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The following is an excerpt from a 10-Q SEC Filing, filed by ADVANCED MICRO DEVICES INC on 11/12/2003.
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ADVANCED MICRO DEVICES INC - 10-Q - 20031112 - NOTES_TO_FINANCIAL_STATEMENT

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 28, 2003

 

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 28, 2003. 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 29, 2002, as amended. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

The Company uses a 52- to 53- week fiscal year ending on the last Sunday in December. The quarters ended September 28, 2003 and September 29, 2002 each included 13 weeks. The nine- month periods ended September 28, 2003 and September 29, 2002 each included 39 weeks.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation. The consolidated financial statements include the Company’s accounts and those of its majority and wholly owned subsidiaries (see Note 6 FASL LLC ). Upon consolidation, all significant intercompany accounts and transactions are eliminated and amounts pertaining to the noncontrolling ownership interests in the operating results and financial position of the majority owned subsidiary, FASL LLC, are reported as “minority interest.” Also included in the financial statements, under the equity method of accounting, are the Company’s percentage equity share of certain investees’ operating results, where the Company has the ability to exercise significant influence over the operations of the investee.

 

Product Warranties. At the time revenue is recognized, the Company provides for estimated costs that may be incurred under product warranties, with the corresponding expense recognized in cost of sales. Estimates of warranty expense are based on historical experience. Remaining warranty accruals are evaluated periodically and are adjusted for changes in experience.

 

New Accounting Pronouncements. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). Variable interest entities often are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” defines what these variable interest entities are and provides guidelines on identifying them and assessing an enterprise’s interests in a variable interest entity to decide whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before

 

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February 1, 2003, the provisions of this interpretation will apply no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on the Company’s results of operations or financial condition.

 

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity – as either debt or equity in the balance sheet. The requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s results of operations or financial condition.

 

3. Stock-Based Incentive Compensation Plans

 

The Company uses the intrinsic value method to account for stock options issued to its employees under its stock option plans and amortizes deferred compensation, if any, over the vesting period of the options. Compensation expense resulting from the issuance of fixed term stock option awards is measured as the difference between the exercise price of the option and the fair market value of the underlying share of company stock subject to the option on the award’s grant date. For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option pricing model. The pro forma effect on net loss and net loss per share are as follows for the quarters and nine-month periods ended September 28, 2003 and September 29, 2002.

 

     Quarter Ended

    Nine Months Ended

 

(Thousands except per share amounts)


  

September 28,

2003


   

September 29,

2002


   

September 28,

2003


   

September 29,

2002


 

Net loss—as reported

   $ (31,231 )   $ (254,171 )   $ (317,683 )   $ (448,272 )

Plus: intrinsic value compensation expense recorded

     366       541       1,361       2,195  

Less: fair value compensation expenses

     (19,148 )     (32,299 )     (58,307 )     (119,978 )
    


 


 


 


Net loss—pro forma

   $ (50,013 )   $ (285,929 )   $ (374,629 )   $ (566,055 )
    


 


 


 


Basic net loss per share—as reported

   $ (0.09 )   $ (0.74 )   $ (0.92 )   $ (1.31 )

Diluted net loss per share—as reported

   $ (0.09 )   $ (0.74 )   $ (0.92 )   $ (1.31 )

Basic net loss per share—pro forma

   $ (0.14 )   $ (0.83 )   $ (1.08 )   $ (1.66 )

Diluted net loss per share—pro forma

   $ (0.14 )   $ (0.83 )   $ (1.08 )   $ (1.66 )

 

On June 27, 2003, the Company filed a Tender Offer Statement with the SEC and made an offer, which was approved by the Company’s stockholders, to exchange certain stock options to purchase shares of the Company’s common stock, outstanding under eligible option plans and held by

 

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eligible employees, for replacement options to be granted no sooner than six months and one day from the cancellation of the surrendered options. The offer to exchange expired on July 25, 2003. Options to purchase approximately 19.0 million shares of the Company’s common stock were tendered for exchange and cancelled on July 28, 2003. Subject to the terms of the offer to exchange, the Company will grant replacement options to purchase approximately 13.4 million shares of its common stock at fair market value on the date of grant on or after January 29, 2004, in exchange for the options cancelled. The Company does not expect to record compensation expense as a result of the exchange.

 

4. Financial Instruments

 

The following is a summary of the available-for-sale securities held by the Company as of September 28, 2003:

 

(Thousands)


   Cost

  

Fair Market

Value


Cash equivalents:

             

Federal agency notes

   $ 5,469    $ 6,221

Money market funds

     764,435      764,737
    

  

Total cash equivalents

   $ 769,904    $ 770,958
    

  

Short-term investments:

             

Corporate notes

   $ 13,807    $ 13,461

Federal agency notes

     5,487      5,552

Auction rate preferred stocks

     59,000      59,027

Bank notes

     2,727      2,964
    

  

Total short-term investments

   $ 81,021    $ 81,004
    

  

Long-term investments:

             

Equity investments

   $ 7,765    $ 13,784
    

  

Total long-term investments (included in other assets)

   $ 7,765    $ 13,784
    

  

 

Long-term equity investments consist of marketable equity securities that, while available for sale, are not intended to be used to fund current operations.

 

The amortized cost and estimated fair value of available-for-sale marketable debt securities (short-term investments) at September 28, 2003, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without call or prepayment penalties.

