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 September 29, 1996
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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
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ADVANCED MICRO DEVICES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-1692300
- -------------------------------- -----------------------------------
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
One AMD Place
P. O. Box 3453
Sunnyvale, California 94088-3453
- --------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 732-2400
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares of $0.01 par value common stock outstanding as of October
31, 1996: 136,543,378.
-----------
ADVANCED MICRO DEVICES, INC.
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INDEX
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Part I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Consolidated Statements of
Operations--
Quarters Ended September 29, 1996
and October 1, 1995, and Nine Months
Ended September 29, 1996 and October 1, 1995 3
Condensed Consolidated Balance Sheets--
September 29, 1996 and December 31, 1995 4
Condensed Consolidated Statements of Cash Flows--
Nine Months Ended September 29, 1996
and October 1, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II. Other Information
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Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 32
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1. FINANCIAL INFORMATION
---------------------
ITEM 1.
-------
FINANCIAL STATEMENTS
--------------------
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(Thousands except per share amounts)
Quarter Ended Nine Months Ended
----------------------------- --------------------------------
October 1, October 1,
September 29, 1995 September 29, 1995
1996 (Restated)* 1996 (Restated)*
-------- -------- ---------- ----------
Net sales $456,862 $606,953 $1,456,151 $1,873,201
Expenses:
Cost of sales 337,692 368,359 1,086,206 989,949
Research and development 105,656 106,237 293,204 308,806
Marketing, general and administrative 90,432 102,549 276,506 311,885
-------- -------- ---------- ----------
533,780 577,145 1,655,916 1,610,640
-------- -------- ---------- ----------
Operating income (loss) (76,918) 29,808 (199,765) 262,561
Interest income and other, net 4,214 10,408 55,312 24,441
Interest expense (3,443) (315) (7,236) (1,394)
-------- -------- ---------- ----------
Income (loss) before income taxes
and equity in joint venture (76,147) 39,901 (151,689) 285,608
Provision (benefit) for income taxes (30,459) 10,212 (62,182) 92,052
-------- -------- ---------- ----------
Income (loss) before equity in joint venture (45,688) 29,689 (89,507) 193,556
Equity in net income of joint venture 7,326 12,311 41,800 13,426
-------- -------- ---------- ----------
Net income (loss) (38,362) 42,000 (47,707) 206,982
Preferred stock dividends - - - 10
-------- -------- ---------- ----------
Net income (loss) applicable to common stockholders $(38,362) $ 42,000 $ (47,707) $ 206,972
======== ======== ========== ==========
Net income (loss) per common share $ (.28) $ .30 $ (.35) $ 1.53
======== ======== ========== ==========
Shares used in per share calculation 136,082 139,288 135,019 135,451
======== ======== ========== ==========
* Restated from previously released financial information to reflect the January
1996 merger with NexGen, Inc., which has been accounted for under the
pooling-of-interests method.
See accompanying notes
- ----------------------
3
ADVANCED MICRO DEVICES, INC.
----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Thousands)
September 29, December 31,
1996 1995(1)
(Unaudited) (Restated)*
------------- -------------
Assets
- ------
Current assets:
Cash and cash equivalents $ 108,748 $ 126,316
Short-term investments 252,596 383,349
----------- -----------
Total cash, cash equivalents, and short-term investments 361,344 509,665
Accounts receivable, net 234,242 284,238
Inventories:
Raw materials 23,680 29,494
Work-in-process 97,946 68,827
Finished goods 41,863 57,665
----------- -----------
Total inventories 163,489 155,986
Deferred income taxes 149,289 147,489
Prepaid expenses and other current assets 95,287 40,564
----------- -----------
Total current assets 1,003,651 1,137,942
Property, plant, and equipment, at cost 3,231,071 2,946,901
Accumulated depreciation and amortization (1,497,804) (1,305,267)
----------- -----------
Property, plant, and equipment, net 1,733,267 1,641,634
Investment in joint venture 192,128 176,821
Other assets 124,946 122,070
----------- -----------
$ 3,053,992 $ 3,078,467
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable to banks $ 12,902 $ 26,770
Accounts payable 166,791 241,916
Accrued compensation and benefits 73,333 106,347
Accrued liabilities 107,617 103,404
Income tax payable 148 56,297
Deferred income on shipments to distributors 85,936 100,057
Current portion of long-term debt and capital lease obligations 27,711 41,642
----------- -----------
Total current liabilities 474,438 676,433
Deferred income taxes 97,407 84,607
Long-term debt and capital lease obligations, less current portion 445,489 214,965
Stockholders' equity:
Capital stock:
Common stock, par value 1,413 1,050
Capital in excess of par value 943,077 908,989
Retained earnings 1,092,168 1,192,423
----------- -----------
Total stockholders' equity 2,036,658 2,102,462
----------- -----------
$ 3,053,992 $ 3,078,467
=========== ===========
(1) The information in this column was derived from the Company's Supplemental
Audited Consolidated Balance Sheet as of December 31, 1995.
* Restated from previously released financial information to reflect the
January 1996 merger with NexGen, Inc., which has been accounted for under
the pooling-of-interests method.
See accompanying notes
- ----------------------
4
ADVANCED MICRO DEVICES, INC.
---------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(Thousands)
Nine Months Ended
------------------------------------
October 1,
September 29, 1995
1996 (Restated)*
-------------- ------------
Cash flows from operating activities
Net income (loss) (47,707) $ 206,982
Adjustments to reconcile net income (loss) to net cash:
provided by (used in) operating activities
Depreciation and amortization 248,457 180,622
Net (gain) loss on sale of property, plant, and equipment 6,252 (348)
Write-down of property, plant, and equipment 1,068 513
Net gain realized on sale of available-for-sale securities (41,028) (2,707)
Compensation recognized under employee stock plans 2,478 1,863
Undistributed income of joint venture (41,800) (13,426)
Changes in operating assets and liabilities:
Net increase in receivables, inventories, prepaid
expenses, and other assets (56,420) (84,792)
Payment of litigation settlement - (20,000)
Net (increase) decrease in deferred income taxes 11,000 (16,900)
Increase (decrease) in income tax payable (59,471) 56,260
Net increase (decrease) in payables and accrued liabilities (98,972) 111,232
-------------- ------------
Net cash provided by (used in) operating activities (76,143) 419,299
-------------- ------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (349,132) (491,176)
Proceeds from sale of property, plant, and equipment 2,278 3,046
Purchase of available-for-sale securities (518,317) (628,079)
Proceeds from sale of available-for-sale securities 692,741 582,072
Purchase of held-to-maturity debt securities - (566,619)
Proceeds from maturities of held-to-maturity debt securities - 508,635
Investment in joint venture - (18,019)
-------------- ------------
Net cash used in investing activities (172,430) (610,140)
-------------- ------------
Cash flows from financing activities:
Proceeds from borrowings 432,760 227,828
Payments on capital lease obligations and other debt (230,377) (117,270)
Proceeds from issuance of stock 28,622 96,051
Redemption of preferred stock and stockholder rights - (2,501)
Payments of preferred stock dividends - (10)
-------------- ------------
Net cash provided by financing activities 231,005 204,098
-------------- ------------
Net increase (decrease) in cash and cash equivalents (17,568) 13,257
Cash and cash equivalents at beginning of period 126,316 85,966
-------------- ------------
Cash and cash equivalents at end of period $ 108,748 $ 99,223
============== ============
Supplemental disclosures of cash flow information:
Cash paid during the first nine months for:
Interest (net of amounts capitalized) $ - $ 2,541
============== ============
Income taxes $ 4,441 $ 53,291
============== ============
Non-cash financing activities:
Equipment capital leases $ 342 $ 19,690
============== ============
Conversion of preferred stock to common stock $ - $ 270,328
============== ============
* Restated from previously released financial information to reflect the
January 1996 merger with NexGen, Inc., which has been accounted for under the
pooling-of-interest method.
See accompanying notes
- ----------------------
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The results of operations of Advanced Micro Devices, Inc. (AMD or the
Company) for the interim periods shown in this report are not necessarily
indicative of results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operations. All such adjustments are of a normal
recurring nature.
