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Advanced Micro Devices (AMD)

Filed: 19 Jan 05, 7:00pm
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As filed with the Securities and Exchange Commission on January 20, 2005

Registration No. 333 -        


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


ADVANCED MICRO DEVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware 3674 94-1692300

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

One AMD Place

Sunnyvale, California 94088-3453

(408) 749-4000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)


Harry Wolin, Esq.

Senior Vice President, General Counsel

Advanced Micro Devices, Inc.

One AMD Place

Sunnyvale, California 94088-3453

(408) 749-4000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)


Copies to:

Tad J. Freese

Latham & Watkins LLP

505 Montgomery Street, Suite 2000

San Francisco, California 94111

(415) 391-0600

Approximate date of commencement of proposed sale to the public:    As soon as practicable after the effective date of this registration statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration number for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier, effective registration statement for the same offering.  ¨

CALCULATION OF REGISTRATION FEE


Title of Each Class of

Securities to be Registered

  

Amount to be

Registered

  

Proposed

Offering Price

Per Note

  

Proposed

Aggregate

Offering Price

  

Amount of

Registration Fee

7.75% Senior Notes due 2012

  $600,000,000  100%(1) $600,000,000  $70,620

(1)Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(f).

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.

 



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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 20, 2005

 

PRELIMINARY PROSPECTUS

 

LOGO

 

OFFER TO EXCHANGE

up to $600,000,000 aggregate principal amount of its

7.75% Senior Notes due 2012,

which have been registered under the Securities Act,

for any and all of its outstanding 7.75% Senior Notes due 2012

 


 

 The exchange offer expires at 5:00 p.m., New York City time, on                     , 2005, unless extended.

 

 We will exchange all outstanding private notes that are validly tendered and not validly withdrawn for an equal principal amount of a new series of notes, referred to in this prospectus as exchange notes, which are registered under the Securities Act.

 

 The exchange offer is not subject to any conditions other than that it not violate applicable law or any applicable interpretation of the staff of the SEC.

 

 You may withdraw tenders of outstanding notes at any time before the exchange offer expires.

 

 The exchange of notes will not be a taxable event for U.S. federal income tax purposes.

 

 We will not receive any proceeds from the exchange offer.

 

 The terms of the exchange notes are substantially identical to the outstanding private notes, except for transfer restrictions and registration rights relating to the outstanding notes.

 

 You may tender outstanding notes only in denominations of $1,000 and multiples of $1,000.

 

 Our affiliates may not participate in the exchange offer.

 


 

Please refer to “Risk Factors” beginning on page 15 of this prospectus for a description of the risks you should consider before exchanging the notes.

 

We are not making this exchange offer in any state where it is not permitted.

 


 

Neither the Securities and Exchange Commission nor any state securities commission has approved of the notes or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 



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We have not authorized any dealer, salesperson or other person to give any information or make any representations to you other than the information contained in this prospectus. You must not rely on any information or representations not contained in this prospectus as if we had authorized it. This prospectus does not offer to sell or solicit an offer to buy any securities other than the registered notes to which it relates, nor does it offer to buy any notes in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction.

 

The information contained in this prospectus is current only as of the date on the cover page of this prospectus, and may change after that date.

 

This prospectus incorporates important business and financial information about us that is not included in or delivered with this prospectus. This information is available without charge to you upon written or oral request. If you would like a copy of any of this information, please submit your request to Advanced Micro Devices, Inc., One AMD Place, Sunnyvale, California 94088, Attention: Legal Department, or call (408) 749-4000 and ask to speak to someone in our Legal Department. In addition, to obtain timely delivery of any information you request, you must submit your request no later than                     , 2005, which is five business days before the date the exchange offer expires.

 


 

TABLE OF CONTENTS

 

   Page

Prospectus Summary

  1

Risk Factors

  15

The Exchange Offer

  32

Use of Proceeds

  41

Capitalization

  42

Selected Historical Consolidated Financial Data

  43

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

  45

Business

  78

Management

  96

Description of Certain Indebtedness

  99

Description of the Notes

  105

Book-Entry; Delivery and Form

  140

United States Federal Income Tax Considerations

  142

Plan of Distribution

  143

Legal Matters

  143

Experts

  143

Available Information

  144

Incorporation by Reference

  144

 

Each broker-dealer that receives exchange notes for its own account in exchange for private notes, which the broker-dealer acquired as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. The letter of transmittal accompanying this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. A broker-dealer may use this prospectus, as it may be amended or supplemented from time to time, in connection with resales of exchange notes received in exchange for private notes which the broker-dealer acquired as a result of market-making or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

 

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MARKET AND INDUSTRY DATA

 

Market and industry data throughout this prospectus were obtained from a combination of third-party industry data and good faith estimates of management based on these data. While we believe these industry data and estimates of management are reliable, neither we nor the initial purchasers have independently verified this data. Accordingly, neither we nor the initial purchasers make any representations as to the accuracy or completeness of these data. We are not aware of any misstatements regarding market or industry data contained in this prospectus; however, such data involves risks and uncertainties and is subject to change based on various factors, including those factors discussed in the “Risk Factors” section of this prospectus.

 

TRADEMARKS

 

AMD, the AMD Arrow logo, AMD Opteron, AMD Athlon, AMD Sempron, AMD Turion, AMD PowerNow!, Alchemy, Geode and combinations thereof are trademarks of Advanced Micro Devices, Inc. Spansion and MirrorBit are trademarks of Spansion LLC. HyperTransport is a licensed trademark of the HyperTransport Technology Consortium. Windows is a registered trademark of Microsoft Corporation in the United States and/or other jurisdictions. MIPS is a registered trademark of MIPS Technologies, Inc. Other names are for informational purposes only and may be trademarks of their respective owners.

 

FORWARD-LOOKING STATEMENTS

 

Discussions contained in this prospectus and the documents incorporated by reference in this prospectus include forward-looking statements. These forward-looking statements involve numerous risks and uncertainties and should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology or by discussions of strategy, plans or intentions. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially. The forward-looking statements relate to, among other things:

 

 our sales, operating results and anticipated cash flows;

 

 the adequacy of resources to fund operations and capital expenditures;

 

 marketing, general and administrative expenditures;

 

 customer and market acceptance of our AMD Opteron, AMD Athlon 64, AMD Turion 64 and AMD Sempron microprocessors;

 

 customer and market acceptance of Spansion Flash memory products based on MirrorBit and floating gate technology;

 

 our ability to remain competitive and maintain our market position;

 

 our ability to maintain and develop key relationships with our customers;

 

 the ability to produce our microprocessor and Flash memory products in the volumes and mix required by the market;

 

 our ability to maintain the level of investment in research and development and capacity that is required to remain competitive;

 

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  our ability to transition to new products and manufacturing process technologies in a timely and effective way;

 

  our ability to achieve cost reductions in the amounts and in the timeframes anticipated;

 

  the process technology transitions in our wafer fabrication facilities; and

 

  our ability to gain market share in high growth global markets such as China, Latin America, India and Eastern Europe.

 

See “Risk Factors,” as well as such other risks and uncertainties as are detailed in our other documents incorporated by reference in this prospectus, for a discussion of the factors that could cause actual results to differ materially from the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only. We assume no obligation to update forward-looking statements.

 

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PROSPECTUS SUMMARY

 

As used in this prospectus, references in this prospectus to “us,” “we,” “our,” the “Company” or “AMD” shall mean Advanced Micro Devices, Inc. and our consolidated subsidiaries, including Spansion LLC, unless the context indicates otherwise. The summary highlights selected information contained or incorporated by reference in this prospectus. This summary is not complete and does not contain all the information that you should consider before exchanging your notes. You should read this entire prospectus, including the risk factors, the financial statements and the related notes included elsewhere in this prospectus, as well as the information incorporated by reference, before tendering your private notes in exchange for exchange notes.

 

Our Company

 

We are a leading semiconductor company with manufacturing facilities in the United States, Europe and Asia, and sales offices throughout the world. We design, manufacture and market industry-standard digital integrated circuits, or ICs, that are used in diverse product applications such as desktop and mobile personal computers, or PCs, workstations, servers, communications equipment such as mobile telephones and automotive and consumer electronics. Our products consist primarily of:

 

  microprocessors, which are used for control and computing tasks, and complementary chipset components, which perform essential logic functions that support the microprocessors; and

 

  Flash memory devices, which are used to store data and programming instructions.

 

In addition, we are targeting the embedded processor market for personal connectivity devices.

 

Our major direct microprocessor customers are original equipment manufacturers, or OEMs, such as Acer, eMachines, Fujitsu-Siemens, Hewlett-Packard and Sun Microsystems. Our major direct Flash memory customers include five of the top seven mobile phone manufacturers. For the nine months ended September 26, 2004, we had approximately $3.7 billion of consolidated net sales. We are listed on the New York Stock Exchange under the trading symbol “AMD.”

 

Our Industry

 

The Microprocessor Market

 

A microprocessor is an IC that serves as the central processing unit, or CPU, of a computer. It generally consists of millions of transistors that process data and control other devices in the system. The performance of a microprocessor is a critical factor impacting the performance of a PC and other similar devices. The principal indicators of microprocessor performance are work-per-cycle, or how many instructions are executed per cycle, and clock speed, representing the rate at which its internal logic operates, measured in units of hertz, or cycles processed per second. Other factors impacting microprocessor performance include memory size, data access speed and power consumption.

 

Emerging trends in the microprocessor market include:

 

  64-bit computing. For nearly the last ten years, microprocessors have had 32-bit processing capabilities. While 32-bit processors have historically been sufficient, we believe that they will face challenges as new data and memory-intensive consumer and enterprise software applications gain market popularity. Microprocessors with 64-bit processing capabilities enable systems to have greater performance by allowing software applications and operating systems to access more memory and process more data.

 

  

Dual-core processors. Over the last ten years as microprocessors have increased in transistor density and overall performance capabilities, they have increasingly faced power consumption challenges. The

 

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expected introduction of dual-core processors, consisting of two processor cores on one semiconductor die, provides an attractive method of increasing processor performance with minimal increase in power consumption.

 

Microprocessors are essential components of both PCs and servers, with the greatest demand for microprocessors today coming from PC manufacturers. In 2003, the global market for microprocessors used in PCs was $20.8 billion according to International Data Corporation, or IDC. IDC expects the global market for microprocessors used in PCs to increase to $31.4 billion by 2008, representing a compound annual growth rate of 8.6 percent from 2003. According to IDC, the majority of this growth is expected to be driven by increased demand for mobile PCs, with microprocessors used in mobile PCs being expected to grow at a compound annual growth rate of 18.2 percent from 2003 to 2008. In addition, according to Gartner, server unit shipments are expected to grow at a 9.0 percent compound annual growth rate from 2003 to 2008. Accordingly, we believe that there will be increased demand for microprocessors from server manufacturers as enterprises continue to upgrade their networks.

 

The Flash Memory Market

 

Flash memory devices store data and instructions and retain information after electrical power is shut off. Flash memory can be used to provide storage of control programs and system-critical data in communication devices such as mobile telephones and routers. There are two major types of Flash memory employed in the market today: Boolean logic-based NOR (Not Or) Flash memory and NAND (Not And) Flash memory. According to Gartner, in 2003, global NOR Flash memory sales were $6.8 billion and global NAND Flash memory sales were $4.1 billion. NOR Flash memory is generally more reliable than NAND Flash memory and less prone to data corruption. NOR Flash memory is typically used to store program code in communication devices such as mobile telephones and consumer products such as DVD players. NAND Flash memory has generally been less expensive to manufacture and is typically used in devices that require high-capacity data storage such as memory cards for digital cameras and MP3 players. Within the Flash memory market, we sell NOR Flash memory products. However, we have designed a new architecture called ORNAND based on our MirrorBit technology that we believe will enable us to offer products that combine the best features of both NOR and NAND architectures. We believe that ORNAND will allow us to offer products with higher densities in the NOR Flash memory market and will enable us to enter and compete in end markets traditionally served by NAND.

 

The global Flash memory market (both NAND technology and NOR technology) has grown significantly over the past five years, from $2.8 billion in 1998 to $10.9 billion in 2003 according to Gartner, representing a compound annual growth rate of 31.5 percent. Gartner projects the global Flash memory market will increase to $22.6 billion in 2008, representing a compound annual growth rate of 15.7 percent from 2003. Over this period, Gartner projects that global sales of NOR Flash memory will grow by 11.0 percent and global sales of NAND Flash memory will grow by 22.0 percent. We believe much of this growth will be driven by an increase in unit shipments and Flash memory content in mobile telephones, growth in unit shipments and Flash memory content for personal connectivity and consumer electronic devices and proliferation of Flash memory within a variety of new automotive applications.

 

Our Strengths

 

We believe that the following strengths have enabled us to attain a leading position as a global manufacturer and supplier of microprocessors and Flash memory devices, and will assist us in penetrating the embedded microprocessor market for personal connectivity devices:

 

Customer-Focused Product Development. We work with customers to identify evolving needs and new applications in order to develop innovative products and features. For example, we developed our AMD64 technology to address increasing customer demand for systems with greater performance. Our AMD64

 

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technology allows both 32-bit and 64-bit computing, enabling our customers to protect their investment by continuing to use their 32-bit software applications while transitioning to a 64-bit platform. Currently more than 40 percent ofForbes 100 companies or their affiliates now use AMD64 processor-based systems to run critical enterprise applications. In Flash memory, we have worked closely with mobile telephone customers to develop products that deliver high performance and functionality at lower price points. We believe that our MirrorBit technology will enable our customers to cost effectively include next-generation applications, such as high-resolution cameras and streaming video, on their mobile telephones.

 

Technology and Product Innovation. We believe that our strong research and product development capabilities have resulted in innovative IC designs and the creation of advanced products. For example, we led the industry in providing x86 64-bit computing with the introduction of our AMD Opteron microprocessors in April 2003. In addition, we were the first to demonstrate x86 dual-core processor technology, which provides a path for increasing processor performance with a minimal increase in power consumption. In Flash memory, we have designed our ORNAND architecture to provide the high reliability of NOR, read speeds and burst write speeds significantly faster than those of NAND today and the ability to scale to high densities at competitive costs.

 

Leading Manufacturing Process Technology. We have devoted significant resources to develop manufacturing process technologies used in the production of ICs. In order to meet anticipated microprocessor demand, we are completing the construction of and facilitizing a new 300-millimeter wafer fabrication facility in Dresden, Germany, which will be equipped to manufacture microprocessors at 65-nanometer geometries and below. In addition, we recently upgraded Fab 30 to add incremental capacity at 90-nanometer geometries. For our Flash memory products, we are in volume production on 110-nanometer geometries, and we plan to be in production on 90-nanometer geometries in the second half of 2005.

 

Key Technology and Manufacturing Relationships. In order to maintain our technology and manufacturing expertise, we have entered into strategic relationships with several companies. Key relationships include:

 

  Fujitsu. In June 2003, we established Spansion LLC, a new Flash memory company, which integrated our and Fujitsu’s Flash memory businesses, including our previous Flash memory manufacturing joint venture with Fujitsu called Fujitsu AMD Semiconductor Limited, or FASL. We hold a 60 percent interest in Spansion LLC and Fujitsu holds the remaining 40 percent interest. Spansion LLC is currently a leading provider of NOR Flash memory.

 

  IBM. We have a joint development agreement with IBM to develop new microprocessor process technologies, including 65-nanometer and 45-nanometer, to be implemented on silicon wafers, which we deploy in our wafer fabrication facilities.

 

Strong Market Position. We are one of the largest suppliers of microprocessors and the largest company dedicated exclusively to developing, designing and manufacturing Flash memory. According to IDC, in 2003, we had a market share of 16.5 percent in microprocessors based on unit sales, second to Intel. According to the market research firm iSupply, we were the largest NOR Flash memory supplier by revenue based on the first nine months of 2004, with 25.2 percent of the NOR Flash memory market.

 

Our Strategy

 

We intend to continue to leverage our technology, manufacturing expertise and customer relationships to build on our position as a leading provider of microprocessors and Flash memory products, and to penetrate the embedded processor market for personal connectivity devices. We are pursuing the following strategies to achieve these goals:

 

Expand Our Market Opportunity. Through our continued commitment to research and development of cutting-edge products, we plan to continue to be an innovator in the design of new ICs. We plan to leverage our

 

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technology to expand our market share in existing markets, as well as enter new markets and expand our presence in high growth global markets such as China, Eastern Europe, India and Latin America. Our strategy in each of our operating segments is as follows:

 

  Microprocessors. We will seek to increase market acceptance of our AMD64 technology, particularly in the enterprise segment. In addition, we have successfully demonstrated our dual-core processors and we plan to offer commercially dual-core processors for servers and workstations in mid-2005, followed by dual-core processors for the PC market in late 2005. We also intend to invest in our mobile microprocessor product portfolio with increasing emphasis on low-power computing in order to address further the thin-and-light segment.

 

  Flash Memory. In the Flash memory sector, we intend to expand our leading position in the NOR Flash memory market as well as leverage our ORNAND architecture based on MirrorBit technology to enter markets traditionally served by NAND Flash memory.

 

Accelerate New Product Development through Our Customer-Centric Innovation. We are focused on providing new products that assist our customers in adding functionality and enhancing the performance of their products. As we did with our AMD64 and MirrorBit technology, we intend to continue to work closely with our customers to jointly define our next-generation products in order to develop solutions for their technology needs.

 

Leverage Our Manufacturing and Process Technology Expertise to Support Next-Generation Products. We are focused on developing microprocessor and Flash memory designs using advanced manufacturing process technology. We plan to continue manufacturing products with smaller geometries, such as 90-nanometer geometries and below, on larger silicon wafers, such as 300-millimeter wafers. We believe that using such smaller geometries and larger wafers will result in a lower cost per unit and enhance our competitive advantage.

 

Continue to Pursue Strategic Alliances. We will continue to pursue strategic technology and manufacturing alliances that provide us with the ability to develop more efficient manufacturing capabilities, offer a stronger product portfolio with next-generation products, and increase market share. We believe these alliances will enable us to continue to improve our cost structure and decrease the risks associated with the development of new products and technologies.

 

Distinguish and Market Our Brand Name. We seek to increase sales of our products through targeted advertising directed at both business and home users as part of our branding campaign. Through a combination of online media, multimedia, print collateral, public relations activities, trade events and sponsorships, we are also seeking to position ourselves in the market as a leader in innovation driven by customer needs. For example, we seek to distinguish the AMD Athlon 64 brand by marketing our AMD Athlon 64 processors to sophisticated PC users, gamers and enterprises, and our AMD Sempron processors to value-conscious buyers of desktop and notebook PCs. We are also marketing our AMD Opteron processors to server OEMs. In addition, we are marketing our Spansion Flash memory devices to mobile phone and embedded systems markets.

 

Recent Developments

 

Results of Operations for the Fourth Quarter and Fiscal Year Ended December 26, 2004

 

On January 18, 2005, we reported net sales of $1.26 billion and operating income of $20 million for the quarter ended December 26, 2004. The net loss of $30 million, or $0.08 per share, for the fourth quarter included charges of approximately $49 million, or $0.13 per share. These charges are primarily associated with the exchange of an aggregate of $201.0 million of our 4.50% Convertible Senior Notes due 2007 for 29,391,261 shares of our common stock and the prepayment premium associated with the prepayment of the full amount owed by our indirect wholly-owned German subsidiary, AMD Saxony Limited Liability Company & Co. KG, under its existing term loan, which was paid using the net proceeds from the sale of the notes. For more

 

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information, see “Use of Proceeds.” For the fiscal year ended December 26, 2004, net sales were approximately $5 billion, a 42 percent increase from the fiscal year ended December 28, 2003. Net income for fiscal year 2004 was $91 million, or $0.25 per share.

 

Net sales in the fourth quarter increased by two percent compared to the third quarter of 2004 and increased by five percent compared to the fourth quarter of 2003. In the fourth quarter of 2003, we reported sales of $1.21 billion and net income of $43 million, or $0.12 per share. In the third quarter of 2004, we reported sales of $1.24 billion and net income of $44 million, or $0.12 per share.The increase in net sales in the fourth quarter compared to the third quarter of 2004 was primarily attributable to an increase in net sales for Computation Products of nine percent. In addition, in the fourth quarter, net sales of AMD64-based microprocessors increased to 50 percent of total PC processor sales.

 

Net sales for Computation Products were $730 million in the fourth quarter of 2004, an increase of 26 percent from the fourth quarter of 2003 and an increase of nine percent from $672 million in the third quarter of 2004. Operating income for Computation Products of $89 million in the fourth quarter was flat compared with the third quarter. The growth in net sales for Computation Products was primarily attributable to an increase in unit shipments across all segments,particularly our server and mobile processor products, with strong sales in high-growth global markets.

 

Net sales for Memory Products were $504 million in the fourth quarter of 2004, a decrease of 11 percent from the fourth quarter of 2003 and a decrease of six percent from $538 million in the third quarter of 2004. Net sales decreased due to an aggressive pricing environment, significantly lower sales in Japan and a delay in qualifying a new product in the wireless segment. Operating loss for Memory Products in the fourth quarter was $39 million, compared to operating income of $15 million in the third quarter of 2004. The average bit density in Spansion Flash memory products grew in the fourth quarter and we shipped a record number of bits, with MirrorBit technology increasing as a percentage of overall bits shipped.

 

Operating income for the fourth quarter of $20 million declined from $46 million in the fourth quarter of 2003 and from $68 million in the third quarter of 2004. Operating expenses of $498 million increased from $389 million in the fourth quarter of 2003 and from $433 million in the third quarter of 2004. Research and development costs for the fourth quarter increased by nine percent compared to the third quarter largely due to start-up costs associated with our new 300-millimeter fabrication facility, Fab 36, and other server and workstation product development costs. Marketing, general and administrative costs in the fourth quarter increased 21 percent as compared to the third quarter of 2004 primarily due to seasonal merchandising activities, increased marketing investments and costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

 

Gross margin increased to 41 percent in the fourth quarter of 2004 from 40 percent in the third quarter of 2004 due primarily to increased net sales of Computation Products. Our cash, cash equivalents and short-term investments at December 26, 2004 totaled $1.20 billion, compared with $1.19 billion at the end of the third quarter of 2004.

 

Other Information

 

We were incorporated under the laws of Delaware on May 1, 1969. Our mailing address and executive offices are located at One AMD Place, Sunnyvale, California 94088, and our telephone number is (408) 749-4000. Our website iswww.amd.com. The information contained on our website does not constitute a part of this prospectus.

 

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The Exchange Offer

 

The Exchange Offer

We are offering to exchange the exchange notes for the outstanding private notes that are properly tendered and accepted. You may tender outstanding private notes only in denominations of $1,000 and multiples of $1,000. We will issue the exchange notes on or promptly after the exchange offer expires. As of the date of this prospectus, $600,000,000 principal amount of private notes is outstanding.

 

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on                     , 2005, unless extended, in which case the expiration date will mean the latest date and time to which we extend the exchange offer.

 

Conditions to the Exchange Offer

The exchange offer is not subject to any condition other than that it not violate applicable law or any applicable interpretation of the staff of the SEC. The exchange offer is not conditioned upon any minimum principal amount of private notes being tendered for exchange.

 

Procedures for Tendering Private Notes

If you wish to tender your private notes for exchange notes pursuant to the exchange offer, you must transmit to Wells Fargo Bank, N.A., as exchange agent, on or before the expiration date, either:

 

  a computer generated message transmitted through The Depository Trust Company’s Automated Tender Offer Program system and received by the exchange agent and forming a part of a confirmation of book-entry transfer in which you acknowledge and agree to be bound by the terms of the letter of transmittal; or

 

  a properly completed and duly executed letter of transmittal, which accompanies this prospectus, or a facsimile of the letter of transmittal, together with your private notes and any other required documentation, to the exchange agent at its address listed in this prospectus and on the front cover of the letter of transmittal.

 

 

If you cannot satisfy either of these procedures on a timely basis, then you should comply with the guaranteed delivery procedures described below. By executing the letter of transmittal, you will make the representations to us described under “The Exchange Offer—Procedures for Tendering.”

 

Special Procedures for Beneficial Owners

If you are a beneficial owner whose private notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your private notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on your own behalf, you must either (1) make appropriate arrangements to register ownership of the private notes in your name or (2) obtain a properly completed bond power from the registered

 

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holder before completing and executing the letter of transmittal and delivering your private notes.

 

Guaranteed Delivery Procedures

If you wish to tender your private notes and time will not permit the documents required by the letter of transmittal to reach the exchange agent before the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, you must tender your private notes according to the guaranteed delivery procedures described in this prospectus under the heading “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Acceptance of the Private Notes and Delivery of the Exchange Notes

Subject to the satisfaction or waiver of the conditions to the exchange offer, we will accept for exchange any and all private notes which are validly tendered in the exchange offer and not withdrawn before 5:00 p.m., New York City time, on the expiration date.

 

Withdrawal Rights

You may withdraw the tender of your private notes at any time before 5:00 p.m., New York City time, on the expiration date, by complying with the procedures for withdrawal described in this prospectus under the heading “The Exchange Offer—Withdrawal of Tenders.”

 

U.S. Federal Tax Considerations

The exchange of notes will not be a taxable event for United States federal income tax purposes. For a discussion of certain federal tax considerations relating to the exchange of notes, see “U.S. Federal Income Tax Considerations.”

 

Exchange Agent

Wells Fargo Bank, N.A., the trustee under the indenture governing the notes, is serving as the exchange agent.

 

Consequences of Failure to Exchange

If you do not exchange your private notes for exchange notes, you will continue to be subject to the restrictions on transfer provided in the private notes and in the indenture governing the private notes. In general, the private notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently plan to register the private notes under the Securities Act.

 

Broker-Dealers

Each broker-dealer that receives exchange notes for its own account in exchange for private notes, which the broker-dealer acquired as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. See “Plan of Distribution.”

 

Registration Rights Agreement

You are entitled to exchange your private notes for exchange notes with substantially identical terms. This exchange offer satisfies that right. After the exchange offer is completed, you will no longer be entitled to any exchange or registration rights with respect to your private notes.

 

We explain the exchange offer in greater detail beginning on page 32.

 

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The Exchange Notes

 

The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of the Notes” section of this prospectus contains a more detailed description of the terms of the exchange notes.

 

The form and terms of the exchange notes are the same as the form and terms of the private notes, except that the exchange notes will be registered under the Securities Act and, therefore, the exchange notes will not be subject to the transfer restrictions, registration rights and provisions providing for an increase in the interest rate applicable to the private notes. The exchange notes will evidence the same debt as the private notes and are governed by the same indenture as the private notes.

 

Issuer

Advanced Micro Devices, Inc.

 

Notes Offered

$600,000,000 aggregate principal amount of 7.75% Senior Notes due 2012.

 

Interest Payment Dates

May 1 and November 1 of each year, beginning on May 1, 2005.

 

Maturity Date

November 1, 2012.

 

Ranking

The notes are our general unsecured senior obligations. The notes:

 

  rank equal in right of payment with all of our current and future unsecured senior debt;

 

  are effectively subordinated in right of payment to all of our existing and future secured debt, to the extent of the value of the assets securing such debt;

 

  are effectively subordinated to our debt that is guaranteed in the future by our subsidiaries with respect to the assets and earnings of those subsidiaries, including Spansion LLC, our majority-owned subsidiary;

 

  are structurally subordinated to all existing and future debt and other liabilities, including trade payables, of our subsidiaries including Spansion LLC; and

 

  are senior in right of payment to all of our subordinated obligations, if any.

 

As of September 26, 2004, after giving effect to the issuance of the private notes and the application of the net proceeds therefrom:

 

  we would have had consolidated debt of $2,024 million, approximately $1,503 million of which would have constituted debt directly borrowed by AMD, and approximately $521 million of which would have constituted debt directly borrowed by our subsidiaries;

 

  of the debt directly borrowed by AMD as described above, none of such debt would have been secured or guaranteed by any of our subsidiaries;

 

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  of the debt directly borrowed by our subsidiaries as described above, approximately $213 million of such debt would have been guaranteed by AMD (of which approximately $31 million would have been secured by assets of AMD);

 

  in addition to the debt described above, we would have had other liabilities of approximately $1,869 million, approximately $1,100 million of which would have constituted other liabilities of our subsidiaries; and

 

  in addition to the debt and other liabilities described above, AMD and/or its subsidiaries would have guaranteed approximately $178 million of obligations, which guarantees are not reflected on our consolidated balance sheet.

 

Furthermore, as of September 26, 2004, we had available up to $100 million for future secured borrowings under a revolving credit facility. We and our subsidiaries may incur additional debt (including secured and guaranteed debt) and other liabilities in the future.

 

Unrestricted Subsidiaries

We derived approximately 27 percent of our consolidated net sales for the year ended December 28, 2003 and 48 percent of our consolidated net sales for the nine months ended September 26, 2004 from our unrestricted subsidiaries, including Spansion LLC. The indenture governing the notes will provide that Spansion LLC and its subsidiaries will constitute unrestricted subsidiaries under, and as defined in, the indenture, even though certain debt of Spansion LLC and its subsidiaries (a) will be recourse debt and (b) could cause cross-defaults on our debt and the debt of our restricted subsidiaries. Spansion LLC and its subsidiaries, as unrestricted subsidiaries, will not be subject to the covenants or certain defaults applicable to us and our restricted subsidiaries. As of September 26, 2004 we had made loans to Spansion LLC and its subsidiaries in an aggregate amount of approximately $357 million and had guaranteed indebtedness of Spansion LLC and its subsidiaries in an aggregate amount of approximately $213 million.

 

Optional Redemption

Prior to November 1, 2008, we may redeem some or all of the notes at a price equal to 100 percent of the principal amount, plus accrued and unpaid interest and a “make-whole” premium. Thereafter, we may redeem all or part of the notes at any time at the redemption prices set forth in the section “Description of the Notes—Optional Redemption,” plus accrued and unpaid interest, if any, to the date of redemption.

 

 

On or prior to November 1, 2007, we may redeem up to 35 percent of the notes with the proceeds of certain sales of our equity securities at 107.75 percent of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption. See “Description of the Notes—Optional Redemption.”

 

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Change of Control

Upon the occurrence of a change of control, you will have the right as a holder of notes to require us to repurchase all of your notes at a repurchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. We may not have enough funds or the terms of our other debt may prevent us from purchasing the notes. See “Description of the Notes—Repurchase at the Option of Holders Upon a Change of Control.”

 

Certain Covenants

The indenture governing the notes will contain certain covenants that will limit, among other things, our ability and the ability of our restricted subsidiaries to:

 

  incur additional indebtedness;

 

  pay dividends and make other restricted payments;

 

  make certain investments, including investments in our unrestricted subsidiaries;

 

  create or permit certain liens;

 

  create or permit restrictions on the ability of the restricted subsidiaries to pay dividends or make other distributions to us;

 

  use the proceeds from sales of assets;

 

  enter into certain types of transactions with affiliates; and

 

  consolidate or merge or sell our assets as an entirety or substantially as an entirety.

 

These covenants are subject to a number of important exceptions and limitations, which are described under the heading “Description of the Notes—Certain Covenants.”

 

Use of Proceeds

We will not receive any cash proceeds from the exchange offer.

 

Risk Factors

An investment in the notes involves substantial risks. You should consider carefully all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” before tendering your private notes in exchange for exchange notes.

 

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Summary Historical Consolidated Financial Data

 

The following table sets forth summary historical consolidated financial information. The summary statement of operations and cash flows data for the years ended December 30, 2001, December 29, 2002 and December 28, 2003, and the summary balance sheet data as of December 29, 2002 and December 28, 2003, have been derived from, and should be read together with, our audited consolidated financial statements incorporated by reference in this prospectus. The summary balance sheet data as of December 30, 2001, have been derived from our audited consolidated financial statements not incorporated by reference in this prospectus. The summary balance sheet data and summary statement of operations and cash flows data as of and for the nine months ended September 26, 2004, and the summary balance sheet data and summary statement of operations and cash flows data as of and for the nine months ended September 28, 2003, have been derived from, and should be read together with, our unaudited interim condensed consolidated financial statements incorporated by reference in this prospectus. The summary balance sheet data as of September 28, 2003 have been derived from unaudited interim condensed consolidated financial statements not incorporated by reference in this prospectus. Other financial data, including data for the twelve months ended September 26, 2004, are derived from our unaudited interim condensed consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation. Our consolidated financial statements for periods subsequent to June 30, 2003 include the financial position and operating results of Spansion LLC, our majority-owned subsidiary, which we formed with Fujitsu Limited, effective June 30, 2003. Results of our operations for periods prior to June 30, 2003 do not include the operating results of Spansion LLC, therefore our operating results for the year ended December 28, 2003 and nine months ended September 26, 2004 are not fully comparable with our results for prior periods. We have provided summary historical consolidated financial data for the twelve-month period ended September 26, 2004 to enable investors to evaluate our consolidated operating results over the most recent cumulative 12-month period. Operating results for the nine months and twelve months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the full year ended December 26, 2004. The following summary historical consolidated financial data should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

  Fiscal Year Ended

  Nine Months Ended

  Twelve
Months
Ended
Sept. 26,
2004


 
  

Dec. 30,

2001


  

Dec. 29,

2002


  

Dec. 28,

2003


  

Sept. 28,

2003


  

Sept. 26,

2004


  
  (in thousands) 

Statement of Operations Data:

                        

Net sales

 $3,891,754  $2,697,029  $3,070,228  $2,125,989  $2,876,699  $3,820,938 

Net sales to related party

  —     —     448,940   187,586   861,030   1,122,384 
  


 


 


 


 


 


Total net sales

  3,891,754   2,697,029   3,519,168   2,313,575   3,737,729   4,943,322 

Expenses:

                        

Cost of sales

  2,589,747   2,105,661   2,327,063   1,548,556   2,289,935   3,068,442 

Research and development

  650,930   816,114   852,075   625,572   681,807   908,310 

Marketing, general and administrative

  620,030   670,065   587,307   424,500   561,389   724,196 

Restructuring and other special charges, net

  89,305   330,575   (13,893)  (5,854)  2,514   (5,525)
  


 


 


 


 


 


Operating income (loss)

  (58,258)  (1,225,386)  (233,384)  (279,199)  202,084   247,899 

Interest income and other, net

  25,695   32,132   21,116   12,203   11,280   20,193 

Interest expense

  (61,360)  (71,349)  (109,960)  (79,017)  (83,258)  (114,201)
  


 


 


 


 


 


Income (loss) before minority interest, income taxes and equity in net income of manufacturing joint venture(1)

  (93,923)  (1,264,603)  (322,228)  (346,013)  130,106   153,891 

Minority interest in loss (income) of subsidiary

  —     —     44,761   25,353   1,832   21,240 
  


 


 


 


 


 


Income (loss) before income taxes and equity in net income of manufacturing joint venture

  (93,923)  (1,264,603)  (277,467)  (320,660)  131,938   175,131 

Provision (benefit) for income taxes

  (14,463)  44,586   2,936   2,936   10,819   10,819 
  


 


 


 


 


 


Income (loss) before equity in net income of manufacturing joint venture

  (79,460)  (1,309,189)  (280,403)  (323,596)  121,119   164,312 

Equity in net income of manufacturing joint venture

  18,879   6,177   5,913   5,913   —     —   
  


 


 


 


 


 


Net income (loss)

 $(60,581) $(1,303,012) $(274,490) $(317,683)  121,119   164,312 
  


 


 


 


 


 


 

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  Fiscal Year Ended

 Nine Months Ended

  

Twelve
Months
Ended

Sept. 26,

2004


 
  

Dec. 30,

2001


  

Dec. 29,

2002


  

Dec. 28,

2003


 

Sept. 28,

2003


  

Sept. 26,

2004


  
  (in thousands) 

Cash Flow Data:

                       

Net cash provided by (used in) operating activities

 $167,645  $(119,963) $295,586 $(93,006) $724,333  $1,112,925 

Net cash provided by (used in) investing activities

  (553,521)  (854,389)  83,183  290,555   (1,011,791)  (1,219,163)

Net cash provided by (used in) financing activities

  140,891   907,440   267,402  365,694   98,886   594 

Other Financial Data:

                       

EBITDA(2)

 $552,759  $(466,298) $814,367 $457,673  $1,098,685  $1,455,379 

Depreciation and amortization

  622,867   756,169   995,663  708,352   895,104   1,182,415 

Capital expenditures

  678,865   705,147   570,316  407,535   969,758   1,132,539 

Ratio of total debt to LTM net income

                     12.43x

Ratio of total pro forma debt to LTM EBITDA(3)

                     1.39x

Balance Sheet Data (at end of period):

                       

Cash(4)

 $869,997  $1,006,655  $1,313,367 $1,075,939  $1,185,177  $1,185,177 

Working capital

  1,039,172   851,303   1,448,008  1,248,941   1,467,314   1,467,314 

Total assets

  5,647,242(5)  5,710,318(5)  7,049,772  6,664,365(5)  7,282,439   7,282,439 

Total long term debt and capital lease obligations

  635,705   1,640,055   2,092,940  2,081,576   2,043,044   2,043,044 

Stockholders’ equity

  3,555,055   2,467,265   2,438,310  2,282,784   2,571,442   2,571,442 

(1)Manufacturing joint venture refers to Fujitsu AMD Semiconductor Limited (FASL), our previous manufacturing joint venture with Fujitsu Limited, which was contributed to Spansion LLC in connection with the formation of Spansion LLC, effective June 30, 2003.
(2)EBITDA is defined as net income (loss) before (i) interest income, (ii) interest expense, (iii) provision for income taxes and (iv) depreciation and amortization. EBITDA does not include Fujitsu Limited’s 40 percent share of Spansion LLC’s net income or loss. Depreciation and amortization, interest income and interest expense as set forth below represent amounts that are also attributable to the results of operations of Spansion LLC and its subsidiaries. Other companies in our industry may calculate EBITDA differently than we do and EBITDA as presented in this prospectus may not be comparable with similarly titled measures of other companies. We have included this non-GAAP financial measure because we believe that it provides holders of the notes with useful information in assessing our operating performance and as an indicator of our ability to service or incur indebtedness, make capital expenditures and finance working capital requirements. EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. The reconciliation of net income (loss) under GAAP to EBITDA is as follows:

 

  Fiscal Year Ended

  Nine Months Ended

  

Twelve
Months
Ended

Sept. 26,

2004


 
  

Dec. 30,

2001


  

Dec. 29,

2002


  

Dec. 28,

2003


  

Sept. 28,

2003


  

Sept. 26,

2004


  
  (in thousands) 

Net income (loss)

 $(60,581) $(1,303,012) $(274,490) $(317,683) $121,119  $164,312 

Depreciation and amortization

  622,867   756,169   995,663   708,352   895,104   1,182,415 

Interest income

  (56,424)  (35,390)  (19,702)  (14,949)  (11,615)  (16,368)

Interest expense

  61,360   71,349   109,960   79,017   83,258   114,201 

Provision (benefit) for income taxes

  (14,463)  44,586   2,936   2,936   10,819   10,819 
  


 


 


 


 


 


EBITDA

 $552,759  $(466,298) $814,367  $457,673  $1,098,685  $1,455,379 
  


 


 


 


 


 


 

(3)Total pro forma debt is total debt taking into effect the issuance of the notes and the application of the net proceeds therefrom. We have included this non-GAAP financial measure because we believe that it provides noteholders with useful information in assessing our operating performance and as an indicator of our ability to service or incur indebtedness, make capital expenditures and finance working capital requirements. The reconciliation of the ratio of total debt to LTM net income (loss) under GAAP to the ratio of pro forma debt to LTM EBITDA is as follows:

 

   Twelve Months Ended
Sept. 26, 2004


 

For a reconciliation of net income to EBITDA, see Footnote 2 above.

     

Reconciliation of total debt to pro forma total debt:

     

Total debt

  $2,043,044 

Total pro forma debt

   2,024,359 

EBITDA

   1,455,379 

Ratio of total debt to net income

   12.43x

Ratio of pro forma total debt to net income

   12.32x

Ratio of pro forma debt to EBITDA

   1.39x

 

(4)Cash includes cash, cash equivalents, compensating balance and short-term investments.
(5)Total assets as of December 30, 2001, December 29, 2002 and September 28, 2003 do not reflect a reclassification of certain prior period amounts to conform to current period presentation. After taking effect of the reclassification, total assets for December 30, 2001, December 29, 2002 and September 28, 2003 were $5,636,445, $5,694,453 and $6,628,996. This reclassification will be reflected in our future earnings releases and periodic reports. We do not believe that these reclassifications are material to the overall presentation of our balance sheet data.

 

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Summary Restricted Group Consolidated Financial Data

 

The following table sets forth summary restricted group unaudited consolidated financial data for the year ended December 28, 2003 and the nine months and twelve months ended September 26, 2004. Spansion LLC and its subsidiaries constitute “unrestricted subsidiaries” as defined under the indenture that governs the notes. The restricted group’s consolidated financial data does not include the results of operations of Spansion LLC and its subsidiaries. The restricted group consolidated financial data is presented in order to provide investors with financial information that substantially reflects the results of operations of that portion of our business that has been designated as “restricted subsidiaries.” Periods prior to June 30, 2003 include AMD sales attributable to our memory business, which was contributed to Spansion LLC on June 30, 2003. We have provided summary restricted group consolidated financial data for the twelve-month period ended September 26, 2004 to enable investors to evaluate the restricted group’s operating results over the most recent cumulative 12-month period. Operating results for the nine months and twelve months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the full year ended December 26, 2004. The following information should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

   

Fiscal Year
Ended

Dec. 28, 2003


  

Nine Months
Ended

Sept. 26, 2004


  

Twelve Months
Ended

Sept. 26, 2004


 
   (in thousands) 

Statement of Operations Data:

             

Net sales

  $2,583,957  $1,962,478  $2,628,021 

Expenses:

             

Cost of sales

   1,537,588   862,646   1,179,711 

Research and development

   708,274   477,982   629,645 

Marketing, general and administrative

   508,947   449,115   575,851 

Restructuring and other special charges, net

   (13,893)  2,514   (5,525)
   


 


 


Operating income (loss)

   (156,959)  170,221   248,339 

Interest income and other, net

   19,962   6,346   13,823 

Interest expense

   (88,539)  (51,021)  (70,484)
   


 


 


Income (loss) before income taxes

   (225,536)  125,546   191,678 
   


 


 


Provision (benefit) for income taxes

   (1,479)  15,192   15,649 
   


 


 


Net income (loss)

  $(224,057) $110,354   176,029 
   


 


 


Other Financial Data:

             

EBITDA(1)

  $584,111  $645,855  $886,599 

Depreciation and amortization

   739,875   479,068   638,589 

Capital expenditures

   402,607   541,234   624,873 

Balance Sheet Data (at end of period):

             

Cash(2)

  $983,823  $901,609  $901,609 

Total long-term debt and capital lease obligations

   1,567,338   1,602,664   1,602,664 

(1)

EBITDA is defined as net income (loss) before (i) interest income, (ii) interest expense, (iii) provision for income taxes, and (iv) depreciation and amortization. Other companies in our industry may calculate EBITDA differently than we do and EBITDA as presented in this prospectus may not be comparable with similarly titled measures of other companies. We have included this non-GAAP financial measure because we believe that it provides holders of the notes with useful information in assessing the restricted group’s operating performance and as an indicator of the restricted group’s ability to meet our obligations under the notes. EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to net income as

 

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indicators of operating performance or any other measures of performance derived in accordance with GAAP. The reconciliation of net income (loss) under GAAP to EBITDA is as follows:

 

   

Fiscal Year
Ended

Dec. 28, 2003


  

Nine Months
Ended

Sept. 26, 2004


  

Twelve Months
Ended

Sept. 26, 2004


 
   (in thousands) 

Net income (loss)

  $(224,057) $110,354  $176,029 

Depreciation and amortization

   739,875   479,068   638,589 

Interest income

   (18,767)  (9,780)  (14,152)

Interest expense

   88,539   51,021   70,484 

Provision (benefit) for income taxes

   (1,479)  15,192   15,649 
   


 


 


EBITDA

  $584,111  $645,855  $886,599 
   


 


 


 

(2)Cash includes cash, cash equivalents, compensating balance and short-term investments.

