UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2001
--------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-7882
----------------------------------------------------------
ADVANCED MICRO DEVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1692300
- ------------------------------------ ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One AMD Place
Sunnyvale, California 94088
- ---------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 732-2400
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
The number of shares of $0.01 par value common stock outstanding as of August 3,
2001: 345,550,821
-1-
INDEX
- -----
Part I. Financial Information
---------------------
Page No.
--------
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations -
Quarters and Six Months Ended July 1, 2001 and July 2, 2000 3
Condensed Consolidated Balance Sheets -
July 1, 2001 and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended July 1, 2001 and July 2, 2000 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Part II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 6. Exhibits and Reports on Form 8-K 40
Signature 41
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(Thousands except per share amounts)
Quarter Ended Six Months Ended
------------------------- --------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
--------- ----------- ----------- -----------
Net sales $ 985,264 $ 1,170,437 $ 2,174,011 $ 2,262,466
Expenses:
Cost of sales 636,199 612,567 1,351,029 1,218,324
Research and development 171,114 155,651 328,874 316,948
Marketing, general and administrative 156,291 152,022 305,429 296,328
--------- ----------- ----------- -----------
963,604 920,240 1,985,332 1,831,600
--------- ----------- ----------- -----------
Operating income 21,660 250,197 188,679 430,866
Interest income and other, net 12,308 19,935 31,131 41,063
Interest expense (20,199) (11,244) (41,844) (22,723)
--------- ----------- ----------- -----------
Income before income taxes and equity in net income
(loss) of joint venture 13,769 258,888 177,966 449,206
Provision for income taxes 3,717 51,778 56,260 51,778
--------- ----------- ----------- -----------
Income before equity in net income (loss) of joint venture 10,052 207,110 121,706 397,428
Equity in net income (loss) of joint venture 7,300 32 20,483 (937)
--------- ----------- ----------- -----------
Net income $ 17,352 $ 207,142 $ 142,189 $ 396,491
========= =========== =========== ===========
Net income per common share:
Basic $ 0.05 $ 0.67 $ 0.44 $ 1.30
========= =========== =========== ===========
Diluted $ 0.05 $ 0.60 $ 0.43 $ 1.17
========= =========== =========== ===========
Shares used in per share calculation:
Basic 330,120 309,116 322,234 305,438
========= =========== =========== ===========
Diluted 340,533 352,437 332,183 348,160
========= =========== =========== ===========
See accompanying notes.
- -----------------------
-3-
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Thousands)
July 1, December 31,
2001 2000*
----------------- ----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 392,500 $ 591,457
Short-term investments 664,663 701,708
----------------- ----------------
Total cash, cash equivalents and short-term investments 1,057,163 1,293,165
Accounts receivable, net of allowance for doubtful accounts 728,356 547,200
Inventories:
Raw materials 51,284 34,413
Work-in-process 215,261 154,854
Finished goods 134,304 154,274
----------------- ----------------
Total inventories 400,849 343,541
Deferred income taxes 188,946 218,527
Prepaid expenses and other current assets 175,522 255,256
----------------- ----------------
Total current assets 2,550,836 2,657,689
Property, plant and equipment, at cost 5,763,554 5,461,801
Accumulated depreciation and amortization (3,095,283) (2,825,334)
----------------- ----------------
Property, plant and equipment, net 2,668,271 2,636,467
Investment in joint venture 377,639 261,728
Other assets 234,207 211,851
----------------- ----------------
$ 5,830,953 $ 5,767,735
================= ===============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 314,606 $ 477,369
Accrued compensation and benefits 121,523 172,815
Accrued liabilities 315,928 276,721
Income taxes payable 38,184 74,806
Deferred income on shipments to distributors 67,407 92,828
Current portion of long-term debt, capital lease obligations and other 220,080 129,570
----------------- ----------------
Total current liabilities 1,077,728 1,224,109
Deferred income taxes 198,203 203,986
Long-term debt, capital lease obligations and other, less current portion 754,717 1,167,973
Commitments and contingencies
Stockholders' equity:
Common stock, par value 3,464 3,141
Capital in excess of par value 1,955,498 1,406,290
Retained earnings 1,998,450 1,856,261
Accumulated other comprehensive loss (157,107) (94,025)
----------------- ----------------
Total stockholders' equity 3,800,305 3,171,667
----------------- ----------------
$ 5,830,953 $ 5,767,735
================= ================
* Amounts as of December 31, 2000 were derived from the December 31, 2000
audited financial statements.
See accompanying notes.
- -----------------------
-4-
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
Six Months Ended
-----------------------------
July 1, July 2,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 142,189 $ 396,491
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 312,376 275,703
Net change in deferred income taxes 23,798 33,886
Foreign grant and subsidy income (24,749) (22,155)
Net loss on disposal of property, plant and equipment 18,862 3,414
Undistributed (income) loss of joint venture (20,483) 937
Recognition of deferred gain on sale of building (841) (840)
Net compensation recognized under employee stock plans 2,860 2,508
Changes in operating assets and liabilities:
Increase in accounts receivable (180,970) (97,481)
Increase in inventories (64,718) (57,366)
Increase (decrease) in prepaid expenses 2,147 (25,035)
Decrease in other assets 47,209 29,641
Decrease in tax refund receivable and tax payable (37,887) (2,175)
(Refund) receipt of customer deposits under purchase agreements (39,000) 142,500
Decrease in payables and accrued liabilities (151,094) (76,008)
(Decrease) increase in accrued compensation (51,290) 63,879
Income tax benefits from employee stock option exercises 4,480 -
------------ ------------
Net cash (used in) provided by operating activities (17,111) 667,899
Cash flows from investing activities:
Purchases of property, plant and equipment (377,818) (289,893)
Proceeds from sale of property, plant and equipment 367 9,660
Purchases of available-for-sale securities (2,190,266) (1,562,628)
Proceeds from sale/maturity of available-for-sale securities 2,205,171 1,497,207
Investment in joint venture (122,356) -
------------ ------------
Net cash used in investing activities (484,902) (345,654)
Cash flows from financing activities:
Proceeds from borrowings 334,307 6,924
Payments on debt and capital lease obligations (47,598) (12,380)
Proceeds from issuance of stock and other 32,623 95,099
------------ ------------
Net cash provided by financing activities 319,332 89,643
Effect of exchange rate changes on cash and cash equivalents (16,276) 3,510
------------ ------------
Net increase in cash and cash equivalents (198,957) 415,398
Cash and cash equivalents at beginning of period 591,457 294,125
------------ ------------
Cash and cash equivalents at end of period $ 392,500 $ 709,523
============ ============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 26,458 $ 23,542
============ ============
Income taxes $ 50,996 $ 9,734
============ ============
Supplemental disclosures of non-cash financing activities:
Redemption of convertible debt $ 516,860 $ -
============ ============
See accompanying notes.
- -----------------------
-5-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. The results of operations for the interim periods shown in
this report are not necessarily indicative of results to be expected for
the full fiscal year ending December 30, 2001. In the opinion of the
Company's management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature. The interim financial statements should be read in
conjunction with the financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in
December. The quarters ended July 1, 2001 and July 2, 2000 each included 13
weeks. The six months ended July 1, 2001 and July 2, 2000 included 26 and
27 weeks.
-6-
2. Available-For-Sale Securities
The following is a summary of available-for-sale securities:
July 1,
(Thousands) 2001
-------------
Cash equivalents:
Certificates of deposit $ 10,001
Commercial paper 32,671
Money market funds 44,614
Municipal bonds 28,485
Federal agency notes 49,577
Tax exempt money market funds 25,000
-------------
Total cash equivalents $ 190,348
=============
Short-term investments:
Certificates of deposit $ 10,121
Commercial paper 237
Money market auction rate preferred stocks 181,279
Municipal bonds 246,447
Federal agency notes 46,197
Floating rate notes 10,013
Tax exempt preferred auction 170,369
-------------
Total short-term investments $ 664,663
=============
Long-term investments:
Equity investments $ 25,671
Commercial paper 9,999
Treasury notes 3,323
-------------
Total long-term investments (included in other assets) $ 38,993
=============
-7-
3. Net Income per Common Share
Basic net income per common share is computed using the weighted-average
common shares outstanding. Diluted net income per common share is computed
using the weighted-average common shares outstanding plus any potential
dilutive securities. Dilutive securities included stock options and shares
issuable upon the conversion of convertible debt. For the three- and six-
month periods ended July 1, 2001, an incremental 14 million and 21 million
shares of common stock issuable upon the assumed conversion of convertible
debt were anti-dilutive and were not included in the calculation of diluted
earnings per share. The following table sets forth the components of basic
and diluted income per common share:
Quarter Ended Six Months Ended
------------------------ ------------------------
July 1, July 2, July 1, July 2,
(Thousands except per share data) 2001 2000 2001 2000
----------- ----------- ----------- -----------
Numerator:
Numerator for basic income per common share $ 17,352 $ 207,142 $ 142,189 $ 396,491
Effect of adding back interest expense associated with convertible debentures - 6,207 - 13,970
----------- ----------- ----------- -----------
Numerator for diluted income per common share $ 17,352 $ 213,349 $ 142,189 $ 410,461
=========== =========== =========== ===========
Denominator:
Denominator for basic income per share - weighted-average shares 330,120 309,116 322,234 305,438
Effect of dilutive securities:
Employee stock options 10,413 15,361 9,949 14,760
Convertible debentures - 27,960 - 27,962
----------- ----------- ----------- -----------
Dilutive potential common shares 10,413 43,321 9,949 42,722
----------- ----------- ----------- -----------
Denominator for diluted net income per common share -
adjusted weighted-average shares 340,533 352,437 332,183 348,160
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.05 $ 0.67 $ 0.44 $ 1.30
=========== =========== =========== ===========
Diluted $ 0.05 $ 0.60 $ 0.43 $ 1.18
=========== =========== =========== ===========
-8-
On August 21, 2000, the Company effected a two for one stock split in the
form of a stock dividend of one share of common stock for each share of AMD
common stock held on August 7, 2000. Share and per share amounts have been
adjusted for prior periods presented to give effect to the stock split.
