UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1998 ----------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-7882 ------------------ ADVANCED MICRO DEVICES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-1692300 - -------------------------------- ------------------------------------------ State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization One AMD Place P. O. Box 3453 Sunnyvale, California 94088-3453 - ---------------------------------------- --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 732-2400 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ The number of shares of $0.01 par value common stock outstanding as of April 10, 1998: 143,365,262. ADVANCED MICRO DEVICES, INC. - ---------------------------- INDEX - -----
Part I. Financial Information Page No. - --------------------- -------- Item 1. Financial Statements Condensed Consolidated Statements of Operations-- Quarters Ended March 29, 1998 and March 30, 1997 3 Condensed Consolidated Balance Sheets-- March 29, 1998 and December 28, 1997 4 Condensed Consolidated Statements of Cash Flows-- Three Months Ended March 29, 1998 and March 30, 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 1. Legal Proceedings 32 Item 6. Exhibits and Report on Form 8-K 32 Signature 33 ---------
2 I. FINANCIAL INFORMATION --------------------- ITEM 1. ------- FINANCIAL STATEMENTS -------------------- ADVANCED MICRO DEVICES, INC. ---------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (Unaudited) (Thousands except per share amounts)
Quarter Ended ------------------------------ March 29, March 30, 1998 1997 --------- ---------- Net sales $ 540,856 $ 551,999 Expenses: Cost of sales 423,591 349,076 Research and development 128,120 104,908 Marketing, general and administrative 88,214 94,519 --------- --------- 639,925 548,503 --------- --------- Operating income (loss) (99,069) 3,496 Litigation settlement (11,500) -- Interest income and other, net 5,581 13,322 Interest expense (12,472) (9,410) --------- --------- Income (loss) before income taxes and equity in joint venture (117,460) 7,408 Provision (benefit) for income taxes (46,997) 2,148 --------- --------- Income (loss) before equity in joint venture (70,463) 5,260 Equity in net income of joint venture 7,736 7,691 --------- --------- Net income (loss) $ (62,727) $ 12,951 ========= ========= Net income (loss) per common share: Basic $ (0.44) $ 0.09 ========= ========= Diluted $ (0.44) $ 0.09 ========= ========= Shares used in per share calculation: Basic 142,503 138,616 ========= ========= Diluted 142,503 146,758 ========= =========
See accompanying notes - ---------------------- 3 ADVANCED MICRO DEVICES, INC. ---------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS* ------------------------------------- (Thousands)
March 29, December 28, 1998 1997 -------------- -------------- Assets - ------ Current assets: Cash and cash equivalents $ 192,481 $ 240,658 Short-term investments 114,323 226,374 ----------- ----------- Total cash, cash equivalents and short-term investments 306,804 467,032 Accounts receivable, net 254,346 329,111 Inventories: Raw materials 32,028 33,375 Work-in-process 92,712 96,712 Finished goods 33,119 38,430 ----------- ----------- Total inventories 157,859 168,517 Deferred income taxes 160,583 160,583 Prepaid expenses and other current assets 36,214 50,024 ----------- ----------- Total current assets 915,806 1,175,267 Property, plant and equipment, at cost 3,951,830 3,799,051 Accumulated depreciation and amortization (1,897,535) (1,808,362) ----------- ----------- Property, plant and equipment, net 2,054,295 1,990,689 Investment in joint venture 208,616 204,031 Other assets 153,589 145,284 ----------- ----------- $ 3,332,306 $ 3,515,271 =========== =========== Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Notes payable to banks $ 5,372 $ 6,601 Accounts payable 279,176 359,536 Accrued compensation and benefits 74,047 63,429 Accrued liabilities 113,186 134,656 Income tax payable 13,500 12,676 Deferred income on shipments to distributors 78,427 83,508 Current portion of long-term debt and capital lease obligations 95,048 66,364 ----------- ----------- Total current liabilities 658,756 726,770 Deferred income taxes 41,568 96,269 Long-term debt and capital lease obligations, less current portion 666,271 662,689 Stockholders' equity: Capital stock: Common stock, par value 1,435 1,428 Capital in excess of par value 1,026,313 1,018,884 Retained earnings 1,003,404 1,066,131 Accumulated other comprehensive income (65,441) (56,900) ----------- ----------- Total stockholders' equity 1,965,711 2,029,543 ----------- ----------- $ 3,332,306 $ 3,515,271 =========== =========== * Amounts as of March 29, 1998 are unaudited. Amounts as of December 28, 1997 were derived from the December 28, 1997 audited financial statements. See accompanying notes -----------------------
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ADVANCED MICRO DEVICES, INC. ---------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (Thousands) Quarter Ended ---------------------------------------- March 29, March 30, 1998 1997 ------------ ------------- Cash flows from operating activities: Net income (loss) $ (62,727) $ 12,951 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 112,160 88,821 Net loss on disposal of property, plant and equipment 528 3,110 Net gain realized on sale of available-for-sale securities - (4,978) Compensation recognized under employee stock plans 1,961 7,733 Undistributed income of joint venture (7,736) (7,691) Changes in operating assets and liabilities: Net decrease (increase) in receivables, inventories, prepaid expenses and other assets 83,843 (5,286) Net (increase) decrease in deferred income taxes (54,701) 4,440 Decrease (increase) in income tax payable 824 (5,777) Net (decrease) increase in payables and accrued liabilities (95,730) 21,475 --------- ---------- Net cash (used in) provided by operating activities (21,578) 114,798 --------- ---------- Cash flows from investing activities: Purchase of property, plant and equipment (181,230) (150,594) Proceeds from sale of property, plant and equipment 5,707 130 Purchase of available-for-sale securities (248,361) (308,326) Proceeds from sale of available-for-sale securities 359,184 138,892 Investment in joint venture - (128) --------- ---------- Net cash used in investing activities (64,700) (320,026) --------- ---------- Cash flows from financing activities: Proceeds from borrowings 49,083 261,584 Payments on debt and capital lease obligations (16,457) (21,993) Proceeds from issuance of stock 5,475 24,828 --------- ---------- Net cash provided by financing activities 38,101 264,419 --------- ---------- Net (decrease) increase in cash and cash equivalents (48,177) 59,191 Cash and cash equivalents at beginning of period 240,658 166,194 --------- ---------- Cash and cash equivalents at end of period $ 192,481 $ 225,385 ========= ========== Supplemental disclosures of cash flow information: Cash paid (refunded) during the first three months for: Income taxes $ (1,498) $ (101,435) ========= ==========
See accompanying notes - ---------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- 1. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The Company uses a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended March 29, 1998 and March 30, 1997 each included 13 weeks. Certain prior year amounts on the Condensed Consolidated Financial Statements have been reclassified to conform to the 1998 presentation. 2. The following is a summary of available-for-sale securities as of March 29, 1998 (in thousands): Cash equivalents: Commercial paper $ 4,954 Certificates of deposit 20,001 Federal agency notes 28,032 Other debt securities 26 -------- Total cash equivalents $ 53,013 ======== Short-term investments: Money market auction rate preferred stocks $ 61,500 Certificates of deposit 14,993 Treasury notes 10,009 Corporate notes 17,950 Commercial paper 9,871 -------- Total short-term investments $114,323 ======== Long-term investments: Equity investments $ 12,438 Treasury notes 1,996 -------- Total long-term investments $ 14,434 ========
3. Basic earnings per share is based upon weighted-average common shares outstanding. Diluted earnings per share is computed using the weighted- average common shares outstanding plus any potential dilutive securities. Dilutive securities include stock options, warrants, restricted stock, convertible debt and convertible preferred stock. The following table sets forth the computation of basic and diluted net income (loss) per common share: 6
(Thousands except per share data) Quarter Ended ----------------------------------------- March 29, 1998 March 30, 1997 -------------- -------------- Numerator: Net income (loss) $(62,727) $ 12,951 -------- -------- Numerator for basic and diluted net income (loss) per common share $(62,727) $ 12,951 -------- -------- Denominator: Denominator for basic net income (loss) per common share - weighted-average shares 142,503 138,616 Effect of dilutive securities: Employee stock options - 7,873 Warrants - 269 -------- -------- Dilutive potential common shares - 8,142 Denominator for diluted net income (loss) per common share - adjusted weighted-average shares 142,503 146,758 -------- -------- Basic net income (loss) per common share $ (0.44) $ 0.09 ======== ======== Diluted net income (loss) per common share $ (0.44) $ 0.09 ======== ========