 

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RISK FACTORS

 

An investment in our notes involves a high degree of risk. In deciding whether to invest in the notes, you should carefully consider the following factors, in addition to the other information and data contained in or incorporated by reference into this prospectus. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially and adversely affected. In such case, our ability to make payments on the notes could be impaired, the trading price of the notes could decline and you could lose all or part of your investment.

 

Risks Related to Our Business

 

If we cannot generate sufficient operating cash flow and obtain external financing, we may be unable to make all of our planned capital expenditures or fulfill our obligations to Fab 36 or Spansion LLC.

 

Our ability to fund capital expenditures in accordance with our business plan depends on generating sufficient cash flow from operations and the availability of external financing. For example, in 2005 we plan to spend approximately $1.5 billion in capital expenditures.

 

Under the partnership agreement for AMD Fab 36 Limited Liability Company & Co. KG, or AMD Fab 36 KG, our German subsidiaries, AMD Fab 36 Holding GmbH and AMD Fab 36 Admin GmbH, are obligated to invest approximately $718 million into AMD Fab 36 KG (based on an exchange rate of 0.815 euro to one U.S. dollar as of September 26, 2004). In addition, under the revolving credit agreement among AMD, AMD Fab 36 Holding and AMD Fab 36 KG, we or AMD Fab 36 Holding are required to provide up to approximately $921 million to AMD Fab 36 KG (based on an exchange rate of 0.815 euro to one U.S. dollar as of September 26, 2004). Loans provided to AMD Fab 36 KG under this revolving credit agreement are unsecured and subordinated to the rights of the consortium of banks that will also be providing financing to AMD Fab 36 KG. In addition, we are also obligated through June 30, 2007 to provide Spansion LLC, our majority-owned subsidiary, with additional funding to finance operational cash flow needs. Generally, Spansion LLC must seek any required financing from external sources. However, if such third-party financing is not available, either on a non-recourse basis to us or with guarantees based on our pro rata ownership interest, we must provide funding to Spansion LLC equal to our pro rata ownership interest in Spansion LLC, which is currently 60%. An inability to meet our funding obligations for Spansion LLC could, among other things, result in additional equity in Spansion LLC being issued to Fujitsu or third parties, which would reduce our ownership in and control over Spansion LLC.

 

Our capital expenditures, together with ongoing operating expenses, will be a substantial drain on our cash flow and may decrease our cash balances. The timing and amount of our capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and market competition. We regularly assess markets for external financing opportunities, including debt and equity. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain needed debt and/or equity financing or to generate sufficient cash from operations may require us to abandon projects or curtail capital expenditures. If we curtail capital expenditures or abandon projects, we could be materially adversely affected. For example, if we abandon the Fab 36 project, we will have to write off related costs that we capitalized and we will be required to continue to make payments or otherwise be liable pursuant to then-existing contracts that we cannot terminate at will or without significant penalties.

 

If we lose Microsoft Corporation’s support for our products, or if there is a significant delay in Microsoft’s release of an operating system that works with our AMD64 technology, our ability to sell our microprocessors could be materially adversely affected.

 

Our ability to innovate beyond the x86 instruction set controlled by Intel depends partially on Microsoft designing and developing its operating systems to run on or support our microprocessor products. If Microsoft

 

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does not continue to design and develop its operating systems so that they work with our x86 instruction sets, including the timely introduction of an operating system that works with the AMD64 technology that we introduced with our AMD Opteron and AMD Athlon 64 processors, independent software providers may forego designing their software applications to take advantage of our innovations and customers may not purchase personal computers, or PCs, with our microprocessors. If we fail to retain the support of Microsoft, our ability to market our microprocessors could be materially adversely affected.

 

In July 2004, Microsoft announced a delay in the release of its Windows Server 2003 Service Pack 1, Windows Server 2003 for 64-bit Extended Systems and Windows XP 64-bit for 64-bit Extended Systems. The new Windows editions are designed to take advantage of 64-bit extensions to the standard x86 instruction set. Microsoft estimated that the release of this software will occur in the first half of 2005. Previously, Microsoft estimated the release date for this software would be in late 2004. This delay could adversely impact the timing of development of 64-bit applications by independent software providers and the adoption of 64-bit computing by end users. As a result, this delay could have a material adverse effect on our ability to sell our AMD Opteron and AMD Athlon 64 processors.

 

We must achieve further market acceptance of our 64-bit technology, AMD64, or we will be materially adversely affected.

 

We designed our AMD Opteron and AMD Athlon 64 processors to provide users with the ability to take advantage of 64-bit applications while preserving their ability to run existing 32-bit applications on servers and workstations and on desktop and mobile PCs. Market acceptance of these processors is subject to risks and uncertainties including:

 

  the support of operating system and application program providers for our 64-bit instruction set, including timely development of 64-bit applications;

 

  the willingness of users to purchase products with 64-bit capability prior to the availability of operating systems and software applications that take full advantage of our AMD64 technology;

 

  our ability to produce these processors in a timely manner on advanced process technologies, including 90-nanometer silicon-on-insulator technology, in the volume and with the performance and feature set required by customers; and

 

  the availability, performance and feature set of motherboards, memory and chipsets designed for these processors.

 

If we are unable to achieve further market acceptance of our AMD64 technology, we will be materially adversely affected.

 

We cannot be certain that our substantial investments in research and development of process technologies will lead to timely improvements in technology and equipment used to fabricate our products or that we will have sufficient resources to invest in the level of research and development that is required to remain competitive.

 

We make substantial investments in research and development for process technologies in an effort to design and manufacture leading-edge microprocessors. We cannot be certain that we will be able to develop, or obtain or successfully implement leading-edge process technologies needed to manufacture future generations of our products profitably or on a timely basis. Furthermore, we cannot assure you that we will have sufficient resources to maintain the level of investment in research and development that is required for us to remain competitive. For example, from the beginning of 2002 through September 26, 2004, we paid approximately $228 million to IBM in connection with agreements and services related to license grants and research and development activities.

 

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In addition, we have a joint development agreement with IBM, pursuant to which we work together to develop new process technologies. The successful and timely development and implementation of silicon-on-insulator technology and the achievement of other milestones set forth in the joint development agreement with IBM are critical to our AMD Opteron and AMD Athlon 64 microprocessors and to our ability to commence operations at Fab 36 in accordance with our planned schedule. In September 2004, we amended our joint development agreement with IBM and extended its termination date from December 2005 to December 2008. The continuation of the process development projects past December 31, 2005 is conditioned upon the approval of IBM’s board of directors. If such approval is not received, either party has the right to terminate the agreement effective December 31, 2005 with respect to process development projects past December 31, 2005. If the agreement were to be terminated, we would either have to resume research and development activities for microprocessor technology internally or find an alternative partner. In either case, our research and development costs could increase, and we could experience delays or other setbacks in the development of new process technologies, any of which could materially adversely affect us.

 

The semiconductor industry is highly cyclical and has experienced severe downturns that materially adversely affected, and may in the future materially adversely affect, our business.

 

The semiconductor industry is highly cyclical and has experienced significant downturns, often in connection with maturing product cycles, manufacturing overcapacity and declines in general economic conditions. Our historical financial results have also been subject to substantial fluctuations. Our financial performance has been, and may in the future be, negatively affected by these downturns. We incurred substantial losses in recent downturns, due to:

 

  the cyclical nature of supply/demand imbalances in the semiconductor industry;

 

  a decline in demand for end-user products that incorporate our semiconductors;

 

  excess inventory levels in the channels of distribution, including our customers;

 

  excess production capacity; and

 

  accelerated declines in average selling prices.

 

For example, in 2001 and 2002, we implemented restructuring plans due to weak customer demand associated with the downturn in the semiconductor industry. If these conditions in the semiconductor industry occur again in the future, we could be materially adversely affected.

 

Fluctuations in demand for PCs and mobile telephones may adversely affect sales of our products.

 

The Computation Products segment of our business is dependent upon the market for computers, including PCs. Industry-wide fluctuations in the computer marketplace have materially adversely affected us in the past and may materially adversely affect us in the future. Depending on the growth rate of computers sold, sales of our microprocessors may not grow and may even decrease. If end-user demand for computers is below our expectations, we could be materially adversely affected. In addition, potential market share increases by customers who exclusively purchase microprocessors from Intel Corporation, such as Dell, Inc., could further materially adversely affect us.

 

The Memory Products segment of our business is dependent to a large degree upon demand for mobile telephones. If demand for mobile telephones is below our expectations or if the functionality of successive generations of mobile telephones does not require increasing NOR Flash memory density, we could be materially adversely affected.

 

Intense competition in the microprocessor and Flash memory markets could materially adversely affect us.

 

The IC industry is intensely competitive. Our success depends to a significant extent on the development, qualification, implementation and acceptance of new product designs and improvements that provide value to our

 

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customers. Our ability to develop and qualify such products and related technologies to meet evolving industry requirements and at prices acceptable to our customers are significant factors in determining our competitiveness in our target markets. If we are delayed in developing or qualifying new technologies, we could be materially adversely affected. For example, during the fourth quarter of 2004 we experienced a delay in qualifying a new Spansion Flash memory product in the wireless segment. This delay contributed to a decrease in our Flash memory product revenues.

 

With respect to our microprocessor products, our competitor is Intel. Microprocessor products compete on performance, quality, reliability, price, adherence to industry standards, software and hardware compatibility, marketing and distribution capability, brand recognition and availability. After a product is introduced, costs and average selling prices normally decrease over time as production efficiency improves, and successive generations of products are developed and introduced for sale. We may not be able to compete effectively if we fail to reduce our costs on existing products or fail to develop and introduce, on a cost-effective and timely basis, new products or enhanced versions of existing products with higher margins.

 

The Flash memory market is characterized by migration to higher density and lower cost devices and a competitive pricing environment. Our principal competitors in the Flash memory market are Intel, Samsung, Toshiba, STMicroelectronics N.V., Sharp Electronics Corporation, Silicon Storage Technology and Macronix International. In addition, ample capacity for manufacturing Flash memory products exists due to recent capital investment by some of our competitors, which may further contribute to a competitive pricing environment. In the past, the net increases of supply, meaning the difference of capacity additions less capacity reductions due to obsolescence, sometimes exceeded demand requirements leading to oversupply situations and downturns in the industry. Fluctuations in the rate at which industry capacity is growing relative to the growth rate in demand for Flash memory products, particularly NOR-based products, may in the future put pressure on our average selling prices and hurt our results of operations.

 

To compete successfully, we must transition to technologies that meet the increasing demand for higher Flash memory content in mobile phones and automotive applications, among other markets, at competitive prices. We expect competition in the Flash memory market to increase as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity increases and competitors aggressively price their Flash memory products to increase market share.

 

In addition, we and certain of our competitors have licensed non-volatile memory technology called NROM technology from a third party. NROM technology allows memory devices to store two bits of data in a memory cell. NROM technology has similar characteristics to our MirrorBit technology which may allow these competitors to develop Flash memory technology that is competitive with MirrorBit technology.

 

Intel Corporation’s dominance of the microprocessor market, its position in the Flash memory market and its business practices may limit our ability to compete effectively.

 

Intel has dominated the market for microprocessors used in desktop and mobile PCs for many years. Intel is also a dominant competitor in the server segment of the microprocessor market and a significant competitor in the Flash memory market. Intel’s significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives, and to discipline customers who do business with us. These aggressive activities can result in lower unit sales and average selling prices for our products, particularly microprocessors and Flash memory products, and adversely affect our margins and profitability. For example, Intel exerts substantial influence over PC manufacturers and their channels of distribution through the “Intel Inside” brand program and other marketing programs. As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s:

 

 pricing and allocation strategies and actions, including aggressive pricing for Flash memory products and microprocessors to increase market share;

 

 product mix and introduction schedules;

 

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 product bundling, marketing and merchandising strategies;

 

 exclusivity payments to its current and potential customers;

 

 control over industry standards, PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system, or BIOS, suppliers; and

 

 user brand loyalty.

 

Because of its dominant position in the microprocessor market, Intel has been able to control x86 microprocessor and PC system standards and dictate the type of products the microprocessor market requires of Intel’s competitors. Intel also dominates the PC system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a PC system. As a result, PC original equipment manufacturers, or OEMs, are highly dependent on Intel, less innovative on their own and, to a large extent, are distributors of Intel technology. Additionally, Intel is able to drive de facto standards for x86 microprocessors that could cause us and other third-party companies to have delayed access to such standards. In marketing our microprocessors to OEMs, we depend on third-party companies other than Intel for the design and manufacture of core-logic chipsets, graphics chips, motherboards, BIOS software and other components. In recent years, many of these third-party designers and manufacturers have lost significant market share to Intel or exited the business. In addition, these companies produce chipsets, motherboards, BIOS software and other components to support each new generation of Intel’s microprocessors, and Intel has significant leverage over their business opportunities.

 

We do not currently plan to develop microprocessors that are bus interface protocol compatible with Intel microprocessors because our patent-cross license agreement with Intel does not extend to Intel’s proprietary bus interface protocol. Thus, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. Our ability to compete with Intel in the market for microprocessors will depend on our continued success in developing and maintaining relationships with infrastructure providers in order to ensure that these third-party designers and producers of motherboards, chipsets and other system components support our microprocessor offerings, particularly AMD64-based microprocessors. A failure of the designers and producers of motherboards, chipsets and other system components to support our microprocessor offerings, particularly our AMD64-based microprocessors, could have a material adverse effect on us.

 

We expect Intel to maintain its dominant position in the microprocessor market, to continue to be a significant competitor in the Flash memory market and to continue to invest heavily in research and development, new manufacturing facilities and other technology companies. Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on research and development and production capacity than we do. We expect competition from Intel to increase to the extent Intel reduces prices on its microprocessor and/or Flash memory products and introduces new competitive products. For example, during June 2004 Intel announced the availability of a 64-bit processor for servers and workstations that runs existing 32-bit software applications. These processors compete with our AMD Opteron microprocessors. In addition, Intel announced that it will offer 64-bit processors for the desktop market and other market segments that will be able to run existing 32-bit software applications in a time frame based on both timing and availability of the infrastructure required to support them, and customer demand. These products would compete with our AMD Athlon 64 microprocessors. Moreover, Intel currently manufactures certain of its microprocessor products on 300-millimeter wafers using 90-nanometer process technology. Use of 90-nanometer technology can result in products that are higher performing, use less power and cost less to manufacture. Use of 300-millimeter wafers can decrease manufacturing costs and increase capacity by yielding more chips per wafer than 200-millimeter wafers. We are currently transitioning to 90-nanometer process technology for microprocessor manufacturing and we expect to transition to 300-millimeter wafers in 2006. To the extent Intel manufactures its microprocessor products on larger wafers and smaller process technologies earlier than we do, we may be more vulnerable to Intel’s aggressive pricing strategies for microprocessor products. Intel’s dominant position in the microprocessor market, its existing relationships with top-tier OEMs and its aggressive pricing strategies could result in lower unit sales and average selling prices for our products, which could have a material adverse effect on us.

 

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The loss of a significant customer for our microprocessor products or the loss of a significant customer for our Spansion Flash memory products in the high-end mobile telephone market, may have a material adverse effect on us.

 

Collectively, our top ten OEM microprocessor customers accounted for approximately 17 percent of our total net revenues in 2003. Our Flash memory product sales growth is dependent on demand for high-end mobile telephones. To date, our sales in that market have been concentrated with a limited group of customers. If we were to lose a significant customer, or if one of our top customers downsizes or otherwise contracts its operations, demand for our products could decrease and we would be materially adversely affected.

 

A lack of market acceptance of MirrorBit technology could have a material adverse effect on us.

 

We believe that market acceptance of MirrorBit technology is a critical factor impacting our ability to increase Flash memory product revenues and market share. MirrorBit technology is a memory cell architecture that enables Flash memory products to store two bits of data in a single memory cell thereby doubling the density or storage capacity of each memory cell. A lack of continued market acceptance of MirrorBit technology, adoption of such technology at a slower rate than we anticipate, or any substantial difficulty in transitioning Flash memory products, including those based on MirrorBit technology, to any future process technology could reduce our ability to be competitive in the market.

 

In addition, we intend to address end markets traditionally served by Flash memory products based on NAND architecture with our new ORNAND architecture. We are currently developing these products and if they, or any future products based on our MirrorBit technology and ORNAND architecture, fail to achieve acceptance in markets traditionally served by NAND architecture, or at all, we could be materially adversely affected.

 

Spansion Flash memory products are based on NOR architecture, and a significant market shift to NAND architecture could materially adversely affect us.

 

Flash memory products are generally based on either Boolean logic-based NOR (Not Or) architecture or NAND (Not And) architecture. NAND has historically been the preferred architecture for data storage because of attributes such as high densities and fast write and erase speeds. NOR has been the preferred architecture for code execution because of its fast read performance and superior reliability. To date, our Flash memory products have been based on NOR architecture, and we do not currently manufacture products based on NAND architecture. During 2003, industry sales of products based on NAND architecture grew at higher rates than sales of NOR-based products. This resulted in NAND vendors gaining a greater share of the overall Flash market. As mobile telephones and other consumer-driven applications become more advanced they will require higher density Flash memory to meet increased data storage requirements from music downloads, photos and videos. Because storage requirements will increase to accommodate data-intensive applications, OEMs may increasingly choose NAND-based products, accepting the drawbacks in reliability in exchange for a lower cost alternative than NOR. Any significant shift in the marketplace to products based on NAND architecture or other architectures may reduce the total market available to us and therefore reduce our market share.

 

We are required to reach agreement with Fujitsu regarding certain actions of our majority-owned subsidiary, Spansion LLC, and our interests may not be aligned.

 

We own 60 percent of the equity interest in Spansion LLC while Fujitsu owns the remaining 40 percent. Although we are entitled to appoint a majority of the board of managers which generally manages the affairs of Spansion LLC, certain actions by Spansion LLC require Fujitsu’s consent for as long as Fujitsu maintains specific levels of equity ownership in Spansion LLC. In addition, based upon designated thresholds of Fujitsu’s percentage interest in Spansion LLC, certain actions require the affirmative vote of at least a majority of the managers appointed by Fujitsu. These actions include:

 

  major investments, acquisitions and dispositions of assets;

 

  a merger or consolidation resulting in the transfer of more than 50% of the equity interests;

 

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  settlement of major legal proceedings and other actions;

 

  approval of certain material contracts between us and Spansion LLC;

 

  changes to the equity capital structure of the Spansion LLC; and

 

  winding-up Spansion LLC or one of its material subsidiaries.

 

There can be no guarantee that our interests and those of Fujitsu will be aligned with respect to such decisions and we may be unable to take steps that we believe are desirable. In addition, a reduction in our percentage interest may result in our inability to appoint a majority of Spansion LLC’s board of managers, which could result in the loss of effective control of Spansion LLC, although the results of operations of Spansion LLC may continue to impact significantly our results of operations and we still may be required to make loans to, and guarantee indebtedness of, Spansion LLC.

 

Our operating results are subject to quarterly and seasonal sales patterns.

 

A substantial portion of our quarterly sales have historically been made in the last month of the quarter. This uneven sales pattern makes prediction of net sales for each financial period difficult and increases the risk of unanticipated variations in quarterly results and financial condition. In addition, our operating results tend to vary seasonally. For example, demand in the retail sector of the PC market is often stronger during the fourth quarter as a result of the winter holiday season. European sales are often weaker during the summer months. Many of the factors that create and affect seasonal trends are beyond our control.

 

Worldwide economic and political conditions may adversely affect demand for our products.

 

The last economic slowdown in the United States and worldwide adversely affected demand for our products. Although economic conditions have continued to improve since the second half of 2003, another decline in the worldwide semiconductor market or a future decline in economic conditions or consumer confidence in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us. For example, China’s economy has been growing at a fast pace over the past several years, and Chinese authorities have recently introduced various measures to slow down the pace of economic growth. However, if Chinese authorities are not able to stage an orderly slowdown, China’s economy could be materially adversely affected. A decline in economic conditions in China could lead to declining worldwide economic conditions. If economic conditions decline, whether in China or worldwide, we could be materially adversely affected.

 

The occurrence and threat of terrorist attacks and the consequences of sustained military action in the Middle East have in the past, and may in the future, adversely affect demand for our products. In addition, terrorist attacks may negatively affect our operations directly or indirectly and such attacks or related armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive, ultimately affecting our sales.

 

Also as a result of terrorism, the United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales, our supply chain and our ability to deliver products to our customers. Political and economic instability in some regions of the world may also result and could negatively impact our business. The consequences of armed conflicts are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us.

 

More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility to the United States economy and worldwide financial markets. Any of these occurrences could have a material adverse effect on us and also may result in volatility of the market price for our securities.

 

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Unfavorable currency exchange rate fluctuations could adversely affect us.

 

As a result of our foreign operations, we have sales, costs, assets and liabilities that are denominated in foreign currencies, primarily the European Union euro and the Japanese yen. For example:

 

  a significant portion of our manufacturing costs for our microprocessor products is denominated in euro while sales of those products are denominated primarily in U.S. dollars;

 

  some fixed asset purchases are denominated in euro and yen;

 

  sales of our Flash memory products in Japan are denominated in yen; and

 

  a significant amount of the costs of our Fab 36 project is denominated in euro.

 

As a consequence, movements in exchange rates could cause our U.S. dollar-denominated expenses to increase as a percentage of net sales, affecting our profitability and cash flows. For example, the U.S. dollar- denominated cost of construction of Fab 36 has increased from our initial projections as a result of the recent depreciation of the U.S. dollar against the euro. Whenever we believe appropriate, we hedge a portion of our foreign currency exchange exposure to protect against fluctuations in currency exchange rates. As of September 26, 2004 we had an aggregate of $503 million (notional amount) of short-term foreign currency forward contracts and purchased call option contracts denominated in euro and yen. However, generally, we hedge only a portion of our foreign currency exchange exposure. Moreover, we determine our total foreign currency exchange exposure using projections of long-term expenditures for items such as equipment and materials used in manufacturing. We cannot assure you that our hedging activities will eliminate foreign exchange rate exposure. Failure to do so could have an adverse effect on our business, financial condition, results of operations and cash flow.

 

In addition, even where revenues and expenses are matched, we must translate euro and yen denominated results of operations, assets and liabilities for our foreign subsidiaries to U.S. dollars in our consolidated financial statements. Consequently, increases and decreases in the value of the U.S. dollar versus the euro or yen will affect our reported results of operations and the value of our assets and liabilities in our consolidated balance sheet, even if our results of operations or the value of those assets and liabilities has not changed in their original currency. These transactions could significantly affect the comparability of our results between financial periods and/or result in significant changes to the carrying value of our assets, liabilities and shareholders’ equity.

 

Manufacturing capacity constraints and manufacturing capacity utilization rates may adversely affect us.

 

There may be situations in which our manufacturing facilities are inadequate to meet the demand for certain of our products. Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with third parties, could have a material adverse effect on us. If we do not complete the transition to 90-nanometer manufacturing process technology at Fab 30 on a timely basis, we may not be able to meet the demand for certain of our microprocessor products. In addition, if we do not transition to manufacturing certain Flash memory products using 90-nanometer and more advanced manufacturing process technology on a timely basis, or otherwise increase capacity for our Flash memory business, we may not be able to meet demand for these products from our customers. If we cannot meet demand for our products we could be materially adversely affected.

 

At times we may underutilize our manufacturing facilities as a result of reduced demand for certain of our products. During such times, many of our costs remain fixed and cannot be reduced in proportion to the reduced revenues for such a period. We are substantially increasing our manufacturing capacity by building Fab 36, transitioning to smaller manufacturing process technologies and making significant capital investments in our existing manufacturing facilities. In addition, we have announced plans to construct a clean room for and facilitize a new 300-millimeter Flash memory fabrication facility, which we call SP1. If the increase in demand for our products is not consistent with our expectations, we may underutilize manufacturing facilities. This has in the past had, and in the future may have, a material adverse effect on us.

 

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Unless we maintain manufacturing efficiency, our future profitability could be materially adversely affected.

 

Manufacturing our products involves highly complex processes that require advanced equipment. Our manufacturing efficiency is an important factor in our profitability, and we cannot be sure that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors. We continuously modify manufacturing processes in an effort to improve yields and product performance and decrease costs. We may fail to achieve acceptable yields or experience product delivery delays as a result of, among other things, capacity constraints, construction delays, delays in the development of new process technologies, changes in our process technologies, upgrades or expansion of existing facilities, or impurities or other difficulties in the manufacturing process.

 

We are currently completing the transition to 90-nanometer process technology for our microprocessor products. In addition, we plan to transition the manufacture of certain Flash memory products to 90-nanometer process technology in the second half of 2005. During periods when we are implementing new process technologies, manufacturing facilities may not be fully productive. A substantial delay in the technology transitions to smaller process technologies could have a material adverse effect on us, particularly if our competitors transition to more cost effective technologies earlier than we do. Our results of operations could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.

 

If our microprocessors are not compatible with some or all industry-standard software and hardware, we could be materially adversely affected.

 

Our microprocessors may not be fully compatible with some or all industry-standard software and hardware. Further, we may be unsuccessful in correcting any such compatibility problems in a timely manner. If our customers are unable to achieve compatibility with software or hardware after our products are shipped in volume, we could be materially adversely affected. In addition, the mere announcement of an incompatibility problem relating to our products could have a material adverse effect on us.

 

Costs related to defective products could have a material adverse effect on us.

 

One or more of our products may be found to be defective after the product has been shipped to customers in volume. The cost of a recall, software fix, product replacements and/or product returns may be substantial and could have a material adverse effect on us. In addition, modifications needed to fix the defect may impede performance of the product.

 

If essential equipment or materials are not available to manufacture our products, we could be materially adversely affected.

 

Our manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and materials from a number of suppliers. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Because some equipment and material that we purchase is complex, it is sometimes difficult for us to substitute one supplier for another or one piece of equipment for another. In addition, certain raw materials we use in the manufacture of our products are available from a limited number of suppliers. For example, we are largely dependent on one supplier for our 200-millimeter and 300-millimeter silicon-on-insulator (SOI) wafers. Although there are alternative sources available for us to procure these wafers, we have not qualified these sources and we do not believe that they currently have sufficient capacity to meet our requirements for SOI wafers. We are also dependent on other key chemicals from a limited number of suppliers and also rely on a limited number of foreign companies to supply the majority of certain types of IC packages we purchase. Similarly, we purchase commercial non-Flash memory die, such as SRAM and pSRAM, from third-party suppliers and incorporate these die into Spansion multi-chip package products. Some of these suppliers are also

 

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our competitors. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. If we are unable to procure certain of these materials, we may have to reduce our manufacturing operations. Such a reduction could have a material adverse effect on us.

 

Our inability to continue to attract and retain qualified personnel may hinder our product development programs.

 

Our future success depends upon the continued service of numerous qualified engineering, manufacturing, marketing, sales and executive personnel. If we are not able to continue to attract, retain and motivate qualified personnel necessary for our business, the progress of our product development programs could be hindered, and we could be materially adversely affected.

 

We outsource to third parties certain supply-chain logistics functions, including physical distribution of our products, and co-source some information technology services.

 

We rely on a third-party provider to deliver our products to our customers and to distribute materials for our fabrication facilities. In addition, we rely on a third-party provider in India to provide certain information technology services to us, including helpdesk support, desktop application services, business and software support applications, server and storage administration, data center operations, database administration, and voice, video and remote access. Our relationships with these providers are governed by fixed term contracts. We cannot guarantee that these providers will fulfill their respective responsibilities in a timely manner in accordance with the contract terms, in which case our internal operations, the distribution of our products to our customers and the distribution of materials for our fabrication facilities could be materially adversely affected. Also, we cannot guarantee that our contracts with these third-party providers will be renewed, in which case we would have to transition these functions in-house or secure new providers, which could have a material adverse effect on us.

 

In addition, we decided to outsource or co-source these functions to third parties primarily to lower our operating expenses and to create a more variable cost structure. However, if the costs related to administration, communication and coordination of these third-party providers are greater than we expect, then we will not realize our anticipated cost savings.

 

Uncertainties involving the ordering and shipment of, and payment for, our products could materially adversely affect us.

 

Sales of our products are typically made pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our microprocessor customers. From time to time, we enter into long-term supply arrangements with our Flash memory customers. Generally, our customers may cancel orders 30 days prior to shipment without incurring a significant penalty. We base our inventory levels on customers’ estimates of demand for their products, which are difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors, as our forecasts for demand are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to failure of anticipated orders to materialize could result in excess or obsolete inventory, which could result in write-downs of inventory. Because market conditions are uncertain, these and other factors could materially adversely affect us.

 

Our reliance on third-party distributors subjects us to certain risks.

 

We market and sell our products directly and through third-party distributors pursuant to agreements that can generally be terminated for convenience by either party upon prior notice to the other party. In addition, these agreements are non-exclusive and permit our distributors to offer our competitors’ products. In 2003, two distributors, Avnet, Inc. and Fujitsu (a distributor of Spansion LLC), each accounted for approximately 13

 

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percent of our consolidated net sales. Accordingly, we are dependent on our distributors to supplement our direct marketing and sales efforts. If any significant distributor or a substantial number of our distributors terminated their relationship with us or decided to market our competitors’ products over our products, our ability to bring our products to market would be impacted and we could be materially adversely affected.

 

Additionally, distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price reductions, as well as provide return rights for our products. Under certain agreements, distributors are allowed to return any product that we have removed from our price book or that is not more than twelve months older than the manufacturing code date. In addition, some agreements with our distributors contain standard stock rotation provisions permitting limited levels of product returns. We defer the gross margins on our sales to distributors, resulting from both our deferral of revenue and related product costs, until the applicable products are re-sold by the distributors. However, in the event of an unexpected significant decline in the price of our products, the price protection rights we offer to our distributors could materially adversely affect us because our revenue would decline.

 

Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us.

 

We have international sales operations and as part of our business strategy, we are continuing to seek expansion of product sales in high growth markets. Our international sales as a percentage of our total consolidated net sales were approximately 80 percent and 77 percent in 2003 and the nine months ended September 26, 2004, respectively. Nearly all product assembly and final testing of our products are performed at manufacturing facilities in China, Malaysia, Singapore and Thailand. We manufacture our microprocessors in Germany and certain Spansion Flash memory products are manufactured in Japan. We also depend on foreign foundry suppliers for the production of our sets and our embedded microprocessors for personal connectivity devices and depend on an international joint venture for the manufacture of optical photomasks that we intend to use in the manufacture of our microprocessors.

 

The political and economic risks associated with our operations in foreign countries include, without limitation:

 

  expropriation;

 

  changes in a specific country’s or region’s political or economic conditions;

 

  trade protection measures and import or export licensing requirements;

 

  difficulty in protecting our intellectual property;

 

  changes in foreign currency exchange rates;

 

  restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions;

 

  changes in freight and interest rates;

 

  disruption in air transportation between the United States and our overseas facilities; and

 

  loss or modification of exemptions for taxes and tariffs.

 

Any of the above risks, should they occur, could have a material adverse effect on us.

 

Our inability to effectively control the sales of our products on the gray market could have a material adverse effect on us.

 

We market and sell our products directly to OEMs and through authorized third-party distributors. From time to time, our products are diverted from our authorized distribution channels and are sold on the “gray market.” Gray market products entering the market result in shadow inventory that is not visible to us, thus

 

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making it difficult to forecast demand accurately. Also, when gray market products enter the market, we and our distribution channel compete with heavily discounted products, which adversely affects demand for our products. In addition, our inability to control gray marketing activities could result in customer satisfaction issues, because any time products are purchased outside our authorized distribution channel, there is a risk that our customers are buying counterfeit or substandard products, including products that may have been altered, mishandled or damaged, or used products represented as new. Our inability to control sales of our products on the gray market could have a material adverse effect on us.

 

If we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses.

 

We rely on a combination of protections provided by contracts, copyrights, patents, trademarks and other common law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from third party infringement or from misappropriation in the United States and abroad. Any patent licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted thereunder may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property on a worldwide basis in a cost-effective manner.

 

We may become a party to intellectual property claims or litigation that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our products.

 

From time to time, we have been notified that we may be infringing intellectual property rights of others. If any such claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain all necessary licenses on satisfactory terms, if at all. In the event we cannot obtain a license, we may be prevented from using some technology which could result in our having to stop the sale of some of our products, increase the costs of selling some of our products, or damage our reputation. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be extremely expensive and time-consuming and could have a material adverse effect on us. We cannot assure you that litigation related to the intellectual property rights of us and others will always be avoided or successfully concluded.

 

Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, alteration of manufacturing processes, sales limitations, and criminal and civil liabilities.

 

Our operations are subject to various U.S. and foreign environmental statutes and regulations, including those relating to materials used in our products, manufacturing processes and packaging, discharge of pollutants into the air, water and soil, treatment, transport, storage and disposal of solid and hazardous wastes, and remediation of soil and groundwater contamination. From time to time, our facilities are subject to investigation by governmental regulators. We have in the past been named and may in the future be named as a responsible party or a potentially responsible party on Superfund clean-up orders and other environmental investigations sponsored by the Environmental Protection Agency, or EPA. We cannot be certain that we have identified all environmental matters giving rise to potential liability. Existing or future regulations could require us to procure expensive pollution abatement or remediation equipment, to modify product designs or to incur other expenses associated with compliance with environmental regulations. Any past misuse of hazardous materials, new releases or newly discovered contaminations at any of our currently or formerly owned or operated properties could result in increased expenditures or liabilities which could materially adversely affect us.

 

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Future litigation proceedings may materially adversely affect us.

 

From time to time we are a defendant or plaintiff in various legal actions. Litigation can involve complex factual and legal questions and its outcome is uncertain. Any claim that is successfully asserted against us may cause us to pay substantial damages. In addition, future litigation may result in injunctions against future product sales. Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations, which could have a material adverse effect on us.

 

Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses.

 

Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses. For example, our corporate headquarters are located near major earthquake fault lines in California and some wafer fabrication facilities for Spansion Flash memory products are located near major earthquake fault lines in Japan. In the event of a major earthquake, or other natural or manmade disaster we could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us.

 

Risks Related to the Notes

 

If you do not exchange your notes pursuant to this exchange, you may never be able to sell your notes.

 

It may be difficult for you to sell notes that are not exchanged in the exchange offer. Those notes may not be offered or sold unless they are registered and there are exemptions from the registration requirements under the Securities Act and applicable state securities laws.

 

If you do not tender your private notes or if we do not accept some of your private notes, those notes will continue to be subject to the transfer and exchange restrictions in:

 

  the indenture;

 

  the legend on the private notes; and

 

  the offering circular relating to the private notes.

 

The restrictions on transfer of your private notes arise because we issued the private notes pursuant to an exemption from the registration requirements of the Securities Act and applicable state securities laws. In general, you may only offer or sell the private notes if they are registered under the Securities Act and applicable state securities laws, or offered and sold pursuant to an exemption from such requirements. We do not intend to register the private notes under the Securities Act. To the extent private notes are tendered and accepted in the exchange offer, the trading market, if any, for the private notes would be adversely affected.

 

We have a substantial amount of indebtedness which could adversely affect our financial position and prevent us from fulfilling our obligations under the notes.

 

We currently have, and following this offering will continue to have, a substantial amount of indebtedness. As of September 26, 2004, after giving effect to the issuance of the notes and the application of the net proceeds therefrom, we would have had consolidated debt of approximately $2,024 million. In addition, we guaranteed approximately $178 million of obligations which are not reflected on our balance sheet.

 

Our substantial indebtedness may:

 

  make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on the notes and our other indebtedness;

 

  limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions and general corporate and other purposes;

 

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  limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general corporate purposes;

 

  require us to use a substantial portion of our cash flow from operations to make debt service payments;

 

  limit our flexibility to plan for, or react to, changes in our business and industry;

 

  place us at a competitive disadvantage compared to our less leveraged competitors; and

 

  increase our vulnerability to the impact of adverse economic and industry conditions.

 

The notes will be unsecured and effectively subordinated to our existing and future secured indebtedness.

 

The notes will be unsecured obligations, ranking effectively junior in right of payment to all of our existing and future secured debt, including obligations under our revolving credit facility. As of September 26, 2004, after giving effect to the issuance of the notes and the application of the net proceeds therefrom, we (excluding our subsidiaries) would have had no secured indebtedness but up to $100 million available for future secured borrowings under our revolving credit facility. In addition, the indenture governing the notes will permit the incurrence of additional debt, some of which may be secured. In the event that we are declared bankrupt, become insolvent or are liquidated or reorganized, any secured indebtedness will be entitled to be paid in full to the extent of the assets securing such debt before any payment is made with respect to the notes. As a result, holders of the notes may receive less from our assets, ratably, than holders of our secured indebtedness.

 

The notes will be structurally subordinated to all indebtedness and other liabilities, including trade payables, of our subsidiaries.

 

We conduct a substantial portion of our operations, including our international operations and our Flash memory business, through our subsidiaries. In the event of our bankruptcy or the bankruptcy of any of our subsidiaries, the holders of their liabilities, indebtedness and trades payables will generally be entitled to payment of their claim from the assets of the affected subsidiaries before those assets were made available for distribution to us. Even if we were a creditor of such a subsidiary, our claims would remain subordinate to any indebtedness of such subsidiary which is senior in right of payment to the indebtedness held by us. As a result, the claims of holders of the notes will rank effectively junior to the claims of all of the creditors of our subsidiaries, including trade creditors and holders of debt guaranteed by our subsidiaries. If any indebtedness of our subsidiaries were to be accelerated, we cannot assure you that the assets of the subsidiaries remaining after payment of such indebtedness and other liabilities would be sufficient to repay our indebtedness in full, including the notes. As of September 26, 2004, after giving effect to the issuance of the notes and the application of the net proceeds therefrom, no debt directly borrowed by AMD would have been guaranteed or secured by any of our subsidiaries. Our subsidiaries would have had approximately $521 million of their own indebtedness (excluding amounts payable to affiliated entities) and approximately $1,100 million of other liabilities outstanding, including trade payables and deferred income tax liabilities. In addition, the indenture governing the notes will permit, subject to certain limitations, certain of these subsidiaries to incur additional indebtedness and will not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

 

Spansion LLC will not be subject to the covenants contained in the indenture governing the notes and we will be permitted to make certain loans and advances to Spansion LLC in addition to those already outstanding.

 

Under the terms of the indenture that governs the notes, Spansion LLC and its subsidiaries will constitute “unrestricted subsidiaries.” The activities of Spansion LLC and its subsidiaries will therefore not be subject to the restrictive covenants or certain defaults in the indenture, and its results of operations will not be considered (except to the extent dividends are paid to us or to a restricted subsidiary) when determining our consolidated fixed charge coverage ratio under the covenant restricting our indebtedness or our consolidated net income under the covenant governing restricted payments. In addition, the indenture contains certain exceptions to the covenants generally applicable to unrestricted subsidiaries, including the fact that indebtedness of Spansion LLC and its subsidiaries can be recourse to us and our restricted subsidiaries and could cross-default to our debt and

 

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the debt of our restricted subsidiaries. As of September 26, 2004, we had made loans to Spansion LLC and its subsidiaries in an aggregate amount of approximately $357 million and had guaranteed indebtedness of Spansion LLC and its subsidiaries in an aggregate amount of approximately $213 million. Following the date of this offering, we will be permitted to make further loans and advances in accordance with the covenants restricting indebtedness and governing restricted payments contained in the indenture. This additional amount of permitted investments, together with the fact that Spansion LLC is not subject to any limitations on indebtedness under the indenture, may make it more difficult for us to fulfill our obligations under the notes.

 

We and our subsidiaries may be able to incur substantially more debt, including secured debt, in the future.

 

Subject to the restrictions in the agreements governing our existing indebtedness, we and our subsidiaries may incur significant additional debt, including secured debt, in the future. In particular, after giving effect to the issuance of the notes and the application of the net proceeds therefrom, as of September 26, 2004, we and our subsidiaries would have had the following additional borrowings available:

 

  We currently have available up to $100 million under our revolving credit facility. Amounts borrowed under this facility are secured by all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds, excluding Spansion LLC’s accounts receivable, inventory and general intangibles.

 

  Spansion Japan, a wholly-owned subsidiary of Spansion LLC, had up to 15 billion yen (approximately $136 million as of September 26, 2004) available under a revolving credit facility.

 

  AMD Fab 36 KG will have the ability, subject to achieving certain technological milestones, to borrow up to $859 million (based on an exchange rate of 0.815 euro to one U.S. dollar as of September 26, 2004) from a consortium of banks under the Fab 36 Loan Agreements during 2006 and 2007.

 

Although the terms of these facilities contain, and the indenture governing the notes will contain, restrictions on the incurrence of additional debt, these restrictions are subject to a number of important exceptions, and debt incurred in compliance with these restrictions could be substantial. The additional debt that we and our subsidiaries expect to obtain in the future could intensify the risk that we may not be able to fulfill our obligations under the notes.

 

We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the notes.

 

Our ability to make payments on and to refinance our debt, including the notes, or our guarantees of other parties’ debts will depend on our financial and operating performance, which may fluctuate significantly from quarter to quarter, and is subject to prevailing economic conditions and financial, business and other factors, many of which are beyond our control. We cannot assure you that we will continue to generate sufficient cash flow or that we will be able to borrow funds under our credit facilities in amounts sufficient to enable us to service our debt, or to meet our working capital and capital expenditure requirements. If we are not able to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we may be required to sell assets or equity, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. We cannot assure you that we will be able to refinance our debt, sell assets or equity, or borrow more funds on terms acceptable to us, if at all.

 

Changes in the financial and credit markets or in our credit ratings could adversely affect the market prices of the notes.

 

The future market prices of the notes will depend on a number of factors, including:

 

  the prevailing interest rates being paid by companies similar to us;

 

  our ratings with major credit rating agencies; and

 

  the overall condition of the financial and credit markets.

 

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The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Fluctuations in these factors could have an adverse effect on the market prices of the notes. In addition, credit rating agencies continually revise their ratings for companies that they follow, including us. We cannot assure you that any credit rating agencies that rate the notes will maintain their ratings on the notes. A negative change in our rating could have an adverse effect on the market price of the notes.

 

Our debt instruments impose restrictions on us that may adversely affect our ability to operate our business.

 

The indenture governing the notes will contain various covenants that limit our ability to:

 

  incur additional indebtedness;

 

  pay dividends and make other restricted payments;

 

  make certain investments, including investments in our unrestricted subsidiaries;

 

  create or permit certain liens;

 

  create or permit restrictions on the ability of certain restricted subsidiaries to pay dividends or make other distributions to us;

 

  use the proceeds from sales of assets;

 

  enter into certain types of transactions with affiliates; and

 

  consolidate or merge or sell our assets as an entirety or substantially as an entirety.

 

In addition:

 

  The guarantees associated with the Fab 36 Loan Agreements contain restrictive covenants, including a prohibition on the ability of AMD Fab 36 KG and its affiliated limited partners to pay us dividends and other payments, and also require us to maintain specified financial ratios when group consolidated cash is below specified amounts.