4. Investment in Joint Venture
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD
Semiconductor Limited (FASL), for the development and manufacture of
non-volatile memory devices. FASL operates advanced integrated circuit
manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory
devices. FASL also uses foundry facilities in Iwate, Japan and Gresham,
Oregon. The Company's share of FASL is 49.992 percent, and the investment
is being accounted for under the equity method. At July 1, 2001, the
cumulative adjustment related to the translation of the FASL financial
statements into U.S. dollars resulted in an increase in the investment in
FASL of $41 million. During the quarter ended July 1, 2001, the Company
made capital contributions of approximately $122 million to FASL. The
following are the significant FASL related-party transactions and balances:
Quarter Ended Six Months Ended
---------------------------- ----------------------------
July 1, July 2, July 1, July 2,
(Thousands) 2001 2000 2001 2000
----------- ------------ ------------ ------------
Royalty income $ 10,604 $ 7,110 $ 24,949 $ 13,653
Purchases 129,027 78,420 288,754 154,658
July 1, December 31,
(Thousands) 2001 2000
----------- ------------
Royalty receivable $ 10,083 $ 9,561
Accounts payable 85,551 77,503
The following is condensed unaudited financial data of FASL:
Quarter Ended Six Months Ended
-------------------------- ------------------------
July 1, July 2, July 1, July 2,
(Thousands) 2001 2000 2001 2000
------------ ---------- ----------- ----------
Net sales $ 250,294 $ 156,587 $ 566,761 $ 302,029
Gross profit 28,521 2,485 92,533 3,298
Operating income 27,018 1,806 89,994 1,677
Net income 15,717 1,092 52,292 845
The Company's share of the above FASL net income differs from the equity in
net income of joint venture reported on the condensed consolidated
statements of operations. The difference is due primarily to adjustments
resulting from the related-party transactions between FASL and the Company
which are reflected on the Company's condensed consolidated statements of
operations.
FASL has expanded its production capacity through a foundry arrangement
with Fujitsu Microelectronics, Inc. (FMI). In connection with this foundry
arrangement, the Company agreed to guarantee up to $125 million of Fujitsu
Limited's obligations under FMI's credit facility.
5. Segment Reporting
AMD operates in two reportable segments: the Core Products and Foundry
Services segments. AMD has previously shown three reportable segments;
however, as a result of the sale of Legerity, Inc. (Legerity), effective
July 31, 2000, the Company no longer operates in the Voice Communications
segment. The Core Products segment includes microprocessors, Flash memory
devices, Erasable Programmable Read-Only Memory (EPROM) devices, embedded
processors, platform products and networking products. The Foundry Services
segment includes fees for wafer fabrication and assembly, test, mark and
pack services provided to Legerity and Vantis Corporation (Vantis), the
Company's former programmable logic subsidiary. The Voice Communications
segment included the voice communications products of Legerity until July
31, 2000, the effective date of its sale. The following table is
-9-
a summary of the operating income by segment for the quarters and six months
ended July 1, 2001 and July 2, 2000:
Quarter Ended Six Months Ended
------------------------- -------------------------
(Thousands) July 1, July 2, July 1, July 2,
Net sales: 2001 2000 2001 2000
---------- ------------ ----------- -----------
Core Products segment $ 955,455 $ 1,082,902 $ 2,102,595 $ 2,095,546
Foundry Services segment 29,809 24,172 71,416 44,037
Voice Communications segment - 63,363 - 122,883
---------- ------------ ----------- -----------
Total net sales $ 985,264 $ 1,170,437 $ 2,174,011 $ 2,262,466
========== ============ =========== ===========
Segment operating income (loss):
Core Products segment $ 27,787 $ 226,323 $ 193,996 $ 385,460
Foundry Services segment (6,127) 4,224 (5,317) 9,459
Voice Communications segment - 19,650 - 35,947
---------- ------------ ----------- -----------
Total segment operating income 21,660 250,197 188,679 430,866
Interest income and other, net 12,308 19,935 31,131 41,063
Interest expense (20,199) (11,244) (41,844) (22,723)
Provision for income taxes (3,717) (51,778) (56,260) (51,778)
Equity in net income (loss) of FASL 7,300 32 20,483 (937)
---------- ------------ ----------- -----------
Net income $ 17,352 $ 207,142 $ 142,189 $ 396,491
========== ============ =========== ===========
-10-
6. Comprehensive Income (Loss)
The following are the components of comprehensive income (loss):
Quarter Ended Six Months Ended
---------------------- ------------------------
July 1, July 2, July 1, July 2,
(Thousands) 2001 2000 2001 2000
--------- ---------- ---------- -----------
Net income $ 17,352 $ 207,142 $ 142,189 $ 396,491
Foreign currency translation adjustments (23,558) (7,394) (40,940) (32,763)
Derivative financial instrument gains (losses), net (3,831) - (11,648) -
Unrealized gains on securities, net of tax:
Unrealized gains (losses) on investments arising
during the period 498 54 (10,492) 2,564
--------- ---------- ---------- ----------
Other comprehensive income (loss) (26,891) (7,340) (63,080) (30,199)
--------- ---------- ---------- ----------
Comprehensive income (loss) $ (9,539) $ 199,802 $ 79,109 $ 366,292
========= ========== ========== ==========
The components of accumulated other comprehensive loss are as follows:
July 1, December 31,
(Thousands) 2001 2000
----------- ------------
Unrealized gain on investments, net of tax $ 2,649 $ 13,143
Derivatives - cash flow hedging adjustments (11,648) -
Cumulative translation adjustments (148,108) (107,168)
----------- ------------
$ (157,107) $ (94,025)
=========== ============
-11-
7. Share Repurchase Program
On January 29, 2001, the Company announced that the Board of Directors had
authorized a program to repurchase up to $300 million worth of the
Company's common shares over a period of time to be determined by
management. Any such repurchases will be made in the open market or in
privately negotiated transactions from time to time in compliance with Rule
10b-18 of the Securities Exchange Act, subject to market conditions,
applicable legal requirements and other factors. This plan does not
obligate the Company to acquire any particular amount of its common stock,
and the plan may be suspended at any time at the Company's discretion. No
shares had been repurchased as of July 1, 2001.
8. Dresden Loan Agreements
AMD Saxony Manufacturing GmbH (AMD Saxony), an indirect wholly owned
subsidiary of the Company, operates the Company's manufacturing and design
facility in Dresden, Germany (Dresden Fab 30). In 1997, AMD Saxony entered
into a loan and related agreements (the Dresden Loan Agreements) with a
consortium of banks led by Dresdner Bank AG.
In February 2001, the Dresden Loan Agreements were amended to reflect new
capacity and increased capital spending plans for Dresden Fab 30. Under the
February 2001 amendments, the Company agreed to extend its guaranty of AMD
Saxony's obligations and to make available to AMD Saxony revolving loans of
up to $500 million. The Company also expanded its obligation to reimburse
AMD Saxony for the cost of producing wafers for the Company and agreed to
cancel the cost overrun facility made available by the banks. Under these
amendments, the Company has been released from financial covenants limiting
capital expenditures and requiring AMD Saxony to achieve capacity and
production cost targets by the end of 2001.
The Dresden Loan Agreements, as amended, require that the Company: provide
interim funding to AMD Saxony if either the remaining capital investment
allowances or the remaining interest subsidies are delayed, such interim
funding to be repaid as AMD Saxony receives the grants and 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; and guarantee up to 35 percent of AMD Saxony's obligations
under the Dresden Loan Agreements, which guarantee must not be less than
$100 million or more than $264 million, until the bank loans are repaid in
full.