 

(Thousands)


   Amortized
Cost


  

Estimated

Fair Value


Due in one year or less

   $ 13,717    $ 13,687

Due after one year

     67,304    $ 67,317
    

  

Total

   $ 81,021    $ 81,004
    

  

 

Available-for-sale securities with maturities greater than twelve months are classified as short-term when they include investments of cash that are intended to be used in current operations. The Company realized net gains from the sale of available-for-sale securities in the first nine months of 2003 of $3.7 million, which were included in interest and other income, net.

 

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At September 28, 2003 and December 29, 2002, the Company had approximately $12 million and $13 million of investments classified as held to maturity, consisting of commercial paper and treasury notes used for long-term workers compensation and leasehold deposits that were included in other assets. The fair value of the investments approximated cost at September 28, 2003 and December 29, 2002.

 

Included in cash and cash equivalents is a compensating balance of $201 million, which AMD Saxony is required to keep at all times through June 29, 2005 in an account with Dresdner Bank AG in connection with the Dresden Loan Agreements (see Note 11 Guarantees ). Included in prepaid and other assets is $28 million of restricted cash associated with the advance receipt of interest subsidies from the Federal Republic of Germany and the State of Saxony in connection with the Dresden Loan Agreements. Restrictions over the Company’s access to the restricted cash will lapse as the Company incurs qualifying interest expense on the Dresden term loan over the next four quarters.

 

5. Net Loss Per Common Share

 

Potential dilutive common shares include shares issuable upon the exercise of outstanding employee stock options and the conversion of outstanding convertible notes and debentures. As the Company incurred net losses for all periods presented, diluted net loss per common share is the same as basic net loss per common share. Potential dilutive common shares of approximately 78 million and 22 million for the three months ended September 28, 2003 and September 29, 2002 and 77 million and 20 million for the nine months ended September 28, 2003 and September 29, 2002 were not included in the net loss per common share calculation, as their inclusion would have been antidilutive.

 

6. FASL LLC

 

In order to respond more quickly to changes in market trends and improve efficiencies in the production, marketing and product design of their Flash memory products, the Company and Fujitsu Limited formed FASL LLC effective June 30, 2003. FASL LLC is headquartered in Sunnyvale, California and its manufacturing, research and assembly operations are in the U.S. and Asia. As the Company has a 60% controlling equity interest in FASL LLC, it began consolidating the results of FASL LLC’s operations on June 30, 2003, the effective date of the transaction. The Company is accounting for the FASL LLC transaction as a partial step acquisition and purchase business combination under the provisions of SFAS 141, Business Combinations , and EITF Consensus No. 01-02, Interpretations of APB Opinion No. 29 , [ Accounting for Nonmonetary Transactions ].

 

Both the Company and Fujitsu contributed their respective investments in the former Manufacturing Joint Venture (formerly referred to as FASL). As a result of this transaction, the Company acquired an incremental 10.008% controlling interest in the net assets of the Manufacturing Joint Venture (the difference between the Company’s 60% ownership of these net assets after their contribution to FASL LLC and its previous 49.992% ownership in these same net assets prior to their contribution to FASL LLC). Accordingly, the Company recorded its acquired incremental 10.008% interest in the Manufacturing Joint Venture’s contributed net assets based on the assets’ fair value on the effective

 

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date of the transaction. The remaining 89.992% interest in the Manufacturing Joint Venture’s net assets was recorded at its historical carrying value.

 

The Company also contributed its Flash memory inventory, its manufacturing facility located in Austin, Texas (Fab 25), its Flash memory research and development facilities in Sunnyvale, California, and its Flash memory assembly and test operations in Thailand, Malaysia and China. The Company recorded its continuing 60% interest in these net assets at their historical carrying values. The remaining 40% interest in these net assets was deemed to have been sold to Fujitsu and, accordingly, 40% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value on the effective date of the transaction. The excess of the fair value of the net assets treated as sold over their historical carrying value, approximately $44.7 million, was not recorded as a gain because the fair value of the consideration received by the Company in the form of the Company’s 60% equity interest in Fujitsu’s contributions and the incremental 10.008% interest in the former Manufacturing Joint Venture’s net assets less direct costs of the transaction, did not exceed the 40% interest in book value of the net assets contributed by the Company.

 

To form FASL LLC, Fujitsu also contributed its Flash memory division, including related inventory, cash, and its Flash memory assembly and test operations in Malaysia. The Company is deemed to have acquired a 60% interest in the net assets contributed by Fujitsu and, accordingly, 60% of the carrying values of these net assets were adjusted to and recorded based on the net assets’ fair value. The remaining 40% interest in these net assets was recorded at the historical carrying value.

 

As part of the transaction, the Company and Fujitsu entered into various service contracts with FASL LLC. The Company will continue to provide, among other things, certain information technology, facilities, logistics, legal, tax, finance, human resources and environmental, health and safety services to FASL LLC. These contracts continue to be evaluated by the parties to ensure accuracy and efficiency in the manner in which the services are provided and allocated to FASL LLC.

 

The Company also loaned FASL LLC $120 million pursuant to a promissory note. The note has a term of three years and bears interest at LIBOR plus 4%, but is eliminated in the Company’s consolidated financial statements. Fujitsu also loaned FASL LLC $40 million pursuant to a promissory note. The note has a term of three years, with four equal principal payments due on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006. The note bears interest at LIBOR plus 4% to be paid quarterly.

 

The following table summarizes the preliminary purchase price allocation to the assets and liabilities of FASL LLC at June 30, 2003, the effective date of the transaction, including the fair values of the assets and liabilities attributable to the Manufacturing Joint Venture, AMD’s contributions and Fujitsu’s contributions. Upon consolidation, all amounts pertaining to Fujitsu’s interest in FASL LLC are reported as minority interest. Management considered a number of factors, including independent appraisals and valuations, in determining the preliminary purchase allocation.