The Company uses a 52 to 53 week fiscal year ending on the last Sunday in
December. The quarters ended September 29, 1996 and October 1, 1995
included 13 weeks. The nine months ended September 29, 1996 and October 1,
1995 included 39 and 40 weeks, respectively.
Certain prior year amounts on the Condensed Consolidated Financial
Statements have been reclassified to conform to the 1996 presentation.
2. The following is a summary of available-for-sale securities included in
cash and cash equivalents and short-term investments as of September 29,
1996 (in thousands):
Cash equivalents
Certificates of deposit $ 15,000
Treasury notes 2,017
Federal agency notes 32,267
Security repurchase agreements 7,400
Commercial paper 52,064
---------
Total cash equivalents $ 108,748
=========
Short-term investments
Certificates of deposit $ 63,103
Corporate notes 18,954
Treasury notes 62,671
Commercial paper 80,368
Money market auction preferred stocks 27,500
---------
Total short-term investments $ 252,596
=========
As of September 29, 1996, the Company held $13.2 million of available-for-
sale equity securities with a fair value of $19.9 million which are
included in other assets. The net unrealized gain on these equity
securities is included in retained earnings. During the first nine months
of 1996, the Company sold a portion of its available-for-sale equity
securities and realized a pre-tax gain of $41.0 million.
6
3. The primary net income per common share computation is based on the
weighted average number of common shares outstanding plus dilutive common
share equivalents. The primary net loss per common share computation
excludes common share equivalents as their effect on the net loss per share
would be anti-dilutive. In the first quarter of 1995, the Company called
for redemption of all outstanding shares of its Convertible Preferred
Stock. As a result, all of its outstanding preferred stock was either
redeemed or converted to the Company's common stock. Shares used in the
per share computations are as follows:
Quarter Ended Nine Months Ended
------------------------------- --------------------------
September 29, October 1, September 29, October 1,
1996 1995 1996 1995
------------- ----------- ------------- ----------
(Thousands)
Common shares outstanding 135,827 130,494 134,782 126,394
Employee stock plans 255 2,290 237 5,808
Warrants - 6,504 - 3,249
------------- ----------- ------------- ----------
136,082 139,288 135,019 135,451
=========== =========== ============= ==========
4. On January 17, 1996, the Company acquired NexGen, Inc. (NexGen) in a
transaction accounted for as a pooling-of-interests. All financial data
and footnote information of the Company, including the Company's previously
issued financial statements for the periods presented in this Form 10-Q,
have been restated to include the historical financial information of
NexGen in accordance with generally accepted accounting principles.
Separate results of the combining entities for the quarter and nine
months ended October 1, 1995 are as follows:
7
Quarter ended Nine Months Ended
October 1, 1995 October 1, 1995
(Thousands) (Thousands)
---------------- ----------------
Net sales:
AMD $ 590,385 $ 1,836,695
NexGen 16,568 36,506
---------------- ----------------
$ 606,953 $ 1,873,201
================ ================
Net income (loss):
AMD $ 62,468 $ 261,849
NexGen (20,468) (54,867)
---------------- ----------------
$ 42,000 $ 206,982
================ ================
5. In August 1996, the Company sold $400.0 million of Senior Secured Notes due
August 1, 2003 under its shelf registration statement declared effective by
the Securities and Exchange Commission on May 17, 1994. Due to the sale of
the Senior Secured Notes, the Company has fully utilized its existing shelf
registration statement. Interest on the Senior Secured Notes accrues at
the rate of 11 percent per annum and is payable semi-annually in arrears on
February 1 and August 1 of each year, commencing February 1, 1997.
On July 19, 1996, the Company entered into a syndicated bank loan agreement
(the New Credit Agreement) which provides for a new $400.0 million term
loan and revolving credit facility which became available concurrently with
the sale of the Senior Secured Notes. The New Credit Agreement replaced the
Company's unsecured and unused $250.0 million line of credit and its
unsecured $150.0 million four-year term loan. The New Credit Agreement
provides for a $150.0 million three-year secured revolving line of credit
(which can be extended for one additional year, subject to approval of the
lending banks) and a $250.0 million four-year secured term loan which is
available to the Company for a period of six months after the closing of
the sale of Senior Secured Notes and which the Company expects to utilize
fully.
The Company used $150.0 million of the net proceeds to repay its existing
four-year term bank loan which was to mature on January 5, 1999. The New
Credit Agreement and the Indenture which relates to the Senior Secured
Notes contain covenants regarding limits on the Company's ability to engage
in various transactions and require maintenance of specified financial
ratio requirements. The Senior Secured Notes are redeemable at the
Company's option after August 1, 2001.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- ------- -----------------------------------------------------------------
FINANCIAL CONDITION
-------------------
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- ---------------------------------------------------------
The statements in this Management's Discussion and Analysis of Results of
Operations and Financial Condition that are forward looking are based on current
expectations and beliefs and involve numerous risks and uncertainties that could
cause actual results to differ materially. The forward looking statements
relate to operating results, cash flow, capital expenditures and adequacy of
resources to fund operations and capital investments; future business prospects
for microprocessors, Flash memory device products and other product lines; the
effect of foreign exchange contracts; the development, validation,
certification, introduction, market acceptance and pricing of the K86(TM)
products; the impact of the Company's acquisition of NexGen, Inc. (NexGen); the
Company's commitment to research and development; the planned build-out of Fab
25 (as defined below); and the proposed Dresden and FASL II manufacturing
facilities (which are defined below). See "Financial Condition" and "Risk
Factors" below, as well as such other risks and uncertainties as are detailed in
the Company's Securities and Exchange Commission reports and filings for a
discussion of the factors that could cause the actual results to differ
materially from the forward looking statements.
The following discussion should be read in conjunction with the attached
Condensed Consolidated Financial Statements and Notes thereto, and with the
Company's Supplemental Consolidated Financial Statements and Notes thereto at
December 31, 1995 and December 25, 1994, and for each of the three years in the
period ended December 31, 1995. On January 17, 1996, the Company acquired
NexGen in a transaction accounted for as a pooling-of-interests. All financial
data and footnote information of the Company, including the Company's previously
issued financial statements for the periods discussed herein, have been restated
to give retroactive effect to the merger with NexGen.
Am486 and Nx586 are registered trademarks of AMD.
K86, K86 RISC SUPERSCALAR, AMD-K5, AMD-K6, SLAC, and Nx686 are trademarks of
AMD.
Windows and WindowsNT are registered trademarks of Microsoft Corporation.
9
RESULTS OF OPERATIONS
- ---------------------
Net sales were $456.9 million for the third quarter of 1996 as compared to
$607.0 million for the same period in 1995 and $455.1 million for the second
quarter of 1996. For the nine month period ended September 29, 1996, net sales
decreased to $1,456.2 million from $1,873.2 million for the comparable period in
1995. Net sales decreased in the third quarter of 1996 as compared to the
corresponding period in 1995 primarily due to a decline in Am486(R)
microprocessor sales as average selling prices decreased significantly, and
secondarily due to a decline in Flash memory device sales. These decreases were
partially offset by increased sales of AMD-K5(TM) microprocessors. Net sales
decreased in the nine month period ended September 29, 1996 as compared to the
corresponding period in 1995 primarily due to a decline in Am486 microprocessor
sales, as average selling prices decreased significantly.
Communications and Components Group (CCG) net sales were $284.2 million for the
third quarter of 1996 as compared to $324.2 million for the same period in 1995
and $290.1 million for the second quarter of 1996. For the nine month period
ended September 29, 1996, CCG net sales increased to $922.7 million from $859.3
million for the comparable period in 1995. The three main factors contributing
to the decrease in CCG net sales in the third quarter of 1996 as compared to the
same period in 1995, were first, a decline in Flash memory device sales, as
average selling prices declined; second, a decline in unit shipments of bipolar
programmable logic devices; and third, a decline in Erasable Programmable Read-
Only Memories (EPROMs) sales, as average selling prices declined. CCG net sales
increased in the nine month period ended September 29, 1996 as compared to the
corresponding period in 1995 primarily due to increased unit shipments of Flash
memory devices, and secondarily due to an increase in unit shipments of AMD's
Subscriber Line Interface Circuit (SLIC) and Subscriber Line Audio-Processing
Circuit (SLAC(TM)) products. These increases were partially offset by a decline
in unit shipments of bipolar programmable logic devices. The market for the
Company's Flash memory devices in 1996 has been characterized by increased
competition and falling prices. There can be no assurance that these trends
will not continue or accelerate.
