FINANCIAL HIGHLIGHTS
Five Years Ended December 27, 1998
(Dollars in thousands except per share amounts,
ratios and employment figures) 1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------
Net sales $2,155,453 $2,468,379 $1,953,019 $2,356,375 $2,542,141
Operating income (loss) 469,035 222,200 (253,310) (90,653) (163,642)
Net income (loss) 270,942 216,326 (68,950) (21,090) (103,960)
Net income (loss) per
common share:
Basic 2.22 1.69 (0.51) (0.15) (0.72)
Diluted 2.03 1.57 (0.51) (0.15) (0.72)
Working capital 441,649 461,509 445,604 448,497 721,308
Total assets 2,525,721 3,078,467 3,145,283 3,515,271 4,252,968
Long-term debt, capital lease
obligations and other,
less current portion 75,752 214,965 444,830 662,689 1,372,416
Stockholders' equity 1,797,354 2,102,462 2,021,878 2,029,543 2,005,049
Capital additions 586,473 650,322 493,723 729,870 996,170
Depreciation and amortization 224,421 272,527 346,774 394,465 467,521
Research and development 295,326 416,521 400,703 467,877 567,402
Research and development as
a percentage of net sales 13.7% 16.9% 20.5 % 19.9 % 22.3 %
Return on equity 17.2% 11.1% (3.3)% (1.0)% (5.2)%
Debt as a percentage of capital 7.6% 11.9% 19.4 % 26.6 % 43.2 %
Worldwide employment 11,994 12,981 12,181 12,759 13,597>>
[GRAPH APPEARS HERE]
1
TO MY FELLOW SHAREHOLDERS
1998 was the year of the AMD-K6(R)-2 processor with 3DNow!(TM) technology.
Our introduction of the AMD-K6-2 processor with 3DNow! technology in May of
1998 was a watershed event. For the first time in our history, we had a new,
differentiated processor, fully compatible with the Microsoft(R) Windows(R)
computing standard, that offered clear, compelling performance advantages for
consumers.
The response of the marketplace has validated our strategy:
. Today nine of the world's top ten personal computer manufacturers offer
systems powered by AMD-K6 family processors, including the world's #1 and #2
manufacturers of portable systems.
. Unit shipments of AMD-K6 family processors more than trebled year-to-
year, and revenues
from AMD-K6 family processors nearly trebled to $1.25 billion.
. AMD shipped more than 13 million AMD-K6 family processors in 1998 -
including more
than 8.5 million AMD-K6-2 processors with 3DNow! technology.
. AMD-K6 family processors captured a 16 percent share of the worldwide
market for Windows compatible processors in the fourth quarter of 1998 - more
than double our market share
for the same quarter of 1997!
The success of the AMD-K6-2 processor enabled AMD to achieve record
quarterly revenues of $788,820,000, as well as record annual revenues of
$2,542,141,000. In 1998, AMD revenues grew by 8 percent in a year when worldwide
shipments of integrated circuits declined by nearly 10 percent.
Despite the progress we made in microprocessors, enabling a return to
profitability in the second half, AMD incurred a substantial net loss of
$103,960,000, or $0.72 per share, in 1998.
Our non-microprocessor product groups - our Communications Group, our
Memory Group, and Vantis, our programmable logic subsidiary - were severely
impacted by continuing weak demand and resultant price pressures due to the
lingering recession in the worldwide semiconductor industry. Revenues from these
groups in the aggregate continued to decline throughout the year, in some
measure offsetting the strong revenue growth of our Computation Products Group.
I do not expect significant growth in revenues from these product lines during
the first half of 1999. Therefore, for the near term, any and all revenue growth
must come from our Computation Products Group, i.e., processors for Windows
computing.
At AMD, we define "winning" as gaining market share, and "success" as
profitable growth. By these definitions, even though we are winning, we have not
been consistently successful. The necessity of investing heavily and
continuously in research and development while bringing up additional production
facilities in order to execute our long-term strategy continues to make it
difficult to achieve consistent profitable growth. I am not satisfied with our
performance, and I will not be satisfied until we can consistently grow
profitably.
Our principal challenge in 1999 will be to continue to grow our
microprocessor market share and position ourselves for sustained profitability.
All applicable resources at AMD must and will be focused accordingly as we
restructure our activities to address the realities of the marketplace.
The 1,000 Days In 1996 I issued a challenge to our worldwide sales force. At
that time, I told them that we had 1,000 days in which to establish an
alternative platform for Microsoft Windows computing. The 1,000-day window of
opportunity began with the introduction of our first independently engineered
alternative to Intel processors. Our overarching goal was and is to capture a 30
percent unit share of the worldwide market for processors for Windows computing
by the end of 2001, creating an opportunity for us to achieve financial returns
superior to the semiconductor industry. Our immediate challenges, however, were
to shed our "clone image" and secure a beachhead with innovative products of our
own concept and design.
2
By the end of 1998 - and the expiration of our initial 1,000-day campaign -
the beachhead was ours. The AMD-K6-2 processor with 3DNow! technology and a low-
cost infrastructure supported by independent chipset and motherboard suppliers
throughout the world have established AMD and our AMD-K6 processor family as the
only real alternative to the Intel monopoly. With a 16 percent market share, we
are just over halfway toward our long-term goal. Let's review the progress we
have made and the challenges we must meet to achieve that goal.
Our "P3 Strategy" Execution of our "P3 Strategy" continues to be the key to
success: first, we must be the nucleating point for platforms based on processor
products that offer compelling features within the Microsoft Windows standard;
second, we must have leading-edge process technology that will enable us to
deliver high-performance processors at competitive cost; and finally, we must
have production capacity to manufacture processors using that technology in
volume to support our customers as they come to depend upon AMD for a growing
percentage of their requirements.
During the past three years we have made extraordinary progress in creating
these wealth-producing assets.
PROCESS TECHNOLOGY. Today all of our microprocessor production is on
leading-edge 0.25-micron (250-nanometer) technology. We have successfully
developed 180-nanometer, six-layer, aluminum interconnect technology to remain
at the leading edge and have produced advanced processors using this technology
both in our development facility in Sunnyvale, California, and in Fab 25 in
Austin, Texas. We are on schedule to introduce 180-nanometer technology into
high-volume production in the third quarter of 1999.
The next step in the continuing evolution of process technology will employ
the use of copper interconnect technology to achieve even higher-performance
devices and lower-cost production. During 1998, we entered into a seven-year
agreement with Motorola to collaborate on the development of process technology,
including copper interconnect technology. This alliance with another of the
world's premier semiconductor manufacturers has increased our confidence that we
will meet our schedule for introduction of copper interconnect technology into
production at Fab 30 in Dresden, Germany. We have commenced process integration
wafer starts that will utilize copper interconnect technology resulting from
this alliance, and we plan to qualify the process for production by the end of
this year in order to generate revenues from Fab 30 in the first quarter of
2000.
Production Capacity. We have completed the outfitting of Fab 25. This
facility is now equipped to produce 5,000 wafers per week - 250,000 wafers per
year - employing technologies with geometries of 250 nanometers and finer. Fab
25 is currently operating at approximately 80 percent of capacity.
We have completed construction of Fab 30, and are in the process of
installing equipment and qualifying the facility to commence commercial
production by the end of this year. When fully equipped, Fab 30 will also be
capable of producing 250,000 wafers per year employing technologies of 180
nanometers and finer with copper interconnects.
Platforms/Products. The AMD-K6-2 processor with 3DNow! technology enabled
AMD to gain a substantial share of the mainstream PC market, reaching a 37
percent share of the market in December for desktop systems in the North
American retail channel, which is frequently a bellwether for trends in the PC
industry. In January of this year, we were #1 in the channel with a 43.9 percent
market share versus Intel's 40.3 percent! I believe a growing installed base of
PC systems with 3DNow! technology establishes a strong platform for software
developers, which should enhance opportunities for even broader acceptance of
AMD processors going forward. All AMD processors for the PC market incorporate
3DNow! technology, which is supported by Microsoft Windows Direct X.
The AMD-K6-III processor with 3DNow! technology, our latest offering for
the mainstream PC market, features a unique performance-enhancing tri-level
cache memory design with more on-system
3
cache memory than any other processor currently available for Windows computing.
With outstanding capability and features, the AMD-K6-III processor will enable
PC manufacturers to build more affordable high-performance systems. I expect
that an increasing proportion of production for the market segments served by
AMD will be devoted to the AMD-K6-III processor family throughout the remainder
of 1999.
The Convergence of Computation and Communications As the convergence of
computation and communications continues to accelerate, driven in large measure
by the burgeoning growth of the Internet, AMD will devote increasing focus on
enhancement of the personal computer as a visual computing platform and
information tool. Today, our Computation Products Group (which now includes our
Embedded Processor Division) produces two-thirds of our total revenues. With new
opportunities created by the Internet and electronic commerce, our
Communications Group is developing new products, such as our PCnet (TM) Home
controller, that will enable home PC users to link multiple PCs together over
standard telephone wiring - all sharing access to a single Internet connection.
We will also supply ADSL (Asynchronous Digital Subscriber Line) chipsets capable
of delivering high-speed access to the Internet over existing copper telephone
lines.
The AMD-K7 Processor and the Next 1,000 Days Our mission of establishing
the beachhead and putting in place significant wealth-producing assets has been
accomplished in the aforementioned 1,000-day campaign. Our mission for the next
1,000 days is to extract the value for our shareholders from the substantial
investments we have made and continue to make in our P3 strategy. The
forthcoming AMD-K7(TM) processor family will be central to our success. The AMD-
K7 processor will be the first seventh-generation Microsoft Windows compatible
processor in the marketplace.
Prototype AMD-K7 processors were demonstrated at Comdex last fall, and we
are currently sampling versions with clock speeds in excess of 500 megahertz.
Simply put, we believe that the AMD-K7 processor will be the highest-performance
processor for Windows computing on the market in 1999. We plan to aggressively
increase clock speeds over the 18-month period following introduction with a
goal of achieving a clock speed of 1 gigahertz by the end of next year!
The AMD-K7 processor family and the infrastructure to support it offer the
greatest technical, logistical and marketing challenges in AMD's 30-year
history. This is the culmination of our corporate purpose of "empowering people
everywhere to lead more productive lives" and our corporate mission "to grow
faster and achieve superior returns to the semiconductor industry" through
innovative solutions.
Microprocessors for Microsoft Windows computing represent the largest
segment of the worldwide semiconductor industry. The barriers to entry are high.
The scale of investment to compete is enormous. The rewards of success should be
commensurate.
Carpe diem!
/s/ W. J. Sanders III
W. J. Sanders III
Chairman and Chief Executive Officer
February 26, 1999
- --------------------------------------------------------------------------------
The forward-looking statements contained in the above letter are subject to
risks and uncertainties, including those discussed in this annual report and the
company's Form 10-K for the fiscal year ended December 27, 1998, as filed with
the Securities and Exchange Commission, that could cause actual results to
differ materially from those projected.
- --------------------------------------------------------------------------------
4
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; our ability to access external sources of
capital; our ability to transition to new process technologies; our ability to
increase unit shipments of microprocessors at higher speed grades; anticipated
market growth; Year 2000 costs; the effect of foreign currency hedging
transactions; the effect of adverse economic conditions in Asia; our new
integrated circuit manufacturing and design facility in Dresden, Germany
(Dresden Fab 30); and the Fujitsu AMD Semiconductor Limited (FASL) manufacturing
facilities. See "Financial Condition" and "Risk Factors" below, as well as such
other risks and uncertainties as are detailed in our Securities and Exchange
Commission reports and filings for a discussion of the factors that could cause
actual results to differ materially from the forward-looking statements.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto at December 27, 1998 and December 28,
1997 and for each of the three years in the period ended December 27, 1998.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Advanced Micro Devices, Inc. (AMD, we or our) participates in all three
technology areas within the digital integrated circuit (IC) market - memory
circuits, logic circuits and microprocessors - through, collectively, (1) our
AMD segment, which consists of our three product groups - Computation Products
Group (CPG), Memory Group and Communications Group; and (2) our Vantis segment,
which consists of our 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, the Memory Group, the
Communications Group and Vantis for 1998, 1997 and 1996:
(Millions) 1998 1997 1996
- ---------------------------------------------------
AMD segment
CPG $1,257 $ 682 $ 341
Memory Group 561 724 698
Communications Group 519 707 666
----------------------
2,337 2,113 1,705
Vantis segment 205 243 248
----------------------
Total $2,542 $2,356 $1,953
======================
For the year ended December 27, 1998, we experienced lower than expected net
sales due to the general downturn in the worldwide semiconductor market and the
current economic conditions in Asia, which negatively impacted our results of
operations. To the extent that these factors continue to deteriorate in 1999,
our net sales and results of operations may continue to be negatively affected.
Recent and Anticipated Results of Operations
Net sales were $789 million in the fourth quarter of 1998 compared to $686
million in the third quarter of 1998 and $613 million in the fourth quarter of
1997. In the first quarter of 1999, we implemented design enhancements to
increase the yield of higher-speed versions of AMD-K6(R)-2 microprocessors.
However, we will incur a shortfall in
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
microprocessor units shipped in the first quarter of 1999 as a result of lower
than expected yields in the first eight weeks of the quarter on wafers started
prior to our implemention of these design enhancements. Additionally, we expect
that we will be unable to increase our microprocessor average selling prices in
the first quarter of 1999 due to Intel's announced price reductions. As a result
of these factors, combined with increases in our planned research and
development spending on technology development through Dresden Fab 30 and our
alliance with Motorola (described below), we will be unable to increase our
microprocessor revenue and expect to incur a significant operating loss in the
first quarter of 1999.
Net Sales Comparison of Years Ended December 27, 1998 and December 28, 1997
Total net sales increased by $186 million, or 8 percent, to $2,542 million in
1998 from $2,356 million in 1997 primarily due to an increase in CPG net sales
of $575 million. This increase was partially offset by a combined decrease in
the other product groups of $389 million.
CPG net sales increased by 84 percent to $1,257 million in 1998 compared to $682
million in 1997. This increase was primarily due to increased shipments of
microprocessors at a higher speed grade mix and higher average selling prices.
CPG sales growth in 1999 is dependent on increased unit shipments at higher
speed grades and higher average selling prices, as to which we cannot give any
assurance.
Memory Group net sales decreased 23 percent to $561 million from the prior year
primarily due to a significant decline in the average selling price of Flash
memory devices. This decrease was partially offset by an increase in unit
shipments of Flash memory devices. Oversupply in the Flash market, combined with
an increase in competition, has caused downward pressure on the average selling
price of Flash memory devices. We expect continued price pressure from intense
competition in Flash memory devices. In addition, average selling prices and
unit shipments of EPROMs declined. We expect future EPROM sales to be flat or
down due to a general shift to Flash memory devices.
Communications Group net sales decreased 27 percent to $519 million from the
prior year primarily due to a significant decrease in unit shipments of nearly
all products. Our offerings of network products, which represented approximately
one-half of the decline in Communications Group net sales, have not kept pace
with the market shift towards higher-performance products. Our sales of tele-
communication products, which represented more than one-third of the decline in
Communications Group net sales, were particularly impacted by the general
economic downturn in Asia.
Vantis net sales decreased 16 percent to $205 million from the prior year due to
a decrease in unit shipments and lower average selling prices of low-density or
simple PLD (SPLD) products. The total available market for SPLD products has
been shrinking for the past three years as older SPLD products are increasingly
replaced by complex PLD (CPLD) and field programmable gate array (FPGA) products
in new designs. This decline in market demand for SPLDs intensified at the
beginning of 1998 and led to increased competition among SPLD suppliers. In
addition, sales of CPLDs decreased slightly despite a significant sales increase
in our newer CPLD products.
Net Sales Comparison of Years Ended December 28, 1997 and December 29, 1996
In 1997, net sales of $2,356 million increased $403 million, or 21 percent, from
1996 primarily due to an increase in CPG net sales. Net sales from non-
microprocessor products increased nominally in 1997 compared to 1996.
CPG net sales doubled to $682 million in 1997 compared to $341 million in 1996
largely due to sales of AMD-K6 microprocessors, which became available at the
end of the first quarter of 1997. This sales growth was partially offset by
decreased sales of earlier generations of microprocessors, which represented
most of our microprocessor sales in 1996.
Memory Group net sales increased 4 percent as substantial Flash memory device
unit growth more than offset declines in the average selling price. EPROM
product net sales decreased due to a decline in both the average selling price
and unit shipments.
Communications Group net sales increased 6 percent primarily due to increased
unit shipments of telecommunication products. This increase was partially offset
by a decline in the average selling price of network products. Vantis net sales
decreased 2 percent due to declines in the average selling price of both SPLD
and CPLD products. These decreases were partially offset by increases in unit
shipments of both SPLD and CPLD products.
6
COMPARISON OF EXPENSES, GROSS MARGIN PERCENTAGE AND INTEREST
The following is a summary of expenses, gross margin percentage and interest
income and other, net for 1998, 1997 and 1996:
(Millions except for gross margin percentage) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Cost of sales $1,719 $1,578 $1,441
Gross margin percentage 32% 33% 26%
Research and development $ 567 $ 468 $ 401
Marketing, general and administrative 420 401 365
Litigation settlement 12 - -
Interest income and other, net 34 35 59
Interest expense 66 45 15
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly due to the state-of-the-art
production facilities required for microprocessors. As a result, gross margin is
significantly affected by short-term fluctuations in product sales. Gross margin
percentage growth is dependent on increased sales from microprocessor and other
products as fixed costs continue to rise due to continuing capital investments
required to expand production capacity.