-12-
9. Derivative Instruments and Hedging
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings (fair value
hedges) or recognized in other comprehensive income until the hedged item
is recognized in earnings (cash flow hedges). The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings. As
of January 1, 2001, the Company's foreign currency forward contracts had
been entered into to hedge the gains and losses generated by the
re-measurement of foreign currency denominated intercompany accounts. These
derivatives therefore did not qualify for hedge accounting and, therefore,
the change in fair values of these derivatives are adjusted to fair value
through operations. Accordingly, the adoption of SFAS 133 had no impact on
the Company's consolidated financial position or operating results.
The Company purchases significant volumes of inventory from its
unconsolidated joint venture in Japan, FASL, and from AMD Saxony. Purchases
from FASL and AMD Saxony are denominated in yen and the euro, respectively.
Therefore, in the normal course of business, the Company's financial
position is routinely subjected to market risk associated with foreign
currency rate fluctuations. The Company's general practice is to ensure
that material business exposure to foreign exchange risks are identified,
measured and minimized using the most effective and efficient methods to
eliminate or reduce such exposures. To protect against the reduction in
value of forecasted yen and euro denominated cash flows resulting from
these transactions, the Company has instituted a foreign currency cash flow
hedging program. The Company purchases foreign currency forward contracts
and sells or purchases foreign currency option contracts generally expiring
within 12 months to hedge portions of its forecasted foreign currency
denominated cash flows. These foreign currency contracts are carried on the
Company's balance sheet at fair value with the effective portion of the
contracts' gain or loss recorded in other comprehensive income (a component
of stockholders' equity) and subsequently recognized in earnings in the
same period the hedged forecasted transaction affects earnings. The Company
does not use derivatives for trading purposes.
The effectiveness test for these foreign currency contracts utilized by the
Company is the fair value to fair value comparison method. SFAS 133 permits
the exclusion from the effectiveness assessment of the time value portion
of the change in value of the currency forward contract. The change in fair
value of the time value portion of the derivative is considered by the
Company to be inherently ineffective and is immediately adjusted through
earnings each accounting period. During the three-month period ended July
1, 2001, portions of the hedging instruments excluded from the assessment
of hedge effectiveness were not material to the Company's consolidated
financial position or operating results and are included in earnings in the
accompanying Consolidated Statements of Operations.
-13-
As of July 1, 2001, the Company expects to reclassify the amount
accumulated in other comprehensive income to earnings within the next
twelve months due to the recognition in earnings of the hedged forecasted
transactions.
If a cash flow hedge should be discontinued because it is probable that the
original forecasted transaction will not occur, the net gain or loss in
accumulated other comprehensive income will be reclassified into earnings
as a component of income and expense. No such amounts were recorded in
earnings during the three-month period ended July 1, 2001.
The following table summarizes activity in other comprehensive income
related solely to derivatives classified as cash flow hedges held by the
Company during the period from January 1, 2001 through July 1, 2001:
Six Months Ended
(Thousands) July 1, 2001
----------------
Cumulative effect of adopting SFAS 133 $ -
Changes in fair value of derivatives, net 11,648
----------------
$ 11,648
================
10. Debt
On May 21, 2001, the Company called all $517.5 million of its outstanding
6% Convertible Subordinated Notes due 2005 for redemption, which resulted
in the conversion of $517.3 of such Notes into approximately 28 million
shares of the Company's common stock. The remaining $0.2 million of such
Notes were paid in cash to investors.
11. Subsequent Events
On August 1, 2001, the Company redeemed all $43 million of its outstanding
11% Senior Secured Notes due 2003.
On July 25, 2001, the Company acquired 293,329 shares of its common stock
at an aggregate cost of $5 million under its existing common stock
repurchase program.
-14-
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are forward-looking are based on
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual results to differ materially. The forward-looking
statements relate to, among other things: operating results; anticipated cash
flows; capital expenditures; adequacy of resources to fund operations and
capital investments; our ability to produce AMD Athlon(TM) and AMD Duron(TM)
microprocessors in the volume required by customers on a timely basis; our
ability to maintain average selling prices of seventh-generation microprocessors
despite aggressive pricing strategies of our competitors; the ability of third
parties to provide timely infrastructure solutions (motherboards and chipsets)
to support our microprocessors; our ability to increase customer and market
acceptance of the newest versions of our seventh-generation microprocessors,
particularly in commercial and mobile markets; a recovery in the communications
industry leading to an increase in the demand for Flash memory products; the
effect of foreign currency hedging transactions; the production ramp of our new
submicron integrated circuit manufacturing and design facility in Dresden,
Germany (Dresden Fab 30); and the financing and construction of 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 other 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 Unaudited
Condensed Financial Statements and related notes included in this report and our
Audited Financial Statements and related notes as of December 31, 2000 and
December 26, 1999 and each of the three years in the period ended December 31,
2000 as filed in our Annual Report on Form 10-K.
AMD, the AMD logo, and combinations thereof, Advanced Micro Devices, AMD-K6, AMD
Athlon and AMD Duron are either trademarks or registered trademarks of Advanced
Micro Devices, Inc. Vantis is a trademark of Vantis Corporation. Legerity is a
trademark of Legerity, Inc. Microsoft and Windows are either registered
trademarks or trademarks of Microsoft Corporation. Other terms used to identify
companies and products may be trademarks of their respective owners.
-15-
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
We participate in all three technology areas within the digital integrated
circuit (IC) market--microprocessors, memory circuits and logic
circuits--through our Core Products and Foundry Services segments. Our Core
Products segment includes our PC processors, Memory products and Other IC
products. PC processors include our seventh-generation microprocessors, the AMD
Athlon and AMD Duron microprocessors, and our sixth-generation microprocessors.
Memory products include Flash memory devices and Erasable Programmable Read-Only
Memory (EPROM) devices. Other IC products include embedded processors, platform
products and networking products. Our Foundry Services segment consists of fees
for services that we provide to Legerity, Inc. and Vantis Corporation.
On August 4, 2000, we completed the sale of 90 percent of Legerity for
approximately $375 million in cash, effective July 31, 2000. We retained a ten
percent ownership interest in Legerity and a warrant to acquire approximately an
additional ten percent. As part of the transaction, we entered into various
service contracts with Legerity to continue to provide, among other things,
wafer fabrication and assembly, test, mark and pack services to Legerity. We
receive fees from Legerity for these services.
We use a 52- to 53-week fiscal year ending on the last Sunday in December. The
quarters ended July 1, 2001, December 31, 2000 and July 2, 2000 each included 13
weeks. The six months ended July 1, 2001 and July 2, 2000 included 26 and 27
weeks.
-16-
The following is a summary of our net sales by segment for the periods presented
below:
Quarter Ended Six Months Ended
------------------------------------------- --------------------------
July 1, April 1, July 2, July 1, July 2,
(Millions) 2001 2001 2000 2001 2000
----------- ---------- --------- ---------- -----------
Core Products segment:
PC Processors $ 588 $ 661 $ 583 $ 1,249 $ 1,146
Memory Products 316 411 362 727 689
Other IC Products 51 75 138 126 260
----------- ---------- --------- ---------- -----------
955 1,147 1,083 2,102 2,095
Foundry Services segment 30 42 24 72 44
Voice Communications segment - - 63 - 123
----------- ---------- --------- ---------- -----------
$ 985 $ 1,189 $ 1,170 $ 2,174 $ 2,262
=========== ========== ========= ========== ===========
Net Sales Comparison of Quarters Ended July 1, 2001 and April 1, 2001
Net sales of $985 million for the second quarter of 2001 decreased by 17 percent
compared to net sales of $1,189 million for the first quarter of 2001. If
current conditions prevail, overall revenues could decline in the range of 10 to
15 percent in the third quarter of 2001.
PC Processors net sales of $588 million decreased 11 percent in the second
quarter of 2001 compared to the first quarter of 2001. The decrease in net sales
was primarily due to a decline in average selling prices resulting from very
aggressive market pricing pressures from our competitors, partially offset by
higher unit sales of our seventh-generation microprocessors. Maintaining overall
PC Processor sales levels in the third quarter of 2001 is dependent upon
continuing a successful production ramp in Dresden Fab 30, the ability to
maintain average selling prices for our seventh-generation microprocessors,
availability of chipsets and motherboards from third-party suppliers and
increasing market acceptance of the newest versions of the AMD Athlon and AMD
Duron processors, particularly in commercial and mobile markets, as to which we
cannot give any assurance.