Programmable Logic Division (PLD) net sales were $58.1 million for the third
quarter of 1996 as compared to $68.1 million for the same period in 1995 and
$61.6 million for the second quarter of 1996. For the nine month period ended
September 29, 1996, PLD net sales increased to $189.2 million from $186.8
million for the comparable period in 1995. PLD net sales in the third quarter
of 1996 decreased from the comparable period in 1995 due to decreased unit
shipments and declines in average selling prices. The Company believes this
decline in net sales is attributable to decreased market demand in the simple
programmable logic market. There can be no assurance that this trend will not
continue.
10
Computation Products Group (CPG) net sales were $114.6 million for the third
quarter of 1996 as compared to $214.7 million for the same period in 1995 and
$103.4 million for the second quarter of 1996. For the nine month period ended
September 29, 1996, CPG net sales decreased to $344.3 million from $827.1
million for the comparable period in 1995. CPG net sales increased in the third
quarter of 1996 as compared to the immediate prior quarter due to higher unit
shipments of AMD-K5 microprocessors which more than offset the decline in Am486
microprocessor sales. The decline in CPG net sales was in each other case due
to increased market acceptance of higher performance fifth generation
microprocessors from Intel Corporation, coupled with the Company's delay in
introducing competitive fifth generation microprocessors. Average selling prices
for fourth generation microprocessors, including the Company's Am486
microprocessor, have continued to decline as the product life cycle ages. The
Company's fifth generation microprocessor, the AMD-K5 microprocessor, was
introduced relatively late in the life cycle of fifth generation products. As
such, the Company believes the AMD-K5 microprocessor will be a transitional
product and will be unlikely to generate levels of sales achieved by the Am486
microprocessor over its product life.
Gross margins were 26 percent for the third quarter of 1996 as compared to 39
percent for the same period in 1995. For the nine month period ended September
29, 1996, gross margins decreased to 25 percent from 47 percent for the
comparable period in 1995. The gross margin declines were due to lower sales
and underutilization of the Company's production facilities.
Research and development expenses were $105.7 million for the third quarter of
1996 as compared to $106.2 million for the same period in 1995. For the nine
month period ended September 29, 1996, research and development expenses
decreased to $293.2 million from $308.8 million for the comparable period in
1995.
Marketing, general and administrative expenses were $90.4 million for the third
quarter of 1996 as compared to $102.5 million for the same period in 1995 and
$83.1 million for the second quarter of 1996. For the nine month period ended
September 29, 1996, marketing, general and administrative expenses decreased to
$276.5 million from $311.9 million for the comparable period in 1995.
Marketing, general and administrative expenses in the third quarter of 1996
increased from the immediate prior quarter primarily due to a charge of
approximately $6.0 million for employee severance pay and benefits associated
with a work force reduction. The decline in marketing, general and
administrative expenses was in each other case primarily due to the cessation of
promotional expenses associated with NexGen's products, which the Company no
longer offers.
Interest income and other, net was $4.2 million for the third quarter of 1996 as
compared to $10.4 million for the same period in 1995 and $23.0 million for the
second quarter of 1996. For the nine month period ended September 29, 1996,
interest income and other, net increased to $55.3 million from $24.4 million for
the
11
comparable period in 1995. The Company's quarter ended June 30, 1996 and
nine month period ended September 29, 1996 include pre-tax gains of $16.3
million and $41.0 million, respectively, resulting from the sales of equity
investments.
Interest expense was $3.4 million for the third quarter of 1996 as compared to
$0.3 million for the same period in 1995 and $1.8 million for the second quarter
of 1996. For the nine month period ended September 29, 1996, interest expense
increased to $7.2 million from $1.4 million for the comparable period in 1995.
Interest expense increased from the immediate prior quarter primarily due to
interest expense incurred on the Company's Senior Secured Notes sold in August
1996, partially offset by higher capitalized interest mainly related to the
second phase of equipment installation at AMD's manufacturing facility in
Austin, Texas (Fab 25) to increase its production capacity. Gross interest
expense increased in the third quarter and the nine month periods ended
September 29, 1996 from 1995, and is expected to increase in the future,
primarily due to interest expense incurred on the Company's Senior Secured Notes
as discussed above.
During the third quarter of 1996, the Company recorded a tax credit of $30.5
million. This results in an effective tax rate (benefit) of approximately 40
percent for the third quarter and nine month periods ended September 29, 1996.
The income tax rate was 26 percent and 32 percent in the third quarter and the
first nine months of 1995, respectively.
International sales were 53 percent of net sales in the third quarter of 1996 as
compared to 56 percent for the same period in 1995 and 53 percent for the second
quarter of 1996. For the nine month period ended September 29, 1996,
international sales decreased to 52 percent of net sales from 58 percent for the
comparable period in 1995. Approximately 17 percent of the Company's net sales
were denominated in foreign currencies in the first nine months of 1996. The
Company does not have sales denominated in local currencies in those countries
which have highly inflationary economies. (A highly inflationary economy is
defined in accordance with the Statement of Financial Accounting Standards No.
52 as one in which the cumulative inflation over a three-year consecutive period
approximates 100 percent or more.) The impact on the Company's operating
results from changes in foreign currency rates individually and in the aggregate
has not been material.
The Company enters into foreign exchange forward contracts to buy and sell
currencies as economic hedges of the Company's foreign net monetary asset
position including the Company's liabilities for products purchased from its
manufacturing joint venture with Fujitsu Limited, Fujitsu AMD Semiconductor
Limited (FASL). In 1995 and 1996, these hedging transactions were denominated
in lira, yen, French franc, Deutsche mark, and pound sterling. The maturities
of these contracts are generally short-term in nature. The Company believes its
foreign exchange contracts do not subject the Company to material risk from
exchange rate movements because gains and losses on these contracts are designed
to offset losses and gains on the net monetary asset position being hedged. Net
foreign currency gains and losses have not
12
been material. As of September 29, 1996, the Company had approximately $34.3
million (notional amount) of foreign exchange forward contracts.
The Company has engaged in interest rate swaps primarily to reduce its interest
rate exposure by changing a portion of the Company's interest rate obligation
from a floating rate to a fixed rate basis. At September 29, 1996, the net
outstanding notional amount of interest rate swaps was $165.0 million, of which
$125.0 million will mature in 1996 and $40.0 million will mature in 1997. Gains
and losses related to these interest rate swaps have been immaterial.
The Company participates as an end user in various derivative markets to manage
its exposure to interest and foreign currency exchange rate fluctuations. The
counterparties to the Company's foreign exchange forward contracts and interest
rate swaps consist of a number of major, high credit quality, international
financial institutions. The Company does not believe that there is significant
risk of nonperformance by these counterparties because the Company monitors the
credit ratings of such counterparties, and reduces the financial exposure by
limiting the amount of agreements entered into with any one financial
institution.
FINANCIAL CONDITION
- -------------------
The Company's working capital balance increased to $529.2 million at September
29, 1996 from $461.5 million at December 31, 1995 primarily due to $400.0
million of cash received from the sale of its Senior Secured Notes in the third
quarter of 1996, which was partially offset by both repayment of the Company's
$150.0 million four-year term bank loan, and continued capital spending,
particularly on Fab 25. The Company's operations required the use of $76.1
million in cash for the nine months ended September 29, 1996. The Company's
cash, cash equivalents and short-term investments balance was approximately
$361.3 million at September 29, 1996 compared to $509.7 million at December 31,
1995.
Excluding the cash received from the sale of the Senior Secured Notes, the
Company's capital investments and its recent operating performance have resulted
in significant negative cash flow and the Company anticipates negative cash flow
through the remainder of 1996. In 1996, the Company has made substantial
capital investments in its process technology and manufacturing capacity based,
in part, upon Company and industry projections regarding future growth in the
market for integrated circuits (ICs). The Company plans to continue to make
significant capital investments through the remainder of 1996 and in 1997. The
Company's current capital plan and requirements are based on the availability of
financial resources and various product-mix, selling-price, and unit-demand
assumptions and are, therefore, subject to revision.
