Exhibit 99.2

Unaudited Pro Forma Condensed Combined Financial Statements

On July 23, 2006, Advanced Micro Devices, Inc. (“AMD” or the “Company”) and ATI Technologies, Inc. (“ATI”) entered into an acquisition agreement pursuant to which AMD agreed to acquire all of the outstanding ATI common stock for a combination of cash and shares of AMD common stock (the “Acquisition”). The Acquisition was closed on October 24, 2006. The aggregate consideration paid by AMD for all outstanding ATI common shares consisted of approximately $4.26 billion of cash and 57.95 million shares of AMD common stock. Under the agreement, AMD also assumed substantially all issued and outstanding ATI stock options, restricted stock units and other stock-based awards as of October 24, 2006 in exchange for comparable AMD stock-based awards. To finance a portion of the cash consideration paid, AMD borrowed $2.50 billion under a term loan (the “Debt Financing”) with a third party financial institution. The total purchase price, including transaction costs of $25 million, was $5.61 billion.

The following unaudited pro forma condensed combined balance sheet as of October 1, 2006 and the unaudited pro forma condensed combined statements of operations for the year ended December 25, 2005 and the nine months ended October 1, 2006 are based on the historical financial statements of AMD and ATI after giving effect to (1) the Acquisition, (2) the Debt Financing and (3) the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The pro forma information is being filed pursuant to the requirements of Item 2 and 9.01 of Form 8-K and Rule 3-05 and Article 11 of U.S. Securities and Exchange Commission (SEC) Regulation S-X and is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. The pro forma information does not reflect cost savings, operating synergies or revenue enhancements expected to result from the Acquisition or the costs to achieve these cost savings, operating synergies and revenue enhancements. Income taxes reflect the assumption that certain U.S. tax elections will be made related to this Acquisition that will allow AMD to realize U.S. tax deductions from the amortization of acquired intangibles and goodwill. The pro forma adjustments and the allocation of the purchase price are based on AMD management’s estimates of the fair value of the assets acquired and liabilities assumed in the Acquisition.

The allocation of the purchase price is based on the actual net tangible and intangible assets of ATI that existed as of October 24, 2006, the closing date of the Acquisition.

The unaudited pro forma condensed combined balance sheet is presented as if the Acquisition and the Debt Financing had been completed on October 1, 2006, the last day of AMD’s third fiscal quarter and combines the historical unaudited consolidated balance sheet of AMD at October 1, 2006 and the historical unaudited consolidated balance sheet of ATI at August 31, 2006.

The unaudited pro forma condensed combined statements of operations for the year ended December 25, 2005 and for the nine months ended October 1, 2006 are presented as if the Acquisition and the Debt Financing had been completed on December 27, 2004, the first day of AMD’s fiscal 2005. The unaudited pro forma condensed combined statement of operations for the year ended December 25, 2005 combines the historical results of AMD for the year ended December 25, 2005 and, due to ATI’s different fiscal year end, the historical results of ATI for the 12-month period ended November 30, 2005. The unaudited pro forma condensed combined statement of operations for the nine months ended October 1, 2006

 

1


combines the historical unaudited results of AMD for the nine months ended October 1, 2006 and the historical unaudited results of ATI for the nine months ended August 31, 2006. ATI’s historical consolidated financial statements were prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. AMD’s consolidated financial statements were prepared in accordance with U.S. GAAP. As described in Notes 5 and 6 to these unaudited pro forma condensed combined financial statements, ATI’s historical consolidated financial statements have been adjusted to U.S. GAAP and certain additional conforming presentation adjustments have also been made to the financial statements of ATI to conform with AMD’s presentation under U.S. GAAP. Unless stated otherwise, all dollar amounts are presented in U. S. dollars.

AMD may seek to refinance the Debt Financing. There is no guarantee that any or all of the Debt Financing can be refinanced at interest rates acceptable to AMD. There is currently no commitment to refinance the Debt Financing and, accordingly, the pro forma financial statements do not reflect the impact of such refinancing.

 

2


Unaudited Pro Forma Condensed Combined Balance Sheet

at October 1, 2006

U.S. GAAP (U.S. dollar, in thousands)

 

    

AMD at
October 1,

2006

    ATI at
August 31,
2006
    Pro Forma
Adjustments
    Pro Forma
Combined
 
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 1,384,526     $ 219,874     $ (817,355 )(4)(5)   $ 787,045  

Marketable securities

     972,377       376,801       (972,377 )(4)     376,801  

Accounts receivable, net

     688,023       299,389       —         987,412  

Inventories

     465,716       362,352       91,686 (4)     919,754  

Deferred income taxes

     74,981       11,156       (11,156 )(2)     74,981  

Prepaid expenses and other current assets

     305,045       31,159       —         336,204  

Receivable from Spansion

     21,193       —         —         21,193  
                                

Total current assets

     3,911,861       1,300,731       (1,709,202 )     3,503,390  

Property, plant and equipment, net

     3,403,879       124,748       16,570 (4)     3,545,197  

Goodwill, net

     —         193,125       2,922,881 (1)(4)     3,116,006  

Other intangibles, net

     —         33,637       1,220,763 (1)(4)     1,254,400  

Long-term investments

     671,249       291       —         671,540  

Tax credits recoverable

     —         115,955       (115,955 )(2)     —    

Deferred income taxes - long term

     6,972       52,776       (52,776 )(2)     6,972  

Other long-term assets

     385,283       —         1,876 (4)(5)     387,159  
                                

Total assets

   $ 8,379,244     $ 1,821,263     $ 2,284,157     $ 12,484,664  
                                
LIABILITIES AND STOCKHOLDERS’ EQUITY         

Current liabilities:

        