 

  Our revolving credit facility contains restrictive covenants, including a prohibition on our ability to pay dividends, and also requires us to maintain specified financial ratios and satisfy other financial condition tests when our net domestic cash is below specified amounts.

 

  The July 2003 Spansion Term Loan, as amended, contains restrictive covenants, including a prohibition on Spansion LLC’s ability to pay dividends and also requires Spansion LLC to maintain specified financial ratios and satisfy other financial condition tests when its net domestic cash or its net worldwide cash is below specified amounts.

 

Our ability to satisfy the covenants, financial ratios and tests of our debt instruments can be affected by events beyond our control. We cannot assure you that we will meet those requirements. A breach of any of these covenants, financial ratios or tests could result in a default under the applicable agreement. In addition, those agreements contain cross-default provisions whereby a default under one agreement would likely result in cross-default under agreements covering other borrowings. For example, the occurrence of a default with respect to any indebtedness that results in acceleration of the maturity date or any failure to repay debt when due in an amount in excess of $50 million would cause a cross default under the indenture governing these notes. Similarly, a default with respect to any indebtedness in excess of $25 million would cause a cross-default under the indentures governing our 4.75% Convertible Senior Debentures due 2022 and 4.50% Notes. The occurrence of a default under any of these borrowing arrangements would permit the applicable lenders or note holders to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable and would permit the lenders to terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against any collateral granted to them to secure that indebtedness. We have granted a security interest in substantially all of our inventory and accounts receivable under our revolving credit facility, and in certain property, plant and equipment under the July 2003 Spansion Term Loan Agreement. If the

 

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lenders under any of the credit facilities or the note holders or the trustee under the indenture governing our 4.75% Debentures and our 4.50% Notes accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay those borrowings and our other indebtedness.

 

In the event of a change of control, we may not be able to repurchase the notes as required by the indenture, which would result in a default under our indenture.

 

Upon a change of control under the indenture, we will be required to offer to repurchase all of the notes then outstanding at 101 percent of the principal amount, plus accrued and unpaid interest, if any, up to but excluding the repurchase date. Our secured revolving credit facility and the Fab 36 Loan Agreements provide that certain change of control events will be a default under the respective agreement that will permit the lenders to accelerate the maturity of all borrowings thereunder and terminate commitments to lend thereunder. Moreover, the indentures governing our 4.75% Debentures and 4.50% Notes require us to offer to repurchase these securities upon certain change of control events. As of September 26, 2004, after giving effect to the exchange of an aggregate of $201.0 million of our 4.50% Notes for 29,391,261 shares of our common stock, which occurred after September 26, 2004, the aggregate outstanding principal amount of the 4.75% Debentures and the 4.50% Notes was $701.5 million. Any of our future debt agreements may contain similar provisions. We cannot assure you that we will have the financial resources to repurchase your notes, particularly if that change of control event triggers a similar repurchase requirement for, or results in the acceleration of the 4.75% Debentures, the 4.50% Notes or other indebtedness.

 

In addition, our secured revolving credit facility would prohibit us from repurchasing any of the notes if we were in default or if our net domestic cash (as defined therein) falls below $125 million. Our Fab 36 Loan Agreements would also prohibit us from repurchasing the notes if our group consolidated cash (as defined therein) falls below $500 million and if as a result of such repurchase we would not be able to satisfy the financial covenants therein. As of September 26, 2004, net domestic cash totaled $333 million and group consolidated cash was greater than $500 million. However, if we were to be subject to these covenants and unable to obtain a consent to the repurchase, we would remain prohibited from repurchasing the notes.

 

You cannot be sure that an active trading market will develop for the notes.

 

The exchange notes are a new issue of securities for which there is no active trading market. The initial purchasers of the private notes have advised us that they presently intend to make a market in the exchange notes as permitted by applicable law. The initial purchasers are not obligated, however, to make a market in the exchange notes and any such market-making may be discontinued at any time at the sole discretion of the initial purchasers. If an active market is not developed or maintained, the market price and the liquidity of the notes may be adversely affected. In addition, the liquidity of the trading market in the notes and the market prices quoted for the notes may be adversely affected by changes in the overall market for high-yield securities and by changes in our financial performance or prospects, or in the prospects of the companies in our industry. The market price of the notes may also be significantly affected by wide fluctuations in response to a variety of factors, including those described in this “Risk Factors” section.

 

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THE EXCHANGE OFFER

 

Purpose of the Exchange Offer

 

We issued $600,000,000 of the private notes on October 29, 2004 to Citigroup Global Markets Inc., Credit Suisse First Boston LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated, the initial purchasers, pursuant to a purchase agreement. The initial purchasers subsequently sold the private notes to “qualified institutional buyers,” as defined in Rule 144A under the Securities Act, pursuant to Rule 144A, and outside the United States under Regulation S of the Securities Act. As a condition to the sale of the private notes, we entered into a registration rights agreement with the initial purchasers on October 29, 2004. Pursuant to the registration rights agreement, we agreed that we would:

 

1. file an exchange offer registration statement with the SEC on or prior to January 28, 2005;

 

2. use our commercially reasonable efforts to have the exchange offer registration statement declared effective by the SEC on or prior to May 2, 2005;

 

3. keep the exchange offer open for a period of not less than the minimum period required under applicable law, but in no event for less than 30 days; and

 

4. use our commercially reasonable efforts to consummate the exchange offer on or before June 14, 2005.

 

Upon the effectiveness of the exchange offer registration statement, we will offer the exchange notes in exchange for the private notes. A copy of the registration rights agreement is filed as an exhibit to the registration statement of which this prospectus forms a part.

 

Resale of the Exchange Notes

 

Based upon an interpretation by the staff of the SEC contained in no-action letters issued to third parties, we believe that you may exchange private notes for exchange notes in the ordinary course of business. For further information on the SEC’s position, seeExxon Capital Holdings Corporation, available May 13, 1988,Morgan Stanley & Co. Incorporated, available June 5, 1991 andSherman & Sterling, available July 2, 1993, and other interpretive letters to similar effect. You will be allowed to resell exchange notes to the public without further registration under the Securities Act and without delivering to purchasers of the exchange notes a prospectus that satisfies the requirements of Section 10 of the Securities Act so long as you do not participate, do not intend to participate, and have no arrangement with any person to participate, in a distribution of the exchange notes. However, the foregoing does not apply to you if you are: a broker-dealer who purchased the exchange notes directly from us to resell pursuant to Rule 144A or any other available exemption under the Securities Act; or an “affiliate” of ours within the meaning of Rule 405 under the Securities Act.

 

In addition, if you are a broker-dealer, or you acquire exchange notes in the exchange offer for the purpose of distributing or participating in the distribution of the exchange notes, you cannot rely on the position of the staff of the SEC contained in the no-action letters mentioned above and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available.

 

Each broker-dealer that receives exchange notes for its own account in exchange for private notes, which the broker-dealer acquired as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. A broker-dealer may use this prospectus, as it may be amended or supplemented from time to time, in connection with resales of exchange notes received in exchange for private notes which the broker-dealer acquired as a result of market-making or other trading activities. We have agreed that, starting on the expiration date and ending on the close of business 180 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”

 

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Terms of the Exchange Offer

 

Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, we will accept any and all private notes validly tendered and not withdrawn before the expiration date. We will issue $1,000 principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding private notes surrendered pursuant to the exchange offer. You may tender private notes only in integral multiples of $1,000.

 

The form and terms of the exchange notes are the same as the form and terms of the private notes except that:

 

  we will register the exchange notes under the Securities Act and, therefore, the exchange notes will not bear legends restricting their transfer; and

 

  holders of the exchange notes will not be entitled to any of the rights of holders of private notes under the registration rights agreement, which rights will terminate upon the completion of the exchange offer.

 

The exchange notes will evidence the same debt as the private notes and will be issued under the same indenture, so the exchange notes and the private notes will be treated as a single class of debt securities under the indenture.

 

As of the date of this prospectus, $600,000,000 in aggregate principal amount of the private notes are outstanding and registered in the name of Cede & Co., as nominee for The Depository Trust Company. Only registered holders of the private notes, or their legal representative or attorney-in-fact, as reflected on the records of the trustee under the indenture, may participate in the exchange offer. We will not set a fixed record date for determining registered holders of the private notes entitled to participate in the exchange offer.

 

You do not have any appraisal or dissenters’ rights under the indenture in connection with the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement and the applicable requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC.

 

We will be deemed to have accepted validly tendered private notes when, as and if we had given oral or written notice of acceptance to the exchange agent. The exchange agent will act as your agent for the purposes of receiving the exchange notes from us.

 

If you tender private notes in the exchange offer you will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of private notes pursuant to the exchange offer. We will pay all charges and expenses, other than the applicable taxes described below, in connection with the exchange offer.

 

Expiration Date; Extensions; Amendments

 

The expiration date will mean 5:00 p.m., New York City time on                     , 2005, unless we, in our sole discretion, extend the exchange offer, in which case the expiration date will mean the latest date and time to which we extend the exchange offer.

 

To extend the exchange offer, we will:

 

  notify the exchange agent of any extension orally or in writing; and

 

  communicate to each registered holder an announcement that will include disclosure of the approximate number of private notes deposited to date,

 

each before 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date.

 

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We reserve the right, in our reasonable discretion:

 

  to delay accepting any private notes;

 

  to extend the exchange offer; or

 

  if any conditions listed below under “—Conditions” are not satisfied, to terminate the exchange offer by giving oral or written notice of the delay, extension or termination to the exchange agent.

 

We will follow any delay in acceptance, extension or termination as promptly as practicable by oral or written notice to the registered holders. If we amend the exchange offer in a manner we determine constitutes a material change, we will promptly disclose the amendment in a prospectus supplement that we will distribute to the registered holders. We will also extend the exchange offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure, if the exchange offer would otherwise expire during the five to ten business day period.

 

Interest on the Exchange Notes

 

The exchange notes will bear interest at the same rate and on the same terms as the private notes. Consequently, the exchange notes will bear interest at a rate equal to 7.75% per annum (calculated using a 360-day year). Interest will be payable semi-annually on each May 1 and November 1, commencing May 1, 2005.

 

You will receive interest on May 1, 2005 from the date of the initial issuance of the exchange notes, plus an amount equal to the accrued interest on the private notes from October 29, 2004 to the date of exchange. We will deem the right to receive any interest accrued on the private notes waived by you if we accept your private notes for exchange.

 

Procedures for Tendering

 

You may tender private notes in the exchange offer only if you are a registered holder of private notes. To tender in the exchanger offer, you must:

 

  complete, sign and date the letter of transmittal or a facsimile of the letter of transmittal;

 

  have the signatures guaranteed if required by the letter of transmittal; and

 

  mail or otherwise deliver the letter of transmittal or the facsimile to the exchange agent at the address listed below under “—Exchange Agent” for receipt before the expiration date.

 

In addition, either:

 

  the exchange agent must receive certificates for the private notes along with the letter of transmittal into its account at the depositary pursuant to the procedure for book-entry transfer described below before the expiration date;

 

  the exchange agent must receive a timely confirmation of a book-entry transfer of the private notes, if the procedure is available, into its account at the depositary pursuant to the procedure for book-entry transfer described below before the expiration date; or

 

  you must comply with the guaranteed delivery procedures described below.

 

Your tender, if not withdrawn before the expiration date, will constitute an agreement between you and us in accordance with the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

 

The method of delivery of private notes and the letter of transmittal and all other required documents to the exchange agent is at your election and risk. We recommend that instead of delivery by mail, you use an overnight

 

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or hand delivery service, properly insured. In all cases, you should allow sufficient time to assure delivery to the exchange agent before the expiration date. You should not send letters of transmittal or private notes to us. You may request your respective brokers, dealers, commercial banks, trust companies or nominees to effect the transactions described above for you.

 

If you are a beneficial owner of private notes whose private notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your notes, you should contact the registered holder promptly and instruct the registered holder to tender on your behalf. If you wish to tender on your own behalf, before completing and executing the letter of transmittal and delivering the private notes you must either:

 

  make appropriate arrangements to register ownership of the private notes in your name; or

 

  obtain a properly completed bond power from the registered holder.

 

The transfer of registered ownership may take considerable time. Unless the private notes are tendered:

 

1. by a registered holder who has not completed the box entitled “Special Issuance Instructions” or the box entitled “Special Delivery Instructions” on the letter of transmittal; or

 

2. for the account of: a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc.; a commercial bank or trust company having an office or correspondent in the United States; or an “eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Exchange Act that is a member of one of the recognized signature guarantee programs identified in the letter of transmittal,

 

an eligible guarantor institution must guarantee the signatures on a letter of transmittal or a notice of withdrawal described below under “—Withdrawal of Tenders.”

 

If the letter of transmittal is signed by a person other than the registered holder, the private notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as the registered holder’s name appears on the private notes.

 

If the letter of transmittal or any private notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, they should so indicate when signing, and unless waived by us, they submit evidence satisfactory to us of their authority to so act with the letter of transmittal.

 

The exchange agent and the depositary have confirmed that any financial institution that is a participant in the depositary’s system may utilize the depositary’s Automated Tender Offer Program to tender notes.

 

We will determine in our sole discretion all questions as to the validity, form, eligibility, including time of receipt, acceptance and withdrawal of tendered private notes, which determination will be final and binding. We reserve the absolute right to reject any and all private notes not properly tendered or any private notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular private notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, you must cure any defects or irregularities in connection with tenders of private notes within the time we determine. Although we intend to notify you of defects or irregularities with respect to tenders of private notes, neither we, the exchange agent nor any other person will incur any liability for failure to give you that notification. Unless waived, we will not deem tenders of private notes to have been made until you cure the defects or irregularities.

 

While we have no present plan to acquire any private notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any private notes that are not tendered in the exchange offer, we

 

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reserve the right in our sole discretion to purchase or make offers for any private notes that remain outstanding after the expiration date. We also reserve the right to terminate the exchange offer, as described below under “—Conditions,” and, to the extent permitted by applicable law, purchase private notes in the open market, in privately negotiated transactions or otherwise. The terms of any of those purchases or offers could differ from the terms of the exchange offer.

 

If you wish to tender private notes in exchange for exchange notes in the exchange offer, we will require you to represent that:

 

  you are not an affiliate of ours;

 

  you will acquire any exchange notes in the ordinary course of your business; and

 

  at the time of completion of the exchange offer, you have no arrangement with any person to participate in the distribution of the exchange notes.

 

In addition, in connection with the resale of exchange notes, any participating broker-dealer who acquired the private notes for is own account as a result of market-making or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the exchange notes, other than a resale of an unsold allotment from the original sale of the notes, with this prospectus.

 

Return of the Notes

 

If we do not accept any tendered private notes for any reason described in the terms and conditions of the exchange offer or if you withdraw or submit private notes for a greater principal amount than you desire to exchange, we will return the unaccepted, withdrawn or non-exchanged notes without expense to you as promptly as practicable. In the case of private notes tendered by book-entry transfer into the exchange agent’s account at the depositary pursuant to the book-entry transfer procedures described below, we will credit the private notes to an account maintained with the depositary as promptly as practicable.

 

Book-Entry Transfer

 

The exchange agent will make a request to establish an account with respect to the private notes at the depositary for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in the depositary’s systems may make book-entry delivery of private notes by causing the depositary to transfer the private notes into the exchange agent’s account at the depositary in accordance with the depositary’s procedures for transfer. However, although delivery of private notes may be effected through book-entry transfer at the depositary, you must transmit and the exchange agent must receive, the letter of transmittal or a facsimile of the letter of transmittal, with any required signature guarantees and any other required documents, at the address below under “—Exchange Agent” on or before the expiration date or pursuant to the guaranteed delivery procedures described below.

 

Guaranteed Delivery Procedures

 

If you wish to tender your private notes and (1) the notes are not immediately available or (2) you cannot deliver the private notes, the letter of transmittal or any other required documents to the exchange agent before the expiration date, you may effect a tender if:

 

1. the tender is made through an eligible guarantor institution;

 

2. before the expiration date, the exchange agent receives from the eligible guarantor institution a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us, that: states your name and address, the certificate number(s) of the private notes and the principal amount of private notes tendered, states that the tender is being made by that notice of guaranteed delivery,

 

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and guarantees that, within three New York Stock Exchange trading days after the expiration date, the eligible guarantor institution will deposit with the exchange agent the letter of transmittal, together with the certificate(s) representing the private notes in proper form for transfer or a confirmation of a book-entry transfer, as the case may be, and any other documents required by the letter of transmittal; and

 

3. within five New York Stock Exchange trading days after the expiration date, the exchange agent receives a properly executed letter of transmittal, as well as the certificate(s) representing all tendered private notes in proper form for transfer and all other documents required by the letter of transmittal.

 

Upon request, the exchange agent will send to you a notice of guaranteed delivery if you wish to tender your notes according to the guaranteed delivery procedures described above.

 

Withdrawal of Tenders

 

Except as otherwise provided in this prospectus, you may withdraw tenders of private notes at any time before 5:00 p.m., New York City time, on the expiration date.

 

To withdraw a tender of private notes in the exchange offer, the exchange agent must receive a written or facsimile transmission notice of withdrawal at its address listed in this prospectus before the expiration date. Any notice of withdrawal must:

 

  specify the name of the person who deposited the private notes to be withdrawn;

 

  identify the private notes to be withdrawn, including the certificate number(s) and principal amount of the private notes; and

 

  be signed in the same manner as the original signature on the letter of transmittal by which the private notes were tendered, including any required signature guarantees.

 

We will determine in our sole discretion all questions as to the validity, form and eligibility of the notices, and our determination will be final and binding on all parties. We will not deem any properly withdrawn private notes to have been validly tendered for purposes of the exchange offer, and we will not issue exchange notes with respect to those private notes, unless you validly retender the withdrawn private notes. You may retender properly withdrawn private notes by following one of the procedures described above under “—Procedures for Tendering” at any time before the expiration date.

 

Conditions

 

Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange the exchange notes for, any private notes, and may terminate the exchange offer as provided in this prospectus before the acceptance of the private notes, if, in our reasonable judgment, the exchange offer violates applicable law, rules or regulations or an applicable interpretation of the staff of the SEC.

 

If we determine in our reasonable discretion that any of these conditions are not satisfied, we may

 

  refuse to accept any private notes and return all tendered private notes to you;

 

  extend the exchange offer and retain all private notes tendered before the exchange offer expires, subject, however, to your rights to withdraw the private notes; or

 

  waive the unsatisfied conditions with respect to the exchange offer and accept all properly tendered private notes that have not been withdrawn.

 

If the waiver constitutes a material change to the exchange offer, we will promptly disclose the waiver by means of a prospectus supplement that we will distribute to the registered holders of the private notes, and we

 

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will extend the exchange offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders, if the exchange offer would otherwise expire during the five to ten business day period.

 

Termination of Rights

 

All of your rights under the registration rights agreement will terminate upon consummation of the exchange offer except with respect to our continuing obligations:

 

  to indemnify you and parties related to you against liabilities, including liabilities under the Securities Act; and

 

  to provide, upon your request, the information required by Rule 144A(d)(4) under the Securities Act to permit resales of the notes pursuant to Rule 144A.

 

Shelf Registration

 

If:

 

1. we are not permitted to consummate the exchange offer because the exchange offer is not permitted by applicable law or SEC policy;

 

2. the exchange offer has not been consummated by June 14, 2005; or

 

3. the exchange offer is not available to any holder of transfer restricted securities,

 

we will file with the SEC a shelf registration statement to cover resales of the private notes by the holders thereof who satisfy certain conditions relating to the provision of information in connection with the shelf registration statement.

 

For purposes of the preceding, “transfer restricted securities” means each private note until:

 

1. the date on which such note has been exchanged by a person other than a broker-dealer for an exchange note in the exchange offer;

 

2. following the exchange by a broker-dealer in the exchange offer of a private note for an exchange note, the date on which such exchange note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the exchange offer registration statement;

 

3. the date on which such private note has been effectively registered under the Securities Act and disposed of in accordance with the shelf registration statement; or

 

4. the date on which such private note is distributed to the public pursuant to Rule 144 under the Securities Act.

 

Liquidated Damages

 

If:

 

1. we fail to file any registration statement required by the registration rights agreement on or before the date specified for such filing; or

 

2. any of such registration statements is not declared effective by the SEC on or prior to the date specified for such effectiveness; or

 

3. we fail to consummate the exchange offer by June 14, 2005; or

 

4. the shelf registration statement or the exchange offer registration statement is declared effective but (i) ceases to be effective at any time at which it is required to be effective under the registration rights

 

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agreement, or (ii) ceases to be usable in connection with resales or exchanges of transfer restricted securities with and during the periods specified in the registration rights agreement;

 

(each such event referred to in clauses (1) through (4) above, a “registration default”), then we will pay to each holder of the outstanding notes, as liquidated damages, for the period from the occurrence of the registration default until such time as no registration default is in effect an amount per annum equal to 0.25% during the first 90-day period following the occurrence of such registration default which rate shall increase by an additional 0.25% during each subsequent 90-day period, up to a maximum of 1.00% in respect of the aggregate principal amount of transfer restricted securities held by such holder until the applicable registration statement is filed, the exchange offer registration statement is declared effective and the exchange offer is consummated or the shelf registration statement is declared effective or again becomes effective, as the case may be. If, after the cure of all registration defaults then in effect, there is a subsequent registration default, the rate of additional interest for such subsequent registration default shall initially be 0.25% regardless of the rate in effect with respect to any prior registration default at the time of cure of such registration default.

 

Exchange Agent

 

We have appointed Wells Fargo Bank, N.A., as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or the letter of transmittal and requests for a notice of guaranteed delivery to the exchange agent addressed as follows:

 

By Registered or Certified Mail:

  By Hand Delivery:

Wells Fargo Bank, N.A.

  Wells Fargo Bank, N.A.

707 Wilshire Boulevard, 17th Floor

  707 Wilshire Boulevard, 17th Floor

Los Angeles, California 90017

  Los Angeles, California 90017

Attention: Corporate Trust Administration

  Attention: Corporate Trust Administration

By Overnight Delivery:

  By Facsimile:

Wells Fargo Bank, N.A.

  (213) 614-3355

707 Wilshire Boulevard, 17th Floor

  Attention: Corporate Trust Administration

Los Angeles, California 90017

  Confirm by Telephone:

Attention: Corporate Trust Administration

  (213) 614-3349

 

Delivery to an address other than the one stated above or transmission via a facsimile number other than the one stated above will not constitute a valid delivery.

 

Fees and Expenses

 

We will bear the expenses of soliciting tenders. We are making the principal solicitation by mail; however, our officers and regular employees may make additional solicitations by facsimile, telephone or in person.

 

We have not retained any dealer manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses.

 

We will pay the cash expenses incurred in connection with the exchange offer which we estimate to be approximately $250,000. These expenses include registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees and printing costs, among others.

 

We will pay all transfer taxes, if any, applicable to the exchange of notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the private notes pursuant to the

 

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exchange offer, then you must pay the amount of the transfer taxes. If you do not submit satisfactory evidence of payment of the taxes or exemption from payment with the letter of transmittal, we will bill the amount of the transfer taxes directly to you.

 

Consequences of Failures to Exchange

 

Participation in the exchange offer is voluntary. We urge you to consult your financial and tax advisors in making your decisions on what action to take. Private notes that are not exchanged for exchange notes pursuant to the exchange offer will remain restricted securities. Accordingly, those private notes may be resold only:

 

  to a person whom the seller reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule 144A;

 

  in a transaction meeting the requirements of Rule 144 under the Securities Act;

 

  outside the United States to a foreign person in a transaction meeting the requirements of Rule 903 or 904 of Regulation S under the Securities Act;

 

  in accordance with another exemption from the registration requirements of the Securities Act and based upon an opinion of counsel if we so request;

 

  to us; or

 

  pursuant to an effective registration statement.

 

In each case, the private notes may be resold only in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction.

 

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USE OF PROCEEDS

 

The exchange offer satisfies an obligation under the registration rights agreement. We will not receive any cash proceeds from the exchange offer.

 

The net proceeds from the sale of the private notes, after deducting discounts, commissions and estimated offering expenses were approximately $587.0 million. We used the net proceeds, along with existing cash, to prepay the full amount owed by our indirect wholly-owned subsidiary, AMD Saxony, under the Dresden Term Loan, which, including accrued and unpaid interest through the prepayment date, was $647.2 million based on a U.S. dollar to euro exchange rate of $1.28 to €1.00 as of November 2, 2004, the date of the prepayment. In connection with the prepayment, we paid a prepayment premium of approximately $8.5 million based on a U.S. dollar to euro exchange rate of $1.33 to €1.00, the average of the exchange rates in effect on the three installment dates during which the prepayment premium was paid.

 

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CAPITALIZATION

 

The following table sets forth our consolidated cash and long-term debt, including the current portion, and capitalization as of September 26, 2004 on an actual basis and as adjusted to give effect to the issuance and the sale of the notes and the application of the net proceeds therefrom as described under “Use of Proceeds.” This table should be read in conjunction with our consolidated financial statements and the related notes thereto and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

   As of September 26, 2004

   Actual

  As adjusted

   (in thousands)

Cash(1)(2)

  $1,185,177  1,145,676
   

  

Long-term debt and capital lease obligations including current portion:

       

Secured revolving credit facility(3)

   —    —  

Dresden Term Loan

   618,685  —  

7.75% Senior Notes due 2012

   —    600,000

4.75% Convertible Senior Debentures due 2022(4)

   500,000  500,000

4.50% Convertible Senior Notes due 2007(5)

   402,500  402,500

Spansion Japan Revolving Credit Facility(6)

   —    —  

July 2003 Spansion Term Loan

   51,474  51,474

Spansion Japan Term Loan

   130,169  130,169

Capital lease obligations

   206,413  206,413

Other(7)

   60,089  60,089
   

  

Total long-term debt and capital lease obligations

   1,969,330  1,950,645
   

  

Total stockholders’ equity(8)

   2,571,442  2,563,626
   

  

Total capitalization

  $4,540,772  4,514,271
   

  

(1)Cash includes cash, cash equivalents, compensating balance and short-term investments.
(2)As adjusted, reflects a $7.8 million prepayment premium under the Dresden Term Loan based on a U.S. dollar to euro exchange rate of $1.23 to €1.00 as of September 26, 2004. Along with the net proceeds from the sale of the private notes, approximately $39.5 million of existing cash would have been required to prepay the loan, including the prepayment premium.
(3)As of September 26, 2004, we had up to $100 million available under the secured revolving credit facility.
(4)The 4.75% Debentures are convertible into shares of our common stock at a conversion price of $23.38 per share, subject to adjustment in certain circumstances.
(5)The 4.50% Notes are convertible into shares of our common stock at a conversion price of $7.37 per share, subject to adjustment in certain circumstances. This amount does not reflect the exchange by us of an aggregate of $201.0 million of our 4.50% Notes for 29,391,261 shares of our common stock after September 26, 2004.
(6)As of September 26, 2004, Spansion Japan had approximately $136 million available under this facility.
(7)Includes $40 million under a cash note to Fujitsu related to funding of Spansion LLC, approximately $6.7 million under the AMD Penang term loan and approximately $13.4 million under the Spansion China loan.
(8)Adjusted to reflect the $7.8 million prepayment premium described under note (2) above.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

 

The following table sets forth selected consolidated financial data. The selected consolidated balance sheet data as of December 29, 2002 and December 28, 2003 and the selected statement of operations and cash flows data for the years ended December 30, 2001, December 29, 2002 and December 28, 2003 have been derived from, and should be read together with, our audited consolidated financial statements incorporated by reference in this prospectus. The selected balance sheet data as of December 26, 1999, December 31, 2000 and December 30, 2001, and the selected consolidated statement of operations data for the years ended December 26, 1999 and December 31, 2000 have been derived from, and should be read together with, our audited consolidated financial statements not incorporated by reference in this prospectus. The selected statement of operations and cash flows data as of and for the nine months ended September 28, 2003 and September 26, 2004 have been derived from, and should be read together with, our unaudited interim condensed consolidated financial statements incorporated by reference in this prospectus. Other financial data are derived from our audited consolidated financial statements, our unaudited interim condensed consolidated financial statements and our accounting records. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation. Our consolidated financial statements for periods subsequent to September 28, 2003 include Spansion LLC, our majority-owned subsidiary which was formed by us and Fujitsu Limited, effective June 30, 2003. Our results of operations for periods prior to June 30, 2003 do not include Spansion LLC, therefore our results of operations for the year ended December 28, 2003 are not fully comparable with our results for prior periods. In addition, results of operations for the nine months ended September 26, 2004 are not necessarily indicative of the results that may be expected for the full year ended December 27, 2004. The following selected consolidated financial data should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

  Fiscal Year Ended

  Nine Months Ended

 
  

Dec. 26,

1999


  

Dec. 31,

2000


  

Dec. 30,

2001


  

Dec. 29,

2002


  

Dec. 28,

2003


  Sept. 28,
2003


  

Sept. 26,

2004


 
  (in thousands) 

Statement of Operations Data:

                            

Net sales

 $2,857,604  $4,644,187  $3,891,754  $2,697,029  $3,070,228  $2,125,989  $2,876,699 

Net sales to related party

  —     —     —     —     448,940   187,586   861,030 
  


 


 


 


 


 


 


Total net sales

  2,857,604   4,644,187   3,891,754   2,697,029   3,519,168   2,313,575   3,737,729 

Expenses:

                            

Cost of sales

  1,964,434   2,514,637   2,589,747   2,105,661   2,327,063   1,548,556   2,289,935 

Research and development

  635,786   641,799   650,930   816,114   852,075   625,572   681,807 

Marketing, general and administrative

  540,070   599,015   620,030   670,065   587,307   424,500   561,389 

Restructuring and other special charges, net

  38,230   —     89,305   330,575   (13,893)  (5,854)  2,514 
  


 


 


 


 


 


 


Operating income (loss)

  (320,916)  888,736   (58,258)  (1,225,386)  (233,384)  (279,199)  202,084 

Interest income and other, net

  463,794   423,200   25,695   32,132   21,116   12,203   11,280 

Interest expense

  (69,253)  (60,037)  (61,360)  (71,349)  (109,960)  (79,017)  (83,258)
  


 


 


 


 


 


 


Income (loss) before minority interest, income taxes and equity in net income of manufacturing joint venture(1)

  73,625   1,251,899   (93,923)  (1,264,603)  (322,228)  (346,013)  130,106 

Minority interest in loss (income) of subsidiary

  —     —     —     —     44,761   25,353   1,832 
  


 


 


 


 


 


 


Income (loss) before income taxes and equity in net income of manufacturing joint venture

  73,625   1,251,899   (93,923)  (1,264,603)  (277,467)  (320,660)  131,938 

Provision (benefit) for income taxes

  167,350   256,868   (14,463)  44,586   2,936   2,936   10,819 
  


 


 


 


 


 


 


Income (loss) before equity in net income of manufacturing joint venture

  (93,725)  995,031   (79,460)  (1,309,189)  (280,403)  (323,596)  121,119 

Equity in net income of manufacturing joint venture

  4,789   11,039   18,879   6,177   5,913   5,913   —   
  


 


 


 


 


 


 


Net income (loss) before extraordinary item

  (88,936)  1,006,070   (60,581)  (1,303,012)  (274,490)  (317,683)  (121,119)

Extraordinary item—debt retirement, net of $13,497 tax benefit

  —     (23,044)  —     —     —     —     —   
  


 


 


 


 


 


 


Net income (loss)

 $(88,936) $983,026  $(60,581) $(1,303,012) $(274,490) $(317,683)  121,119 
  


 


 


 


 


 


 


 

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  Fiscal Year Ended

 Nine Months Ended

 
  

Dec. 26,

1999


  

Dec. 31,

2000


  

Dec. 30,

2001


  

Dec. 29,

2002


  

Dec. 28,

2003


 Sept. 28,
2003


  

Sept. 26,

2004


 
  (in thousands) 

Cash Flow Data:

                           

Net cash provided by (used in) operating activities

  259,920   1,205,552   167,645   (119,963)  295,586  (93,006)  724,333 

Net cash provided by (used in) investing activities

  (142,374)  (815,802)  (553,521)  (854,389)  83,183  290,555   (1,011,791)

Net cash provided by (used in) financing activities

  (173,543)  (100,851)  140,891   907,440   267,402  365,694   98,886 

Other Financial Data:

                           

EBITDA(2)

 $636,726  $1,819,773  $552,759  $(466,298) $814,367 $457,673  $1,098,685 

Depreciation and amortization

  515,520   579,070   622,867   756,169   995,663  708,352   895,104 

Capital expenditures

  619,772   805,474   678,865   705,147   570,316  407,535   969,758 

Ratio of earnings to fixed charges(3)

  1.3x  13.0x  —     —     —    —     2.4x

Balance Sheet Data (at end of period):

                           

Cash(4)

 $596,511  $1,293,165  $869,997  $1,006,655  $1,313,367 $1,075,939  $1,185,177 

Working capital

  499,226   1,433,580   1,039,172   851,303   1,448,008  1,248,941   1,467,314 

Total assets

  4,377,698   5,767,735   5,647,242(5)  5,710,318(5)  7,049,772  6,664,365(5)  7,282,439 

Total long-term debt and capital lease obligations

  1,474,908   1,297,543   635,705   1,640,055   2,092,940  2,081,576   2,043,044 

Stockholders’ equity

  1,979,273   3,171,667   3,555,055   2,467,265   2,438,310  2,282,784   2,571,442 

(1)Manufacturing joint venture refers to Fujitsu AMD Semiconductor Limited (FASL), our previous manufacturing joint venture with Fujitsu Limited, which was contributed to Spansion LLC in connection with the formation of Spansion LLC, effective June 30, 2003.
(2)EBITDA is defined as net income (loss) before (i) interest income, (ii) interest expense, (iii) income tax, and (iv) depreciation and amortization. EBITDA does not include Fujitsu Limited’s 40 percent share of Spansion LLC’s net income or loss. Other companies in our industry may calculate EBITDA differently than we do and EBITDA as presented in this prospectus may not be comparable with similarly titled measures of other companies. We have included this non-GAAP financial measure because we believe that it provides noteholders with useful information in assessing our operating performance and as an indicator of our ability to service or incur indebtedness, make capital expenditures and finance working capital requirements. Depreciation and amortization, interest income and interest expense as set forth below represent amounts that are also attributable to the results of operations of Spansion LLC and its subsidiaries. EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with GAAP. The reconciliation of net income (loss) to EBITDA is as follows:

 

  Fiscal Year Ended

  Nine Months Ended

 
  Dec. 26,
1999


  

Dec. 31,

2000


  Dec. 30,
2001


  

Dec. 29,

2002


  Dec. 28,
2003


  Sept. 28,
2003


  Sept. 26,
2004


 
  (in thousands) 

Net income (loss)

 $(88,936) $983,026  $(60,581) $(1,303,012) $(274,490) $(317,683) $121,119 

Depreciation and amortization

  515,520   579,070   622,867   756,169   995,663   708,352   895,104 

Interest income

  (26,461)  (59,228)  (56,424)  (35,390)  (19,702)  (14,949)  (11,615)

Interest expense

  69,253   60,037   61,360   71,349   109,960   79,017   83,258 

Provision (benefit) for income taxes

  167,350   256,868   (14,463)  44,586   2,936   2,936   10,819 

EBITDA

 $636,726  $1,819,773  $552,759  $(466,298) $814,367  $457,673  $1,098,685 

 

(3)For purposes of computing the ratio of earnings to fixed charges, fixed charges consist of interest expense on long-term debt and capital leases, amortization of deferred financing costs and that portion of rental expense deemed to be representative of interest. Earnings consist of income (loss) before income taxes and equity in joint venture, plus fixed charges. For the fiscal years ended 2001, 2002, 2003 and nine months ended September 28, 2003, earnings were insufficient to cover fixed charges by $76 million, $1,253 million, $301 million and $329 million, respectively.
(4)Cash includes cash and cash equivalents, compensating balance and short-term investments.
(5)Total assets as of December 30, 2001, December 29, 2002 and September 28, 2003 do not reflect a reclassification of certain prior period amounts to conform to current period presentation. After taking effect of the reclassification, total assets for December 30, 2001, December 29, 2002 and September 28, 2003 were $5,636,445, $5,694,453 and $6,628,996. This reclassification will be reflected in our future earnings releases and periodic reports. We do not believe that these reclassifications are material to the overall presentation of our balance sheet data.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes incorporated by reference in this prospectus and our audited consolidated financial statements and related notes as of December 28, 2003 and December 29, 2002, and for each of the three years in the period ended December 28, 2003 as filed in our Annual Report on Form 10-K for the year ended December 28, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation. The following discussion should also be read, together with the whole of this prospectus, in conjunction with the documents listed in the section “Incorporation by Reference.” The following discussion contains forward-looking statements that involve risks and uncertainties. See the disclosure regarding “Forward-Looking Statements” at the front of this prospectus.

 

Overview

 

We design, manufacture and market industry-standard digital integrated circuits, or ICs, that are used in diverse product applications such as desktop and mobile PCs, workstations, servers, communications equipment such as mobile phones and automotive and consumer electronics. Our products consist primarily of microprocessors and Flash memory devices. We also sell low power, high performance x86 and MIPS® architecture-based embedded microprocessors for personal connectivity devices.

 

We believe critical success factors include: continuing to increase market acceptance of our AMD64 technology, particularly in the enterprise segment; strengthening our relationships with key customers and establishing relationships with new customers that are industry leaders in their markets; successfully developing and continuing to transition to the latest manufacturing process technologies for both our microprocessor and Flash memory products; developing and introducing new microprocessor products for the mobile, server and workstation markets on a timely basis and increasing our share of those markets; expanding our participation in high-growth global markets, including China, Latin America, India and Eastern Europe; and improving our share of the Flash memory market, including increasing the adoption of MirrorBit technology.

 

We have two reportable segments:

 

  the Computation Products segment, which includes microprocessor products for desktop and mobile PCs, servers and workstations and chipset products; and

 

  the Memory Products segment, which primarily consists of Spansion Flash memory products.

 

We review and assess operating performance using segment net sales and operating income before interest, taxes and minority interest. These performance measures include the allocation of expenses to the operating segments based on management’s judgment. Prior to the third quarter of 2003, we had two reportable segments: the Core Products and Foundry Services segments. Primarily as a result of the formation of Spansion LLC, effective as of June 30, 2003, we re-evaluated our reportable segments, and beginning in the third quarter of 2003, we changed our reportable segments to the Computation Products segment and the Memory Products segment. We believe that separate reporting of these operating segments, given our focus on Spansion LLC as an operating entity with its own brand—Spansion, provides more useful information to investors.

 

In addition to our reportable segments, we also have the All Other category that is not a reportable segment, but rather includes other small operating segments that are neither individually nor in the aggregate greater than ten percent of our consolidated net sales or assets. This category also includes certain operating expenses and credits that are not allocated to the operating segments.

 

Prior period segment information has been reclassified to conform to the current period presentation. However, because Spansion LLC did not exist prior to June 30, 2003, the results of our operations for periods prior to the third quarter of 2003 do not include the consolidation of Spansion LLC’s results of operations.

 

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Accordingly, our operating results for nine months ended September 26, 2004 are not fully comparable with our results for nine months ended September 28, 2003 and the segment operating information for the Memory Products segment for nine months ended September 26, 2004 is not fully comparable to the reclassified segment information for nine months ended September 28, 2003.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net sales, inventories, asset impairments, restructuring charges, income taxes, and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ in the future from these estimates or our estimates may be affected by different assumptions or conditions.

 

We believe the following critical accounting policies are the most significant to the presentation of our financial statements and require the most difficult, subjective and complex judgments:

 

Revenue Reserves

 

We record a provision for estimated product returns and allowances on product sales and a provision for estimated future price reductions in the same period that the related revenues are recorded. We base these estimates on management judgment while considering actual historical sales returns, historical price reductions, market activity, allowances, and other known or anticipated trends and factors. Actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results.

 

Inventory Valuation

 

At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist us in determining the carrying value of our inventory and are also used for near-term factory production planning. Inventories on hand in excess of forecasted demand of generally six months or less, are not valued. In addition, we write off inventories that are considered obsolete. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. We adjust remaining inventory balances to approximate the lower of our standard manufacturing cost or market value. If we anticipate future demand or market conditions to be less favorable than our projections, additional inventory write-downs may be required, and would be reflected in cost of sales in the period the revision is made. This would have a negative impact on our gross margins in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period. To the extent these factors materially affect our gross margins, we would disclose them.

 

Impairment of Long-Lived Assets

 

We consider no less frequently than quarterly whether indicators of impairment of long-lived assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset and significant changes in the extent or manner in which an asset is used. If these or other indicators are present,

 

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we determine whether the estimated undiscounted cash flows attributable to the assets in question are less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals or other methods. If the asset determined to be impaired is to be held and used, we recognize an impairment loss through a charge to our operating results to the extent the present value of anticipated net cash flows attributable to the asset is less than the asset’s carrying value, which we depreciate over the remaining estimated useful life of the asset. We may incur additional impairment losses in future periods if factors influencing our estimates of the undiscounted cash flows change.

 

Restructuring Charges

 

We record and account for our restructuring activities following formally approved plans that identify the actions and timeline over which the restructuring activities will occur. Restructuring charges include estimates pertaining to employee severance and fringe benefit costs, facility exit costs, subleasing assumptions and facility and equipment decommissioning costs resulting from exiting certain facilities. We review remaining restructuring accruals on a quarterly basis and adjust these accruals when changes in facts and circumstances suggest actual amounts will differ from our estimates. Although we do not anticipate significant changes, actual costs may be different than our original or revised estimates. These changes in estimates can result in increases or decreases to our results of operations in future periods and would be presented on the restructuring and other special charges, net, line of our consolidated operating statements.

 

Income Taxes

 

In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.

 

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a charge to income tax expense, in the form of a valuation allowance, for the deferred tax assets that we estimate will not ultimately be recoverable. We consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In fiscal 2002, we recorded a valuation allowance against all of our U.S. deferred tax assets, net of deferred tax liabilities, based on past performance and the likelihood of realization of our deferred tax assets at the time. In fiscal 2003, we continued to provide a valuation allowance against all of our U.S. deferred tax assets, net of deferred tax liabilities. If we later determine that it is more likely than not that the net deferred tax assets will be realized, an appropriate amount of the previously provided valuation allowance will be reversed, resulting in a benefit to our earnings. Such benefits would be recorded on the income tax provision (benefit) line of our statement of operations.

 

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment by the Internal Revenue Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.

 

Commitments and Contingencies

 

From time to time we are a defendant or plaintiff in various legal actions that arise in the normal course of business. We are also a party to environmental matters, including local, regional, state and federal government clean-up activities at or near locations where we currently or have in the past conducted our business. We are also a guarantor of various third-party obligations and commitments. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A

 

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determination of the amount of reserves required for these commitments and contingencies, if any, that would be charged to earnings includes assessing the probability of adverse outcomes and estimating the amount of potential losses. The required reserves may change in the future due to new developments in each matter or changes in circumstances, such as a change in settlement strategy. Changes in required reserves could increase or decrease our earnings in the period the changes are made.