Options, warrants and restricted stock were outstanding during the quarter ended March 29, 1998, but were not included in the computation of diluted net loss per common share because the effect in periods with a net loss would be antidilutive. Options to purchase 335,980 shares of common stock at a weighted-average price of $35.51 per share were outstanding during the quarter ended March 30, 1997, but were not included in the computation of diluted net income per common share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 4. In 1996, the Company entered into a syndicated bank loan agreement (the Credit Agreement), which provides for a $150 million three-year secured revolving line of credit (which is currently unused) and a $250 million four-year secured term loan. All of the secured term loan is outstanding at March 29, 1998. The secured loan is repayable in eight equal quarterly installments of approximately $31 million commencing in October 1998. The Credit Agreement contains provisions regarding limits on the Company's and its subsidiaries' ability to engage in various transactions and requires satisfaction of specified financial performance criteria. At March 29, 1998, the Company was in compliance with all restrictive covenants of the Credit Agreement and all retained earnings were restricted as to payments of cash dividends on common stock. 5. In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD Semiconductor Limited (FASL), for the development and manufacture of non- volatile 7 memory devices. FASL operates advanced integrated circuit manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory devices. The Company's share of FASL is 49.992 percent and the investment is being accounted for under the equity method. At March 29, 1998, the cumulative adjustment related to the translation of the FASL financial statements into U.S. dollars resulted in a decrease of approximately $49 million to the investment in FASL. In the first quarter of 1998 and of 1997, the Company purchased $60 million and $50 million, respectively, of Flash memory devices from FASL. At March 29, 1998 and March 30, 1997, the Company had outstanding payables of $39 million and $24 million, respectively, to FASL for Flash memory device purchases. At March 29, 1998 and March 30, 1997, the Company had outstanding royalty receivables of $6 million and $8 million, respectively, as a result of FASL sales. In the first quarter of 1998 and of 1997, the Company earned royalty income of $6 million and $4 million, respectively, as a result of FASL sales. The following is condensed unaudited financial data of FASL:
(Thousands) Quarter Ended ------------------------------------------- (Unaudited) March 29, 1998 March 30, 1997 -------------- --------------- Net sales $119,001 $78,837 Gross profit 16,714 12,349 Operating income 13,929 12,324 Net income 10,550 6,047
The Company's share of the above FASL net income differs from the equity in net income of joint venture reported on the Condensed Consolidated Statements of Operations due to adjustments resulting from the related party relationship between FASL and the Company which are reflected on the Company's Condensed Consolidated Statements of Operations. 6. As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net loss or stockholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available- for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Total comprehensive loss amounted to approximately $71 million and $11 million, respectively. The following are the components of comprehensive loss: 8
Quarter Ended ------------------------------------ (Thousands) March 29, 1998 March 30, 1997 --------------- --------------- Net income (loss) $(62,727) $ 12,951 Foreign currency translation adjustments (7,313) (22,568) Unrealized losses on securities, net of tax: Unrealized holding losses arising during the period (1,228) 2,473 Less: Reclassification adjustment for gains included in earnings - (3,534) -------- -------- Other comprehensive loss (8,541) (23,629) -------- -------- Comprehensive loss $(71,268) $(10,678) ======== ========
The components of accumulated other comprehensive income, net of related tax are as follows:
March 29, December 28, (Thousands) 1998 1997 ---------- ------------ Unrealized gain on investments 779 2,007 Cumulative translation adjustments (66,220) (58,907) ------- ------- (65,441) (56,900) ======= =======
7. On April 23, 1998, the Company announced it had reached an agreement in principle to settle the class action securities lawsuit against the Company and certain of its current and former officers and directors. The agreement in principle to settle is subject to the approval of the Company's Board of Directors and confirmation by the United States District Court in San Jose, California. The suit was filed in November 1995 and related to the Company's AMD-K5 microprocessor development project. The Company has recorded a liability of $11,500,000 for the cost of settlement to the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements The statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are forward-looking are based on 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; anticipated cash flows; realization of net deferred tax assets; capital expenditures; adequacy of resources to fund operations and capital investments; the Company's ability to access external sources of capital; the Company's ability to transition to new process technologies; anticipated market growth; Year 2000 expenses; the effect of foreign currency hedging transactions; the effect of adverse economic conditions in Asia; and the Dresden Fab 30 and FASL manufacturing facilities. 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 actual results to differ materially from the forward-looking statements. The following discussion should be read in conjunction with the included Condensed Consolidated Financial Statements and Notes thereto, and with the Company's Consolidated Financial Statements and Notes thereto at December 28, 1997 and December 29, 1996 and for each of the three years in the period ended December 28, 1997. AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, Vantis, NexGen, K86, AMD-K5, AMD-K6, AMD-K7, Nx586 and Nx686 are either trademarks or registered trademarks of Advanced Micro Devices, Inc. Microsoft, Windows, Windows 95 and Windows NT are registered trademarks of Microsoft Corporation. Pentium is a registered trademark of Intel Corporation. Other terms used to identify companies and products may be trademarks of their respective owners. 10 RESULTS OF OPERATIONS AMD participates in all three technology areas within the digital integrated circuit (IC) market--memory circuits, logic circuits and microprocessors-- through, collectively, its Computation Products Group (CPG), its Memory Group, its Communications Group, and its programmable logic subsidiary, Vantis Corporation (Vantis). CPG products include microprocessors and core logic products. Memory Group products include Flash memory devices and Erasable Programmable Read-Only Memory (EPROM) devices. Communications Group products include telecommunication products, networking and input/output (I/O) products, and embedded processors. Vantis products are complex and simple, high- performance CMOS (complementary metal oxide semiconductor) programmable logic devices (PLDs). The following is a summary of the net sales of the CPG, Memory Group, Communications Group and Vantis for the periods presented below:
Quarters Ended March 29, December 28, March 30, (Millions) 1998 1997 1997 ------------ ----------- ---------- CPG $169 $203 $128 Memory Group 167 181 184 Communications Group 149 174 171 Vantis 56 55 69 ---- ---- ---- Total $541 $613 $552 ==== ==== ====