The Company plans to construct an 875,000 square foot submicron integrated
circuit manufacturing and design facility in Dresden, in the State of Saxony,
Germany (the Dresden Facility) over the next five years at a presently estimated
cost in Deutsche
13
marks equivalent to approximately $1.5 billion (under current exchange rates).
It is presently intended that the Dresden Facility will be dedicated to the
production of microprocessors and other advanced logic products. The governments
of the Federal Republic of Germany and the State of Saxony have agreed to
provide financing assistance for the Dresden Facility through grants and
allowances in Deutsche marks in an aggregate amount equivalent to approximately
$350.0 million at current exchange rates, interest subsidies in Deutsche marks
in an aggregate amount equivalent to approximately $200.0 million at current
exchange rates, and loan guarantees. Through 1997, AMD currently intends to
invest in the Dresden Facility, through a wholly owned subsidiary (the German
Subsidiary) or through a wholly-owned intermediate holding company, as
appropriate, an aggregate amount in Deutsche marks which is equivalent to
approximately $150.0 million at current exchange rates. The planned Dresden
Facility costs are denominated in Deutsche marks and, therefore, are subject to
change due to foreign exchange rate fluctuations.
The Company's total cash investment in FASL was $160.4 million at the end of
the third quarter of 1996 and at the end of 1995. No additional cash investment
is currently planned for the remainder of 1996. In March of 1996, FASL began
construction of a second Flash memory device wafer fabrication facility (FASL
II) at a site contiguous to the existing FASL facility in Aizu-Wakamatsu, Japan.
The facility is expected to cost approximately $1.1 billion when fully equipped.
Capital expenditures for FASL II construction are expected to be funded by the
cash anticipated to be generated from FASL operations and, if necessary, bank
borrowings by FASL. To the extent that FASL is unable to secure the necessary
funds for FASL II, AMD may be required to contribute cash or guarantee third-
party loans in proportion to its percentage interest in FASL. At September 29,
1996, AMD had loan guarantees of $12.6 million outstanding with respect to such
loans. The planned FASL II costs are denominated in yen and, therefore, are
subject to change due to foreign exchange rate fluctuations.
In August 1996, the Company sold $400.0 million of Senior Secured Notes due
August 1, 2003 under its shelf registration statement declared effective by the
Securities and Exchange Commission on May 17, 1994. Due to the sale of the
Senior Secured Notes, the Company has fully utilized its existing shelf
registration statement. Interest on the Senior Secured Notes accrues at the rate
of 11 percent per annum and is payable semi-annually in arrears on February 1
and August 1 of each year, commencing February 1, 1997.
The net proceeds to the Company from the sale of Senior Secured Notes, after
deducting underwriting discounts and commissions and estimated expenses of the
sale of Senior Secured Notes, were approximately $389.0 million. The Company
used $150.0 million of the net proceeds to repay its existing four-year term
bank loan which was to mature on January 5, 1999. The Company expects to use the
balance of the net proceeds of approximately $239.0 million for general
corporate purposes.
14
On July 19, 1996, the Company entered into a syndicated bank loan agreement (the
New Credit Agreement) which provides for a new $400.0 million term loan and
revolving credit facility which became available concurrently with the sale of
the Senior Secured Notes. The New Credit Agreement replaced the Company's
unsecured and unused $250.0 million line of credit and its unsecured $150.0
million four-year term loan. The New Credit Agreement provides for a $150.0
million three-year secured revolving line of credit (which can be extended for
one additional year, subject to approval of the lending banks) and a $250.0
million four-year secured term loan which is available to the Company for a
period of six months after the closing of the sale of Senior Secured Notes and
which the Company expects to utilize fully.
The Company believes that current cash balances, together with cash flows, will
be sufficient to fund operations and capital investments currently planned
through 1997.
RISK FACTORS
- ------------
The Company's business, results of operations and financial condition are
subject to the following risk factors:
Microprocessor Products
Intel Dominance. Intel Corporation (Intel) has long held a dominant position in
- ---------------
the market for microprocessors used in personal computers (PCs). Intel's
dominant market position has to date allowed it to set x86 microprocessor
standards and thus dictate the type of product the market requires of Intel's
competitors. In addition, Intel's financial strength has enabled it to reduce
prices on its microprocessor products within a short period of time following
their introduction, which reduces the margins and profitability of its
competitors. AMD believes that the process technologies used in the fabrication
of the Company's microprocessors are currently somewhat behind those of Intel.
The Company expects Intel to continue to invest heavily in research and
development and new manufacturing facilities and to maintain its dominant
position through advertising campaigns designed to engender brand loyalty to
Intel among PC purchasers. In addition to its dominant microprocessor market
share, Intel also dominates the PC platform in other manners. For example, Intel
has obtained a dominant market share in sales of 64-bit or Pentium-class core
logic chip sets, has emerged as the world's largest motherboard manufacturer,
has become a significant manufacturer of personal computers, incorporating Intel
microprocessors, chip sets, motherboards and other Intel-designed components for
resale by third-party original equipment manufacturers (OEMs) under such OEMs'
names, and has purchased an equity interest in Phoenix Technologies Ltd., a
company which has a significant share of the market for BIOS software (basic
input/output system software encoded in read-only memory which controls access
to devices connected to a PC, such as the monitor and the serial communications
port). The Company does not have the financial resources to compete with Intel
on such a large
15
scale. As long as Intel remains in this dominant position, its product
introduction schedule, product pricing strategy and customer brand loyalty may
continue to have a material adverse effect on the Company, as they have had in
the past.
As Intel has expanded its role in designing and setting standards for PC
systems, many PC OEMs have reduced their system development expenditures and
have begun to purchase microprocessors in conjunction with chip sets or in
assembled motherboards. In marketing its microprocessors to these OEMs and
dealers, AMD is dependent upon companies other than Intel for the design and
manufacture of core-logic chip sets, motherboards, BIOS software and other
components. In recent years, these third-party designers and manufacturers have
lost market share to Intel. In addition, these companies are able to produce
chip sets, motherboards, BIOS software and other components to support each new
generation of Intel's microprocessors only to the extent that Intel makes its
related proprietary technology available. Any delay in the availability of such
technologies would make it increasingly difficult for them to retain or regain
market share. To compete with Intel in this market in 1996 and beyond, the
Company intends to form closer relationships with third-party designers and
manufacturers of core-logic chip sets, motherboards, BIOS software and other
components, expand its chip set and system design capabilities, and sell a
portion of the Company's processors along with chip sets and license system
designs incorporating the Company's processors and products resulting from AMD's
relationships with such third party designers and manufacturers to OEMs. There
can be no assurance, however, that such efforts by the Company will be
successful. The Company expects that as Intel introduces future generations of
microprocessors, chip sets and motherboards, the design of chip sets and higher
level board products which support Intel microprocessors will become
increasingly dependent on the Intel microprocessor design and may become
incompatible with non-Intel PC systems. If the infrastructure of third-party
designers and manufacturers which supports non-Intel PC platforms were to fail
to continue to support the Company's products or to offer products competitive
with Intel's, the Company could experience difficulties marketing its
microprocessors, which could have a material adverse effect on the Company.