Accounts payable

   $ 901,349     $ 306,149     $ —       $ 1,207,498  

Accrued compensation and benefits

     147,250       31,894       —         179,144  

Accrued liabilities

     473,477       252,385       6,257 (4)     732,119  

Income taxes payable

     17,790       —         67,532 (2)     85,322  

Deferred income

     115,571       8,201       —         123,772  

Current portion of long-term debt and capital lease obligations

     44,950       2,512       —         47,462  

Other current liabilities

     191,824       —         —         191,824  
                                

Total current liabilities

     1,892,211       601,141       73,789       2,567,141  

Deferred income taxes

     75,861       37,030       (37,030 )(2)     75,861  

Long-term debt and capital lease obligations

     644,357       29,694       2,500,000 (4)     3,174,051  

Other long-term liabilities

     482,204       —         —         482,204  

Minority interest in consolidated subsidiaries

     272,116       94       —         272,210  

Commitments and contingencies

        

Stockholders’ equity:

        

Capital stock:

        

Common stock, par value

     4,871       765,708       (765,129 )(3)(4)     5,450  

Capital in excess of par value

     4,051,291       86,091       1,229,632 (3)(4)     5,367,014  

Treasury stock, at cost

     (92,612 )     (7,840 )     7,840 (3)     (92,612 )

Retained earnings

     881,632       298,829       (714,429 )(3)(4)     466,032  

Accumulated other comprehensive income

     167,313       10,516       (10,516 )(3)     167,313  
                                

Total stockholders’ equity

     5,012,495       1,153,304       (252,602 )     5,913,197  
                                

Total liabilities and stockholders’ equity

   $ 8,379,244     $ 1,821,263     $ 2,284,157     $ 12,484,664  
                                

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

3


Unaudited Pro Forma Condensed Combined Statement of Operations

U.S. GAAP (U.S. dollar, in thousands, except per share amounts)

 

     AMD
Year Ended
December 25,
2005
   

ATI

Year Ended
November 30,
2005

    Pro Forma
Adjustments
   

Pro Forma
Combined

 

Net sales

   $ 4,972,408     $ 2,199,353     $ —       $ 7,171,761  

Net sales to related party

     875,169       —         —         875,169  
                                

Total net sales

     5,847,577       2,199,353       —         8,046,930  

Cost of sales

     3,455,812       1,625,309       3,584 (2)(3)     5,084,705  
                                

Gross margin

     2,391,765       574,044       (3,584 )     2,962,225  

Research and development

     1,144,025       406,543       29,172 (1)(2)(3)     1,579,740  

Marketing, general and administrative

     1,016,085       235,860       20,985 (1)(2)(3)(5)     1,272,930  

Amortization of acquisition related intangibles

     —         —         284,028 (4)     284,028  
                                

Operating income (loss)

     231,655       (68,359 )     (337,769 )     (174,473 )

Interest income

     37,151       16,718       —         53,869  

Interest expense

     (104,960 )     (2,090 )     (193,090 )(6)(7)     (300,140 )

Other income (expense), net

     (23,580 )     2,338       —         (21,242 )
                                

Income (loss) before minority interest, loss on disposition of equity interest in Spansion Inc., equity in net income (loss) of unconsolidated investee and income taxes

     140,266       (51,393 )     (530,859 )     (441,986 )

Minority interest in consolidated subsidiaries

     125,151       —         —         125,151  

Loss on disposition of equity interest in Spansion Inc.

     (109,681 )     —         —         (109,681 )

Equity in income (loss) of unconsolidated investee

     3,105       —         —         3,105  
                                

Income (loss) before income tax provision (benefit)

     158,841       (51,393 )     (530,859 )     (423,411 )

(Benefit) provision for income taxes

     (6,642 )     (36,193 )     50,519 (8)     7,684  
                                

Net income (loss)

   $ 165,483     $ (15,200 )   $ (581,378 )   $ (431,095 )
                                

Net income (loss) per common share:

        

Basic

   $ 0.41     $ (0.06 )     $ (0.94 )

Diluted

   $ 0.40     $ (0.06 )     $ (0.94 )

Shares used in per share calculation:

        

Basic

     400,004       251,117         457,950  

Diluted

     440,776       251,117         457,950  

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

4


Unaudited Pro Forma Condensed Combined Statement of Operations

U.S. GAAP (U.S. dollar, in thousands, except per share amounts)

 

     AMD
Nine Months
Ended
October 1,
2006
    ATI
Nine Months
Ended
August 31,
2006
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Net sales

   $ 3,876,147     $ 1,841,549     $ —       $ 5,717,696  
                                

Total net sales

     3,876,147       1,841,549       —         5,717,696  

Cost of sales

     1,724,663       1,321,445       (665 )(2)(3)     3,045,443  
                                

Gross margin

     2,151,484       520,104       665       2,672,253  

Research and development

     820,230       345,364       (27,255 )(1)(2)(3)     1,138,339  

Marketing, general and administrative

     851,373       203,621       (7,672 )(1)(2)(3)(5)     1,047,322  

Amortization of acquisition related intangibles

     —         —         194,872 (4)     194,872  
                                

Operating income (loss)

     479,881       (28,881 )     (159,280 )     291,720  

Interest income

     94,658       18,328       —         112,986  

Interest expense

     (58,743 )     (1,565 )     (144,818 )(6)(7)     (205,126 )

Other income (expense), net

     (13,863 )     4,277       —         (9,586 )
                                

Income (loss) before minority interest, equity in net income (loss) of Spansion Inc., and income taxes

     501,933       (7,841 )     (304,098 )     189,994  

Minority interest in consolidated subsidiaries

     (20,471 )     21       —         (20,450 )

Equity in net income (loss) of Spansion Inc.

     (40,914 )     —         —         (40,914 )

Provision (benefit) for income taxes

     32,722       (21,468 )     (74,738 )(8)     (63,484 )
                                

Net income (loss)

   $ 407,826     $ 13,648     $ (229,360 )   $ 192,114  
                                

Net income (loss) per common share:

        

Basic

   $ 0.85     $ 0.05       $ 0.36  

Diluted

   $ 0.82     $ 0.05       $ 0.34  

Shares used in per share calculation:

        

Basic

     478,318       253,824         536,264  

Diluted

     497,332       259,103         561,828  

See accompanying notes to unaudited pro forma condensed combined financial statements.