- ------------------------------------------------------------------------ REVENUE COMPARISON OF QUARTERS ENDED MARCH 29, 1998 AND MARCH 30, 1997 Net sales of $541 million in the first quarter of 1998 decreased approximately 2 percent as compared to the first quarter of 1997 as CPG sales increases were offset by lower sales in the other groups. CPG net sales increased during the first quarter of 1998 as compared to the first quarter of 1997 largely due to sales of AMD-K6(TM) microprocessors. AMD-K6 microprocessors sold at substantially higher average selling prices than AMD- K5(TM) microprocessors that made up the majority of CPG net sales during the first quarter of 1997. CPG sales growth during the remainder of 1998 is dependent on a successful transition to the 0.25 micron process technology in Fab 25 in order to meet customer microprocessor needs for performance and volume. Memory Group net sales of both EPROM and Flash memory devices decreased. EPROM prices declined significantly, and unit sales were lower as customer demand continued to shift to Flash memory from EPROM. Flash memory device net sales declined slightly as significant unit volume increases were more than offset by significant price declines due to continuing increased competition. The Company expects continued price pressure from intense competition in Flash memory devices. 11 Communications Group net sales decreased primarily due to substantial decreases in unit shipments of the Company's network products, as other Communications Group product sales were flat. The Company's offerings of network products have not kept pace with the market shift towards higher performance products and sales are likely to continue to decline until the Company introduces new competitive products in volume, which the Company anticipates will occur no earlier than the fourth quarter of 1998. The Company expects the other Communications Group product divisions to have flat to lower sales in the second quarter of 1998 primarily due to the economic crisis in Asia. Results could be affected beyond the second quarter of 1998 if there is no improvement in the economic condition in Asia. Vantis net sales decreased due to declines in the average selling price and unit shipments of both simple PLDs (SPLDs) and complex PLDs (CPLDs). Lower SPLD sales reflect the market transition to CPLDs, as well as increased competition in the SPLD market. REVENUE COMPARISON OF QUARTERS ENDED MARCH 29, 1998 AND DECEMBER 28, 1997 Net sales in the first quarter of 1998 decreased approximately 12 percent as compared to the fourth quarter of 1997, due to lower sales in all groups except Vantis. The decline in CPG sales from the fourth quarter of 1997 to the first quarter of 1998 was due to lower average selling prices for the AMD-K6 microprocessor, as unit volume remained relatively flat. During the first quarter of 1998, the microprocessor market migrated to higher performance products, which the Company only manufactured in limited quantities. This migration, together with increased price competition, resulted in a reduction of the average selling price on AMD microprocessor products. In addition, due to inadequate manufacturing yields on AMD-K6 microprocessors, the Company was unable to increase microprocessor unit volume. CPG sales growth during the remainder of 1998 is dependent on a successful transition to the 0.25 micron process technology in Fab 25 in order to meet customer microprocessor needs for performance and volume. Memory Group net sales decreased. EPROM prices declined significantly, and unit sales were lower as customer demand continued to shift to Flash memory from EPROM. Flash memory device sales declined as relatively flat unit volume was offset by average selling price declines from continuing increased competition. The Company expects continued price pressure from intense competition in Flash memory devices. Communications Group net sales decreased as unit volume for networking and other Communications Group products declined during the first quarter of 1998. The Company's offerings of network products have not kept pace with the market shift towards higher performance products and sales are likely to continue to decline until the Company introduces new competitive products in volume, which the Company anticipates will occur no earlier than the fourth quarter of 1998. Net sales were also affected by declines in unit volume and average selling price for other communication products. The Company expects the other Communications Group product divisions to have flat to lower sales in the second quarter of 12 1998 primarily due to the economic crisis in Asia. Results could be affected beyond the second quarter of 1998 if there is no improvement in the economic condition in Asia. Vantis net sales increased slightly as both unit shipments and average selling prices of both SPLDs and CPLDs were flat. COMPARISON OF EXPENSES, GROSS MARGIN PERCENTAGE AND INTEREST INCOME AND OTHER, NET The following is a summary of expenses, gross margin percentage and interest income and other, net for the periods presented below:
Quarters Ended March 29, December 28, March 30, (Millions) 1998 1997 1997 ------------ ----------- ---------- (Millions except for gross margin percentage) Cost of sales $424 $429 $349 Gross margin percentage 22% 30% 37% Research and development $128 $127 $105 Marketing, general and administrative 88 102 95 Litigation settlement 12 -- -- Interest income and other, net 6 7 13 Interest expense 12 12 9
Gross margin percentage decreased in the first quarter of 1998, as compared to the first quarter of 1997 and the fourth quarter of 1997. The Company has throughout this period continued to invest in the facilitization of Fab 25 and, during the first quarter of 1998, in the transition from 0.35 micron to 0.25 micron process technology in Fab 25. These investments have led to significant increases in the Company's fixed costs associated with its microprocessor products. The decline in gross margin percentage between the first quarter of 1997 and the first quarter of 1998 was caused in part by increases in fixed costs in Fab 25, increased back-end assembly costs in support of AMD-K6 microprocessor production and a decline in non-microprocessor product revenues. The decline in gross margin percentage between the fourth quarter of 1997 and the first quarter of 1998 was primarily attributable to significantly lower revenues in the first quarter of 1998 and the increased fixed costs associated with the transition to 0.25 micron process technology in Fab 25. The Company intends to continue to invest in 0.25 micron process technology capacity which will increase its fixed costs. Accordingly, absent significant increases in revenues, the Company will continue to experience pressure on its gross margin percentages. Research and development expenses increased as compared to the first quarter of 1997 primarily due to a higher proportion of research and development activities in the Submicron Development Center in Sunnyvale, California, primarily to support CPG and the Memory Group. Research and development expenses in the first quarter of 1998 as compared to the fourth quarter of 1997 were flat. 13 Marketing, general and administrative expenses decreased in the first quarter of 1998 from both the first quarter of 1997 and the fourth quarter of 1997. In each case the decrease was primarily due to reduced spending on advertising and marketing expenses associated with the AMD-K6 microprocessor. The Company expects advertising and promotional expenses associated with the AMD-K6 microprocessor to increase during the remainder of 1998. The litigation settlement of $11,500,000 in the first quarter of 1998 represents the estimated costs associated with an agreement in principle to settle the class action securities lawsuit against the Company and certain of its current and former officers and directors, announced by the Company on April 23, 1998. The agreement in principle to settle is subject to approval of the Company's Board of Directors and confirmation by the United States District Court in San Jose, California. The suit was filed in November 1995 and related to the Company's AMD-K5 microprocessor development project. Interest income and other, net decreased in the first quarter of 1998 as compared to the first quarter of 1997 primarily due to a pre-tax gain of $5 million resulting from the sale of equity securities in the first quarter of 1997. Interest income and other, net decreased in the first quarter of 1998 as compared to the fourth quarter of 1997 due to lower average cash balances. Interest expense increased as compared to the first quarter of 1997 primarily due to higher average debt balances and lower capitalized interest related to the second phase of construction of Fab 25 and construction of Dresden Fab 30. Interest expense was flat as compared to the fourth quarter of 1997. INCOME TAX The Company recorded a tax benefit of $47 million and a tax provision of $2 million in the first quarter of 1998 and 1997, respectively, for an effective tax benefit rate of 40 percent and a positive tax rate of 29 percent for the respective periods. The difference in the effective tax rates primarily reflects the impact of foreign tax benefits on different levels of income. Realization of the Company's net deferred tax assets ($119 million at March 29, 1998) 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. OTHER ITEMS International sales were 55 percent of total sales in the first quarter of 1998 as compared to 56 percent for the same period in 1997 and the immediate prior quarter. In the first quarter of 1998, approximately 10 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 Company has recently experienced slightly lower than expected demand in Asia, primarily in its telecommunication products. 