 

(In millions)


   Manufacturing
Joint Venture


    AMD’s
Contributions


    Fujitsu’s
Contributions


    Total

 

Cash

   $ —       $ 122     $ 189     $ 311  

Inventory

     55       220       128       403  

Fixed assets

     960       1,010       33       2,003  

Intangible assets

     21       —         —         21  

Debt and capital lease obligations

     (148 )     (609 )     (40 )     (797 )

Other assets (liabilities), net

     (100 )     (2 )     (1 )     (103 )
    


 


 


 


Fair value of net assets exchanged/acquired

     788       741       309       1,838  

Percent of fair value recorded in the purchase business combination

     10.008 %     40 %     60 %        
    


 


 


 


Fair value recorded

   $ 79     $ 296     $ 186     $ 561  
    


 


 


 


Net book value of contributions on acquisition date

     762       629       293       1,684  

Percent of book value recorded in the purchase business combination

     89.992 %     60 %     40 %        
    


 


 


 


Historical carrying value recorded

   $ 686     $ 377     $ 117     $ 1,180  
    


 


 


 


Initial purchase combination basis of net assets acquired

   $ 765     $ 673     $ 303     $ 1,741  
    


 


 


 


 

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The intangible assets in the table above consist of the estimated fair value of the manufacturing and product distribution contracts among FASL LLC and AMD and Fujitsu which are determined to have an estimated useful life of four years. No value was assigned to in-process research and development because AMD and Fujitsu performed all research and development activities for the Manufacturing Joint Venture and AMD and Fujitsu did not convey in-process technology rights to FASL LLC. Additionally, FASL LLC pays intellectual property royalties to AMD and Fujitsu for technological know-how used in its business operations at royalty rates deemed to approximate fair market values. No additional intangible assets were identified in connection with the transaction.

 

The Company’s acquisition cost was approximately $264 million, which includes 40% of the net book value of the Company’s contributions and other direct acquisition costs incurred by the Company. The acquisition cost approximated the fair values of the incremental net assets and equity interests acquired. Accordingly, there was no goodwill associated with the business combination.

 

The following pro forma financial information includes the combined results of operations of AMD and the Manufacturing Joint Venture as though the Manufacturing Joint Venture had been consolidated by AMD at the beginning of the nine-month periods ended September 28, 2003 and September 29, 2002 and for the quarter ended September 29, 2002. The historically reported operating results of the Manufacturing Joint Venture do not include Flash memory sales recorded by Fujitsu’s former Flash memory operations in periods preceding June 29, 2003 because the information is not available to the Company. Depreciation and amortization expenses were estimated for the pro forma periods based on the amounts at which fixed and intangible assets were recorded at the acquisition date. Pro forma interest income and expense are not material and are not included in the pro forma financial information. Had the transaction occurred at the beginning of fiscal 2003, revenue, net loss and net loss per share would have been $2,536 million, $322 million and $0.93 for the nine-month period ended September 28, 2003. As the effective date of the transaction was June 30, 2003, no pro forma information is necessary for the three months ended September 28, 2003. Had the transaction occurred at the beginning of 2002, revenue, net loss and net loss per share would have been $627 million, $257 million, and $0.75, respectively, for the three-month period ended September 29, 2002 and $2,297 million, $446 million, and $1.30 for the nine-month periods ended September 29, 2002. These pro forma results are not necessarily indicative of the operating results that would have occurred if the transaction had been completed at the beginning of the periods indicated. The pro forma results are not necessarily indicative of future operating results.

 

In addition, the Manufacturing Joint Venture provided a defined benefit pension plan and a lump-sum retirement benefit plan to certain employees. These plans were and are administered by Fujitsu and cover FASL LLC employees formerly assigned from Fujitsu and employees hired directly by the Manufacturing Joint Venture. A full actuarial valuation has not been completed for the specific portion of the plans that relate to the Manufacturing Joint Venture employees. As a result, the Company estimated FASL LLC’s proportionate allocation of pension obligations, pension assets and elements of pension expensed based on information provided by the actuaries to determine the amounts to be recorded on its consolidated financial statements. For the quarter ended September 28, 2003, the Company recorded an estimated pension cost charge of approximately $3 million and has recorded an estimated pension benefit obligation liability of approximately $25 million. As of September 28, 2003, the estimated projected benefit obligations were approximately $27 million and the estimated total pension plan assets were approximately $4 million. Although the Company believes that the estimates and assumptions used by the Company are reasonable, the actual amounts recorded could vary when a full actuarial valuation is completed as of Fujitsu’s fiscal year ended March 31, 2004. However, the Company does not expect any such difference will have a material impact on its consolidated financial statements.

 

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The following tables present the significant related party transactions between the Company and the Manufacturing Joint Venture for the periods in which the investment was accounted for under the equity method:

 

    

Quarter Ended


   Nine Months Ended

(Thousands)


  

September 28,

2003


  

September 29,

2002


  

September 28,

2003


   September 29,
2002


Royalty income

      $ 9,789    $ 24,611    $ 25,330

Purchases

        107,832      356,595      283,713

Sales to the Manufacturing Joint Venture

        —        222,570      —  

 

(Thousands)


  

September 28,
2003


  

December 29,
2002


Royalty receivable

      $11,551

Accounts receivable

      96,814

Accounts payable

      108,890

 

The following is condensed unaudited financial data for the Manufacturing Joint Venture:

 

     Quarter Ended

    Nine Months Ended

(Thousands)


   September 28,
2003


   September 29,
2002


    September 28,
2003


    September 29,
2002


Net sales

      $ 235,986     $ 565,037     $ 577,167

Gross (loss) profit

        1,429       (12,955 )     45,133

Operating (loss) income

        (2,673 )     (14,958 )     38,209

Net loss

        (1,559 )     (9,618 )     18,130

 

(Thousands)


   September
28, 2003


   December
29, 2002


Current assets

      $ 287,050

Non-current assets

        1,056,107

Current liabilities

        549,015

 

The Company’s share of the Manufacturing Joint Venture’s net income (loss) differed from the equity in net income previously reported on the condensed consolidated statements of operations. The difference was due to adjustments resulting from intercompany profit eliminations and differences in U.S. and Japanese tax treatment of the Manufacturing Joint Venture’s income, which were reflected on the Company’s consolidated statements of operations. The Company never received cash dividends from the Manufacturing Joint Venture.