Memory products net sales of $316 million decreased 23 percent in the second
quarter of 2001 compared to the first quarter of 2001. The decrease was
primarily the result of the continuing weakness in the communications and
networking equipment industries resulting in a decrease in the sales of Flash
memory devices. We expect these revenues will continue to decline in the third
quarter of 2001.
The Other IC products net sales of $51 million decreased 32 percent in the
second quarter of 2001 compared to the first quarter of 2001 primarily due to
decreased net sales of chipset products and networking products. Networking
product sales decreased as a result of the communications and networking
equipment industries decline. We expect these revenues will continue to decline
in the third quarter of 2001.
The Foundry Services segment included service fees of $30 million in the second
quarter of 2001 compared to $42 million in the first quarter of 2001. This 29
percent decrease was due to the communications and networking equipment
industries decline. We expect that service fees will continue to decline.
Net Sales Comparison of Quarters Ended July 1, 2001 and July 2, 2000
Net sales of $985 million for the second quarter of 2001 decreased by 16 percent
compared to net sales of $1,170 million for the second quarter of 2000.
-17-
PC Processors net sales of $588 million increased one percent in the second
quarter of 2001 compared to the same quarter of 2000 primarily due to increased
net sales of our seventh-generation microprocessors offset by a decrease in net
sales of AMD-K6 microprocessors. The increase in net sales was primarily due to
higher unit shipments, offset by lower average selling prices of our
seventh-generation microprocessors and lower sales of AMD-K6 microprocessors
caused by a market shift toward our seventh-generation microprocessors.
Memory products net sales of $316 million decreased by 13 percent in the second
quarter of 2001 compared to the same quarter of 2000 due to the communications
and networking equipment industries downturn, resulting in a decrease in the
sales of Flash memory devices.
The Other IC products net sales of $51 million in the second quarter of 2001
decreased by 63 percent when compared to the same quarter of 2000 due to
decreased net sales from networking products, chipsets and embedded processors
products as the communications and networking equipment industries continued to
decline.
The Foundry Services segment service fees of $30 million in the second quarter
of 2001 increased compared to the same quarter of 2000. The increase was
primarily due to the addition of service fees from Legerity after the second
quarter of 2000.
Net Sales Comparison of Six Months Ended July 1, 2001 and July 2, 2000
Net sales of $2,174 million for the first six months of 2001 decreased by four
percent compared to net sales of $2,262 million for the first six months of
2000.
PC Processors net sales of $1,249 million increased nine percent in the first
six months of 2001 compared to the same period of 2000 primarily due to
increased net sales of our seventh-generation microprocessors offset by a
decrease in net sales of AMD-K6 microprocessors. The increase in net sales was
primarily due to higher unit shipments, offset by lower average selling prices
of our seventh-generation microprocessors and lower sales of AMD-K6
microprocessors caused by a market shift toward our seventh-generation
microprocessors.
Memory products net sales of $727 million decreased by five percent in the first
six months of 2001 compared to the same period of 2000 due to the communications
and networking equipment industries downturn, resulting in a decrease in the
sales of Flash memory devices.
The Other IC products net sales of $126 million in the first six months of 2001
decreased by 51 percent when compared to the same period of 2000 due to
decreased net sales from networking products, chipsets and embedded processor
products as the communications and networking equipment industries continued to
decline.
The Foundry Services segment service fees of $72 million in the first six months
of 2001 increased compared to the same period of 2000. The increase was
primarily due to the addition of service fees from Legerity after the second
quarter of 2000.
-18-
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 the periods presented below:
Quarter Ended Six Months Ended
-------------------------------------------- --------------------------
July 1, April 1, July 2, July 1, July 2,
(Millions except for gross margin percentage) 2001 2001 2000 2001 2000
---- ---- ---- ---- ----
Cost of sales $636 $715 $613 $1,351 $1,219
Gross margin percentage 35% 40% 48% 38% 46%
Research and development $171 $158 $156 $ 329 $ 317
Marketing, general and administrative 156 149 152 305 296
Interest income and other, net 12 19 20 31 41
Interest expense 20 22 11 42 22
We operate in an industry characterized by high fixed costs due to the
capital-intensive manufacturing process, particularly the state-of-the-art
production facilities required for PC processors and Flash memory devices. As a
result, our gross margin percentage is significantly affected by fluctuations in
product sales. The ability to maintain gross margin percentages depends on
continually increasing sales because fixed costs continue to rise due to the
ongoing capital investments required to expand production capacity and
capability.
The gross margin percentage of 35 percent in the second quarter of 2001
decreased from 40 percent in the first quarter of 2001 and from 48 percent in
the same quarter of 2000. The decrease in gross margin percentage in the second
quarter of 2001 compared to the first quarter of 2001 was primarily attributable
to a decline in the average selling prices for seventh-generation
microprocessors. The decrease in gross margin percentage in the second quarter
of 2001 compared to the same quarter in 2000 was primarily due to higher fixed
manufacturing costs, changes in product mix and pricing pressures. Fixed costs
will continue to increase as we ramp Dresden Fab 30 production.
Research and development expenses of $171 million in the second quarter of 2001
increased eight percent compared to the immediate prior quarter, and 10 percent
compared to the same quarter in 2000. The increase was primarily due to
increased research and development activities for PC microprocessors.
Included in research and development and cost of sales were the recognition of
deferred credits on foreign capital grants and interest subsidies that were
received for Dresden Fab 30. These credits of approximately $11 million per
quarter (denominated in deutsche marks) will continue to be offset against
Dresden Fab 30 expenses in future quarters until June 2007.
Marketing, general and administrative expenses of $156 million in the second
quarter of 2001 increased five percent compared to the first quarter of 2001 as
a result of an increase in marketing spending and corporate advertising for
seventh-generation microprocessors. Marketing, general and administrative
expenses in the second quarter of 2001 increased three percent compared to the
same quarter in 2000. The increase was primarily due to increased advertising
and marketing for seventh-generation microprocessors and spending on information
systems.
Interest income and other, net of $12 million in the second quarter of 2001
decreased 36 percent compared to the first quarter of 2001 and decreased 40
percent compared to the same quarter of 2000. The decrease was primarily due to
the recognition of an other than temporary decline in the value of our short-
term investments.
Interest expense of $20 million in the second quarter of 2001 decreased nine
percent compared to the first quarter of 2001 primarily due to the conversion of
nearly all of our of 6% convertible
-19-
subordinated notes, partially offset by an increase of interest expense as a
result of increased borrowings by AMD Saxony, our indirect wholly owned
subsidiary, under the loan agreements with a consortium of banks led by Dresdner
Bank AG (the Dresden Loan Agreements). Interest expense increased 80 percent
compared to the same quarter of 2000 primarily due to increased borrowings by
AMD Saxony under the Dresden Loan Agreements. During the construction of Dresden
Fab 30 we capitalized interest expense attributable to the construction. Fab 30
began production at the end of the second quarter of 2000 and consequently we no
longer capitalize these interest costs.
Income Tax
We recorded a $4 million income tax provision in the second quarter of 2001 and
a $52 million income tax provision in the second quarter of 2000. The effective
tax rates for the quarter and six months ended July 1, 2001 were 27 percent and
32 percent. The effective tax rates for the quarter and six months ended July 2,
2000 were 20 percent and 12 percent, reflecting the utilization of net operating
loss carryforwards.
Other Items
International sales as a percent of net sales were 61 percent in the second
quarter of 2001 compared to 63 percent in the first quarter of 2001 and 61
percent in the second quarter of 2000. International sales as a percent of net
sales were 62 percent in the first six months of 2001 compared to 60 percent in
the first six months of 2000. During the second quarter of 2001, approximately
one percent of our net sales were denominated in foreign currencies compared to
six percent in the same period in 2000. We do not have sales denominated in
local currencies in countries that have highly inflationary economies. The
impact on our operating results from changes in foreign currency rates
individually and in the aggregate has not been significant.
Comparison of Segment Income
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 by segment for the periods
presented below:
Quarter Ended Six Months Ended
------------------------------------ ------------------------
July 1, April 1, July 2, July 1, July 2,
(Millions) 2001 2001 2000 2001 2000
---- ---- ---- ---- ----
Core Products $ 28 $ 166 $ 226 $ 194 $ 386
Foundry Services (6) 1 4 (5) 9
Voice Communications - - 20 - 36
----- ------ ------ ------ ------
Total $ 22 $ 167 $ 250 $ 189 $ 431
===== ====== ====== ====== ======
Core Products' operating income in the second quarter of 2001 decreased 83
percent compared to the first quarter of 2001 and 88 percent compared to the
second quarter of 2000. The decrease was primarily due to a decline in the
average selling price for PC processors as well as a downturn in the
communications and networking equipment industries resulting in a decrease in
the net sales of our Core Products. Core Products' operating income in the first
six months of 2001 decreased 50 percent compared to the first six months of 2000
due to a downturn in the communications and networking equipment industries
resulting in a
-20-
decrease in net sales of our Core Products, as well as a decline in the average
selling price for PC processors and a decline in unit sales of our Flash memory
devices. As a result of the sale of Legerity, effective July 31, 2000, we no
longer operate in our former Voice Communications segment, resulting in no
operating income in the second quarter of 2001 compared to an operating income
of $20 million in the second quarter of 2000.