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 anticipates that the Asian economic crisis will continue to adversely affect the Company's results of operations at least through the second quarter of 1998, and further decline of the economic crisis in Asia could have a material adverse effect on the Company's results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was approximately $22 million for the first quarter of 1998. This compares to cash flow provided by operating activities of approximately $115 million for 14 the first quarter of 1997. Net operating cash flows decreased as compared to the same period in 1997 due to a net decrease in earnings of $76 million, combined with an increase in depreciation and amortization of $23 million and a decrease in the net change in operating assets and liabilities of $81 million. Investing activities consumed $65 million in cash during the first quarter of 1998 and $320 million during the first quarter of 1997. Capital expenditures totaled $181 million in the first quarter of 1998, up from $151 million in the same period in 1997, as the Company continued to invest in property, plant and equipment primarily for Fab 25 and Dresden Fab 30. Capital expenditures in the first quarter of 1998 were offset by net proceeds from the sale of short-term investments of approximately $111 million. In the first quarter of 1997 the increase in available-for-sale securities was approximately $169 million. The Company's financing activities provided cash of $38 million during the first quarter of 1998, compared to $264 million during the same period in 1997. Financing sources of cash for the first quarter of 1998 included borrowings from Dresdner Bank AG in the amount of DM90 million ($49 million), as part of the Dresden Loan Agreement, as defined below. The loan amount was offset by debt repayments of $16 million. Financing sources of cash for the first quarter of 1997 included borrowings from a $250 million four-year secured term loan, offset by debt repayments of $22 million. Financing activities for both periods include issuance of common stock under employee stock plans. The Company plans to continue to make significant capital investments, at a significantly higher rate than in previous years. These investments include those relating to the conversion of Fab 25 to 0.25 micron process technology and the construction and facilitization of Dresden Fab 30. The conversion of Fab 25 from 0.35 to 0.25 micron process technology is anticipated to be completed in 1998 at a cost in 1998 of approximately $351 million, although there can be no assurance that the actual amount will not vary materially. Dresden Fab 30 is being constructed by AMD Saxony, an indirect wholly owned German subsidiary of the Company. This 900,000-square-foot submicron integrated circuit manufacturing and design facility is to be completed over the next four years. The project is being supported by the Company together with the Federal Republic of Germany, the State of Saxony and a consortium of banks. The plan for Dresden Fab 30 was revised in February 1998 to reflect planned upgrades in wafer production technology as well as the decline in the deutsche mark relative to the U.S. dollar, which has increased the proportion of the project to be funded by the Company rather than the Federal Republic of Germany, the State of Saxony and the consortium of banks. The Company entered into foreign currency hedging transactions for Dresden Fab 30 during the first quarter of 1997 and the first quarter of 1998 and anticipates entering into additional such foreign currency hedging transactions in the future. The present estimated construction cost of Dresden Fab 30 is approximately $1.9 billion. In March 1997, AMD Saxony entered into a Loan Agreement (the Dresden Loan Agreement), denominated in deutsche marks, with a consortium of banks led by Dresdner Bank AG under 15 which loan facilities totaling $932 million will be made available for the Dresden Fab 30 project. In connection with the Dresden Loan Agreement, as amended, the Company has agreed to invest in AMD Saxony over the next two years equity and subordinated loans in an amount totaling approximately $270 million ($100 million in 1998 and $170 million in 1999), and to guarantee a portion of AMD Saxony's obligations under the Dresden Loan Agreement up to a maximum of approximately $123 million until Dresden Fab 30 has been completed. AMD is required to fund $70 million of the $170 million due in 1999 on an accelerated basis as follows: (i) if the Company undertakes a sale or other placement of its stock in the capital markets in 1998, the $70 million will be funded upon receipt of the offering proceeds; (ii) if the Company generates $140 million of net income (as defined in the Indenture for the Senior Secured Notes) in 1998, the $70 million will be funded prior to January 31, 1999; (iii) if the Company does not fund through (i) or (ii) above, the Company will fund the maximum amount allowed under the Indenture for the Senior Secured Notes by January 31, 1999 and will fund the remaining amount through the sale of at least $200 million of the Company's stock by June 30, 1999. Because the Company's obligations under the Dresden Loan Agreement are denominated in deutsche marks, the dollar amounts set forth herein are subject to change based on applicable conversion rates. In addition, after completion of Dresden Fab 30, the Company has agreed to make funds available to AMD Saxony up to approximately $82 million if the subsidiary does not meet its fixed charge coverage ratio covenant. The Company has also agreed to fund certain contingent obligations, including various obligations to fund project cost overruns, if any, and to fund shortfalls in government subsidies resulting from a default under the subsidy agreements caused by AMD Saxony or its affiliates, if any. The Federal Republic of Germany and the State of Saxony have agreed to support the Dresden Fab 30 project in the form of (i) guarantees of 65 percent of bank debt to be incurred by AMD Saxony up to a maximum of $932 million, (ii) investment grants and subsidies totaling $283 million and (iii) interest subsidies from the State of Saxony totaling $169 million, all of which are denominated in deutsche marks in the applicable agreements. In the event the grants or subsidies are delayed, the Company is obligated, as requested by AMD Saxony, to provide interim funding, such interim funding will be repaid to the Company as the grants and subsidies are received by AMD Saxony. As of March 29, 1998, the Company has invested $170 million in AMD Saxony. The remaining $161 million required to complete Dresden Fab 30 is to be provided from cash generated by AMD Saxony from 1999 to 2001, which will be derived from sales of wafers to the Company. Defaults under the Dresden Loan Agreement include the failure of the Company, AMD Saxony or AMD Holding to comply with obligations under the Dresden Loan Agreement, the government subsidy and grant agreements and related documents, including material variances from the approved schedule and budget, the Company's failure to fund equity contributions or shareholder loans or otherwise comply with its obligations relating to the Dresden Loan Agreement, the sale of shares in AMD Saxony or AMD Holding, the failure to pay material obligations, the occurrence of a material adverse change or filings or proceedings in bankruptcy or insolvency with respect to the Company, AMD Saxony or AMD Holding and the occurrence of a default under the Credit Agreement or the Indenture. Generally, any such default which either (i) results from the Company's non- compliance with the Dresden Loan Agreement and is 16 not cured by the Company or (ii) results in recourse to the Company of more than $10 million and is not cured by the Company, would result in a cross-default under the Credit Agreement and the Indenture. The FASL joint venture completed construction of the building for a second Flash memory device wafer fabrication facility, FASL II, in the third quarter of 1997 at a site contiguous to the existing FASL facility in Aizu-Wakamatsu, Japan. Equipment installation is in progress and the facility is expected to cost approximately $1.1 billion when fully equipped, which is anticipated in the second quarter of 2000. Approximately $260 million of such cost has been funded as of March 29, 1998. Capital expenditures for FASL II construction to date have been funded by cash generated from FASL operations and borrowings by FASL and during the remainder of 1998, the Company presently anticipates that such capital expenditures will continue to be funded by cash generated from FASL operations and borrowings by FASL. However, to the extent that FASL is unable to secure the necessary funds for FASL II, the Company may be required to contribute cash or guarantee third-party loans in proportion to its 49.992 percent interest in FASL. At March 29, 1998, AMD had loan guarantees of $48 million outstanding with respect to such loans. The planned FASL II costs are denominated in yen and are therefore subject to change due to foreign exchange rate fluctuations. In 1996, the Company entered into a syndicated bank loan agreement (the Credit Agreement), which provides for a $150 million three-year secured revolving line of credit (which is currently unused) and a $250 million four-year secured term loan. All of the secured term loan is outstanding at March 29, 1998. The secured loan is repayable in eight equal quarterly installments of approximately $31 million commencing in October 1998. As of March 29, 1998, the Company also had available unsecured uncommitted bank lines of credit in the amount of $67 million, of which $5 million was outstanding. In February 1998, certain of the covenants under the Credit Agreement, including those related to the modified quick ratio, minimum tangible net worth and fixed charge