Dependence on New AMD Microprocessor Products. Am486 microprocessor products
- ---------------------------------------------
contributed a significant portion of AMD's revenues, profits and margins in 1994
and 1995. Am486 microprocessor revenues, profits and margins in 1996 will be
significantly below those of 1995. As the product life cycle of fourth-
generation x86 products ages, AMD's ability to maintain or expand its
current levels of revenues from microprocessor products, and its ability to
benefit fully from the substantial financial commitments it has made to process
technologies and integrated circuit manufacturing facilities dedicated to
the production of microprocessors, will depend upon its success in developing
and marketing in a timely manner its next generations of microprocessor
products, the K86 RISC SUPERSCALAR(TM) products. The Company is now shipping
its K86 products including the 133 and 150 megahertz (MHz) AMD-K5 products
which are designed to be competitive with the Pentium, Intel's fifth
16
generation microprocessor. The Company anticipates that the AMD-K5
microprocessor, which was introduced relatively late in the life cycle of fifth
generation microprocessor products, will be a transitional product, unlikely to
result in the levels of revenue for the Company realized from the Am486
microprocessor. The Company's AMD-K5 products have not, to date, achieved
substantial market acceptance, which has had and continues to have a material
adverse effect on the Company. The Company acquired NexGen in January 1996, in
part, to accelerate the introduction of its microprocessor products,
particularly its sixth generation products. The Company is modifying NexGen's
sixth-generation design using AMD's design, verification and manufacturing
technologies. With these changes, AMD intends to develop and produce the AMD-
K6(TM) microprocessor. AMD does not expect any sales of the AMD-K6 products in
1996. The Company intends to begin volume shipments of the AMD-K6 products in
the first half of 1997, although no assurance can be given that such shipments
will occur. The Company's production and sales plans for K86 microprocessors,
including the AMD-K6 microprocessor, are subject to numerous risks and
uncertainties, including the timing of the introduction of future AMD-K5
products and of AMD-K6 products, the possibility that volume shipments of the
AMD-K6 may be delayed due to the time required to verify operating systems and
application software compatibility, the development of market acceptance for the
AMD-K5 and the AMD-K6 products particularly with leading OEMs of PCs, the
effects of marketing and pricing strategies adopted by Intel, the possible
adverse effects of existing and future customer inventory levels, the pace at
which the Company is able to ramp production of fifth and sixth generation
microprocessors in Fab 25, the possibility that products newly introduced by the
Company may be found to be defective, possible adverse conditions in the
personal computer market and unexpected interruptions in the Company's
manufacturing operations. A failure of the Company's K86 products, particularly
the AMD-K6, to be timely introduced or to achieve market acceptance, would have
a material adverse effect on the Company.
Dependence on Market Acceptance of x86 Standard and Dominance of Windows.
- ------------------------------------------------------------------------
Customer acceptance of AMD's K86 products will depend upon the continued demand
for x86-based personal computers, including the continued development of
application software programs for such computers. There can be no assurance of
the continued acceptance of the x86 standard or that software developers will
continue to develop software compatible with this standard. AMD's K86 products
will face competition not only from x86 products manufactured by Intel and
others but also from products based upon an increasing number of different
architectures which have been developed or are under development by Hewlett-
Packard, IBM, Motorola, Silicon Graphics, Sun Microsystems, Digital Equipment
Corporation and other manufacturers of integrated circuits. Several of these
manufacturers, such as Motorola, Digital Equipment Corporation, Silicon Graphics
and Sun Microsystems, produce microprocessors which are designed to be
compatible with such operating systems as WindowsNT(R) and UNIX but not with
Windows(R). Currently, as a result of the dominance of the Windows operating
system, which operates with x86 based PCs, AMD is able to market its
microprocessors without significant competition from
17
these manufacturers. AMD would lose much of this advantage if the Microsoft
Windows operating system should be displaced as the dominant operating system
software by one or more other systems, such as WindowsNT or UNIX. A reduction in
the market acceptance of either the x86 standard or the Windows operating system
could have a material adverse effect on the Company.
Compatibility Certifications. For its future generations of K86 microprocessors,
- ----------------------------
AMD intends to obtain Windows and Windows 95 certifications from Microsoft and
other appropriate certifications from recognized testing organizations. A
failure to obtain certification from Microsoft would prevent the Company from
describing and labeling its K86 microprocessors as Microsoft Windows compatible.
This could substantially impair the Company's ability to market the products and
could have a material adverse effect on the Company.
Acquisition of NexGen. AMD believes that its acquisition of NexGen is important
- ---------------------
to the development and introduction of its K86 products, particularly the AMD-K6
microprocessor. AMD has acquired and is currently developing new technologies
to manufacture its sixth generation microprocessor which will utilize NexGen's
sixth generation design as modified by AMD. There can be no assurance that AMD
will be successful in implementing these new technologies. If the new
technologies cannot be successfully implemented or if AMD encounters other
difficulties in manufacturing its sixth generation microprocessors, such an
event would have a material adverse effect on the Company.
Fluctuation in PC Market. Since most of AMD's microprocessor products are used
- ------------------------
in personal computers and related peripherals, AMD's future growth is closely
tied to the performance of the PC industry. The Company could be materially and
adversely affected by industry-wide fluctuations in the PC marketplace in the
future.
Possible Rights of Others. Prior to its acquisition by AMD, NexGen granted
- -------------------------
limited manufacturing rights regarding certain of its current and future
microprocessors, including the Nx586(R) and Nx686(TM), to IBM and Compaq. The
Company does not intend to produce any NexGen products as it is the Company's
position that its forthcoming AMD-K6 products are AMD products and not NexGen
products. There can be no assurance that neither IBM nor Compaq will seek to
establish rights with respect to the products. If either IBM or Compaq or both
were deemed to have rights to produce AMD's AMD-K6 products for their own use
and IBM were deemed to have the right to produce limited volumes of such
products for sale to third parties, such production could reduce the potential
market for microprocessor products produced by AMD, the profit margin achievable
with respect to such products, or both.
18
Manufacturing
Underutilized Capacity. The Company's manufacturing facilities are currently
- ----------------------
underutilized as a result of reduced demand for certain of the Company's
products and may remain so until the Company has developed new products and such
products have achieved market acceptance. The Company's operations related to
microprocessors are particularly affected by this situation. The
underutilization of the Company's manufacturing facilities is having, and could
continue to have, a material adverse effect on the Company. The Company plans to
increase its manufacturing capacity by making significant capital investments in
Fab 25 and in its German Subsidiary which will construct an integrated circuit
manufacturing facility, which is presently intended to be dedicated to the
production of microprocessors and other advanced logic products. In addition,
FASL has begun construction of a second Flash memory device manufacturing
facility (FASL II). There can be no assurance that the industry projections
regarding future growth in the markets for integrated circuits upon which the
Company is basing its strategy of increasing its manufacturing capacity will
prove to be accurate. If demand for the Company's products does not increase,
the underutilization of the Company's manufacturing facilities will likely
increase and have a material adverse effect on the Company.
Process Technology. Manufacturers of integrated circuits are constantly seeking
- ------------------
to improve the process technologies used to manufacture their products. In order
to remain competitive, the Company must make continuing substantial investments
in improving its process technologies. In particular, the Company has made and
continues to make significant research and development investments in the
technologies and equipment used in the fabrication of its microprocessor
products and by FASL in the fabrication of Flash memory devices. Portions of
these investments might not be recoverable if the Company's K86 microprocessors
fail to gain market acceptance or if the market for its Flash memory products
should significantly deteriorate. This could have a material adverse effect on
the Company. In addition, any inability of the Company to remain competitive
with respect to process technology could have a material adverse effect on the
Company.
Commitments to Facilities Dedicated to Specific Products. The Company has made
- --------------------------------------------------------
and plans to continue to make substantial capital investments in integrated
circuit manufacturing facilities dedicated to the production of specific product
lines. AMD has invested over $970.0 million in Fab 25 and ancillary facilities
as of September 29, 1996, and currently expects to have invested over $1.2
billion by the end of 1997 and over $1.6 billion by the end of 1999, although
the Company is not obligated to make such further investments. Fab 25 is
currently dedicated to the production of Microsoft Windows compatible
microprocessors. Other facilities of the Company are also dedicated to the
production of specific product lines. In addition, the Company's German
Subsidiary currently plans to construct a semiconductor manufacturing facility,
at an estimated cost of $1.5 billion over 5 years, which will be dedicated to
the production of microprocessors. Significant time and expense would be
incurred
19
were the Company to alter any of its facilities so that they could be used to
produce other IC products. Any such alteration, resulting from a need to respond
to changes in the markets for the Company's products or otherwise, could have a
material adverse effect on the Company.
Manufacturing Constraints. While the Company's manufacturing facilities are
- -------------------------
currently underutilized, there have been situations in the past in which the
Company's manufacturing facilities were inadequate to enable the Company to meet
demand for certain of its products. In addition to having its own fabrication
facilities, AMD has foundry arrangements for the production of its products by
third parties. Any inability of AMD to generate sufficient manufacturing
capabilities to meet demand, either in its own facilities or through foundry or
similar arrangements with others, could have a material adverse effect on the
Company.
Manufacturing Interruptions. Any substantial interruption with respect to any of
- ---------------------------
AMD's manufacturing operations, either as a result of a labor dispute, equipment
failure or other cause, could have a material adverse effect on the Company. The
Company may also be materially adversely affected by fluctuations in
manufacturing yields.