-21-
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Net cash used by operating activities was $17 million in the first six months of
2001 primarily due to net income of $142 million and depreciation and
amortization of $312 million, offset by a decrease of $476 million in payables,
accrued liabilities and accrued compensation.
Net cash provided by operating activities was $668 million in the first six
months of 2000 primarily due to net income of $396 million, depreciation and
amortization expenses of $276 million, and $142 million from customer deposits
under long-term purchase agreements, offset by a decrease of $120 million in
payables, accrued liabilities and accrued compensation.
Net cash used by investing activities was $485 million during the first six
months of 2001. Major uses of cash during the period included $378 million for
the purchases of property, plant and equipment, primarily for Dresden Fab 30 and
Asia manufacturing facilities, $2,190 million for purchases of
available-for-sale securities, and $122 million of additional equity investments
in FASL, offset by $2,205 million of proceeds from the maturities of
available-for-sale securities.
Net cash used by investing activities was $346 million in the first six months
of 2000. Major uses of cash during the period included $290 million from
purchases of property, plant and equipment, primarily for Dresden Fab 30 and
Asia manufacturing facilities and $1,563 million from purchases of
available-for-sale securities, offset by $1,497 million of proceeds from the
maturities of available-for-sale securities.
Net cash provided by financing activities was $319 million during the first six
months of 2001. Major uses of cash during the period included $48 million in
payments on debt and capital lease obligations offset by $346 million in
proceeds from Dresden Fab 30 borrowing activities, $21 million in proceeds from
Dresden Fab 30 foreign grants and subsidies and $33 million in proceeds from the
issuance of stock in connection with stock option exercises and purchases under
our Employee Stock Purchase Plan.
Net cash provided by financing activities was $90 million in the first six
months of 2000 primarily due to $95 million in proceeds from the issuance of
stock in connection with stock option exercises and purchases under our Employee
Stock Purchase Plan and $7 million in proceeds from borrowings, offset by $12
million in payments on debt and capital lease obligations.
Under our Loan and Security Agreement (the Loan Agreement) effective on July 13,
1999, which provides for a four-year secured revolving line of credit of up to
$200 million, we can borrow, subject to amounts which may be set aside by the
lenders, up to 85 percent of our eligible accounts receivable from Original
Equipment Manufacturers (OEMs) and 50 percent of our eligible accounts
receivable from distributors. We must comply with certain financial covenants if
the level of domestic cash we hold declines to certain levels, or the amount of
borrowings under the Loan Agreement rises to certain levels. Our obligations
under the Loan Agreement are secured by a pledge of most of our accounts
receivable, inventory, general
-22-
intangibles and the related proceeds. As of July 1, 2001, no funds were drawn
under the Loan Agreement. In addition, we had available unsecured, uncommitted
bank lines of credit in the amount of $24 million, none of which were
outstanding.
We plan to make capital investments of approximately $900 million during 2001.
These investments include those relating to the continued facilitization of
Dresden Fab 30 and our fabrication facility in Austin, Texas (Fab 25).
On January 29, 2001, we announced that our Board of Directors had authorized a
program to repurchase up to $300 million worth of our common shares over a
period of time to be determined by management. Any such repurchases will be made
in the open market or in privately negotiated transactions from time to time in
compliance with Rule 10b-18 of the Securities Exchange Act, subject to market
conditions, applicable legal requirements and other factors. This plan does not
obligate us to acquire any particular amount of our common stock, and the plan
may be suspended at any time at our discretion. On July 25, 2001, we acquired
293,329 shares of our common stock at an aggregate cost of $5 million under the
plan.
On May 21, 2001, we called all $517.5 million of our outstanding 6% Convertible
Subordinated Notes due 2005 for redemption, which resulted in the conversion of
$517.3 of such Notes into approximately 28 million shares of our common stock.
The remaining $0.2 million of such Notes were paid in cash to investors.
On August 1, 2001, we redeemed all $43 million of our outstanding 11% Senior
Secured Notes due 2003.
AMD Saxony, an indirect wholly owned German subsidiary of AMD, has constructed a
fab and has installed equipment in Dresden Fab 30, which began production in the
second quarter of 2000. 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 will be $2.3
billion when fully equipped by the end of 2003. We have invested $1.6 billion to
date. 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. Because most of the amounts under the Dresden Loan Agreements
are denominated in deutsche marks, the dollar amounts set forth below are
subject to change based on applicable conversion rates. We used the exchange
rate at the end of the second quarter of 2001, which was approximately 2.27
deutsche marks to one U.S. dollar, to value the amounts denominated in deutsche
marks. 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.
The Dresden Loan Agreements 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 $271 million as of July 1, 2001 in the form of subordinated loans to
and equity in AMD Saxony. In addition to support from AMD, the
-23-
consortium of banks referred to above has made available $661
million in loans to AMD Saxony to help fund Dresden Fab 30 project costs. As of
July 1, 2001, $618 million of the available loans were outstanding.
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 the lesser of 65 percent of AMD Saxony bank debt or $661
million;
. capital investment grants and allowances totaling $287 million; and
. interest subsidies totaling $138 million.
Of these amounts, AMD Saxony had received $284 million in capital investment
grants and allowances and $54 million in interest subsidies as of July 1, 2001.
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
July 1, 2001, we were in compliance with all of the conditions of the grants and
subsidies.
In February 2001, we amended the Dresden Loan Agreements to reflect new capacity
and increased capital expenditure plans for Dresden Fab 30. Under the February
2001 amendments, we agreed to increase and extend our guaranty of AMD Saxony's
obligations and to make available to AMD Saxony revolving loans of up to $500
million. We expanded our obligation to reimburse AMD Saxony for the cost of
producing wafers for us, and we also agreed to cancel the cost overrun facility
made available by the banks. Under the February 2001 amendments, we have been
released from financial covenants limiting capital expenditures and requiring
AMD Saxony to achieve capacity and production cost targets by the end of 2001.
The Dresden Loan Agreements, as amended, also require that we:
. provide interim funding to AMD Saxony if either the remaining capital
investment allowances or the remaining interest subsidies are delayed, such
funding to 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; and
. guarantee up to 35 percent of AMD Saxony's obligations under the Dresden
Loan Agreements, which guarantee must not be less than $100 million or more
than $264 million, until the bank loans are repaid in full.
The definition of defaults under the Dresden Loan Agreements includes the
failure of AMD, AMD Saxony or AMD Saxony Holding GmbH (AMD Holding), the parent
company of AMD Saxony and a wholly owned subsidiary of AMD, to comply with
obligations in connection with the Dresden Loan Agreements, including:
-24-
. material variances from the approved plan and specifications;
. our failure to fund equity contributions or shareholder loans or otherwise
comply with our obligations relating to the Dresden Loan Agreements;
. the sale of shares in AMD Saxony or AMD Holding;
. the failure to pay material obligations;
. the occurrence of a material adverse change or filings or proceedings in
bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
. the occurrence of default under the indenture dated August 1, 1996 between
AMD and the United States Trust Company of New York (the Indenture)
pursuant to which our Senior Secured Notes were issued or the Loan
Agreement.
Generally, any default with respect to borrowings made or guaranteed by AMD
results in recourse to us of more than $10 million and, if not cured by us,
would result in a cross-default under the Dresden Loan Agreements and the Loan
Agreement. As of July 1, 2001, we were in compliance with all conditions of 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 the continued facilitization of Dresden Fab
30, and we will be in default under the Dresden Loan Agreements and the Loan
Agreement, which would permit acceleration of certain indebtedness, which would
have a material adverse effect on us. We cannot assure that we will be able to
obtain the funds necessary to fulfill these obligations. Any such failure would
have a material adverse effect on us.
FASL, a joint venture formed by AMD and Fujitsu Limited (Fujitsu) in 1993, is
continuing the facilitization of its second Flash memory device wafer
fabrication facility, FASL JV2, in Aizu-Wakamatsu, Japan. The facility,
including equipment, is expected to cost approximately $1.3 billion when fully
equipped. As of July 1, 2001, approximately $864 million (denominated in yen) of
this cost had been funded. In July 2000, FASL broke ground for a third
fabrication facility for the manufacture of Flash memory devices in
Aizu-Wakamatsu, Japan. The facility, designated as FASL JV3, is expected to cost
approximately $1.4 billion when fully equipped. Capital expenditures for FASL
JV2 and FASL JV3 construction to date have been funded by cash generated from
FASL operations and borrowings by FASL. FASL has also expanded its production
capacity through a foundry arrangement with Fujitsu Microelectronics, Inc.