 

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7. Foundry Arrangement Guarantee

 

In 2000, the Manufacturing Joint Venture further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility), to produce Flash memory devices for sale to the Manufacturing Joint Venture, the Company agreed to guarantee the repayment of up to $125 million of Fujitsu’s obligations as a co-signer with FMI under its global multicurrency revolving credit facility with a third-party bank (the Guarantee). In 2001, Fujitsu closed the Gresham Facility due to the downturn of the Flash memory market. The Company disagreed with Fujitsu as to the amount owed under this Guarantee and reached a settlement, resulting in a cash payment by the Company to Fujitsu. The settlement amount is immaterial to the Company’s financial statements, and was recorded in the Company’s statement of operations for the second quarter ended June 29, 2003 and paid in the third quarter ended September 28, 2003.

 

8. Segment Reporting

 

Prior to the third quarter of 2003, the Company had two reportable segments, the Core Products and Foundry Services segments. Primarily as a result of the formation of FASL LLC, the Company re-evaluated its reportable segments under SFAS 131. Management reviews and assesses operating performance using segment revenues and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management judgment.

 

Beginning in the third quarter of 2003, the Company changed its reportable segments to: the Computation Products segment, which includes x86 microprocessors for servers, workstations, desktop and notebook PCs and chipset products, and the Memory Products segment, which includes the Flash memory products of AMD and FASL LLC. The Company believes that separate reporting of these operating segments, given the Company’s new focus on FASL LLC as a separate operating company and FASL LLC’s separate market brand , provides more useful information.

 

The All Other category comprises other small operating segments (Personal Connectivity Solutions Products, which includes low power MIPS and x86 solutions, and Foundry Services, which included fees from our former voice communications and programmable logic products subsidiaries) that are neither individually nor in the aggregate material. This category also includes certain operating expenses and credits that are not allocated to the operating segments. Prior period segment information has been restated to conform to the current period presentation. However, as the Company’s results of operations for prior periods did not include the consolidation of FASL LLC’s operations the segment operating information for the Memory Products segment for the quarter ended September 28, 2003 is not comparable to the restated segment information for all prior periods presented.

 

The following table is a summary of sales and operating income (loss) by segment and category with reconciliation to net loss for the quarters and nine months ended September 28, 2003 and September 29, 2002:

 

     Quarter Ended

    Nine Months Ended

 

(Thousands)


  

September 28,

2003


   

September 29,

2002


   

September 28,

2003


   

September 29,

2002


 

Computation Products

                                

Revenue

   $ 503,461     $ 263,727     $ 1,379,190     $ 1,334,560  

Operating income (loss)

   $ 19,290     $ (316,553 )   $ (85,881 )   $ (503,308 )

Memory Products

                                

Revenue

     423,815       188,589       852,707       524,200  

Operating loss

     (49,455 )     (14,261 )     (186,826 )     (100,641 )

All Other

                                

Revenue

     26,483       55,911       81,678       151,839  

Operating income (loss)

     (64 )     5,630       (6,492 )     (31,442 )

Total AMD

                                

Revenue

     953,759       508,227       2,313,575       2,010,599  

Operating income (loss)

     (30,229 )     (325,184 )     (279,199 )     (635,391 )

Interest income and other, net

     493       12,941       12,203       31,140  

Interest expense

     (26,848 )     (21,166 )     (79,017 )     (49,053 )

Minority interest

     25,353       —         25,353       —    

(Provision) benefit for income taxes

     —         73,350       (2,936 )     198,884  

Equity in net income of Manufacturing Joint Venture

     —         5,888       5,913       6,148  
    


 


 


 


Net loss

   $ (31,231 )   $ (254,171 )   $ (317,683 )   $ (448,272 )
    


 


 


 


 

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9. Comprehensive Income (Loss)

 

The following are the components of comprehensive income (loss):

 

 

     Quarter Ended

    Nine Months Ended

 

(Thousands)


   September 28,
2003


   

September 29,

2002


   

September 28,

2003


   

September 29,

2002


 

Net loss

   $ (31,231 )   $ (254,171 )   $ (317,683 )   $ (448,272 )

Net change in cumulative translation adjustments

     51,504       (20,483 )     154,494       80,873  

Net change in unrealized gain (loss) on cash flow hedges

     (8,086 )     (1,307 )     (19,713 )     32,111  

Net change in minimum pension liabilities

     (3,874 )     —         (3,874 )     —    

Net change in unrealized gain (loss) on available-for-sale securities

     3,865       (3,400 )     3,682       (4,477 )
    


 


 


 


Other comprehensive income (loss)

     43,409       (25,190 )     134,589       108,507  
    


 


 


 


Comprehensive income (loss)

   $ 12,178     $ (279,361 )   $ (183,094 )   $ (339,765 )
    


 


 


 


 

The components of accumulated other comprehensive income are as follows:

 

(Thousands)


   September 28,
2003


    December 29,
2002


Net unrealized gain on available-for-sale securities, net of taxes of $2,104 in 2003 and $1,250 in 2002

   $ 5,762     $ 2,152

Net unrealized gain on cash flow hedges, net of taxes of $13,739 in 2003 and $17,511 in 2002

     9,366       29,079

Minimum pension liability

     (3,874 )     —  

Cumulative translation adjustments

     153,384       18,674
    


 

     $ 164,638     $ 49,905
    


 

 

10. Long-term Debt and Capital Lease Obligations

 

     Payments Due By Period

(In Thousands)


   Total

   2003

   2004

   2005

   2006

   2007

   2008 and beyond

4.75% Convertible Senior Debentures Due 2022

   $ 500,000    $ —      $ —      $ —      $ —      $ —      $ 500,000

4.50% Convertible Senior Notes Due 2007

     402,500      —        —        —        —        402,500      —  

Dresden term loans

     612,740             34,424      309,813      268,503      —        —  

July 2003 FASL term loan

     89,375      16,875      27,500      27,500      17,500      —        —  

Manufacturing Joint Venture term loan

     160,923      —        42,913      42,913      42,913      32,184      —  

Fujitsu cash note

     40,000      —        —        10,000      30,000      —        —  

Capital lease obligations

     276,038      19,616      91,970      85,600      74,526      4,326      —  
    

  

  

  

  

  

  

Total debt and capital lease obligations

   $ 2,081,576    $ 36,491    $ 196,807    $ 475,826    $ 433,442    $ 439,010    $ 500,000
    

  

  

  

  

  

  

 

-14-


On July 7, 2003, the Company amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003 (the July 2003 Loan Agreement). See Note 14 Subsequent Events . The following describes the July 2003 Loan Agreement as of September 28, 2003, before it was amended on October 3, 2003. The July 2003 Loan Agreement provided for a secured revolving line of credit of up to $200 million that expired in July of 2007. The Company could borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company had to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in the July 2003 Loan Agreement) it held declined below $200 million:

 

  restrictions on the Company’s ability to pay cash dividends on its common stock;

 

  maintain an adjusted tangible net worth (as defined in the Amended and Restated Loan Agreement) as follows:

 

Measurement Date


   Amount

September 30, 2003

   $ 1.25 billion

December 31, 2003

   $ 1.25 billion

Last day of each fiscal quarter in 2004

   $ 1.425 billion

Last day of each fiscal quarter in 2005

   $ 1.85 billion

Last day of each fiscal quarter thereafter

   $ 2.0 billion

 

  achieve EBITDA (earnings before interest, taxes, depreciation and amortization) according to the following schedule:

 

Period


   Amount

Four fiscal quarters ending September 30, 2003

   $ 150 million

Four fiscal quarters ending December 31, 2003

   $ 400 million

Four fiscal quarters ending March 31, 2004

   $ 550 million

Four fiscal quarters ending June 30, 2004

   $ 750 million

Four fiscal quarters ending September 30, 2004

   $ 850 million

Four fiscal quarters ending December 31, 2004

   $ 950 million

Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter

   $ 1,050 million

 

At September 28, 2003, net domestic cash, as defined, totaled $429 million.

 

The Company’s obligations under the July 2003 Loan Agreement were secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles were not pledged as security for the Company’s obligations. As of September 28, 2003, no amount was outstanding under the July 2003 Loan Agreement.

 

On July 11, 2003, the Company amended its September 2002 Loan Agreement and assigned it to FASL LLC. Under the Amended and Restated Term Loan Agreement (the July 2003 FASL Term Loan), amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.14 percent at September 28, 2003. Repayment occurs in equal, consecutive, quarterly principal and interest installments ending in September 2006. As of September 28, 2003, approximately $89 million was outstanding under the July 2003 FASL Term Loan, of which 60 percent is guaranteed by the Company and 40 percent is guaranteed by Fujitsu.

 

FASL LLC must also comply with additional financial covenants if its net domestic cash balance (as defined in the July 2003 FASL Term Loan) declines below $130 million through the first quarter of 2004, $120 million from the second quarter of 2004 and the end of 2005 and $100 million during 2006. At any time that net domestic cash falls below these thresholds, FASL LLC must comply with, among other things, the following financial covenants:

 

  maintain an adjusted tangible net worth (as defined in the July 2003 FASL Term Loan) of not less than $850 million.

 

  achieve EBITDA according to the following schedule:

 

 

Period


   Amount

 

Quarter ending September 2003

   $ (40 million )

For the six months ending December 2003

   $ 75 million  

For the nine months ending March 2004

   $ 170 million  

For the four quarters ending June 2004

   $ 285 million  

For the four quarters ending September 2004

   $ 475 million  

For the four quarters ending December 2004

   $ 550 million  

For the four quarters ending in 2005

   $ 640 million  

For the four quarters ending in 2006

   $ 800 million  

 

  maintain a Fixed Charge Coverage Ratio (as defined in the July 2003 FASL Term Loan) according to the following schedule:

 

Period


   Ratio

Third Fiscal Quarter of 2003

   -0.6 to 1.00

Fourth Fiscal Quarter of 2003

   0.2 to 1.00

First Fiscal Quarter of 2004

   0.25 to 1.00

Period ending June 2004

   0.4 to 1.00

Period ending September 2004

   0.8 to 1.00

Period ending December 2004

   1.0 to 1.00

Full Fiscal Year 2005

   1.0 to 1.00

Full Fiscal Year 2006

   0.9 to 1.00

 

At September 28, 2003, FASL LLC’s net domestic cash totaled $202 million.