Gross margin percentage decreased to 32 percent in 1998 compared to 33 percent
in 1997. The decline in gross margin percentage was primarily caused by a
decline in net sales of non-microprocessor products. During 1998, we continued
to invest in the facilitization of Fab 25, our submicron integrated circuit
manufacturing facility in Austin, Texas, and in the transition from 0.35-micron
to 0.25-micron process technology in Fab 25. These investments have led to
significant increases in our fixed costs associated with our microprocessor
products. Fixed costs will continue to increase as we add equipment to Fab 25
and as we introduce equipment for 0.18-micron process technology capacity in our
production facilities. Accordingly, absent significant increases in sales,
particularly with respect to microprocessors, we will continue to experience
pressure on our gross margin percentage.
Gross margin percentage increased in 1997 compared to 1996 primarily due to
increased sales of microprocessors manufactured in Fab 25.
In 1998, we entered into an alliance with Motorola for the development of Flash
memory and logic technology. The alliance includes a seven-year technology
development and license agreement and a patent cross-license agreement. The
agreements provide that we will co-develop with Motorola future-generation logic
process and embedded Flash technologies. The licenses to each generation of
technology vary in scope relative to the contributions to technology development
made by both companies. Subject to certain conditions, the companies will share:
. ownership of jointly developed technology and any intellectual property
rights relating to such technology;
. development costs for mutually agreed upon facilities, tasks and
technologies; and
. foundry support.
In addition, we will gain access to Motorola's semiconductor logic process
technology, including copper interconnect technology. In exchange, we will
develop and license to Motorola a Flash module design to be used in Motorola's
future embedded Flash products. The licenses to logic process technologies
granted to AMD may be subject to variable royalty rates, which are dependent on
the technology transferred and subject to certain other conditions. Motorola
will have additional rights, subject to certain conditions, to make stand-alone
Flash devices, and to make and sell certain data networking devices. The rights
to data networking devices may be subject to variable royalty payment
provisions.
Research and development expenses increased in 1998 compared to 1997 due to an
increase in spending in Dresden Fab 30 for construction, facilitization and pre-
production process development and in Fab 25 for new product and process
development. In addition, we incurred research and development expenses of $11
million in the fourth quarter of 1998 related to the alliance with Motorola. We
expect research and development spending related to this alliance
7
to be between $15 million and $20 million per quarter in 1999. We cannot give
any assurance that we will benefit from this additional research and development
spending through future copper interconnect-based product offerings, and any
such failure could have a material adverse effect on our business.
Research and development expenses increased in 1997 compared to 1996. In 1996, a
significant portion of our Submicron Development Center (SDC) in Sunnyvale,
California, capacity was devoted to the production of products for sale. In
1997, a higher percentage of SDC capacity was devoted to process development.
Marketing, general and administrative expenses increased in 1998 compared to
1997 primarily due to depreciation expense and labor costs associated with the
installation of new order management and accounts receivable systems and related
software upgrades. In 1997, marketing, general and administrative expenses
increased compared to 1996 primarily due to higher advertising and marketing
expenses associated with the introduction of the AMD-K6 micro processor.
Additionally, business systems expenses increased in 1997 due to new system
installation and upgrade expenses.
A litigation settlement of approximately $12 million was recorded in the first
quarter of 1998 for the settlement of a class action securities lawsuit against
AMD and certain of our current and former officers and directors. We paid the
settlement during the third quarter of 1998.
Interest expense increased in 1998 compared to 1997 due to the increase in debt
balances including the $517.5 million of Convertible Subordinated Notes sold in
May 1998 (the Convertible Subordinated Notes). There was no significant change
in interest income and other, net in 1998 compared to 1997. Interest expense
increased in 1997 compared to 1996 due to the increase in debt balances,
including the $400 million of Senior Secured Notes sold in August 1996 (the
Senior Secured Notes) and the $250 million four-year secured term loan received
under the 1996 syndicated bank loan agreement, which also provides for a
currently unused $150 million revolving line of credit (the Credit Agreement).
This increase was partially offset by higher capitalized interest related to the
second phase of construction of Fab 25 and construction of Dresden Fab 30.
Interest income and other, net decreased in 1997 compared to 1996 due to the
absence in 1997 of realized gains recorded in 1996 of approximately $41 million
from sales of equity securities. This reduction in 1997 was partially offset by
higher interest income in 1997 as a result of higher cash balances.
Income Tax
We recorded tax benefits of $92 million in 1998, $55 million in 1997 and $85
million in 1996, resulting in an effective tax benefit rate of approximately 44
percent in 1998, 55 percent in 1997 and 41 percent in 1996. The tax benefit rate
is greater than the federal statutory rate due to fixed tax benefits that
increase the benefit rate in a loss year. The lower tax benefit rate in 1998 and
1996 compared to 1997 reflects a lesser impact of these fixed benefits relative
to a larger pre-tax loss in 1998 and 1996 compared to 1997. Realization of our
net deferred tax assets ($171 million at December 27, 1998) is dependent on
future taxable income. While we believe 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 as a percent of net sales were 55 percent in 1998, 57
percent in 1997 and 53 percent in 1996. During 1998, approximately 8 percent of
our net sales were denominated in foreign currencies. We do not have sales
denominated in local currencies in those countries which have highly
inflationary economies (as defined by generally accepted accounting
principles). The impact on our operating results from changes in foreign
currency rates individually and in the aggregate has not been material.
Comparison of Segment Income (Loss)
We operate in two segments: (1) our AMD segment, which consists of our three
product groups - Computation Products Group, Memory Group and Communications
Group; and (2) our Vantis segment, which consists of Vantis. For a comparison of
segment net sales, refer to the previous discussions on net sales by product
group.
The following is a summary of operating income (loss) by segment for
1998, 1997 and 1996:
(Millions) 1998 1997 1996
- -------------------------------------------------------------------------
AMD segment $(185) $(127) $(270)
Vantis segment 22 37 17
----- ----- -----
Total $(163) $ (90) $(253)
===== ===== =====
8
The AMD segment's operating loss increased in 1998 compared to 1997 primarily
due to a significant increase in fixed costs associated with microprocessor
products, as well as increased costs for research and development related to
Dresden Fab 30 and the Motorola alliance and depreciation expense and labor
costs associated with the installation of new order management and accounts
receivable systems and related software upgrades. These increases in expenses
were partially offset by higher net sales in the AMD segment. The AMD segment's
operating loss decreased in 1997 compared to 1996 primarily due to increased AMD
segment net sales. This increase in net sales was partially offset by increases
in research and development expenses as well as advertising and marketing
expenses for the introduction of the AMD-K6 microprocessor.
The Vantis segment's operating income decreased in 1998 compared to 1997 due to
a decrease in unit shipments, lower average selling prices of SPLD products and
higher spending on software and product development. This decrease in net sales
was partially offset by a decrease in costs and expenses as a result of reduced
manufacturing activity in response to lower demand for SPLDs coupled with lower
per unit wafer fabrication expenses and lower marketing, general and
administrative expenses. Despite a decrease in net sales, the Vantis segment's
operating income increased in 1997 compared to 1996 due to the transfer of
manufacturing activity from the SDC to other production facilities, where
production costs were lower. In addition, research and development expenses in
1997 decreased from 1996.
- --------------------------------------------------------------------------------
Financial Condition
Cash flow from operating activities was $144 million in 1998 compared to $399
million in 1997 and $89 million in 1996. Net operating cash flows in 1998
decreased $254 million year over year primarily due to an increase in net loss
of $83 million combined with a decrease in the net change in operating assets
and liabilities of $153 million and a decrease in net non-cash adjustments to
net loss of $18 million. The decrease in the net change in operating assets and
liabilities was primarily due to a lower increase in payables and accrued
liabilities in 1998 compared to 1997. The decrease in net non-cash adjustments
to net loss was primarily due to a larger increase in deferred income taxes in
1998 compared to 1997. This decrease was partially offset by an increase in
depreciation and amortization in 1998.
Investing activities consumed $998 million in cash during 1998 compared to $633
million in 1997 and $276 million in 1996. Substantially all of our net investing
activities in 1998 consisted of capital expenditures. Capital expenditures
increased in 1998 compared to 1997 due to continued investment in property,
plant and equipment primarily for Fab 25 and Dresden Fab 30. Capital
expenditures of $485 million in 1996 were offset by net proceeds from the sale
of short-term investments of approximately $207 million.
Our financing activities provided cash of $975 million in 1998, including
proceeds from the Convertible Subordinated Notes, borrowings from Dresdner Bank
AG in the amount of $300 million (denominated in deutsche marks), and capital
investment grants from the Federal Republic of Germany and the State of Saxony
of $197 million.
Financing sources of cash for 1997 and 1996 consisted primarily of borrowings
under the Credit Agreement in 1997 and proceeds from the Senior Secured Notes in
1996. The above sources were offset by debt repayments of $88 million in 1998,
$80 million in 1997 and $253 million in 1996. Financing activities for all years
presented include proceeds from the issuance of common stock under employee
stock plans.
We plan to continue to make significant capital investments in 1999. These
investments include those relating to the continued facilitization of Dresden
Fab 30 and Fab 25.
AMD Saxony, an indirect wholly owned German subsidiary of AMD, has constructed
and is installing equipment in Dresden Fab 30, a 900,000-square-foot submicron
integrated circuit manufacturing and design facility located in Dresden, in the
State of Saxony, Germany. AMD, the Federal Republic of Germany, the State of
Saxony and a consortium of banks are supporting the project. We currently
estimate construction and facilitization costs of Dresden Fab 30 to be $1.9
billion. In March 1997, AMD Saxony entered into a loan agreement and other
related agreements (the Dresden Loan Agreements) with a consortium of banks led
by Dresdner Bank AG. The Dresden Loan Agreements provide for the funding of the
construction and facilitization of Dresden Fab 30. The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of
Germany and the State of Saxony.
9
The Dresden Loan Agreements, which were amended in February 1998 to reflect
upgrades in wafer production technology as well as the decline in the deutsche
mark relative to the U.S. dollar, require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we have
invested $270 million to date in the form of subordinated loans and equity in
AMD Saxony, which includes $100 million in subordinated loans in 1998 ($60
million of which was paid after fiscal 1998 but before December 31, 1998). We
are required to make additional subordinated loans to, or equity investments in,
AMD Saxony totaling $170 million in 1999, $70 million of which must be funded
through the sale of at least $200 million of our stock by June 30, 1999. We
cannot give any assurance that the requisite external financing will be
available on favorable terms, if at all.
In addition to support from AMD, the consortium of banks referred to above has
made available $989 million in loans (denominated in deutsche marks) to AMD
Saxony to help fund Dresden Fab 30 project costs. AMD Saxony had $300 million of
such loans outstanding as of December 27, 1998.
Finally, the Federal Republic of Germany and the State of Saxony are supporting
the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in
the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount
of $989 million;
. capital investment grants and allowances totaling $289 million; and
. interest subsidies totaling $180 million.
Of these amounts (which are all denominated in deutsche marks), AMD Saxony has
received $275 million in capital investment grants and $8 million in interest
subsidies as of December 27, 1998. The grants and subsidies are subject to
conditions, including meeting specified levels of employment in December 2001
and maintaining those levels until June 2007. Noncompliance with the conditions
of the grants and subsidies could result in the forfeiture of all or a portion
of the future amounts to be received as well as the repayment of all or a
portion of amounts received to date. As of December 27, 1998, we were in
compliance with all of the conditions of the grants and subsidies.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed,
which will be repaid to AMD as AMD Saxony receives the grants or
subsidies from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under
the subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $130 million (denominated in deutsche
marks) until Dresden Fab 30 has been completed;
. fund certain contingent obligations including obligations to fund
project cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30,
up to approximately $87 million (denominated in deutsche marks) if AMD
Saxony does not meet its fixed charge coverage ratio covenant.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. At the end of the fourth quarter of 1998, the
exchange rate was approximately 1.67 deutsche marks to 1 U.S. dollar (which we
used to calculate our obligations denominated in deutsche marks).
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Holding, the parent company of AMD Saxony and
the wholly owned subsidiary of AMD, to comply with obligations in connection
with the Dresden Loan Agreements, including:
. material variances from the approved schedule and budget;
. our failure to fund equity contributions or share holder loans or
otherwise comply with our obligations relating to the Dresden Loan
Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings of proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding;
and
. the occurrence of default under the indenture pursuant to which the
Senior Secured Notes were issued (the Indenture) or the Credit
Agreement.
10
Generally, any such default which either (1) results from our noncompliance with
the Dresden Loan Agreements and is not cured by AMD or (2) results in recourse
to AMD of more than $10 million and is not cured by AMD, would result in a
cross-default under the Dresden Loan Agreements, the Indenture and the Credit
Agreement. Under certain circumstances, cross-defaults result under the
Convertible Subordinated Notes, the Indenture and the Dresden Loan Agreements.
In the event we are unable to meet our obligation to make loans to, or equity
investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD
Saxony will be unable to complete Dresden Fab 30 and we will be in default under
the Dresden Loan Agreements, the Indenture and the Credit Agreement, which would
permit acceleration of certain indebtedness, which would have a material adverse
effect on our business. There can be no assurance that we will be able to obtain
the funds necessary to fulfill these obligations and any such failure would have
a material adverse effect on our business.
Beginning in October 1998, the $250 million four-year secured term loan under
the Credit Agreement was repayable in eight equal quarterly installments of
approximately $31 million. As of December 27, 1998, the outstanding balance was
$219 million. As of December 27, 1998, we also had available unsecured
uncommitted bank lines of credit in the amount of $69 million, of which $6
million was outstanding.
In February and June 1998, certain of the covenants under the Credit Agreement,
including those relating to the modified quick ratio, minimum tangible net worth
and the fixed charge coverage ratio, were amended. As of December 27, 1998, we
were in compliance with all covenants under the Credit Agreement. In March 1999,
the parties to the Credit Agreement agreed to amend certain covenants, including
those relating to minimum tangible net worth, the modified quick ratio, the
leverage ratio and profitability, to facilitate our compliance with all
covenants under the Credit Agreement as of the end of the first quarter of 1999.
FASL, a joint venture formed by AMD and Fujitsu Limited in 1993, is continuing
the facilitization of its second Flash memory device wafer fabrication facility,
FASL II, in Aizu-Wakamatsu, Japan. We expect the facility, including equipment,
to cost approximately $1 billion when fully equipped. As of December 27, 1998,
approximately $368 million of such cost had been funded. Capital expenditures
for FASL II construction to date have been funded by cash generated from FASL
operations and local borrowings by FASL. During 1999, we presently anticipate
that FASL capital expenditures will continue to be funded by cash generated from
FASL operations and local borrowings by FASL. However, to the extent that FASL
is unable to secure the necessary funds for FASL II, we may be required to
contribute cash or guarantee third-party loans in pro portion to our 49.992
percent interest in FASL. As of December 27, 1998, we had loan guarantees of $81
million outstanding with respect to these loans. The planned FASL II costs are
denominated in yen and are, therefore, subject to change due to foreign exchange
rate fluctuations.
As a result of our alliance with Motorola, relating to the development of Flash
memory and logic technology, we expect related research and development spending
to be between $15 million and $20 million per quarter in 1999.
We believe that cash flows from operations and current cash balances, together
with external financing activities, will be sufficient to fund operations and
capital investments through 1999.
- --------------------------------------------------------------------------------
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 is required to be adopted in years
beginning after June 15, 1999. We expect to adopt SFAS 133 in 2000. We have not
completed our review of SFAS 133, and accordingly have not evaluated the effect
the adoption of the Statement may have on our consolidated results of operations
and financial position. SFAS 133 will require AMD to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
11
- --------------------------------------------------------------------------------
Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk Our exposure to market risk for changes in interest rates
relates primarily to our investment portfolio and long-term debt obligations. We
do not use derivative financial instruments in our investment portfolio. We
place our investments with high credit quality issuers and, by policy, limit the
amount of credit exposure to any one issuer. As stated in our investment policy,
we are averse to principal loss and ensure the safety and preservation of our
invested funds by limiting default risk, market risk and reinvestment risk.
We mitigate default risk by investing in only the highest credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
We primarily use proceeds from debt obligations to support general corporate
purposes including capital expenditures and working capital needs. We have no
interest rate exposure due to rate changes for the Convertible Subordinated
Notes and the Senior Secured Notes. However, we do have interest rate exposure
on our $250 million bank term loan due to its variable LIBOR pricing. From time
to time, we enter into interest rate swaps, primarily to reduce our interest
rate exposure by changing a portion of our interest rate exposure from floating
to fixed rate. There were no interest rate swaps outstanding at the end of
fiscal 1998.
The table below presents principal (or notional) amounts and related weighted-
average interest rates by year of maturity for our investment portfolio and debt
obligations as of December 27, 1998 and December 28, 1997.