(FMI). In connection with this foundry arrangement, we agreed to guarantee up to
$125 million of Fujitsu's obligations under FMI's credit facility.
A significant portion of the FASL capital expenditures in 2001 will continue to
be funded by cash generated from FASL operations. In addition, both Fujitsu and
AMD made capital contributions of 15 billion yen ($122 million) each to FASL
during the second quarter of 2001. Further, to the extent that additional funds
are required for the full facilitization of FASL JV2 or ramp of FASL JV3, AMD
may be required to contribute cash or guarantee third-party loans in proportion
to our 49.992 percent interest in FASL. As of July 1, 2001, we did not have any
loan guarantees outstanding with respect to these loans. These planned costs
-25-
are incurred in yen and are, therefore, subject to change due to foreign
exchange rate fluctuations. At the end of the second quarter of 2001, the
exchange rate was approximately 121.46 yen to 1 U.S. dollar, which we used to
translate the amounts denominated in yen.
We believe that cash flows from operations and current cash balances, together
with available external financing, will be sufficient to fund operations and
capital investments for at least 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:
Flash Memory Products
The demand for Flash memory devices continues to be weak primarily as a result
of the continued severe downturn in the communications and networking equipment
industries. It is extremely difficult to forecast memory product sales given the
uncertainties of the level of demand in a continuing soft market. Therefore, we
cannot be certain as to the level of demand for our Flash memory devices,
although a substantial sequential decline in sales is probable in the current
quarter. If the communications and networking equipment industries do not
recover and the sales of our Flash memory products continue to decline, our
business could be materially and adversely affected.
Competition in the market for Flash memory devices will increase in 2001 and
beyond as existing manufacturers introduce new products and industry-wide
production capacity increases. We may be unable to maintain or increase our
market share in Flash memory devices as the market develops and as existing and
potential new competitors introduce competitive products. A decline in our Flash
memory device business could have a material adverse effect on our business.
Microprocessor Products
Dependence on AMD Seventh-Generation Microprocessors. We must continue to
successfully market our seventh-generation Microsoft Windows compatible
microprocessors, the AMD Athlon and AMD Duron microprocessors, in order to
increase our microprocessor product revenues in 2001 and beyond, and to benefit
fully from the substantial financial investments and commitments we have made
and continue to make related to microprocessors. We began volume shipments of
AMD Athlon microprocessors in the second half of 1999. We began shipments of AMD
Duron processors, a derivative of the AMD Athlon processor designed to provide
an optimized solution for value-conscious business and home users, in the second
half of 2000. Our production and sales plans for AMD Athlon and AMD Duron
microprocessors are subject to numerous risks and uncertainties, including:
. our ability to maintain average selling prices of seventh-generation
microprocessors despite increasingly aggressive Intel pricing strategies,
marketing programs and product bundling of microprocessors, motherboards,
chipsets and combinations thereof;
-26-
. whether Tier One OEM customers will use our seventh-generation
microprocessors in systems developed for the commercial market;
. our ability to successfully offer new higher performance versions of the
AMD Athlon microprocessor competitive with Intel's Pentium 4 processor;
. our ability on a timely basis to produce seventh-generation microprocessors
in the volume and with the performance and feature set required by
customers;
. the pace at which we are able to ramp production in Dresden Fab 30 on 0.18-
and 0.13-micron copper interconnect process technology;
. our ability to expand our chipset and system design capabilities;
. the availability and acceptance of motherboards and chipsets designed for
our seventh-generation microprocessors; and
. the use and market acceptance of a non-Intel processor bus (adapted by us
from Digital Equipment Corporation's EV6 bus) in the design of our
seventh-generation microprocessors, and the availability of chipsets from
vendors who will develop, manufacture and sell chipsets with the EV6
interface in volumes required by us.
If we fail to achieve continued market acceptance of our seventh-generation
microprocessors our business will be materially and adversely affected.
Investment in and Dependence on AMD Microprocessor Products. Our microprocessor
product revenues have and will continue in 2001 and 2002 to make significant
contributions to our overall revenues, profit margins and operating results. We
plan to continue to make significant capital expenditures to support our
microprocessor products both in the near and long term. These capital
expenditures will be a substantial drain on our cash flow and possibly on our
cash balances as well.
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 Athlon
and AMD Duron microprocessors, our seventh-generation Microsoft Windows
compatible microprocessors, and future generations of microprocessors beginning
with the "Hammer" family of microprocessors that we plan to introduce in 2002.
The Hammer processors will be our first processors capable of 64-bit operation,
and are being designed to deliver leading-edge performance on both the 64-bit
software used by high-end workstations and servers and the 32-bit software used
by the majority of desktop and mobile computer users.
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 fast pace and offer higher performance microprocessors in significantly
greater volumes. We must achieve acceptable yields while producing
microprocessors at higher speeds. Any significant difficulty in achieving
microprocessor yield and volume plans may 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
-27-
achieve the production ramp necessary to meet our customers' volume requirements
for higher performance microprocessors. It is also possible that we may not
increase our microprocessor revenues enough to achieve sustained profitability.
To sell the volume of AMD Athlon and AMD Duron microprocessors we currently plan
to make in 2001 and 2002, we must increase sales to existing customers and
develop new customers in both consumer and commercial markets. If we lose any
current top tier OEM customers, 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 microprocessors are subject to other risks
and uncertainties, including:
. the effects of Intel's increasingly aggressive pricing, new product
introductions and marketing strategies;
. adverse market conditions in the personal computer (PC) market and
consequent diminished demand for our microprocessors;
. market acceptance of our microprocessors, including the timely volume
availability of motherboards and chipsets designed for these processors;
. whether we can successfully fabricate higher performance microprocessors in
planned volume and speed mixes;
. whether we will have the financial and other resources necessary to
continue to invest in the microprocessor products, including leading-edge
wafer fabrication equipment and advanced process technologies;
. the possibility that our newly introduced products may be defective; and
. unexpected interruptions in our manufacturing operations.
See also the discussions below regarding Intel Dominance and Process Technology.
Intel Dominance. Intel has dominated the market for microprocessors used in PCs
for many years. Because of its dominant market position, Intel has historically
set and controlled x86 microprocessor and PC system standards and, thus,
dictated the type of product the market requires of Intel's competitors. In
addition, Intel may and does vary prices on its microprocessors and other
products at will and thereby affects the margins and profitability of its
competitors due to its financial strength and dominant position. Because Intel
has dominated the microprocessor market for many years and has brand strength,
we have in the past priced AMD microprocessors below the published price of
Intel processors offering comparable performance. Thus, Intel's processor
pricing and marketing can impact and have impacted the average selling prices of
our microprocessors, and consequently can impact and have impacted our overall
margins.
Intel also exerts substantial influence over PC manufacturers and their channels
of distribution through the "Intel Inside" brand program and other marketing
programs. Intel invests billions of dollars in, and as a result exerts 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:
-28-
. through the Intel Inside and other marketing programs;
. through other contractual constraints on customers, retailers, industry
suppliers and other third parties;
. by controlling industry standards; and
. by controlling supply and demand of motherboards, chipsets and other system
components.
As an extension of its dominant microprocessor market share, Intel also
dominates the PC platform. As a result, PC manufacturers have been increasingly
unable 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:
. pricing strategies;
. product mix and introduction schedules;
. product bundling, marketing, and merchandising strategies;
. control over industry standards, PC manufacturers and other PC industry
participants, including motherboard, chipset and basic input/output system
(BIOS) suppliers; and
. user brand loyalty.
As Intel expanded its dominance over the PC system platform, many PC
manufacturers reduced their system development expenditures and now purchase
microprocessors together with chipsets or in assembled motherboards. PC OEMs are
increasingly dependent on Intel, less innovative on their own and, to a large
extent, distributors of Intel technology. In marketing our microprocessors to
these OEMs and dealers, we depend on companies other than Intel for the design
and manufacture of core-logic chipsets, graphics chips, motherboards, BIOS
software and other components. In recent years, many of these third-party
designers and manufacturers have lost significant market share to Intel. In
addition, these companies produce chipsets, motherboards, BIOS software and
other components to support each new generation of Intel's microprocessors only
if Intel makes information about its products available to them in time to
address market opportunities. Delay in the availability of such information
makes, and will continue to make, it increasingly difficult for these third
parties to retain or regain market share.