 

Manufacturing Joint Venture Loan Refinancing

 

As a result of the FASL LLC transaction, the Manufacturing Joint Venture’s third party loans were refinanced from the proceeds of a term loan in the aggregate principal amount of 18 billion yen (approximately $161 million on September 28, 2003) entered into between a wholly owned subsidiary of FASL LLC and a Japanese financial institution. Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. Under the agreement, the

 

-15-


amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating. The current interest rate is 1.06%. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. The Company has agreed to pay Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan.

 

Capital Lease and Leaseback Transactions

 

On July 16, 2003, a wholly owned subsidiary of FASL LLC entered into a sale-leaseback transaction for certain equipment with a third party financial institution in the amount of 12 billion yen (approximately $100 million on July 16, 2003) of cash proceeds. Upon execution of the agreement, the equipment had a net book value of approximately $168 million. As the term on the leaseback is more than 75 percent of the remaining estimated economic lives of the equipment, the Company is accounting for the transaction as a capital lease. The Company recognized an immediate loss of $16 million on the transaction due to the fact that the fair market value of the equipment was less than their net book value at the time of the transaction. The Company also recorded approximately $52 million of deferred loss which will be amortized in proportion to the leased assets over their average estimated remaining lives, which is approximately 3 years. The Company guaranteed 50 percent or up to approximately $50 million of the outstanding obligations under the lease arrangement. As of September 28, 2003, the outstanding lease obligation under this agreement was approximately $91 million. FASL LLC and its subsidiaries also entered into other capital lease transactions during the third quarter of 2003, which resulted in additional capital lease obligations of $152 million as of September 28, 2003.

 

The Company has guaranteed approximately $156 million of the total $276 million outstanding obligations under capital lease arrangements of FASL LLC as of September 28, 2003.

 

11. Guarantees

 

The Company accounts for guarantees in accordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

 

Guarantees of indebtedness recorded on the Company’s consolidated balance sheets

 

The following table summarizes the principal guarantees issued as of September 28, 2003 related to underlying liabilities that are already recorded on the Company’s consolidated balance sheets as of September 28, 2003:

 

          Amounts of guarantee expiration per period

(Thousands)


   Amounts
Guaranteed *


   2003

   2004

   2005

   2006

   2007

   2008 and
Beyond


Dresden term loan guarantee

   $ 306,369    $ —      $ —      $ —      $ 306,369    $ —       $ —  

July 2003 FASL term loan guarantee (see Note 10)

     53,625      10,125      16,500      16,500      10,500      —        —  

FASL capital lease guarantees (see Note 10)

     155,812      10,587      47,998      51,128      43,397      2,702      —  
Manufacturing Joint Venture term loan guarantee (see Note 10)      96,554      —        25,748      25,748      25,748      19,310      —  
    

  

  

  

  

  

  

Total guarantees

   $ 612,360    $ 20,712    $ 90,246    $ 93,376    $ 386,014    $ 22,012    $ 0
    

  

  

  

  

  

  

 


* Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.

 

-16-


Dresden Term Loan Agreements and Dresden Term Loan Guarantee

 

AMD Saxony Limited Liability Company & Co. KG, (AMD Saxony, formerly known as AMD Saxony Manufacturing GmbH), an indirect wholly owned German subsidiary of AMD, continues to facilitize Fab 30, which began production in the third quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony and a consortium of banks are providing financing for the project.

 

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, a German financial institution, in order to finance the project.

 

Because most of the amounts under the Dresden Loan Agreements were denominated in deutsche marks (converted to euros), the dollar amounts discussed below are subject to change based on applicable conversion rates. The Company used the exchange rate that was permanently fixed on January 1, 1999, of 1.95583 deutsche marks to one euro for the conversion of deutsche marks to euros, and then used the exchange rate of 0.87 euro to one U.S. dollar as of September 28, 2003, to translate the amounts denominated in deutsche marks into U.S. dollars.

 

The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Fab 30 and also require that the Company guarantee up to 50 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $128 million or more than $344 million, until the bank loans are repaid in full. As of September 28, 2003, the amount outstanding under the guarantee was $306 million.

 

As AMD Saxony’s obligations under the Dresden Loan Agreements are included in the Company’s consolidated financial statements, no incremental liability is recorded under the Dresden guarantee.

 

Guarantees of indebtedness not recorded on the Company’s consolidated balance sheets

 

The following table summarizes the principal guarantees issued as of September 28, 2003 for which the underlying liabilities are not recorded on the Company’s consolidated balance sheets as of September 28, 2003. These guarantees are described below the following table:

 

          Amounts of guarantee expiration per period

 

(Thousands)


  

Amounts*

Guaranteed


   2003

   2004

   2005

   2006

   2007

  

2008 and

beyond


 

FASL LLC operating lease guarantees

   $ 29,386    $ 7,647    $ 21,739    $    $    $ —      $ —    

BAC payment guarantee

     28,686      —        —                  —        28,686  

AMTC payment guarantee

     36,718      —        —                  36,718      —    

AMTC rental guarantee

     130,036      —        —                  —        130,036 **
    

  

  

  

  

  

  


Total

   $ 224,826    $ 7,647    $ 21,739    $    $    $ 36,718    $ 158,722  
    

  

  

  

  

  

  


* Amounts guaranteed represent the principal amount of the underlying obligations and are exclusive of obligations for interest, fees and expenses.
** Amounts outstanding will diminish until the expiration of the guarantee.