coverage ratio, were amended at the request of the Company. The Company sought to amend the covenants because otherwise it risked violating certain of the covenants unless it scaled back on its business and capital investment plan. As of March 29, 1998, the Company is in compliance with all covenants under the Credit Agreement. However, the Company will be required to raise $300-400 million of funds through external financing in the second quarter of 1998 in order to meet certain of these amended covenants and to continue to make the substantial capital investments required to convert Fab 25 to 0.25 micron process technology, as well as for other ongoing capital investments. The Company has filed a shelf registration statement for the offering of debt or equity securities under the Securities Act of 1933, as amended. In the event the Company is unable to meet its obligation to make loans to, or equity investments in, AMD Saxony as required under the Dresden Loan Agreement, AMD Saxony will be unable to complete Dresden Fab 30 and the Company will be in default under the Dresden Loan Agreement, the Credit Agreement and the Indenture, which would permit acceleration of indebtedness, which would have a material adverse effect on the Company. There can be no 17 assurance that the Company will be able to obtain the funds necessary to fulfill these obligations and any such failure would have a material adverse effect on the Company. The Company has historically been able to raise external financing to fund its capital expenditures and believes that cash flows from operations and current cash balances, together with external financing activities during 1998, will be sufficient to fund operations and capital investments currently planned through 1998. RISK FACTORS The Company's business, results of operations and financial condition are subject to a number of risk factors, including the following: Financing Requirements The Company plans to continue to make significant capital investments, at a significantly higher rate than in previous years. These investments include those relating to the conversion of Fab 25 to 0.25 micron process technology and the construction and facilitization of Dresden Fab 30. Equipment installation is in progress at FASL II and the facility is expected to cost approximately $1.1 billion when fully equipped, which is anticipated in the second quarter of 2000. Capital expenditures for FASL II construction to date have been funded by cash generated from FASL operations and borrowings by FASL. To the extent that FASL is unable to secure the necessary funds for FASL II, the Company may be required to contribute cash or guarantee third-party loans in proportion to its 49.992 percent interest in FASL. In 1996, the Company entered into a syndicated bank loan agreement (the Credit Agreement), which provided for a $150 million three-year secured revolving line of credit (which is currently unused) and a $250 million four-year secured term loan. All of the secured term loan is outstanding at March 29, 1998. The secured loan is repayable in eight equal quarterly installments of approximately $31 million commencing in October 1998. In February 1998, certain of the covenants under the Credit Agreement were amended. The Company will be required to raise funds through external financing in the second quarter of 1998 in order to meet certain of these amended covenants and to continue to make the substantial capital investments required to convert Fab 25 to 0.25 micron process technology, as well as for other ongoing capital investments. In March 1997, the Company's indirect wholly owned subsidiary, AMD Saxony, entered into a Loan Agreement (the Dresden Loan Agreement) with a consortium of banks led by Dresdner Bank AG. Under the terms of the February 1998 amendments to the Dresden Loan Agreement, the Company is required to make subordinated loans to, or equity investments in, AMD Saxony, totaling $100 million in 1998 and $170 million in 1999. AMD is required to fund $70 million of the 1999 amount on an accelerated basis as follows: (i) if the Company undertakes a sale or other placement of its stock in the capital markets in 1998, the $70 million will be funded upon receipt 18 of the offering proceeds; (ii) if the Company generates $140 million of net income (as defined in the Indenture for the Senior Secured Notes) in 1998, the $70 million will be funded prior to January 31, 1999; (iii) if the Company does not fund through (i) or (ii) above, the Company will fund the maximum amount allowed under the Indenture for the Senior Secured Notes by January 31, 1999 and will fund the remaining amount through the sale of at least $200 million of the Company's stock by June 30, 1999. In the event the Company is unable to obtain the external financing necessary to meet its covenants under the Credit Agreement, it will also be unable to fund its capital investments planned for 1998. In addition, in the event the Company is unable to meet its obligation to make loans to, or equity investments in, AMD Saxony as required under the Dresden Loan Agreement, AMD Saxony will be unable to complete Dresden Fab 30 and the Company will be in default under the Dresden Loan Agreement, the Credit Agreement and the Indenture, which would permit acceleration of indebtedness, which would have a material adverse effect on the Company. There can be no assurance that the Company will be able to obtain the funds necessary to fulfill these obligations and any such failure would have a material adverse effect on the Company. Microprocessor Products Investment in and Dependence on K86(TM) AMD Microprocessor Products; Transition to 0.25 Micron Process Technology. The Company's microprocessor business has in the past, and will in 1998, continue to significantly impact the Company's revenues, margins and operating results. The Company plans to continue to make significant capital expenditures to support the microprocessor business in 1998, which will be a substantial drain on the Company's cash flow and cash balances. The Company's ability to increase microprocessor product revenues, and benefit fully from the substantial financial investments and commitments it has made and continues to make related to microprocessors, depends upon the success of the AMD-K6 microprocessor in 1998 and future generations of K86 microprocessors in 1999 and beyond. The microprocessor market is characterized by very short product life cycles and migration to ever higher performance microprocessors. To compete successfully against Intel Corporation in this market, the Company must transition to new process technologies at a faster pace than before and offer higher performance microprocessors in significantly greater volumes. The Company has recently experienced significant difficulty in achieving its microprocessor yield and volume plans on 0.35 micron process technology, which in turn has adversely affected the Company's results of operations and liquidity. Independent of these yield problems, the Company has determined that it must convert from 0.35 micron to 0.25 micron process technology in Fab 25 as soon as possible in order to meet customer microprocessor needs for performance and volume, and to compete successfully against Intel. The Company's process technology transition schedule is aggressive and entails a high degree of risk. The Company's 0.25 micron process technology has not been qualified in Fab 25. There can be no assurance that the Company will execute a successful transition to 0.25 micron process technology in Fab 25, or that the Company will achieve the production ramp necessary to meet customer needs for higher performance AMD- K6 19 microprocessors in the volumes customers require, or that the Company will increase revenues sufficient to achieve profitability in the microprocessor business. The failure to convert Fab 25 to 0.25 micron process technology on a timely basis could adversely affect unit production yields and volumes, result in the failure to meet customer demands, cause customers to cease purchasing AMD-K6 microprocessors, and could impact the viability of the Company's microprocessor business, any of which would have a material adverse effect on the Company. The Company's production and sales plans for the AMD-K6 microprocessors are subject to other risks and uncertainties, including: whether the Company can successfully fabricate higher performance AMD-K6 microprocessors in planned volume mixes; whether it can maintain and continue to improve production yields on wafers still being processed on 0.35 micron process technology; the effects of Intel new product introductions, marketing strategies and pricing; the continued development of worldwide market acceptance for the AMD-K6 microprocessor and systems based on it; whether the Company will have the financial and other resources necessary to continue to invest in the microprocessor business, including leading-edge wafer fabrication equipment and advanced process technologies; the possibility that products newly introduced by the Company may be found to be defective; possible adverse market conditions in the personal computer market and consequent diminished demand for the Company's