 

5


Notes to Unaudited Pro Forma Condensed Combined Financial Statements

1. Basis of Presentation

The unaudited pro forma condensed combined balance sheet as of October 1, 2006 and the unaudited pro forma condensed combined statements of operations for the nine months ended October 1, 2006 and the year ended December 25, 2005 are based on the historical financial statements of AMD and ATI after giving effect to (1) the Acquisition, (2) the Debt Financing and (3) the assumptions and adjustments described in these notes to the unaudited pro forma condensed combined financial statements.

The pro forma information is being filed pursuant to the requirements of Item 2 and 9.01 of Form 8-K and Rule 3-05 and Article 11 of U.S. Securities and Exchange Commission (SEC) Regulation S-X and is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. The pro forma information is based on estimates and assumptions set forth in the notes to such information. It does not reflect cost savings, operating synergies or revenue enhancements expected to result from the Acquisition or the costs to achieve these cost savings, operating synergies and revenue enhancements. Income taxes reflect the assumption that certain U.S. tax elections will be made related to the Acquisition that will allow AMD to realize U.S. tax deductions from the amortization of acquired intangibles and goodwill. The pro forma adjustments and the allocation of the consideration are based on AMD management’s estimates of the fair value of the assets acquired and liabilities assumed in the Acquisition.

The unaudited pro forma condensed combined balance sheet is presented as if the Acquisition and the Debt Financing had been completed on October 1, 2006 and combines the historical unaudited consolidated balance sheet of AMD at October 1, 2006 and the historical unaudited consolidated balance sheet of ATI at August 31, 2006. Since the final valuation of the ATI assets acquired and liabilities assumed, including net tangible and intangible assets, is as of the transaction closing date, October 24, 2006, those amounts actually recorded could differ from the amounts reflected in these pro forma financial statements.

The unaudited pro forma condensed combined statements of operations for the year ended December 25, 2005 and for the nine months ended October 1, 2006 are presented as if the Acquisition and the Debt Financing had been completed on December 27, 2004, the first day of AMD’s fiscal 2005. The unaudited pro forma condensed combined statement of operations for the year ended December 25, 2005 combines the historical results of AMD for the year ended December 25, 2005 and, due to ATI’s different fiscal year end, the historical results of ATI for the 12-month period ended November 30, 2005. The unaudited pro forma condensed combined statement of operations for the nine months ended October 1, 2006 combines the historical unaudited results of AMD for the nine months ended October 1, 2006 and the historical unaudited results of ATI for the six months ended August 31, 2006. ATI’s historical consolidated financial statements were prepared in accordance with Canadian GAAP, which differs in certain respects from U.S. GAAP. AMD’s consolidated financial statements were prepared in accordance with U.S.

 

6


GAAP. As described in Notes 5 and 6 to these unaudited pro forma condensed combined financial statements, ATI’s historical consolidated financial statements were adjusted to U.S. GAAP and certain adjustments have also been made to the financial statements of ATI to conform with AMD’s presentation under U.S. GAAP. Unless stated otherwise, all dollar amounts are presented in U.S. dollars.

2. The Acquisition

On July 23, 2006, AMD and ATI entered into an acquisition agreement pursuant to which AMD agreed to acquire all of the outstanding ATI common stock for a combination of cash and shares of AMD common stock. The Acquisition closed on October 24, 2006. The aggregate consideration paid by AMD for all outstanding ATI common shares consisted of $4.26 billion of cash and 57.95 million shares of AMD common stock. Under the agreement, AMD also assumed substantially all issued and outstanding ATI stock options, restricted stock units and other stock-based awards as of October 24, 2006 in exchange for comparable AMD stock-based awards. To finance a portion of the cash consideration paid, AMD borrowed $2.50 billion under a term loan (the “Debt Financing”) with a third party financial institution. The total purchase price, including transaction costs of $25 million, was $5.61 billion. The acquisition will be accounted for under the purchase method of accounting.

The following table summarizes the components of the estimated total consideration determined for accounting purposes of these pro forma condensed combined financial statements (in thousands):

 

     Value  

Cash paid for ATI common stock (259.9 million shares at $16.40 per share)

   $ 4,262,852  

57.95 million shares of AMD common stock issued for ATI common stock

     1,172,055  

Fair value of stock options, stock appreciation rights, and restricted stock units exchanged (1)

     219,070  

Unvested portion of the fair value of stock options, stock appreciation rights, and restricted stock units (1)

     (68,564 )

Direct acquisition costs (2)

     25,004  
        

Total purchase price

   $ 5,610,417  
        

(1) This is based on 17.8 million outstanding ATI stock options, 3.0 million outstanding ATI restricted stock units, and other stock awards as of October 24, 2006. The fair value of consideration includes assumed cash-out payments of $4 million for certain stock awards which AMD did not assume. AMD issued 17.1 million stock options and 2.2 million restricted stock units in exchange for ATI’s comparable outstanding stock awards using the exchange ratio of 0.9596 as calculated pursuant to the acquisition agreement. In addition, AMD also issued 0.7 million shares of restricted stock units which are to be settled in cash upon vesting. The estimated fair value of AMD’s replacement options is calculated using the lattice binomial model and the estimated fair value of AMD’s replacement restricted stock units is calculated using the AMD’s closing share price of $20.32 at October 24, 2006. In accordance with FASB Statement No. 123R, Share-based Payment, the portion of the estimated fair value of unvested AMD’s replacement stock options and restricted stock units subject to future employee service requirements ($68.6 million) is deducted from the purchase price consideration and will be recognized as compensation expense over the remaining vesting period of the applicable awards.
(2) Direct Acquisition costs of approximately $25.0 million consist of investment banking fees, legal and accounting fees and other external costs directly related to the Acquisition.