 

Results of Operations

 

Effective June 30, 2003, we and Fujitsu formed Spansion LLC. As a result of the transaction, we began consolidating Spansion LLC’s results of operations on June 30, 2003. Prior to June 30, 2003, we accounted for our share of the manufacturing joint venture’s operating results under the equity method. As Spansion LLC did not exist prior to June 30, 2003, the results of our operations for periods prior to the third quarter of 2003 do not include the consolidation of Spansion LLC’s results of operations. Accordingly, our operating results for the quarter and nine months ended September 26, 2004 are not fully comparable with our results for the quarter and nine months ended September 28, 2003 and our segment operating information for the Memory Products segment for the quarter and nine months ended September 26, 2004 is not fully comparable to the reclassified segment information for the quarter and nine months ended September 28, 2003. As we have a 60 percent controlling interest in Spansion LLC, Fujitsu’s 40 percent share in the net income (loss) of Spansion LLC is reflected as a minority interest adjustment to our consolidated financial statements. This minority interest adjustment will not correspond to Memory Products segment operating income (loss) because Memory Products segment operating income (loss) includes operations incremental to those of Spansion LLC. In addition, the minority interest calculation is based on Spansion LLC’s net income (loss) rather than operating income (loss).

 

Year to Year Comparison

 

We use a 52- to 53-week fiscal year ending on the last Sunday in December. The following is a summary of our net sales for 2001, 2002 and 2003.

 

   2001

  2002

  2003

   (in millions)

Computation Products

  $2,466  $1,756  $1,960

Memory Products

   1,133   741   1,419

All Other

   293   200   140
   

  

  

Total Net Sales

  $3,892  $2,697  $3,519
   

  

  

 

Net Sales Comparison for Years Ended December 28, 2003 and December 29, 2002

 

Total net sales of $3,519 million in 2003 increased 30 percent compared to net sales of $2,697 million in 2002.

 

Computation Products net sales of $1,960 million in 2003 increased 12 percent compared to net sales of $1,756 million in 2002. The increase in net sales resulted primarily from a 15 percent increase in microprocessor unit shipments due primarily to increased demand from our OEM customers, partially offset by a four percent decline in the average selling prices of our microprocessor products. Unit shipment growth was particularly strong in Latin America and China, which accounted for 77 percent of overall unit growth.

 

Memory Products net sales of $1,419 million in 2003 increased 92 percent compared to net sales of $741 million in 2002. The increase in net sales was primarily attributable to the effect of consolidating Spansion LLC’s results of operations, which include Spansion LLC’s sales to Fujitsu, and increased demand for Flash memory products. Further quantification of the breakdown in the increase in net sales is not practical due to the reorganization of geographical sales territories between AMD and Fujitsu.

 

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All Other net sales of $140 million in 2003 decreased 30 percent compared to net sales of $200 million in 2002 and consisted primarily of net sales of our Personal Connectivity Solutions Group products. The decrease was due to a $53 million decrease in revenue resulting from discontinued production of selected mature embedded processors and networking products and a $34 million decrease in foundry services revenues, offset by a $28 million increase in revenues from sales of AMD Geode and wireless products.

 

Net Sales Comparison for Years Ended December 29, 2002 and December 30, 2001

 

Total net sales of $2,697 million in 2002 decreased 31 percent compared to net sales of $3,892 million in 2001.

 

Computation Products net sales of $1,756 million in 2002 decreased 29 percent compared to net sales of $2,466 million in 2001. This decrease was almost wholly due to a decrease in unit sales of 16 percent, and a decrease in average selling prices of 13 percent, reflecting an industry-wide weakness in PC sales, competitive pricing pressure, and the execution of our plan to align our microprocessor inventory in the supply chain with forecasted customer demand, which included our decision to limit shipments and accept receipt of product returns from certain customers.

 

Memory Products net sales of $741 million in 2002 decreased 35 percent compared to net sales of $1,133 million in 2001. The decrease was primarily due to a decrease in average selling prices of 36 percent, reflecting continued weakness in the communications and networking equipment industries.

 

All Other net sales of $200 million in 2002 decreased 32 percent compared to net sales of $293 million in 2001. The decrease was primarily due to a decrease in foundry services revenues of approximately $64 million and a decrease in net sales of $31 million from embedded processors and networking products as a result of sustained market declines in the communications and networking equipment industries.

 

Comparison of Expenses, Gross Margin, Interest Income and Other, Net, Interest Expense and Taxes

 

The following table is a summary of gross margin, expenses and interest income and other, net, and interest expense for 2001, 2002 and 2003:

 

   2001

  2002

  2003

 
   (in millions, except for
percentages)
 

Cost of sales

  $2,590  $2,106  $2,327 

Gross margin

   33%  22%  34%

Research and development

  $651  $816  $852 

Marketing, general and administrative

   620   670   587 

Restructuring and other special charges, net

   89   331   (14)

Interest income and other, net

   26   32   21 

Interest expense

   61   71   110 

Income tax provision (benefit)

   (14)  45   3 

 

Gross margin increased to 34 percent in 2003 compared to 22 percent in 2002. The increase in gross margin was primarily due to an increase in net sales of 30 percent, accompanied by an increase in cost of sales of only ten percent. Our cost of sales increased at a lower rate than net sales primarily due to cost reductions from the 2002 Restructuring Plan and other cost reduction initiatives. In addition, microprocessor unit sales increased 15 percent while average selling prices of microprocessor products decreased by 4 percent, and we realized $63 million, or approximately 2 percentage points resulting from the sale of microprocessor products that had been previously written off. Further quantification of the improvement in gross margin is not practical due to the consolidation of Spansion LLC’s operating results on June 30, 2003.

 

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We amortize capital grants and allowances, interest subsidies and research and development subsidies that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 as they are earned. The amortization of these grants and subsidies is recognized as credits to research and development expenses and cost of sales. The credits to cost of sales totaled $46.2 million in 2003 and $36.5 million in 2002.

 

Gross margin decreased to 22 percent in 2002 compared to 33 percent in 2001. This decrease was primarily due to a 31 percent decrease in the combined sales of PC processors and Flash memory products, as a result of lower unit demand and average selling prices due to weakened customer demand and industry-wide excess inventory, partially offset by cost savings realized from the closure of certain facilities pursuant to the 2001 Restructuring Plan, which is discussed below.

 

Research and development expenses of $852 million in 2003 increased four percent from $816 million in 2002 due primarily to an increase in expenses as a result of the Spansion LLC transaction, $23 million in research and development efforts related to new microprocessors, and $58 million in expenses related to amounts paid to IBM to jointly develop new logic process technologies for use in future high-performance microprocessor products. These increases were offset by a $35 million reduction in internal research and development costs from 2002 to 2003, primarily due to the reduction of research and development activities associated with our embedded microprocessors for personal connectivity devices and the absence of the $42 million charge representing amounts paid to IBM in 2002 in exchange for consulting services relating to optimizing the performance of our manufacturing processes.

 

We amortize capital grants and allowances, interest subsidies and research and development subsidies that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 as they are earned. The amortization of these grants and subsidies is recognized as credits to research and development expenses and cost of sales. The credits to research and development expenses totaled $29.0 million in 2003 and $22.8 million in 2002.

 

Research and development expenses of $816 million in 2002 increased 25 percent compared to $651 million in 2001. This increase was primarily due to an overall increase in research and development efforts directed to our microprocessors. In addition, research and development expenses in 2002 included a $42 million charge for amounts paid to IBM in exchange for consulting services relating to optimizing the performance of our manufacturing processes in the fourth quarter of 2002, as well as the reallocation of $30 million from manufacturing resources, previously included in costs of goods sold, to research and development activities for microprocessors.

 

Marketing, general and administrative expenses of $587 million in 2003 decreased 12 percent compared to $670 million in 2002. The decrease was primarily due to decreased cooperative advertising and marketing expenses of $55 million and cost reductions from the 2002 Restructuring Plan and other cost reduction initiatives.

 

Marketing, general and administrative expenses of $670 million in 2002 increased eight percent compared to $620 million in 2001 primarily as a result of increased advertising and marketing expenses associated with the launch of our branding campaign.

 

Effects of Our 2002 Restructuring Plan

 

In December 2002, we began implementing a restructuring plan (the 2002 Restructuring Plan) to further align our 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 our agreement with IBM to jointly develop future generations of our logic process technology, we ceased logic research and development in our Submicron Development Center, or SDC, and eliminated most of those related resources, including the sale or abandonment of certain equipment used in the SDC.

 

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The 2002 Restructuring Plan resulted in the consolidation of facilities, primarily at our Sunnyvale, California site and at sales offices worldwide. We vacated and are attempting to sublease certain facilities currently occupied under long-term operating leases through 2013. We also terminated the implementation of certain partially completed 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, we recorded restructuring costs and other special charges of $330.6 million in the fourth quarter of 2002, consisting primarily of anticipated exit costs of $138.9 million almost wholly related to vacating and consolidating our facilities, $68.8 million of anticipated severance and fringe benefit costs, a charge of $55.5 million resulting from the abandonment of partially completed ERP software and other information technology implementation activities, an asset impairment charge of $32.5 million relating to a license that has no future use because of its association with discontinued logic development activities, and asset impairment charges of $30.6 million resulting from the abandonment of equipment previously used in logic process development and manufacturing activities.

 

During 2003, management approved the sale of additional equipment, primarily equipment used in the SDC, that was identified as no longer useful in our operations. As a result, we 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 sale of the equipment.

 

During 2003, we revised our 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 creation of Spansion LLC. As a result, we reversed $8.9 million of the estimated severance and fringe benefit accrual. As of December 28, 2003, 1,736 employees had been terminated pursuant to the 2002 Restructuring Plan resulting in cumulative cash payments of $53 million in severance and employee benefit costs. The remaining accrual of $6.7 million represents the severance benefits cost obligations for individuals whose employments terminated but who elected to defer receipt of severance benefits until 2004 and for employees who were pre-notified in 2003 of their employment terminations to occur in 2004.

 

With the exception of exit costs consisting primarily of remaining lease payments on abandoned facilities, net of estimated sublease income that are payable through 2011, we have substantially completed the activities associated with the 2002 Restructuring Plan as of December 28, 2003. As a result of the 2002 Restructuring Plan, we realized overall cost reductions of approximately $150 million in 2003. We also implemented other cost reduction initiatives incremental to the specific expense reductions resulting from the 2002 Restructuring Plan.

 

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

 

   Severance
and Employee
Benefits


  Asset
Impairment


  Exit Costs

  Other
Restructuring
Charges


  Total

 
   (in thousands) 

2002 provision

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

Non-cash charges

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

Cash charges

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


 


 


 


 


Accrual at December 29, 2002

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

2003 provision

   —     7,791   3,314   —     11,105 

Cash charges

   (38,816)  —     (20,796)  (4,300)  (63,912)

Non-cash charges

   —     (7,791)  —     —     (7,791)

Non-cash adjustment

   (8,864)      —     (15)  (8,879)
   


 


 


 


 


Accrual at December 28, 2003

  $6,740  $—    $120,623  $—    $127,363 
   


 


 


 


 


 

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Effects of Our 2001 Restructuring Plan

 

In 2001, we announced a restructuring plan (the 2001 Restructuring Plan) due to the continued slowdown in the semiconductor industry and a resulting decline in revenues. We substantially completed our execution of the 2001 Restructuring Plan as of December 28, 2003. During 2003, we reduced the estimated accrual of the facility and equipment decommission costs by $12.2 million based on the most current information available. During 2003, we also realized a recovery of approximately $3.9 million for the excess of the sale price over the estimated fair value of equipment that was determined to be impaired as a result of the 2001 Restructuring Plan. Both amounts were included in restructuring and other special charges, net. As a result of the 2001 Restructuring Plan, we have realized overall cost reductions of $211 million as of December 28, 2003.

 

The following table summarizes activity under the 2001 Restructuring Plan through December 28, 2003:

 

   Severance
and Employee
Benefits


  Facility and
Equipment
Impairment


  Facilities and
Equipment
Decommission
Costs


  Other
Facilities
Exit Costs


  Total

 
   (in thousands) 

2001 provision

  $34,105  $39,000  $15,500  $700  $89,305 

2001 cash charges

   (7,483)  —     —     (54)  (7,537)

2001 non-cash charges

   —     (39,000)  —     —     (39,000)
   


 


 


 


 


Accrual at December 30, 2001

   26,622   —     15,500   646   42,768 

2002 cash charges

   (26,622)  —     (445)  —     (27,067)
   


 


 


 


 


Accrual at December 29, 2002

   —     —     15,055   646   15,701 

Non-cash adjustments

   —     —     (11,574)  (646)  (12,220)

Cash charges

   —     —     (2,485)  —     (2,485)
   


 


 


 


 


Accrual at December 28, 2003

  $—    $—    $996  $—    $996 
   


 


 


 


 


 

Interest Income and Other, Net

 

Interest income and other, net, of approximately $21 million in 2003 decreased 34 percent from $32 million in 2002. The decrease was primarily due to a decrease in investment income of $16 million caused by lower cash equivalents and short-term investment balances and $2.3 million in charges in 2003 for other-than-temporary declines in our equity investments. This decrease was offset by a gain of approximately $6 million based on the difference between the carrying value and fair value of assets contributed by us to Spansion LLC. Fujitsu now owns a 40 percent interest in these assets. The gain on the deemed sale of these assets to Spansion LLC was limited to the difference in carrying value of our interest in the assets following the completion of the transaction and the carrying value of the assets immediately prior to the transaction.

 

Interest income and other, net, of $32 million in 2002 increased 23 percent compared to $26 million in 2001. The increase was primarily due to $4.7 million in charges for other-than-temporary declines in our equity investments as compared to $27 million in charges in 2001, offset by a decrease of $20 million in interest income as a result of lower interest rates on our investment portfolio and lower cash equivalents and short term investment balances.

 

Interest Expense

 

Interest expense of $110 million in 2003 increased 55 percent compared to $71 million in 2002. The increase was due primarily to the effect of our 4.50% Convertible Senior Notes due 2007, or the 4.50% Notes, issued in November 2002, which resulted in annual interest charges, including amortization of financing costs, of $20 million, interest of $6 million on $110 million drawn at the end of September 2002 under our July 2003 Loan Agreement, and the Spansion LLC transaction, which resulted in additional interest expense of approximately $6 million in 2003. In addition, in 2002 we capitalized interest of $10.7 million on continued expansion and facilitization of Fabs 25 and 30 compared to only $1.5 million in 2003.

 

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Interest expense of $71 million in 2002 increased 16 percent compared to $61 million in 2001. The increase was due primarily to the effect of interest expense incurred on our 4.75% Convertible Senior Debentures due 2022, or the 4.75% Debentures, issued in January 2002, which resulted in interest charges of $22 million, partially offset by an increase in capitalized interest associated with conversion of Fab 25 to a Flash memory facility, facilitization activities at Fab 30, and a decrease of $9 million in interest expense due to a partial repayment of the outstanding loans under the Dresden Loan Agreements in 2002.

 

Income Taxes

 

We recorded an income tax provision of $3 million in 2003, an income tax provision of $45 million in 2002 and an income tax benefit of $14 million in 2001. The income tax provision in 2003 primarily reflected income tax expense generated in certain foreign tax jurisdictions, offset by a benefit of a U.S. federal tax refund from a carryback claim we filed in 2003. No net tax benefit was recorded in 2003 on pre-tax losses due to continuing operating losses. Our tax provision for 2003 does not reflect an increase in our net deferred tax liability of approximately $46 million. This net deferred tax liability was recognized by the Japanese subsidiary of Spansion LLC, Spansion Japan Limited, as tax expense in periods prior to our consolidation of Spansion LLC on June 30, 2003, and therefore has not been recorded as a component of our tax expense for 2003. The 2002 income tax provision was recorded primarily for taxes due on income generated in certain state and foreign tax jurisdictions. No tax benefit was recorded in 2002 on pre-tax losses due to the establishment of a valuation allowance against the remainder of our U.S. deferred tax assets, net of U.S. deferred tax liabilities in the fourth quarter, due to the incurrence of continuing substantial operating losses in the U.S. The effective benefit rate of 15.4 percent for 2001 was less than the statutory rate because of a lower than U.S. statutory 24 percent tax benefit rate on the 2001 restructuring charges, reflecting the allocation of the charges between the U.S. and foreign lower-taxed jurisdictions, and a provision for U.S. taxes on certain previously undistributed earnings of lower-taxed foreign subsidiaries.

 

Other Items

 

Our international sales as a percent of net sales were 80 percent in 2003, compared to 73 percent in 2002 and 67 percent in 2001. The following table summarizes sales by geographic areas as of and for each of the three years ended December 28, 2003:

 

   2001

  2002

  2003

   (in thousands)

Sales to external customers:

            

United States(1)

  $1,282,663  $736,566  $720,679

Japan

   217,667   251,673   575,479

Korea

   279,898   339,740   316,893

Europe

   1,492,428   945,836   1,179,474

Other Countries

   619,098   423,214   726,643
   

  

  

   $3,891,754  $2,697,029  $3,519,168
   

  

  


(1)Includes an insignificant amount of sales in Canada.

 

During 2003, approximately 15 percent of our net sales were denominated in currencies other than the U.S. dollar, primarily the Japanese yen, as compared to one percent during 2002. The increase was primarily due to the consolidation of Spansion LLC’s results of operations, which include sales by Spansion LLC to Fujitsu, which are denominated in yen. Our foreign exchange risk exposure resulting from these sales is partially mitigated as a result of our yen-denominated manufacturing costs. In addition, we are subject to foreign currency risk related to our manufacturing costs in Fab 30, which are denominated in euros. We use foreign currency forward and option contracts to reduce our exposure to the euro, but future exchange rate fluctuations may cause increases or decreases to our Fab 30 manufacturing costs. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not been material, principally as a result of our foreign currency hedging activities.

 

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Comparison of Operating Income (Loss)

 

The following is a summary of operating income (loss) for 2001, 2002 and 2003:

 

   2001

  2002

  2003

 
   (in millions) 

Computation Products

  $(191) $(661) $(23)

Memory Products

   268   (159)  (189)

All Other

   (135)  (405)  (21)
   


 


 


Total Operating Income (Loss)

  $(58) $(1,225) $(233)
   


 


 


 

Computation Products operating loss of $23 million in 2003 improved by $638 million compared to an operating loss of $661 million in 2002. The improvement was primarily due to incremental net sales of $204 million and a decrease in both manufacturing costs of $330 million and marketing, general and administrative expenses of $39 million, which resulted primarily from our cost reduction initiatives and the 2002 Restructuring Plan. In addition, cooperative advertising and marketing expenses decreased by $55 million from 2002.

 

Computation Products operating loss of $661 million in 2002 increased by $470 million compared to an operating loss of $191 million in 2001 primarily due to a decrease in net sales. The decrease was primarily due to a decline in average selling prices of 13 percent and a decline in unit sales of 16 percent for microprocessors as a result of the sustained downturn in the PC industry.

 

Memory Products operating loss of $189 million in 2003 increased $30 million from 2002. Further quantification of the changes is not practical due to the consolidation of Spansion LLC on June 30, 2003.

 

Memory Products operating loss was $159 million in 2002 compared to $268 million of operating income in 2001. The change in the operating result was primarily due to decrease in net sales of $392 million as a result of a 36 percent decline in average selling prices due to continued weakness in the Flash memory market.

 

Our All Other operating loss of $21 million in 2003 improved by $384 million compared to 2002, primarily due to $331 million of restructuring and other special charges included in the 2002 results, and a $14 million credit adjustment to the restructuring charge in 2003.

 

Our All Other operating loss of $405 million in 2002 increased by $270 million compared to 2001. The operating loss included $331 million of restructuring and other special charges in 2002 compared to approximately $89 million in 2001. The remaining increase of operating loss was primarily due to an increase in operating loss of Personal Connectivity Solutions Group products, partially offset by approximately $27 million of improvement of operating results in foundry services.

 

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Quarter to Quarter and Nine-Month to Nine-Month Comparison

 

The quarters ended September 26, 2004, June 27, 2004 and September 28, 2003 each included 13 weeks. The nine months ended September 26, 2004 and September 28, 2003 each included 39 weeks. The following is a summary of our net sales and operating income (loss) by segment and category for the periods presented below:

 

   Quarter Ended

  Nine Months Ended

 
   

September 26,

2004


  

June 27,

2004


  

September 28,

2003


  

September 26,

2004


  

September 28,

2003


 
   (in millions) 

Net sales

                     

Computation Products

  $672  $554  $503  $1,797  $1,379 

Memory Products

   538   673   424   1,839   853 

All Other

   29   35   27   101   82 
   


 


 


 


 


Total

  $1,239  $1,262  $954  $3,737  $2,314 
   


 


 


 


 


Operating income (loss)

                     

Computation Products

  $89  $57  $19  $214  $(86)

Memory Products

   15   45   (49)  74   (187)

All Other

   (36)  (30)  —     (86)  (6)
   


 


 


 


 


Total

  $68  $72  $(30) $202  $(279)
   


 


 


 


 


 

Computation Products

 

Computation Products net sales of $672 million in the third quarter of 2004 increased 21 percent compared to net sales of $554 million in the second quarter of 2004. The increase in net sales was driven primarily by increased microprocessor sales across all markets, with a 12 percent increase in average selling prices and a nine percent increase in unit shipments. Unit shipments of our AMD Athlon 64 microprocessors nearly doubled from the second quarter of 2004.

 

Computation Products net sales of $672 million in the third quarter of 2004 increased 34 percent compared to net sales of $503 million in the third quarter of 2003, primarily as a result of a 23 percent increase in average selling prices and a nine percent increase in unit shipments. Unit shipments increased due to improving market conditions across all geographic regions, especially North America and Asia. Average selling prices increased primarily as a result of increased sales of our higher-priced AMD Opteron and AMD Athlon 64 microprocessors, which we introduced in April 2003 and September 2003.

 

Computation Products net sales of $1,797 million in the first nine months of 2004 increased 30 percent compared to $1,379 million in the first nine months of 2003. Net sales increased primarily as a result of a 24 percent increase in average selling prices and a five percent increase in unit shipments. Average selling prices increased primarily as a result of sales of our higher-priced AMD Opteron and AMD Athlon 64 microprocessors. Unit shipments increased primarily as a result of improving market conditions across all geographic regions.

 

Computation Products operating income of $89 million in the third quarter of 2004 improved $32 million from operating income of $57 million in the second quarter of 2004, primarily as a result of an increase in microprocessor sales across all markets, with a 12 percent increase in average selling prices and a nine percent increase in unit shipments.

 

Computation Products operating income in the third quarter of 2004 improved by $70 million compared to operating income of $19 million in the third quarter of 2003, primarily as a result of improving market conditions across all geographic regions, which contributed to the nine percent increase in unit shipments and 23 percent increase in average selling prices referenced above.

 

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Computation Products operating income of $214 million in the first nine months of 2004 improved from an operating loss of $86 million in the first nine months of 2003. This improvement was primarily due to an increase in microprocessor sales. Net sales increased as a result of the 24 percent increase in average selling prices and the five percent increase in unit shipments referenced above.

 

Memory Products

 

Memory Products net sales of $538 million in the third quarter of 2004 decreased 20 percent compared to net sales of $673 million in the second quarter of 2004. The decrease in net sales was primarily attributable to a 14 percent decrease in unit shipments and seven percent decrease in average selling prices. In particular, net sales in Asia decreased 21 percent primarily due to a decrease in demand from the wireless handset market, in part due to channel inventory accumulation by wireless handset OEMs in China.

 

Memory Products net sales of $538 million in the third quarter of 2004 increased 27 percent compared to net sales of $424 million in the third quarter of 2003. The increase in net sales was primarily attributable to a 22 percent increase in average selling prices and a five percent increase in unit shipments of Spansion Flash memory products. Average selling prices and unit shipments increased from the third quarter of 2003 due to increased market demand, especially in Asia, where net sales increased 40 percent compared to third quarter of 2003.

 

Memory Products net sales of $1,839 million in the first nine months of 2004 increased 116 percent compared to net sales of $853 million in the first nine months of 2003. This increase was primarily attributable to the effect of consolidating the operating results of Spansion LLC, effective June 30, 2003, which include Spansion LLC’s sales to Fujitsu, as well as increased demand for Flash memory products. Further quantification of the breakdown in the sales increase is not practical due to the reorganization of customers and geographical sales territories between AMD and Fujitsu.

 

Memory Products operating income of $15 million in the third quarter of 2004 decreased by $30 million compared to operating income of $45 million in the second quarter of 2004. The decrease in operating income was primarily due to a 20 percent decrease in Memory Products net sales. As stated above, Memory Products net sales decreased primarily as a result of decreased demand from the wireless handset market in Asia and to a lesser extent in Europe, in part due to channel inventory accumulation by wireless handset OEMs in China. The impact of this decrease was partially offset by a decline in manufacturing costs due to our transition to 110-nanometer process technology for certain of our Flash memory products as well as increased shipments of Flash memory products based on MirrorBit technology.

 

Memory Products operating income of $15 million in the third quarter of 2004 improved by $64 million from an operating loss of $49 million in the third quarter of 2003. The improvement was primarily due to an increase in net sales of 27 percent, a decline in manufacturing costs due to our transition to smaller process technology, increased shipments of Flash memory products based on MirrorBit technology and benefits realized from the integration of our and Fujitsu’s Flash memory operations.

 

Memory Products operating income of $74 million in the first nine months of 2004 improved $261 million from an operating loss of $187 million in the first nine months of 2003. This improvement was primarily due to the effect of consolidating the operating results of Spansion LLC, which include Spansion LLC’s sales to Fujitsu, as well as improving market demand for Flash memory products during the first two quarters of 2004. Further quantification of the improvement in operating results is not practical due to the consolidation of Spansion LLC’s results of operations on June 30, 2003, which include sales to Fujitsu.

 

All Other Category

 

All Other net sales of $29 million in the third quarter of 2004 decreased 15 percent compared to net sales of $35 million in the second quarter of 2004 primarily due to a decrease in demand for certain of our embedded microprocessor and networking products.

 

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All Other net sales of $29 million in the third quarter of 2004 were relatively flat compared to net sales of $27 million in the third quarter of 2003.

 

All Other net sales of $101 million in the first nine months of 2004 increased 24 percent compared to $82 million in the first nine months of 2003, primarily due to sales of certain new embedded microprocessor products.

 

All Other operating loss of $36 million in the third quarter of 2004 increased by $6 million compared to an operating loss of $30 million in the second quarter of 2004, primarily due to a decrease in demand for certain of our embedded microprocessor and networking products.

 

All Other operating loss of $36 million in the third quarter of 2004 increased by $36 million from the third quarter of 2003. Operating loss increased primarily due to an increase in profit sharing and bonus expenses of approximately $17 million, the absence in the third quarter of 2004 of a reversal of restructuring costs of $8 million in connection with our 2002 Restructuring Plan recorded in the third quarter of 2003 and a write-down of inventory of approximately $6 million for certain of our personal connectivity solutions products. We reversed $8 million of restructuring costs in the third quarter of 2003 because we revised our estimated severance and fringe benefits costs due to the additional resources required in connection with the Spansion LLC transaction and our related decision to reduce the number of positions to be eliminated by 200. We decided to write-down the value of inventory related to certain of our personal connectivity solutions products because we revised our estimate of forecasted sales levels after evaluating demand for these products.

 

All Other operating loss of $86 million in the first nine months of 2004 increased by $80 million from an operating loss of $6 million in the first nine months of 2003. Operating loss increased primarily due to an increase in profit sharing and bonus expenses of approximately $36 million, a write-down of the value of inventory for certain of our personal connectivity solutions products of approximately $12 million, an increase in manufacturing costs related to our personal connectivity solutions products of approximately $33 million and the absence in 2004 of a reversal of restructuring costs of $8 million recorded in the third quarter of 2003 referenced above.

 

Comparison of Expenses, Gross Margin, Interest Income and Other, Net, Interest Expense and Taxes

 

The following table is a summary of certain consolidated statement of operations data for the periods indicated:

 

  Quarters Ended

  Nine Months Ended

 
  

September 26,

2004


  

June 27,

2004


  

September 28,

2003


  

September 26,

2004


  

September 28,

2003


 
  (in millions except for percentages) 

Cost of sales

 $738  $783  $627  $2,290  $1,549 

Gross margin

  40%  38%  34%  39%  33%

Research and development

 $231  $225  $214  $682  $626 

Marketing, general and administrative

  202   179   151   561   425 

Restructuring and other special charges, net

  —     3   (8)  3   (6)

Interest income and other, net

  3   (2)  0   11   12 

Interest expense

  (25)  (28)  (27)  (83)  (79)

Income tax provision

  5   4   —     11   3 

 

The gross margin of 40 percent in the third quarter of 2004 improved from 38 percent in the second quarter of 2004 and from 34 percent in the third quarter of 2003. The improvement in gross margin from the second quarter of 2004 was primarily due to increased net sales of our higher-margin AMD Athlon 64 and AMD Opteron microprocessor products and reduced manufacturing costs due to our transition to smaller process technology for Flash memory products, partially offset by a decrease in net sales of our Flash memory products.

 

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The improvement in gross margin from the third quarter of 2003 was primarily due to a richer product mix and improving market conditions, which resulted in higher average selling prices for both our microprocessor and Flash memory products. Gross margin of 39 percent in the first nine months of 2004 improved from 33 percent in the first nine months of 2003. The improvement was primarily due to a richer product mix, higher average selling prices for both our microprocessor and Flash memory products, cost reductions from the 2002 Restructuring Plan and other cost reduction initiatives. Further quantification of changes in the improvement in gross margin is not practical due to the consolidation of Spansion LLC’s operating results, effective on June 30, 2003.

 

We amortize capital grants and allowances and interest subsidies that we receive from the State of Saxony and the Federal Republic of Germany for Fab 30 as they are earned. The amortization of these grants and subsidies is recognized as credits to cost of sales. The credits to cost of sales totaled $17.5 million in the third quarter of 2004, $17.0 million in the second quarter of 2004 and $11.6 million in the third quarter of 2003. In the first nine months of 2004, such credits totaled $48.0 million, and in the first nine months of 2003, such credits totaled $33.6 million. The fluctuations in these credits have not significantly impacted our gross margins.

 

Research and development expenses of $231 million in the third quarter of 2004 remained relatively flat compared to $225 million in the second quarter of 2004 and increased eight percent compared to $214 million in the third quarter of 2003. The increase from the third quarter of 2003 was primarily due to our increased research and development activities associated with newer versions of our microprocessor products. Research and development expenses of $682 million in the first nine months of 2004 increased nine percent compared to $626 million in the first nine months of 2003, primarily due to an increase in research and development expenses as a result of the formation of Spansion LLC, increased research and development activities related to newer versions of our AMD Opteron and AMD Athlon 64 microprocessors and increased research and development activities associated with our personal connectivity solutions products.

 

From time to time, we also apply for and obtain subsidies from the State of Saxony and the Federal Republic of Germany for certain research and development projects. We record the research and development subsidies as a reduction of research and development expenses when all conditions and requirements set forth in the subsidy grant are met. The credits to research and development expenses totaled $8.7 million in the third quarter of 2004, $4.2 million in the second quarter of 2004 and $5.7 million in the third quarter of 2003. In the first nine months of 2004, credits totaled $18.2 million, and in the first nine months of 2003, credits totaled $15.8 million.

 

Marketing, general and administrative expenses of $202 million in the third quarter of 2004 increased 13 percent compared with $179 million in the second quarter of 2004. This increase was primarily due to corporate advertising and branding efforts, including for the AMD Athlon 64 and AMD Opteron brands, and the launch of our AMD Sempron microprocessor products. Marketing, general and administrative expenses of $202 million in the third quarter of 2004 increased 34 percent compared to $151 million in the third quarter of 2003. This increase was primarily due to marketing and branding efforts for our AMD Opteron and AMD Athlon 64 microprocessor products and the launch of our AMD Sempron microprocessor products in July 2004.

 

Marketing, general and administrative expenses of $561 million in the first nine months of 2004 increased 32 percent compared to $425 million in the first nine months of 2003. This increase was primarily due to an increase in expenses as a result of the formation of Spansion LLC and increased marketing and branding efforts for our AMD Opteron, AMD Athlon 64 and AMD Sempron microprocessor products.

 

Effects of Our 2002 Restructuring Plan

 

In December 2002, we began implementing the 2002 Restructuring Plan to further align our cost structure to the industry conditions at that time, including weak customer demand and industry-wide excess inventory. As a result of the 2002 Restructuring Plan, as of September 26, 2004, 1,785 employees had been terminated resulting in cumulative cash payments of approximately $60 million in severance and employee benefit costs.

 

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With the exception of the facility exit costs consisting primarily of remaining lease payments on abandoned facilities, which are payable through 2011, net of estimated sublease income, we have substantially completed the activities associated with the 2002 Restructuring Plan. As a result of the 2002 Restructuring Plan, we realized overall cumulative cost reductions of approximately $283 million as of September 26, 2004.

 

The following table summarizes activities under the 2002 Restructuring Plan from December 28, 2003 through September 26, 2004:

 

   Severance and
Employee
Benefits


  Exit and
Equipment
Decommission
Costs


  Total

 
   (in thousands) 

Accruals at December 28, 2003

  $6,740  $120,623  $127,363 

Q1 2004 cash payments

   (4,664)  (5,437)  (10,101)
   


 


 


Accruals at March 28, 2004

   2,076   115,186   117,262 

Q2 2004 cash payments

   (1,481)  (5,224)  (6,705)

Q2 2004 non-cash adjustments

   253   2,261   2,514 
   


 


 


Accruals at June 27, 2004

   848   112,223   113,071 

Q3 2004 cash payments

   (330)  (5,092)  (5,422)

Q3 2004 non-cash adjustments

   (268)  —     (268)
   


 


 


Accruals at September 26, 2004

  $250  $107,131  $107,381 
   


 


 


 

Interest Income and Other, Net

 

Interest income and other, net, of approximately $2.5 million in the third quarter of 2004 increased from a net expense of $2 million in the second quarter of 2004 primarily because of a loss of approximately $6 million during the second quarter of 2004 as a result of the mark-to-market of certain of our foreign currency forward contracts being used as economic hedges of forecasted capital contributions to AMD Fab 36 KG, our German limited liability partnership that owns Fab 36, which do not qualify as accounting hedges. Interest income and other, net, in the third quarter of 2004 increased from $0.5 million in the third quarter of 2003 primarily due to a $2 million charge in the third quarter of 2003 for other than temporary declines in our equity investments. Interest income and other, net, of $11 million in the first nine months of 2004 decreased from $12 million in the first nine months of 2003. While interest income in the first nine months of 2004 was relatively flat compared with the first nine months of 2003, the decrease was due to certain one-time other income and expenses items. Other income and expenses in the first nine months of 2004 included a gain of approximately $7 million from sales of equity investments in the first quarter of 2004, offset by a loss of approximately $6 million during the second quarter of 2004 as a result of the hedging loss referenced above. Other income and expenses in the first nine months of 2003 included a gain of approximately $3.7 million from sale of available-for-sale securities, offset by a $2 million charge in the third quarter of 2003 for other than temporary declines in our equity investments.

 

Interest Expense

 

Interest expense of $25 million in the third quarter of 2004 decreased from $28 million in the second quarter of 2004 primarily because we capitalized an additional $1.2 million of interest expense in connection with our Fab 36 project. Interest expense decreased from $27 million in the third quarter of 2003 primarily because we capitalized approximately $3 million of interest expense in connection with our Fab 36 project. Interest expense of $83 million in the first nine months 2004 increased from $79 million in the first nine months of 2003 primarily due to additional interest expense of approximately $9 million from new debt assumed by Spansion LLC and its subsidiaries after the formation of Spansion LLC, as well as debt consolidated on our financial statements incurred by FASL, the previous manufacturing joint venture between us and Fujitsu, prior to the formation of Spansion LLC, partially offset by approximately $4.5 million of interest expense relating to our Fab 36 project that we capitalized.

 

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Income Taxes

 

We recorded an income tax provision of approximately $5 million in the third quarter of 2004 and $4 million in the second quarter of 2004. We recorded no income tax provision in the third quarter of 2003. The income tax provision recorded in the third and second quarters of 2004 was primarily for taxes due on income generated in certain foreign jurisdictions. The effective tax rates for the quarters ended September 26, 2004, June 27, 2004 and September 28, 2003 were ten percent, ten percent and zero percent. The effective tax rate for the nine months ended September 26, 2004 was approximately eight percent. The approximately $3 million income tax provision for the nine months ended September 28, 2003 was primarily for taxes due on income generated in certain state and foreign tax jurisdictions.

 

Other Items

 

International sales as a percent of net sales were 77 percent in the third quarter of 2004, 80 percent in the second quarter of 2004 and 81 percent in the third quarter of 2003. In the third quarter of 2003, sales to Latin America, constituting approximately two percent of total net sales, were originally reported as domestic sales and have been reclassified as international sales. During the third quarter of 2004, approximately 21 percent of our net sales were denominated in currencies other than the U.S. dollar, primarily the Japanese yen, as compared to 28 percent during the second quarter of 2004 and 21 percent during the third quarter of 2003. Sales denominated in foreign currencies consist primarily of sales by Spansion Japan Limited, a wholly owned subsidiary of Spansion LLC, to Fujitsu which are denominated in yen.

 

As a result of our foreign operations, we have sales, costs, assets and liabilities that are denominated in foreign currencies, primarily the European Union euro and the Japanese yen. For example:

 

  a significant portion of our manufacturing costs for our microprocessor products is denominated in euros while sales of those products are denominated primarily in U.S. dollars;

 

  certain of our fixed asset purchases are denominated in euros and yen;

 

  sales of our Flash memory products in Japan are denominated in yen; and

 

  a significant amount of costs of our Fab 36 project is denominated in euros.

 

As a consequence, movements in exchange rates could cause our U.S. dollar-denominated expenses to increase as a percentage of net sales, affecting our profitability and cash flows. We use foreign currency forward and option contracts to reduce our exposure to currency fluctuations on our foreign currency exposures. The objective of these contracts is to minimize the impact of foreign currency exchange rate movements on our operating results and on the cost of capital asset acquisitions. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not been material, principally as a result of our foreign currency hedging activities.

 

Financial Condition

 

Our cash, cash equivalents and short-term investments at September 26, 2004 totaled $1.2 billion, which included approximately $284 million in cash, cash equivalents and short-term investments held by Spansion LLC. Spansion LLC’s operating agreement governs its ability to use this cash balance for operations or to distribute it to us and Fujitsu. Pursuant to the operating agreement, and subject to restrictions contained in third-party loan agreements, Spansion LLC must first distribute any cash balance to us and Fujitsu in an amount sufficient to cover each party’s estimated tax liability, if any, related to Spansion LLC’s taxable income for each fiscal year. Any remaining cash balance after the tax liability distribution would be used by Spansion LLC to fund its operations in accordance with its budget. If any cash remains, it must be used to repay Spansion LLC’s outstanding debt to us and Fujitsu. Any remaining cash after these distributions is distributed at the discretion of Spansion LLC’s board of managers to us and Fujitsu, pro rata, based on each party’s membership interest at the time of distribution, which currently is 60 percent for AMD and 40 percent for Fujitsu. Our cash balance also

 

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included a compensating balance of $215 million as of September 26, 2004, which represents the minimum cash balance that AMD Saxony was required to maintain pursuant to the terms of the Dresden Loan Agreements. As a result of the prepayment of the Dresden Term Loans on November 2, 2004, AMD Saxony is currently not required to maintain a minimum cash balance.

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by operating activities in the first nine months of 2004 was approximately $724 million. Our net income for the period was adjusted for non-cash charges, which were primarily depreciation and amortization. The net changes in payables and accrued liabilities in the first nine months of 2004 included refunds of customer deposits of $21 million under long-term purchase agreements and $39 million in royalty payments by us under a cross-license agreement. Accounts receivable increased in the first nine months of 2004 by approximately $236 million due to an increase of net sales of 62 percent in the first nine months of 2004 compared to net sales in the first nine months of 2003. In addition, inventories increased in the first nine months of 2004 by approximately $112 million in anticipation of increased seasonal demand for our microprocessor and Flash memory products during the remainder of 2004. Substantially all of the increase in inventories was related to Flash memory products based on 110-nanometer technology and AMD64-based processor products.

 

Net cash used in operating activities was $93 million in the first nine months of 2003. This was primarily caused by our year-to-date net loss of $318 million and approximately $436 million used for other operating activities due to net changes in operating assets and liabilities, described below, offset by non-cash charges, which included $708 million of depreciation and amortization, non-cash credits of $49 million from foreign grant and subsidy income, and $20 million of net loss on disposal of property, plant and equipment. The net changes in operating assets and liabilities included a payment of $90 million for a technology license from IBM, refunds of customer deposits of $27 million under long-term purchase agreements and approximately $35 million of severance payments under the 2002 Restructuring Plan.

 

Net Cash Provided by (Used in) Investing Activities

 

Net cash used in investing activities was $1,012 million in the first nine months of 2004. Cash was used primarily to purchase short-term investments and property, plant and equipment, including $301 million for the continuing construction of Fab 36.

 

Net cash provided by investing activities was $291 million during the first nine months of 2003. This amount includes $148 million from the acquisition of a controlling interest in Spansion LLC and $530 million net cash from purchases and sales of available-for-sale securities, offset by $408 million used for the purchases of property, plant and equipment.

 

Net Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities was $99 million in the first nine months of 2004, primarily from investments in AMD Fab 36 KG of $74 million of silent partnership contributions and $91 million of limited partnership contributions from the unaffiliated limited partners, amounts borrowed by our subsidiaries under short-term loans, proceeds from an equipment sale-leaseback transaction and sales of stock under our Employee Stock Purchase Plan and upon employee stock option exercises, partially offset by payments on debt and capital lease obligations.

 

Net cash provided by financing activities was $366 million during the first nine months of 2003, primarily from $245 million received from equipment sale-leaseback transactions, $40 million borrowed by Spansion LLC from Fujitsu as part of Spansion LLC transaction, $142 million of capital investment grants received from the German government for the Fab 30 project and $17 million of proceeds primarily from sales of stock under our Employee Stock Purchase Plan and upon employee stock option exercises, offset by $85 million in payments on debt and capital lease obligations.

 

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Revolving Credit Facilities

 

AMD Revolving Credit Facility

 

Our revolving credit facility provides for a secured revolving line of credit of up to $100 million that expires in July 2007. We can borrow, subject to amounts set aside by the lenders, up to 85 percent of our eligible accounts receivable from OEMs and 50 percent of our eligible accounts receivable from distributors. As of September 26, 2004, no borrowings were outstanding under our revolving credit facility.

 

Pursuant to the terms of our revolving credit facility, we have to comply with, among other things, the following financial covenants if our net domestic cash (as defined in our revolving credit facility) declines below $125 million:

 

  comply with restrictions on our ability to pay cash dividends on our common stock;

 

  maintain an adjusted tangible net worth (as defined in our revolving credit facility) as follows:

 

Measurement Date


  Amount

   (in billions)

Last day of each fiscal quarter in 2004

  $1.425

Last day of each fiscal quarter in 2005

  $1.85

Last day of each fiscal quarter thereafter

  $2.0

 

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

 

Period


  Amount

   (in millions)

Four fiscal quarters ending September 30, 2004

  $850

Four fiscal quarters ending December 31, 2004

  $950

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

  $1,050

 

As of September 26, 2004, net domestic cash, as defined, totaled $333 million and the preceding financial covenants were not applicable. Our obligations under our revolving credit facility are secured by all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds, excluding Spansion LLC’s accounts receivable, inventory and general intangibles.

 

Spansion Japan Revolving Loan Agreement

 

In March 2004, Spansion Japan Limited entered into a revolving credit facility agreement with certain Japanese financial institutions in the aggregate amount of 15 billion yen (approximately $136 million as of September 26, 2004). The revolving facility consists of two tranches: tranche A in the aggregate amount of up to nine billion yen (approximately $81 million as of September 26, 2004) and tranche B in the aggregate amount of up to six billion yen (approximately $54 million as of September 26, 2004). Spansion Japan can draw under the facility until March 24, 2005. However, as described in more detail below, the total amount that Spansion Japan can draw is limited based on the value of Spansion Japan’s accounts receivable from Fujitsu, which are pledged as security to the lenders. As of September 26, 2004, there were no borrowings outstanding under this facility.