1998 1997
---------------------------------------------------------------------------------------- --------
(Thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair value Total
- ---------------------------------------------------------------------------------------------------------------------- --------
Cash equivalents
Fixed rate amounts $ 22,434 - - - - - $ 22,434 $ 22,394 $ 37,761
Average rate 5.51% - - - - -
Variable rate amounts $136,408 - - - - - $ 136,408 $ 136,408 -
Average rate 5.12% - - - - -
Short-term investments
Fixed rate amounts $219,085 - - - - - $ 219,085 $ 219,617 $164,538
Average rate 5.64% - - - - -
Variable rate amounts $115,500 - - - - - $ 115,500 $ 115,500 $ 61,200
Average rate 5.66% - - - - -
Long-term investments
Equity investments - $ 7,027 - - - - $ 7,027 $ 13,292 $ 6,161
Fixed rate amounts - $ 2,000 - - - - $ 2,000 $ 2,003 $ 1,997
Average rate 5.88% 5.88% - - - -
Total investments
Securities $493,427 $ 9,027 - - - - $ 502,454 $ 509,214 $271,657
Average rate 5.49% 5.88% - - - -
Notes payable
Fixed rate amounts $ 6,017 - - - - - $ 6,017 $ 6,017 $ 6,601
Average rate 1.06% - - - - -
Long-term debt
Fixed rate amounts $ 283 $ 151 $53,611 $178,332 $468,290 $518,169 $1,218,836 $1,266,196 $410,056
Average rate 7.49% 7.49% 7.49% 7.59% 8.00% 6.01%
Variable rate amounts $125,000 $93,750 - - - - $ 218,750 $ 218,750 $250,000
Average rate 8.06% 8.06% - - - -
Foreign Exchange Risk We use foreign exchange forward and option contracts to
reduce our exposure to currency fluctuations on our net monetary assets position
in our foreign subsidiaries, liabilities for products purchased from FASL, fixed
asset purchase commitments and obligations for future investments in AMD Saxony.
The objective of these contracts is to minimize the impact of foreign currency
exchange rate movements on our operating results and on the cost of capital
asset acquisition. Our accounting policy for these instruments is based on our
designation of such instruments as hedging transactions. We do not use
derivative financial instruments for speculative or trading purposes. We had $13
million (notional amount) of short-term foreign currency forward contracts
denominated in the Japanese yen, German mark and British pound outstanding as of
December 27, 1998.
We also have entered into various foreign currency option arrangements. In 1997,
we purchased $150 million of call option contracts to hedge our obligations to
provide loans to, or invest equity in, AMD Saxony, of which $75 million were
outstanding as of December 27, 1998. In 1998, we entered into a no-cost collar
arrangement to hedge Dresden Fab 30 project costs through which we purchased
$300 million of put option contracts and sold $300 million of call option
contracts. We had $220 million of no-cost collar option contracts outstanding as
of December 27, 1998.
Gains and losses related to the foreign currency forward and option contracts
for the year ended December 27, 1998 were not material. We do not anticipate any
material adverse effect on our consolidated financial position, results of
operations or cash flows resulting from the use of these instruments in the
future. We cannot give any assurance that these strategies will be effective or
that transaction losses can be minimized or forecasted accurately.
The following table provides information about our foreign currency forward and
option contracts as of December 27, 1998 and December 28, 1997.
1998 1997
------------------------------------ ------------------------------------
Notional Average Estimated Notional Average Estimated
(Thousands except contract rates) amount contract rate fair value amount contract rate fair value
- ---------------------------------------------------------------------------------------------------------------------------------
Foreign currency forward contracts:
Japanese yen $ 6,865 117.07 $ (22) $ 9,688 129.41 $ 76
German mark 5,407 1.66 (7) 1,695 1.77 -
British pound 840 1.68 4 823 1.65 (6)
Dutch guilder - - - 24,861 2.01 238
Italian lira - - - 6,323 1,739.00 2
French franc - - - 2,110 5.94 (1)
------- -------- -------- ----
$13,112 $ (25) $ 48,500 $309
======= ======== ======== ====
Purchased call option contracts:
German mark $ 75,000 1.45 $ 45 $150,000 1.45 $369
Purchased put option contracts:
German mark $220,000 1.85 $ 1,547 $ - - $ -
Written call option contracts:
German mark $220,000 1.69 $(13,469) $ - - $ -
The purchased call option contracts mature in 1999.
The purchased put and written call option contracts both mature in 2000. All of
our foreign currency forward contracts mature within the next 12 months.
- --------------------------------------------------------------------------------
Risk Factors
Our business, results of operations and financial condition are subject to a
number of risk factors, including the following:
Demand for Our Products Affected by Asian and Other Domestic and International
Economic Conditions
The demand for our products has been weak due to the general downturn in the
worldwide semiconductor market and the current economic crisis in Asia. We
anticipate that the economic crisis in Asia may continue to adversely affect our
business. A further decline of the worldwide semi-conductor market and economic
condition in Asia could decrease the demand for microprocessors and other ICs. A
significant decline in economic conditions in any significant geographic area,
both domestically and internationally, could decrease the overall demand for our
products.
13
Microprocessor Products
Fluctuations in PC Market. Since most of our microprocessor products are used in
PCs and related peripherals, our future growth is closely tied to the
performance of the PC industry. Industry-wide fluctuations in the PC marketplace
have in the past, and may in the future, materially and adversely affect our
business.
Investment in and Dependence on K86 (TM) AMD Micro processor Products. Our
microprocessor product revenues have in the past significantly impacted, and
will continue in 1999 and 2000 to significantly impact, our revenues, profit
margins and operating results. We plan to continue to make significant capital
expenditures to support our microprocessor products both in the near and long
term. These capital expenditures will be a substantial drain on our cash flow
and cash balances.
Our ability to increase microprocessor product revenues, and benefit fully from
the substantial financial investments and commitments we have made and continue
to make related to microprocessors, depends upon the success of the AMD-K6-2 and
AMD-K6-III microprocessors with 3DNow! technology (the AMD-K6 family of micro-
processors or the AMD-K6 microprocessors), the AMD-K7 microprocessor, which is
our seventh-generation Microsoft Windows compatible microprocessor planned for
introduction by the end of the first half of 1999, and future generations of K86
microprocessors. The microprocessor market is characterized by short product
life cycles and migration to ever higher performance microprocessors. To compete
successfully against Intel in this market, we must transition to new process
technologies at a faster pace than before and offer higher performance
microprocessors in significantly greater volumes. We must achieve acceptable
yields while producing microprocessors at higher speeds. In the past, including
the last few months, we have experienced significant difficulty in achieving
microprocessor yield and volume plans. Such difficulties have in the past and
may in the future adversely affect our results of operations and liquidity. If
we fail to offer higher performance microprocessors in significant volume on a
timely basis in the future, our business could be materially and adversely
affected. We may not achieve the production ramp necessary to meet our
customers' volume requirements for higher performance AMD-K6 and AMD-K7
microprocessors. It is also possible that we may not increase our microprocessor
revenues enough to achieve sustained profitability in the AMD segment of our
business.
To sell the volume of AMD-K6 and AMD-K7 micro processors we currently plan to
make in 1999 and 2000, we must increase sales to existing customers and develop
new customers. If we lose any current top-tier Original Equipment Manufacturer
(OEM) customer, or if we fail to attract additional customers through direct
sales and through our distributors, we may not be able to sell the volume of
units planned. This result could have a material adverse effect on our business.
Our production and sales plans for the AMD-K6 and AMD-K7 microprocessors are
subject to other risks and uncertainties, including:
. the timing of introduction and market acceptance of the AMD-K7
microprocessor;
. whether we can successfully fabricate higher-performance AMD-K6 and
AMD-K7 microprocessors in planned volume mixes;
. the effects of Intel new product introductions, marketing strategies
and pricing;
. the continued development of worldwide market acceptance for the AMD-K6
microprocessors and systems based on them;
. whether we will have the financial and other resources necessary to
continue to invest in our microprocessor products, including leading-edge
wafer fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective;
. adverse market conditions in the PC market and consequent diminished
demand for our microprocessors; and
. unexpected interruptions in our manufacturing operations.
Because Intel dominates the industry and has brand strength, we price the AMD-K6
microprocessors below the published price of Intel processors offering
comparable performance. Thus, Intel'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 our margins. Our business could be
materially and adversely affected if we fail to:
. achieve the product performance improvements necessary to meet customer
needs;
. continue to achieve market acceptance of our AMD-K6 microprocessors and
increase market share;
. substantially increase revenues of the AMD-K6 family of microprocessors;
and
. successfully introduce and ramp production of the AMD-K7 microprocessor.
14
See also discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for a long time. Because of its dominant market position, Intel can set and
control x86 microprocessor and PC system standards and, thus, dictate the type
of product the market requires of Intel's competitors. In addition, Intel may
vary prices on its microprocessors and other products at will and thereby affect
the margins and profitability of its competitors due to its financial strength
and dominant position. Intel may exert substantial influence over PC
manufacturers through the Intel Inside advertising rebate program. Intel may
also invest hundreds of millions of dollars in, and as a result exert influence
over, many other technology companies. We expect Intel to continue to invest
heavily in research and development, new manufacturing facilities and other
technology companies, and to remain dominant:
. through the Intel Inside 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. As a result, it is difficult for PC manufacturers to
innovate and differentiate their product offerings. We do not have the financial
resources to compete with Intel on such a large scale. As long as Intel remains
in this dominant position, we may be materially and adversely affected by its:
. product introduction schedule;
. product pricing strategy; and
. customer brand loyalty and control over industry standards, PC
manufacturers and other PC industry participants.
As Intel has expanded its dominance over the PC system platform, many PC
manufacturers have reduced their system development expenditures and have
purchased microprocessors in conjunction with chipsets or in assembled
motherboards. PC OEMs have become increasingly dependent on Intel, less
innovative on their own and more of a distribution channel for Intel technology.
In marketing our microprocessors to these OEMs and dealers, we depend on
companies other than Intel for the design and manufacture of core-logic
chipsets, motherboards, basic input/output system (BIOS) software and other
components. In recent years, these third-party designers and manufacturers have
lost significant market share to Intel. In addition, these companies produce
chipsets, motherboards, BIOS software and other components to support each new
generation of Intel's microprocessors only if Intel makes information about its
products available to them in time to address market opportunities. Delay in the
availability of such information makes, and will continue to make, it
increasingly difficult for these third parties to retain or regain market share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form closer relationships with third-party designers and
manufacturers of core-logic chipsets, motherboards, BIOS software and other
components. Similarly, we intend to expand our chipset and system design
capabilities, and to offer OEMs licensed system designs incorporating our
microprocessors and companion products. We cannot be certain, however, that our
efforts will be successful. We expect that, as Intel introduces future
generations of microprocessors, chipsets and motherboards, the design of
chipsets, memory and other semiconductor devices, and higher level board
products which support Intel microprocessors, will become increasingly dependent
on the Intel microprocessor design and may become incompatible with non-Intel
processor-based PC systems.
Intel's Pentium(R) II and Celeron (TM) microprocessors are sold only in form
factors that are not physically or interface protocol compatible with "Socket 7"
motherboards currently used with AMD-K6 microprocessors. Thus, Intel no longer
supports the Socket 7 infrastructure as it has transitioned away from its
Pentium processors. Because the AMD-K6 microprocessors are designed to be Socket
7-compatible, and will not work with motherboards designed for Pentium II and
Celeron processors, we intend to continue to work with third-party designers and
manufacturers of motherboards, chipsets and other products to ensure the
continued availability of Socket 7 infrastructure support for the AMD-K6
microprocessors, including support for enhancements and features we add to our
microprocessors. Socket 7 infrastructure support for the AMD-K6 microprocessors
may not endure over time as Intel moves the market to its infrastructure
choices. We do not currently plan to develop microprocessors that are bus
interface protocol compatible with the Pentium II, Pentium III and Celeron
processors because our patent cross-license agreement with Intel does not extend
to our microprocessors that are bus interface protocol compatible with Intel's
sixth and subsequent generation processors. Similarly, our ability to compete
with Intel in the market for seventh-generation and future generation
microprocessors will depend on our:
. success in designing and developing the micro-processors; and
15
. ability to ensure that the microprocessors can be used in PC platforms
designed to support Intel's microprocessors and our microprocessors, or
that alternative platforms are available which are competitive with those
used with Intel processors.
A failure for any reason of the designers and producers of motherboards,
chipsets and other system components to support our x86 microprocessor offerings
would have a material adverse effect on our business.
Dependence on Microsoft and Logo License. Our ability to innovate beyond the x86
instruction set controlled by Intel depends on support from Microsoft in its
operating systems. If Microsoft does not provide support in its operating
systems for the x86 instructions that we innovate and design into our
processors, independent software providers may forego designing their software
applications to take advantage of our innovations. This would adversely affect
our ability to market our processors. In addition, we have entered into logo
license agreements with Microsoft that allow us to label our products as
"Designed for Microsoft Windows." We have also obtained appropriate
certifications from recognized testing organizations for our K86
microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our K86 microprocessors with the
Microsoft Windows logo. This could impair our ability to market the products and
could have a material adverse effect on our business.
Future Dependence on Planned AMD-K7 Microprocessor. We will need to successfully
develop and market in a timely manner our seventh-generation microprocessor, the
AMD-K7, in order to increase our microprocessor product revenues in 1999 and
beyond, and to benefit fully from the substantial financial investments and
commitments we have made and continue to make related to microprocessors. We
currently plan to introduce the AMD-K7 microprocessor by the end of the first
half of 1999. We cannot be certain that the introduction will occur on schedule.
Our 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 we are able to transition production in Fab 25 from
0.25- to 0.18-micron process technology and to ramp production in Dresden
Fab 30 on 0.18-micron copper interconnect process technology;
. the use and market acceptance of a non-Intel processor bus (adapted by us
from Digital Equipment Corporation's EV6 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 us;
. our ability to expand our chipset and system design capabilities;
. the availability to our 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;
. our ability to design and manufacture processor
modules through subcontractors; and
. the availability and acceptance of motherboards designed for the AMD-K7
microprocessor.
If we fail to introduce the AMD-K7 microprocessor in a timely manner or achieve
market acceptance, our business will be materially and adversely affected.
Possible Rights of Others. Prior to our acquisition of NexGen, NexGen granted
limited manufacturing rights regarding certain of its current and future
microprocessors, including the Nx586(TM) and Nx686(TM) to other companies. We do
not intend to produce any NexGen products. We believe that our AMD-K6
microprocessors are AMD products and not NexGen products because, among other
things, we significantly modified the technology we acquired in the NexGen
merger using our design, verification and manufacturing technologies. No NexGen
licensee or other party has asserted any rights with respect to the AMD-K6
family of microprocessors. However, it is possible that another company may seek
to establish rights with respect to the microprocessors. If another company were
deemed to have rights to produce any of our AMD-K6 family of microprocessors for
its own use or for sale to third parties, such production could reduce the
potential market for our microprocessor products, the profit margin achievable
with respect to such products, or both.
Financing Requirements
We plan to continue to make significant capital investments in 1999. These
investments include those relating to the construction and facilitization of
Dresden Fab 30 and the continued facilitization of Fab 25.
In 1998, equipment was installed and production was initiated in FASL II. We
expect the facility, including equipment, to cost approximately $1 billion when
fully equipped. Capital expenditures for FASL II construction
16
to date have been funded by cash generated from FASL operations and borrowings
by FASL. If FASL is unable to secure the necessary funds for FASL II, we may be
required to contribute cash or guarantee third-party loans in proportion to our
49.992 percent interest in FASL.
In 1996, we entered into the Credit Agreement, which provided for a $150 million
three-year secured revolving line of credit (which is currently unused) and a
$250 million four-year secured term loan. Approximately $219 million of the
secured term loan was outstanding as of December 27, 1998. We are required to
repay the secured loan in eight equal quarterly installments of approximately
$31 million which commenced in October 1998.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into a
loan agreement and other related agreements (the Dresden Loan Agreements) with a
consortium of banks led by Dresdner Bank AG. The Dresden Loan Agreements, which
were amended in February 1998 to reflect upgrades in wafer production technology
as well as the decline in the deutsche mark relative to the U.S. dollar, require
that we partially fund Dresden Fab 30 project costs in the form of subordinated
loans to, or equity investments in, AMD Saxony. In accordance with the terms of
the Dresden Loan Agreements, we have invested $270 million to date in the form
of subordinated loans and equity in AMD Saxony, which includes $100 million in
subordinated loans in 1998 ($60 million of which was paid after fiscal 1998 but
before December 31, 1998). We are required to make additional subordinated loans
to, or equity investments in, AMD Saxony totaling $170 million in 1999, $70
million of which must be funded through the sale of at least $200 million of our
stock by June 30, 1999. We cannot give any assurance that the requisite external
financing will be available on favorable terms, if at all.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. At the end of the fourth quarter of 1998, the
exchange rate was approximately 1.67 deutsche marks to 1 U.S. dollar (which we
used to calculate our obligations denominated in deutsche marks).
If we are unable to meet our obligation to make loans to, or equity investments
in, AMD Saxony as required under the Dresden Loan Agreements, AMD Saxony will be
unable to complete Dresden Fab 30 and we will be in default under the Dresden
Loan Agreements, the Credit Agreement and the Indenture, which would permit
acceleration of certain indebtedness, which would have a material adverse effect
on our business. If we are unable to obtain the funds necessary to fulfill these
obligations, our business will be materially and adversely affected.
Flash Memory Products
Increasing Competition and Price Decline. Competition in the market for Flash
memory devices continues to increase as existing manufacturers introduce new
products and industry-wide production capacity increases, and as Intel continues
to aggressively price its Flash memory products. We expect competition in the
marketplace for Flash memory devices to continue to increase. The selling prices
of Flash memory devices declined from 1996 through the fourth quarter of 1998.
It is possible that we will be unable to maintain our market share in Flash
memory devices and that price declines may accelerate as the market develops and
as existing and potential new competitors introduce competitive products. A
continued decline in our Flash memory device business or continued declines in
the gross margin percentage in this business could have a material adverse
effect on our business.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. Our operations related to
microprocessors have been particularly affected by this situation. If we
underutilize our manufacturing facilities in the future, our revenues may
suffer. We are increasing our manufacturing capacity by making significant
capital investments in Fab 25 and 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. We have also built a new
test and assembly facility in Suzhou, China. We are basing our strategy of
increasing our manufacturing capacity on industry projections for future growth.
