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Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Cash flow from operating activities was $144 million in 1998 compared to $399 million in 1997 and $89 million in 1996. Net operating cash flows in 1998 decreased $254 million year over year primarily due to an increase in net loss of $83 million combined with a decrease in the net change in operating assets and liabilities of $153 million and a decrease in net non-cash adjustments to net loss of $18 million. The decrease in the net change in operating assets and liabilities was primarily due to a lower increase in payables and accrued liabilities in 1998 compared to 1997. The decrease in net non-cash adjustments to net loss was primarily due to a larger increase in deferred income taxes in 1998 compared to 1997. This decrease was partially offset by an increase in depreciation and amortization in 1998.

Investing activities consumed $998 million in cash during 1998 compared to $633 million in 1997 and $276 million in 1996. Substantially all of our net investing activities in 1998 consisted of capital expenditures. Capital expenditures increased in 1998 compared to 1997 due to continued investment in property, plant and equipment primarily for Fab 25 and Dresden Fab 30. Capital expenditures of $485 million in 1996 were offset by net proceeds from the sale of short-term investments of approximately $207 million.

Our financing activities provided cash of $975 million in 1998, including proceeds from the Convertible Subordinated Notes, borrowings from Dresdner Bank AG in the amount of $300 million (denominated in deutsche marks), and capital investment grants from the Federal Republic of Germany and the State of Saxony of $197 million.

Financing sources of cash for 1997 and 1996 consisted primarily of borrowings under the Credit Agreement in 1997 and proceeds from the Senior Secured Notes in 1996. The above sources were offset by debt repayments of $88 million in 1998, $80 million in 1997 and $253 million in 1996. Financing activities for all years presented include proceeds from the issuance of common stock under employee stock plans.

We plan to continue to make significant capital investments in 1999. These investments include those relating to the continued facilitization of Dresden Fab 30 and Fab 25.

AMD Saxony, an indirect wholly owned German subsidiary of AMD, has constructed and is installing equipment in Dresden Fab 30, a 900,000-square-foot submicron integrated circuit manufacturing and design facility located in Dresden, in the State of Saxony, Germany. AMD, the Federal Republic of Germany, the State of Saxony and a consortium of banks are supporting the project. We currently estimate construction and facilitization costs of Dresden Fab 30 to be $1.9 billion. In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG. The Dresden Loan Agreements provide for the funding of the construction and facilitization of Dresden Fab 30. The funding consists of:

  • equity, subordinated loans and loan guarantees from AMD;
  • loans from a consortium of banks; and
  • grants, subsidies and loan guarantees from the Federal Republic of Germany and the State of Saxony.

The Dresden Loan Agreements, which were amended in February 1998 to reflect upgrades in wafer production technology as well as the decline in the deutsche mark relative to the U.S. dollar, require that we partially fund Dresden Fab 30 project costs in the form of subordinated loans to, or equity investments in, AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, we have invested $270 million to date in the form of subordinated loans and equity in AMD Saxony, which includes $100 million in subordinated loans in 1998 ($60 million of which was paid after fiscal 1998 but before December 31, 1998). We are required to make additional subordinated loans to, or equity investments in, AMD Saxony totaling $170 million in 1999, $70 million of which must be funded through the sale of at least $200 million of our stock by June 30, 1999. We cannot give any assurance that the requisite external financing will be available on favorable terms, if at all.

In addition to support from AMD, the consortium of banks referred to above has made available $989 million in loans (denominated in deutsche marks) to AMD Saxony to help fund Dresden Fab 30 project costs. AMD Saxony had $300 million of such loans outstanding as of December 27, 1998.

Finally, the Federal Republic of Germany and the State of Saxony are supporting the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in the form of:

  • guarantees of 65 percent of AMD Saxony bank debt up to a maximum amount of $989 million;
  • capital investment grants and allowances totaling $289 million; and
  • interest subsidies totaling $180 million.

Of these amounts (which are all denominated in deutsche marks), AMD Saxony has received $275 million in capital investment grants and $8 million in interest subsidies as of December 27, 1998. The grants and subsidies are subject to conditions, including meeting specified levels of employment in December 2001 and maintaining those levels until June 2007. Noncompliance with the conditions of the grants and subsidies could result in the forfeiture of all or a portion of the future amounts to be received as well as the repayment of all or a portion of amounts received to date. As of December 27, 1998, we were in compliance with all of the conditions of the grants and subsidies.