 

Amounts borrowed under tranche A bear interest at a rate of TIBOR plus 0.55 percent. Amounts borrowed under tranche B bear interest at a rate of TIBOR plus 1.2 percent. Spansion Japan must first fully draw under tranche A prior to drawing amounts under tranche B. Borrowings must be used for working capital purposes and must be repaid no later than April 24, 2005.

 

Pursuant to the terms of the revolving credit facility agreement, Spansion Japan is required to comply with the following financial covenants:

 

  ensure that assets exceed liabilities as of the end of each fiscal year and each six-month (mid-year) period;

 

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  maintain an adjusted tangible net worth (as defined in the agreement) at an amount not less than 60 billion yen (approximately $542 million as of September 26, 2004) as of the last day of each fiscal quarter;

 

  maintain total net income plus depreciation of $213 million as of the last day of fiscal year 2004; and

 

  ensure that as of the last day of each of the third and fourth quarter of 2004, the ratio of (a) net income plus depreciation to (b) the sum of interest expenses plus the amount of scheduled debt repayments plus capital expenditures for its facilities located in Aizu-Wakamatsu, Japan, for such period, is not less than 120%.

 

As of September 26, 2004, Spansion Japan was in compliance with these financial covenants. As security for amounts outstanding under the revolving facility, Spansion Japan pledged its accounts receivable from Fujitsu. The accounts receivable are held in trust pursuant to the terms of a trust agreement. Under the trust agreement, Spansion Japan is required to maintain the value of its accounts receivable at specified thresholds (as defined by the trust agreement), based upon the amounts outstanding under tranche A and tranche B. In addition, the trustee collects payments from Fujitsu into a separate trust account and releases these amounts to Spansion Japan, subject to the calculated thresholds, upon instruction from the agent for the lenders. At any time when the accounts receivable balance in the trust account is less than the required thresholds, Spansion Japan is required to do one of the following to cure the shortfall:

 

  provide additional cash to the trust; or

 

  repay a specified portion of the outstanding loans.

 

Amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Spansion Japan, including: filings or proceedings in bankruptcy, failure to pay any obligations under the revolving credit facility that have become due, failure to pay other third-party indebtedness where such debt exceeds 200 million yen (approximately $2 million as of September 26, 2004), or if the value of the accounts receivable from Fujitsu held in trust is below the required thresholds and such shortfall is not remedied within three business days. In addition, amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Fujitsu including: filings or proceedings in bankruptcy, default by Fujitsu with respect to payments to Spansion Japan or other obligations under their purchase and sale agreement, default by Fujitsu with respect to other third-party indebtedness where such debt exceeds one billion yen (approximately $9 million as of September 26, 2004). As of September 26, 2004, the amount of accounts receivable held in the trust was approximately $176 million. Because most amounts under the Spansion Japan Revolving Loan are denominated in yen, the dollar amounts stated above are subject to change based on applicable exchange rates. We used the exchange rate as of September 26, 2004 of 110.625 yen to one U.S. dollar to translate the amounts denominated in yen into U.S. dollars.

 

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Contractual Cash Obligations and Guarantees

 

The following table summarizes our total principal contractual cash obligations at September 26, 2004, and is supplemented by the discussion following the table. Amounts set forth for operating leases and unconditional purchase commitments include only those amounts that are not recorded on our consolidated balance sheets.

 

    Payments Due By Fiscal Period

  Total

 2004

 2005

 2006

 2007

 2008

 2009 and
Beyond


  (in thousands)

4.75% Convertible Senior Debentures Due 2002

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

4.50% Convertible Senior Notes Due 2007(1)

  402,500  —    —    —    402,500  —    —  

Dresden Term Loan(2)

  618,685  —    331,438  287,247  —    —    —  

July 2003 Spansion Term Loan

  51,474  6,875  27,500  17,099  —    —    —  

Spansion Japan Term Loan

  130,169  10,847  43,390  43,390  32,542  —    —  

Fujitsu Cash Note

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

AMD Penang Term Loan

  6,705  380  1,518  1,518  1,518  1,518  253

Spansion China Short-Term Loan

  13,384  —    13,384  —    —    —    —  

Capital lease obligations

  206,413  26,307  96,397  79,368  4,124  217  —  

Other long-term liabilities

  —    —    —    —    —    —    —  

Operating leases

  390,056  17,956  62,885  51,535  39,832  37,586  180,262

Unconditional purchase commitments(3)(4)

  1,050,957  166,319  162,978  142,710  132,877  112,735  333,338
  

 

 

 

 

 

 

Total principal contractual cash obligations(5)(6)

 $3,410,343 $228,684 $749,490 $652,867 $613,393 $152,056 $1,013,853
  

 

 

 

 

 

 


(1)On October 22, 2004, we exchanged $70 million of our 4.5% Notes, plus accrued and unpaid interest, for 10,550,000 shares of our common stock. On November 8, 2004, we exchanged $60 million of our 4.50% Notes for 8,748,612 shares of our common stock. On November 18, 2004, we exchanged $71 million of our 4.50% Notes for 10,092,649 shares of our common stock. For more information, see “Other Financial Matters—Section 3(a)(9) Exchange.”
(2)On November 2, 2004, we used the net proceeds from our offering of 7.75% Notes, together with existing cash, to prepay the amount outstanding under the Dresden Term Loan plus accrued and unpaid interest. See “Other Financial Matters—Issuance of Senior Notes,” below.
(3)Purchase orders for goods and services that are cancelable upon notice and without significant penalties are not included in the amounts above.
(4)We have unconditional purchase commitments for goods and services where payments are based, in part, on volume or type of services we require. In those cases, we only included the minimum volume or purchase commitment in the table above.
(5)We have not included in the table above the silent partnership contributions of the unaffiliated limited partners of AMD Fab 36 KG or our repurchase obligation with respect to such silent partnership contributions. As of September 26, 2004, AMD Fab 36 KG had received $74 million of silent partnership contributions. These contributions were recorded as long-term debt in our consolidated balance sheets. Assuming milestones are met by AMD Fab 36 KG, we expect to receive a total of up to $172 million of silent partnership contributions from the unaffiliated limited partners. With respect to each unaffiliated limited partner, AMD Fab 36 Holding and AMD Fab 36 Admin are obligated to repurchase such partner’s silent partner contribution in annual installments one year after the partner has contributed the full amount required under the partnership agreements. As of September 26, 2004, the unaffiliated limited partners had not contributed the full amount required under the partnership agreements, and therefore, the condition precedent to our repurchase obligations had not been met. For more information, see “Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements.”

 

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(6)On October 29, 2004, we sold $600,000,000 of 7.75% Senior Notes. The 7.75% Notes mature on November 1, 2012. We have not included the contractual cash obligation for the 7.75% Notes in the table above because the transaction occurred after the end of the third quarter of 2004. See “Other Financial Matters—Issuance of Senior Notes,” below.

 

4.75% Convertible Senior Debentures Due 2022

 

On January 29, 2002, we issued $500 million of our 4.75% Convertible Senior Debentures Due 2022, or the 4.75% Debentures, in a private offering pursuant to Rule 144A and Regulation S of the Securities Act.

 

The interest rate payable on the 4.75% Debentures will reset on August 1, 2008, August 1, 2011 and August 1, 2016 to a rate equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. Holders have the right to require us to repurchase all or a portion of our 4.75% Debentures on February 1, 2009, February 1, 2012, and February 1, 2017. The holders of the 4.75% Debentures also have the ability to require us to repurchase the 4.75% Debentures in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.75% Debentures plus accrued and unpaid interest. The 4.75% Debentures are convertible by the holders into our common stock at a conversion price of $23.38 per share at any time. At this conversion price, each $1,000 principal amount of the 4.75% Debentures will be convertible into approximately 43 shares of our common stock. Issuance costs incurred in the amount of approximately $14 million are amortized ratably, which approximates the effective interest method, over the term of the 4.75% Debentures, as interest expense.

 

Beginning on February 5, 2005, the 4.75% Debentures are redeemable by us for cash at our option at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest, provided that we may not redeem the 4.75% Debentures prior to February 5, 2006, unless the last reported sale price of our common stock is at least 130 percent of the then effective conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date of the redemption notice.

 

The redemption prices for the specified periods are as follows:

 

Period


  Price as a
Percentage of
Principal Amount


 

Beginning on February 5, 2005 through February 4, 2006

  102.375%

Beginning on February 5, 2006 through February 4, 2007

  101.583%

Beginning on February 5, 2007 through February 4, 2008

  100.792%

Beginning on February 5, 2008

  100.000%

 

We may elect to purchase or otherwise retire our 4.75% Debentures with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

 

4.50% Convertible Senior Notes Due 2007

 

On November 25, 2002, we sold $402.5 million of 4.50% Convertible Senior Notes Due 2007, or the 4.50% Notes, in a registered offering. Interest on the 4.50% Notes is payable semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2003. Beginning on December 4, 2005, the 4.50% Notes are redeemable by us at our option for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest provided that we may not redeem the 4.50% Notes unless the last reported sale price of our common stock is at least 150 percent of the then effective conversion price for at least 20 trading days within a period of 30 trading days ending within five trading days of the date of the redemption notice.

 

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The redemption prices for the specified periods are as follows:

 

Period


  Price as a
Percentage of
Principal Amount


 

Beginning on December 4, 2005 through November 30, 2006

  101.800%

Beginning on December 1, 2006 through November 30, 2007

  100.900%

On December 1, 2007

  100.000%

 

The 4.50% Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date of December 1, 2007, unless previously redeemed or repurchased, into shares of common stock at a conversion price of $7.37 per share, subject to adjustment in certain circumstances. At this conversion price, each $1,000 principal amount of the 4.50% Notes will be convertible into approximately 135 shares of our common stock. Issuance costs incurred in the amount of approximately $12 million are amortized ratably, over the term of the 4.50% Notes, as interest expense, approximating the effective interest method.

 

Holders have the right to require us to repurchase all or a portion of our 4.50% Notes in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.50% Notes plus accrued and unpaid interest.

 

On October 22, 2004, we exchanged $70 million of our 4.50% Notes plus accrued and unpaid interest, for 10,550,000 shares of our common stock. On November 8, 2004, we exchanged $60 million of our 4.50% Notes for 8,748,612 shares of our common stock. On November 18, 2004, we exchanged $71 million of our 4.50% Notes for 10,092,649 shares of our common stock. For more information, see “Other Financial Matters—Section 3(a)(9) Exchange.”

 

We may elect to purchase or otherwise retire our 4.50% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer when we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

 

Dresden Term Loan and Dresden Inter-company Guarantee

 

AMD Saxony, our indirect, wholly owned German subsidiary, continues to facilitize Fab 30, which began production in the second quarter of 2000. AMD, the Federal Republic of Germany, the State of Saxony and a consortium of banks provided financing for the project. We estimate that the construction and facilitization costs of Fab 30 will be $2.5 billion when it is fully equipped by the end of 2005. As of September 26, 2004, we had invested approximately $2.3 billion in AMD Saxony.

 

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. AMD Saxony has pledged substantially all of its property as security under the Dresden Loan Agreements, we pledged our equity interests in our other wholly owned subsidiaries that are the limited partners and the general partner of AMD Saxony and these wholly owned subsidiaries pledged all of their partnership interests in AMD Saxony.

 

Because most of the amounts under the Dresden Loan Agreements are denominated in deutsche marks (converted to euros), the dollar amounts are subject to change based on applicable exchange rates. We 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 at September 26, 2004, of 0.815 euro to one U.S. dollar, to translate the amounts denominated in deutsche marks into U.S. dollars. However, with respect to amounts for investment grants and allowances and interest subsidies received by AMD Saxony through

 

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September 26, 2004, we used historical exchange rates that were in effect at the time AMD Saxony received these grants, allowances and subsidies to convert amounts denominated in deutsche marks (converted to euros) into U.S. dollars.

 

The Dresden Loan Agreements, as amended, provide for the funding of the construction and facilitization of Fab 30. The funding consists of:

 

  equity contributions, subordinated and revolving loans and loan guarantees from, and full cost reimbursement through, AMD;

 

  loans from a consortium of banks; and

 

  investment grants, investment allowances, interest subsidies, and loan guarantees from the Federal Republic of Germany and the State of Saxony.

 

The Dresden Loan Agreements require that we partially fund Fab 30 project costs in the form of subordinated and revolving loans to, or equity investments in, AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, as of September 26, 2004, we had provided $178 million of subordinated loans and $286 million of equity investments in AMD Saxony. These amounts have been eliminated in our unaudited condensed consolidated financial statements.

 

In addition to support from us, the consortium of banks referred to above made available $941 million in loans to AMD Saxony to help fund Fab 30 project costs. The loans have been fully drawn. AMD Saxony had $619 million of such loans outstanding as of September 26, 2004, which are included in our unaudited condensed consolidated balance sheet. On November 2, 2004, AMD Saxony prepaid the full amount outstanding under the Dresden Term Loans plus accrued and unpaid interest. The Dresden Loan Agreements were terminated effective December 23, 2004. See “Other Financial Matters—Issuance of Senior Notes,” below.

 

Pursuant to a Subsidy Agreement, the Federal Republic of Germany and the State of Saxony are supporting the Fab 30 project, in accordance with the Dresden Loan Agreements, in the form of:

 

  guarantees equal to 65 percent of AMD Saxony bank debt, which was approximately $402 million as of September 26, 2004;

 

  capital investment grants and allowances totaling up to approximately $447 million as of September 26, 2004; and

 

  interest subsidies totaling $188 million as of September 26, 2004.

 

Of these amounts, AMD Saxony received approximately $411 million in capital investment grants and allowances and $153 million in interest subsidies. AMD Saxony also received $56 million in research and development subsidies through September 26, 2004. Amounts received under the Subsidy Agreement are recorded as a long-term liability on our financial statements and are being amortized to operations ratably over the contractual life of the Subsidy Agreement as a reduction to operating expenses. As of September 26, 2004, these amounts were amortized through December 2007. AMD Saxony has received substantially all investment grants and allowances and interest subsidies to which it is entitled.

 

Under the original Subsidy Agreement for the construction and financing of Fab 30, AMD Saxony undertook to attain a certain employee headcount by December 2003 and to maintain such headcount until December 2008. Noncompliance with the conditions of the grants, allowances and subsidies contained in the Subsidy Agreement 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. In December 2002, AMD Saxony reduced its anticipated employment levels as a result of the 2002 Restructuring Plan. Consequently, as of December 2003, headcount was below the level agreed to by AMD Saxony at which AMD Saxony would be entitled to receive the maximum amount of capital investment grants and allowances available. However, the aggregate amount of grants and allowances actually received by AMD Saxony to date, calculated as a percentage of the maximum amount of grants and allowances available, does not exceed the actual headcount at AMD Saxony at December 2003, calculated as a percentage of the headcount target undertaken in the Subsidy Agreement. Accordingly,

 

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AMD Saxony does not believe it has received grants and allowances in excess of its entitlement under the Subsidy Agreement. However, we anticipate that the maximum amount of capital investment grants and allowances available under the Subsidy Agreement will be reduced from an originally anticipated amount of $511 million to approximately $447 million. We adjusted the quarterly amortization of these amounts accordingly.

 

In April 2004, the German governmental authorities advised AMD Saxony that rather than maintaining employee headcount attained by December 2003 through December 2008, it would be required to maintain employee headcount attained as of December 2002 through December 2007. Beginning in April 2004, we adjusted the quarterly amortization of the grants and allowances until December 2007. In addition, based on employee headcount attained as of December 2002, AMD Saxony does not believe that it has received grants and allowances in excess of its entitlement under the Subsidy Agreements.

 

Under the Dresden Loan Agreements, AMD Saxony and its limited partners are currently prevented from paying dividends or making other payments to us. In addition, the Dresden Loan Agreements, as amended, also require that we:

 

  provide interim funding to AMD Saxony if either the remaining capital investment grants and allowances or the remaining interest subsidies are delayed, such funding to be repaid to AMD, as AMD Saxony receives the investment grants and allowances or subsidies from the State of Saxony and the Federal Republic of Germany;

 

  fund shortfalls in government subsidies resulting from any default under the Subsidy Agreement caused by AMD Saxony or its affiliates; and

 

  guarantee up to 50 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $137 million or more than $368 million, until the bank loans are repaid in full.

 

As of September 26, 2004, the amount guaranteed was $309 million. However, on November 2, 2004, AMD Saxony prepaid the full amount outstanding under the Dresden Term Loans plus accrued and unpaid interest and effective December 23, 2004, the Dresden Loan Agreements were terminated. See “Other Financial Matters—Issuance of Senior Notes,” below.

 

Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements

 

We are facilitizing our new 300-millimeter wafer fabrication facility, Fab 36, in Dresden, Germany, adjacent to Fab 30. Fab 36 is owned by a German limited partnership named AMD Fab 36 Limited Liability Company & Co. KG, or AMD Fab 36 KG. We control the management of AMD Fab 36 KG through a wholly owned Delaware subsidiary, AMD Fab 36 LLC, which is a general partner of AMD Fab 36 KG. We expect that Fab 36 will produce future generations of our microprocessor products, and that it will be in volume production in 2006. AMD, Leipziger Messe GmbH, a nominee of the State of Saxony, Fab 36 Beteiligungs GmbH, an investment consortium arranged by M+W Zander Facility Engineering GmbH, the general contractor for the project, and a consortium of banks are providing financing for the project. We also anticipate receiving up to approximately $666 million in grants and allowances from federal and state German authorities for the project. We expect that capital expenditures for Fab 36 through 2007 will be approximately $2.5 billion in the aggregate.

 

The funding to construct and facilitize Fab 36 consists of:

 

  contributions under the partnership agreements of up to approximately $718 million and revolving loans of up to approximately $920 million, a guarantee from, and full cost reimbursement through, AMD;

 

  investments of up to approximately $393 million from the unaffiliated limited partners of AMD Fab 36 KG;

 

  loans of up to approximately $859 million from a consortium of banks;

 

  up to approximately $666 million of subsidies consisting of grants and allowances, from the Federal Republic of Germany and the State of Saxony; and

 

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  a loan guarantee from the Federal Republic of Germany and the State of Saxony of 80 percent of the losses sustained by the consortium of banks referenced above after the banks have foreclosed on all other security.

 

As of September 26, 2004 we had provided $209 million of equity in AMD Fab 36 KG and no loans were outstanding. These amounts have been eliminated in our consolidated financial statements.

 

On April 21, 2004, AMD, AMD Fab 36 KG, AMD Fab 36 LLC, AMD Fab 36 Holding GmbH, a German company and wholly owned subsidiary of AMD that owns substantially all of our limited partnership interest in AMD Fab 36 KG, and AMD Fab 36 Admin GmbH, a German company and wholly owned subsidiary of AMD Fab 36 Holding that owns the remainder of our limited partnership interest in AMD Fab 36 KG, (collectively referred to as the AMD companies) entered into a series of agreements (the partnership agreements) with the unaffiliated limited partners of AMD Fab 36 KG, Leipziger Messe and Fab 36 Beteiligungs, relating to the rights and obligations with respect to their limited partner and silent partner contributions in AMD Fab 36 KG. The partnership is established for an indefinite period of time. A partner may terminate its participation in the partnership by giving twelve months advance notice to the other partners. The termination becomes effective at the end of the year following the year during which the notice is given. However, other than for good cause, a partner’s termination will not be effective before December 31, 2015.

 

Also on April 21, 2004, AMD Fab 36 KG entered into a term loan agreement and other related agreements (the Fab 36 Loan Agreements) with a consortium of banks led by Dresdner Bank AG, a German financial institution, to finance the purchase of equipment and tools required to operate Fab 36. The consortium of banks agreed to make available up to $859 million in loans to AMD Fab 36 KG upon its achievement of specified milestones, including attainment of “technical completion” at Fab 36, which requires certification by the banks’ technical advisor that AMD Fab 36 KG has a wafer fabrication process suitable for high volume production of advanced microprocessors and has achieved specified levels of average wafer starts per week and average wafer yields, as well as cumulative capital expenditures of approximately $1.2 billion. We currently anticipate that AMD Fab 36 KG will attain these milestones and first be able to draw on the loans in 2006. The amounts outstanding under the Fab 36 Loan Agreements are repayable in quarterly installments commencing in September 2007 and terminating in March 2011.

 

AMD Fab 36 KG pledged substantially all of its current and future assets as security under the Fab 36 Loan Agreements, we pledged our equity interest in AMD Fab 36 Holding and AMD Fab 36 LLC, AMD Fab 36 Holding pledged its equity interest in AMD Fab 36 Admin and its partnership interest in AMD Fab 36 KG and AMD Fab 36 Admin and AMD Fab 36 LLC pledged all of their partnership interests in AMD Fab 36 KG. AMD guaranteed the obligations of AMD Fab 36 KG to the lenders under the Fab 36 Loan Agreements. This guarantee also guarantees repayment of grants and allowances by AMD Fab 36 KG, should such repayment be required pursuant to the terms of the subsidies provided by the federal and state German authorities. Pursuant to the terms of the guarantee, we have to comply with specified adjusted tangible net worth and EBITDA financial covenants if the sum of our and our subsidiaries’ cash, cash equivalents and short-term investments, less the amount outstanding under any third-party revolving credit facility or term loan agreement with an original maturity date for amounts borrowed of up to one year (group consolidated cash), declines below the following amounts:

 

Amount
(in thousands)


  if Moody’s
Rating is at least


     if Standard & Poor’s Rating
is at least


$500,000  B1 or lower  and  B+ or lower
  425,000  Ba3  and  BB-
  400,000  Ba2  and  BB
  350,000  Ba1  and  BB+
  300,000  Baa3 or better  and  BBB-or better

 

As of September 26, 2004, group consolidated cash was greater than $500 million, and therefore, the preceding financial covenants were not applicable.

 

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Because most of the amounts under the Fab 36 Loan Agreements and the partnership agreements are denominated in euros, the U.S. dollar amounts are subject to change based on applicable exchange rates. We used the exchange rate at September 26, 2004, of 0.815 euro to one U.S. dollar, to translate the amounts denominated in euros into U.S. dollars. However, with respect to amounts for investment grants, allowances and subsidies received by Fab 36 through September 26, 2004, we used historical exchange rates that were in effect at the time Fab 36 received these grants, allowances and subsidies to convert amounts denominated in euros into U.S. dollars.

 

The partnership agreements set forth each limited partner’s aggregate capital contribution to AMD Fab 36 KG and the milestones for such contributions. Pursuant to the terms of the partnership agreements, AMD, through AMD Fab 36 Holding and AMD Fab 36 Admin, agreed to provide an aggregate of $718 million, Leipziger Messe agreed to provide an aggregate of $246 million and Fab 36 Beteiligungs agreed to provide an aggregate of $147 million. The capital contributions of Leipziger Messe and Fab 36 Beteiligungs are comprised of limited partnership contributions and silent partnership contributions. The unaffiliated partners’ contributions are due at various dates upon the achievement of milestones relating to the construction and operation of Fab 36.

 

The partnership agreements also specify that the unaffiliated partners receive a guaranteed rate of return of between 11 percent and 13 percent per annum of their total investment depending upon the monthly wafer output of Fab 36. We guaranteed these payments by AMD Fab 36 KG.

 

Pursuant to the terms of the partnership agreements and subject to the prior consent of the Federal Republic of Germany and the State of Saxony, AMD Fab 36 Holding and AMD Fab 36 Admin have a call option over the limited partnership interests held by Leipziger Messe and Fab 36 Beteiligungs, first exercisable three and one-half years after the relevant partner has completed the applicable capital contribution and every three years thereafter. Also, commencing five years after completion of the relevant partner’s capital contribution, Leipziger Messe and Fab 36 Beteiligungs each have the right to sell their limited partnership interest to third parties (other than competitors), subject to a right of first refusal held by AMD Fab 36 Holding and AMD Fab 36 Admin, or to put their limited partnership interest to AMD Fab 36 Holding and AMD Fab 36 Admin. The put option is thereafter exercisable every three years. Leipziger Messe and Fab 36 Beteiligungs also have a put option in the event they are outvoted at AMD Fab 36 KG partners’ meetings with respect to certain specified matters such as increases in the partners’ capital contributions beyond those required by the partnership agreements, investments significantly in excess of the business plan, or certain dispositions of the limited partnership interests of AMD Fab 36 Holding and AMD Fab 36 Admin. The purchase price under the put option is the partner’s capital account balance plus accumulated or accrued profits due to such limited partner. The purchase price under the call option is the same amount, plus a premium of $4.3 million to Leipziger Messe and $2.6 million to Fab 36 Beteiligungs. The right of first refusal price is the lower of the put option price or the price offered by the third party that triggered the right. We guaranteed the payments under the put options.

 

In addition, AMD Fab 36 Holding and AMD Fab 36 Admin are obligated to repurchase the silent partnership interest of Leipziger Messe’s and Fab 36 Beteiligungs’ contributions over time. Specifically, AMD Fab 36 Holding and AMD Fab 36 Admin are required to repurchase Leipziger Messe’s silent partnership interest of $98 million in annual 25 percent installments commencing one year after Leipziger Messe has completed its limited partnership and silent partnership contributions, and Fab 36 Beteiligungs’ silent partnership interest of $74 million in annual 20 percent installments commencing one year after Fab 36 Beteiligungs has completed its limited partnership and silent partnership contributions.

 

For accounting and financial reporting purposes under United States generally accepted accounting principles, we initially classified the silent partnership contributions as long-term debt, based on their fair value because of the mandatory redemption features described in the prior paragraph. Each accounting period, we increase the ultimate redemption value of the silent partnership contributions by the guaranteed rate of return of between 11 percent to 13 percent. We will treat this increase as interest expense.

 

The limited partnership contributions that AMD Fab 36 KG expects to receive from Leipziger Messe and Fab 36 Beteiligungs are subject to the put and call provisions referenced above. These contributions are not

 

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mandatorily redeemable, but rather are subject to redemption outside of the control of AMD Fab 36 Holding and AMD Fab 36 Admin. Upon consolidation, we initially record these contributions as minority interest, based on their fair value. Each accounting period, we increase the ultimate redemption value of these contributions by the guaranteed rate of return of between 11 percent and 13 percent. We treat this increase as minority interest allocation. No separate accounting is required for the put and call options because they are not freestanding instruments and not considered derivatives under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. However, in the event of exercise of the call option by the AMD Fab 36 Holding and AMD Fab 36 Admin, the call premium referenced above would be recorded as an additional minority interest allocation.

 

As of September 26, 2004, AMD Fab 36 KG received $74 million of silent partnership contributions and $91 million of limited partnership contributions from the unaffiliated limited partners. These contributions were recorded as long-term debt and minority interest, respectively, in the accompanying consolidated balance sheet.

 

In addition to support from us and the consortium of banks referred to above, the Federal Republic of Germany and the State of Saxony have agreed to support the Fab 36 project in the form of:

 

  a loan guarantee equal to 80 percent of the losses sustained by the consortium of banks referenced above after the banks have foreclosed on all other security; and

 

  subsidies consisting of grants and allowances totaling up to approximately $666 million.

 

As of September 26, 2004, AMD Fab 36 KG received allowances of $5 million for investments made in 2003.

 

The Fab 36 Loan Agreements also require that we:

 

  provide funding to AMD Fab 36 KG if cash shortfalls occur, including funding shortfalls in government subsidies resulting from any defaults caused by AMD Fab 36 KG or its affiliates; and

 

  guarantee 100 percent of AMD Fab 36 KG’s obligations under the Fab 36 Loan Agreements until the bank loans are repaid in full.

 

Under the Fab 36 Loan Agreements, AMD Fab 36 KG and each of the affiliated limited partners are generally prevented from paying dividends or making other payments to us. In addition, AMD Fab 36 KG would be in default under the Fab 36 Loan Agreements if we or any of the AMD companies fail to comply with certain obligations thereunder or upon the occurrence of certain events and if, after the occurrence of the event, the lenders determine that their legal or risk position is adversely affected. Circumstances that could result in a default include:

 

  failure of any limited partner to make contributions to AMD Fab 36 KG as required under the partnership agreements or our failure to provide loans to AMD Fab 36 KG as required under the Fab 36 Loan Agreements;

 

  failure to pay any amount due under the Fab 36 Loan Agreements within five days of the due date;

 

  occurrence of any event which the lenders reasonably believe has had or is likely to have a material adverse effect on the business, assets or condition of AMD Fab 36 KG or AMD or their ability to perform under the Fab 36 Loan Agreements;

 

  filings or proceedings in bankruptcy or insolvency with respect to us, AMD Fab 36 KG or any limited partner;

 

  occurrence of a change in control (as defined in the Fab 36 Loan Agreements) of AMD;

 

  AMD Fab 36 KG’s noncompliance with certain affirmative and negative covenants, including restrictions on payment of profits, dividends or other distributions except in limited circumstances and restrictions on incurring additional indebtedness, disposing of assets and repaying subordinated debt; and

 

  AMD Fab 36 KG’s noncompliance with certain financial covenants, including minimum tangible net worth, minimum interest cover ratio, loan to fixed asset value ratio and a minimum cash covenant.

 

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In general, any default with respect to other indebtedness of AMD Fab 36 KG that results in recourse to AMD Fab 36 KG of more than $6 million or any default with respect to indebtedness made or guaranteed by AMD that results in recourse to us of more than $25 million, and that is not cured, would result in a cross-default under the Fab 36 Loan Agreements.

 

The occurrence of a default under the Fab 36 Loan Agreements would permit the lenders to accelerate the repayment of all amounts outstanding under the Fab 36 Loan Agreements. In addition, the occurrence of a default under these agreements could result in a cross-default under the indentures governing our 4.75% Debentures, 4.50% Notes and 7.75% Notes. We cannot assure you that we would be able to obtain the funds necessary to fulfill these obligations. Any such failure would have a material adverse effect on us.

 

July 2003 Spansion Term Loan and Guarantee

 

Under our July 2003 Spansion Term Loan, as amended, amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.98 percent at September 26, 2004. Repayment occurs in equal, consecutive, quarterly principal and interest installments ending in September 2006. As of September 26, 2004, $51 million was outstanding under the July 2003 Spansion Term Loan, of which 60 percent is guaranteed by us and 40 percent is guaranteed by Fujitsu. Spansion LLC granted a security interest in certain property, plant and equipment as security under the July 2003 Spansion Term Loan. In addition, as security for our guarantee obligations, we granted a security interest in certain of our assets, including our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds.

 

Pursuant to the terms of the July 2003 Spansion Term Loan, Spansion LLC is required to comply with the following financial covenants during an enhanced covenant period which occurs if either Spansion LLC’s net domestic cash balance (as defined in the July 2003 Spansion Term Loan) as of the last day of any fiscal quarter is below $60 million or if its net worldwide cash balance (as defined in the July 2003 Spansion Term Loan) as of the last day of any fiscal quarter is below $130 million:

 

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

 

  achieve EBITDA according to the following schedule:

 

Period


  Amount

   (in millions)

For the four quarters ending December 2004

  $550

For the four quarters ending in 2005

  $640

For the four quarters ending in 2006

  $800

 

  maintain a fixed charge coverage ratio (as defined in the July 2003 Spansion Term Loan) according to the following schedule:

 

Period


  Ratio

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

 

In addition, during an enhanced covenant period, Spansion LLC is restricted in its ability to pay cash dividends in respect of membership interests.

 

As of September 26, 2004, Spansion LLC’s net domestic cash balance was $80 million and its net worldwide cash balance was $284 million. Because Spansion LLC was not in an enhanced covenant period, the preceding financial covenants were not applicable.

 

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Spansion Japan Term Loan and Guarantee

 

As a result of the Spansion LLC transaction, the third-party loans of the Manufacturing Joint Venture were refinanced from the proceeds of a term loan entered into between Spansion Japan, which owns the assets of the Manufacturing Joint Venture, and a Japanese financial institution. Under the agreement, the amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating and Spansion Japan’s non-consolidated net asset value as of the last day of its fiscal year. The interest rate was 0.98 percent as of September 26, 2004. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. As of September 26, 2004, $130 million was outstanding under this term loan agreement. Spansion Japan’s assets are pledged as security for its borrowings under this agreement. Also, Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. We agreed to reimburse Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan. Pursuant to the terms of the Spansion Japan Term Loan, Spansion Japan is required to comply with the following financial covenants:

 

  ensure that assets exceed liabilities as of the end of each fiscal year and each six-month period during such fiscal year;

 

  maintain an adjusted tangible net worth (as defined in the loan agreement), as of the last day of each fiscal quarter, of not less than 60 billion yen (approximately $542 million based on the exchange rate as of September 26, 2004);

 

  maintain total net income plus depreciation, as of the last day of each fiscal period, as follows:

 

Period


  Amount

   (in millions)

Fiscal year 2004

  $207

Fiscal year 2005

  $191

Fiscal year 2006

  $176

 

  ensure that as of the last day of any fiscal quarter, the ratio of (a) net income plus depreciation to (b) the sum of (i) interest expense for such period plus (ii) scheduled amortization of debt for borrowed money (as defined in the loan agreement) for such period, including lease rentals plus (iii) maintenance capital expenditures for Spansion Japan’s existing and after acquired real property and improvements at its manufacturing facilities located in Aizu-Wakamatsu, Japan, is not less than:

 

Period


  Percentage

 

Third and fourth fiscal quarters of 2004

  120%

Fiscal year 2005

  120%

Fiscal year 2006

  120%

 

As of September 26, 2004, Spansion Japan was in compliance with these financial covenants.

 

Because most amounts under the Spansion Japan Term Loan are denominated in yen, the dollar amounts are subject to change based on applicable exchange rates. We used the exchange rate as of September 26, 2004 of 110.625 yen to one U.S. dollar to translate the amounts denominated in yen into U.S. dollars.

 

Fujitsu Cash Note

 

As a result of the Spansion LLC transaction, Fujitsu loaned $40 million to Spansion LLC pursuant to a promissory note. The note bears an interest rate of LIBOR plus four percent, which was 5.98 percent as of September 26, 2004, and has a term of three years. The note is repayable in four equal payments, including interest, on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006.

 

AMD Penang Term Loan

 

On January 29, 2004, our subsidiary in Malaysia, AMD Export Sdn. Bhd., or AMD Penang, entered into a term loan agreement with a local financial institution. Under the terms of the loan agreement, AMD Penang can

 

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borrow up to 30 million Malaysian Ringgit (approximately $8 million as of September 26, 2004) in order to fund the purchase of equipment. The loan bears a fixed annual interest rate of 5.9 percent and is payable in equal, consecutive, monthly principal and interest installments through February 2009. The total amount outstanding as of September 26, 2004 was approximately $7 million.

 

Spansion China Loan

 

Spansion (China) Limited, Spansion LLC’s subsidiary in the People’s Republic of China, entered into two revolving loan agreements with a local financial institution. Under the terms of the revolving foreign exchange loan agreement, Spansion China can borrow in U.S. dollars up to an amount of $18 million. Under the terms of the revolving Renminbi (RMB) loan agreement, Spansion China can borrow up to RMB 120 million (approximately $14.5 million as of September 26, 2004). The interest rate on the U.S. dollar denominated loans is LIBOR plus one percent and the interest rate on the RMB denominated loans is fixed at 4.779 percent. The maximum term of each loan is 12 months from the date of each drawdown. As of September 26, 2004, the total amount outstanding under the U.S. dollar denominated loan was approximately $5.5 million and the amount outstanding under the RMB denominated portion was approximately $7.9 million.

 

Capital Lease Obligations

 

As of September 26, 2004, we had aggregate outstanding capital lease obligations of approximately $206 million. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2008. Leased assets consist principally of machinery and equipment. We guaranteed approximately $104 million of Spansion LLC’s and its subsidiaries’ aggregate outstanding capital lease obligations as of September 26, 2004.

 

Other Long-Term Liabilities

 

The only component of Other Long-Term Liabilities that requires us to make cash payments is a net restructuring accrual of approximately $89 million relating to the net future operating lease payments on certain facilities that were included in our 2002 Restructuring Plan. We will make these payments through 2011. We included these amounts in the operating lease total in the table above. The other components of Other Long-Term Liabilities primarily consist of approximately $185 million of deferred subsidies related to the Fab 30 project, approximately $28 million of deferred subsidies related to the Fab 36 project and a $22 million deferred gain as a result of the sale and leaseback of our corporate marketing, general and administrative facility in Sunnyvale, California in 1998. These components do not require us to make cash payments.

 

Operating Leases

 

We lease certain of our facilities, including our executive offices in Sunnyvale, California, under lease agreements that expire at various dates through 2018. We lease certain of our manufacturing and office equipment for terms ranging from one to five years. Total future lease obligations as of September 26, 2004, were approximately $390 million, of which $113 million was recorded as a liability for certain facilities that were included in our 2002 Restructuring Plan.

 

Unconditional Purchase Commitments

 

Total non-cancelable purchase commitments as of September 26, 2004, were approximately $1,051 million for periods through 2020. These purchase commitments included approximately $169 million to M+W Zander for the design and construction of Fab 36. These payments will be made to M+W Zander as services are performed. Our non-cancelable purchase commitments also included $260 million representing future payments to IBM in connection with joint development projects pursuant to the joint development agreement. As IBM’s services are being performed ratably over the life of the agreement, we expense the payments as incurred. Purchase commitments also included approximately $67 million for software maintenance agreements that

 

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require periodic payments through 2007. As a result, we have not recorded any liabilities relating to these agreements. The remaining $565 million primarily consists of non-cancelable contractual obligations to purchase raw materials, natural resources and office supplies, including approximately $444 million related to contractual obligations to purchase energy and gas for Fab 36 through 2020. Purchase orders for goods and services that are cancelable without significant penalties are not included in the amounts above.

 

Guarantees

 

Guarantees of Indebtedness Recorded on Our Unaudited Condensed Consolidated Balance Sheet

 

The following table summarizes the principal guarantees issued as of September 26, 2004 related to underlying liabilities that are already recorded on our unaudited condensed consolidated balance sheet as of September 26, 2004 and their expected expiration dates by year. No incremental liabilities are recorded on our unaudited consolidated balance sheet for these guarantees. For more information on these guarantees, see “Contractual Cash Obligations and Guarantees,” above.

 

  Amounts
Guaranteed(1)


 Amounts of Guarantee Expiration per Period

  2004

 2005

 2006

 2007

 2008

 2009 and
Beyond


  (in thousands)

Dresden inter-company guarantee(2)

 $309,343  —   $165,719 $143,624  —   —   —  

July 2003 Spansion term loan guarantee

  30,885  4,126  16,500  10,259  —   —   —  

Spansion Japan term loan guarantee

  78,101  6,508  26,034  26,034  19,525 —   —  

Spansion capital lease guarantees

  104,273  12,721  45,066  43,215  3,271 —   —  
  

 

 

 

 

 
 

Total guarantees(3)

 $522,602 $23,355 $253,319 $223,132 $22,796 —   —  
  

 

 

 

 

 
 

(1)Amounts represent the principal amount of the underlying obligations guaranteed and are exclusive of obligations for interest, fees and expenses.
(2)On November 2, 2004, we used the net proceeds from the offering of 7.75% Notes, together with existing cash, to prepay the amount outstanding under the Dresden Term Loan plus accrued and unpaid interest.
(3)We have not included in the table above our guarantees with respect to the obligations of AMD Fab 36, AMD Fab 36 Holding or AMD Fab 36 Admin under the Fab 36 Loan Agreements and the partnership agreements. As of September 26, 2004, no amounts were outstanding under the Fab 36 Loan Agreements and AMD Fab 36 KG had received $74 million of silent partnership contributions and $91 million of limited partnership contributions from its unaffiliated limited partners. Assuming milestones are met, by AMD Fab 36 KG, we expect to receive a total $172 million of silent partnership contributions and $221 million of limited partnership contributions from the unaffiliated limited partners. With respect to each unaffiliated limited partner, AMD Fab 36 Holding and AMD Fab 36 Admin are obligated to repurchase such partner’s silent partnership contribution in annual installments commencing one year after the partner has contributed the full amount required under the partnership agreements. We guaranteed these repurchase obligations. However, as of September 26, 2004, the unaffiliated limited partners had not contributed the full amount required under the partnership agreements, and therefore, the condition precedent to our repurchase obligations had not been met. See “Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements,” above.

 

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Guarantees of Indebtedness not Recorded on Our Unaudited Condensed Consolidated Balance Sheet

 

The following table summarizes the principal guarantees issued as of September 26, 2004 for which the related underlying liabilities are not recorded on our unaudited condensed consolidated balance sheets as of September 26, 2004 and their expected expiration dates. We have not recorded any liability in our consolidated financial statements associated with the guarantees because they were issued prior to December 31, 2002, the effective date of FIN 45.

 

  Amounts
Guaranteed(1)


 Amounts of Guarantee Expiration per Period

  2004

 2005

 2006

 2007

 2008

 2009 and
Beyond


  (in thousands)

Spansion LLC operating lease guarantees

 $18,474 $2,767 $9,506 $6,201  —   —    —  

AMTC revolving loan guarantee

  39,282  —    —    —    39,282 —    —  

AMTC rental guarantee(2)

  117,888  —    —    —    —   —    117,888

Other

  2,719  453  1,813  453  —   —    —  
  

 

 

 

 

 
 

Total guarantees

 $178,363 $3,220 $11,319 $6,654 $39,282 —   $117,888
  

 

 

 

 

 
 


(1)Amounts represent the principal amount of the underlying obligations guaranteed and are exclusive of obligations for interest, fees and expenses.
(2)Amount of the guarantee diminishes as the rent is paid.

 

Spansion LLC Operating Lease Guarantees

 

We guaranteed certain operating leases entered into by Spansion LLC and its subsidiaries totaling approximately $18 million as of September 26, 2004. The amounts guaranteed are reduced by the actual amount of lease payments paid by Spansion LLC over the lease terms.

 

AMTC and BAC Guarantees

 

The Advanced Mask Technology Center GmbH & Co. KG (AMTC) and Maskhouse Building Administration GmbH & Co., KG (BAC) are joint ventures formed by us, 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 and AMTC entered into a $147 million revolving credit facility and a $92 million term loan in December 2002. 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, as of September 26, 2004, we guaranteed up to approximately $39 million plus interest and expenses under the revolving loan, and up to approximately $17 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 our obligations under the rental agreement guarantee is approximately $118 million. As of September 26, 2004, $72 million was drawn under the revolving credit facility, and $73 million was drawn under the term loan.

 

Other Financial Matters

 

Issuance of Senior Notes

 

On October 29, 2004, we sold $600,000,000 of the private notes. Issuance costs incurred in connection with this transaction in the amount of approximately $12 million will be amortized ratably over the term of the notes as interest expense, approximating the effective interest method.

 

On November 2, 2004 we used the net proceeds from the offering of approximately $587 million, together with existing cash, to prepay the full amount outstanding under the Dresden Term Loan plus accrued and unpaid

 

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interest. The interest rate on the Dresden Term Loan was approximately 4.64 percent on a weighted average basis. Separately, as a result of this transaction, as of September 26, 2004, we classified approximately $300 million of the Dresden Term Loan from current portion of long term debt to long term debt and approximately $32 million as current portion of long term debt in our condensed consolidated balance sheet.