If these industry projections are inaccurate and demand for our products does
not increase, we will likely underutilize our manufacturing facilities and our
business could be materially and adversely affected.
In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to generate sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the greater risk is that we will have surplus capacity.
17
Process Technology. In order to remain competitive, we must make continuing
substantial investments in improving our process technologies. In particular, we
have made and continue to make significant research and development investments
in the technologies and equipment used to fabricate our microprocessor products
and our Flash memory devices. Portions of these investments might not be fully
recovered if we fail to continue to gain market acceptance or if the market for
our Flash memory products should significantly deteriorate. Likewise, we are
making a substantial investment in Dresden Fab 30. The business plan for Dresden
Fab 30 calls for the successful development and installation of 0.18-micron
process technology and copper interconnect technology in order to manufacture
the AMD-K7 microprocessor in Dresden Fab 30 beginning in late 1999. We have
entered into a strategic alliance with Motorola to co-develop the copper
interconnect technology required for the AMD-K7 and subsequent generations of
microprocessors. We cannot be certain that the strategic alliance will be
successful or that we will be able to develop or obtain the leading-edge process
technologies that will be required in Dresden Fab 30 to fabricate the AMD-K7
microprocessor successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. For example, our results in the past have been negatively affected
by disappointing AMD-K6 microprocessor yields. We may in the future be
materially and adversely affected by fluctuations in manufacturing yields. The
manufacture of ICs is a complex process. Normal manufacturing risks include
errors and interruptions in the fabrication process and defects in raw
materials, as well as other risks, all of which can affect yields. Additional
manufacturing risks incurred in ramping up new fabrication areas and/or new
manufacturing processes include equipment performance and process controls as
well as other risks, all of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products are shipped
in volume, we could be materially and adversely affected. It is also possible
that we may be unsuccessful in correcting any such compatibility problems that
are discovered or that corrections will be unacceptable to customers or made in
an untimely manner. In addition, the mere announcement of an incompatibility
problem relating to our products could have a material adverse effect on our
business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall, or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could impose
substantial costs on us and have a material adverse effect on our business.
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, a few foreign companies principally supply several types of the IC
packages purchased by us, as well as by the majority of other companies in the
semiconductor industry. Interruption of supply or increased demand in the
industry could cause shortages in various essential materials. We would have to
reduce our manufacturing operations if we were unable to procure certain of
these materials. This reduction in our manufacturing operations could have a
material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and final
testing of our products are performed at our manufacturing facilities in Penang,
Malaysia; Bangkok, Thailand; and Singapore; or by subcontractors in Asia. We
have also constructed an additional assembly and test facility in Suzhou, China.
We also depend on foreign foundry suppliers and joint ventures for the
manufacture of a portion of our finished silicon wafers. Foreign manufacturing
and construction of foreign facilities entail political and economic risks,
including political instability, expropriation, currency controls and
fluctuations, changes in freight and interest rates, and loss or modification of
exemptions for taxes and tariffs. For example, if we were unable to assemble and
test our products abroad, or if air transportation between the United States and
our overseas facilities were disrupted, there could be a material adverse effect
on our business.
Impact of Year 2000
General. The Year 2000 issue is the result of computer software and firmware
being written using two digits rather than four to define the applicable year.
If our computer software and firmware with date-sensitive functions are not Year
2000 capable, 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, interruptions in
manufacturing operations
18
or in the ability to process transactions, send invoices or engage in other
normal business activities.
Our multi-step Year 2000 readiness plan includes development of corporate
awareness, assessment of internal systems, project planning, project
implementation (including remediation, upgrading and replacement), validation
testing and contingency planning for both information technology (IT) and non-IT
internal systems.
The Plan. Our plan covers four areas that are critical to our business
operations:
. Information Technology, which includes application software,
infrastructure and network engineering and telecommunications;
. Manufacturing, which includes wafer fabrication facilities, assembly and
test facilities, and third-party foundries;
. Products and product design, which includes our commercial products and
the hardware and software tools used specifically for product design; and
. Organizational support, which includes nonfabrication facilities,
security, corporate supply management, shipping, quality and
environmental health and safety (EHS) departments.
. Information Technology. We will be required to modify or replace significant
portions of our application software so that our systems will function properly
with respect to dates in the year 2000 and thereafter. Application software
consists of business software required for our corporate business systems,
including our accounts payable and receivable, payroll, order management,
general ledger and shipping applications. In December 1998, we installed new,
Year 2000 capable order management and accounts receivable systems. In addition,
we are utilizing internal resources and have contracted with a software
reengineering company which specializes in Year 2000 remediation to remediate
noncompliant code in our other application systems. The reengineering company
has completed remediation of approximately 75 percent of the remaining
application systems. Our goal is to complete remediation by June 30, 1999. It is
also our goal to complete testing and put all application systems into
production by September 30, 1999. If required modifications to existing software
are not made, or are not completed in a timely manner, the Year 2000 issue could
have a material impact on our business.
IT infrastructure consists of hardware and software other than application
software that supports our mainframe and distributed computer systems, including
PCs, operating systems and system utilities. We have tested Year 2000 capable
versions of all our infrastructure software and are in the process of
transitioning such software into productive use. Our goal is to have 95 percent
of our infrastructure hardware and software installed and in production by March
31, 1999, with the remaining 5 percent to be completed by September 30, 1999. If
we are unable to successfully transition our infrastructure software or to
install and put our infrastructure hardware and software into production as
anticipated, our business could be materially and adversely affected.
Network engineering and telecommunications consist of components in our data and
voice communication networks. Approximately 95 percent of the data components
and 70 percent of the voice components in our communication networks were Year
2000 capable as of January 31, 1999. Our goal is to make all data and voice
network components Year 2000 capable by March 31, 1999. However, we do not
currently have all of the information necessary to determine if certain of our
international network service providers will be Year 2000 capable in a timely
manner. If they are not Year 2000 capable, our business could be materially and
adversely affected.
. Manufacturing. We are dedicating substantial resources to Year 2000 issues
with respect to our wafer fabrication facilities worldwide to ensure continued
operation of all critical wafer fabrication systems in the year 2000 and
thereafter. We have retained an outside firm to provide Year 2000 program
management and implementation assistance in connection with problem assessment,
remediation and compliance testing. It is our goal that 60 percent of the
critical wafer fabrication equipment will be Year 2000 capable by June 30, 1999,
and the remaining critical equipment will be Year 2000 capable by year-end 1999.
Fabrication equipment software testing and installation is ongoing and will
continue through the fourth quarter of 1999. However, some vendors have
indicated that Year 2000 capable upgrades will not be available until mid to
late 1999. If these vendors do not provide Year 2000 capable upgrades in time
for us to install the products and to do adequate testing, or if the products do
not adequately address the Year 2000 problem, our business will be materially
and adversely affected.
Our assembly and test facilities are located in Malaysia, Thailand, China and
Singapore. The remediation and replacement process for noncompliant systems and
equipment in these facilities was approximately 75 percent complete as of
January 31, 1999. Our goal is to complete this remediation by March 31, 1999.
19
We believe that all critical Year 2000-related manufacturing activities,
including our wafer fabrication facilities and assembly and test facilities,
will be complete by year-end 1999. We have begun contingency planning for
critical areas of manufacturing and will continue developing and refining these
plans throughout 1999.
However, we cannot give any assurance that we will be successful in our efforts
to resolve any Year 2000 issues and to continue operations in our wafer
fabrication facilities in 2000. Our failure to successfully resolve such issues
could result in a shutdown of some or all of our operations, which would have a
material adverse effect on our business.
. Products and Product Design. We have reviewed the status of our current
products and have not identified any mission critical products with Year 2000
problems. It is our goal that the hardware and software we use for product
design will be Year 2000 capable by June 30, 1999. Testing of these systems is
ongoing and will continue through the end of the year. If we fail to make the
hardware and software we use for product design Year 2000 capable by year-end
1999, our business could be materially and adversely affected.
. Organizational Support. Since organizational support consists of several
functional divisions that provide administrative support to us as a whole, and
this support overlaps in many areas, we are unable to quantify the overall
progress of this group. However, several divisions have commenced significant
projects aimed at Year 2000 readiness. For example, the facilities department is
in the process of upgrading the building management system at our corporate
marketing, general and administrative facility located in Sunnyvale, California.
Our goal is to install all software upgrades required by facilities for Year
2000 readiness by June 30, 1999. EHS provides another example. Upgrades are
being scheduled and performed on gas detection systems, acid neutralization
systems and groundwater cleanup controls. Our goal is for EHS's remaining Year
2000 readiness activities to be 75 percent complete by March 31, 1999 and 100
percent complete by June 30, 1999. Similarly, our security department has
completed our plan to ensure Year 2000 compliance of the fire, intrusion and
industrial process alarms in our China, Thailand and Germany sites. Our goal is
to have our domestic alarm systems upgraded and tested for Year 2000 compliance
by September 30, 1999, and to have all remaining international alarm system
upgrades and testing complete by October 31, 1999. However, if we are unable to
complete such upgrades and testing before year-end 1999, our business could be
materially and adversely affected.
Third-Party Suppliers and Customers. We have initiated formal communication with
our significant suppliers to determine the extent to which our operations are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. Suppliers of hardware, software or other products that might contain
embedded processors were requested to provide information regarding the Year
2000 compliance status of their products. We contacted additional suppliers in
the second half of 1998 and will continue to seek information from nonresponsive
suppliers in the first quarter of 1999. In addition, in order to protect against
the acquisition of additional non-compliant products, we now require suppliers
to warrant that products sold or licensed to us are Year 2000 capable. In the
event that any of our significant customers and suppliers do not successfully
and timely achieve Year 2000 compliance, our business or operations could be
adversely affected. We cannot give any assurance that the systems of other
companies on which our systems rely will be converted in a timely manner and
would not have an adverse effect on our operations. We are currently assessing
our exposure to contingencies related to the Year 2000 issue for the products we
sell; however, we do not expect these to have a material impact on our
operations.
Our goal is to resolve our critical Year 2000 issues by June 30, 1999, which is
prior to any anticipated impact on our operating systems. We expect some testing
and verification activities, as well as some upgrading of the wafer fabrication
equipment, to continue through the end of the year. We also expect some aspects
of the Year 2000 plan to continue beyond January 1, 2000 with respect to
resolution of non-critical issues. However, these dates are contingent upon the
timeliness and accuracy of software and hardware upgrades from vendors, adequacy
and quality of resources available to work on completion of the project and any
other unforeseen factors.
Costs. The total expense of the Year 2000 plan is currently estimated to be a
maximum of $35 million, although actual expenditures may differ. Actual costs
incurred through the end of the fourth quarter of 1998 were approximately $8.5
million, the majority of which was expensed. The expenses of the Year 2000
project are being funded through operating cash flows.
Estimates. The costs of the Year 2000 plan and the dates on which we believe we
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. We cannot give any assurance that these
estimates will be achieved. Consequently, actual results could differ materially
from those anticipated.
20
Contingency Planning. We have not yet fully developed a comprehensive
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. Development of
contingency plans is in progress and will develop in detail and expand during
the remainder of 1999. We cannot give any assurance that we will be able to
develop a contingency plan that will adequately address all issues that may
arise in the year 2000. Our failure to develop and implement, if necessary, an
appropriate contingency plan could have a material adverse impact on our
operations. Finally, we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
Other Risk Factors
Debt Restrictions. The Credit Agreement and the Indenture contain significant
covenants that limit our ability and our subsidiaries' ability to engage in
various transactions and require satisfaction of specified financial performance
criteria. In addition, the occurrence of certain events, including, among other
things, failure to comply with the foregoing covenants, material inaccuracies of
representations and warranties, certain defaults under or acceleration of other
indebtedness and events of bankruptcy or insolvency, would, in certain cases
after notice and grace periods, constitute events of default permitting
acceleration of indebtedness. The limitations imposed by the Credit Agreement
and the Indenture are substantial, and failure to comply with such limitations
could have a material adverse effect on our business.
In addition, the Dresden Loan Agreements substantially prohibit AMD Saxony from
transferring assets to us, which will prevent us from using current or future
assets of AMD Saxony other than to satisfy obligations of AMD Saxony.
Programmable Logic Software Risks. Historically, our programmable logic
subsidiary, Vantis, has depended primarily on third parties to develop and
maintain software "fitters" that allow electrical circuit designs to be
implemented using Vantis' CPLDs. Vantis has initiated efforts to manage and
control the development and maintenance of software fitters for Vantis' products
internally. More specifically, Vantis acquired rights to MINC, Inc.'s (MINC)
software and hired selected MINC development personnel. Accordingly, MINC no
longer supplies software development services to Vantis. Vantis' efforts to
develop and maintain internally the software needed to sell and support its
products may or may not be successful. If Vantis is unable to successfully
develop and maintain software internally in a cost-effective manner, Vantis'
business could be materially and adversely affected.
If the existing software were subject to errors or "bugs," or if the internally
developed software is subject to delays in development, errors, or "bugs" or is
not accepted by the market, then Vantis would need to find another vendor for
such services. It is possible that Vantis could be unable to locate additional
software development tool vendors with the available capacity and technology
necessary for the development and maintenance of software fitter tools. Even if
an additional vendor or vendors were identified, Vantis may still be unable to
enter into contracts with those vendors on terms acceptable to Vantis. Vantis'
inability to find an acceptable alternative vendor for software services in a
timely manner could materially and adversely affect Vantis' business.
Introduction of Vantis' FPGA Products. In January 1998, Vantis announced its
intention to introduce its first FPGA products, which it currently intends to
introduce under the VF1 name during the second half of 1999. 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 2000. Vantis' VF1 FPGA products may or may not be available as
scheduled or 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 products across all major segments of the PLD market and could
have a material adverse effect on Vantis.
In addition, Vantis has contracted with several developers of FPGA software
tools, including AutoGate Logic, Inc. (AGL), to develop and maintain software
for Vantis' VF1 family of FPGAs. If any of these developers were to stop
developing and maintaining software for the VF1 family, or if the software
developed by these developers were subject to delays, errors or "bugs," Vantis
would need to find an alternative developer or developers for these services or
rely on its own internal software development efforts to address this need. It
is possible that Vantis' internal development efforts may be unsatisfactory or
that Vantis may be unable to locate available and acceptable alternative
software developers. Any interruption in the timely development of FPGA software
for the VF1 family could have a material adverse effect on Vantis.
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent
21
new product introductions and enhancements, short product life cycles and severe
price competition. Currently accepted industry standards may change. Our success
depends substantially on our ability, on a cost-effective and timely basis, to
continue to enhance our existing products and to develop and introduce new
products that take advantage of technological advances and adhere to evolving
industry standards. An unexpected change in one or more of the technologies
related to our products, in market demand for products based on a particular
technology or of accepted industry standards could materially and adversely
affect our business. We may or may not be able to develop new products in a
timely and satisfactory manner to address new industry standards and
technological changes, or to respond to new product announcements by others. In
addition, new products may or may not achieve market acceptance.
Competition. The IC industry is intensely competitive and, historically, has
experienced rapid technological advances in product and system technologies.
After a product is introduced, prices normally decrease over time as production
efficiency and competition increase, and as successive generations of products
are developed and introduced for sale. Technological advances in the industry
result in frequent product introductions, regular price reductions, short
product life cycles and increased product capabilities that may result in
significant performance improvements. 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. Our operating results are subject to
substantial quarterly and annual fluctuations due to a variety of factors,
including:
. the effects of competition with Intel in the microprocessor and Flash
memory device markets;
. competitive pricing pressures;
. anticipated decreases in unit average selling prices of our products;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. the gain or loss of significant customers;
. new product introductions by us or our competitors;
. changes in the mix of products produced and sold and in the mix of sales
by distribution channels;
. market acceptance of new or enhanced versions of our products;
. seasonal customer demand due to vacation and holiday schedules (for
example, decreased demand in Europe during the summer); and
. the timing of significant orders and the timing and extent of product
development costs.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery, or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most instances,
our agreements with distributors protect their inventory of our products against
price reductions, as well as products that are slow moving or have been
discontinued. These agreements, which may be canceled by either party on a
specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could
materially and adversely affect us if there is an unexpected significant decline
in the price of our products.
Key Personnel. Our future success depends upon the continued service of numerous
key engineering, manufacturing, sales and executive personnel. We may or may not
be able to continue to attract and retain qualified personnel necessary for the
development and manufacture of our products. Loss of the service of, or failure
to recruit,
22
key engineering design personnel could be significantly detrimental to our
product development programs or otherwise have a material adverse effect on our
business.
Intellectual Property Rights; Potential Litigation. It is possible that:
. we will be unable to protect our technology or other intellectual
property adequately through patents, copyrights, trade secrets,
trademarks and other measures;
. competitors will be able to develop similar technology independently;
. any patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual
property rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide
competitive advantages to us; and
. others will independently develop similar products, duplicate our
products or design around our patents and other rights.
From time to time, we have been notified that we may be infringing intellectual
property rights of others. If any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
We could decide, in the alternative, to resort to litigation to challenge such
claims. Such challenges could be extremely expensive and time-consuming and
could materially and adversely affect our business. We cannot give any assurance
that all necessary licenses can be obtained on satisfactory terms, or whether
litigation may always be avoided or successfully concluded.