 

7


AMD financed the cash portion of the Acquisition with a combination of cash and debt. For the debt, AMD entered into a Credit Agreement with Morgan Stanley Senior Funding, Inc., as Syndication Agent and Administrative Agent, Wells Fargo Bank, N.A., as Collateral Agent, and other lenders that may become party thereto from time to time, pursuant to which AMD borrowed an aggregate amount of $2.5 billion under a term loan. Amounts borrowed under this Credit Agreement bear interest, in the case of base rate loans, at a rate equal to the “base rate,” which is the higher of (i) the prime rate published by the Wall Street Journal and (ii) 0.5% per annum above the Federal Funds Effective Rate (as defined in the Credit Agreement) plus a 1.25% margin, or in the case of Eurodollar loans, at a rate equal to the Eurodollar Rate (as defined in the Credit Agreement) plus a 2.25% margin. Such margins will reduce by 0.25% when the outstanding aggregate principal amount under the Credit Agreement is less than $1.75 billion. As of October 24, 2006, the base rate was 8.25%, without the margin, and the Eurodollar Rate was 5.32%, without the margin. The amounts borrowed under the Credit Agreement are repayable in quarterly installments commencing in December 2006 and terminating in December 2013. The initial interest rate on the Term Loan, which is based on the Eurodollar Rate, is 7.57%.

The purchase consideration was allocated based on the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the Acquisition. An allocation of the purchase price has been made to major categories of assets and liabilities in the accompanying unaudited pro forma condensed combined financial statements based on management’s best estimates. The excess of the purchase price over the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.

The allocation of the purchase consideration based on a valuation of the assets acquired and liabilities assumed as of the closing date, is presented below (in thousands):

 

Book value of ATI net assets acquired, excluding inventories, property, plant and equipment, goodwill and other intangibles, and certain tax related assets, and including additional income tax liabilities    $ 229,053

Inventories

     454,040

Property, plant and equipment, net

     141,318

Identifiable intangible assets:

  

Developed product technology

     752,100

Game console royalty agreements

     146,400

Customer relationships

     257,200

Trademark/trade name

     62,400

Customer backlog

     36,300
      

Identifiable intangible assets

     1,254,400

In-process research and development

     415,600

Goodwill

     3,116,006
      

Total purchase price

   $ 5,610,417
      

AMD reviewed the recorded book values of ATI’s net assets acquired as of October 24, 2006 and believes that other than the inventory, property, plant, and equipment, goodwill and other intangibles, the carrying amounts of these net assets acquired approximate their current fair values.

 

8


Inventory – Compared to the net book value of inventory as of October 24, 2006, there is a write-up adjustment of $92 million to record 1) finished goods at their estimated selling prices less estimated costs of disposal and a reasonable allowance for profit upon their sale, 2) work-in-process at their estimated selling prices less estimated costs to complete their manufacture and a reasonable allowance for profit for the remaining manufacturing and upon their sale, and 3) raw materials at their current replacement costs. Although, due to its non-recurring nature, the effect of the aggregate pro forma adjustment to the inventory’s fair value is not included in the accompanying condensed combined statements of operations, the actual adjustment to be recorded will impact cost of sales during the approximate six-month period after the closing of the Acquisition, during which time the inventory on hand is expected to be sold.

Property, plant, and equipment – Compared to the net book value of property, plant and equipment as of October 24, 2006, the Company recorded a write-up adjustment of approximately $16.6 million. Approximately $7.4 million of the adjustment relates to land and the remaining portion relates to building and equipment which will be depreciated over an estimated average life of the related assets of two to ten years.

Identifiable intangible assets – Developed product technology comprises products that have reached technological feasibility, and includes technology in ATI’s discrete products, integrated products, handheld products, and digital television products divisions. This intangible asset is expected to have an estimated useful life of five years. Game console royalty agreements represent existing agreements with video game console manufacturers for the payment of royalties to ATI for intellectual property design work performed, and are expected to have an average estimated useful life of five years. Customer relationship intangibles represent ATI’s existing customer relationships and are expected to have an average estimated useful life of four years. Trademarks and trade names are expected to have an average estimated useful life of seven years. Customer backlog represents existing customer orders that have not been delivered and is expected to have an estimated useful life of fourteen months.

The fair value of intangible assets was based on a valuation conducted by AMD’s management using income approaches to value and was based on management’s latest financial forecast. The rates used to discount net cash flows to their present values ranged from 12% to 15%. These discount rates were determined after consideration of AMD’s estimated weighted average cost of capital and the estimated internal rate of return specific to the Acquisition.

Estimated useful lives for the intangible assets were based on historical experience with technology life cycles, product roadmaps and AMD’s intended future use of the intangible assets. Intangible assets are being amortized using the straight-line method, considering the pattern in which the economic benefits of the intangible assets are consumed.

In-process research and development – In-process research and development represents incomplete ATI research and development projects that have not reached technological feasibility and have no alternative future use at the time of the Acquisition.

The fair value of in-process research and development was based on a valuation conducted by AMD’s management using an income approach to value and was based on historical costs incurred and management’s latest financial forecast. The discount rate used to discount net cash flows to their present values for the projects was 15%. This discount rate was estimated after consideration of AMD’s estimated weighted average cost of capital, the estimated internal rate of return specific to this Acquisition, and the relative risk of the in-process development projects as compared to each of the identifiable intangible assets.

 

9


For pro forma financial statement purposes, in-process research and development costs are not included in the unaudited pro forma condensed statement of operations due to their non-recurring nature, but such costs will be expensed in AMD’s consolidated financial statements as a charge in the fourth quarter of fiscal 2006.

Goodwill – Goodwill represents the excess of the estimated purchase price over the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized but rather is tested for impairment at least annually. In the event that AMD determines that the value of goodwill has become impaired, AMD will incur a charge for the amount of impairment during the fiscal quarter in which such determination is made.