microprocessors; and unexpected interruptions in the Company's manufacturing operations. The Company's ability to sell the volume of AMD-K6 microprocessors it currently plans to make in 1998 depends on increasing sales to existing customers and developing new customers. The loss of any current top tier OEM customer, or the Company's failure to attract additional customers through direct sales and through the Company's distributors, would affect the Company's ability to sell the volume of units planned, which could have a material adverse effect on the Company. In view of Intel Corporation's industry dominance and brand strength, AMD prices the AMD-K6 microprocessor at least 25 percent below the published price of Intel processors offering comparable performance. Thus, Intel Corporation's decisions on processor prices can impact and have impacted the average selling prices of the AMD-K6 microprocessors, and consequently can impact and have impacted the Company's margins. A failure to significantly improve production yields and volumes, achieve the production ramp and product performance improvements necessary to meet customer needs, continue to achieve market acceptance of the Company's AMD-K6 microprocessors and increase market share, or to increase AMD-K6 revenues substantially would have a material adverse effect on the Company. AMD is also devoting substantial resources to the development of its seventh- generation Microsoft Windows compatible microprocessor. The success of the AMD- K7(TM) and future generation microprocessors depends greatly on the Company achieving success and increasing market share with the AMD-K6 microprocessor. See also discussions below regarding Intel Dominance and Process Technology. Intel Dominance. Intel has long held a dominant position in the market for microprocessors used in personal computers. Intel Corporation's dominant market position enables 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 and dominant position enable it to vary prices on its microprocessors at will and thereby affect the margins and profitability of its competitors. Intel Corporation's strength also enables it to exert substantial influence and control over PC manufacturers through the Intel Inside advertising rebate program and to invest hundreds of millions of dollars in, and as a result exert influence over, many other technology companies. The Company expects Intel to continue to invest heavily in research and development, new manufacturing facilities, other technology companies and to maintain its 20 dominant position through the Intel Inside program, through other contractual constraints on customers, industry suppliers and other third parties, and by controlling industry standards. As an extension of its dominant microprocessor market share, Intel also now dominates the PC platform, which has made it difficult for PC manufacturers to innovate and differentiate their product offerings. 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, customer brand loyalty and control over industry standards, PC manufacturers and other PC industry participants, may have a material adverse effect on the Company. As Intel has expanded its dominance over the entirety of the PC system platform, many PC manufacturers have reduced their system development expenditures and have begun to purchase microprocessors in conjunction with chipsets or in assembled motherboards. The trend has been for PC OEMs to be increasingly dependent on Intel, less innovative on their own, and more of a distribution channel for Intel technology. In marketing its microprocessors to these OEMs and dealers, AMD depends upon companies other than Intel for the design and manufacture of core-logic chipsets, motherboards, basic input/output system (BIOS) software and other components. In recent years, these third-party designers and manufacturers have lost significant market share to Intel. In addition, these companies are able to produce chipsets, motherboards, BIOS software and other components to support each new generation of Intel Corporation's microprocessors only if Intel makes information about its products available to them in time to address market opportunities. Delay in the availability of such information makes and will continue to make it increasingly difficult for 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 chipsets, motherboards, BIOS software and other components. The Company similarly intends to expand its chipset and system design capabilities, and to offer OEMs licensed system designs incorporating the Company's microprocessors 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, chipsets and motherboards, the design of chipsets, memory and other semiconductor devices, and higher level board products which support Intel microprocessors, will become increasingly dependent on the Intel microprocessor design and may become incompatible with non-Intel processor-based PC systems. Intel Corporation's Pentium II is sold only in the form of a "Slot 1" daughtercard that is not physically or interface protocol compatible with "Socket 7" motherboards currently used with Intel Pentium and AMD-K6 processors. Thus, Intel is decreasing its support of the Socket 7 infrastructure as it transitions away from its Pentium processors. Because the AMD-K6 microprocessor is designed to be Socket 7 compatible, and will not work with motherboards designed for Slot 1 Pentium II processors, the Company intends to continue to work with third-party designers and manufacturers of motherboards, chipsets and other products to assure the continued availability of Socket 7 infrastructure support for the AMD-K6 microprocessor, including support for enhancements and features the Company plans to add to the microprocessor. There can be no assurance that Socket 7 infrastructure support for the AMD-K6 microprocessor will endure over time as Intel moves the market to its Slot 1 designs. AMD has no plans to develop microprocessors that are bus interface protocol compatible with the Pentium II 21 processors, because the Company's patent cross-license agreement with Intel does not extend to AMD microprocessors that are bus interface protocol compatible with Intel Corporation's Pentium Pro, Pentium II and subsequent generation processors. Similarly, the Company's ability to compete with Intel in the market for seventh-generation and future generation microprocessors will depend not only upon its success in designing and developing the microprocessors, but also in ensuring either that the microprocessors can be used in PC platforms designed to support Intel microprocessors as well as AMD microprocessors or that alternative platforms are available which are competitive with those used with Intel processors. A failure for any reason of the designers and producers of motherboards, chipsets and other system components to support the Company's x86 microprocessor offerings could have a material adverse effect on the Company. Dependence on Microsoft and Compatibility Certifications. The Company's ability to innovate beyond the x86 instruction set controlled by Intel depends on support from Microsoft in its operating systems. There can be no assurance that Microsoft will provide support in its operating systems for x86 instructions innovated by the Company and designed into its processors but not used by Intel in its processors. This uncertainty may cause independent software providers to forego designing their software applications to take advantage of AMD innovations, which would adversely affect the Company's ability to market its processors. In addition, AMD has obtained Windows, Windows 95 and Windows NT certifications from Microsoft and other appropriate certifications from recognized testing organizations for its K86 microprocessors. A failure to maintain 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. Future Dependence on Planned AMD-K7 Microprocessor. The Company's ability to increase microprocessor product revenues in 1999 and beyond, and to benefit fully from the substantial financial investments and commitments it has made and continues to make related to microprocessors, including the substantial investment the Company is making in Fab 30 in Dresden, Germany, depends upon its success in developing and marketing in a timely manner in 1999 its seventh- generation microprocessor, the AMD-K7. The Company currently plans to begin volume production of the AMD-K7 in the first half of 1999. No assurance can be made that such production will begin on the current planned schedule. The Company's production and sales plans for the AMD-K7 are subject to numerous risks and uncertainties, including: the successful development and installation of 0.18 micron process technology and copper interconnect technology; the pace at which the Company is able to ramp production in Dresden Fab 30 on 0.18 micron process technology; the use and market acceptance of a non-Intel processor bus (adapted by the Company from Digital Equipment Corporation's EV6 pin bus) in the design of the AMD-K7, and the availability of chipset vendors who will develop, manufacture and sell chipsets with the EV6 interface in volumes required by the Company; the availability to the Company's customers of cost and performance competitive Static Random Access Memories (SRAMs) (including TAG chips) if Intel corners the market for SRAM production capacity through its relationship with SRAM manufacturers; the Company's ability to design and manufacture modules internally or through subcontractors and the acceptance of motherboards used in the AMD-K7 as Intel moves the market to its Slot 1 design. A failure of 22 the AMD-K7 microprocessor to be timely introduced or achieve market acceptance, would have a material adverse effect on the Company. Fluctuations 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. For example, economic conditions in Asia could lead to reduced worldwide demand for PCs and the Company's microprocessors. 