Environmental Regulations. We could possibly be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future governmental regulations
related to the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in the manufacturing process. Such
regulations could require us to acquire expensive remediation equipment or to
incur other expenses to comply with environmental regulations. Our failure to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused, and are
likely to continue to cause, the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology company
stocks in general have experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of the companies. This market
volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current business plan envisions substantial cash outlays requiring external
capital financing. It is possible that capital and/or long-term financing will
be unavailable on terms favorable to us or in sufficient amounts to enable us to
implement our current plan.
Earthquake Danger. Our corporate headquarters, a portion of our manufacturing
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. We
could be materially and adversely affected in the event of a major earthquake.
Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of
the European Union established fixed conversion rates between their existing
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that date. The transition period will last through
January 1, 2002. We are assessing the potential impact to us that may result
from the euro conversion. We do not expect the introduction and use of the euro
to materially affect our foreign exchange activities, to affect our use of
derivatives and other financial instruments, or to result in any material
increase in costs to us. We will continue to assess the impact of the
introduction of the euro currency over the transition period as well as the
period subsequent to the transition, as applicable.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 27, 1998
(Thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
Net sales $2,542,141 $ 2,356,375 $ 1,953,019
Expenses:
Cost of sales 1,718,703 1,578,438 1,440,828
Research and development 567,402 467,877 400,703
Marketing, general and administrative 419,678 400,713 364,798
2,705,783 2,447,028 2,206,329
Operating loss (163,642) (90,653) (253,310)
Litigation settlement (11,500) - -
Interest income and other,
net 34,207 35,097 59,391
Interest expense (66,494) (45,276) (14,837)
---------- ----------- -----------
Loss before income taxes and equity in joint venture (207,429) (100,832) (208,756)
Benefit for income taxes (91,878) (55,155) (85,008)
---------- ----------- -----------
Loss before equity in joint venture (115,551) (45,677) (123,748)
Equity in net income of joint venture 11,591 24,587 54,798
---------- ----------- -----------
Net loss $ (103,960) $ (21,090) $ (68,950)
========== =========== ===========
Net loss per common share:
Basic $(0.72) $(0.15) $(0.51)
========== =========== ===========
Diluted $(0.72) $(0.15) $(0.51)
========== =========== ===========
Shares used in per share
calculation:
Basic 143,668 140,453 135,126
Diluted 143,668 140,453 135,126
See accompanying notes
24
December 27, 1998 and December 28, 1997
(Thousands except share and per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 361,908 $ 240,658
Short-term investments 335,117 226,374
----------------------------
Total cash, cash equivalents and short-term investments 697,025 467,032
Accounts receivable, net of allowance for doubtful
accounts of $12,663 in 1998 and $11,221 in 1997 415,557 329,111
Inventories:
Raw materials 21,185 33,375
Work-in-process 129,036 96,712
Finished goods 24,854 38,430
----------------------------
Total inventories 175,075 168,517
Deferred income taxes 205,959 160,583
Prepaid expenses and other current assets 68,411 50,024
----------------------------
Total current assets 1,562,027 1,175,267
PROPERTY, PLANT AND EQUIPMENT:
Land 36,273 29,421
Buildings and leasehold improvements 823,287 1,012,680
Equipment 2,776,336 2,295,498
Construction in progress 744,466 461,452
----------------------------
Total property, plant and equipment 4,380,362 3,799,051
Accumulated depreciation and amortization (2,111,894) (1,808,362)
----------------------------
Property, plant and equipment, net 2,268,468 1,990,689
INVESTMENT IN JOINT VENTURE 236,820 204,031
OTHER ASSETS 185,653 145,284
----------------------------
$ 4,252,968 $ 3,515,271
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 6,017 $ 6,601
Accounts payable 333,975 359,536
Accrued compensation and benefits 80,334 63,429
Accrued liabilities 168,280 134,656
Income tax payable 22,026 12,676
Deferred income on shipments to distributors 84,523 83,508
Current portion of long-term debt, capital lease
obligations and other 145,564 66,364
----------------------------
Total current liabilities 840,719 726,770
DEFERRED INCOME TAXES 34,784 96,269
LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER, LESS
CURRENT PORTION 1,372,416 662,689
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Capital stock:
Common stock, par value $0.01; 250,000,000 shares
authorized; 145,477,376 shares issued and
outstanding in 1998 and 142,123,079 in 1997 1,465 1,428
Capital in excess of par value 1,071,591 1,018,884
Retained earnings 962,171 1,066,131
Accumulated other comprehensive loss (30,178) (56,900)
----------------------------
Total stockholders' equity 2,005,049 2,029,543
----------------------------
$ 4,252,968 $ 3,515,271
============================
See accompanying notes
25
Consolidated Statements of Stockhloders' Equity
Common Stock Capital in Accumulated other Total
------------------------
Three Years Ended December 27, 1998 Number excess of Retained comprehensive Stockholders'
(Thousands) of Shares Amount par value earnings income (loss) equity
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 132,182 $ 1,050 $ 908,989 $ 1,156,171 $ 36,252 $ 2,102,462
Comprehensive loss:
Net loss - - - (68,950) - (68,950)
Other comprehensive loss:
Net change in unrealized
loss on investments,
net of tax benefit of $2,635 - - - - (31,432) (31,432)
Net change in cumulative
translation adjustments - - - - (28,769) (28,769)
-----------
Total other comprehensive loss (60,201)
-----------
Total comprehensive loss $ (129,151)
===========
Issuance of shares:
Employee stock plans 3,838 315 27,433 - - $ 27,748
Fujitsu Limited 1,000 10 16,525 - - 16,535
Compensation recognized
under employee
stock plans - - 24 - - 24
Warrants exercised 560 5 2,755 - - 2,760
Income tax benefits
realized from employee
stock option exercises - - 1,500 - - 1,500
--------------------------------------------------------------------------------------------
December 29, 1996 137,580 1,380 957,226 1,087,221 (23,949) 2,021,878
Comprehensive loss:
Net loss - - - (21,090) - (21,090)
Other comprehensive loss:
Net change in unrealized
loss on investments, net
of tax benefit of $1,230 - - - - (2,813) (2,813)
Net change in cumulative
translation adjustments - - - - (30,138) (30,138)
-----------
Total other comprehensive loss (32,951)
-----------
Total comprehensive loss $ (54,041)
===========
Issuance of shares for
employee stock plans 4,113 44 38,013 - - $ 38,057
Compensation recognized
under employee
stock plans - - 21,232 - - 21,232
Warrants exercised 430 4 2,413 - - 2,417
--------------------------------------------------------------------------------------------
December 28, 1997 142,123 1,428 1,018,884 1,066,131 (56,900) 2,029,543
Comprehensive loss:
Net loss - - - (103,960) - (103,960)
Other comprehensive loss:
Net change in unrealized
gain on investments, net
of tax expense of $355 - - - - 4,753 4,753
Net change in cumulative
translation adjustments - - - - 21,969 21,969
-----------
Total other comprehensive loss 26,722
-----------
Total comprehensive loss $ (77,238)
===========
Issuance of shares:
Employee stock plans 2,354 27 25,656 - - $ 25,683
Fujitsu Limited 1,000 10 18,395 - - 18,405
Compensation recognized
under employee
stock plans - - 8,645 - - 8,645
Warrants exercised - - 11 - - 11
--------------------------------------------------------------------------------------------
December 27, 1998 145,477 $ 1,465 $ 1,071,591 $ 962,171 $ (30,178) $2,005,049
============================================================================================
See accompanying notes
26
Consolidated Statements of Cash Flows
Three Years Ended December 27, 1998
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (103,960) $ (21,090) $ (68,950)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 467,521 394,465 346,774
Net (increase) decrease in deferred income
taxes (106,861) (18,566) 17,134
Net loss on disposal of property, plant and
equipment 11,515 19,763 11,953
Net gain realized on sale of available-for-sale
securities - (4,978) (41,022)
Compensation recognized under employee stock
plans 8,645 21,232 24
Undistributed income of joint venture (11,591) (24,587) (54,798)
Changes in operating assets and
liabilities:
Net (increase) decrease in receivables,
inventories, prepaid expenses and other
assets (153,366) (184,966) 30,421
Increase (decrease) in tax refund
receivable and income tax payable 9,350 61,209 (110,058)
Net increase (decrease) in payables and
accrued liabilities 23,160 156,333 (42,863)
----------------------------------------------
Net cash provided by operating activities 144,413 398,815 88,615
----------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (996,170) (685,100) (485,018)
Proceeds from sale of property, plant and
equipment 106,968 43,596 2,489
Purchase of available-for-sale securities (1,591,802) (537,275) (633,476)
Proceeds from sale of available-for-sale
securities 1,482,890 545,478 840,492
----------------------------------------------
Net cash used in investing activities (998,114) (633,301) (275,513)
----------------------------------------------
Cash flows from financing activities:
Proceeds from borrowings 836,100 283,482 447,877
Debt issuance costs (14,350) (13,080) (15,378)
Payments on debt and capital lease obligations (87,549) (79,791) (252,766)
Proceeds from foreign grants 196,651 77,865 -
Proceeds from issuance of stock 44,099 40,474 47,043
----------------------------------------------
Net cash provided by financing activities 974,951 308,950 226,776
----------------------------------------------
Net increase in cash and cash equivalents 121,250 74,464 39,878
Cash and cash equivalents at beginning of year 240,658 166,194 126,316
----------------------------------------------
Cash and cash equivalents at end of year $ 361,908 $ 240,658 $ 166,194
==============================================
Supplemental disclosures
of cash flow information:
Cash paid (refunded) during the year for:
Interest, net of amounts capitalized $ 58,517 $ 34,600 $ -
==============================================
Income taxes $ 2,732 $ (100,016) $ 375
==============================================
Non-cash financing activities:
Equipment capital leases $ 13,908 $ 44,770 $ 8,705
==============================================
See accompanying notes
27
Notes to Consolidated Financial Statements
December 27, 1998, December 28, 1997 and December 29, 1996
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF OPERATIONS
We are a semiconductor manufacturer with manufacturing facilities in the U.S.,
Europe and Asia and sales offices throughout the world. Our products include a
wide variety of industry-standard integrated circuits (ICs) which are used in
many diverse product applications such as telecommunications equipment, data and
network communications equipment, consumer electronics, personal computers (PCs)
and workstations.
Vantis Corporation (Vantis), our wholly owned subsidiary designs, develops and
markets programmable logic devices (PLDs). On September 29, 1997, we transferred
certain of the assets and liabilities of our PLD division (excluding bipolar
products) to Vantis.
- --------------------------------------------------------------------------------
NOTE 2. BUSINESS COMBINATION
On January 17, 1996, we acquired NexGen, Inc. in a tax-free reorganization in
which NexGen was merged directly into AMD. At the date of the merger, we
reserved approximately 33.6 million total shares to be exchanged, which
represented eight-tenths (0.8) of a share of our common stock for each share of
the common stock of NexGen outstanding or subject to an assumed warrant or
option. We accounted for the merger under the pooling-of-interests method. We
prepared the consolidated financial statements to give retroactive effect to the
merger of NexGen with and into AMD on January 17, 1996.
- --------------------------------------------------------------------------------
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR We use a 52- to 53-week fiscal year ending on the last Sunday in
December, which resulted in a 52-week fiscal year for 1998, 1997 and 1996, which
ended on December 27, December 28 and December 29, respectively.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our
accounts and those of our subsidiaries. Upon consolidation, all significant
intercompany accounts and transactions are eliminated. Also included in our
consolidated financial statements, under the equity method of accounting, is our
49.992 percent investment in Fujitsu AMD Semiconductor Limited (FASL).
FOREIGN CURRENCY TRANSLATION We included in operations adjustments resulting
from the process of translating into U.S. dollars the foreign currency financial
statements of our wholly owned foreign subsidiaries for which the U.S. dollar is
the functional currency. We included in stockholders' equity the adjustments
relating to the translation of the financial statements of AMD Saxony, our
indirect wholly owned German subsidiary in Dresden, in the State of Saxony, and
our unconsolidated joint venture, for which the local currencies are the
functional currencies.
CASH EQUIVALENTS Cash equivalents consist of financial instruments which are
readily convertible into cash and have original maturities of three months or
less at the time of acquisition.
INVESTMENTS We classify, at the date of acquisition, our marketable debt and
equity securities into held-to-maturity and available-for-sale categories.
Currently, we classify our securities as available-for-sale which are reported
at fair market value with the related unrealized gains and losses included in
stockholders' equity. Realized gains and losses and declines in value of
securities judged to be other than temporary are included in interest income and
other, net. Interest and dividends on all securities are included in interest
income and other, net. The cost of securities sold is based on the specific
identification method.
We consider investments with maturities between 3 and 12 months short-term
investments. Short-term investments consist of money market auction rate
preferred stocks and debt securities such as commercial paper, corporate notes,
certificates of deposit and marketable direct obligations of United States
governmental agencies.
DERIVATIVE FINANCIAL INSTRUMENTS We utilize derivative financial instruments to
reduce financial market risks. We use these instruments to hedge foreign
currency and interest rate market exposures of underlying assets, liabilities
and other obligations. We do not use derivative financial instruments for
speculative or trading purposes. Our accounting policies for these instruments
are based on whether such instruments are designated as hedging transactions.
The criteria we use for designating an instrument as a hedge include the
instrument's effectiveness in risk reduction and
28
one-to-one matching of derivative instruments to underlying transactions. Gains
and losses on foreign currency forward and option contracts that are designated
and effective as hedges of anticipated transactions, for which a firm commitment
has been attained, are deferred and either recognized in income or included in
the basis of the transaction in the same period that the underlying transactions
are settled. Gains and losses on foreign currency forward and option contracts
and interest rate swap contracts that are designated and effective as hedges of
existing transactions are recognized in income in the same period as losses and
gains on the underlying transactions are recognized and generally offset. Gains
and losses on any instruments not meeting the above criteria would be recognized
in income in the current period. Purchased option contracts that would result in
losses, if exercised, are allowed to expire. If an underlying hedged transaction
is terminated earlier than initially anticipated, the offsetting gain or loss on
the related derivative instrument would be recognized in income in the same
period. Subsequent gains or losses on the related derivative instrument would be
recognized in income in each period until the instrument matures, is terminated
or is sold. Premiums paid for foreign currency forward and option contracts are
generally amortized over the life of the contracts and are not material to our
results of operations. Unamortized premiums are included in prepaid expenses and
other assets.
INVENTORIES We state inventories at standard cost adjusted to approximate the
lower of cost (first-in, first-out method) or market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost. We
provide depreciation and amortization on the straight-line basis over the
estimated useful lives of the assets for financial reporting purposes and on
accelerated methods for tax purposes. We estimate useful lives for financial
reporting purposes as follows:
. machinery and equipment, 3 to 5 years;
. buildings, up to 26 years; and
. leasehold improvements, the shorter of the
remaining terms of the leases or the estimated
economic useful lives of the improvements.
REVENUE RECOGNITION We recognize revenue from product sales direct to customers
when shipped. In addition, we sell to distributors under terms allowing the
distributors certain rights of return and price protection on unsold merchandise
they hold. The distributor agreements, which may be canceled by either party
upon specified notice, generally contain a provision for the return of our
products in the event the agreement with the distributor is terminated.
Accordingly, we defer recognition of revenue and related gross profits from
sales to distributors with agreements that have the aforementioned terms until
the merchandise is resold by the distributors.
FOREIGN GRANTS AND SUBSIDIES The Federal Republic of Germany and the State of
Saxony have agreed to support the Dresden Fab 30 project in the amount of $469
million (denominated in deutsche marks) consisting of capital investment grants
and interest subsidies. Dresden Fab 30 is our new integrated circuit
manufacturing and design facility in Dresden, Germany. The grants and subsidies
are subject to conditions, including meeting specified levels of employment in
December 2001 and maintaining those levels until June 2007. The grants and
subsidies will be recognized as a reduction of operating expense ratably over
the life of the project. In 1998, grants and subsidies recognized as income were
not material. As of December 27, 1998, AMD Saxony had received grants and
subsidies totaling $283 million (denominated in deutsche marks). Noncompliance
with the conditions of the grants and subsidies could result in the forfeiture
of all or a portion of the future amounts to be received as well as the
repayment of all or a portion of amounts received to date.
ADVERTISING EXPENSES We account for advertising costs as expense in the period
in which they are incurred. Advertising expense for 1998, 1997 and 1996 was
approximately $74 million, $74 million and $44 million, respectively.
NET LOSS PER COMMON SHARE Basic and diluted net loss per share are computed
using weighted-average common shares outstanding.
The following table sets forth the computation of basic and diluted net loss per
common share:
(Thousands except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Numerator for basic and diluted net loss
per common share $(103,960) $(21,090) $ (68,950)
-------------------------------------
Denominator for basic and diluted net loss per
common share-weighted-average shares 143,668 140,453 135,126
-------------------------------------
Basic and diluted net loss per common share $ (0.72) $ (0.15) $ (0.51)
=====================================
29
Notes to Consolidated Financial Statements
Options, warrants and restricted stock were outstanding during 1998, 1997 and
1996 but we did not include them in the computation of diluted net loss per
common share because the effect in years with a net loss would be anti-dilutive.
Convertible debt was outstanding during 1998 but we did not include it in the
computation of diluted net loss per common share because the effect in years
with a net loss would be antidilutive.
COMPREHENSIVE LOSS In 1998, we 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 loss and
its components; however, the adoption of this Statement had no impact on our net
loss or stockholders' equity. SFAS 130 requires unrealized gains or losses on
our available-for-sale securities and the foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive loss. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
The following are the components of accumulated other comprehensive loss:
December 27, December 28,
(Thousands) 1998 1997
- --------------------------------------------------------------------------------
Unrealized gain on investments $ 6,760 $ 2,007
Cumulative translation adjustments (36,938) (58,907)
-----------------------------
$(30,178) $(56,900)
=============================
Cumulative translation adjustments are not tax affected.