Pre-acquisition contingencies – If AMD identifies a material pre-acquisition contingency during the purchase price allocation period, which is generally up to one year after the closing of the Acquisition, AMD will attempt to determine its fair value and include it in the purchase price allocation. If, as of the end of the purchase price allocation period, AMD is unable to determine its fair value, AMD will apply FASB Statement No. 5, Accounting for Contingencies, and the amount, if any, determined by applying Statement 5 to such item will be included in the purchase price allocation.

AMD received a subpoena from the U.S. Department of Justice (DOJ) Antitrust Division in connection with the DOJ’s investigation into potential antitrust violations related to graphics processors and cards. AMD entered the graphics processor business following the company’s acquisition of ATI Technologies, Inc. The DOJ has not made any specific allegations against AMD or ATI. AMD intends to cooperate with the investigation.

In connection with this Acquisition, AMD has also developed a plan to integrate the operations of both companies, which resulted in certain workforce reductions, anticipated duplicate facilities closures, and cancellation of certain existing contractual obligations. AMD believes the charges associated with this plan will not be material to its financial statements. Therefore these charges are not reflected in the unaudited pro forma condensed combined financial statements presented.

3. Pro Forma Adjustments

The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition described in Note 2, as if it had occurred on October 1, 2006. The unaudited pro forma condensed combined statements of operations give effect to the Acquisition as if it had occurred on December 27, 2004, the first day of AMD’s fiscal year ended December 25, 2005. The unaudited pro forma condensed combined statements of operations do not include any non-recurring charges that will arise as a result of the Acquisition described in Note 2.

Explanations of the adjustments to the unaudited pro forma condensed combined balance sheet as of October 1, 2006 are as follows (in thousands):

(1) To eliminate ATI’s existing goodwill and other intangibles, net

 

Line Item

   Increase (decrease)  

Goodwill

   $ (193,125 )

Other intangibles, net

   $ (33,637 )

 

10


(2) To eliminate tax credits recoverable and certain deferred income taxes assets as they are determined unrealizable and to record additional income tax liabilities under AMD’s tax structure

 

Line Item

   Increase (decrease)  

Deferred income taxes, current

   (11,156 )

Deferred income taxes, long-term

   (52,776 )

Tax credit recoverable

   (115,955 )

Income tax payable

   67,532  

Deferred income taxes liability

   (37,030 )

(3) To eliminate the stockholders’ equity section of ATI

 

Line Item

   Increase (decrease)  

Capital stock

   $ (765,708 )

Capital in excess of par value

   $ (86,091 )

Treasury stock

   $ (7,840 )

Retained earnings

   $ (298,829 )

Accumulated other comprehensive income

   $ (10,516 )

(4) To record the purchase consideration and the purchase price allocations based on their fair values. For pro forma purposes, the $415.6 million of purchased in-process research and development has been charged directly against retained earnings as such amount was not recorded in the pro forma condensed combined statement of operations for the year ended December 25, 2005 due to its non-recurring nature. However, the actual charge for in-process research and development will be expensed in AMD’s consolidated statement of operations in its fourth quarter of fiscal 2006. In addition, the impact of the fair value write-up of inventories has not been recorded in the pro forma condensed combined statement of operations for the year ended December 25, 2005 due to its non-recurring nature. Such fair value write-up will have an adverse impact on the post-acquisition combined operations when the inventories are sold.

 

Line Item

   Increase (decrease)  

Cash

   $ (790,475 )

Marketable securities (assumed approximately $1 billion of cash portion of the purchase price consideration is funded by sales of marketable securities)

   $ (972,377 )

Inventories

   $ 91,686  

Property, plant and equipment, net

   $ 16,570  

Goodwill

   $ 3,116,006  

Developed product technology

   $ 752,100  

Game console royalty agreements

   $ 146,400  

Retained earnings (immediate expense of in-process research and development)

   $ (415,600 )

Customer relationships

   $ 257,200  

Trademark/trade name

   $ 62,400  

Backlog

   $ 36,300  

Other assets - to reclassify capitalized direct acquisition costs to goodwill

   $ (25,004 )

Accrued liabilities for the cash portion of vested stock award to be paid after acquisition

   $ 6,257  

Long-term debt

   $ 2,500,000  

Common stock, par value, for the 57.95 million shares

   $ 579  

Capital in excess of par value, for the 57.95 million shares

   $ 1,171,475  
Capital in excess of par value, for the estimated fair value of the replacement stock options, stock appreciation rights, restricted stock units - vested portion    $ 144,248  

 

11


(5) To record debt issuance cost for the $2.5 billion term loan

 

Line Item

   Increase (decrease)  

Other assets - debt issuance cost

   $ 26,880  

Cash

   $ (26,880 )

Explanations of the adjustments included in the unaudited pro forma condensed combined statement of operations for the year ended December 25, 2005 are as follows (in thousands):

(1) To eliminate the amortization expense of ATI’s intangible assets.

 

Line Item

   Increase (decrease)  

Research and development

   $ (8,022 )

Marketing, general and administrative

   $ (2,851 )

(2) To eliminate ATI’s stock-based compensation expense.

 

Line Item

   Increase (decrease)  

Cost of sales

   $ (770 )

Research and development

   $ (7,996 )

Marketing, general and administrative

   $ (4,674 )

(3) To record the stock-based compensation expense for AMD’s replacement stock options and restricted stock units.

 

Line Item

   Increase (decrease)

Cost of sales

   $ 4,354

Research and development

   $ 45,190

Marketing, general and administrative

   $ 26,416

(4) To record amortization expense associated with the various identified intangible assets. These intangible assets are being amortized using the straight-line method over their estimated useful lives, ranging from fourteen months to seven years.

 

Line Item

   Increase (decrease)

Amortization of acquisition related intangibles

   $ 284,028

 

12


(5) To record additional depreciation expense resulting from the fair value write-up of property, plant, and equipment. Such write-up is being depreciated over the related assets’ estimated useful lives, ranging from two to ten years. For pro forma presentation purposes, the entire amount has been charged to marketing, general and administrative expense.