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(TM) and Nx686(TM), to other companies. The Company does not intend to produce any NexGen products. The Company believes that its AMD-K6 microprocessors are AMD products and not NexGen products because, among other things, the technology acquired in the NexGen merger was significantly modified using the Company's design, verification and manufacturing technologies. No NexGen licensee or other party has asserted any rights with respect to the AMD-K6 microprocessor; however, there can be no assurance that another company will not seek to establish rights with respect to the microprocessors. If another company were deemed to have rights to produce the Company's AMD-K6 microprocessors 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. Flash Memory Products Importance of Flash Memory Device Business; Increasing Competition. The market for Flash memory devices continues to experience increased competition as additional manufacturers introduce competitive products and industry-wide production capacity increases. The Company expects that the marketplace for Flash memory devices will continue to be increasingly competitive. A substantial portion of the Company's revenues is derived from sales of Flash memory devices, and the Company expects that this will continue to be the case for the foreseeable future. During 1996, 1997 and the first quarter of 1998, 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 more competitors emerge. A decline in the Company's Flash memory device business or declines in the gross margin percentage in this business could have a material adverse effect on the Company. 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. For example, there is currently an economic crisis in Asia, which has led to weak demand for the Company's products in certain Asian economies - notably Korea and Japan. The Company anticipates that the Asian economic crisis 23 may continue to affect adversely the Company's results of operations, and the further decline of the economic condition in Asia could in the future affect demand for microprocessors and other integrated circuits, which could have a material adverse effect on the Company's sales and operating results. 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 is increasing its manufacturing capacity by making significant capital investments in Fab 25 and in Dresden Fab 30. In addition, the building construction of FASL II, a second Flash memory device manufacturing facility, is complete and equipment installation is in progress. The Company is also building a new test and assembly facility in Suzhou, China. 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 could have a material adverse effect on the Company. In contrast to the above, there also 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. Any inability of AMD to generate sufficient manufacturing capacities 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. 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 fails to successfully ramp production in Fab 25 of 0.25 micron process technology, if the Company's microprocessors fail to continue 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. For example, the Company's ability to generate sufficient revenue to achieve profitability in the microprocessor business in the near future and the Company's success in competing with Intel, and producing higher performance AMD-K6 microprocessors in volumes sufficient to increase market share depends on the timely development and qualification of 0.25 micron process technology in Fab 25. There can be no assurance that the Company will be able to commit Fab 25 production to a qualified 0.25 micron process technology in order to fabricate product in sufficient volume to generate revenue necessary to offset investments in Fab 25 and meet the anticipated needs and demands of its customers. Likewise, the Company is making a substantial investment in Dresden Fab 30. The business plan for Dresden Fab 30 calls for the successful development and 24 installation of 0.18 micron process technology and copper interconnect technology in order to manufacture the AMD-K7 microprocessor beginning in 1999. There can be no assurance that the Company will be able to develop or obtain the leading-edge process technologies that will be required in Dresden Fab 30 to fabricate the AMD-K7 microprocessor successfully. Manufacturing Interruptions and Yields. 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. For example, the Company's recent results have been negatively affected by disappointing AMD-K6 microprocessor yields. The Company may in the future be materially adversely affected by fluctuations in manufacturing yields. The manufacture of integrated circuits is a complex process. Normal manufacturing risks include errors and interruptions in the fabrication process and defects in raw materials, as well as other risks, all of which can affect yields. Additional manufacturing risks incurred in ramping up new fabrication areas and/or new manufacturing processes include errors and interruptions in the fabrication process, equipment performance, process controls as well as other risks, all of which can affect yields. Product Incompatibility. 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. 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. Essential Manufacturing Materials. Certain 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 a few foreign 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. International Manufacturing and Foundries. 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 25 assembly and test facility. The Company also depends on foreign foundry suppliers and joint ventures for the manufacture of a portion of its finished silicon wafers. Foreign manufacturing and construction of foreign facilities entail political and economic risks, including political instability, expropriation, currency controls and fluctuations, changes in freight and interest rates, and loss or modification of exemptions for taxes and tariffs. For example, if 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 for 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. In addition, the agreements entered into by AMD Saxony in connection with the Dresden Fab 30 loan substantially prohibit the transfer of assets from AMD Saxony to the Company, which will prevent the Company from using current or future assets of AMD Saxony other than to satisfy obligations of AMD Saxony. Programmable Logic Software Risks. Historically, the Company's programmable logic subsidiary, Vantis, has depended on third parties to develop and maintain software "fitters" that allow electrical circuit designs to be implemented using Vantis' complex programmable logic devices. Currently, Vantis has contracted with MINC, Inc. (MINC), a vendor of complex programmable logic device software development tools, to develop and maintain software fitters for Vantis' products. If MINC were to stop developing and maintaining software fitters for Vantis' products, or if the software developed by MINC was subject to delays, errors or "bugs," and Vantis was not able to internally develop and maintain such software fitters, then Vantis would need to find another vendor for such services. No assurance can be given that Vantis would be able to locate additional software development tool vendors with the available capacity and technology necessary for the development and maintenance of software fitter tools, or, if an additional vendor or vendors were identified, that Vantis would be able to enter into contracts with such vendors on terms acceptable to Vantis. Any interruption in the MINC services, or Vantis' inability to find an acceptable alternative vendor for software services in a timely manner, could have a material adverse effect on Vantis. Vantis recently initiated efforts to manage and control the development and maintenance of software fitters for Vantis' products internally. Undertaking significant software development projects is a new effort for Vantis and is subject to many risks, including risks of delays, errors and "bugs," and customer resistance to change. If Vantis' internally-developed software is not 26 available as scheduled or fails to gain market acceptance, Vantis would need to contract on acceptable terms with vendors having the available capacity and technology to develop and maintain such software. No assurance can be given that Vantis' efforts to internally develop and