EMPLOYEE STOCK PLANS As allowed under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," we
continue to account for our stock option plans and our employee stock purchase
plan in accordance with provisions of the Accounting Principles Board's Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees" (see Note 10).
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results inevitably will differ from those
estimates, and such differences may be material to the financial statements.
FINANCIAL PRESENTATION We have reclassified certain prior year amounts on the
consolidated financial statements to conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
required to be adopted beginning after June 15, 1999. We expect to adopt SFAS
133 in 2000. We have not completed our review of SFAS 133, and accordingly have
not evaluated the effect the adoption of the Statement may have on our
consolidated results of operations and financial position. SFAS 133 will require
us to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings.
30
Notes to Consolidated Financial Statements
NOTE 4. FINANCIAL INSTRUMENTS
AVAILABLE-FOR-SALE SECURITIES Available-for-sale securities as of
December 27, 1998 and December 28, 1997 were as follows:
Gross Gross Fair market
(Thousands) Cost unrealized gains unrealized losses value
- ----------------------------------------------------------------------------------------------------------------
1998
Cash equivalents:
Commercial paper $ 22,434 $ - $ (40) $ 22,394
Money market funds 136,408 - - 136,408
-----------------------------------------------------------
Total cash equivalents $158,842 $ - $ (40) $158,802
===========================================================
Short-term investments:
Money market auction rate preferred stocks $115,500 $ - $ - $115,500
Certificates of deposit 100,230 58 (50) 100,238
Treasury notes 7,696 - (18) 7,678
Corporate notes 32,657 30 - 32,687
Federal agency notes 34,616 50 (153) 34,513
Commercial paper 43,886 704 (89) 44,501
-----------------------------------------------------------
Total short-term investments $334,585 $ 842 $(310) $335,117
===========================================================
Long-term investments:
Equity investments $ 7,027 $6,265 $ - $ 13,292
Treasury notes 2,000 3 - 2,003
-----------------------------------------------------------
Total long-term investments $ 9,027 $6,268 $ - $ 15,295
===========================================================
1997
Cash equivalents:
Commercial paper $ 14,901 $ 14 $ - $ 14,915
Federal agency notes 22,860 - (79) 22,781
-----------------------------------------------------------
Total cash equivalents $ 37,761 $ 14 $ (79) $ 37,696
===========================================================
Short-term investments:
Money market auction rate preferred stocks $ 61,200 $ - $ - $ 61,200
Certificates of deposit 50,025 345 (10) 50,360
Treasury notes 9,989 9 - 9,998
Corporate notes 37,862 127 (4) 37,985
Federal agency notes 47,283 4 (70) 47,217
Commercial paper 19,379 235 - 19,614
-----------------------------------------------------------
Total short-term investments $225,738 $ 720 $ (84) $226,374
===========================================================
Long-term investments:
Equity investments $ 6,087 $1,341 $ - $ 7,428
Treasury notes 1,997 95 - 2,092
-----------------------------------------------------------
Total long-term investments $ 8,084 $1,436 $ - $ 9,520
===========================================================
We realized a net gain on the sales of available-for-sale securities of $5
million and $41 million for 1997 and 1996, respectively. We did not sell any
available-for-sale securities in 1998.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK As part of our asset and
liability management strategy, we use financial instruments with off-balance-
sheet risk to manage financial market risk, including interest rate and foreign
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange risk. The notional amounts, carrying amounts and fair values of these
instruments as of December 27, 1998 and December 28, 1997 are included in the
table below.
1998 1997
---------------------------------------------- --------------------------------------------
(Thousands) Notional amount Carrying amount Fair value Notional amount Carrying amount Fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign exchange instruments:
Purchased foreign currency
call option contracts $ 75,000 $ 289 $ 45 $150,000 $893 $ 369
Purchased foreign currency
put option contracts 220,000 - 1,547 - - -
Written foreign currency
call option contracts 220,000 (3,416) (13,469) - - -
Foreign exchange forward
contracts 13,112 (32) (25) 48,500 53 309
We used prevailing financial market information and price quotes from certain of
our counterparty financial institutions as of the respective dates to obtain the
estimates of fair value.
Foreign Exchange Forward Contracts We use foreign exchange forward contracts
to hedge our exposure to currency fluctuations on our net monetary assets
position in our foreign subsidiaries, liabilities for products purchased from
FASL and fixed asset purchase commitments. Our hedging transactions in 1998 were
denominated in Italian lira, Japanese yen, French franc, German mark, British
pound, Dutch guilder, Thailand baht, Singapore dollar and Malaysian ringit. The
maturities of these contracts were generally less than 12 months.
Foreign Currency Option Contracts In 1998, we entered into a no-cost collar
arrangement to hedge Dresden Fab 30 project costs denominated in U.S. dollars.
In addition to purchased put option contracts, no-cost collars include written
call option contracts, the contract rates of which are structured so as to avoid
payment of any option premium at the time of purchase. With respect to the
written call option contracts, we recognized a loss in 1998 associated with the
counterparties' in-the-money position. Unrealized losses on outstanding written
contracts are included in accrued liabilities. These contracts mature on various
dates through 2000.
In 1997, we purchased foreign currency call option contracts to hedge market
risk exposures related to currency fluctuations on firm commitments denominated
in deutsche marks to make investments in, or subordinated loans to, AMD Saxony.
These contracts mature on various dates through 1999.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS We estimated the fair value of debt
using discounted cash flow analysis based on estimated interest rates for
similar types of borrowing arrangements.
The carrying amounts and estimated fair values of our other financial
instruments are as follows:
1998 1997
--------------------------- ---------------------------
(Thousands) Carrying amount Fair value Carrying amount Fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term debt:
Notes payable $ 6,017 $ 6,017 $ 6,601 $ 6,601
Current portion of long-term debt
(excluding capital leases) 125,283 148,178 37,176 47,013
Long-term debt (excluding capital leases) 1,312,303 1,336,768 622,880 640,604
NOTE 5. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash equivalents, short-term investments, trade
receivables and financial instruments used in hedging activities.
We place our cash equivalents and short-term investments with high credit
quality financial institutions and, by policy, limit the amount of credit
exposure with any one financial institution. We acquire investments in time
deposits and certificates of deposit from banks having combined capital, surplus
and undistributed profits of not less than $200 million. Investments in
commercial paper and money market auction rate preferred stocks of industrial
firms and financial institutions are rated A1, P1 or better; investments in tax-
exempt securities including municipal notes and bonds are rated AA, Aa or
better; and investments in repurchase agreements must have securities of the
type and quality listed above as collateral.
32
We limit concentrations of credit risk with respect to trade receivables because
a large number of geographically diverse customers make up our customer base,
thus spreading the trade credit risk. We control credit risk through credit
approvals, credit limits and monitoring procedures. We perform in-depth credit
evaluations of all new customers and require letters of credit, bank guarantees
and advance payments, if deemed necessary. Our bad debt expenses have not been
material.
The counterparties to the agreements relating to our derivative instruments
consist of a number of major, high credit quality, international financial
institutions. We do not believe that there is significant risk of nonperformance
by these counterparties because we monitor their credit ratings and limit the
financial exposure and the amount of agreements entered into with any one
financial institution. While the notional amounts of financial instruments are
often used to express the volume of these transactions, the potential accounting
loss on these transactions if all counterparties failed to perform is limited to
the amounts, if any, by which the counterparties' obligations under the
contracts exceed our obligations to the counterparties.
- ------------------------------------------------------------------------
NOTE 6. INCOME TAXES
Benefit for income taxes consists of:
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------
Current:
U.S. Federal $ 1,706 $(43,053) $(102,213)
U.S. State and Local 1,772 (1,959) (1,026)
Foreign National and Local 11,505 8,423 1,097
Deferred:
U.S. Federal (89,997) (12,902) 16,280
U.S. State and Local (16,869) (7,872) 854
Foreign National and Local 5 2,208 -
-------------------------------
Benefit for income taxes $(91,878) $(55,155) $ (85,008)
===============================
Tax benefits resulting from the exercise of nonqualified stock options and the
disqualifying disposition of shares acquired under our incentive stock option
and stock purchase plans reduced taxes currently payable as shown above by
approximately $2 million in 1996. We credited such benefits to capital in excess
of par value when realized. Tax benefits generated in 1998 and 1997 did not
reduce taxes currently payable.
Deferred income taxes reflect the net tax effects of tax carryovers and
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities as of December
27, 1998 and December 28, 1997 are as follows:
(Thousands) 1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryovers $ 237,767 $ 99,424
Deferred distributor income 28,940 36,898
Inventory reserves 25,655 30,085
Accrued expenses not currently deductible 29,462 26,345
Federal and state tax credit carryovers 92,879 74,535
Other 86,895 60,927
----------------------
Total deferred tax assets 501,598 328,214
Less: valuation allowance (73,243) (44,221)
----------------------
428,355 283,993
----------------------
Deferred tax liabilities:
Depreciation (196,293) (175,177)
Other (60,887) (44,502)
----------------------
Total deferred tax liabilities (257,180) (219,679)
----------------------
Net deferred tax assets $ 171,175 $ 64,314
======================
33
Notes to Consolidated Financial Statements
Realization of our net deferred tax assets is dependent on future taxable
income. We believe that it is more likely than not that such assets will be
realized. However, ultimate realization could be negatively impacted by market
conditions and other variables not known or anticipated at this time.
The valuation allowance increased $29 million in 1998 from 1997. The valuation
allowance for deferred tax assets includes $29 million attributable to stock
option deductions, the benefit of which will be credited to equity when
realized.
Pretax loss from foreign operations was approximately $36 million in 1998.
Pretax income from foreign operations was approximately $10 million in 1997 and
$33 million in 1996.
A portion of the net operating loss carryovers are subject to limitation.
Availability of $11 million of tax effected net operating loss carryovers occurs
primarily in 2000. The federal and state tax credit and net operating loss
carryovers expire beginning in the year 2002 through 2013.
The following is a reconciliation between statutory federal income taxes and the
total benefit for income taxes.
1998 1997 1996
---------------- ---------------- ---------------------
(Thousands except percent) Tax Rate Tax Rate Tax Rate
- ---------------------------------------------------------------------------------------------------------------
Statutory federal income tax benefit $(72,598) (35.0)% $(35,291) (35.0)% $(73,065) (35.0)%
State taxes net of federal benefit (8,000) (3.9) (7,500) (7.4) (520) (0.2)
Tax exempt Foreign Sales
Corporation income (940) (0.5) (1,369) (1.4) (2,283) (1.1)
Foreign income at other than U.S. rates (3,949) (1.9) (10,228) (10.1) (9,782) (4.7)
Tax credits (6,200) (3.0) (4,077) (4.0) (1,886) (0.9)
Other (191) - 3,310 3.2 2,528 1.2
---------------------------------------------------------------
$(91,878) (44.3)% $(55,155) (54.7)% $(85,008) (40.7)%
===============================================================
We have made no provision for income taxes on approximately $363 million of
cumulative undistributed earnings of certain foreign subsidiaries because it is
our intention to permanently invest such earnings. If such earnings were
distributed, we would accrue additional taxes of approximately $117 million.
Note 7. Debt
Significant elements of revolving lines of credit are:
(Thousands except percent) 1998 1997
- -----------------------------------------------------------------------------------------
Committed:
Three-year secured revolving line of credit $ 150,000 $ 150,000
Uncommitted:
Portion of unsecured lines of credit available
to foreign subsidiaries 68,980 67,052
Amounts outstanding at year-end under lines of credit:
Short-term 6,017 6,601
Short-term borrowings:
Average daily borrowings 5,386 10,795
Maximum amount outstanding at any month-end 6,017 13,846
Weighted-average interest rate 1.18% 1.75%
Average interest rate on amounts outstanding at year-end 1.06% 2.01%
----------------------
34
Interest on foreign and short-term domestic borrowings is negotiated at the time
of the borrowing. Information with respect to our long-term debt, capital lease
obligations and other at year-end is:
(Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
6% Convertible Subordinated Notes with interest payable
semiannually and principal due on May 15, 2005 $ 517,500 $ -
11% Senior Secured Notes with interest payable
semiannually and principal due on August 1, 2003,
secured by the Fab 25 facility and equipment 400,000 400,000
Term loans under the Dresden Loan Agreements
with weighted-average interest of 5.37% and
principal due between 2001 and 2003, secured
by the Dresden Fab 30 facility and equipment 299,679 -
Secured term loan with interest at LIBOR plus
2.5% (8.06% at December 27, 1998) payable
quarterly and principal payable quarterly from
October 1998 through May 2000, secured by
the Fab 25 facility and equipment 218,750 250,000
Obligations under capital leases 42,812 68,997
Mortgage with principal and 9.88% interest payable
in monthly installments through April 2007 1,657 1,781
Promissory notes - 6,577
Obligations secured by equipment - 1,668
Other debt - 30
-----------------------
1,480,398 729,053
Other 37,582 -
-----------------------
1,517,980 729,053
Less: current portion (145,564) (66,364)
-----------------------
Long-term debt, capital lease obligations and other,
less current portion $1,372,416 $ 662,689
=======================
In May 1998, we sold $517.5 million of Convertible Subordinated Notes due May
15, 2005 under our $1 billion shelf registration declared effective by the
Securities and Exchange Commission on April 20, 1998. Interest on the
Convertible Subordinated Notes accrues at the rate of 6 percent per annum and is
payable semiannually in arrears on May 15 and November 15 of each year,
commencing November 15, 1998. The Convertible Subordinated Notes are redeemable
at our option on and after May 15, 2001. The Notes are convertible at the option
of the holder at any time prior to the close of business on the maturity date,
unless previously redeemed or repurchased, into shares of common stock at a
conversion price of $37.00 per share, subject to adjustment in certain
circumstances.
Included in other is a deferred gain of $34 million recorded during 1998 as a
result of the sale and leaseback of our corporate marketing, general and
administrative facility. The deferred gain will be amortized over the lease
term, which is 20 years (see Note 12).
For each of the next five years and beyond, our long-term debt and capital lease
obligations are:
Long-term debt
(Thousands) (Principal only) Capital leases
- -----------------------------------------------------------------------------
1999 $ 125,283 $19,231
2000 93,901 13,628
2001 53,611 8,886
2002 178,332 3,876
2003 468,290 3,056
Beyond 2003 518,169 557
---------------------------
Total 1,437,586 49,234
Less: amount representing interest - (6,422)
---------------------------
Total at present value $1,437,586 $42,812
===========================
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations under the lease agreements are collateralized by the assets leased.
We leased total assets of approximately $97 million and $138 million at
December 27, 1998 and December 28, 1997, respectively. Accumulated amortization
of these leased assets was approximately $60 million and $85 million at December
27, 1998 and December 28, 1997, respectively.
The above debt agreements limit our and our subsidiaries' ability to engage in
various transactions and require satisfaction of specified financial performance
criteria.
At December 27, 1998, we were in compliance with all restrictive covenants of
such debt agreements and all retained earnings were restricted as to payments of
cash dividends on common stock.
Under certain circumstances, cross-defaults result under the Convertible
Subordinated Notes, the Indenture to the Senior Secured Notes and the Dresden
Loan Agreements, which consist of a loan agreement and other related agreements
between AMD Saxony and a consortium of banks led by Dresdner Bank AG.
- --------------------------------------------------------------------------------
NOTE 8. INTEREST EXPENSE & INTEREST INCOME AND OTHER, NET
INTEREST EXPENSE
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Total interest charges $ 96,206 $ 74,716 $ 32,507
Interest capitalized (29,712) (29,440) (17,670)
---------------------------------
Interest expense $ 66,494 $ 45,276 $ 14,837
=================================
In 1998, interest expense primarily consisted of interest expense incurred on
our Senior Secured Notes sold in August 1996, interest on our Convertible
Subordinated Notes sold in May 1998 and interest on our $250 million four-year
secured term loan, net of interest capitalized primarily related to the
facilitization of Fab 25 and construction of Dresden Fab 30. In 1997, interest
expense primarily consisted of interest expense incurred on our Senior Secured
Notes sold in August 1996 and interest on our $250 million four-year secured
term loan, net of interest capitalized primarily related to the second phase of
construction of Fab 25 and Dresden Fab 30. In 1996, interest expense primarily
consisted of interest expense incurred on our Senior Secured Notes sold in
August 1996, net of interest capitalized primarily related to equipment
installation in Fab 25.
INTEREST INCOME AND OTHER, NET
(Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Interest income $31,478 $28,975 $19,564
Other income, net 2,729 6,122 39,827
---------------------------
$34,207 $35,097 $59,391
===========================
In 1998, other income, net primarily consisted of gains resulting from the sale
of an investment. Other income, net primarily consisted of gains resulting from
the sales of equity investments for 1997 and 1996. We also included the net loss
on the sale of fixed assets in other income, net for all years presented.
- --------------------------------------------------------------------------------
NOTE 9. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which we have adopted in the current
year.
As required by SFAS 131, we have determined that we have two principle
businesses and operate in two segments: (1) our AMD segment, which consists of
our three product groups - Computation Products Group, Memory Group and
Communications Group and (2) our Vantis segment, which consists of Vantis. Our
reportable segments are organized as discrete and separate functional units with
separate management teams and separate performance assessment and resource
allocation processes. The AMD segment produces microprocessors, core logic
products, Flash memory devices, EPROMs, telecommunication products, networking
and I/O products and embedded processors. The Vantis segment produces complex
and simple, high-performance CMOS PLDs.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. We evaluate performance and allocate
resources based on segment operating income (loss).