 

Line Item

   Increase (decrease)

Marketing, general and administrative

   $ 2,094

(6) To record interest expense associated with the $2.5 billion debt to finance the transaction. The interest rate used is 7.57% which is based on the Eurodollar rate of 5.32% as of October 24, 2006, plus 2.25% margin. A 1/8% increase or decrease from this interest rate will result in approximately $3.125 million interest expense difference for the period.

 

Line Item

   Increase (decrease)

Interest expense

   $ 189,250

(7) To record the amortization of debt issuance cost of $25 million over the seven-year term of the debt. The amortization is calculated on a straight-line basis, which approximates the effective interest method.

 

Line Item

   Increase (decrease)

Interest expense

   $ 3,840

(8) AMD has not recorded a tax benefit on the pro forma adjustments for the year ended December 25, 2005. There would be no incremental tax benefit from the pro forma adjustments as AMD recorded a full valuation allowance against its net U. S. deferred tax assets for this period. In addition, ATI’s investment tax credit (ITC) and US research tax credit are eliminated as they are deemed not realizable under AMD’s tax structure.

 

Line Item

   Increase (decrease)

Income tax expense

   $ 50,519

Explanations of the adjustments included in the unaudited pro forma condensed combined statement of operations for the nine months ended October 1, 2006 are as follows (in thousands):

(1) To eliminate the amortization expense of ATI’s intangible assets.

 

Line Item

   Increase (decrease)  

Research and development

   $ (12,348 )

Marketing, general and administrative

   $ (306 )

(2) To eliminate ATI’s stock-based compensation expense.

 

Line Item

   Increase (decrease)  

Cost of sales

   $ (1,159 )

Research and development

   $ (24,832 )

Marketing, general and administrative

   $ (14,358 )

 

13


(3) To record the stock-based compensation expense for AMD’s replacement stock options and restricted stock units.

 

Line Item

   Increase (decrease)

Cost of sales

   $ 494

Research and development

   $ 9,925

Marketing, general and administrative

   $ 5,422

(4) To record amortization expense associated with the various identified intangible assets. These intangible assets are being amortized using the straight-line method over their estimated useful lives, ranging from fourteen months to seven years.

 

Line Item

   Increase (decrease)

Amortization of acquisition related intangibles

   $ 194,872

(5) To record additional depreciation expense resulting from the fair value write-up of property, plant, and equipment. Such write-up is being depreciated over the related assets’ estimated useful lives, ranging from two to ten years. For pro forma presentation purposes, the entire amount has been charged to marketing, general and administrative expense.

 

Line Item

   Increase (decrease)

Marketing, general and administrative

   $ 1,570

(6) To record interest expense associated with the $2.5 billion debt to finance the transaction. The interest rate used is 7.57% which is based on the Eurodollar rate of 5.32% as of October 24, 2006, plus 2.25% margin. A 1/8% increase or decrease from this interest rate will result in approximately $2.344 million interest expense difference for the period.

 

Line Item

   Increase (decrease)

Interest expense

   $ 141,938

(7) To record the amortization of estimated debt issuance costs of $25 million over the seven-year term of the debt. The expense is calculated on a straight line basis which approximates the effective interest method.

 

Line Item

   Increase (decrease)

Interest expense

   $ 2,880

(8) To record the net income tax impact of the pro forma income statement adjustments. In addition, ATI’s ITC and US research tax credit in the amount of $31,696 thousand are eliminated as they are deemed not realizable under AMD’s tax structure.

 

Line Item

   Increase (decrease)  

Income tax

   $ (74,738 )

 

14


4. Unaudited Pro Forma Income (Loss) Per Share

The following table sets forth the computation of shares used in deriving the unaudited pro forma basic and diluted net income (loss) per share (in thousands):

 

     Weighted Average Shares
  

Nine Months Ended
October 1,

2006

    Year Ended
December 25,
2005

Historical AMD basic, as reported

   478,318     400,004

Incremental shares issued in the transaction

   57,946     57,946
          

Pro forma combined basic

   536,264     457,950
          

Historical AMD diluted, as reported

   497,332    

Anti-dilutive effect of assumed conversion of 4.75% Senior Convertible Debentures due 2022

   (3,054 )  

Estimated dilutive effect of stock options, stock appreciation rights, and restricted stock units exchanged in the transaction

   9,604    

Incremental shares issued in the transaction

   57,946    
          

Pro forma combined diluted

   561,828     457,950
          

For the nine months ended October 1, 2006, the assumed conversion of AMD’s 4.75% Senior Convertible Debentures due 2022 had an anti-dilutive effect and was, therefore, excluded from the historical AMD diluted share calculations. For the year ended December 25, 2005, potentially dilutive securities of approximately 66.3 million, including AMD options and restricted stock awards and the assumed exchanged AMD options, stock appreciation rights, and restricted stock units for ATI options, stock appreciation rights, and restricted stock units, were excluded from the pro forma per share calculations above, because of the pro forma net loss position of the year ended December 25, 2005. In addition, the assumed conversion of AMD’s 4.50% Senior Convertible Debentures due 2007 and AMD’s 4.75% Senior Convertible Debentures due 2022 was also excluded as these instruments are anti-dilutive in that period.