 

Section 3(a)(9) Exchange

 

On October 22, 2004, we exchanged $70 million of our 4.50% Notes, plus accrued and unpaid interest, for 10,550,000 shares of our common stock. On November 8, 2004, we exchanged $60 million of our 4.50% Notes for 8,748,612 shares of our common stock. On November 18, 2004, we exchanged $71 million of 4.50% Notes for 10,092,649 shares of common stock. These shares were issued in reliance upon an exemption from registration provided under Section 3(a)(9) of the Securities Act of 1933, as amended. As a result of these transactions, we recognized an expense of approximately $31.8 million during the fourth quarter of 2004 equal to the fair value of the shares issued in the transactions in excess of the fair value of the shares issuable pursuant to the original conversion terms of the 4.50% Notes.

��

We may elect to purchase or otherwise retire additional amounts of our 4.50% Notes with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer, when we believe that market conditions are favorable to do so.

 

Spansion LLC

 

During the four-year period commencing on June 30, 2003, we are obligated to provide Spansion LLC with additional funding to finance operations shortfalls, if any. Generally, Spansion LLC is first required to seek any required financing from external sources, either on a non-recourse basis to us or with guarantees based on our pro-rata ownership interest. However, if such third-party financing is not available, we must provide funding to Spansion LLC equal to our pro-rata ownership interest in Spansion LLC, which is currently 60 percent. At this time, we believe that Spansion LLC will be able to obtain external financing when needed. However, there is no assurance that external financing will be available when needed and currently we cannot estimate the amount of additional funding, if any, that we will be required to provide during this four-year period.

 

Short-Term and Long-Term Liquidity

 

We believe that cash flows from operations and current cash balances, together with available external financing and the extension of existing facilities, will be sufficient to fund operations and capital investments over the next twelve months and longer-term. Should additional funding be required, such as to meet the payment obligation of our long term debt when due, or to finance the continued construction and facilitization of Fab 36, we may need to raise the required funds through borrowings or public or private sales of debt or equity securities. Such funding may be obtained through bank borrowings, from additional securities which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933, or a combination of one or more of the foregoing. We believe that, in the event of such requirements, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available in needed quantities or on terms favorable to us.

 

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BUSINESS

 

General

 

We are a leading semiconductor company with manufacturing facilities in the United States, Europe and Asia, and sales offices throughout the world. We design, manufacture and market industry-standard digital integrated circuits, or ICs, that are used in diverse product applications such as desktop and mobile personal computers, or PCs, workstations, servers, communications equipment such as mobile telephones and automotive and consumer electronics. Our products consist primarily of microprocessors and Flash memory devices. In addition, we are targeting the embedded microprocessor market for personal connectivity devices. Our major direct microprocessor customers are original equipment manufacturers, or OEMs, such as Acer, eMachines, Fujitsu-Siemens, Hewlett-Packard and Sun Microsystems. Our major direct Flash memory customers include five of the top seven mobile phone manufacturers.

 

For the nine months ended September 26, 2004, we had consolidated net sales of approximately $3.7 billion. We are listed on the New York Stock Exchange under the trading symbol “AMD.”

 

Our Industry

 

Semiconductors are critical components used in a variety of electronic products and systems. An IC is a semiconductor device that consists of many interconnected transistors on a single chip. Since the invention of the transistor in 1948, improvements in IC process and design technologies have led to the development of smaller, more complex and more reliable ICs at a lower cost per function. In order to satisfy the demand for faster, smaller and lower-cost ICs, semiconductor manufacturers have continually developed improvements in manufacturing and process technology. ICs are increasingly being manufactured using smaller geometries, migrating from 130-nanometer to 90-nanometer and below. In addition, the size of silicon wafers from which ICs are produced has increased, with some semiconductor manufacturers migrating from 200-millimeter wafers to 300-millimeter wafers. Use of smaller process geometries can result in products that are higher performing, use less power and cost less to manufacture on a per unit basis. Use of larger wafers, together with smaller process geometries, can contribute further to a decrease in manufacturing costs per unit and increase capacity by yielding more chips per wafer.

 

The availability of low-cost semiconductors, together with increased customer demand for sophisticated electronic systems, has led to the proliferation of semiconductors. Today, virtually all electronic products use semiconductors, including PCs and related peripherals, wired and wireless voice and data communications and networking products including mobile telephones, facsimile and photocopy machines, home entertainment equipment, industrial control equipment and automobiles. According to the Semiconductor Industry Association, or the SIA, the global semiconductor market grew from $18 billion in 1983 to $166 billion in 2003, representing a compound annual growth rate of 11.7 percent. Going forward, the SIA projects that the global semiconductor market will grow at a compound annual rate of 10.4 percent from 2003 through 2007. Although the semiconductor market has periodically experienced cyclicality, we believe overall demand in the industry will continue to increase over time.

 

Within the global semiconductor industry, we primarily participate in two markets:

 

  microprocessors, which are used for control and computing tasks, and complementary chipset components, which perform essential logic functions that support the microprocessors; and

 

  Flash memory devices, which are used to store data and programming instructions.

 

In addition, we are targeting the embedded processor market for personal connectivity devices.

 

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The Microprocessor Market

 

A microprocessor is an IC that serves as the central processing unit, or CPU, of a computer. It generally consists of millions of transistors that process data and control other devices in the system, acting as the brain of the computer. The performance of a microprocessor is a critical factor impacting the performance of a PC and other similar devices. The principal indicators of microprocessor performance are work-per-cycle, or how many instructions are executed per cycle, and clock speed, representing the rate at which its internal logic operates, measured in units of hertz, or cycles processed per second. Other factors impacting microprocessor performance include memory size, data access speed and power consumption. Developments in circuit design and manufacturing process technologies have resulted in dramatic advances in microprocessor performance over the past two decades. We market our processors based on overall performance, which is a function of both architecture and clock speed. We believe overall performance is a better indicator of CPU capability than simply clock speed.

 

The microprocessor market is characterized by short product life cycles and migration to ever-higher-performance microprocessors. To compete successfully in this market, microprocessor manufacturers must transition to new process technologies at a fast pace and offer higher-performance microprocessors in significantly greater volumes. They also must achieve manufacturing yield and volume goals while manufacturing microprocessors in order to sell them at competitive prices.

 

A factor driving change in the microprocessor industry is the introduction of 64-bit computing. The bit rating of a microprocessor generally denotes the largest amount of numerical data that a microprocessor can handle in a single clock cycle. For nearly the last ten years, microprocessors have had 32-bit computing capabilities. While 32-bit processors have historically been sufficient, we believe that they will face challenges as new data and memory-intensive consumer and enterprise software applications gain popularity. Microprocessors with 64-bit processing capabilities enable systems to have greater performance by allowing software applications and operating systems to access more memory and process more data. From applications for multimedia and gaming, to grid computing and extensive enterprise databases, we believe the demand for 64-bit computing will increase across the computing industry. Additionally, we believe that the introduction of advanced operating systems, such as Microsoft’s Windows 64, and software applications designed to take advantage of the 64-bit platform, will drive further adoption of 64-bit processors.

 

Another emerging trend in the microprocessor industry is the expected introduction of dual-core processors, which consist of two processor cores on one semiconductor die. Over the last ten years as microprocessors have increased in transistor density and overall performance capabilities, they have increasingly faced power consumption challenges. By enabling numerous operations to be executed simultaneously across two processor cores, the expected introduction of dual-core processors provides an attractive method of increasing processor performance with minimal increase in power consumption.

 

Improvements in the performance characteristics of microprocessors and decreases in production costs resulting from advances in manufacturing process technology, as well as a corresponding decrease in selling prices, have increased the demand for microprocessors over time. The greatest demand for microprocessors today is from PC manufacturers. Factors that we believe will stimulate growth in the demand for microprocessors include an anticipated replacement cycle for older PC systems, lower-priced PC systems, enhanced product features, and strategic purchases of new PC systems to deploy new tools and technologies. In 2003, the global market for microprocessors used in PCs was $20.8 billion according to International Data Corporation, or IDC. IDC expects the global market for microprocessors used in PCs to increase to $31.4 billion by 2008, representing a compound annual growth rate of 8.6 percent from 2003. According to IDC, the majority of this growth is expected to be driven by increased demand for mobile PCs with microprocessors used in mobile PCs being expected to grow at a compound annual growth rate of 18.2 percent from 2003 to 2008. In addition, according to Gartner, server unit shipments are expected to grow at a compound annual growth rate of 9.0 percent from 2003 to 2008. Accordingly, we believe that there will be increased demand for microprocessors from server manufacturers as enterprises continue to upgrade their networks.

 

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The Flash Memory Market

 

Flash memory devices store data and instructions and retain information after electrical power is shut off. Flash memory can be used to provide storage of control programs and system-critical data in communication devices such as mobile telephones and routers. For example, Flash memory devices in mobile telephones enable users to add and modify frequently-called numbers and enable manufacturers to preprogram firmware and other information. In networking applications, Flash memory devices are used in hubs, switches and routers to enable systems to store firmware and preprogrammed Internet addresses and other routing information.

 

There are two major types of Flash memory employed in the market today: Boolean logic-based NOR (Not Or) Flash memory and NAND (Not And) Flash memory. According to Gartner, in 2003, global NOR Flash memory sales were $6.8 billion and global NAND Flash memory sales were $4.1 billion. NOR Flash memory is generally more reliable than NAND Flash memory and less prone to data corruption. NOR Flash memory is typically used to store program code. Common examples include communication devices such as mobile telephones, and consumer products such as DVD players. NAND Flash memory has generally been less expensive to manufacture and is typically used in devices that require high-capacity data storage such as memory cards for digital cameras and MP3 players. Within the Flash memory market, we sell NOR Flash memory products. However, we have designed a new architecture called ORNAND based on our MirrorBit technology that we believe will enable us to offer products that combine the best features of both NOR and NAND architectures. We believe that ORNAND will allow us to offer products with higher densities in our traditional NOR Flash memory markets and will enable us to enter and compete in end markets traditionally served by NAND.

 

The global Flash memory market (both NAND technology and NOR technology) has grown significantly over the past five years, from $2.8 billion in 1998 to $10.9 billion in 2003 according to Gartner, representing a compound annual growth rate of 31.5 percent. Gartner projects the global Flash memory market will increase to $22.6 billion in 2008, representing a compound annual growth rate of 15.7 percent from 2003. Over this period, Gartner projects sales of NOR Flash memory will grow by 11.0 percent and sales of NAND Flash memory will grow by 22.0 percent. We believe much of this growth will be driven by the following trends:

 

  Increase in unit shipments of mobile telephones. Mobile telephones comprised approximately 38.9 percent of global Flash memory sales in the second quarter of 2004 according to iSuppli Corporation, representing the largest single end market for Flash memory. According to Gartner, worldwide mobile telephone shipments are expected to increase from 520 million units in 2003 to 763 million units in 2008, representing a compound annual growth rate of 8.0 percent over the period.

 

  Increase in Flash memory content in mobile telephones. As mobile telephone complexity has increased through the development of more sophisticated features, the amount of Flash memory required has increased as well. Greater Flash memory capacity is required to store increases in data applications, such as music downloads and pictures, as well as the higher-complexity program code associated with advanced mobile telephones that include features such as color displays, global positioning systems, internet services and built-in cameras.

 

  Growth in unit shipments and Flash memory content of personal connectivity and consumer electronic devices. Demand for digital content is driving significant growth in the consumer electronics market. According to Gartner, aggregate unit sales of digital consumer devices such as digital cameras, DVD players, DTVs and DVRs are expected to grow from 183 million units in 2003 to 407 million units in 2008, representing a compound annual growth rate of 17.3 percent. Consumer electronics products are also expected to increase in complexity, thus requiring increased amounts of Flash memory.

 

  Proliferation of Flash memory within a variety of new automotive applications. Flash memory content is increasing in a variety of automotive applications, such as control and navigation systems.

 

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The Embedded Processor Market for Personal Connectivity Solutions

 

In addition to our primary microprocessor and Flash memory markets, we are currently targeting the embedded processor market for personal connectivity devices and specific consumer markets. Personal connectivity devices can be classified into five main segments: computer devices such as thin clients; smart handheld devices and personal digital assistants, or PDAs; access devices such as gateways and access points; entertainment devices such as media players and digital TVs; and automotive devices such as in-car navigation systems, telematics and media playback. The applications in these devices typically require highly integrated system-on-chips that have high-performance, low-power embedded processors and microcontrollers. According to Gartner, the market for embedded processors and 32-bit microcontrollers is expected to grow from $4.4 billion in 2003 to $7.1 billion in 2007. The primary driver for such growth is the expected strong demand for personal connectivity devices. For example, IDC predicts that smart handheld devices, including converged mobile devices and PDAs, will grow from 20.0 million shipments in 2003 to 138.5 million shipments in 2008, representing a 47.8 percent compound annual growth rate.

 

Our Strengths

 

We believe that the following strengths have enabled us to attain a leading position as a global manufacturer and supplier of microprocessors and Flash memory devices, and will assist us in penetrating the embedded microprocessor market for personal connectivity devices:

 

Customer-Focused Product Development. We work with customers to identify evolving needs and new applications in order to develop innovative products and features. For example, we developed our AMD64 technology to address increasing customer demand for systems with greater performance. Our AMD64 technology allows both 32-bit and 64-bit computing while being fully compatible with the pervasive x86 architecture. This enables our microprocessor customers to protect their investments by continuing to use their 32-bit software while transitioning to a 64-bit platform. Currently more than 40 percent ofForbes100 companies or their affiliates now use AMD64 processor-based systems to run critical enterprise applications. We have worked closely with mobile telephone customers to develop Flash memory products that deliver high performance and functionality at lower price points. We believe that our MirrorBit technology will enable our customers to cost effectively include next-generation applications, such as high-resolution cameras and streaming video, on their mobile telephones.

 

Technology and Product Innovation. We believe our strong research and product development capabilities have resulted in innovative IC designs and the creation of advanced products. For example, we led the industry in providing x86 64-bit computing with the introduction of the our AMD Opteron microprocessors in April 2003. Thus far, more than 2,000 OEMs and software and hardware developers worldwide have purchased our 64-bit technology. In addition, we were the first to demonstrate x86 dual-core processor technology, which provides a path for increasing processor performance with a minimal increase in power consumption. In Flash memory, we believe that our MirrorBit technology offers a number of advantages over single-bit-per-cell and multi-level-cell floating gate technology, including a doubling of storage capacity compared to single-bit-per-cell floating gate technology, by storing two physically distinct bits on opposite sides of a memory cell and a simpler cell architecture compared to competitive multi-level-cell floating gate technology that requires fewer manufacturing steps. We have designed our ORNAND to provide the high reliability of NOR, read speeds and burst write speeds significantly faster than those of NAND today and the ability to scale to high densities at competitive costs.

 

Leading Manufacturing Process Technology. We have devoted significant resources to develop manufacturing process technologies used in the production of ICs. In order to meet anticipated demand, we are completing the construction of and facilitizing a new 300-millimeter wafer fabrication facility. This new facility, Fab 36, is located in Dresden, Germany, adjacent to our existing manufacturing facility, Fab 30, and will be equipped to manufacture microprocessor products at 65-nanometer geometries and below. In addition, we recently upgraded Fab 30 to add incremental capacity at 90-nanometer geometries. For our Flash memory products, we are in volume production on 110-nanometer geometries, and we plan to be in production on

 

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90-nanometer geometries in the second half of 2005. Furthermore, we have developed significant expertise in utilizing advanced process control and yield enhancement techniques that enable us to achieve savings in our manufacturing processes and rapidly integrate design changes.

 

Key Technology and Manufacturing Relationships. In order to maintain our technology and manufacturing expertise, we have entered into strategic relationships with several companies. We believe that these relationships enable us to develop advanced process technologies while sharing the up-front development costs with our partners. Key relationships include:

 

  Fujitsu. In 1993, we formed Fujitsu AMD Semiconductor Limited, or FASL, a joint venture with Fujitsu for manufacturing Flash memory devices that FASL sold to Fujitsu and us. In June 2003, we established Spansion LLC, a new Flash memory company, which integrated our and Fujitsu’s Flash memory businesses, including FASL. We hold a 60 percent interest in Spansion LLC and Fujitsu holds the remaining 40 percent interest. We believe Spansion LLC has enabled both us and Fujitsu to respond more quickly to changes in the Flash memory market and improve efficiencies in the production, marketing and design of our Flash memory products. Spansion LLC is currently a leading provider of NOR Flash memory.

 

  IBM. We have a joint development agreement with IBM to develop new microprocessor process technologies, including 65-nanometer and 45-nanometer, to be implemented on silicon wafers, which we deploy in our wafer fabrication facilities. In September 2004, we amended the joint development agreement and extended its termination date from December 2005 to December 2008, subject to IBM board of directors’ approval. We believe our relationship with IBM allows us to improve the performance of our products and reduce our development and manufacturing costs.

 

Strong Market Position. We are one of the largest suppliers of microprocessors and the largest company dedicated exclusively to developing, designing and manufacturing Flash memory. According to IDC, in 2003, we had a market share of 16.5 percent in microprocessors based on unit sales, second only to Intel. According to the market research firm iSupply, we were the largest NOR Flash memory supplier by revenue based on the first nine months of 2004, with 25.2 percent of the NOR Flash memory market.

 

Our Strategy

 

We intend to continue to leverage our technology, manufacturing expertise and customer relationships to build on our position as a leading provider of microprocessors and Flash memory products and to penetrate the embedded processor market for personal connectivity devices. We are pursuing the following strategies to achieve these goals:

 

Expand Our Market Opportunity. Through our continued commitment to research and development and cutting-edge products, we plan to continue to be an innovator in the design of new ICs. We plan to leverage our technology to expand our market share in existing markets, as well as enter new markets and expand our presence in high growth global markets such as China, Eastern Europe, India and Latin America. Our strategy in each of our operating segments is as follows:

 

  Microprocessors. We will seek to increase market acceptance of our AMD64 technology, particularly in the enterprise segment. In addition, we have successfully demonstrated our dual-core processors and we plan to offer commercially dual-core processors for servers and workstations in mid-2005, followed by dual-core processors for the PC market in late 2005. We also intend to invest in our mobile microprocessor product portfolio with increasing emphasis on low-power computing, which we believe will allow us to address further the thin-and-light segment.

 

  Flash Memory. In the Flash memory sector, we intend to expand our leading position in the NOR Flash memory market as well as leverage our ORNAND architecture based on MirrorBit technology to enter markets traditionally served by NAND Flash memory.

 

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Accelerate New Product Development through Our Customer-Centric Innovation. We are focused on providing new products that assist our customers in adding functionality and enhancing the performance of their products. As we did with our AMD64 and MirrorBit technology, we intend to continue to work closely with our customers to jointly define our next-generation products in order to develop solutions for their technology needs.

 

By actively building and leveraging our relationships with our customers, we believe we can target our research and development investments more effectively to develop new products while maximizing the value we are able to provide our customers.

 

Leverage Our Manufacturing and Process Technology Expertise to Support Next-Generation Products. We are focused on developing microprocessor and Flash memory designs using advanced manufacturing process technology. We plan to continue manufacturing products with smaller geometries, such as 90-nanometer geometries and below, on larger silicon wafers, such as 300-millimeter wafers. We believe that using such smaller geometries and larger wafers will result in a lower cost per unit and enhance our competitive advantage. We are completing the construction of and facilitizing Fab 36, our new 300-millimeter fabrication facility, which will be equipped to produce future generations of our microprocessor products at 65 nanometers and below. We expect Fab 36 to be in volume production in 2006. At Spansion LLC, in order to meet anticipated demand for Flash memory, we plan to construct a clean room and equip a new 300-millimeter fabrication facility in Aizu-Wakamatsu, Japan, and we plan to be operational with 300-millimeter Flash memory capacity by 2007. We are also developing additional capacity by transitioning to smaller geometries and by migrating our product portfolio to MirrorBit technology. In addition, we plan to be in production on 90-nanometer technology in the second half of 2005.

 

Continue to Pursue Strategic Alliances. We will continue to pursue strategic technology and manufacturing alliances that provide us with the ability to develop more efficient manufacturing capabilities, offer a stronger product portfolio with next-generation products, and increase market share. We believe these alliances will enable us to continue to improve our cost structure and decrease the risks associated with the development of new products and technologies.

 

Distinguish and Market Our Brand Name. We seek to increase sales of our products through targeted advertising directed at both business and home users as part of our branding campaign. Through a combination of online media, multimedia, print collateral, public relations activities, trade events and sponsorships, we are also seeking to position ourselves in the market as a leader in innovation driven by customer needs. For example, we are currently an official sponsor and technology partner of Lance Armstrong and the Discovery Channel Pro Cycling Team and the Scuderia Ferrari Formula One team. Furthermore, we seek to distinguish the AMD Athlon 64 brand by marketing our AMD Athlon 64 microprocessors to sophisticated PC users, gamers and enterprises, and our AMD Sempron processors to value-conscious buyers of desktop and notebook PCs. We are also marketing our AMD Opteron processors to server OEMs. In addition, we are marketing our Spansion Flash memory devices to mobile phone and embedded systems markets.

 

Our Products

 

Microprocessor Products

 

We currently offer microprocessor products for desktop and mobile PCs, servers and workstations. Our microprocessors are based on the x86 architecture. In addition, we design them based on a superscalar reduced instruction set computer, or RISC, architecture. RISC architecture allows microprocessors to perform fewer types of computer instructions thereby allowing the microprocessor to operate at a higher speed. We also design our microprocessors to be compatible with operating system software such as Windows® XP, Windows 2000, Windows NT®, Windows 98 (and Windows predecessor operating systems), Linux, NetWare® and UNIX.

 

Desktop PCs. Our microprocessors for desktop PCs consist of AMD Athlon 64 FX, AMD Athlon 64 and AMD Sempron processors. In September 2003, we introduced the first Windows-compatible, x86 architecture-based 64-bit PC processor, the AMD Athlon 64 microprocessor. AMD Athlon 64 processors are based on the

 

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AMD64 technology platform, which extends the industry-standard x86 instruction set architecture to 64-bit computing. We designed our AMD Athlon 64 processors to allow simultaneous 32-bit and 64-bit computing, enabling users to protect their information technology investments by continuing to use their 32-bit software applications while implementing 64-bit applications on the timetable of their choice. We designed our AMD Athlon 64 processors for sophisticated PC users and businesses that seek to access large amounts of data and memory. Simultaneously with our introduction of the AMD Athlon 64 processor, we introduced the AMD Athlon 64 FX processor, designed specifically for gamers, PC enthusiasts and digital content creators who require products that can perform graphic-intensive tasks. Our AMD Sempron microprocessors, which we introduced in July 2004, are designed for value-conscious buyers of desktop and notebook PCs.

 

Mobile PCs. Our microprocessors for the mobile computing market consist of our AMD Turion 64 processors, mobile AMD Athlon 64 processors, mobile AMD Sempron processors and AMD Athlon XP-M processors. Our OEM customers incorporate these processors into a variety of notebook designs, including full-size and thin-and-light notebooks. We have designed mobile processor products for high-performance computing and wireless connectivity. They feature advanced power management from AMD PowerNow! technology which offers reduced power consumption and extended system battery life.

 

Servers and Workstations. Our x86 microprocessors for servers and workstations consist of the AMD Opteron and AMD Athlon MP processors. A server is a powerful computer on a network that is dedicated to a particular purpose and stores large amounts of information and performs the critical functions for that purpose. A workstation is essentially a heavy-duty desktop, designed for tasks such as computer-aided design. We introduced our first 64-bit microprocessor for servers and workstations, the AMD Opteron processor, in April 2003. Like the AMD Athlon 64 processors, the AMD Opteron processors for servers and workstations are based on the AMD64 technology and are designed to allow simultaneous 32-bit and 64-bit computing. AMD Opteron processors are the first processors to extend the industry-standard x86 instruction set architecture to 64-bit computing. AMD Opteron processors are available in one- to eight-way servers that can be used in a variety of server applications, including business processing (enterprise resource planning, customer relationship management, and supply chain management) and business intelligence. AMD Opteron processors are also available in one- to four-way workstation solutions that can be used in workstation applications such as engineering and digital content creation software, and other information technology infrastructure applications such as intensive Web serving and messaging.

 

Chipsets. We also sell chipset products and make available motherboard reference design kits, designed to support our microprocessors for use in PCs and embedded products. A chipset provides the interface between all of a PC’s subsystems and sends data from the microprocessor to all the input/output and storage devices, such as the keyboard, mouse, monitor and hard drive. The primary reason we offer these products to our customers is to provide them with a solution that will allow them to use our microprocessors and develop and introduce their products into the market more quickly. We report the revenue from sales of our chipset products in our Computation Products segment.

 

Our AMD Opteron and AMD Athlon 64 processors support HyperTransport technology, which is a high-bandwidth communications interface we initially developed, as well as integrated memory controllers that enable substantially higher performance than existing, non-integrated memory controller architectures. We expect our advanced architecture to provide users with even greater performance improvements as operating systems and software applications begin leveraging the benefits of our 64-bit architecture. To that end, we work with Microsoft to incorporate 64-bit support into the Windows operating system. Microsoft has indicated that they intend to release its Windows Server 2003 Service Pack 1, Windows Server 2003 for 64-bit Extended Systems and Windows XP 64-bit Extended Systems in the first half of 2005. We believe that the backward compatibility of these processors will allow users to migrate more easily from current 32-bit operating systems and applications to future 64-bit operating systems and applications on a common hardware platform.

 

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Flash Memory Products

 

Our Spansion Flash memory products encompass a broad spectrum of densities and features to address the wireless and embedded categories of the Flash memory market. These products are used in mobile telephones, consumer electronics, automotive electronics, networking equipment and other applications that require memory to be non-volatile and electrically rewritten. Our Spansion Flash memory products are categorized into two technologies: floating gate technology and MirrorBit technology.

 

Floating Gate Technology. Our Spansion Flash memory products using conventional floating gate technology are available in densities from one megabit to 128 megabits. A conventional memory cell includes a transistor having a source, and a drain and a control gate to regulate the current flow between the source and the drain, thereby defining whether the memory cell stores a “0” bit or a “1” bit. Floating gate technology is memory cell technology in which the memory cell includes a conductive storage medium called a “floating gate” between the control gate and the source and drain. Adding or removing charge from the floating gate changes the threshold voltage of the cell. Our products using conventional floating gate technology are typically used for their non-volatile code storage and code execution as well as their ease of in-system re-programmability. Floating gate has the ability to operate at very high read speeds and temperatures and is optimal for harsh environments such as automotive applications. These products are designed to meet the requirements of a range of Flash memory market segments, from the low-end, low-density value segment to the high-performance, high-density wireless segment.

 

MirrorBit Technology.Our Spansion Flash memory products also include devices based on MirrorBit technology, our proprietary technology that stores two bits of data in a single memory cell thereby doubling the density, or storage capacity, of each memory cell and enabling higher density products. MirrorBit technology stores charge in a non-conductive storage medium without a floating gate. NOR Flash memory products based on MirrorBit technology require fewer wafer fabrication process steps to manufacture and have simpler layouts compared to similar products based on single-bit-per-cell or multi-level-cell floating gate technology. As a result, MirrorBit technology can contribute to a smaller die size and improved production yields. Due to these characteristics, for a given density, NOR Flash memory products based on MirrorBit technology can be less expensive to produce than similar products based on conventional floating gate single-bit-per-cell or multi-level cell technology. We believe MirrorBit technology gives us an advantage in the manufacturing of these products equivalent to one lithography node over multi-level cell solutions and two lithography nodes over single-bit-per-cell solutions. Lithography is a measure of the process technology used in the manufacture of ICs. In addition, at the highest densities, we believe MirrorBit technology enables the production of NOR Flash memory products that are not commercially viable using multi-level-cell floating gate technology at the same lithography.

 

Our Spansion Flash memory products based on MirrorBit technology are available in densities ranging from 16 megabits through 512 megabits. We believe our 512-megabit product will enable designers to create large memory arrays, simplify existing designs by using only a single device, and reduce costs by migrating from floating gate technology-based products. We believe manufacturing costs for our NOR Flash memory products produced on 110-nanometer MirrorBit technology will be similar to or lower than manufacturing costs for comparable products based on conventional floating gate multi-level cell technology that are manufactured using 90-nanometer process technology.

 

Our Spansion Flash memory products implement different architectures to address different customer requirements. These different architectures may be supported on floating gate technology as well as on MirrorBit technology. We address demand for lower-performance customer applications by providing asynchronous access products with slower read speeds. We address demand for higher-performance products by providing advanced architecture products that support faster burst- and page-mode read interfaces. Burst-mode products allow fast access to data in a continuous sequential operation, while page-mode products allow fast random access to data within a page. The wireless market in particular currently demands such high-performance solutions. We intend to continue to address the growing performance requirements of our customers in this market by expanding our product offerings and improving our products’ performance. In addition to a high-performance architecture,

 

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Spansion products may also include benefits such as Advanced Sector Protection, which improves security by protecting Flash memory content against inadvertent or deliberate changes to code or data, and simultaneous read/write, which improves system performance by allowing a device to conduct read, write or erase operations simultaneously.

 

We also offer Flash memory in multi-chip packages, or MCPs, across a range of densities. Currently, the largest consumers of Flash memory devices are mobile phone manufacturers. Mobile phone manufacturers require devices that allow them to make feature-rich products in small packages. They are especially interested in MCPs due to the single, space-saving package, low power consumption, and high performance. Our MCP products incorporate Spansion Flash memory devices ranging from 16 megabits to 256 megabits and third-party non-Flash memory die, such as static RAM, or SRAM, or pseudo static RAM, or pSRAM devices, which we purchase from outside vendors, ranging from two megabits to 128 megabits. We intend to continue to provide new products for this growing market.

 

Personal Connectivity Solutions

 

We offer low-power, high-performance embedded microprocessor products for personal connectivity devices. Our products include low-power x86 and MIPS® architecture-based embedded processors. We design these embedded processors to address customer needs in non-PC markets where Internet connectivity and/or low power processing is a priority. Typically these embedded processors are used in products that require high to moderate levels of performance where key features include reduced cost, mobility, low power and small form factor. Products that use our embedded processors are targeted for specific market segments using system-on-chip, or SoC, design techniques.

 

In August 2003, we acquired the Geode family of embedded microprocessor products from National Semiconductor Corporation. The Geode technology integrates complex functionality, such as processing, system logic, graphics, and audio and video decompression onto one integrated device. AMD Geode microprocessors are based on x86 architecture and are optimized for high performance at low power. We target our AMD Geode processors for five main market segments: computer devices such as thin clients; smart handheld devices or PDAs; access devices such as gateways and access points; entertainment devices such as media players and Digital TV; and automotive devices such as in-car navigation systems, telematics and media playback enterprise. With the AMD Geode family of microprocessors, we are able to extend the range of our x86-based product offerings to serve markets from embedded appliances to high-end servers.

 

In October 2004, we launched the Personal Internet Communicator (PIC), a consumer device that we believe will help provide managed Internet access to first time technology users in developing markets such as Brazil, China, India, Mexico and Russia. Through the PIC, end-users a provided with access to a variety of communication and productivity tools such as an Internet browser, e-mail, word processing, spreadsheet applications and a presentation viewer. The PIC runs on operating systems powered by Microsoft® Windows® technology. The PIC is branded, marketed and sold by local service providers such as telecommunications companies and government-sponsored communications programs.

 

We developed our AMD Alchemy embedded processors for portable media players, Internet access points, and gateways in which low power consumption is a key factor. All of these products have an architecture that provides a 32-bit MIPS instruction set. They support operating systems such as Microsoft Windows, CE.NET, Linux, VxWorks, and other operating systems.

 

We believe that these products offer our customers high performance at low power, faster time to market and lower product costs. Our strategy is to continue providing cost-effective embedded microprocessors for personal connectivity devices that our customers can deploy quickly in their applications.

 

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Marketing and Sales

 

We market and sell our products, other than Flash memory products, under the AMD trademark. We employ a direct sales force through our principal facilities in Sunnyvale, California, and field sales offices throughout the United States and abroad, primarily Europe and Asia Pacific. We also sell our products through third-party distributors and independent sales representatives in both domestic and international markets pursuant to non-exclusive agreements. Our AMD Channel Partner Program provides product information, training and marketing materials.

 

Spansion Flash memory products are marketed and sold under the Spansion trademark. We and Fujitsu act as distributors of Spansion Flash memory products and receive a commission from Spansion LLC. We distribute Spansion products in the same manner as we sell our other products, through our direct sales force and through third-party distributors and independent sales representatives.

 

We market our products through our direct marketing and co-marketing programs. Our direct marketing activities include print and Web-based advertising as well as consumer and trade events and other industry and consumer communications. In addition, we have cooperative advertising and marketing programs with our customers, including market development programs. Under these programs, eligible customers can use market development funds in partial reimbursement for advertisements and marketing programs related to our products.

 

We intend to build upon our position as a global supplier of ICs by continuing to focus on high growth global markets. In 2004, we continued to focus on expanding our participation in China’s microprocessor, embedded processor and Flash memory markets. For example, in order to strengthen and consolidate our efforts in China, in February 2004 we established AMD (China) Co., Ltd., which serves as our regional headquarters. We also established relationships with OEMs such as Dawning Information Industry Corp. Ltd., a server manufacturer in China, Founder Group, a high-tech enterprise founded by Peking University, and Lenovo Group Ltd (formerly known as Legend Group Limited), the largest information technology enterprise in China with an approximately 27 percent share of China’s PC market. These activities expanded our existing investments in China, including our Flash memory assembly and test facility in Suzhou. We also established a new microprocessor engineering design center in Bangalore, India.

 

Customers

 

Our customers consist primarily of OEMs and third-party distributors in both domestic and international markets. End users use our products in numerous markets, including computing, networking and telecommunications.

 

We generally warrant that products sold to our customers will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to certain exceptions, we offer a three-year limited warranty to end users for microprocessor products that are commonly referred to as “processors in a box” and a one-year limited warranty to direct purchasers of all other microprocessor, Flash memory and embedded processor products. Warranty expense to date has been minimal. Generally, our customers may cancel orders 30 days prior to shipment without incurring a penalty.

 

Original Equipment Manufacturers

 

We focus on three types of OEMs: multi-nationals, selected regional accounts and target market customers. Large multi-nationals and regional accounts are our core OEM customers. Our OEM customers for microprocessors include numerous foreign and domestic manufacturers of PCs and PC motherboards such as Acer, eMachines, Fujitsu-Siemens, Hewlett-Packard and Sun Microsystems. Our OEM customers for Flash memory products include foreign and domestic manufacturers of mobile telephones, consumer electronics, automotive electronics and networking equipment companies. Generally, OEMs do not have a right to return our products other than pursuant to the standard limited warranty. No OEM customer accounted for ten percent or more of our consolidated net sales in 2001, 2002 or 2003.

 

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Third-Party Distributors

 

Our authorized distributors resell to sub-distributors and mid-sized and smaller OEMs and to electronic manufacturing service providers and other companies. Sales to distributors are typically made pursuant to agreements that provide return rights with respect to any product that we have removed from our price book or that is not more than twelve months older than the manufacturing code date. In addition, some agreements with our distributors may contain standard stock rotation provisions permitting limited levels of product returns. To date, sales returns have had a minimal impact on us.

 

No distributor accounted for ten percent or more of our consolidated net sales in 2001 and 2002. In 2003, two distributors, Avnet, Inc. and Fujitsu, each accounted for approximately 13 percent of our consolidated net sales. Avnet primarily purchases and distributes our microprocessor products. Fujitsu primarily purchases and distributes Flash memory products from Spansion LLC.

 

Research and Development; Manufacturing Process Technology

 

Manufacturing process technology is a key determinant in the improvement of most semiconductor products. Each new generation of manufacturing process technology has resulted in products with greater performance. We have devoted significant resources to developing and improving manufacturing process technologies used in the production of our products. In order to remain competitive, we must continue to maintain our process technology leadership. In particular, we have made and continue to make significant investments in manufacturing process technologies and in strategic relationships with industry-leading companies relating to manufacturing process technology development.

 

Microprocessors

 

We have a joint development agreement with IBM pursuant to which we work together to develop new microprocessor process technologies to be implemented on silicon wafers. On September 15, 2004, we amended the joint development agreement and extended the relationship for an additional three years, from December 31, 2005 to December 31, 2008. Under the amended and restated development agreement, we agreed to continue to develop jointly new microprocessor process technologies. In addition, we received a license from IBM to have our products made in 90-nanometer and 65-nanometer at a third-party foundry or a joint manufacturing facility owned by us and a third-party foundry.

 

The continuation of the process development projects under the development agreement past December 31, 2005 is conditioned upon the approval of IBM’s board of directors. If such approval is not received, either party has the right to terminate the development agreement effective December 31, 2005 with respect to process development projects past December 31, 2005. In addition, the development agreement may be extended further by the mutual agreement of the parties, and can also be terminated immediately by either party if the other party permanently ceases doing business, becomes bankrupt or insolvent, liquidates or undergoes a change of control, or can be terminated by either party upon 30 days written notice upon a failure of the other party to perform a material obligation thereunder.

 

During the term of the development agreement, we are required to pay fees for the additional joint development projects. From September 2004 through December 2008, we are required to pay fees to IBM of between approximately $240 million and $270 million. The actual amount of fees is dependent upon the number of parties (including us and IBM) engaged in related development projects at IBM’s East Fishkill, New York facility during the joint development period. The fees for the joint development projects are generally payable on a quarterly basis over the term of the development agreement. Additionally, the development agreement extended the target dates for achievement of certain development milestones.

 

In addition, in December 2003, we entered into license and consulting services agreements with IBM pursuant to which we licensed technology and know-how developed by IBM for manufacturing products on 300-millimeter silicon wafers. Some research and development work for microprocessor process technologies takes place at Fab 30.

 

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Flash Memory

 

Research and development with respect to non-volatile memory technology used for manufacturing Spansion Flash memory products is conducted primarily at our Submicron Development Center, or SDC, facility located in Sunnyvale, California and at our facilities in Japan. Currently, we are developing new non-volatile memory process technology, including 90-nanometer floating gate technology and 90-nanometer MirrorBit technology utilizing three-layer copper interconnect and have announced plans for development of 65-nanometer technology.

 

At December 2004, our Spansion Flash memory products were manufactured on 110-, 130-, 170-, 200-, 230- and 320-nanometer process technologies. In addition, we plan to be in production on 90-nanometer process technology in the second half of 2005.

 

Competition

 

The IC industry is intensely competitive. Products compete on performance, quality, reliability, price, adherence to industry standards, software and hardware compatibility, marketing and distribution capability, brand recognition and availability. 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 Microprocessor Market

 

Intel has dominated the market for microprocessors used in desktop and mobile PCs for many years. Intel is also a dominant competitor in the server segment of the microprocessor market. Because of its dominant position in the microprocessor market, Intel has also been able to control x86 microprocessor and PC system standards and dictate the type of products the microprocessor market requires of Intel’s competitors. In addition, Intel’s significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives, and to discipline customers who do business with us. These aggressive activities can result in lower unit sales and average selling prices for our products, and adversely affect our margins and profitability. Intel also exerts substantial influence over PC manufacturers and their channels of distribution through the “Intel Inside” brand program and other marketing programs. As long as Intel remains in this dominant position, we may be materially adversely affected by Intel’s:

 

  pricing and allocation strategies and actions, including aggressive pricing for microprocessors to increase market share;

 

  product mix and introduction schedules;

 

  product bundling, marketing and merchandising strategies;

 

  exclusivity payments to its current and potential customers;

 

  control over industry standards, PC manufacturers and other PC industry participants, including motherboard, memory, chipset and basic input/output system, or BIOS, suppliers; and

 

  user brand loyalty.

 

Intel also dominates the PC system platform, which includes core logic chipsets, graphics chips, motherboards and other components necessary to assemble a PC system. As a result, PC OEMs are highly dependent on Intel, less innovative on their own and, to a large extent, are distributors of Intel technology. Additionally, Intel is able to drive de facto standards for x86 microprocessors that could cause us and other companies to have delayed access to such standards. In marketing our microprocessors to OEMs, we depend on third-party companies other than Intel for the design and manufacture of core-logic chipsets, graphics chips, motherboards, BIOS software and other components. In recent years, many of these third-party designers and manufacturers have lost significant market share to Intel or exited the business. In addition, these companies

 

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produce chipsets, motherboards, BIOS software and other components to support each new generation of Intel’s microprocessors, and Intel has significant leverage over their business opportunities.

 

We do not currently plan to develop microprocessors that are bus interface protocol compatible with Intel microprocessors because our patent cross-license agreement with Intel does not extend to Intel’s proprietary bus interface protocol. Thus, our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. Our ability to compete with Intel in the market for microprocessors will depend on our continued success in developing and maintaining relationships with infrastructure providers in order to ensure that these third-party designers and producers of motherboards, chipsets and other system components support our microprocessor offerings, particularly our AMD 64-based microprocessors.

 

Similarly, we offer OEMs and other companies motherboard reference design kits designed to support our processors. The primary reason we offer these products is to provide our customers with a solution that will allow them to use our microprocessors and develop and introduce their products in the market more quickly.

 

We expect Intel to maintain its dominant position in the microprocessor market and to continue to invest heavily in research and development, new manufacturing facilities and other technology companies. Intel has substantially greater financial resources than we do and accordingly spends substantially greater amounts on research and development and production capacity than we do. We expect competition from Intel to continue and increase in the future to the extent Intel reduces the prices for its products and as Intel introduces new competitive products. For example, in June 2004, Intel announced the availability of a 64-bit processor for servers and workstations that runs existing 32-bit software applications. These processors compete with our AMD Opteron microprocessors. In addition, Intel announced that it will offer 64-bit processors for the desktop market and other market segments that will be able to run existing 32-bit software applications in a time frame based on both timing and availability of the infrastructure required to support them, and customer demand. These products would compete with our AMD Athlon 64 microprocessors. Moreover, Intel currently manufactures certain of its microprocessor products on 300-millimeter wafers using 90-nanometer process technology. Use of 90-nanometer technology can result in products that are higher performing, use less power and that cost less to manufacture. Use of 300-millimeter wafers can decrease manufacturing costs and increase capacity by yielding more chips per wafer than 200-millimeter wafers. We are currently transitioning to 90-nanometer process technology for microprocessor manufacturing and we expect to transition to using 300-millimeter wafers in 2006.

 

Competition in the Flash Memory Market

 

Our principal competitors in the Flash memory market are Intel, Samsung, Toshiba, Renesas Technology, STMicroelectronics N.V., Sharp Electronics Corporation, Silicon Storage Technology, and Macronix International. Intel, Toshiba, Renesas, STMicroelectronics and Sharp Electronics each market floating gate devices incorporating multi-level-cell technology which store fractional charge levels within a single cell thereby permitting the storage of two bits per cell and other competitors also either have or plan to develop multi-level-cell technology. We expect competition in the market for Flash memory devices to increase as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity increases and competitors aggressively price their Flash memory products to increase market share. In addition, we and certain of our competitors have licensed non-volatile memory technology called NROM technology from a third party. NROM technology allows memory devices to store two bits of data in a memory cell using a nitride based non-conducting storage medium. NROM technology has similar characteristics to our MirrorBit technology, which may allow these competitors to develop Flash memory technology that is competitive with MirrorBit technology. Furthermore, NAND Flash memory vendors gained an increasing share of the overall Flash memory market in 2003. If further significant improvements in NAND Flash memory technology occur in the future, applications currently using NOR Flash memory may transition to NAND Flash memory. As a result, NAND Flash memory vendors may gain a substantial share of the overall Flash memory market. We believe, however, our ORNAND architecture based on MirrorBit technology will enable us to compete against NAND Flash memory vendors in order to preserve and grow our position in the overall Flash memory market.