The Dresden Loan Agreements also require that we:

  • provide interim funding to AMD Saxony if either the remaining capital investment allowances or the remaining interest subsidies are delayed, which will be repaid to AMD as AMD Saxony receives the grants or subsidies from the State of Saxony;
  • fund shortfalls in government subsidies resulting from any default under the subsidy agreements caused by AMD Saxony or its affiliates;
  • guarantee a portion of AMD Saxony¹s obligations under the Dresden Loan Agreements up to a maximum of $130 million (denominated in deutsche marks) until Dresden Fab 30 has been completed;
  • fund certain contingent obligations including obligations to fund project cost overruns, if any; and
  • make funds available to AMD Saxony, after completion of Dresden Fab 30, up to approximately $87 million (denominated in deutsche marks) if AMD Saxony does not meet its fixed charge coverage ratio covenant.

Because our obligations under the Dresden Loan Agreements are denominated in deutsche marks, the dollar amounts set forth herein are subject to change based on applicable conversion rates. At the end of the fourth quarter of 1998, the exchange rate was approximately 1.67 deutsche marks to 1 U.S. dollar (which we used to calculate our obligations denominated in deutsche marks).

The definition of defaults under the Dresden Loan Agreements includes the failure of AMD, AMD Saxony or AMD Holding, the parent company of AMD Saxony and the wholly owned subsidiary of AMD, to comply with obligations in connection with the Dresden Loan Agreements, including:

  • material variances from the approved schedule and budget;
  • our failure to fund equity contributions or share-holder loans or otherwise comply with our obligations relating to the Dresden Loan Agreements;
  • the sale of shares in AMD Saxony or AMD Holding;
  • the failure to pay material obligations;
  • the occurrence of a material adverse change or filings of proceedings in bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
  • the occurrence of default under the indenture pursuant to which the Senior Secured Notes were issued (the Indenture) or the Credit Agreement.

Generally, any such default which either (1) results from our noncompliance with the Dresden Loan Agreements and is not cured by AMD or (2) results in recourse to AMD of more than $10 million and is not cured by AMD, would result in a cross-default under the Dresden Loan Agreements, the Indenture and the Credit Agreement. Under certain circumstances, cross-defaults result under the Convertible Subordinated Notes, the Indenture and the Dresden Loan Agreements.

In the event we are unable to meet our obligation to make loans to, or equity investments in, AMD Saxony as required under the Dresden Loan Agreements, AMD Saxony will be unable to complete Dresden Fab 30 and we will be in default under the Dresden Loan Agreements, the Indenture and the Credit Agreement, which would permit acceleration of certain indebtedness, which would have a material adverse effect on our business. There can be no assurance that we will be able to obtain the funds necessary to fulfill these obligations and any such failure would have a material adverse effect on our business.

Beginning in October 1998, the $250 million four-year secured term loan under the Credit Agreement was repayable in eight equal quarterly installments of approximately $31 million. As of December 27, 1998, the outstanding balance was $219 million. As of December 27, 1998, we also had available unsecured uncommitted bank lines of credit in the amount of $69 million, of which $6 million was outstanding.

In February and June 1998, certain of the covenants under the Credit Agreement, including those relating to the modified quick ratio, minimum tangible net worth and the fixed charge coverage ratio, were amended. As of December 27, 1998, we were in compliance with all covenants under the Credit Agreement. In March 1999, the parties to the Credit Agreement agreed to amend certain covenants, including those relating to minimum tangible net worth, the modified quick ratio, the leverage ratio and profitability, to facilitate our compliance with all covenants under the Credit Agreement as of the end of the first quarter of 1999.

FASL, a joint venture formed by AMD and Fujitsu Limited in 1993, is continuing the facilitization of its second Flash memory device wafer fabrication facility, FASL II, in Aizu-Wakamatsu, Japan. We expect the facility, including equipment, to cost approximately $1 billion when fully equipped. As of December 27, 1998, approximately $368 million of such cost had been funded. Capital expenditures for FASL II construction to date have been funded by cash generated from FASL operations and local borrowings by FASL. During 1999, we presently anticipate that FASL capital expenditures will continue to be funded by cash generated from FASL operations and local borrowings by FASL. However, to the extent that FASL is unable to secure the necessary funds for FASL II, we may be required to contribute cash or guarantee third-party loans in pro-portion to our 49.992 percent interest in FASL. As of December 27, 1998, we had loan guarantees of $81 million outstanding with respect to these loans. The planned FASL II costs are denominated in yen and are, therefore, subject to change due to foreign exchange rate fluctuations.

As a result of our alliance with Motorola, relating to the development of Flash memory and logic technology, we expect related research and development spending to be between $15 million and $20 million per quarter in 1999.

We believe that cash flows from operations and current cash balances, together with external financing activities, will be sufficient to fund operations and capital investments through 1999.

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