 

15


5. Balance Sheet information relating to ATI

ATI Technologies Inc. and Subsidiaries

Condensed Consolidated Balance Sheet*

 

     August 31, 2006
(U.S. dollar, in thousands)
 
   Canadian
GAAP
    U.S. GAAP
Adjustments
    Presentation
Adjustments
    Adjusted  

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 219,874     —       $ —       $ 219,874  

Short-term investments

     376,801     —         —         376,801  

Accounts receivable, net

     362,380     —         (62,991 )(3)     299,389  

Inventories:

     362,352     —         —         362,352  

Deferred income taxes

     11,156         —         11,156  

Prepaid expenses and other current assets

     28,917     2,242 (1)     —         31,159  
                              

Total current assets

     1,361,480     2,242       (62,991 )     1,300,731  

Property, plant and equipment, net

     124,748         —         124,748  

Goodwill, net

     193,125         —         193,125  

Other intangibles, net

     36,157     (2,520 )(2)     —         33,637  

Long-term investments

     291     —         —         291  

Tax credits recoverable

     115,955     —         —         115,955  

Deferred income tax - long term

     52,776     —         —         52,776  
                              

Total assets

   $ 1,884,532     (278 )     (62,991 )   $ 1,821,263  
                              

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 306,149     —         —       $ 306,149  

Accrued liabilities

     347,270     —         (94,885 )(3)(4)     252,385  

Accrued compensation and benefits

     0         31,894 (4)     31,894  

Deferred revenue

     8,201     —         —         8,201  

Current portion of long-term debt and capital lease obligations

     2,512     —         —         2,512  
                              

Total current liabilities

     664,132     —         (62,991 )     601,141  

Long-term debt and capital lease obligations

     29,694     —         —         29,694  

Deferred income taxes - long term

     37,030     —         —         37,030  

Minority interest in consolidated subsidiaries

     94     —         —         94  

Stockholders’ equity:

        

Capital stock

     765,708     —         —         765,708  

Capital in excess of par value

     86,091     —         —         86,091  

Treasury stock

     (7,840 )   —         —         (7,840 )

Retained earnings

     301,349     (2,520 )(2)     —         298,829  

Accumulated other comprehensive income

     8,274     2,242 (1)     —         10,516  
                              

Total stockholders’ equity

     1,153,582     (278 )     —         1,153,304  
                              

Total liabilities and stockholders’ equity

   $ 1,884,532     (278 )     (62,991 )   $ 1,821,263  
                              

 

16


Notes

 

(1) To adjust prepaid expenses and other current assets and accumulated other comprehensive income for the unrealized gain on open forward foreign exchange contracts at 8/31/06 used to hedge anticipated foreign cash flows. Under Canadian GAAP, no mark-to-market accounting is required. Under U.S. GAAP, the contracts are marked to market and carried at their fair value, with the effective portion of the hedge being recorded as an offsetting adjustment to accumulated other comprehensive income until the anticipated transaction occurs and with the ineffective portion of the hedge being recorded in earnings.
(2) To eliminate the net book value at August 31, 2006 of the purchased in-process research and development recorded in connection with a 2006 acquisition. Under Canadian GAAP, purchased in-process research and development is capitalized and amortized over its estimated useful life. Under U.S. GAAP, purchased in-process research and development is written off at the time of acquisition.
(3) To reclassify price protection and rebate payable as a reduction to accounts receivable to conform with AMD’s presentation.
(4) To reclassify accrued compensation and benefits from accrued liabilities to conform to AMD’s presentation.
 * This balance sheet does not reflect the cumulative US GAAP adjustments for ATI as the adjustments do not materially impact the carrying amounts of the assets and liabilities as of August 31, 2006. The adjustments also do not materially impact AMD’s purchase accounting since the assets acquired and liabilities assumed have been recorded at their estimated fair values.

 

17


6. Statements of operations information relating to ATI

ATI Technologies Inc. and Subsidiaries

Condensed Consolidated Statement of Operations

 

    

Twelve Months Ended November 30, 2005

(U.S. dollar, in thousands)

 
   Canadian
GAAP
   

U.S. GAAP

Adjustments

   

Presentation

Adjustments

    Adjusted  

Net sales

   $ 2,199,353     $ —       $ —       $ 2,199,353  
                                

Total net sales

     2,199,353       —         —         2,199,353  

Cost of sales

     1,624,539       —         770 (8)     1,625,309  
                                

Gross margin

     574,814       —         (770 )     574,044  

Research and development

     340,006       50,519 (1)     16,018 (8)(9)     406,543  

Marketing, general and administrative

     217,443       (112 )(2)     18,529 (8)(9)(10)     235,860  

Amortization of intangible assets

     10,873       —         (10,873 )(9)     —    

Stock-based compensation

     44,284       (30,844 )(3)(5)(6)(7)     (13,440 )(8)     —    

Other charges

     11,004         (11,004 )(10)     —    
                                

Operating loss

     (48,796 )     (19,563 )     —         (68,359 )

Interest income

     16,718       —         —         16,718  

Interest expense

     (2,090 )     —         —         (2,090 )

Other income (expense), net

     2,338       —         —         2,338  
                                

Loss before income taxes

     (31,830 )     (19,563 )     —         (51,393 )

Provision (benefit) for income taxes

     7,318       (43,511 )(1)(3)(4)(7)     —         (36,193 )
                                

Net (loss) income

   $ (39,148 )   $ 23,948     $ —       $ (15,200 )
                                

Notes

 

(1) To reclassify ITC and US research tax credit from research and development to income tax expense. Under Canadian GAAP, ITC and research tax credit are treated as a reduction in research and development expense while they are classified as a reduction in income tax expense under U.S. GAAP.
(2) To reverse amortization of loss of an ineffective interest rate swap contract due to the loss being expensed immediately upon determination of its ineffectiveness for U.S. GAAP versus the loss being amortized over the remaining life of the underlying mortgage obligation being hedged under Canadian GAAP.
(3) To reverse compensation expenses of $25,920 and related tax benefit of $3,195 recognized under Canadian GAAP. During the nine months ended August 31, 2005, ATI used the fair value method to record the stock-based compensation under Canadian GAAP. Under U.S. GAAP, the intrinsic value method is used to account for stock-based compensation for employees during the nine months period.
(4) To adjust income tax expense of $3,709 related to stock options. This relates to the excess tax benefits recorded upon the exercise of those stock options. Under U.S. GAAP, the tax benefits associated with deductible option compensation is treated as an increase in share capital. Under Canadian GAAP, the related tax is treated as a reduction to the income tax provision.