Essential Manufacturing Materials. Certain of the raw materials used by AMD in
- ---------------------------------
the manufacture of its products are available from a limited number of
suppliers. For example, several types of the integrated circuit packages
purchased by AMD, as well as by the majority of other companies in the
semiconductor industry, are principally supplied by Japanese companies.
Shortages could occur in various essential materials due to interruption of
supply or increased demand in the industry. If AMD were unable to procure
certain of such materials from any source, it would be required to reduce its
manufacturing operations which could have a material adverse effect on the
Company.
International Manufacturing. Nearly all product assembly and final testing of
- ---------------------------
AMD's products are performed at its manufacturing facilities in Penang,
Malaysia; Singapore; and Bangkok, Thailand; or by subcontractors in Asia.
Foreign manufacturing entails political and economic risks, including political
instability, expropriation, currency controls and fluctuations, changes in
freight and interest rates, and loss or modification of exemptions for taxes and
tariffs. For example, if AMD were unable to assemble and test its products
abroad, or if air transportation between the United States and AMD's overseas
facilities were disrupted, there could be a material adverse effect on the
Company.
20
Other Risk Factors
Debt Restrictions. The New Credit Agreement and the Indenture related to the
- -----------------
Senior Secured Notes contain significant covenants that limit the Company's and
its subsidiaries' ability to engage in various transactions and, in certain
cases, require satisfaction of specified financial performance criteria. In
addition, the occurrence of certain events (including, without limitation,
failure to comply with the foregoing covenants, material inaccuracies of
representations and warranties, certain defaults under or acceleration of other
indebtedness and events of bankruptcy or insolvency) would, in certain cases
after notice and grace periods, constitute events of default permitting
acceleration of the indebtedness under the New Credit Agreement and the
Indenture. The limitations imposed by the New Credit Agreement and the Indenture
are substantial, and failure to comply with such limitations could have a
material adverse effect on the Company.
Importance of Flash Memory Device Business; Recent Pricing Weakness. The market
- -------------------------------------------------------------------
for Flash memory devices has recently experienced rapid growth and is likely to
become increasingly competitive as additional manufacturers introduce
competitive products and production capacity in the industry increases. The
Company's primary competition with respect to Flash memory devices is Intel. A
substantial portion of the Company's revenues are derived from sales of Flash
memory devices, and the Company expects that this will continue to be the case.
During 1996, the Company has experienced declines in the selling prices of Flash
memory devices. There can be no assurance that the Company will be able to
maintain its market share in Flash memory devices or that price declines may not
accelerate as the market develops and as new competitors emerge. A decline in
the Company's Flash memory device business could have a material adverse effect
on the Company.
Dependence on Third Party for PLD Software. Customers utilizing programmable
- -------------------------------------------
logic devices must use special software packages, generally provided by the
suppliers of the programmable logic devices, to program these devices. AMD
currently provides its programmable logic device customers with software which
it licenses from MINC, Inc. (MINC), an unaffiliated company, and is dependent
upon MINC for the software and continuing improvements in the software. An
inability of AMD to continue to obtain appropriate software and improvements
from MINC, to license alternative software from another third party, or to
develop its own software internally could adversely affect AMD's PLD business,
including the timing of new or improved product introductions, which could have
a material adverse effect on the Company.
Technological Change and Industry Standards. The market for AMD's products is
- -------------------------------------------
generally characterized by rapid technological developments, evolving industry
standards, changes in customer requirements, frequent new product introductions
and enhancements, short product life cycles and severe price competition. The
establishment of industry standards is a function of market acceptance.
Currently accepted industry standards may change at any time. AMD's success
depends
21
substantially upon its ability, on a cost-effective and timely basis, to
continue to enhance its existing products and to develop and introduce new
products that take advantage of technological advances and adhere to evolving
industry standards. An unexpected change in one or more of the technologies
related to its products, in market demand for products based on a particular
technology or in accepted industry standards could have a material adverse
effect on the Company. There can be no assurance that AMD will be able to
develop new products in a timely and satisfactory manner to address new industry
standards and technological changes, or to respond to new product announcements
by others, or that any such new products will achieve market acceptance.
Product Incompatibility. While AMD submits its products to rigorous internal and
- -----------------------
external testing, there can be no assurance that AMD's products will be
compatible with all industry standard software and hardware. Any inability of
AMD's customers to achieve such compatibility or compatibility with other
software or hardware after AMD's products are shipped in volume could have a
material adverse effect on the Company. There can be no assurance AMD will be
successful in correcting any such compatibility problems that are discovered or
that such corrections will be acceptable to customers or made in a timely
manner. In addition, the mere announcement of an incompatibility problem
relating to the Company's products could have a material adverse effect on the
Company.
Competition. The integrated circuit industry is intensely competitive and,
- -----------
historically, has experienced rapid technological advances in product and system
technologies together with substantial price reductions in maturing products.
After a product is introduced, prices normally decrease over time as production
efficiency and competition increase, and a successive generation of products is
developed and introduced for sale. Technological advances in the industry result
in frequent product introductions, regular price reductions, short product life
cycles and increased product capabilities that may result in significant
performance improvements. Competition in the sale of integrated circuits is
based upon performance, product quality and reliability, price, adherence to
industry standards, software and hardware compatibility, marketing and
distribution capability, brand recognition, financial strength and ability to
deliver in large volumes on a timely basis.
Fluctuations in Operating Results. AMD's operating results are subject to
- ----------------------------------
substantial quarterly and other fluctuations due to a variety of factors,
including the effects of competition with Intel in the microprocessor industry,
competitive pricing pressures, anticipated decreases in unit average selling
prices of AMD's products, fluctuations in manufacturing yields, availability and
cost of products from AMD's suppliers, the gain or loss of significant
customers, new product introductions by AMD or its competitors, changes in the
mix of products sold and in the mix of sales by distribution channels, market
acceptance of new or enhanced versions of AMD's products, seasonal customer
demand, the timing of significant orders and the timing and extent of product
development costs. In addition, operating results could be
22
adversely affected by general economic and other conditions affecting the timing
of customer orders, a downturn in the market for PCs, and order cancellations or
rescheduling. AMD's customers may change delivery schedules or cancel orders
without significant penalty. Many of the factors listed above are outside of
AMD's control. These factors are difficult to forecast, and these or other
factors could materially adversely affect AMD's quarterly or annual operating
results.
Order Revision and Cancellation Policies. AMD manufactures and markets a
- ----------------------------------------
standard line of products. Sales are made primarily pursuant to purchase orders
for current delivery, or agreements covering purchases over a period of time,
which are frequently subject to revision and cancellation without penalty. As a
result, AMD must commit resources to the production of products without having
received advance purchase commitments from customers. Any inability to sell
products to which it had devoted significant resources could have a material
adverse effect on the Company. Distributors typically maintain an inventory of
AMD's products. Pursuant to the Company's agreements with the distributors, AMD
protects its distributors' inventory of AMD's products against price reductions
as well as products that are slow moving or have been discontinued. These
agreements, which may be canceled by either party on a specified notice,
generally contain a provision for the return of AMD's products in the event the
agreement with the distributor is terminated. The price protection and return
rights AMD offers to its distributors may materially adversely affect the
Company.
Key Personnel. AMD's future success depends upon the continued service of
- -------------
numerous key engineering, manufacturing, sales and executive personnel. There
can be no assurance that AMD will be able to continue to attract and retain
qualified personnel necessary for the development and manufacture of its
products. Loss of the service of, or failure to recruit, key engineering design
personnel could be significantly detrimental to AMD's product development
programs or otherwise have a material adverse effect on the Company.
Product Defects. One or more of AMD's products may possibly be found to be
- ---------------
defective after AMD has already shipped such products in volume, requiring a
product replacement, recall, or a software fix which would cure such defect but
impede performance. Product returns could impose substantial costs on AMD and
have a material adverse effect on the Company.
Intellectual Property Rights; Potential Litigation. Although AMD attempts to
- --------------------------------------------------
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that AMD will be able to
protect its intellectual property adequately or that competitors will not be
able to develop similar technology independently. There can be no assurance that
any patent applications that AMD may file will be issued or that foreign
intellectual property laws will protect AMD's intellectual property rights.