 

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Competition With Respect to Our Other Products

 

With respect to our embedded processors for personal connectivity devices, our principal competitors are Freescale (formerly Motorola Semiconductor), Hitachi, Intel, NEC Corporation, Toshiba, Transmeta and Via Technologies. We expect competition in the market for these devices to increase as our principal competitors focus more resources on developing low-power embedded processor solutions.

 

Intellectual Property and Licensing

 

We rely on a combination of protections provided by contracts, copyrights, patents, trademarks and other common law rights such as trade secret laws, to protect our products and technologies from unauthorized third-party copying and use. As of December 26, 2004, we had over 6,500 U.S. patents and had over 2,000 patent applications pending in the United States. In certain cases, we have filed corresponding applications in foreign jurisdictions. We expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. We do not believe that any individual patent, or the expiration thereof, is or would be material to our business.

 

In May 2001, we signed a patent cross-license agreement with Intel Corporation, under which we granted each other a non-exclusive license under each party’s patents (other than design patents) for the manufacture and sale of semiconductor products worldwide. We pay Intel a royalty for certain licensed microprocessor products sold by us or any AMD affiliate anywhere in the world. The license terminates in January 2010. As part of the Spansion LLC transaction we entered into a patent cross-license agreement with Spansion LLC whereby each party has been granted a non-exclusive license under the other party’s respective licensed patents for the manufacture and sale of semiconductor products worldwide. In addition, Spansion LLC has granted us the right to sublicense Spansion LLC patents and patent applications. Spansion LLC has entered into a similar cross-license agreement (without the grant of sublicense rights) with Fujitsu Limited. These patent cross-license agreements terminate upon the later of July 1, 2013 or upon the transfer of all of the respective party’s ownership or economic interest in Spansion LLC, unless earlier terminated upon 30 days notice following a change of control of the other party. Effective June 30, 2003, we entered into a patent cross-license with Fujitsu Limited whereby each party has been granted a non-exclusive license under certain of the other party’s respective semiconductor-related patents. This patent cross-license agreement terminates upon the tenth anniversary of the agreement, unless earlier terminated upon 30 days notice following a change of control of the other party. In addition, we have entered into numerous cross-licensing and technology exchange agreements with other companies under which we both transfer and receive technology and intellectual property rights.

 

Backlog

 

We manufacture and market standard lines of products. Consequently, a significant portion of our sales are made from inventory on a current basis. Sales are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time, which orders or agreements may be revised or canceled without penalty. Generally, in light of current industry practice and experience, we do not believe that such agreements provide meaningful backlog figures or are necessarily indicative of actual sales for any succeeding period.

 

Employees

 

As of December 26, 2004, we had approximately 8,300 employees and Spansion LLC had approximately 7,600 employees. An aggregate of approximately 220 individuals remained employed by us or Fujitsu but were made available on a full-time basis to Spansion LLC or its subsidiaries. We expect that substantially all of these individuals will become employees of Spansion LLC or its subsidiaries in 2005. Certain employees of Spansion Japan are represented by a company union. We believe that our relationship with our employees is good.

 

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Properties

 

Our principal engineering, manufacturing, warehouse and administrative facilities (excluding Spansion LLC) comprise approximately 3.3 million square feet and are located in the United States, Germany, Singapore and Malaysia. Approximately 2.2 million square feet of this space is in buildings we own. We acquired approximately 90 acres of land in Dresden, Germany for Fab 30. In August 2004, we transferred 50 acres to AMD Fab 36 KG for Fab 36. Fab 36 and the land owned by AMD Fab 36 KG is encumbered by a lien securing AMD Fab 36 KG’s obligations under the Fab 36 Term Loan. For more detail regarding the Fab 36 Term Loan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Matters—Fab 36 Term Loan and Guarantee and Fab 36 Partnership Agreements.”

 

Spansion LLC’s principal engineering, manufacturing and administrative facilities comprise approximately four million square feet and are located in the United States, Japan, Malaysia, Thailand and China. Over 3.9 million square feet of this space is in buildings Spansion LLC owns. The remainder of this space is leased, primarily from us. Spansion LLC leases approximately 15 acres of land in Suzhou, China for its assembly and test facility. In addition, Spansion LLC also leases approximately 90 acres of land in Japan for its wafer fabrication facilities. Its Fab 25 facility in Austin, Texas is encumbered by a lien securing the July 2003 Spansion Term Loan. For more detail regarding the July 2003 Spansion Term Loan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—July 2003 Spansion Term Loan and Guarantee,” above.

 

In addition to principal engineering, manufacturing, warehouse and administrative facilities, we lease sales office facilities in 21 locations globally, totaling approximately 200,000 square feet. These facilities are generally located in commercial centers near our customers, principally in Latin America, Europe and the Asia Pacific region.

 

We have an operating lease on property containing two buildings with an aggregate of approximately 364,000 square feet, located on 45.6 acres of land in Sunnyvale, California (One AMD Place). This operating lease ends in December 2018. In 2000, we entered into a lease agreement for three buildings, totaling 175,000 square feet, located adjacent to One AMD Place, which we call AMD Square, to be used as engineering offices and lab facilities. During 2002, we determined that we no longer required AMD Square. As of December 28, 2003, AMD Square is vacant, and we are marketing it for sublease. During 2003, we also vacated approximately 75,000 square feet of leased administrative office space in Austin, Texas. We continue to have lease obligations with respect to these facilities ranging from 18 to 24 months, and we are marketing these facilities for sublease.

 

Our and Spansion LLC’s leases cover facilities with expiration terms of generally one to 20 years. We currently do not anticipate difficulty in either retaining occupancy of any of our facilities through lease renewals prior to expiration or through month-to-month occupancy, or replacing them with equivalent facilities.

 

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Manufacturing, Assembly and Test Facilities

 

Our microprocessor fabrication and Flash memory fabrication is conducted at the facilities described in the chart below:

 

Facility Location


  Wafer Size
(diameter in
millimeters)


  Production
Technology
(in nanometers)


  

Approximate

Clean Room

Square Footage


Microprocessor Products

         

Dresden, Germany

         

Fab 30

  200  90 and 130  150,000

Flash Memory Products

         

Austin, Texas

         

Fab 25

  200  110  120,000

Aizu-Wakamatsu, Japan

         

JV1

  200  230 and 320  70,000

JV2

  200  200 and 230  91,000

JV3

  200  110, 130 and 170  118,000

 

We are in the process of facilitizing Fab 36, which is located adjacent to Fab 30 and will be equipped to manufacture microprocessor products on 300-millimeter wafers at 65-nanometer geometries and below. We also announced plans to begin the construction of the clean room and facilitization of SP1, a 300-millimeter Flash memory fabrication facility which is adjacent to JV3. We also have foundry arrangements with third parties for the production of our embedded processor and chipset products.

 

The current assembly and test facilities for our microprocessor and Flash memory products are described in the chart set forth below:

 

Facility Location


  

Approximate
Facility

Square Footage


  Activity

Computation Products

      

Penang, Malaysia

  239,000(1) Assembly & Test

Singapore

  234,000(2) Test

Flash Memory Products

      

Bangkok, Thailand

  78,000  Assembly & Test

Kuala Lumpur, Malaysia

  71,300  Assembly & Test

Penang, Malaysia

  71,000  Assembly & Test

Suzhou, China

  30,250  Assembly & Test

(1)Of the total 239,000 square feet, approximately 127,000 square feet is devoted to administrative offices.
(2)Of the total 234,000 square feet, approximately 40,000 square feet is devoted to administrative and sales offices.

 

We are also in the process of constructing a microprocessor test facility in Suzhou, China. Some assembly and final testing of our microprocessor products is also performed by subcontractors in the United States and Asia, including Fujitsu’s final assembly and testing facility in Kyushu, Japan.

 

Spansion LLC

 

Effective June 30, 2003, we established Spansion LLC, our Flash memory majority owned subsidiary with Fujitsu Limited, in which we hold a 60 percent interest and Fujitsu holds the remaining 40 percent. Spansion LLC is managed by a ten-member board of managers of which we are currently entitled to appoint six managers and Fujitsu is entitled to appoint four managers. If either our or Fujitsu’s percentage interest falls below specified thresholds, the number of managers we or Fujitsu may appoint also decreases. Certain actions by Spansion LLC

 

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require Fujitsu’s consent for as long as Fujitsu maintains specified levels of equity interest in Spansion LLC. In addition, based upon specified thresholds of Fujitsu’s percentage interest in Spansion, certain actions require the affirmative vote of at least a majority of the managers appointed by Fujitsu. These actions include:

 

  major investments, acquisitions and dispositions of assets;

 

  a merger or consolidation resulting in the transfer of more than 50% of the equity interests;

 

  settlement of major legal proceedings and other actions;

 

  approval of certain material contracts between us and Spansion;

 

  changes to the equity capital structure of Spansion LLC; and

 

  winding-up Spansion LLC or one of its material subsidiaries.

 

For a description of certain financing arrangements for Spansion, see “Description of Certain Indebtedness—Spansion Japan Revolving Loan Agreement;—July 2003 Spansion Term Loan and Guarantee;—Spansion Japan Term Loan and Guarantee; and—Spansion China Loan.”

 

Raw Materials

 

Our manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and materials from a number of suppliers. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Because some equipment and material that we purchase is complex, it is sometimes difficult for us to substitute one supplier for another or one piece of equipment for another. In addition, certain raw materials we use in the manufacture of our products are available from a limited number of suppliers. For example, we are largely dependent on one supplier for our 200-millimeter and 300-millimeter silicon-on-insulator (SOI) wafers. Although there are alternative sources available for us to procure these wafers, we have not qualified these sources and do not believe that they currently have sufficient capacity to meet our requirements. We are also dependent on other key chemicals from a limited number of suppliers and also rely on a limited number of foreign companies to supply the majority of certain types of IC packages we purchase. Similarly, we purchase commercial non-Flash memory die, such as SRAM and pSRAM, from third-party suppliers and incorporate these die into Spansion multi-chip package products. Some of these suppliers are also our competitors. Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. If we are unable to procure certain of these materials, we may have to reduce our manufacturing operations. Such a reduction could have a material adverse effect on us.

 

In June 2002, we formed Advanced Mask Technology Center GmbH and Co. KG, or AMTC, and Maskhouse Building Administration GmbH and Co. KG, or BAC, two joint ventures with Infineon Technologies AG and Dupont Photomasks, Inc., for the purpose of constructing and operating an advanced photomask facility in Dresden, Germany. Photomasks are used during the production of ICs. The purpose of AMTC is to conduct research, development and pilot production of optical photomasks for advanced lithography technology. AMTC has commenced pilot production of optical photomasks and has provided test photomasks to Fab 30 for qualification. We intend to procure advanced photomasks from AMTC pursuant to the terms of our joint venture arrangement and use these photomasks in the manufacture of certain of our microprocessor products.

 

Environmental Regulations

 

Our operations are subject to various U.S. and foreign environmental statutes and regulations, including those relating to materials used in our products and manufacturing processes, discharge of pollutants into the air, water and soil, treatment, transport, storage and disposal of solid and hazardous wastes, and remediation of soil and groundwater contamination. From time to time, our facilities are subject to investigation by governmental regulators. We believe we are in material compliance with applicable environmental requirements, and do not expect those requirements to result in material expenditures in the foreseeable future.

 

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Certain environmental laws, including the U.S. Comprehensive Environmental Response Compensation and Liability Act of 1980, or the Superfund Act, and comparable state, local and foreign laws, impose strict and in certain circumstances joint and several liability for response costs, and impose liability for damages to natural resources, upon specified responsible parties, which include former owners and operators of sites designated for clean-up by environmental regulators.

 

We have been named as a responsible party under the Superfund Act at three sites in Sunnyvale, California.Since 1981, we have discovered hazardous material released to the groundwater from former underground tanks on our property. The chemicals released into the groundwater were commonly used in the semiconductor industry in the United States in the wafer fabrication process prior to 1979. We have proceeded to investigate and conduct remediation at these three sites. In 1991, we received four Final Site Clean-up Requirements Orders from the California Regional Water Quality Control Board relating to the three sites. We have entered into settlement agreements with other responsible parties on two of the orders. Under these agreements other parties have assumed the costs and primary responsibility for conducting remediation activities at two of the three sites subject to the orders. We remain responsible for the cost of completing these remediation activities in the event that the other parties do not fulfill their obligations under the settlement agreements.

 

To address anticipated future remediation costs under the orders, we have computed and recorded an estimated environmental liability of approximately $3.3 million in accordance with applicable accounting rules. We have not recorded any potential insurance recoveries in determining the estimated costs of the clean-up. The progress of future remediation efforts cannot be predicted with certainty, and these costs may change. Environmental charges to earnings have not been material during any of the last three fiscal years. We believe that the potential liability, if any, in excess of amounts already accrued, will not have a material adverse effect on our financial condition or results of operations.

 

In 1998, the U.S. Environmental Protection Agency (EPA) identified us as one of hundreds of “potentially responsible parties” under the Superfund Act as a result of disposal of waste at a regulated landfill in Santa Barbara County, California following the abandonment of the site by its owners and its designation as a Superfund site by the EPA. We have reached a settlement with the EPA and completed payment. However, the public notification, judicial review and issuance of a consent decree remain pending. The amount of the settlement did not have a material adverse effect on our financial condition or results of operations.

 

Legal Proceedings

 

We are a defendant or plaintiff in various other actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial condition or results of operations.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth certain information with respect to the persons currently serving as members of our board of directors and as our executive officers.

 

Name


  Age

  

Position


Hector de J. Ruiz

  59  Chairman of the Board of Directors, President and Chief Executive Officer

Bertrand Cambou

  49  Executive Vice President of AMD and President and Chief Executive Officer of Spansion LLC

William T. Edwards

  48  Senior Vice President, Chief Strategy Officer

Thomas M. McCoy

  54  Executive Vice President Legal Affairs and Chief Administrative Officer

Derrick R. Meyer

  43  Executive Vice President, Computation Products Group

Iain Morris

  48  Senior Vice President, Personal Connectivity Solutions

Henri Richard

  46  Executive Vice President, Worldwide Sales and Marketing

Robert J. Rivet

  50  Executive Vice President and Chief Financial Officer

W. Michael Barnes

  62  Director

Charles M. Blalack

  77  Director

R. Gene Brown

  71  Director

Bruce L. Claflin

  53  Director

H. Paulett Eberhart

  51  Director

David J. Edmondson

  45  Director

Robert B. Palmer

  64  Director

Leonard M. Silverman

  65  Director

 

Dr. Hector de J. Ruiz—Dr. Ruiz was appointed as our Chairman of the Board of Directors in April 2004 and he has been a director since February 2000. Dr. Ruiz is also our President and Chief Executive Officer. Dr. Ruiz joined AMD as President and Chief Operating Officer in January 2000 and became our Chief Executive Officer on April 25, 2002. From 1997 until joining AMD in January 2000, Dr. Ruiz served as President of the Motorola, Inc. Semiconductor Products Sector. From 1991 to 1995, Dr. Ruiz was Senior Vice President and General Manager of Motorola’s paging and messaging businesses and in 1996 he became Executive Vice President and General Manager of those businesses. From 1977, when Dr. Ruiz joined Motorola, to 1991, Dr. Ruiz held various executive positions in Motorola’s Semiconductor Products Sector. From 1972 to 1977, Dr. Ruiz worked at Texas Instruments, Inc. Dr. Ruiz is a member of the board of directors of Eastman Kodak Company.

 

Dr. Bertrand Cambou—Dr. Cambou is our Executive Vice President and President and Chief Executive Officer of our majority-owned subsidiary, Spansion LLC. Dr. Cambou joined us in January 2002 as Group Vice President, Memory Group. Dr. Cambou became an executive officer in February 2003. From February 2003 until June 2003, Dr. Cambou served as our Senior Vice President, Memory Group. From June 1999 to January 2002, Dr. Cambou was the Chief Operating Officer and a board member of Gemplus, a smartcard company, and a board member of Ingenico, a developer of terminals for secure e-transactions. Dr. Cambou was employed by Motorola from 1984 until May 1999, most recently as Senior Vice President and General Manager, Networking and Computing Systems within the Semiconductor Product Sector.

 

Dr. William T. Edwards—Dr. Edwards is our Senior Vice President, Chief Strategy Officer. Dr. Edwards joined us in 2002 as Vice President and General Manager, Personal Connectivity Solutions and was named to his current executive officer position in February 2004. Before joining AMD, Dr. Edwards was the Chief Executive Officer of Hesson Labs, Inc., a private fabless semiconductor company, focusing on high-speed CMOS networking devices from June 2001 until January 2002. Prior to that, Dr. Edwards was employed by Motorola for eight years. From June 2000 until April 2001, he was Senior Vice President and General Manager where he helped establish a new internal start-up creating compound semiconductors on silicon substrates, now known as ThoughtBeam. Dr. Edwards served as Senior Vice President and Director of Strategic Management of

 

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Motorola’s Semiconductor Product Sector from January 1997 until June 2000. Prior to that he was Vice President and Director of Motorola’s Corporate Strategy Office. Dr. Edwards’ career spans more than two decades in the high-tech industry, including nine years with The Boston Consulting Group and time with Technology Associates, Inc. and several medical equipment startups.

 

Thomas M. McCoy—Mr. McCoy is our Executive Vice President Legal Affairs and Chief Administrative Officer. From 1998 until December 2003, when he was appointed as Chief Administrative Officer, Mr. McCoy served as our Senior Vice President, General Counsel. From 1995 until April 2003, Mr. McCoy also served as our Secretary. From 1977 until joining us in 1995, Mr. McCoy was with the law firm of O’Melveny & Myers where he practiced law, first as an associate and then as a partner.

 

Derrick R. Meyer—Mr. Meyer is our Executive Vice President, Computation Products Group. Mr. Meyer joined AMD in 1995 and was Vice President of Engineering for the Computation Products Group before being promoted to Group Vice President, Computation Products Group, in 2001. In April 2002, Mr. Meyer became an executive officer of AMD and was promoted to Senior Vice President, Computation Products Group. Before joining us, Mr. Meyer was employed by Digital Equipment Corporation beginning in 1986 and by Intel Corporation from 1983 to 1986.

 

Iain Morris—Mr. Morris joined us in January 2004 as Senior Vice President, Personal Connectivity Solutions, and became an executive officer in February 2004. Before joining AMD, Mr. Morris was president of Hewlett-Packard Company’s Embedded and Personal System Organization from February 2001 until September 2002 and Senior Vice President Mobility and Emerging Technologies through August 2003. From 1978 until January 2001, Mr. Morris held various engineering and executive positions with Motorola, most recently as Senior Corporate Vice President and General Manager, North American Personal Communications Business from January 1999 to January 2001.

 

Henri Richard—Mr. Richard is our Executive Vice President of Worldwide Sales and Marketing. Mr. Richard joined AMD in April 2002 as Group Vice President, Worldwide Sales. He was promoted to Senior Vice President in May 2003 and became an executive officer in February 2004. From September 2000 until April 2002, Mr. Richard was Executive Vice President of Worldwide Field Operations at WebGain, Inc., a privately held provider of Java software for Fortune 500 companies. Mr. Richard was President of the Computer Products Group at Bell Microproducts from April 2000 to August 2000 and Vice President, Worldwide Sales and Support for IBM’s Technology Group from December 1997 to April 2000.

 

Robert J. Rivet—Mr. Rivet is our Executive Vice President and Chief Financial Officer. Mr. Rivet joined us in September 2000. Before joining us, he had served as Senior Vice President and Director of Finance of the Semiconductor Products Sector of Motorola since 1997. Mr. Rivet joined Motorola in 1976 as a senior financial analyst and senior accountant and from 1981 to 1997, he served in a number of positions in semiconductor operations.

 

Dr. W. Michael Barnes—Dr. Barnes has been a director since October 2003. Dr. Barnes served as Senior Vice President and Chief Financial Officer of Rockwell International Corporation, a diversified NYSE company, from 1991 until his retirement in 2001. Dr. Barnes joined Collins Radio Company in 1968 as a member of the corporate operations research staff. Collins was acquired by Rockwell in 1973, and Dr. Barnes held various management positions at Rockwell until 1991. He was named a distinguished alumnus by the Texas A&M University College of Engineering in 1992, is a member of the Texas A&M University Chancellor’s Century Council and is on the University’s Engineering Advisory Board. Dr. Barnes also serves on the board of directors of MetroPCS.

 

Charles M. Blalack—Mr. Blalack has been a director since 1989. Mr. Blalack has been Chairman of the Board and Chief Executive Officer of Blalack and Company, a registered investment advisor since 1969. From 1970 until 1991, Mr. Blalack was Chief Executive Officer of Blalack-Loop, Inc., an investment banking firm and member of the National Association of Securities Dealers. Prior to 1970, he was founder, Chairman and Chief Executive Officer of BW & Associates, an investment banking firm and member of the New York Stock

 

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Exchange. Mr. Blalack was a member of the board of directors of Monolithic Memories, Inc. until it was acquired by AMD in 1987, and currently serves on the board of several early-stage companies.

 

Dr. R. Gene Brown—Dr. Brown has been a director since 1969. Since 2000, Dr. Brown has been an independent private investor and financial management consultant. From 1998 to 2000, he was a director of Hagler Bailly, Inc., a consulting firm. Dr. Brown was a non-employee Managing Director of Putnam, Hayes & Bartlett, Inc., an economic and management consulting firm, from 1975 to 1998, when it was acquired by Hagler Bailly, Inc. From 1961 to 1968, Dr. Brown was a full-time professor in the graduate schools of business at Harvard University and then Stanford University. From 1968 to 1974, Dr. Brown was Vice President of Corporate Development for Syntex Corporation, and from 1974 to 1976, Dr. Brown was President of Berkeley BioEngineering.

 

Bruce L. Claflin—Mr. Claflin has been a director since August 2003. Since January 2001, Mr. Claflin has served as President, Chief Executive Officer, and a member of the board of directors of 3Com Corporation, a provider of voice and data networking products and services. He joined 3Com as President and Chief Operating Officer in August 1998. Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, sales and marketing for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he held various sales, marketing and management positions, including general manager of the IBM PC Company’s worldwide R&D, product and brand management, as well as president of IBM PC Company Americas. Previously, Mr. Claflin served on the board of directors of Time Warner Telecom.

 

H. Paulett Eberhart—Ms. Eberhart has been a director since April 2004. From 2003 until she retired in March 2004, Ms. Eberhart served as President—Americas at Electronic Data Systems Corporation, an information technology and business process outsourcing company. Ms. Eberhart had been an employee of EDS since 1978. Prior to her position as President—Americas, she was Senior Vice President—EDS and President—Solutions Consulting. She was also a member of the Executive Operations Team and Investment Committee of EDS. From 2001 to 2002, Ms. Eberhart served as Senior Vice President, Information Solutions, U.S. and from 1999 to 2001 as Senior Vice President, Information Solutions, Southwest Region. In 1998, she was Senior Vice President, Finance. During this time she was a member of the board of directors of AT Kearney, a subsidiary of EDS. Between 1978 and 1998, Ms. Eberhart served in various management positions in the area of Finance at EDS. Ms. Eberhart served as the chair of the Political Action Committee for EDS and is a member of the Financial Executives Institute and American Institute of Certified Public Accountants. Ms. Eberhart serves as a member of the board of directors of Anadarko Petroleum Corporation and Solectron Corporation.

 

David J. Edmondson—Mr. Edmondson was appointed as a director on October 27, 2004. Mr. Edmondson is the President and Chief Executive Officer-elect of RadioShack Corporation. Mr. Edmondson also serves as a member of the board of directors of RadioShack. He joined RadioShack in 1994 as Vice President of Marketing. Before 2000, when he was named President and Chief Operating Officer, he served as Senior Vice President of RadioShack and Executive Vice President/Chief Operating Officer of the RadioShack Retail Division. Prior to joining RadioShack, Mr. Edmondson served for 12 years in a variety of sales and marketing roles for ADVO, Inc., the largest database and direct marketing company in the nation.

 

Robert B. Palmer—Mr. Palmer has been a director since 1999. Mr. Palmer was the Chairman and Chief Executive Officer of Digital Equipment Corporation from 1995 until his retirement in 1998. Mr. Palmer was appointed Chief Executive Officer and President of Digital in October 1992. From 1985 to 1992, Mr. Palmer served in various executive positions at Digital. Before Digital, Mr. Palmer was Executive Vice President of Semiconductor Operations at United Technologies Corporation (UTC), joining UTC in 1980 when it acquired Mostek Corporation, where he had been a member of the team that founded the company in 1969. Mr. Palmer is on the Board of Trustees of the Cooper Institute for Aerobic Research, a non-profit preventative medicine research and education organization.

 

Dr. Leonard M. Silverman—Dr. Silverman has been a director since 1994. Dr. Silverman was Dean of the School of Engineering of the University of Southern California from 1984 until June 2001. He currently holds the Fred O’Green Chair in Engineering at the same institution. He was elected to the National Academy of Engineering in 1988 and is a Fellow of the Institute of Electrical and Electronic Engineers. Dr. Silverman is a member of the board of directors of Statmon Technologies.

 

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DESCRIPTION OF CERTAIN INDEBTEDNESS

 

AMD Revolving Credit Facility

 

Our revolving credit facility provides for a secured revolving line of credit of up to $100 million that expires in July 2007. We can borrow, subject to amounts set aside by the lenders, up to 85 percent of our eligible accounts receivable from OEMs and 50 percent of our eligible accounts receivable from distributors. As of the date of this prospectus, no borrowings were outstanding under our revolving credit facility.

 

Pursuant to the terms of our revolving credit facility, as amended, we have to comply with, among other things, the following financial covenants if our net domestic cash (as defined in our revolving credit facility) declines below $125 million:

 

  comply with restrictions on our ability to pay cash dividends on our common stock;

 

  maintain an adjusted tangible net worth (as defined in our revolving credit facility) as follows:

 

Measurement Date


  Amount

   (in billions)

Last day of each fiscal quarter in 2004

  $1.425

Last day of each fiscal quarter in 2005

   1.850

Last day of each fiscal quarter thereafter

   2.000

 

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

 

Period


  Amount

   (in millions)

Four fiscal quarters ending September 30, 2004

  $850

Four fiscal quarters ending December 31, 2004

   950

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

   1,050

 

As of September 26, 2004, net domestic cash, as defined, totaled $333 million and the preceding financial covenants were not applicable. Our obligations under our revolving credit facility are secured by all of our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds, excluding Spansion LLC’s accounts receivable, inventory, and general intangibles.

 

Spansion Japan Revolving Loan Agreement

 

In March 2004, Spansion Japan entered into a revolving credit facility agreement with certain Japanese financial institutions in the aggregate amount of 15 billion yen (approximately $136 million as of September 26, 2004). The revolving facility consists of two tranches: tranche A in the aggregate amount of up to nine billion yen (approximately $81 million as of September 26, 2004) and tranche B in the aggregate amount of up to six billion yen (approximately $54 million as of September 26, 2004). Spansion Japan can draw under the facility until March 24, 2005. However, as described in more detail below, the total amount that Spansion Japan can draw is limited based on the value of Spansion Japan’s accounts receivable from Fujitsu, which are pledged as security to the lenders.

 

Amounts borrowed under tranche A bear interest at a rate of TIBOR plus 0.55 percent. Amounts borrowed under tranche B bear interest at a rate of TIBOR plus 1.2 percent. Spansion Japan must first fully draw under tranche A prior to drawing amounts under tranche B. Borrowings must be used for working capital purposes and must be repaid no later than April 24, 2005. As of the date of this prospectus, there were no borrowings outstanding under this facility.

 

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Pursuant to the terms of the revolving credit facility agreement, Spansion Japan is required to comply with the following financial covenants:

 

  ensure that assets exceed liabilities as of the end of each fiscal year and each six-month (mid-year) period;

 

  maintain an adjusted tangible net worth (as defined in the agreement) at an amount not less than 60 billion yen (approximately $542 million as of September 26, 2004) as of the last day of each fiscal quarter;

 

  maintain total net income plus depreciation of $213 million, as of the last day of fiscal year 2004: and

 

  ensure that as of the last day of each of the third and fourth quarter of 2004, the ratio of (a) net income plus depreciation to (b) the sum of interest expenses plus the amount of scheduled debt repayments plus capital expenditures for its facilities located in Aizu-Wakamatsu, Japan, for such period, is not less than 120%.

 

As of September 26, 2004, Spansion Japan was in compliance with these financial covenants.

 

As security for amounts outstanding under the revolving facility, Spansion Japan pledged its accounts receivable from Fujitsu. The accounts receivable are held in trust pursuant to the terms of a trust agreement. Under the trust agreement, Spansion Japan is required to maintain the value of its accounts receivable at specified thresholds (as defined by the trust agreement), based upon the amounts outstanding under tranche A and tranche B. In addition, the trustee collects payments from Fujitsu into a separate trust account and releases these amounts to Spansion Japan, subject to the calculated thresholds, upon instruction from the agent for the lenders. At any time when the accounts receivable balance in the trust account is less than the required thresholds, Spansion Japan is required to do one of the following to cure the shortfall:

 

  provide additional cash to the trust, or

 

  repay a specified portion of the outstanding loans.

 

Amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Spansion Japan, including: filings or proceedings in bankruptcy, failure to pay any obligations under the revolving credit facility that have become due, failure to pay other third-party indebtedness where such debt exceeds 200 million yen (approximately $2 million as of September 26, 2004), or if the value of the accounts receivable from Fujitsu held in trust is below the required thresholds and such shortfall is not remedied within three business days. In addition, amounts outstanding under the revolving credit facility may become automatically due and payable upon the occurrence of specified events with respect to Fujitsu including: filings or proceedings in bankruptcy, default by Fujitsu with respect to payments to Spansion Japan or other obligations under their purchase and sale agreement, default by Fujitsu with respect to other third-party indebtedness where such debt exceeds one billion yen (approximately $9 million as of September 26, 2004). As of September 26, 2004, the amount of accounts receivable held in the trust was approximately $176 million.

 

Because most amounts under the Spansion Japan Revolving Loan are denominated in yen, the U.S. dollar amounts stated above are subject to change based on applicable exchange rates. We used the exchange rate as of September 26, 2004, of 110.625 yen to one U.S. dollar, to translate the amounts denominated in yen into U.S. dollars.

 

4.75% Convertible Senior Debentures Due 2022

 

On January 29, 2002, we issued $500 million of our 4.75% Debentures in a private offering pursuant to Rule 144A and Regulation S of the Securities Act. The interest rate payable on the 4.75% Debentures will reset on August 1, 2008, August 1, 2011 and August 1, 2016 to a rate equal to the interest rate payable 120 days prior to the reset dates on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4.75 percent and will not exceed 6.75 percent. Holders have the right to require us to repurchase all or a portion of our

 

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4.75% Debentures on February 1, 2009, February 1, 2012, and February 1, 2017. The holders of the 4.75% Debentures also have the ability to require us to repurchase the 4.75% Debentures in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.75% Debentures plus accrued and unpaid interest. The 4.75% Debentures are convertible by the holders into our common stock at a conversion price of $23.38 per share at any time. At this conversion price, each $1,000 principal amount of the 4.75% Debentures will be convertible into approximately 43 shares of our common stock. Issuance costs incurred in the amount of approximately $14 million are amortized ratably, which approximates the effective interest method, over the term of the 4.75% Debentures, as interest expense.

 

Beginning on February 5, 2005, the 4.75% Debentures are redeemable by us for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest at our option, provided that we may not redeem the 4.75% Debentures prior to February 5, 2006, unless the last reported sale price of our common stock is at least 130 percent of the then effective conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date of the redemption notice.

 

The redemption prices for the specified periods are as follows:

 

Period


  

Price as a

Percentage of

Principal Amount


 

Beginning on February 5, 2005 through February 4, 2006

  102.375%

Beginning on February 5, 2006 through February 4, 2007

  101.583 

Beginning on February 5, 2007 through February 4, 2008

  100.792 

Beginning on February 5, 2008

  100.000 

 

We may elect to purchase or otherwise retire our 4.75% Debentures with cash, stock or other assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries when we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

 

4.50% Convertible Senior Notes Due 2007

 

On November 25, 2002, we sold $402.5 million of the 4.50% Notes in a registered offering. Interest on the 4.50% Notes is payable semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2003. Beginning on December 4, 2005, the 4.50% Notes are redeemable by us at our option for cash at specified prices expressed as a percentage of the outstanding principal amount plus accrued and unpaid interest provided that we may not redeem the 4.50% Notes unless the last reported sale price of our common stock is at least 150 percent of the then effective conversion price for at least 20 trading days within a period of 30 trading days ending within five trading days of the date of the redemption notice.

 

The redemption prices for the specified periods are as follows:

 

Period


  

Price as a

Percentage of

Principal Amount


 

Beginning on December 4, 2005 through November 30, 2006

  101.800%

Beginning on December 1, 2006 through November 30, 2007

  100.900 

On December 1, 2007

  100.000 

 

The 4.50% Notes are convertible at the option of the holder at any time prior to the close of business on the business day immediately preceding the maturity date of December 1, 2007, unless previously redeemed or repurchased, into shares of common stock at a conversion price of $7.37 per share, subject to adjustment in

 

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certain circumstances. At this conversion price, each $1,000 principal amount of the 4.50% Notes will be convertible into approximately 135 shares of our common stock. Issuance costs incurred in the amount of approximately $12 million are amortized ratably, over the term of the 4.50% Notes, as interest expense, approximating the effective interest method.

 

Holders have the right to require us to repurchase all or a portion of our 4.50% Notes in the event that we undergo specified fundamental changes, including a change of control. In each such case, the redemption or repurchase price would be 100 percent of the principal amount of the 4.50% Notes plus accrued and unpaid interest.

 

On October 22, 2004, we exchanged $70 million of our 4.50% Notes plus accrued and unpaid interest, for 10,550,000 shares of our common stock. On November 8, 2004, we exchanged $60 million of our 4.50% Notes for 8,748,612 shares of our common stock. On November 18, 2004, we exchanged $71 million of our 4.50% Notes for 10,092,649 shares of our common stock. For more information, see “Other Financial Matters—Section 3(a)(9) Exchange.”

 

We may elect to purchase or otherwise retire our 4.50% Notes with cash, stock or other assets from time to time in the open market or privately negotiated transactions, either directly or through intermediaries, or by tender offer, when we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

 

July 2003 Spansion Term Loan and Guarantee

 

Under our July 2003 Spansion Term Loan, as amended, amounts borrowed bear interest at a variable rate of LIBOR plus four percent, which was 5.98 percent at September 26, 2004. Repayment occurs in equal, consecutive, quarterly principal and interest installments ending in September 2006. As of September 26, 2004, $51 million was outstanding under the July 2003 Spansion Term Loan, of which 60 percent is guaranteed by us and 40 percent is guaranteed by Fujitsu. Spansion LLC granted a security interest in certain property, plant and equipment as security under the July 2003 Spansion Term Loan. In addition, as security for our guarantee obligations, we granted a security interest in certain of our assets, including our accounts receivable, inventory, general intangibles (excluding intellectual property) and the related proceeds.

 

Pursuant to the terms of the July 2003 Spansion Term Loan, Spansion LLC is required to comply with the following financial covenants during an enhanced period which occurs if either Spansion LLC’s net domestic cash balance (as defined in the July 2003 Spansion Term Loan) as of the last day of any fiscal quarter is below $60 million or if its net worldwide cash balance (as defined in the July 2003 Spansion Term Loan) as of the last day of any fiscal quarter is below $130 million:

 

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

 

  achieve EBITDA according to the following schedule:

 

Period


  Amount

   (in millions)

For the four quarters ending December 2004

  $550

For the four quarters ending in 2005

   640

For the four quarters ending in 2006

   800

 

  maintain a fixed charge coverage ratio (as defined in the July 2003 Spansion Term Loan) according to the following schedule:

 

Period


  Ratio

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

 

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During an enhanced covenant period, Spansion LLC is restricted in its ability to pay cash dividends in respect of membership interests. As of September 26, 2004, Spansion LLC’s net domestic cash totaled $80 million and its net worldwide cash was $284 million. Because Spansion LLC was not in an enhanced covenant period, the preceding financial covenants were not applicable.

 

Spansion Japan Term Loan and Guarantee

 

As a result of the Spansion LLC transaction, the third-party loans of FASL were refinanced from the proceeds of a term loan entered into between Spansion Japan, which owns the assets of FASL, and a Japanese financial institution. Under the agreement, the amounts borrowed bear an interest rate of TIBOR plus a spread that is determined by Fujitsu’s current debt rating and Spansion Japan’s non-consolidated net asset value as of the last day of its fiscal year. The interest rate was 0.98 percent as of September 26, 2004. Repayment occurs in equal, consecutive, quarterly principal installments ending in June 2007. As of September 26, 2004, approximately $130 million was outstanding under this term loan agreement. Spansion Japan’s assets are pledged as security for its borrowings under this agreement. Also, Fujitsu has guaranteed 100 percent of the amounts outstanding under this facility. We agreed to reimburse Fujitsu 60 percent of any amount paid by Fujitsu under its guarantee of this loan. Under this loan agreement, Spansion Japan is required to comply with the following financial covenants:

 

  ensure that assets exceed liabilities as of the end of each fiscal year and each six month period during such fiscal year;

 

  maintain an adjusted tangible net worth (as defined in the loan agreement), as of the last day of each fiscal quarter, of not less than 60 billion yen (approximately $542 million based on the exchange rate as of September 26, 2004);

 

  maintain total net income plus depreciation, as of the last day of each fiscal period, as follows:

 

Period


  Amount

   (in millions)

Fiscal year 2004

  $207

Fiscal year 2005

   191

Fiscal year 2006

   176

 

  ensure that as of the last day of any fiscal quarter, the ratio of (a) net income plus depreciation to (b) the sum of (i) interest expense for such period plus (ii) scheduled amortization of debt for borrowed money (as defined in the loan agreement) for such period, including lease rentals plus (iii) maintenance capital expenditures for Spansion Japan’s existing and after acquired real property and improvements at its manufacturing facilities located in Aizu-Wakamatsu, Japan, is not less than:

 

Period


  Percentage

 

Third and fourth fiscal quarters of 2004

  120%

Fiscal year 2005

  120 

Fiscal year 2006

  120 

 

As of September 26, 2004, Spansion Japan was in compliance with these financial covenants.

 

Because most amounts under the Spansion Japan Term Loan are denominated in yen, the U.S. dollar amounts are subject to change based on applicable exchange rates. We used the exchange rate as of September 26, 2004 of 110.625 yen to one U.S. dollar to translate the amounts denominated in yen into U.S. dollars.

 

Fujitsu Cash Note

 

As a result of the Spansion LLC transaction, Fujitsu loaned $40 million to Spansion LLC pursuant to a promissory note. The note bears an interest rate of LIBOR plus four percent, which was 5.98 percent as of

 

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September 26, 2004, and has a term of three years. The note is repayable in four equal payments, including interest, on September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006.

 

AMD Penang Term Loan

 

On January 29, 2004, our subsidiary in Malaysia, AMD Export Sdn. Bhd., or AMD Penang, entered into a term loan agreement with a local financial institution. Under the terms of the loan agreement, AMD Penang can borrow up to 30 million Malaysian Ringgit (approximately $8 million as of September 26, 2004) in order to fund the purchase of equipment. The loan bears a fixed annual interest rate of 5.9 percent and is payable in equal, consecutive, monthly principal and interest installments through February 2009. The total amount outstanding as of September 26, 2004 was approximately $7 million.

 

Spansion China Loan

 

Spansion China, Spansion LLC’s subsidiary in the People’s Republic of China, entered into two revolving loan agreements with a local financial institution. Under the terms of the revolving foreign exchange loan agreement, Spansion China can borrow in U.S. dollars up to an amount of $18 million. Under the terms of the revolving Renminbi (RMB) loan agreement, Spansion China can borrow up to RMB 120 million (approximately $14.5 million as of September 26, 2004). The interest rate on the U.S. dollar-denominated loans is LIBOR plus one percent and the interest rate on the RMB-denominated loans is fixed at 4.779 percent. The maximum term of each loan is 12 months from the date of each drawdown. As of September 26, 2004, the total amount outstanding under the U.S. dollar-denominated loan was approximately $5.5 million and the amount outstanding under the RMB-denominated portion was approximately $7.9 million.

 

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DESCRIPTION OF THE NOTES

 

We issued the private notes, and will issue the exchange notes, pursuant to an indenture (the “Indenture”), dated as of October 29, 2004, by and between us and Wells Fargo Bank, N.A., as trustee (the “Trustee”). For purposes of this description, the private notes and the exchange notes will be generally referred to as the “Notes,” unless the context otherwise requires.

 

You can find the definitions of certain terms used in this description under the subheading “—Certain Definitions.” In this description, the words “we,” “our,” or “us” refer only to Advanced Micro Devices, Inc., and not to any of its subsidiaries.

 

The following description is a summary of the material provisions of the Indenture. It does not restate that agreement in its entirety. We urge you to read the Indenture because it contains additional information and defines your rights as a holder of the Notes. A copy of the Indenture is available upon request to us at the address indicated under “Where You Can Obtain Additional Information.”

 

Principal, Maturity and Interest

 

We will issue an aggregate principal amount of $600,000,000 million of exchange notes in the exchange offer. The Indenture provides for the issuance of additional notes having identical terms and conditions to the notes (the “Additional Notes”), subject to compliance with the covenants contained in the Indenture, including without limitation the provisions set forth under “—Certain Covenants—Limitation on Debt.” Any Additional Notes will be part of the same issue as the Notes and will vote on all matters with the Notes.

 

The Notes will mature on November 1, 2012.

 

Interest on the Notes accrues at a rate of 7.75% per annum and will be payable semi-annually in arrears on May 1 and November 1, commencing on May 1, 2005. We will pay interest to those persons who were holders of record of the Notes on April 15 or October 15 immediately preceding each interest payment date.

 

Interest on the Notes accrues from the date of original issuance or, if interest has already been paid, from the date it was most recently paid. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

 

Ranking

 

The Notes are our general unsecured senior obligations. The Notes:

 

  rankpari passu with all of our current and future unsecured senior Debt;

 

  are effectively subordinated to all of our existing and future secured Debt, to the extent of the value of the assets securing such Debt;

 

  are effectively subordinated to our Debt that has been guaranteed by our Subsidiaries with respect to the assets and earnings of those Subsidiaries, including Spansion;

 

  are structurally subordinated to all existing and future Debt and other liabilities, including trade payables, of our Subsidiaries, including Spansion; and

 

  are senior in right of payment to all of our Subordinated Obligations, if any.

 

As September 26, 2004, after giving effect to the issuance of the Notes and the application of the net proceeds therefrom:

 

  we would have had consolidated Debt of $2,024 million, approximately $1,503 million of which would have constituted Debt directly borrowed (or issued) by us, and approximately $521 million of which would have constituted Debt directly borrowed (or issued) by one or more of our Subsidiaries;

 

  of the Debt directly borrowed (or issued) by us as described above, none of such Debt would have been secured or guaranteed by any of our Subsidiaries;

 

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  of the Debt directly borrowed (or issued) by one or more of our Subsidiaries as described above, approximately $213 million of such Debt would have been guaranteed by us of which approximately $31 million would have been secured by assets of ours;

 

  in addition to the Debt described above, we would have had other liabilities as would be shown on our consolidated balance sheet of approximately $1,869 million, approximately $1,100 million of which would have constituted other liabilities of our Subsidiaries; and

 

  in addition to the Debt and other liabilities described above, we and/or our Subsidiaries would have guaranteed approximately $178 million of obligations, which guarantees are not reflected as Debt or other liabilities on our consolidated balance sheet.