 

18


(5) To record additional stock option expense of $1,143 related to an incentive plan entered into in July 2002. Under U.S. GAAP, the intrinsic value of the stock options issued under the incentive plan entered into in July 2002 is calculated as the increase in the Company’s stock price between the grant date and the date on which all the conditions of the incentive awards were determined to have been met. The compensation expense is recognized over the vesting period of the options. Under Canadian GAAP, there is no equivalent requirement.
(6) To record a recovery of stock option expense of $6,497 related to options granted after January 18, 2001 with an exercise price denominated in a currency other than the currency of the primary economic environment of either the employer or the employee. Under U.S. GAAP, these options were accounted for under the variable accounting method prior to the adoption of FASB Statement No. 123R on September 1, 2005. Under Canadian GAAP, there is no equivalent requirement. There were no such options granted after February 28, 2002.
(7) To record additional stock-based compensation according to U.S. GAAP. This includes additional stock option expense of $728 for the stock options unvested on the effective date of FASB Statement No. 123R but not included in the Canadian GAAP calculations. Under Canadian GAAP, the fair value method of accounting is only applied to stock options issued after September 1, 2002, while under U.S. GAAP, the fair value method of accounting is applied to stock options unvested on the effective date. There were some options unvested on the effective date but they were issued before September 1, 2002. The stock option expense is offset by lower restricted stock unit (“RSU”) expense of $298 and the related tax impact of $104 due to amortization difference as ATI amortizes RSU based on actual RSU outstanding at each quarter end under Canadian GAAP but ATI is required to use an expected forfeiture rate to amortize RSU expense under U.S. GAAP.
(8) To reclassify stock-based compensation expense of $13,440 to the applicable functional financial statement expense captions - Cost of sales $770, Research and development $7,996 and Marketing, general and administrative $4,674.
(9) To reclassify amortization expense of intangible assets totaling $10,873 to the applicable functional financial statement expense captions - Research and development $8,022 and Marketing, general and administrative $2,851.
(10) To reclassify other charges of $11,004 to Marketing, general and administrative expense.

 

19


ATI Technologies Inc. and Subsidiaries

Condensed Consolidated Statement of Operations

 

    

Nine Months Ended August 31, 2006

(U.S. dollar, in thousands)

 
     Canadian
GAAP
    U.S. GAAP
Adjustments
    Presentation
Adjustments
    Adjusted  

Net sales

   $ 1,841,549     $ —       $ —       $ 1,841,549  
                                

Total net sales

     1,841,549       —         —         1,841,549  

Cost of sales

     1,320,286       —         1,159 (6)     1,321,445  
                                

Gross margin

     521,263       —         (1,159 )     520,104  

Research and development

     276,488       31,696 (1)     37,180 (6)(7)     345,364  

Marketing, general and administrative

     183,507       (84 )(2)     20,198 (6)(7)(8)     203,621  

Amortization of intangible assets

     10,134       2,520 (3)     (12,654 )(7)     —    

Stock-based compensation

     38,766       1,583 (4)     (40,349 )(6)     —    

Other charges

     5,534         (5,534 )(8)     —    
                                

Operating income (loss)

     6,834       (35,715 )     —         (28,881 )

Interest income

     18,328       —         —         18,328  

Interest expense

     (1,565 )     —         —         (1,565 )

Other income (expense), net

     4,277       —         —         4,277  
                                

Income (loss) before income taxes

     27,874       (35,715 )     —         (7,841 )

Provision (benefit) for income taxes

     2,450       (23,918 )(1)(3)(4)(5)     —         (21,468 )
                                

Net income (loss) before non-controlling interest

     25,424       (11,797 )     —         13,627  

Non-controlling interest

     21       —         —         21  
                                

Net income (loss)

   $ 25,445     $ (11,797 )   $ —       $ 13,648  
                                

Notes

 

(1) To reclassify ITC and U.S. research tax credit from research and development to income tax expense. Under Canadian GAAP, ITC and research tax credit are treated as a reduction in research and development expense while they are classified as a reduction in income tax expense under U.S. GAAP.

 

20


(2) To reverse amortization of loss on ineffective interest rate swap contract of $1.4 million. The loss is expensed immediately upon determination of its ineffectiveness under U.S. GAAP versus the loss being amortized over the remaining life of the underlying mortgage obligation being hedged under Canadian GAAP.
(3) To write-off the unamortized balance of purchased in-process research and development acquired in a 2006 acquisition: $4,200 is the cost of the purchased in-process research and development and $1,680 is its amortization for the period. Under Canadian GAAP, purchased in-process research and development is amortized over its estimated useful life. Under U.S. GAAP, purchased in process research and development is written off at the time of acquisition. The related tax impact of the $1,680 amortization is $437.
(4) To record additional stock based compensation under U.S. GAAP. This includes additional stock option expense of $1,236 with related tax benefit of $366 for the stock options unvested on the effective date of Statement 123R but not included in the Canadian GAAP calculations. Under Canadian GAAP, the fair value method of accounting is only applied to stock options issued after September 1, 2002, while under U.S. GAAP, the fair value method of accounting is applied to stock options unvested on the effective date of Statement 123R. There were some options unvested on the effective date but they were issued before September 1, 2002. RSU expense was also higher by $347 due to differing methods of amortizing RSU expense, with related tax benefit of $223. ATI amortizes RSU expense based on actual RSUs outstanding at each quarter end under Canadian GAAP, but ATI is required to use an expected forfeiture rate to amortize RSU expense under U.S. GAAP.
(5) To adjust income tax expense by $7,930 related to stock options. This relates to the excess tax benefits recorded upon the exercise of those stock options. Under U.S. GAAP, the tax benefits associated with deductible option compensation is treated as an increase in share capital. Under Canadian GAAP, the related tax is treated as a reduction to the income tax provision.
(6) To reclassify stock-based compensation of $40,349 to applicable functional financial statement expense captions: Cost of sales $1,159, Research and development $24,832 and Marketing, general and administrative $14,358.
(7) To reclassify amortization expense of intangible assets totaling $12,654: $12,348 to Research and development and $306 to Marketing, general and administrative.
(8) To reclassify other charges of $5,534 to Marketing, general and administrative expense.

 

21