 

FASL LLC Operating Lease Guarantees

 

The Company has guaranteed certain operating leases entered into by FASL LLC and its subsidiaries totaling approximately $29 million as of September 28, 2003. The amount of the guarantees will be reduced by the actual amount of lease payments paid by FASL LLC over the lease term.

 

-17-


Advanced Mask Technology Center and Maskhouse Building Administration Guarantees

 

The Advanced Mask Technology Center GmbH & Co. KG (AMTC), and Maskhouse Building Administration GmbH & Co., KG (BAC), are joint ventures formed by AMD, Infineon Technologies AG and DuPont Photomasks, Inc. for the purpose of constructing and operating a new advanced photomask facility in Dresden, Germany. To finance the project, BAC entered into an $86 million bridge loan in June 2002, and BAC and AMTC entered into a $138 million revolving credit facility and an $86 million term loan in December 2002. In September 2003, the outstanding amounts under the bridge loan were repaid with proceeds from the term loan. Also in December 2002, in order to occupy the photomask facility, AMTC entered into a rental agreement with BAC. With regard to these commitments by BAC and AMTC, the Company guaranteed up to approximately $29 million plus interest and expenses under the term loan, up to approximately $37 million plus interest and expenses under the revolving loan, and up to approximately $16 million, initially, under the rental agreement. The obligations under the rental agreement guarantee diminish over time through 2011 as the term loan is repaid. However, under certain circumstances of default by the other tenant of the photomask facility under its rental agreement with BAC and certain circumstances of default by more than one joint venture partner under its rental agreement guarantee obligations, the maximum potential amount of the Company’s obligations under the rental agreement guarantee would be approximately $130 million. As of September 28, 2003, $12 million was drawn under the revolving credit facility, and $75 million was drawn under the term loan and are subject to the aforementioned guarantees.

 

The Company has not recorded any liability in its consolidated financial statements associated with these guarantees because they were issued prior to the effective date of FIN 45.

 

Warranties and Indemnities

 

The Company generally offers a three-year limited warranty to end users for certain of its boxed microprocessor products, and a one-year limited warranty only to direct purchasers for all other products.

 

Changes in the Company’s potential liability for product warranty during the nine months ended September 28, 2003 were as follows:

 

(Thousands)


      

Balance at December 29, 2002

   $ 19,369  

New warranties issued during the period

     28,437  

Settlements during the period

     (21,003 )

Changes in liability for pre-existing warranties during the period, including expirations

     (4,520 )
    


Balance at September 28, 2003

   $ 22,283  
    


 

In addition to product warranties, the Company, from time to time, in its normal course of business, indemnifies other parties with whom it enters into contractual relationships, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against specified losses, such as those arising

 

-18-


from a breach of representations or covenants, third party claims that the Company’s products when used for their intended purpose(s) infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, payments made by the Company under these obligations have not been material.

 

12. Restructuring and Other Special Charges

 

2002 Restructuring Plan

 

In December 2002, the Company began implementing a restructuring plan (the 2002 Restructuring Plan) to further align its cost structure to industry conditions resulting from weak customer demand and industry-wide excess inventory.

 

As part of this plan, and as a result of the Company’s technology agreement with IBM to develop future generations of the Company’s logic process technology, the Company has ceased its silicon processing associated with logic research and development in its Submicron Development Center (SDC) in Sunnyvale, California and has eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.

 

The 2002 Restructuring Plan has resulted in the consolidation of facilities, primarily at the Company’s Sunnyvale, California site and at sales offices worldwide. The Company has vacated, and is attempting to sublease, certain facilities currently occupied under long-term operating leases. The Company has also terminated the implementation of certain partially completed enterprise resource planning (ERP) software and other information technology implementation activities, resulting in the abandonment of certain software, hardware and capitalized development costs.

 

Pursuant to the 2002 Restructuring Plan, the Company recorded restructuring costs and other special charges of $330.6 million in the fourth quarter of 2002, consisting primarily of $68.8 million of anticipated severance and fringe benefit costs, an asset impairment charge of $32.5 million relating to a license that had no future use because of its association with discontinued logic development activities, asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and manufacturing activities, anticipated exit costs of $138.9 million primarily related to vacating and consolidating the Company’s facilities and $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities.

 

In the third quarter ended September 28, 2003, the Company revised its estimates of the number of positions to be eliminated pursuant to the 2002 Restructuring Plan from 2,000 to 1,800 in response to the additional resources required due to the FASL LLC transaction. As a result, the Company reversed $8 million of the estimated severance and fringe benefit accrual due to the decision to reduce the number of positions to be eliminated by 200. Therefore, the 2002 Restructuring Plan will result in the reduction of approximately 1,800 positions or 14 percent of the Company’s employees, affecting all levels of its workforce in almost every organization. As of September 28, 2003, 1,512 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $50 million for severance and

 

-19-


employee benefit costs. The Company expects to substantially complete the activities associated with the 2002 Restructuring Plan by the end of December 2003.

 

During the first quarter of 2003, management approved the sale of additional equipment, primarily equipment used in the SDC, that had been identified as no longer useful in the Company’s operations. As a result, the Company recorded approximately $11 million of asset impairment charges in the first quarter of 2003, including $3.3 million of charges for decommission costs necessary to complete the equipment’s sale.