To compete with Intel in the microprocessor market in the future, we intend to
continue to form close relationships with third-party designers and
manufacturers of chipsets, motherboards, graphics chips, 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 do not currently plan to develop microprocessors that are bus interface
protocol compatible with the Pentium III, Pentium 4 and Celeron processors
because our patent cross-license agreement with Intel does not extend to
microprocessors that are bus interface protocol compatible with Intel's sixth
and subsequent generation processors. Thus, the AMD Athlon and AMD Duron
microprocessors are not designed to function with motherboards and chipsets
-29-
designed to work with Intel microprocessors. The same will be true of our Hammer
family of microprocessors. 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 microprocessors; and
. ability to ensure that the microprocessors can be used in PC platforms
designed to support our microprocessors, or that platforms are available
which support both Intel processors and our microprocessors.
A failure for any reason of the designers and producers of motherboards,
chipsets, processor modules and other system components to support our
microprocessor offerings would have a material adverse effect on our business.
Fluctuations in the PC Market. Since most of our microprocessor products are
used in PCs and related peripherals, our future growth is closely tied to the
growth of the PC industry. Industry-wide fluctuations in the PC marketplace have
in the past and may in the future materially and adversely affect our business.
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. For example, we cannot assure that
Microsoft will support our Hammer family of microprocessors and its x86-64 bit
instruction set. Microsoft's support is vital to the success of the Hammer
family products currently in development.
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 microprocessors. If we fail to maintain the logo license agreements with
Microsoft, we may lose our ability to label our 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.
Demand for Our Products Affected by Worldwide Economic Conditions
A continued decline of the worldwide semiconductor market could further decrease
the demand for microprocessors, Flash memory devices and other integrated
circuits. A significant decline in economic conditions in any significant
geographic area, either domestically or internationally, could decrease the
overall demand for our products, which could have a material adverse effect on
our business.
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Financing Requirements
We will have significant capital requirements during the remainder of 2001. To
the extent that we cannot generate the required capital internally or obtain
such capital externally, our business could be materially and adversely
affected. We cannot assure the availability of such capital on terms favorable
to us, or at all. We currently plan to make capital investments of approximately
$900 million in 2001 although the actual expenditures may vary. These
investments include those relating to the continued facilitization of Dresden
Fab 30 and Fab 25.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into
the Dresden Loan Agreements with a consortium of banks led by Dresdner Bank AG.
The Dresden Loan Agreements 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 $271 million as of July 1, 2001, in the form of subordinated loans and
equity in AMD Saxony. If we are unable to meet our obligations to AMD Saxony as
required under the Dresden Loan Agreements, we will be in default under the
Dresden Loan Agreements and the Loan Agreement, which would permit acceleration
of indebtedness, which would have a material adverse effect on our business.
In July 2000, FASL broke ground for a third fabrication facility, FASL JV3, for
the manufacture of Flash memory devices in Aizu-Wakamatsu, Japan. As of December
2000, the building was complete and the clean room was under construction. FASL
JV3 is expected to cost $1.4 billion when fully equipped. FASL capital
expenditures to date have been funded by cash generated from FASL operations and
borrowings by FASL. A significant portion of the FASL capital expenditures in
2001 will continue to be funded by cash generated from FASL operations. In
addition, both Fujitsu and AMD made capital contributions of $122 million each
to FASL during the second quarter of 2001. To the extent that additional funds
are required for the full facilitization of FASL JV2 or ramp of FASL JV3, AMD
may be required to contribute cash or guarantee third-party loans in proportion
to our 49.992 percent interest in FASL. If we are unable to fulfill our
obligations to FASL, our business will be materially and adversely affected.
Manufacturing
Capacity. We underutilize our manufacturing facilities from time to time as a
result of reduced demand for certain of our products. In the past, there have
been times when our operations related to microprocessors have been particularly
affected by this situation. If we underutilize our manufacturing facilities in
the future, our gross margins may suffer. We are substantially increasing our
manufacturing capacity by making significant capital investments in Fab 25 and
Dresden Fab 30. FASL is currently constructing FASL JV3. We are continuing to
increase production in our test and assembly facility in Suzhou, China. We have
based our strategy of increasing our manufacturing capacity on industry
projections for future growth. If these industry projections are inaccurate, or
if demand for our products does not increase consistent with our plans and
expectations, we will likely underutilize our manufacturing facilities and our
business could be materially and adversely affected.
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In contrast to the above, there also have been situations in the past in which
our manufacturing facilities were inadequate to meet the demand for certain of
our products. Our inability to obtain sufficient manufacturing capacities to
meet demand, either in our own facilities or through foundry or similar
arrangements with others, could have a material adverse effect on our business.
At this time, the risk is that we will have underutilized capacity in Fab 25, in
our manufacturing facilities that support our Foundry Services segment and in
the manufacturing facilities used to make our Flash memory devices.
Conversion of Fab 25 to Flash Memory Device Production. We will begin converting
Fab 25 to production of our Flash memory devices by the end of 2001. The speed
of the conversion of Fab 25 will depend on the Flash market and general business
conditions.
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, if the
communications and networking industries do not recover or if the market for our
Flash memory products should continue to significantly deteriorate. Likewise, we
are making a substantial investment in Dresden Fab 30. We have developed and
installed 0.18-micron process technology and copper interconnect technology in
Dresden Fab 30 in order to manufacture AMD Athlon microprocessors and plan to
begin to convert Dresden Fab 30 to 0.13 micron technology in the fourth quarter
of 2001. We have entered into a strategic alliance with Motorola to co-develop
logic process and embedded Flash technologies. The logic process technology
which is the subject of the alliance includes the copper interconnect and
silicon on insulator technology that is required for AMD Athlon microprocessors
and subsequent generations of microprocessors. The successful development and
implementation of silicon on insulator technology is, for example, critical to
the success of the Hammer family of processors currently under development. We
cannot be certain that the strategic alliance will be successful or that we will
be able to develop or obtain the leading-edge process technologies that will be
required in Fab 25 or Dresden Fab 30 to fabricate microprocessors successfully.
Manufacturing Interruptions and Yields. Any substantial interruption of our
manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could materially and adversely affect our business
operations. We also have been and may in the future be materially and adversely
affected by fluctuations in manufacturing yields. The design and manufacture of
ICs is a complex process. Normal manufacturing risks include errors and
interruptions in the fabrication process and defects in raw materials, as well
as other risks, all of which can affect yields. Additional manufacturing risks
incurred in ramping up new fabrication areas and/or new manufacturing processes
include equipment performance and process controls as well as other risks, all
of which can affect yields.
Product Incompatibility. Our products may possibly be incompatible with some or
all industry-standard software and hardware. If our customers are unable to
achieve compatibility with software or hardware after our products are shipped
in volume, we could be materially and adversely affected. It is also possible
that we may be unsuccessful in correcting any such compatibility
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problems that are discovered or that corrections will be unacceptable to
customers or made in an untimely manner. In addition, the mere announcement of
an incompatibility problem relating to our products could have a material
adverse effect on our business.
Product Defects. One or more of our products may possibly be found to be
defective after we have already shipped such products in volume, requiring a
product replacement, recall or a software fix which would cure such defect but
impede performance. We may also be subject to product returns which could impose
substantial costs on us and have a material and adverse effect on our business.
Essential Manufacturing Materials. Certain raw materials we use in the
manufacture of our products are available from a limited number of suppliers.
For example, we are dependent on key chemicals from a limited number of
suppliers, and a few foreign companies principally supply several types of the
integrated circuit packages purchased by us. Interruption of supply or increased
demand in the industry could cause shortages in various essential materials. We
would have to reduce our manufacturing operations if we were unable to procure
certain of these materials. This reduction in our manufacturing operations could
have a material adverse effect on our business.
International Manufacturing and Foundries. Nearly all product assembly and final
testing of our products are performed at our manufacturing facilities in Penang,
Malaysia; Bangkok, Thailand; Suzhou, China; and Singapore; or by subcontractors
in the United States and Asia. We also depend on foreign foundry suppliers and
joint ventures for the manufacture of a portion of our finished silicon wafers.
Foreign manufacturing and construction of foreign facilities entail political
and economic risks, including political instability, expropriation, currency
controls and fluctuations, changes in freight and interest rates, and loss or
modification of exemptions for taxes and tariffs. For example, if we were unable
to assemble and test our products abroad, or if air transportation between the
United States and our overseas facilities were disrupted, there could be a
material adverse effect on our business.
Key Personnel
Our future success depends upon the continued service of numerous key
engineering, manufacturing, marketing, sales and executive personnel. We may or
may not be able to continue to attract, retain and motivate qualified personnel
necessary for our business. Loss of the service of, or failure to recruit, key
engineering design personnel could be significantly detrimental to our product
development programs, including next generation microprocessors and Flash memory
devices, or otherwise have a material adverse effect on our business.