The AMD segment did not have intersegment sales prior to the fourth quarter of
1997. The Vantis segment did not have intersegment sales for any of the years
presented below.
(Thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Net sales:
AMD segment
External customers $2,337,144 $2,113,276 $1,704,925
Intersegment 88,455 25,896 -
-------------------------------------
2,425,599 2,139,172 1,704,925
Vantis segment external customers 204,997 243,099 248,094
Elimination of intersegment sales (88,455) (25,896) -
-------------------------------------
Net sales $2,542,141 $2,356,375 $1,953,019
=====================================
Segment income (loss):
AMD segment $ (185,242) $ (127,406) $ (270,270)
Vantis segment 21,600 36,753 16,960
-------------------------------------
Total operating loss (163,642) (90,653) (253,310)
Litigation settlement (11,500) - -
Interest income and other, net 34,207 35,097 59,391
Interest expense (66,494) (45,276) (14,837)
Benefit for income taxes 91,878 55,155 85,008
Equity in net income of FASL (AMD segment) 11,591 24,587 54,798
-------------------------------------
Net loss $ (103,960) $ (21,090) $ (68,950)
=====================================
Total assets:
AMD segment
Assets excluding investment in FASL $3,881,268 $3,187,506 $2,886,689
Investment in FASL 236,820 204,031 197,205
-------------------------------------
4,118,088 3,391,537 3,083,894
Vantis segment assets 134,880 123,734 61,389
-------------------------------------
Total assets $4,252,968 $3,515,271 $3,145,283
=====================================
Expenditures for long-lived assets:
AMD segment $ 993,679 $ 683,346 $ 480,746
Vantis segment 2,491 1,754 4,272
-------------------------------------
Total expenditures for long-lived assets $ 996,170 $ 685,100 $ 485,018
=====================================
Depreciation and amortization expense:
AMD segment $ 463,719 $ 390,577 $ 343,053
Vantis segment 3,802 3,888 3,721
-------------------------------------
Total depreciation and amortization expense $ 467,521 $ 394,465 $ 346,774
=====================================
37
Notes to Consolidated Financial Statements
Our operations outside the United States include both manufacturing and sales.
Our manufacturing subsidiaries are located in Germany, Malaysia, Thailand,
Singapore and China. Our sales subsidiaries are in Europe and Asia Pacific.
The following is a summary of operations by entities within geographic areas for
the three years ended December 27, 1998:
(Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Sales to external customers:
United States $1,148,610 $1,024,718 $ 917,174
Germany 265,429 219,255 142,339
Other Europe 464,760 464,105 393,444
Asia Pacific 663,342 648,297 500,062
-------------------------------------------
$2,542,141 $2,356,375 $ 1,953,019
===========================================
Long-lived assets:
United States $1,718,435 $1,705,084 $ 1,613,286
Germany 333,851 102,810 12,586
Other Europe 3,927 3,735 4,492
Asia Pacific 212,255 179,060 157,038
-------------------------------------------
$2,268,468 $1,990,689 $ 1,787,402
===========================================
Sales to external customers are based on the customers' billing location. Long-
lived assets are those assets used in each geographic area.
We market and sell our products primarily to a broad base of customers comprised
of distributors and Original Equipment Manufacturers (OEMs) of computation and
communication equipment. One of our OEMs accounted for approximately 12 percent
of 1998 net sales. One of our distributors accounted for approximately 12
percent and 13 percent of 1997 and 1996 net sales, respectively. No other
distributor or OEM customer accounted for 10 percent or more of net sales in
1998, 1997 or 1996.
- --------------------------------------------------------------------------------
NOTE 10. Stock-Based Benefit Plans
STOCK OPTION PLANS We have several stock option plans under which key employees
have been granted incentive (ISOs) and nonqualified (NSOs) stock options to
purchase our common stock. Generally, options are exercisable within four years
from the date of grant and expire five to ten years after the date of grant.
ISOs granted under the plans have exercise prices of not less than 100 percent
of the fair market value of the common stock at the date of grant. Exercise
prices of NSOs range from $0.01 to the fair market value of the common stock at
the date of grant.
On September 10, 1998, the Compensation Committee of our Board of Directors
approved a stock option repricing program pursuant to which our employees
(excluding officers and vice presidents) could elect to cancel certain
unexercised stock options in exchange for new stock options with an exercise
price of $19.43, which was equal to 20 percent above the closing price of our
common stock on the New York Stock Exchange on September 10, 1998. Approximately
2 million options were eligible for repricing, of which we repriced
approximately 1.7 million. We extended the vesting schedules and expiration
dates of repriced stock options by one year.
On July 10, 1996, the Compensation Committee of our Board of Directors approved
a stock option repricing program pursuant to which our employees (excluding
officers) could elect to cancel certain unexercised stock options in exchange
for new stock options with an exercise price of $11.88, equal to the closing
price of our common stock on the New York Stock Exchange on July 15, 1996.
Approximately 6.1 million options were eligible for repricing, of which we
repriced approximately 5.3 million. We extended the vesting schedules and
expiration dates of repriced stock options by one year, and certain employees
canceled stock options for four shares of common stock in exchange for repriced
options for three shares of common stock.
38
The following is a summary of stock option activity and related information (the
repriced options are shown as canceled and granted options in the year they were
repriced):
1998 1997 1996
------------------------- -------------------------- ----------------------------
Weighted- Weighted- Weighted-
average average average
(Shares in thousands) Options exercise price Options exercise price Options exercise price
- ------------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 17,780 $ 17.07 18,651 $12.17 16,329 $16.77
Granted 6,555 19.84 3,392 34.33 11,245 12.96
Canceled (2,666) 31.17 (782) 16.05 (7,042) 26.64
Exercised (1,394) 8.38 (3,481) 8.03 (1,881) 4.07
------- ------- -------
Outstanding at end of year 20,275 16.71 17,780 17.07 18,651 12.17
======= ======= =======
Excercisable at end of year 9,697 14.60 8,299 13.28 7,440 9.80
Available for grant at beginning of year 966 3,845 751
Available for grant at end of year 5,653 966 3,845
--------------------------------------------------------------------------------
The following table summarizes information about options
outstanding at December 27, 1998:
Options outstanding Options exercisable
---------------------------------------------- --------------------------------
Weighted-
average
(Shares in thousands) Number remaining Weighted- Number Weighted-
outstanding contractual average exercisable average
Range of exercise prices at 12/27/98 life (years) exercise price at 12/27/98 exercise price
- -----------------------------------------------------------------------------------------------------------------------------
$ 0.01-$11.88 6,228 5.74 $ 9.52 4,703 $ 9.47
12.13- 14.88 5,268 6.68 14.16 3,189 14.11
15.00- 23.38 5,553 9.33 18.84 316 18.30
24.06- 44.00 3,226 7.72 31.05 1,489 31.04
------- ------
$ 0.01-$44.00 20,275 7.28 16.71 9,697 14.60
======= ======
STOCK PURCHASE PLAN We have an employee stock purchase plan (ESPP) that allows
participating U.S. employees to purchase, through payroll deductions, shares of
our common stock at 85 percent of the fair market value at specified dates. At
December 27, 1998, 427,361 common shares remained available for issuance under
the plan. A summary of stock purchased under the plan is shown below:
(Thousands except employee participants) 1998 1997 1996
- ---------------------------------------------------------------------------------------
Aggregate purchase price $14,949 $14,470 $13,138
Shares purchased 952 673 1,035
Employee participants 3,037 3,046 2,963
-------------------------------------------
STOCK APPRECIATION RIGHTS We may grant stock appreciation rights (SARs) to key
employees under the 1992 stock incentive plan. The number of SARs exercised plus
common stock issued under the stock option plans may not exceed the number of
shares authorized under the stock option plans. We may grant SARs in tandem with
outstanding stock options, in tandem with future stock option grants or
independently of any stock options. Generally, the terms of SARs granted under
the plan are similar to those of options granted under the stock option plans,
including exercise prices, exercise dates and expiration dates. To date, we have
granted only limited SARs, which become exercisable in the event of certain
changes in control of AMD.
39
Notes to Consolidated Financial Statements
RESTRICTED STOCK AWARDS We established the 1987 restricted stock award plan
under which we were authorized to issue up to two million shares of common stock
to employees, subject to terms and conditions determined at the discretion of
the Board of Directors. We entered into agreements to issue 15,000 and 320,609
shares in 1997 and 1996, respectively. The 1987 plan expired in 1997. To date,
we have canceled agreements covering 269,397 shares without issuance and we have
issued 1,714,524 shares pursuant to prior agreements. At December 27, 1998,
agreements covering 253,291 shares were outstanding. Outstanding awards vest
under varying terms within five years.
In 1998, we adopted the 1998 stock incentive plan under which we are authorized
to issue one million shares of common stock to employees who are not covered by
Section 16 of the Securities and Exchange Act of 1934, as amended (the Exchange
Act), subject to terms and conditions determined at the discretion of the Board
of Directors. We did not enter into agreements to issue restricted stock during
1998 under this plan.
SHARES RESERVED FOR ISSUANCE As of December 27, 1998, we had a total of
approximately 41,595,138 shares of common stock reserved for issuance related to
our Convertible Subordinated Notes, the employee stock option plans, the ESPP
and the restricted stock awards.
STOCK-BASED COMPENSATION As permitted under SFAS 123, we have elected to follow
APB 25 and related Interpretations in accounting for stock-based awards to
employees. Pro forma information regarding net income (loss) and net income
(loss) per share is required by SFAS 123 for awards granted after December 31,
1994, as if we had accounted for our stock-based awards to employees under the
fair value method of SFAS 123. We estimated the fair value of our stock-based
awards to employees using a Black-Scholes option pricing model. The Black-
Scholes model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because our stock-
based awards to employees have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of our stock-based awards to employees. The fair value of our stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
Options ESPP
---------------------------------------------
1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Expected life (years) 3.33 3.35 3.16 0.25 0.25 0.25
Expected stock price volatility 64.34% 54.69% 48.02% 76.09% 68.41% 47.81%
Risk-free interest rate 5.42% 6.21% 6.44% 5.18% 5.37% 5.29%
---------------------------------------------
For pro forma purposes, the estimated fair value of our stock-based awards to
employees is amortized over the options' vesting period (for options) and the
three-month purchase period (for stock purchases under the ESPP). Our pro forma
information follows:
(Thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------
Net loss - as reported $(103,960) $(21,090) $(68,950)
Net loss - pro forma (129,721) (44,304) (89,451)
Basic and diluted net loss per share - as reported (0.72) (0.15) (0.51)
Basic and diluted net loss per share - pro forma (0.90) (0.32) (0.66)
--------------------------------
Because SFAS 123 is applicable only to awards granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until approximately 1999.
We granted a total of 4,342,824 stock-based awards during 1998 with exercise
prices equal to the market price of the stock on the grant date. The weighted-
average exercise price and weighted-average fair value of these awards were
$20.16 and $9.80, respectively. We granted a total of 2,060,591 stock-based
awards during 1998 with exercise prices greater than the market price of the
stock
40
on the grant date. The weighted-average exercise price and weighted-average fair
value of these awards were $20.44 and $3.51, respectively. We granted a total of
150,990 stock-based awards during 1998 with exercise prices less than the market
price of the stock on the grant date. The weighted-average exercise price and
weighted-average fair value of these awards were $3.36 and $17.88, respectively.
We granted a total of 3,172,820 stock-based awards during 1997 with exercise
prices equal to the market price of the stock on the grant date. The weighted-
average exercise price and weighted-average fair value of these awards were
$36.11 and $16.07, respectively. We granted a total of 234,285 stock-based
awards during 1997 with exercise prices less than the market price of the stock
on the grant date. The weighted-average exercise price and weighted-average fair
value of these awards were $8.09 and $23.82, respectively. We granted a total of
10,332,224 options during 1996 with exercise prices equal to the market price of
the stock on the grant date. The weighted-average exercise price and weighted-
average fair value of these options were $13.44 and $5.15, respectively. We
granted a total of 912,994 options during 1996 with exercise prices less than
the market price of the stock on the grant date. The weighted-average exercise
price and weighted-average fair value of these options were $7.49 and $12.14,
respectively.
The weighted-average fair value of stock purchase rights during 1998, 1997 and
1996 was $6.21 per share, $8.42 per share and $4.07 per share, respectively.
Note 11. Other Employee Benefit Plans
Profit Sharing Program We have a profit sharing program to which the Board of
Directors has authorized semiannual contributions. Profit sharing contributions
were approximately $5 million in 1998 and $4 million in 1997. There were no
profit sharing contributions in 1996.
Retirement Savings Plan We have a retirement savings plan, commonly known as a
401(k) plan, that allows participating United States employees to contribute
from 1 percent to 15 percent of their pretax salary subject to I.R.S. limits. We
make a matching contribution calculated at 50 cents on each dollar of the first
3 percent of participant contributions, to a maximum of 1.5 percent of eligible
compensation. Our contributions to the 401(k) plan were approximately $5 million
for each of the years 1998, 1997 and 1996.
Note 12. Commitments
We lease certain of our facilities under agreements which expire at various
dates through 2018. We also lease certain of our manufacturing and office
equipment for terms ranging from one to five years. Rent expense was
approximately $54 million, $48 million and $40 million in 1998, 1997 and 1996,
respectively.
For each of the next five years and beyond, noncancelable long-term operating
lease obligations and commitments to purchase manufacturing supplies and
services are as follows:
Operating Purchase
(Thousands) leases commitments
- ----------------------------------------
1999 $ 45,409 $ 38,251
2000 39,788 32,601
2001 30,005 7,660
2002 26,096 5,059
2003 25,308 5,059
Beyond 2003 230,933 19,934
---------------------
$397,539 $ 108,564
=====================
The operating lease of our corporate marketing, general and administrative
facility expired in December 1998. At the end of the lease term, we were
obligated to either purchase the facility or to arrange for its sale to a third
party with a guarantee of residual value to the seller equal to the option
purchase price. In December 1998, we arranged for the sale of the facility to a
third party and leased it back under a new operating lease. We realized a gain
of $34 million as a part of this transaction. We have deferred the gain and will
amortize it over a
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period of 20 years, the life of the lease. The lease expires in December 2018.
At the beginning of the fourth lease year and every three years thereafter, the
annual rent will be adjusted by 200 percent of the cumulative increase in the
consumer price index over the prior three-year period.
In addition to the purchase commitments above, we had commitments of
approximately $205 million for the construction or acquisition of additional
property, plant and equipment at December 27, 1998.
AMD Saxony has constructed and is installing equipment in Dresden Fab 30, a
900,000-square-foot submicron integrated circuit manufacturing and design
facility. AMD, the Federal Republic of Germany, the State of Saxony and a
consortium of banks are supporting the project. In March 1997, AMD Saxony
entered into the Dresden Loan Agreements which provide for the funding of the
construction and facilitization of Dresden Fab 30.
The funding consists of:
. equity, subordinated loans and loan guarantees from AMD;
. loans from a consortium of banks; and
. grants, subsidies and loan guarantees from the Federal Republic of
Germany and the State of Saxony.
The Dresden Loan Agreements, which were amended in February 1998 to reflect
upgrades in wafer production technology as well as the decline in the deutsche
mark relative to the U.S. dollar, require that we partially fund Dresden Fab 30
project costs in the form of subordinated loans to, or equity investments in,
AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we have
invested $270 million to date in the form of subordinated loans and equity in
AMD Saxony, which includes $100 million in subordinated loans in 1998 ($60
million of which was paid after fiscal 1998 but before December 31, 1998). We
are required to make additional subordinated loans to, or equity investments in,
AMD Saxony totaling $170 million in 1999, $70 million of which must be funded
through the sale of at least $200 million of our stock by June 30, 1999.
In addition to support from AMD, the consortium of banks referred to above has
made available $989 million in loans (denominated in deutsche marks) to AMD
Saxony to help fund Dresden Fab 30 project costs. AMD Saxony had $300 million of
such loans outstanding at December 27, 1998.
Finally, the Federal Republic of Germany and the State of Saxony are supporting
the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in
the form of:
. guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount
of $989 million;
. capital investment grants and allowances totaling $289 million; and
. interest subsidies totaling $180 million.
Of these amounts (which are denominated in deutsche marks), AMD Saxony has
received $275 million in capital investment grants and $8 million in interest
subsidies as of December 27, 1998.
The Dresden Loan Agreements also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed,
which will be repaid to AMD as AMD Saxony receives the grants or
subsidies from the State of Saxony;
. fund shortfalls in government subsidies resulting from any default under
the subsidy agreements caused by AMD Saxony or its affiliates;
. guarantee a portion of AMD Saxony's obligations under the Dresden Loan
Agreements up to a maximum of $130 million (denominated in deutsche
marks) until Dresden Fab 30 has been completed;
. fund certain contingent obligations including various obligations to fund
project cost overruns, if any; and
. make funds available to AMD Saxony, after completion of Dresden Fab 30,
up to approximately $87 million (denominated in deutsche marks) if AMD
Saxony does not meet its fixed charge coverage ratio covenant.
Because our obligations under the Dresden Loan Agreements are denominated in
deutsche marks, the dollar amounts set forth herein are subject to change based
on applicable conversion rates. At the end of the fourth quarter of 1998, the
exchange rate was approximately 1.67 deutsche marks to 1 U.S. dollar (which we
used to calculate our obligations denominated in deutsche marks).