 

The following table summarizes activities under the 2002 Restructuring Plan through September 28, 2003:

 

(Thousands)


  

Severance and

Employee

Benefits


   

Asset

impairment


   

Exit and

Equipment

Decommission

Costs


    Other Restructuring
Charges


    Total

 

2002 provision

   $ 68,770     $ 118,590     $ 138,900     $ 4,315     $ 330,575  

Q4 2002 non-cash charges

     —         (118,590 )     —         —         (118,590 )

Q4 2002 cash charges

     (14,350 )     —         (795 )     —         (15,145 )
    


 


 


 


 


Accruals at December 29, 2002

     54,420       —         138,105       4,315       196,840  

Q1 2003 provision

     —         7,791       3,314       —         11,105  

Q1 2003 non-cash charges

     —         (7,791 )     —         —         (7,791 )

Q1 2003 cash charges

     (17,820 )     —         (751 )     (4,223 )     (22,794 )
    


 


 


 


 


Accruals at March 30, 2003

     36,600       —         140,668       92       177,360  

Q2 2003 cash charges

     (14,922 )     —         (8,309 )     (77 )     (23,308 )
    


 


 


 


 


Accruals at June 29, 2003

     21,678       —         132,359       15       154,052  
    


 


 


 


 


Q3 2003 non-cash adjustment

     (8,000 )     —         —         —         (8,000 )

Q3 2003 cash charges

     (2,568 )     —         (5,934 )     —         (8,502 )
    


 


 


 


 


Accruals at September 28, 2003

     11,110       —         126,425       15       137,550  
    


 


 


 


 


 

2001 Restructuring Plan

 

In 2001, the Company announced a restructuring plan (the 2001 Restructuring Plan) due to the slowdown in the semiconductor industry and a resulting decline in revenues. The Company has substantially completed its execution of the 2001 Restructuring Plan, with the exception of the facilities and equipment decommission activities, which are expected to be completed by the end of 2003. During the first quarter of 2003, the Company reduced the estimated accrual of the facility and equipment decommission costs by $7.4 million based on the most current information available. During the first quarter, the Company also realized a recovery of approximately $1.6 million from the sale of equipment impaired as a result of the 2001 Restructuring Plan, previously held-for-sale at amounts in excess of its initially estimated fair value. Both amounts were included in restructuring and other special charges (recoveries) net.

 

-20-


The following table summarizes activities under the 2001 Restructuring Plan during the nine months ended September 28, 2003:

 

(Thousands)


  

Facilities

and Equipment

Decommission

Costs


   

Other

Facilities

Exit

Costs


   Total

 

Accrual at December 29, 2002

   $ 15,055     $ 646    $ 15,701  

Q1 2003 cash charges

     (630 )     —        (630 )

Q1 2003 non-cash adjustment

     (7,400 )     —        (7,400 )
    


 

  


Accruals at March 30, 2003

     7,025       646      7,671  

Q2 2003 cash charges

     (226 )     —        (226 )
    


 

  


Accruals at June 29, 2003

     6,799       646      7,445  

Q3 2003 cash charges

     (596 )     —        (596 )
    


 

  


Accruals at September 28, 2003

   $ 6,203     $ 646    $ 6,849  
    


 

  


 

As of September 28, 2003 and December 29, 2002, $100 million and $113 million of the total restructuring accruals of $144 million and $213 million were included in other liabilities (long-term) on the balance sheets. (See Note 13.)

 

13. Other Liabilities

 

The Company’s other long-term liabilities at September 28, 2003 and December 29, 2002 consisted of:

 

(Thousands)


  

September 28,

2003


  

December 29,

2002


Dresden deferred grants and subsidies

   $ 257,818    $ 146,346

Restructuring accrual

     100,499      112,567

Customer deposits

     17,500      38,000

Deferred gain on building

     23,908      25,169

FASL LLC pension liabilities

     24,704      —  

Other

     853      —  
    

  

     $ 425,282    $ 322,082
    

  

 

14. Subsequent Events

 

Amendment of Note Payable to Bank

 

On July 7, 2003, the Company amended and restated its 1999 Loan and Security Agreement with a consortium of banks led by a domestic financial institution. It was further amended on October 3, 2003. The July 2003 Loan Agreement currently provides for a secured revolving line of credit of up to $125 million that expires in July of 2007. The Company can borrow, subject to amounts that were set aside by the lenders, up to 85 percent of its eligible accounts receivable from OEMs and 50 percent of its eligible accounts receivable from distributors. The Company has to comply with, among other things, the following financial covenants if the level of net domestic cash (as defined in the July 2003 Loan Agreement) it holds declines below $125 million:

 

  restrictions on the Company’s ability to pay cash dividends on its common stock;

 

  maintain an adjusted tangible net worth (as defined in the July 2003 Loan Agreement) as follows:

 

Measurement Date


   Amount

September 30, 2003

   $ 1.25 billion

December 31, 2003

   $ 1.25 billion

Last day of each fiscal quarter in 2004

   $ 1.425 billion

Last day of each fiscal quarter in 2005

   $ 1.85 billion

Last day of each fiscal quarter thereafter

   $ 2.0 billion

 

  achieve EBITDA (earnings before interest, taxes, depreciation and amortization) according to the following schedule:

 

Period


   Amount

Four fiscal quarters ending September 30, 2003

   $ 150 million

Four fiscal quarters ending December 31, 2003

   $ 400 million

Four fiscal quarters ending March 31, 2004

   $ 550 million

Four fiscal quarters ending June 30, 2004

   $ 750 million

Four fiscal quarters ending September 30, 2004

   $ 850 million

Four fiscal quarters ending December 31, 2004

   $ 950 million

Four fiscal quarters ending March 31, 2005 and on each fiscal quarter thereafter

   $ 1,050 million

 

At September 28, 2003, net domestic cash, as defined, totaled $429 million. The Company’s obligations under the July 2003 Loan Agreement are secured by all of its accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds. FASL LLC’s assets, accounts receivable, inventory and general intangibles are not pledged as security for the Company’s obligations.

 

-21-



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