maintain the software needed to sell and support its products will be successful. Any inability of Vantis to successfully develop and maintain software internally in a cost-effective manner could have a material adverse effect on Vantis. Vantis' Dependence on Effective Deployment and Management of Newly-Created FAE Staff. Vantis' major competitors each have a well established network of field application engineers (FAEs). In comparison, Vantis has only recently created its own network of FAEs in order to support its products more effectively and to enhance customer satisfaction with those products. FAEs service larger customer accounts by consulting with customers on specific product issues and providing feedback to Vantis as to customer needs. The future success of Vantis may be affected by its ability to deploy and manage such FAEs and to continue to attract and retain qualified technical personnel to fill these positions. Currently, availability of such qualified technical personnel is limited, and competition among companies for experienced FAEs is intense. During strong business cycles, Vantis expects to experience difficulty in filling its needs for FAEs. No assurance can be given that Vantis will be able to effectively deploy or manage its new network of FAEs, and the failure to do so could delay or limit customer acceptance of Vantis products and otherwise have a material adverse effect on Vantis. Recent Introduction of Vantis' FPGA Products. In January of 1998, Vantis introduced its first field programmable gate array (FPGA) products, which it intends to sell under the VF1 name beginning in the second half of 1998. The market for FPGAs is highly competitive. The design, marketing and sale of FPGA products is subject to many risks, including risks of delays, errors, and customer resistance to change. Vantis does not anticipate significant sales of the VF1 family of products until 1999 at the earliest, and no assurance can be given that its VF1 FPGA products will be available as scheduled or will gain market acceptance. Inadequate forecasts of customer demand, delays in responding to technological advances or to limitations of the VF1 FPGA products, and delays in commencing volume shipments of the VF1 FPGA products each could have a material adverse effect on Vantis. Failure to compete successfully in this highly competitive FPGA market would restrict Vantis' ability to offer high performance products across all major segments of the PLD market and could have a material adverse effect on Vantis. 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. 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 of 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 27 standards and technological changes, or to respond to new product announcements by others, or that any such new products will achieve market acceptance. Competition. The IC industry is intensely competitive and, historically, has experienced rapid technological advances in product and system technologies. After a product is introduced, prices normally decrease over time as production efficiency and competition increase, and as 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 capabilities that may result in significant performance improvements. Competition in the sale of ICs is based on performance, product quality and reliability, price, adherence to industry standards, software and hardware compatibility, marketing and distribution capability, brand recognition, financial strength and ability to deliver in large volumes on a timely basis. 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 produced and 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 due to vacation and holiday schedules (for example, decreased demand in Europe during the summer), 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. Furthermore, the failure to successfully ramp production to 0.25 micron process technology in Fab 25 and to increase production levels could cause existing demand to abate from current levels, which would 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, in most instances 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 28 agreement with the distributor is terminated. The market for the Company's products is generally characterized by, among other things, severe price competition. The price protection and return rights AMD offers to its distributors could materially adversely affect the Company if there is an unexpected significant decline in the price of the Company's products. 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. Intellectual Property Rights; Potential Litigation. There can be no assurance that the Company will be able to protect its technology or other intellectual property adequately through patents, copyrights, trade secrets, trademarks and other measures 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. 29 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 and/or pricing by AMD or its competitors, the pace of new product manufacturing ramps, production yields of key products 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. 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. 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 or to make acquisitions. The Company's current business plan envisions substantial cash outlays requiring external capital financing. There can be no assurance that capital and/or long-term financing will be available on terms favorable to the Company or in sufficient amounts to enable the Company to implement its current plan. 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. Impact of Year 2000. The "Year 2000 Issue" is the result of computer programs being written using two digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company will be required to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. If required modifications to existing software and conversions to new software are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company will use both internal and external resources to reprogram or replace and test the software for Year 2000 modifications. The Company has a plan to formally communicate with all of its significant suppliers and/or subcontractors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. The Company does not currently have any information concerning the Year 2000 compliance status of its customers. In the event that any of the Company's significant customers and suppliers do not successfully and timely achieve Year 2000 compliance, the Company's business or operations could be adversely affected. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The Company is currently assessing its exposure to contingencies related to the Year 2000 Issue for the products it has sold; however, it does not expect these to have a material impact on the operations of the Company. 30 The Company anticipates completing the Year 2000 project by the first quarter of 1999, which is prior to any anticipated impact on its operating systems. This date is contingent upon the timeliness and accuracy of software upgrades from vendors, adequacy and quality of resources available to work on completion of the project and any other factors. The total expense of the Year 2000 project is estimated at $10 million, which is not material to the Company's business operations or financial condition. The expenses of the Year 2000 project are being funded through operating cash flows. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. There can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. 31 II. Other Information Item 1. Legal Proceedings McDaid v. Sanders, et al. (Case No. C-95-20750-JW, N.D. Cal.): Kozlowski, et al. V. Sanders, et al. (Case No. C-95-20829-JW, N.D. Cal.). On April 23, 1998, the Company announced that it had reached an agreement in principle to settle this class action for $11,500,000 to be funded by the Company. The agreement is subject to the approval of the Company's Board of Directors and confirmation by the United States District Court in San Jose, California. The Company's financial results are not materially adversely affected. Item 6. Exhibits and Report on Form 8-K (a). Exhibits *3.2 By-Laws, as amended 27 Financial Data Schedule (b). Report on Form 8-K The following report on Form 8-K was filed during the quarter for which this report is filed: 1. Current Report on Form 8-K dated January 27, 1998 reporting under Item 5 - Other Events - fourth quarter earnings. ________ * This report includes a correct copy of the By-Laws in effect as of the date of this report in replacement of the copy of the By-Laws previously filed. 32 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly earned this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED MICRO DEVICES, INC. Date: April 23 , 1998 By: /s/ James P. Ashby --------------- ------------------- James P. Ashby Vice President and Corporate Controller Signing on behalf of the registrant and as the principal accounting officer 33 EXHIBIT INDEX ------------- Exhibits - -------- * 3.2 By-Laws, as amended 27 Financial Data Schedule _______ * This report includes a correct copy of the By-Laws in effect as of the date of this report in replacement of the copy of the By-Laws previously filed.