There can be no assurance that any patent licensed by or issued to AMD will not
be challenged, invalidated or circumvented or
23
that the rights granted thereunder will provide competitive advantages to AMD.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate AMD's products or design around the patents
issued to or licensed by AMD.
From time to time, AMD has been notified that it may be infringing intellectual
property rights of others. If any such claims are asserted against AMD, AMD may
seek to obtain a license under the third party's intellectual property rights.
AMD could decide, in the alternative, to resort to litigation to challenge such
claims. Such challenges could be extremely expensive and time consuming and
could materially adversely affect the Company. For example, for many years the
Company was involved in intellectual property litigation with Intel which was
settled in 1995. The litigation required substantial resources of the Company.
No assurance can be given that all necessary licenses can be obtained on
satisfactory terms, or that litigation may always be avoided or successfully
concluded.
Environmental Regulations. The failure to comply with present or future
- -------------------------
governmental regulations related to the use, storage, handling, discharge or
disposal of toxic, volatile or otherwise hazardous chemicals used in the
manufacturing process could result in fines being imposed on AMD, suspension of
production, alteration of AMD's manufacturing processes or cessation of
operations. Such regulations could require AMD to acquire expensive remediation
equipment or to incur other expenses to comply with environmental regulations.
Any failure by AMD to control the use, disposal or storage of, or adequately
restrict the discharge of, hazardous substances could subject AMD to future
liabilities and could have a material adverse effect on the Company.
International Sales. AMD derives a substantial portion of its revenues from its
- -------------------
subsidiaries located in Europe and Asia. AMD's international sales operations
entail political and economic risks, including expropriation, currency controls,
exchange rate fluctuations, changes in freight rates and changes in rates for
taxes and tariffs.
Domestic and International Economic Conditions. AMD's business is subject to
- ----------------------------------------------
general economic conditions, both in the United States and abroad. A significant
decline in economic conditions in any significant geographic area could have a
material adverse effect upon the Company.
Volatility of Stock Price; Ability to Access Capital. Based on the trading
- ----------------------------------------------------
history of its stock, AMD believes factors such as quarterly fluctuations in
AMD's financial results, announcements of new products by AMD or its competitors
and general conditions in the semiconductor industry have caused and are likely
to continue to cause the market price of AMD common stock to fluctuate
substantially. Technology company stocks in general have experienced extreme
price and volume fluctuations that often have been unrelated to the operating
performance of the companies. This market volatility may adversely affect the
market price of AMD's common stock and
24
consequently limit the Company's ability to raise capital. In addition, an
actual or anticipated shortfall in revenue, gross margins or earnings from
securities analysts' expectations could have an immediate effect on the trading
price of AMD common stock in any given period.
Earthquake Danger. AMD's corporate headquarters, a portion of its manufacturing
- -----------------
facilities, assembly and research and development activities and certain other
critical business operations are located near major earthquake fault lines. The
Company could be materially adversely affected in the event of a major
earthquake.
25
II. OTHER INFORMATION
Item 1. Legal Proceedings
SEC Investigation. The Securities and Exchange Commission (SEC) began an
- -----------------
informal investigation of the Company in 1993 regarding the Company's
disclosures about the development of its AM486SX microcode and the extent to
which it included access to Intel's 386 microcode. These disclosures were the
subject of securities class actions and a derivative suit that were settled and
dismissed with prejudice. The Company has entered into an agreement with the
SEC settling proceedings related to this investigation. The Company has
consented to entry of a cease and desist order barring the Company from
committing future violations of SEC rules and regulations governing official
Company reports and disclosure of material information. No fines were imposed,
and only the Company was named as the subject of the order.
Advanced Micro Devices, Inc. v. Altera Corporation (Case No. C94-20567-RMW, U.S.
- --------------------------------------------------------------------------------
District Ct., San Jose, California). This litigation, which began in 1994,
- -----------------------------------
involves multiple claims and counterclaims for patent infringement relating to
the Company's and Altera Corporation's programmable logic devices. On June 21,
1996, the jury returned a verdict favorable to Altera. The Company filed a
motion seeking to set aside the verdict. The judge issued a ruling confirming
the jury's verdict. The parties have stipulated that the court, not a jury,
will decide which of the AMD patents-in-suit fall within the scope of the
license that the jury found. Based upon information presently known to
management the Company does not believe that the ultimate resolution of this
lawsuit will have a material adverse effect upon the financial condition or
results of operations of the Company.
26
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits 4.1 Form of Advanced Micro Devices, Inc. 11%
Senior Secured Notes due August 1, 2003,
filed as Exhibit 4.1 to the Corporation's
Current Report on Form 8-K dated August 13,
1996, is hereby incorporated herein by
reference.
4.2 Indenture, dated as of August 1, 1996,
between Advanced Micro Devices, Inc. and
United States Trust Company of New York, as
trustee, filed as Exhibit 4.2 to the
Corporation's Current Report on Form 8-K dated
August 13, 1996, is hereby incorporated herein
by reference.
4.3 Intercreditor and Collateral Agent
Agreement, dated as of August 1, 1996, among
United States Trust Company of New York, as
trustee, Bank of America NT&SA, as agent for
the banks under the Credit Agreement of July
19, 1996, and IBJ Schroder Bank & Trust
Company, filed as Exhibit 4.3 to the
Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
4.4 Payment, Reimbursement and Indemnity
Agreement, dated as of August 1, 1996,
between Advanced Micro Devices, Inc. and IBJ
Schroder Bank & Trust Company, filed as
Exhibit 4.4 to the Corporation's Current
Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
4.5 Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as
of August 1, 1996, among Advanced Micro
Devices, Inc., as grantor, IBJ Schroder Bank
& Trust Company, as grantee, and Shelley W.
27
Austin as trustee, filed as Exhibit 4.5 to
the Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
4.6 Security Agreement, dated as of August 1,
1996, between Advanced Micro Devices, Inc.
and IBJ Schroder Bank & Trust Company, as
agent for United States Trust Company of New
York, as Trustee, and Bank of America NT&SA,
as agent for banks, filed as Exhibit 4.6 to
the Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
4.7 Lease, Option to Purchase and Put Option
Agreement, dated as of August 1, 1996,
between Advanced Micro Devices, Inc., as
lessor, and AMD Texas Properties, LLC, as
lessee, filed as Exhibit 4.7 to the
Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
4.8 Reciprocal Easement Agreement, dated as of
August 1, 1996, between Advanced Micro
Devices, Inc. and AMD Texas Properties, LLC,
filed as Exhibit 4.8 to the Corporation's
Current Report on Form 8-K dated August 13,
1996, is hereby incorporated herein by
reference.
4.9 Sublease Agreement, dated as of August 1,
1996, between Advanced Micro Devices, Inc.,
as sublessee, and AMD Texas Properties, LLC,
as sublessor, filed as Exhibit 4.9 to the
Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
28
10.11(a) Employment Agreement dated September 29,
1996 between the Company and W. J. Sanders
III.
10.24 Credit Agreement, dated as of July 19, 1996,
among Advanced Micro Devices, Inc., Bank of
America NT&SA, as administrative agent and
lender, ABN AMRO Bank N.V., as syndication
agent and lender, and Canadian Imperial Bank
of Commerce, as documentation agent and
lender, filed as Exhibit 99.1 to the
Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
10.24(a) First Amendment to Credit Agreement, dated
as of August 7, 1996, among Advanced Micro
Devices, Inc., Bank of America NT&SA, as
administrative agent and lender, ABN AMRO
Bank N.V., as syndication agent and lender,
and Canadian Imperial Bank of Commerce, as
documentation agent and lender, filed as
Exhibit 99.2 to the Corporation's Current
Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
10.24(b) Second Amendment to Credit Agreement dated
as of September 9, 1996 among Advanced Micro
Devices, Inc., Bank of America NT&SA, as
administrative agent and lender, ABN AMRO
Bank N.V., as syndication agent and lender,
and Canadian Imperial Bank of Commerce, as
documentation agent and lender.
10.25(n) Third Amendment to Third Amended and
Restated Guaranty, dated as of May 10, 1996
(amending the Second Amendment to the Third
Amended and Restated Guaranty, dated as of
January
29
12, 1996, made by the Company in favor of
CIBC, Inc.).