Fluctuations in Operating Results
Our operating results are subject to substantial quarterly and annual
fluctuations due to a variety of factors, including:
. the effects of competition with Intel in microprocessor and Flash memory
device markets;
-33-
. decreases in unit average selling prices of our products due to competitive
pricing pressures or other factors;
. 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;
. production capacity levels and fluctuations in manufacturing yields;
. availability and cost of products from our suppliers;
. seasonal customer demand; and
. the timing of significant orders and the timing and extent of product
development costs.
Our operating results also tend to vary seasonally due to vacation and holiday
schedules. Our revenues are generally lower in the first, second and third
quarters of each year than in the fourth quarter. This seasonal pattern is
largely a result of decreased demand in Europe during the summer months and
higher demand in the retail sector of the personal computer market during the
winter holiday season.
In addition, operating results have recently been, and may in the future be,
adversely affected by general economic and other conditions causing a downturn
in the market for semiconductor devices, or otherwise affecting the timing of
customer orders or causing order cancellations or rescheduling. Our customers
may change delivery schedules or cancel orders without significant penalty. Many
of the factors listed above are outside of our control. These factors are
difficult to forecast, and these or other factors could materially and adversely
affect our quarterly or annual operating results.
Other Risk Factors
Technological Change and Industry Standards. The market for our products is
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition.
Currently accepted industry standards may change. Our success depends
substantially on our ability, on a cost-effective and timely basis, to continue
to enhance our existing products and to develop and introduce new products that
take advantage of technological advances and adhere to evolving industry
standards. An unexpected change in one or more of the technologies related to
our products, in market demand for products based on a particular technology or
of accepted industry standards could materially and adversely affect our
business. We may or may not be able to develop new products in a timely and
satisfactory manner to address new industry standards and technological changes,
or to respond to new product announcements by others. In addition, new products
may or may not achieve market acceptance.
Competition. The integrated circuit industry is intensely competitive and,
historically, has experienced rapid technological advances in product and system
technologies. After a product is introduced, costs and average selling prices
normally decrease over time as production efficiency
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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.
Order Revision and Cancellation Policies. We manufacture and market standard
lines of products. Sales are made primarily pursuant to purchase orders for
current delivery or agreements covering purchases over a period of time, which
may be revised or canceled without penalty. As a result, we must commit
resources to the production of products without any advance purchase commitments
from customers. Our inability to sell products after we devoted significant
resources to them could have a material adverse effect on our business.
Distributors typically maintain an inventory of our products. In most instances,
our agreements with distributors protect their inventory of our products against
price reductions, as well as products that are slow moving or have been
discontinued. These agreements, which may be canceled by either party on a
specified notice, generally allow for the return of our products if the
agreement with the distributor is terminated. The market for our products is
generally characterized by, among other things, severe price competition. The
price protection and return rights we offer to our distributors could materially
and adversely affect us if there is an unexpected significant decline in the
price of our products.
Intellectual Property Rights. It is possible that:
. we will be unable to protect our technology or other intellectual property
adequately through patents, copyrights, trade secrets, trademarks and other
measures;
. patent applications that we may file will not be issued;
. foreign intellectual property laws will not protect our intellectual
property rights;
. any patent licensed by or issued to us will be challenged, invalidated or
circumvented or that the rights granted thereunder will not provide
competitive advantages to us; and
. others will independently develop similar products, duplicate our products
or design around our patents and other rights.
From time to time, we have been notified that we may be infringing intellectual
property rights of others. If any such claims are asserted against us, we may
seek to obtain a license under the third party's intellectual property rights.
We could decide, in the alternative, to resort to
-35-
litigation to challenge such claims. Such challenges could be extremely
expensive and time-consuming and could have a material adverse effect on our
business. We cannot give any assurance that all necessary licenses can be
obtained on satisfactory terms, or whether litigation may always be avoided or
successfully concluded.
California Energy Crisis. California's two largest power companies are currently
experiencing a power shortage that has resulted in periodic "rolling" blackouts
to maintain the stability of the state power grid. Certain of our California
facilities, including our headquarters, product design, sales and process
technology development facilities, are susceptible to power interruptions as
long as the energy crisis continues. One of the power companies, PG&E, has filed
an additional contingency plan with the California Public Utilities Commission
that would, if implemented, result in lengthy and routine power interruptions
that would directly impact our leading-edge process technology development
efforts, which could have a material adverse impact on our business. We are
continuing to assess the impact of the energy crisis on our operations.
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. Any failure to
control the use of, disposal or storage of, or adequately restrict the discharge
of, hazardous substances could subject us to future liabilities and could have a
material adverse effect on our business.
International Sales. Our international sales operations entail political and
economic risks, including expropriation, currency controls, exchange rate
fluctuations, changes in freight rates and changes in rates and exemptions for
taxes and tariffs.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
history of our stock, we believe that the following factors have caused and are
likely to continue to cause the market price of our common stock to fluctuate
substantially:
. quarterly fluctuations in our operating and financial results;
. announcements of new products and/or pricing by us or our competitors;
. the pace of new process technology and product manufacturing ramps;
. production yields of key products; and
. general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or
earnings from securities analysts' expectations could have an immediate effect
on the trading price of our common stock in any given period. Technology company
stocks in general have experienced extreme price and volume fluctuations that
are often unrelated to the operating performance of the companies. This market
volatility may adversely affect the market price of our common stock and
consequently limit our ability to raise capital or to make acquisitions. Our
current long term business plan envisions substantial cash outlays which may
require external capital
-36-
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 strategic plans.
Debt Restrictions. The Dresden Loan Agreements substantially prohibit AMD Saxony
from transferring assets to us.
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 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.
-37-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In February 2001, we cancelled the interest rate swap agreement with a
counterparty under which the difference between fixed- and floating-rate
interest amounts calculated on an agreed-upon notional principal amount ($400
million) were exchanged at specified intervals. The cancellation resulted in a
gain to us of $475,000.
For additional Quantitative and Qualitative Disclosures about Market Risk,
including other foreign exchange risks associated with Dresden Fab 30, reference
is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
-38-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AMD's annual meeting of stockholders was held on April 26, 2001. The following
are the results of the voting on the proposals submitted to stockholders at the
annual meeting.
Proposal No. 1 Election of Directors. The following individuals were elected as
directors:
Name For Withheld
W.J. Sanders III 259,400,030 3,474,452
Hector de J. Ruiz 260,949,548 1,924,934
Charles M. Blalack 260,942,422 1,932,060
R. Gene Brown 260,946,780 1,927,702
Robert B. Palmer 260,956,232 1,918,250
Joe L. Roby 260,397,720 2,476,762
Friedrich Baur 260,952,910 1,921,572
Leonard Silverman 260,955,950 1,918,532
Proposal No. 2: The proposal to ratify the appointment of Ernst & Young LLP as
AMD's independent auditors for the current fiscal year was approved.
For: 260,323,157 Against: 1,464,839 Abstain: 1,086,486
Proposal No. 3: The proposal to approve the amendments to the 1996 Stock
Incentive Plan was approved.
For: 185,413,030 Against: 75,942,169 Abstain: 1,519,282 Broker Non-Vote: 1
Proposal No. 4: The proposal to reapprove the performance goals under the 1996
Executive Incentive Plan was approved.
For: 253,889,078 Against: 7,384,154 Abstain: 1,601,249 Broker Non-Vote: 1
Proposal No. 5: The proposal to approve the amendments to the 2000 Employee
Stock Purchase Plan was approved.
For: 250,342,812 Against: 11,064,097 Abstain: 1,467,572 Broker Non-Vote: 1
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
*10.23(b-1) Third Amendment to Technology Cross License Agreement,
effective April 2, 2001, between AMD and Fujitsu Limited.
*10.23(g-1) Amendment to Joint Venture License Agreement, effective
April 1, 1999, between AMD and Fujitsu Limited.
*10.23(j) Guaranty, effective as of October 1, 2000, by AMD in favor of
and for the benefit of Fujitsu Limited.
10.57 Employment Agreement, dated as of September 27, 2000, between AMD
and Robert J. Rivet.
*10.58 Patent Cross-License Agreement, dated as of May 4, 2001, between
AMD and Intel Corporation.
10.59 Loan Agreement, dated as of June 19, 2001, between AMD and Hector
and Judy Ruiz.
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated April 18, 2001, reporting under Item
5 - Other Events, was filed announcing our first quarter earnings.
2. A Current Report on Form 8-K dated May 7, 2001, reporting under
Item 5 - Other Events, was filed announcing our intention to redeem all
of our outstanding 6% Convertible Subordinated Notes due 2005 on
May 21, 2001.
* Confidential treatment has been requested with respect to certain parts of
this Exhibit.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED MICRO DEVICES, INC.
Date: August 8, 2001 By: /s/ Robert J. Rivet
----------------------------------
Robert J. Rivet
Senior Vice President, Chief
Financial Officer
Signing on behalf of the registrant
and as the principal accounting
officer
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