In December 1995, we signed a five-year, comprehensive cross-license agreement
with Intel. The cross-license is royalty-bearing for products that use certain
Intel technologies. We are required to pay Intel minimum nonrefundable royalties
through 2000.
A license agreement between AMD and the Lemelson Medical, Education & Research
Foundation, Limited Partnership was successfully negotiated and signed in
the first quarter of 1999, as a result of a previously filed complaint against
Vantis, that protects AMD and Vantis from the case being refiled against them.
NOTE 13. INVESTMENT IN JOINT VENTURE
In 1993, we formed a joint venture, FASL, with Fujitsu Limited, for the
development and manufacture of non-volatile memory devices. Through FASL, the
two companies have constructed and are operating an advanced IC manufacturing
facility in Aizu-Wakamatsu, Japan, to produce Flash memory devices. Our share of
FASL is 49.992 percent and the investment is being accounted for under the
equity method. Our share of FASL net income during 1998 was $12 million, net of
income taxes of approximately $11 million. At December 27, 1998, the cumulative
adjustment related to the translation of the FASL financial statements into
U.S. dollars resulted in a decrease of approximately $25 million to the
investment in FASL.
The following table presents the significant FASL related party transactions and
balances:
Three Years Ended December 27, 1998 (Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Royalty income $ 21,136 $ 19,322 $ 20,832
Purchases 211,640 242,161 233,656
-----------------------------
December 27, 1998 and December 28, 1997 (Thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
Royalty receivable $ 6,027 $ 5,614
Accounts payable 39,424 40,002
--------------------
Pursuant to a cross-equity provision between AMD and Fujitsu Limited, we
purchased shares of Fujitsu Limited common stock and own approximately 0.5
million shares at December 27, 1998. Under the same provision, Fujitsu Limited
has purchased 4 million shares of our common stock, and is required to purchase
an additional 0.5 million shares during 1999, for a total investment not to
exceed $100 million.
In the third quarter of 1997, FASL completed construction of the building for a
second Flash memory device wafer fabrication facility, FASL II, at a site
contiguous to the existing FASL facility in Aizu-Wakamatsu, Japan. Equipment
installation is in progress and the facility is expected to cost approximately
$1 billion when fully equipped. Capital expenditures for FASL II construction to
date have been funded by cash generated from FASL operations and local
borrowings by FASL. To the extent that FASL is unable to secure the necessary
funds for FASL II, we may be required to contribute cash or guarantee third-
party loans in proportion to our 49.992 percent interest in FASL. At December
27, 1998, we had loan guarantees of $81 million outstanding with respect to such
loans.
The following is condensed financial data of FASL:
Three Years Ended December 27, 1998 (Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
Net sales $427,140 $423,251 $459,075
Gross profit 25,432 105,691 200,255
Operating income 20,758 94,863 185,825
Net income 13,104 46,000 121,119
----------------------------
December 27, 1998 and December 28, 1997 (Thousands) 1998 1997
- ----------------------------------------------------------------------------
Current assets $118,140 $134,499
Non-current assets 640,040 627,965
Current liabilities 278,309 339,151
Non-current liabilities 1,774 662
------------------
Our share of the above FASL net income differs from the equity in net income of
joint venture reported on the consolidated statements of operations due to
adjustments resulting from the related party relationship between FASL and AMD,
which are reflected on our consolidated statements of operations.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Contingencies
I. Litigation
A. McDaid v. Sanders, et al.; Kozlowski, et al. v. Sanders, et al. We entered
into a Memorandum of Understanding during 1998, which settled this class action
lawsuit against us and certain of our current and former officers and directors
for $11.5 million. Our Board of Directors approved the settlement on April 30,
1998. The Federal Court approved the settlement on November 2, 1998 and
dismissed the case.
B. AMD v. Altera Corporation. This litigation, which began in 1994, involves
multiple claims and counterclaims for patent infringement relating to our and
Altera Corporation's programmable logic devices. In a trial held in May 1996,
a jury found that at least five of the eight AMD patents-in-suit were licensed
to Altera. As a result of the bench trial held in August 1997, the Court held
that Altera is licensed to the three remaining AMD patents-in-suit. Seven
patents were asserted by Altera in its counterclaim against AMD. The court
determined that we are licensed to five of the seven patents and two remain in
suit. Altera filed a motion to recover attorneys' fees in November 1997. We then
filed, and the Court granted, a motion to stay determination of the attorneys'
fees motion until resolution of its appeal. We have filed an appeal of the
rulings of the jury and Court determinations that Altera is licensed to each of
our eight patents-in-suit. Both parties filed briefs and the Federal Court of
Appeal heard oral argument on our appeal on November 3, 1998. Based upon
information presently known to management, we do not believe that the ultimate
resolution of this lawsuit will have a material adverse effect on our financial
condition or results of operations.
C. Ellis Investment Co., Ltd v. AMD, et al. This class action complaint was
filed against AMD and an individual officer of AMD on March 10, 1999. The
complaint alleges that we made misleading statements about the design and
production of the AMD-K6 microprocessor in violation of Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder. The plaintiff seeks to
represent a class comprised of all persons who purchased our common stock during
the period from November 12, 1998 through March 8, 1999. The complaint seeks
unspecified damages, cost and fees. Following the filing of this complaint,
several law firms published press releases announcing that they had filed, or
intend to file, substantially similar class action complaints. As of March 12,
1999, we had not seen or been served with those complaints. Based upon
information presently known to management, we do not believe that the ultimate
resolution of these lawsuits will have a material adverse effect on our
financial condition or results of operations.
II. Environmental Matters
Clean-Up Orders. Since 1981, we have discovered, investigated and begun
remediation of three sites where releases from underground chemical tanks at our
facilities in Santa Clara County, California adversely affected the ground
water. The chemicals released into the ground water were commonly in use in the
semiconductor industry in the wafer fabrication process prior to 1979. At least
one of the released chemicals (which is no longer used by AMD) has been
identified as a probable carcinogen.
In 1991, we received four Final Site Clean-up Requirements Orders from the
California Regional Water Quality Control Board, San Francisco Bay Region,
relating to the three sites. One of the orders named AMD as well as TRW
Microwave, Inc. and Philips Semiconductors Corporation. In January 1999, we
entered into a settlement with Philips, whereby Philips will assume costs
allocated to AMD under this order, although we would be respon-sible for these
costs in the event that Philips does not fulfill its obligations under the
settlement agreement. Another of the orders named AMD as well as National
Semiconductor Corporation.
The three sites in Santa Clara County are on the National Priorities List
(Superfund). If we fail to satisfy federal compliance requirements or
inadequately perform the compliance measures, the government (1) can bring an
action to enforce compliance, or (2) can undertake the desired response actions
itself and later bring an action to recover its costs, and penalties, which is
up to three times the costs of clean-up activities, if appropriate. With regard
to certain claims related to this matter, the statute of limitations has been
tolled.
We have computed and recorded the estimated environmental liability in
accordance with applicable accounting rules and have not recorded any potential
insurance recoveries in determining the estimated costs of the clean-up. The
amount of environmental charges to earnings has not been material during any of
the last three fiscal years. We believe that the potential liability, if any, in
excess of amounts already accrued with respect to the foregoing environmental
matters, will not have a material adverse effect on our financial condition or
results of operations.
We received a notice dated October 14, 1998 from the Environmental Protection
Agency (EPA) indicating that the EPA has determined AMD to be a potentially
responsible party that had arranged for disposal of hazardous substances at a
site located in Santa Barbara County, California. We believe that this matter
will not have a material adverse effect on our business.
III. Other Matters
We are a defendant or plaintiff in various other actions which arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on our
financial condition or results of operations.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Advanced Micro Devices, Inc.
We have audited the accompanying consolidated balance sheets of Advanced Micro
Devices, Inc. as of December 27, 1998 and December 28, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Advanced Micro Devices, Inc. at December 27, 1998 and December 28, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 27, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 12, 1999
except for the third paragraph of Note 14,
as to which the date is
March 12, 1999
45
Supplementary Financial Data
1998 and 1997 by Quarter (Unaudited)
(Thousands except per share Dec. 27, Sept. 27, June 28, Mar. 29, Dec. 28, Sept. 28, June 29, Mar. 30,
and market price amounts) 1998 1998 1998 1998 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 788,820 $ 685,927 $ 526,538 $ 540,856 $ 613,171 $ 596,644 $594,561 $551,999
Expenses:
Cost of sales 481,987 422,985 390,140 423,591 428,856 428,240 372,266 349,076
Research and
development 156,459 143,665 139,158 128,120 127,031 125,917 110,021 104,908
Marketing, general and
administrative 120,498 109,768 101,198 88,214 102,296 100,915 102,983 94,519
------------------------------------------------------------------------------------------------------
758,944 676,418 630,496 639,925 658,183 655,072 585,270 548,503
------------------------------------------------------------------------------------------------------
Operating income (loss) 29,876 9,509 (103,958) (99,069) (45,012) (58,428) 9,291 3,496
Litigation settlement - - - (11,500) - - - -
Interest income and other,
net 10,037 10,071 8,518 5,581 6,525 5,532 9,718 13,322
Interest expense (15,177) (21,182) (17,663) (12,472) (11,757) (14,151) (9,958) (9,410)
------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes and equity in
joint venture 24,736 (1,602) (113,103) (117,460) (50,244) (67,047) 9,051 7,408
Provision (benefit) for
income taxes (136) (635) (44,110) (46,997) (29,861) (30,072) 2,630 2,148
------------------------------------------------------------------------------------------------------
Income (loss) before equity
in joint venture 24,872 (967) (68,993) (70,463) (20,383) (36,975) 6,421 5,260
Equity in net income (loss)
of joint venture (2,551) 1,973 4,433 7,736 8,049 5,300 3,547 7,691
------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 22,321 $ 1,006 $ (64,560) $ (62,727) $ (12,334) $ (31,675) $ 9,968 $ 12,951
======================================================================================================
NET INCOME (LOSS) PER SHARe
Basic $ 0.15 $ 0.01 $ (0.45) $ (0.44) $ (0.09) $ (0.22) $ 0.07 $ 0.09
======================================================================================================
Diluted $ 0.15 $ 0.01 $ (0.45) $ (0.44) $ (0.09) $ (0.22) $ 0.07 $ 0.09
======================================================================================================
Shares used in per share
calculation
Basic 144,926 143,915 143,462 142,503 141,889 141,055 140,255 138,616
======================================================================================================
Diluted 149,949 146,642 143,462 142,503 141,889 141,055 147,919 146,758
======================================================================================================
Common stock market
price range
High $ 32.00 $ 20.94 $ 30.50 $ 25.13 $ 32.75 $ 42.50 $ 45.00 $ 47.38
Low $ 14.00 $ 13.00 $ 16.88 $ 17.13 $ 17.56 $ 31.25 $ 35.50 $ 25.75
------------------------------------------------------------------------------------------------------
46
FINANCIAL SUMMARY
Five Years Ended December 28, 1998
(Thousands except per share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
NET SALES $2,542,141 $2,356,375 $1,953,019 $2,468,379 $2,155,453
Expenses:
Cost of sales 1,718,703 1,578,438 1,440,828 1,417,007 1,013,589
Research and development 567,402 467,877 400,703 416,521 295,326
Marketing, general and
administrative 419,678 400,713 364,798 412,651 377,503
---------------------------------------------------------------------------
2,705,783 2,447,028 2,206,329 2,246,179 1,686,418
---------------------------------------------------------------------------
Operating income (loss) (163,642) (90,653) (253,310) 222,200 469,035
Litigation settlement (11,500) - - - (58,000)
Interest income and other, net 34,207 35,097 59,391 32,465 17,134
Interest expense (66,494) (45,276) (14,837) (3,059) (4,410)
---------------------------------------------------------------------------
Income (loss) before income taxes and
equity in joint venture (207,429) (100,832) (208,756) 251,606 423,759
Provision (benefit) for income taxes (91,878) (55,155) (85,008) 70,206 142,232
---------------------------------------------------------------------------
Income (loss) before equity in joint
venture (115,551) (45,677) (123,748) 181,400 281,527
Equity in net income (loss) of joint
venture 11,591 24,587 54,798 34,926 (10,585)
---------------------------------------------------------------------------
NET INCOME (LOSS) (103,960) (21,090) (68,950) 216,326 270,942
Preferred stock dividends - - - 10 10,350
---------------------------------------------------------------------------
NET INCOME (LOSS)
APPLICABLE TO COMMON STOCKHOLDERS $ (103,960) $ (21,090) $ (68,950) $ 216,316 $ 260,592
===========================================================================
NET INCOME (LOSS)
PER COMMON SHARE
Basic $ (0.72) $ (0.15) $ (0.51) $ 1.69 $ 2.22
===========================================================================
Diluted $ (0.72) $ (0.15) $ (0.51) $ 1.57 $ 2.03
===========================================================================
Shares used in per share
calculation
Basic 143,668 140,453 135,126 127,680 117,597
===========================================================================
Diluted 143,668 140,453 135,126 137,698 133,674
===========================================================================
Long-term debt, capital
lease obligations and other,
less current portion $1,372,416 $ 662,689 $ 444,830 $ 214,965 $ 75,752
Total assets $4,252,968 $3,515,271 $3,145,283 $3,078,467 $2,525,721
---------------------------------------------------------------------------
AMD's common stock (symbol AMD) is listed on the New York Stock Exchange. The
company has never paid cash dividends on common stock and is restricted from
doing so. Refer to the notes to consolidated financial statements. The number of
stockholders of record at January 29, 1999 was 9,734.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, Vantis,
NexGen, K86, AMD-K6, AMD-K6-II, AMD-K6-3, AMD-K7, 3DNow!, PCnet, Nx586 and Nx686
are either trademarks or registered trademarks of Advanced Micro Devices, Inc.
Microsoft and Windows are either registered trademarks or trademarks of
Microsoft Corporation. Pentium is a registered trademark and Celeron is a
trademark of Intel Corporation. Other terms used to identify companies and
products may be trademarks of their respective owners.
47
CORPORATE DIRECTORY
DIRECTORS
W.J. Sanders III
Chairman of the Board and
Chief Executive Officer, AMD
Dr. Friedrich Baur
President and Managing Partner,
MST Beteiligungs und
Unternehmensberatungs GmbH
Charles M. Blalack
Chairman of the Board and
Chief Executive Officer
of Blalack and Company,
Investment Advisors
Dr. R. Gene Brown
Private Investor and Financial
and Management Consultant
Richard Previte
President and Co-Chief Operating
Officer and Member of the
Office of the CEO, AMD
S. Atiq Raza
Co-Chief Operating Officer and
Chief Technical Officer and Member
of the Office of the CEO, AMD
Joe L. Roby
President and Chief Executive Officer,
Donaldson, Lufkin & Jenrette, Inc.
Dr. Leonard M. Silverman
Dean, School of Engineering,
University of Southern California
CORPORATE OFFICERS
W.J. Sanders III
Chief Executive Officer and
Chairman of the Board
Richard Previte
President and
Co-Chief Operating Officer
S. Atiq Raza
Co-Chief Operating Officer and
Chief Technical Officer
Gene Conner
Executive Vice President,
Strategic Relations
Fran Barton
Sr. Vice President,
Chief Financial Officer
Robert R. Herb
Sr. Vice President,
Co-Chief Marketing Executive
Thomas M. McCoy
Sr. Vice President, General
Counsel and Secretary
William Siegle
Sr. Vice President,
Technology Development and
Wafer Fabrication Operations;
Chief Scientist
Stan Winvick
Sr. Vice President,
Human Resources
Stephen Zelencik
Sr. Vice President,
Co-Chief Marketing Executive
GROUP VICE PRESIDENTS
Donald M. Brettner
Group Vice President,
Manufacturing Services Group
Tom Eby
Group Vice President,
Communications Group
Gary O. Heerssen
Group Vice President,
Wafer Fabrication Group
Larry Hollatz
Group Vice President,
Computation Products Group
Walid Maghribi
Group Vice President, Memory Group
Daryl Ostrander
Group Vice President,
Wafer Fabrication Technology Implementation
VICE PRESIDENTS
Benjamin M. Anixter
Vice President, External Affairs
James Ashby
Vice President, Controller
Gary Ashcraft
Vice President and General Manager,
Communication Products Division
Kathryn Brandt
Vice President,
Worldwide Headquarter Sales
Randy Burdick
Vice President,
Chief Information Officer
James Doran
Vice President, Fab 25
and Submicron Development
Center Operations
Gino Giannotti
Vice President, Business Marketing,
Computation Products Group
Richard Heye
Vice President and General Manager,
Texas Microprocessor Division
Mike Johnson
Vice President, Advanced
Research and Development
Dana Krelle
Vice President, Strategic Marketing,
Computation Products Group
Gerald A. Lynch
Vice President, Sales and Marketing,
Asia Pacific - Japan
Robert McConnell
Vice President and General Manager,
Embedded Products Division and
CAD Technology Systems
Amir Mashkoori
Vice President, Operations,
Memory Group
Giuliano Meroni
Vice President, Sales and Marketing, Europe
Laila Razouk
Vice President and General Manager,
Network Products Division
Jack Saltich
Vice President and General Manager,
AMD Saxony Manufacturing GmbH
Craig Sander
Vice President, Technology Development
Dave Sheffler
Vice President, Sales, Americas
Danne Smith
Vice President, Corporate Quality
Michael Van Buskirk
Vice President, Design Engineering,
Non-Volatile Memory Products Division
Jerry Vogel
Vice President and General Manager,
California Microprocessor Division
Michael Woollems
Vice President, Tax and Treasury