10.25(o) Fourth Amendment to Third Amended and
Restated Guaranty, dated as of June 20, 1996
(amending the Third Amendment to the Third
Amended and Restated Guaranty, dated as of
May 10, 1996, made by the Company in favor
of CIBC, Inc.).
10.25(p) Fifth Amendment to Third Amended and
Restated Guaranty, dated as of August 1,
1996 (amending the Third Amended and
Restated Guaranty, dated as of August 25,
1995, made by the Company in favor of CIBC,
Inc.), filed as Exhibit 99.3 to the
Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby
incorporated herein by reference.
10.25(q) Fifth Amendment to Building Lease, dated as
of August 1, 1996 (amending the Building
Lease, dated as of September 22, 1992, by
and between AMD International Sales &
Service, Ltd. and CIBC, Inc.), filed as
Exhibit 99.4 to the Corporation's Current
Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
10.25(r) Fifth Amendment to Land Lease, dated as of
August 1, 1996 (amending the Land Lease,
dated as of September 22, 1992, by and
between AMD International Sales & Service,
Ltd. and CIBC, Inc.), filed as Exhibit 99.5
to the Corporation's Current Report on Form
8-K dated August 13, 1996, is hereby
incorporated herein by reference.
30
*10.48 C-4 Technology Transfer and Licensing
Agreement dated June 11, 1996
between the Company and IBM
Corporation.
27.1 Financial Data Schedule.
(b). Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter for
which this report is filed:
1. Current Report on Form 8-K dated July 10, 1996 reporting under
Item 5 - Other Events - second quarter earnings.
2. Current Report on Form 8-K dated July 22, 1996 reporting under
Item 5 - Other Events - commencement of the underwritten offering
of the Company's Senior Secured Notes.
3. Current Report on Form 8-K dated August 13, 1996 reporting under
Item 5 - Other Events - Completion of the underwritten offering
of the Company's Senior Secured Notes.
* Confidential treatment has been requested as to certain portions of this
Exhibit.
31
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: 11/7/96 By: /s/ Geoffrey Ribar
------------------------------- ------------------
Geoffrey Ribar
Vice President and
Corporate Controller
Signing on behalf of the
registrant and as the principal
accounting officer
32
EXHIBIT INDEX
-------------
Exhibits
- --------
4.1 Form of Advanced Micro Devices, Inc. 11% Senior Secured Notes due
August 1, 2003, filed as Exhibit 4.1 to the Corporation's Current
Report on Form 8-K dated August 13, 1996, is hereby incorporated
herein by reference.
4.2 Indenture, dated as of August 1, 1996, between Advanced Micro
Devices, Inc. and United States Trust Company of New York, as
trustee, filed as Exhibit 4.2 to the Corporation's Current Report on
Form 8-K dated August 13, 1996, is hereby incorporated herein by
reference.
4.3 Intercreditor and Collateral Agent Agreement, dated as of August 1,
1996, among United States Trust Company of New York, as trustee,
Bank of America NT&SA, as agent for the banks under the Credit
Agreement of July 19, 1996, and IBJ Schroder Bank & Trust Company,
filed as Exhibit 4.3 to the Corporation's Current Report on Form 8-K
dated August 13, 1996, is hereby incorporated herein by reference.
4.4 Payment, Reimbursement and Indemnity Agreement, dated as of August
1, 1996, between Advanced Micro Devices, Inc. and IBJ Schroder Bank
& Trust Company, filed as Exhibit 4.4 to the Corporation's Current
Report on Form 8-K dated August 13, 1996, is hereby incorporated
herein by reference.
4.5 Deed of Trust, Assignment, Security Agreement and Financing
Statement, dated as of August 1, 1996, among Advanced Micro Devices,
Inc., as grantor, IBJ Schroder Bank & Trust Company, as grantee, and
Shelley W. Austin as trustee, filed as Exhibit 4.5 to the
Corporation's Current Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
4.6 Security Agreement, dated as of August 1, 1996, between Advanced
Micro Devices, Inc. and IBJ Schroder Bank & Trust Company, as agent
for United States Trust Company of New York, as Trustee, and Bank of
America NT&SA, as agent for banks, filed as Exhibit 4.6 to the
Corporation's Current Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
4.7 Lease, Option to Purchase and Put Option Agreement, dated as of
August 1, 1996, between Advanced Micro Devices, Inc., as lessor, and
AMD Texas Properties, LLC, as lessee, filed as Exhibit 4.7 to the
Corporation's Current Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
4.8 Reciprocal Easement Agreement, dated as of August 1, 1996, between
Advanced Micro Devices, Inc. and AMD Texas Properties, LLC, filed as
Exhibit 4.8 to the Corporation's Current Report on Form 8-K dated
August 13, 1996, is hereby incorporated herein by reference.
4.9 Sublease Agreement, dated as of August 1, 1996, between Advanced
Micro Devices, Inc., as sublessee, and AMD Texas Properties, LLC, as
sublessor, filed as Exhibit 4.9 to the Corporation's Current Report
on Form 8-K dated August 13, 1996, is hereby incorporated herein by
reference.
10.11(a) Employment Agreement dated September 29, 1996 between the Company and
W.J. Sanders III.
10.24 Credit Agreement, dated as of July 19, 1996, among Advanced Micro
Devices, Inc., Bank of America NT&SA, as administrative agent and
lender, ABN AMRO Bank N.V., as syndication agent and lender, and
Canadian Imperial Bank of Commerce, as documentation agent and
lender, filed as Exhibit 99.1 to the Corporation's Current Report on
Form 8-K dated August 13, 1996, is hereby incorporated herein by
reference.
10.24(a) First Amendment to Credit Agreement, dated as of August 7, 1996,
among Advanced Micro Devices, Inc., Bank of America NT&SA, as
administrative agent and lender, ABN AMRO Bank N.V., as syndication
agent and lender, and Canadian Imperial Bank of Commerce, as
documentation agent and lender, filed as Exhibit 99.2 to the
Corporation's Current Report on Form 8-K dated August 13, 1996, is
hereby incorporated herein by reference.
10.24(b) Second Amendment to Credit Agreement dated as of September 9, 1996
among Advanced Micro Devices, Inc., Bank of America NT&SA, as
administrative agent and lender, ABN AMRO Bank N.V., as syndication
agent and lender, and Canadian Imperial Bank of Commerce, as
documentation agent and lender.
10.25(n) Third Amendment to Third Amended and Restated Guaranty, dated as of
May 10, 1996 (amending the Second Amendment to the Third
Amended and Restated Guaranty, dated as of January 12, 1996, made by
the Company in favor of CIBC, Inc.).
10.25(o) Fourth Amendment to Third Amended and Restated Guaranty, dated as of
June 20, 1996 (amending the Third Amendment to the Third Amended and
Restated Guaranty, dated as of May 10, 1996, made by the Company in
favor of CIBC, Inc.).
10.25(p) Fifth Amendment to Third Amended and Restated Guaranty, dated as of
August 1, 1996 (amending the Third Amended and Restated Guaranty,
dated as of August 25, 1995, made by Advanced Micro Devices, Inc. in
favor of CIBC, Inc.), filed as Exhibit 99.3 to the Corporation's
Current Report on Form 8-K dated August 13, 1996, is hereby
incorporated herein by reference.
10.25(q) Fifth Amendment to Building Lease, dated as of August 1, 1996
(amending the Building Lease, dated as of September 22, 1992, by and
between AMD International Sales & Service, Ltd. and CIBC, Inc.),
filed as Exhibit 99.4 to the Corporation's Current Report on Form 8-
K dated August 13, 1996, is hereby incorporated herein by reference.
10.25(r) Fifth Amendment to Land Lease, dated as of August 1, 1996 (amending
the Land Lease, dated as of September 22, 1992, by and between AMD
International Sales & Service, Ltd. and CIBC, Inc.), filed as
Exhibit 99.5 to the Corporation's Current Report on Form 8-K dated
August 13, 1996, is hereby incorporated herein by reference.
*10.48 C-4 Technology Transfer and Licensing Agreement dated June 11, 1996,
between the Company and IBM Corporation.
27.1 Financial Data Schedule
* Confidential treatment has been requested as to certain portions of this
Exhibit.