 3,145,283 $ 3,078,467 $ 2,525,721 $ 1,944,953 $ 1,453,768
- ------------------------------------------------------------------------------------------------------------------------------------
AMD's common stock (symbol AMD) is listed on the New York Stock Exchange. The
Company has never paid cash dividends on common stock and has no present plans
to do so. The number of stockholders of record at January 31, 1997 was 9,963.
AMD, the AMD logo, and combinations thereof are trademarks of Advanced Micro
Devices, Inc.
Am486, MACH, NexGen, and Nx586 are registered trademarks and AMD-K5, AMD-K6,
K86, K86 RISC SUPERSCALAR, and Nx686 are trademarks of Advanced Micro Devices,
Inc.
Microsoft, MS-DOS, Windows and Windows NT are registered trademarks of Microsoft
Corporation.
Other terms and names used are for identification purposes only and may be
trademarks of their respective companies.
39