 

Furthermore, as of September 26, 2004, we have available up to $100 million for future secured borrowings under a revolving credit facility. We and our Subsidiaries may incur additional Debt (including secured and guaranteed Debt) and other liabilities in the future.

 

We conduct a substantial portion of our operations through our Subsidiaries, including Spansion. The claims of creditors (including trade creditors) of any Subsidiary will generally have priority as to the assets of such Subsidiary over the claims of holders of the Notes. In the event of a liquidation of any of our Subsidiaries, our right to receive the assets of any such Subsidiary (and the resulting right of the Holders of the Notes to participate in the distribution of the proceeds of those assets) will be effectively subordinated by operation of law to the claims of creditors (including trade creditors) of such Subsidiary and holders of such Subsidiary’s Preferred Stock and any Guarantees by such Subsidiary of our Debt. If we were a creditor of such Subsidiary or a holder of its Preferred Stock, we would be entitled to participate in the distribution of the proceeds of such Subsidiary’s assets. Our claims would, however, remain subordinate to any Debt or Preferred Stock of such Subsidiary which is senior in right of payment to the Debt or Preferred Stock held by us. In the event of the liquidation, bankruptcy, reorganization, insolvency, receivership or similar proceedings or any assignment for the benefit of our creditors or a marshaling of our assets or liabilities, holders of the Notes may receive ratably less than other such creditors or interest holders.

 

We derived approximately 27 percent of our consolidated net sales for the year ended December 28, 2003 and 48 percent of our consolidated net sales for the nine months ended September 26, 2004 from our Unrestricted Subsidiaries, including Spansion. Under the terms of the Indenture, Spansion LLC and its Subsidiaries will, from and after the Issue Date, constitute Unrestricted Subsidiaries under, and as defined in, the Indenture, even though certain Debt of Spansion and its Subsidiaries (x) will not be Non-Recourse Debt and (y) could cause cross-defaults to our Debt and our Restricted Subsidiaries. Pursuant to the Indenture, Spansion and its Subsidiaries, as Unrestricted Subsidiaries, will not be subject to the covenants or certain Events of Default applicable to us and our Restricted Subsidiaries. As of September 26, 2004, we and our Restricted Subsidiaries had made loans to Spansion and its Subsidiaries in an aggregate amount equal to $357 million and had guaranteed indebtedness of Spansion and its Subsidiaries in an aggregate amount equal to $213 million.

 

Optional Redemption

 

Except as set forth below, the Notes will not be redeemable at our option prior to November 1, 2008. Starting on that date, we may redeem all or any portion of the Notes, at once or over time, after giving the required notice under the Indenture. The Notes may be redeemed at the redemption prices set forth below, plus accrued and unpaid interest, to but excluding the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). The following prices are for Notes redeemed during the 12-month period commencing on November 1 of the years set forth below, and are expressed as percentages of principal amount:

 

Year


  

Redemption

Price


 

2008

  103.875%

2009

  101.938 

2010 and thereafter

  100.000 

 

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In addition, at any time and from time to time prior to November 1, 2008, we may elect to redeem all or any portion of the Notes, after giving the notice required under the Indenture, at a redemption price equal to the sum of:

 

(1) 100% of the principal amount of Notes to be redeemed; and

 

(2) the excess of

 

(a) the sum of the present values of (1) the redemption price of the Notes to be redeemed at November 1, 2008 (as set forth in the prior paragraph), and (2) the remaining scheduled payments of interest from the redemption date to November 1, 2008, but excluding accrued and unpaid interest to the redemption date, discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, over

 

(b) 100% of the principal amount of the Notes to be redeemed,

 

plus accrued and unpaid interest to but excluding the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

 

In addition, at any time and from time to time, prior to November 1, 2007, we may redeem up to a maximum of 35% of the aggregate principal amount of the Notes (including any Additional Notes) with the proceeds of one or more Qualified Equity Offerings, at a redemption price equal to 107.75% of the principal amount, plus accrued and unpaid interest, to but excluding the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date);provided,however, that after giving effect to any such redemption, at least 65% of the aggregate principal amount of the Notes (including any Additional Notes) remains outstanding. Any such redemption shall be made within 90 days of such Qualified Equity Offering upon not less than 30 nor more than 60 days’ prior notice.

 

Selection and Notice

 

If less than all of the Notes are to be redeemed at any time, the Trustee will select Notes for redemption on a pro rata basis (with such adjustments as may be deemed appropriate by the Trustee so that only Notes in denominations of $1,000, or integral multiples thereof shall be purchased);provided, that no Notes of $1,000 or less may be redeemed in part.

 

Notices of redemption will be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at its registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the Notes or a satisfaction and discharge of the Indenture. Notices of redemption may not be conditional.

 

If any Note is to be redeemed in part only, the notice of redemption that relates to that Note will state the portion of the principal amount of that Note that is to be redeemed. A new Note in principal amount equal to the unredeemed portion of the original Note will be issued in the name of the holder of the original Note upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption.

 

Sinking Fund

 

There will be no mandatory sinking fund payments for the Notes.

 

Repurchase at the Option of Holders Upon a Change of Control

 

Upon the occurrence of a Change of Control, each holder of Notes shall have the right to require us to repurchase all or any part of such holder’s Notes pursuant to the offer described below (the “Change of Control Offer”) at a purchase price (the “Change of Control Purchase Price”) equal to 101% of the principal amount

 

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thereof, plus accrued and unpaid interest, if any, to but excluding the repurchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date);provided, however, that notwithstanding the occurrence of a Change of Control, we shall not be obligated to purchase the Notes pursuant to this covenant in the event that it has mailed the notice to exercise its right to redeem all the Notes under the terms of the covenant entitled “—Optional Redemption” at any time prior to the requirement to consummate the Change of Control Offer and redeems the notes in accordance with such notice.

 

Within 30 days following any Change of Control, we shall:

 

(a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States; and

 

(b) send, by first-class mail, with a copy to the Trustee, to each holder of Notes, at such holder’s address appearing in the Note register, a notice stating:

 

(1) that a Change of Control has occurred and a Change of Control Offer is being made pursuant to the covenant entitled “Repurchase at the Option of Holders Upon a Change of Control” and that all Notes timely tendered will be accepted for payment;

 

(2) the Change of Control Purchase Price and the repurchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed;

 

(3) the circumstances and relevant facts regarding the Change of Control; and

 

(4) the procedures that holders of Notes must follow in order to tender their Notes (or portions thereof) for payment, and the procedures that holders of Notes must follow in order to withdraw an election to tender Notes (or portions thereof) for payment.

 

We will not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by us and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer.

 

We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this covenant, we will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue of such compliance.

 

Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that we would decide to do so in the future. Subject to certain covenants described below, we could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of Debt outstanding at such time or otherwise affect our capital structure or credit ratings.

 

The definition of Change of Control includes a phrase relating to the sale, transfer, assignment, lease, conveyance or other disposition of “all or substantially all” our Property and the Property of our Restricted Subsidiaries, considered as a whole. Although there is a developing body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, if we and our Restricted Subsidiaries, considered as a whole, dispose of less than all this Property by any of the means described above, the ability of a holder of Notes to require us to repurchase our Notes may be uncertain. In such a case, holders of the Notes may not be able to resolve this uncertainty without resorting to legal action.

 

The existing Credit Facilities contain, and our future Debt or the future Debt of our Subsidiaries may contain, limitations on certain events that would constitute a Change of Control or require such Debt to be

 

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repurchased upon a Change of Control. Moreover, the exercise by holders of Notes of their right to require us to repurchase such Notes could cause a default under our or our Subsidiaries’ existing or future Debt, even if the Change of Control itself does not. In addition, our ability to pay cash to holders of Notes upon a repurchase may be limited by our then existing financial resources. We cannot assure you that sufficient funds will be available when necessary to make any required repurchases. Our failure to repurchase Notes in connection with a Change of Control would result in a default under the Indenture. Such a default would, in turn, constitute a default under our existing Debt and may constitute a default under future Debt as well. Our obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified at any time prior to the occurrence of such Change of Control with the written consent of the holders of at least a majority in aggregate principal amount of the Notes. See “—Amendments and Waivers.” See also “Risk Factors—Risks Related to the Notes—In the event of a change of control, we may not be able to repurchase the notes as required by the indenture, which would result in a default under the indenture.”

 

Certain Covenants

 

Covenant Suspension. During any period of time that:

 

(a) the Notes have Investment Grade Ratings from both Rating Agencies; and

 

(b) no Default or Event of Default has occurred and is continuing under the Indenture,

 

we and our Restricted Subsidiaries will not be subject to the following provisions of the Indenture:

 

  “—Limitation on Debt;”

 

  “—Limitation on Restricted Payments;”

 

  “—Limitation on Asset Sales;”

 

  “—Limitation on Restrictions on Distributions from Restricted Subsidiaries;”

 

  “—Limitation on Transactions with Affiliates;”

 

  “—Repurchase at the Option of Holders Upon a Change of Control;”

 

  clauses (a) and (b) of the first paragraph and clause (x) of the fifth paragraph of “—Designation of Restricted and Unrestricted Subsidiaries;” and

 

  clause (d) of the first paragraph of “—Merger, Consolidation and Sale of Property”

 

(collectively, the “Suspended Covenants”). In the event that we and our Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, subsequently, one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the Notes below the required Investment Grade Ratings or a Default or Event of Default occurs and is continuing, then we and our Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal, downgrade, Default or Event of Default will be calculated in accordance with the terms of the covenant described below under “—Limitation on Restricted Payments” as though such covenant had been in effect during the entire period of time from the Issue Date.

 

Limitation on Debt. We shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds therefrom, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either:

 

(1) after giving effect to the Incurrence of such Debt and the application of the proceeds thereof, the Consolidated Fixed Charge Coverage Ratio would be at least 2.0 to 1.0; or

 

(2) such Debt is Permitted Debt.

 

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The term “Permitted Debt” is defined to include the following:

 

(a) our Debt evidenced by the private notes (excluding any Additional Notes) issued in the private offering and any exchange notes issued in exchange for the private notes (excluding any Additional Notes) pursuant to the Registration Rights Agreement;

 

(b) our Debt or Debt of a Restricted Subsidiary under Credit Facilities,providedthat the aggregate principal amount of all such Debt under Credit Facilities at any one time outstanding shall not exceed $2,250 million;

 

(c) our Debt or Debt of a Restricted Subsidiary in respect of Capital Lease Obligations and Purchase Money Debt,provided that:

 

(1) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased; and

 

(2) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred and then outstanding in respect of Debt previously Incurred pursuant to this clause (c)) does not exceed 15% of Total Assets;

 

(d) our Debt owing to and held by any Restricted Subsidiary and Debt of a Restricted Subsidiary owing to and held by us or any Restricted Subsidiary;provided, that if we are the obligor on such Debt Incurred after the Issue Date, then such Debt is expressly subordinated by its terms to the prior payment in full in cash of the Notes;provided,however, that any subsequent issue or transfer of Capital Stock or other event that results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Debt (except to us or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof;

 

(e) Debt of a Restricted Subsidiary outstanding on the date on which such Restricted Subsidiary is acquired by us or otherwise becomes a Restricted Subsidiary (other than Debt Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of transactions pursuant to which such Restricted Subsidiary became our Subsidiary or was otherwise acquired by us);

 

(f) Debt under Interest Rate Agreements entered into us or a Restricted Subsidiary for the purpose of managing interest rate risk in the ordinary course of our financial management or such Restricted Subsidiary and not for speculative purposes;

 

(g) Debt under Currency Exchange Protection Agreements entered into by us or a Restricted Subsidiary for the purpose of managing currency exchange rate risks in the ordinary course of business and not for speculative purposes;

 

(h) Guarantees by us or any Restricted Subsidiary of Debt or any other obligation or liability of ours or any Restricted Subsidiary that we or such Restricted Subsidiary could otherwise have Incurred pursuant to this covenant;

 

(i) Debt in connection with one or more standby letters of credit or performance or surety bonds issued by us or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit not to exceed 2.5% of Total Assets at any time outstanding;

 

(j) our Debt or Debt of a Restricted Subsidiary outstanding on the Issue Date not otherwise described in clauses (a) through (i) above;

 

(k) our Debt or Debt of a Restricted Subsidiary in an aggregate principal amount outstanding at any one time not to exceed $500.0 million which amount can include Guarantees of Debt of Unrestricted Subsidiaries, provided such Guarantee is Incurred in compliance with the covenant described under “—Limitation on Restricted Payments;”

 

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(l) Guarantees by us or any Restricted Subsidiary of Debt of Spansion and its Subsidiaries, provided that such Guarantees do not exceed $500.0 million in the aggregate at any one time outstanding, andprovided, further that such Guarantees are Incurred in compliance with the covenant described under “—Limitation on Restricted Payments;” and

 

(m) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (1) of the first paragraph of this covenant and clauses (a), (c), (e) and (j) above and this clause (m).

 

Notwithstanding anything to the contrary in this covenant:

 

(a) we shall not Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such Debt shall be subordinated to the Notes to at least the same extent as such Subordinated Obligations;

 

(b) we shall not permit any Restricted Subsidiary to Incur any Debt pursuant to clause (2) of this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any of our Debt; and

 

(c) accrual of interest, accretion or amortization of original issue discount and the payment of interest or dividends in the form of additional Debt will be deemed not to be an Incurrence of Debt for the purposes of this covenant.

 

For purposes of determining compliance with this covenant, in the event that an item of Debt meets the criteria of more than one of the categories of Permitted Debt described in clauses (a) through (m) above or is entitled to be incurred pursuant to clause (1) of the first paragraph of this covenant, we shall, in our sole discretion, classify (or later reclassify in whole or in part, in its sole discretion) such item of Debt in any manner that complies with this covenant;provided,that any Debt outstanding under Credit Facilities after the application of the net proceeds from the sale of the Notes will be treated as Incurred on the Issue Date under clause (b) above.

 

For purposes of determining compliance with any dollar-denominated restriction on the Incurrence of Debt, with respect to any Debt which is denominated in a foreign currency, the dollar-equivalent principal amount of such Debt Incurred pursuant thereto shall be calculated based on the relevant currency exchange rate in effect on the date that such Debt was Incurred, and any such foreign-denominated Debt may be Refinanced or replaced or subsequently Refinanced or replaced in an amount equal to the dollar equivalent principal amount of such Debt on the date of such refinancing or replacement whether or not such amount is greater or less than the dollar equivalent principal amount of the Debt on the date of initial incurrence.

 

Limitation on Restricted Payments. We shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving effect to, such proposed Restricted Payment,

 

(a) a Default or Event of Default shall have occurred and be continuing,

 

(b) we could not Incur at least $1.00 of additional Debt pursuant to clause (1) of the first paragraph of the covenant described under “—Limitation on Debt,” or

 

(c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value at the time of such Restricted Payment) would exceed an amount equal to the sum of:

 

(1) 50% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recently ended fiscal quarter for which internal financial statements are available (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit), plus

 

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(2) 100% of Capital Stock Sale Proceeds, plus

 

(3) the sum of:

 

(A) the aggregate net cash proceeds received by us or any Restricted Subsidiary from the issuance or sale after the Issue Date of convertible or exchangeable Debt or Disqualified Stock that has been converted into or exchanged for our Capital Stock (other than Disqualified Stock), and

 

(B) the aggregate amount by which our Debt (other than Subordinated Obligations) or Debt of any Restricted Subsidiary is reduced on our consolidated balance sheet on or after the Issue Date upon the conversion or exchange of any such Debt issued or sold on or prior to the Issue Date that is convertible or exchangeable for our Capital Stock (other than Disqualified Stock),

 

excluding, in the case of clause (A) or (B):

 

(x) any such Debt issued or sold to us or one of our Subsidiaries or an employee stock ownership plan or trust established by us or any such Subsidiary for the benefit of their employees, and

 

(y) the aggregate amount of any cash or other Property (other than our Capital Stock which is not Disqualified Stock) distributed by us or any Restricted Subsidiary upon any such conversion or exchange, plus

 

(4) an amount equal to the sum of:

 

(A) the net reduction in Investments in any Person other than us or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to us or a Restricted Subsidiary from such Person;

 

(B) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the cash return of capital to us or our Restricted Subsidiaries with respect to such Restricted Investment; and

 

(C) the portion (proportionate to our equity interest in such Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary;

 

provided,however, that the amounts in (A), (B) and (C) shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by us or any Restricted Subsidiary in such Person, plus

 

(5) $100.0 million.

 

Notwithstanding the foregoing limitation, we and our Restricted Subsidiaries, as applicable, may:

 

(a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on the declaration date, such dividends could have been paid in compliance with the Indenture; provided, however, that such dividend shall be included in the calculation of the amount of Restricted Payments at the time declared;

 

(b) purchase, repurchase, redeem, legally defease, acquire or retire for value our Capital Stock or Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, our Capital Stock (other than Disqualified Stock and other than Capital Stock issued or sold to one of our Subsidiaries or an employee stock ownership plan or trust established by us or any such Subsidiary for the benefit of their employees);provided,however, that

 

(1) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments, and

 

(2) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(2) above;

 

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(c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt;provided,however, that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments;

 

(d) repurchase shares of, or options to purchase shares of, our common stock or any of our Subsidiaries from our current or former officers, directors or employees or any of our Subsidiaries (or permitted transferees of such current or former officers, directors or employees), pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock; provided, however, that:

 

(1) the aggregate amount of such repurchases shall not exceed $10.0 million in any calendar year; and

 

(2) at the time of such repurchase, no other Default or Event of Default shall have occurred and be continuing (or result therefrom);

 

provided further, however, that such repurchases shall be excluded in the calculation of the amount of Restricted Payments;

 

(e) make payments on intercompany Debt, the Incurrence of which was permitted pursuant to the covenant described under “—Limitation on Debt;”provided that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments made after the Issue Date;

 

(f) make cash payments, in lieu of issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for our Capital Stock or that of a Restricted Subsidiary;provided that any such payments and dividends shall not be included in the calculation of the amount of Restricted Payments;

 

(g) repurchase Capital Stock to the extent such repurchase is deemed to occur upon a cashless exercise of stock options or warrants;provided that all such repurchases and dividends shall not be included in the calculation of the amount of Restricted Payments and no proceeds in respect of the issuance of Capital Stock shall be deemed to have been received for the purposes of clause (c)(2) above;

 

(h) repurchase or redeem, for nominal consideration, preferred stock purchase rights issued in connection with our shareholder rights plan;provided that any such payments shall not be included in the calculation of the amount of Restricted Payments;

 

(i) make payments to the limited partners (that are not our Affiliates) of AMD Fab 36 Limited Liability Company & Co. KG (“AMD Fab 36 KG”) under the partnership agreements of AMD Fab 36 KG dated April 21, 2004, as such agreements may be amended from time to time;

 

(j) purchase, repurchase, redeem or acquire the interests of the limited partners (that are not our Affiliates) of AMD Fab 36 KG, including the silent partnership interests and the partnership interests, under the partnership agreements of AMD Fab 36 KG dated April 21, 2004, as such agreements may be amended from time to time; and

 

(k) other Restricted Payments in an aggregate amount not to exceed $100.0 million.

 

Limitation on Liens. We shall not directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens) upon any of our Property (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless we have made or will make effective provision whereby the Notes will be secured by such Lien equally and ratably with (or, if such other Debt constitutes Subordinated Obligations, prior to) all our other Debt or other obligations secured by such Lien for so long as such other Debt or other obligations are secured by such Lien;provided, however, that if the Debt or other obligations so secured are expressly subordinated to the Notes, then the Lien securing such Debt or other obligations shall be subordinated and junior to the Lien securing the Notes.

 

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Limitation on Asset Sales. We shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:

 

(a) we receive or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale;

 

(b) at least 75% of the consideration paid to us or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash or Cash Equivalents; and

 

(c) we deliver an Officers’ Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (a) and (b).

 

Solely for the purposes of clause (b) above of this “Asset Sales” provision, the following will be deemed to be cash:

 

(x) the assumption by the purchaser of our liabilities or the liabilities of any Restricted Subsidiary (other than contingent liabilities or liabilities that are by their terms subordinated to the Notes) as a result of which we and the Restricted Subsidiaries are no longer obligated with respect to such liabilities;

 

(y) any securities, notes or other obligations received by us or any such Restricted Subsidiary from such purchaser to the extent they are promptly converted or monetized by us or such Restricted Subsidiary into cash (to the extent of the cash received); and

 

(z) Additional Assets.

 

The Net Available Cash (or any portion thereof) from Asset Sales may be applied by us or a Restricted Subsidiary, to the extent we or such Restricted Subsidiary elects (or is required by the terms of any Debt) to:

 

(a) permanently prepay or permanently repay any (1) Debt under any Credit Facility, (2) Debt evidenced by the Convertible Notes, (3) Debt which had been secured by the assets sold in the relevant Asset Sale, and (4) Debt of a Restricted Subsidiary; and/or

 

(b) to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by us or another Restricted Subsidiary).

 

Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 365 days from the date of the receipt of such Net Available Cash shall constitute “Excess Proceeds.”

 

When the aggregate amount of Excess Proceeds exceeds $25.0 million (taking into account income earned on such Excess Proceeds, if any), we will be required to make an offer to repurchase (the “Prepayment Offer”) the Notes, which offer shall be in the amount of the Allocable Excess Proceeds (rounded to the nearest $1,000), on apro rata basis according to principal amount, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, to but not including the repurchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence andprovidedthat all holders of Notes have been given the opportunity to tender their Notes for repurchase in accordance with the Indenture, we or such Restricted Subsidiary may use such remaining amount for any purpose permitted by the Indenture, and the amount of Excess Proceeds will be reset to zero.

 

The term “Allocable Excess Proceeds” shall mean the product of:

 

(a) the Excess Proceeds; and

 

(b) a fraction,

 

(1) the numerator of which is the aggregate principal amount of the Notes outstanding on the date of the Prepayment Offer, and

 

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(2) the denominator of which is the sum of the aggregate principal amount of the Notes outstanding on the date of the Prepayment Offer and the aggregate principal amount of our other Debt outstanding on the date of the Prepayment Offer that ispari passuin right of payment with the Notes and subject to terms and conditions in respect of Asset Sales similar in all material respects to this covenant and requiring us to make an offer to repurchase such Debt at substantially the same time as the Prepayment Offer.

 

Within five business days after we are obligated to make a Prepayment Offer as described in the preceding paragraph, we shall send a written notice, by first-class mail, to the holders of Notes, accompanied by such information regarding us and our Subsidiaries as we in good faith believe will enable such holders to make an informed decision with respect to such Prepayment Offer. Such notice shall state, among other things, the purchase price and the repurchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed.

 

We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, we will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof.

 

Limitation on Restrictions on Distributions from Restricted Subsidiaries. We shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to:

 

(a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to us or any other Restricted Subsidiary;

 

(b) make any loans or advances to us or any other Restricted Subsidiary; or

 

(c) transfer any of its Property to us or any other Restricted Subsidiary.

 

The foregoing limitations will not apply:

 

(1) with respect to clauses (a), (b) and (c), to restrictions:

 

(A) in effect on the Issue Date (including, without limitation, restrictions pursuant to the Notes, the Indenture, and any Credit Facility in existence on the Issue Date);

 

(B) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by us;

 

(C) that result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (1)(A) or (B) above or in clause (2)(A) or (B) below,providedsuch restrictions are not materially less favorable, taken as a whole, to the holders of Notes than those under the agreement evidencing the Debt so Refinanced;

 

(D) relating to Debt incurred after the Issue Date, so long as such restrictions (x) are not materially less favorable, taken as whole, to the holders of Notes than those restrictions in effect on the Issue Date pursuant to the Notes, the Indenture and the Credit Facilities in existence on the Issue Date or (y) relate to Debt incurred pursuant to clause (c) of the definition of Permitted Debt contained herein, so long as the respective restrictions apply only to specific Property or projects financed with the respective Incurrence of Debt and/or to any Subsidiary substantially of all whose assets consist of Property or a project financed with proceeds of such Debt;

 

(E) existing under or by reason of applicable law or governmental regulation; or

 

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(F) that constitute customary restrictions contained in joint venture agreements, asset sale agreements, sale-leaseback agreements, stock sale agreements and other similar agreements entered into in good faith and not otherwise prohibited by the Indenture; and

 

(2) with respect to clause (c) only, to restrictions:

 

(A) relating to Debt that is permitted to be Incurred and secured without also securing the Notes pursuant to the covenants described under “—Limitation on Debt” and “—Limitation on Liens” that limit the right of the debtor to dispose of the Property securing such Debt;

 

(B) encumbering Property at the time such Property was acquired by us or any Restricted Subsidiary, so long as such restrictions relate solely to the Property so acquired and were not created in connection with or in anticipation of such acquisition;

 

(C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder;

 

(D) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; or

 

(E) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale.

 

Limitation on Transactions with Affiliates.We shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of related transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of ours (an “Affiliate Transaction”), unless:

 

(a) the terms of such Affiliate Transaction are:

 

(1) set forth in writing; and

 

(2) no less favorable to us or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of ours;

 

(b) if such Affiliate Transaction involves aggregate payments or value in excess of $25.0 million, the Board of Directors (including at least a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction and, in its good faith judgment, believes that such Affiliate Transaction complies with clause (a)(2) of this paragraph as evidenced by a resolution of the Board of Directors; and

 

(c) if such Affiliate Transaction involves aggregate payments or value in excess of $50.0 million, we obtain a written opinion from an Independent Financial Advisor to the effect that the consideration to be paid or received in connection with the such Affiliate Transaction is fair, from a financial point of view, to us and any relevant Restricted Subsidiaries.

 

Notwithstanding the foregoing limitation, we or any Restricted Subsidiary may enter into or suffer to exist the following:

 

(a) any transaction or series of transactions between us and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries;

 

(b) any Restricted Payment permitted to be made pursuant to the covenant described under “—Limitation on Restricted Payments” or any Permitted Investment;

 

(c) any employment, indemnification or other similar agreement or employee benefit plan entered into by us or a Restricted Subsidiary with an employee, officer or director (and payments pursuant thereto) in the ordinary course of business and consistent with past practice that is not otherwise prohibited by the Indenture;

 

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(d) loans and advances to employees made in the ordinary course of business consistent with our past practices or the past practices of a Restricted Subsidiary, as the case may be;provided that such loans and advances do not exceed $10.0 million in the aggregate at any one time outstanding;

 

(e) payment of reasonable directors’ fees to persons who are not otherwise our Affiliates;

 

(f) any issuances our of Capital Stock (other than Disqualified Stock) to our Affiliates; and

 

(g) agreements (and the transactions contemplated thereunder) in effect on the Issue Date and any modifications, extensions or renewals thereto that are not materially less favorable, taken as a whole, to us or any Restricted Subsidiary than such agreements as in effect on the Issue Date.

 

Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any one of our Subsidiaries to be an Unrestricted Subsidiary if:

 

(a) either (1) we are or a Restricted Subsidiary is, as the case may be, permitted to make an Investment in such Subsidiary equal to the sum of the (A) Fair Market Value of the Capital Stock of such Subsidiary plus (B) the amount of any Debt owed by such Subsidiary to us, in each case pursuant to the first paragraph of the covenant under the caption “—Limitation on Restricted Payments,” or (2) such Investment constitutes a Permitted Investment;

 

(b) immediately after giving pro forma effect to such designation, we could Incur at least $1.00 of additional Debt pursuant to clause (1) of the first paragraph of the covenant described under “—Limitation on Debt;” and

 

(c) such Subsidiary does not own any of our Capital Stock or Debt, or own or hold any Lien on any of our Property, or the Property of any Restricted Subsidiary, and does not have any Debt other than Non-Recourse Debt.

 

Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of ours will be classified as a Restricted Subsidiary;provided, however, that such Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if such Person is a Subsidiary of an Unrestricted Subsidiary.

 

Notwithstanding anything to the contrary contained herein, Spansion and its Subsidiaries shall constitute Unrestricted Subsidiaries on and after the Issue Date (unless redesignated as Restricted Subsidiaries by us after the Issue Date in accordance with this covenant), and their designation as Unrestricted Subsidiaries (made pursuant to the definition thereof contained herein) shall not be required to meet any of the tests described in the first paragraph of this covenant and shall not constitute a Restricted Payment hereunder.

 

Except as provided in the first sentence of the first paragraph of this covenant, and except as provided in the immediately preceding paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary, and neither we nor any Restricted Subsidiary shall at any time be directly or indirectly liable for any Debt (other than Debt pursuant to the Indenture) that provides that the holder thereof may (with the passage of time or notice or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its Stated Maturity upon the occurrence of a default with respect to any Debt, Lien or other obligation of any Unrestricted Subsidiary other than Spansion and its Subsidiaries (including any right to take enforcement action against any such Unrestricted Subsidiary (other than Spansion and its Subsidiaries)).

 

The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation,

 

(x) we could Incur at least $1.00 of additional Debt pursuant to clause (1) of the first paragraph of the covenant described under “—Limitation on Debt,” and

 

(y) no Default or Event of Default shall have occurred and be continuing or would result therefrom.

 

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Any such designation or redesignation by the Board of Directors will be evidenced to the Trustee by filing with the Trustee a resolution of the Board of Directors giving effect to such designation or redesignation and an Officers’ Certificate that:

 

(a) certifies that such designation or redesignation complies with the foregoing provisions; and

 

(b) gives the effective date of such designation or redesignation,

 

such filing with the Trustee to occur within 60 days after the end of our fiscal quarter in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of our fiscal year, within 90 days after the end of such fiscal year).

 

Merger, Consolidation and Sale of Property

 

We shall not merge or consolidate with or into any other Person (other than a merger of a Wholly Owned Restricted Subsidiary and us) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all our Property (other than sales, transfers, assignments, leases, conveyances or dispositions to a Wholly Owned Restricted Subsidiary) in any one transaction or series of transactions unless:

 

(a) we shall be the Surviving Person in such merger or consolidation, or the Surviving Person (if other than us) formed by such merger or consolidation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia;

 

(b) the Surviving Person (if other than us) expressly assumes, by supplemental indenture in form reasonably satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of the Indenture to be performed by us;

 

(c) immediately before and after giving effect to such transaction or series of transactions on apro formabasis (and treating, for purposes of this clause (c) and clause (d) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing;

 

(d) immediately after giving effect to such transaction or series of transactions on apro formabasis, (x) we or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (1) of the first paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” or (y) the Consolidated Fixed Charge Coverage Ratio for us or the Surviving Person would be greater than such ratio immediately prior to such transaction or series of transactions; and

 

(e) we shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction or series of transactions have been satisfied.

 

The Surviving Person shall succeed to, and be substituted for, and may exercise our every right and power under the Indenture;provided that the predecessor company in the case of:

 

(a) a sale, transfer, assignment, conveyance or other disposition of all or substantially all of its Property (unless such sale, transfer, assignment, conveyance or other disposition is of all our Property as an entirety or virtually as an entirety), or

 

(b) a lease,

 

shall not be released from any of the obligations or covenants under the Indenture, including with respect to the payment of the Notes.

 

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Payments for Consents

 

We will not, and will not permit any of our Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

 

SEC Reports

 

Notwithstanding that we may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, we shall file with the Commission and provide the Trustee and holders of Notes with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and reports to be so filed with the Commission and provided at the times specified for the filing of such information, documents and reports under such Sections;provided, however, that we shall not be so obligated to file such information, documents and reports with the Commission if the Commission does not permit such filings.

 

Events of Default

 

Events of Default in respect of the Notes include:

 

(1) failure to make the payment of any interest on the Notes when the same becomes due and payable, and such failure continues for a period of 30 days;

 

(2) failure to make the payment of any principal of, or premium, if any, on, any of the Notes when the same becomes due and payable at its Stated Maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise;

 

(3) failure to comply with the covenant described under “—Merger, Consolidation and Sale of Property;”

 

(4) failure to comply with any other covenant or agreement in the Notes or in the Indenture (other than a failure that is the subject of the foregoing clause (1), (2) or (3)), and such failure continues for 45 days after written notice is given to us as provided below;

 

(5) a default under any Debt by us or any Restricted Subsidiary that results in acceleration of the maturity of such Debt, or failure to pay any such Debt at maturity, in an aggregate amount greater than $50.0 million or its foreign currency equivalent at the time (the “cross acceleration provisions”);

 

(6) any judgment or judgments for the payment of money in an aggregate amount in excess of $50.0 million (or its foreign currency equivalent at the time) that shall be rendered against us or any Significant Subsidiary and that shall not be waived, satisfied or discharged for any period of 60 consecutive days during which a stay of enforcement shall not be in effect (the “judgment default provisions”); and

 

(7) certain events involving bankruptcy, insolvency or reorganization by us or any Significant Subsidiary (the “bankruptcy provisions”).

 

A Default under clause (4) is not an Event of Default until the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding notify us of the Default and we do not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a “Notice of Default.”

 

We shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers’ Certificate of any event that with the giving of notice or the lapse of time or both would become an Event of Default, its status and what action we are taking or propose to take with respect thereto.

 

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If an Event of Default with respect to the Notes (other than an Event of Default resulting from certain events involving bankruptcy, insolvency or reorganization with respect to us) shall have occurred and be continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the principal amount of all the Notes then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization with respect to us shall occur, such amount with respect to all the Notes shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of the Notes. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the Trustee, the holders of at least a majority in aggregate principal amount of the Notes then outstanding may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the Indenture.

 

Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of the Notes, unless such holders shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the holders of at least a majority in aggregate principal amount of the Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Notes.

 

No holder of Notes will have any right to institute any proceeding with respect to the Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless:

 

(a) such holder has previously given to the Trustee written notice of a continuing Event of Default;

 

(b) the holders of at least 25% in aggregate principal amount of the Notes then outstanding have made a written request and offered reasonable indemnity to the Trustee to institute such proceeding as trustee; and

 

(c) the Trustee shall not have received from the holders of at least a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days.

 

However, such limitations do not apply to a suit instituted by a holder of any Note for enforcement of payment of the principal of, and premium, if any, or interest on, such Note on or after the respective due dates expressed in such Note.

 

No Personal Liability of Directors, Officers, Employees and Stockholders

 

No director, officer, employee, incorporator or stockholder of ours, as such, will have any liability for any of our obligations under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. The waiver may not be effective to waive liabilities under federal securities laws.

 

Amendments and Waivers

 

Subject to certain exceptions, we and the Trustee with the consent of the holders of at least a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for the Notes) may amend the Indenture and the Notes, and the holders of at least a majority in aggregate principal amount of the Notes outstanding may waive any past Default or compliance with any provisions of the Indenture and the Notes (except a Default in the payment of principal, premium, interest, and certain covenants and provisions of the Indenture which cannot be amended without the consent of each holder of an outstanding Note). However, without the consent of each affected holder of an outstanding Note, no amendment may, among other things:

 

(1) reduce the amount of Notes whose holders must consent to an amendment or waiver;

 

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(2) reduce the rate of, or extend the time for payment of, interest on any Note;

 

(3) reduce the principal of, or extend the Stated Maturity of, any Note;

 

(4) make any Note payable in money other than that stated in the Note;

 

(5) impair the right of any holder of the Notes to receive payment of principal of, premium, if any, and interest on, such holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder’s Notes;

 

(6) release any security interest that may have been granted in favor of the holders of the Notes other than pursuant to the terms of such security interest;

 

(7) subordinate the Notes to any of our other obligations;

 

(8) reduce the premium payable upon the redemption of any Note or change the time at which any Note may be redeemed, as described under “—Optional Redemption;”

 

(9) reduce the premium payable upon a Change of Control or, at any time after a Change of Control has occurred, change the time at which the Change of Control Offer relating thereto must be made or at which the Notes must be repurchased pursuant to such Change of Control Offer;provided,that, prior to the occurrence of a Change of Control, the holders of a majority in aggregate principal amount of the Notes then outstanding may waive the requirement to complete a Change of Control Offer; or

 

(10) at any time after we are obligated to make a Prepayment Offer with the Excess Proceeds from Asset Sales, change the time at which such Prepayment Offer must be made or at which the Notes must be repurchased pursuant thereto.

 

The Indenture and the Notes may be amended by us and the Trustee without the consent of any holder of the Notes to:

 

(1) cure any ambiguity, omission, defect or inconsistency in any manner that is not adverse in any material respect to any holder of the Notes;

 

(2) provide for the assumption by a Surviving Person of our obligations under the Indenture;

 

(3) provide for uncertificated Notes in addition to or in place of certificated Notes (providedthat the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code);

 

(4) add Guarantees with respect to the Notes;

 

(5) secure the Notes, add to our covenants for the benefit of the holders of the Notes or surrender any right or power conferred upon us;

 

(6) make any change that does not adversely affect the rights of any holder of the Notes;

 

(7) comply with any requirement of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act; or

 

(8) provide for the issuance of Additional Notes in accordance with the Indenture.

 

The consent of the holders of the Notes is not necessary to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment becomes effective, we are required to mail to each holder of the Notes at such holder’s address appearing in the Security Register a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes, or any defect therein, will not impair or affect the validity of the amendment.

 

Defeasance

 

We at any time may terminate all our obligations under the Notes and the Indenture (“legal defeasance”), except for certain obligations, including those respecting the defeasance trust and obligations to register the

 

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transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. We at any time may terminate:

 

(1) our obligations under the covenants described under “—Repurchase at the Option of Holders Upon a Change of Control” and “—Certain Covenants;”

 

(2) the operation of the cross acceleration provisions, the judgment default provisions, the bankruptcy provisions with respect to Significant Subsidiaries described under “—Events of Default” above; and

 

(3) the limitation contained in clause (d) under the first paragraph of “—Merger, Consolidation and Sale of Property” above (“covenant defeasance”).

 

We may exercise our legal defeasance option notwithstanding our prior exercise of our covenant defeasance option.

 

If we exercise our legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If we exercise our covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (4) (with respect to the covenants described under “—Repurchase at the Option of Holders Upon a Change of Control” and “—Certain Covenants”), (5), (6) or (7) (with respect only to Significant Subsidiaries) under “—Events of Default” above or because of our failure to comply with clause (d) under the first paragraph of “—Merger, Consolidation and Sale of Property” above.

 

The legal defeasance option or the covenant defeasance option may be exercised only if:

 

(a) we irrevocably deposit in trust with the Trustee money or U.S. Government Obligations for the payment of principal of, premium, if any, and interest on the Notes to maturity or redemption, as the case may be;

 

(b) we deliver to the Trustee a certificate from a nationally recognized investment bank, appraisal firm or firm of independent certified public accountants expressing their opinion that the payments of principal, premium, if any, and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal, premium, if any, and interest when due on all the Notes to be defeased to maturity or redemption, as the case may be;

 

(c) 123 days pass after the deposit is made, and during the 123-day period, no Default described in clause (7) under “—Events of Default” occurs with respect to us or any other Person making such deposit which is continuing at the end of the period;

 

(d) no Default or Event of Default has occurred and is continuing on the date of such deposit and after giving effect thereto;

 

(e) such deposit does not constitute a default under any other material agreement or material instrument binding on us;

 

(f) we deliver to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940;

 

(g) in the case of the legal defeasance option, we deliver to the Trustee an Opinion of Counsel stating that:

 

(1) we have received from the Internal Revenue Service a ruling; or

 

(2) since the date of the Indenture there has been a change in the applicable U.S. federal income tax law,

 

to the effect, in either case, that, and based thereon such Opinion of Counsel shall confirm that, the holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such

 

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defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same time as would have been the case if such defeasance has not occurred;

 

(h) in the case of the covenant defeasance option, we deliver to the Trustee an Opinion of Counsel to the effect that the holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and

 

(i) we deliver to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes have been complied with as required by the Indenture.

 

Satisfaction and Discharge

 

The Indenture will be discharged and will cease to be of further effect as to all notes issued thereunder, when:

 

(a) either:

 

(1) all Notes that have been authenticated, except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has been deposited in trust and thereafter repaid to us, have been delivered to the Trustee for cancellation; or

 

(2) all Notes that have not been delivered to the Trustee for cancellation have become due and payable by reason of the mailing of a notice of redemption or otherwise or will become due and payable within one year, and we have irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the holders, cash in U.S. dollars, U.S. Government Obligations, or a combination of cash in U.S. dollars and U.S. Government Obligations, in such amounts as will be sufficient without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness on the Notes not delivered to the trustee for cancellation for principal, premium and accrued interest to the date of maturity or redemption;

 

(b) no Default or Event of Default has occurred and is continuing on the date of the deposit or will occur as a result of the deposit and the deposit will not result in a breach or violation of, or constitute a default under, any other instrument to which we are a party or by which we are bound;

 

(c) we have paid or caused to be paid all sums payable by it under the Indenture; and

 

(d) we have delivered irrevocable instructions to the Trustee under the Indenture to apply the deposited money toward the payment of the Notes at maturity or the redemption date, as the case may be.

 

In addition, we must deliver an Officers’ Certificate and an Opinion of Counsel to the Trustee stating that all conditions precedent to satisfaction and discharge have been satisfied.

 

Governing Law

 

The Indenture and the Notes are governed by the internal laws of the State of New York without reference to principles of conflicts of law.

 

The Trustee

 

Wells Fargo Bank, N.A. is the Trustee under the Indenture.

 

Except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such

 

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of the rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs.

 

Certain Definitions

 

Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. Unless the context otherwise requires, an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP.

 

Additional Assets” means:

 

(a) any Property (other than cash, Cash Equivalents and securities) to be owned by us or any Restricted Subsidiary and used in a Related Business;

 

(b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by us or another Restricted Subsidiary from any Person other than us or our Affiliate;provided, however, that such Restricted Subsidiary is primarily engaged in a Related Business; or

 

(c) Capital Stock of a Permitted Joint Venture; provided, however, that the acquisition of such Capital Stock complies with the covenant described under “—Certain Covenants—Limitation on Restricted Payments.”

 

Affiliate” of any specified Person means:

 

(a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; or

 

(b) any other Person who is a director or executive officer of:

 

(1) such specified Person;

 

(2) any Subsidiary of such specified Person; or

 

(3) any Person described in clause (a) above.

 

For the purposes of this definition, “control,” when used with respect to any Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

Asset Sale” means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by us or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a “disposition”), of

 

(a) any shares of Capital Stock of a Restricted Subsidiary (other than directors’ qualifying shares), or

 

(b) any of our other Property or that of a Restricted Subsidiary outside of the ordinary course of our business or the ordinary course of business of such Restricted Subsidiary,

 

other than, in the case of clause (a) or (b) above,

 

(1) any disposition by a Restricted Subsidiary to us or by us or a Restricted Subsidiary to a Restricted Subsidiary,

 

(2) any disposition that constitutes a Permitted Investment or Restricted Payment permitted by the covenant described under “—Certain Covenants—Limitation on Restricted Payments,”

 

(3) any disposition effected in compliance with the first paragraph of the covenant described under “—Merger, Consolidation and Sale of Property,”

 

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(4) the sale or other disposition of cash or Cash Equivalents,

 

(5) the exchange of assets held by us or a Restricted Subsidiary for assets held by any Person (including Capital Stock of such Person), provided that (i) the assets received by us or such Restricted Subsidiary in any such exchange will immediately constitute, be part of or be used in a Related Business, and (ii) any such assets received are of a comparable Fair Market Value to the assets exchanged,

 

(6) any disposition in a single transaction or a series of related transactions of assets for aggregate consideration of less than $10.0 million, and

 

(7) any disposition of surplus, discontinued, damaged or worn-out equipment or other immaterial assets no longer used in the ongoing business of us and our Restricted Subsidiaries.

 

Attributable Debt” in respect of a Sale and Leaseback Transaction means, at any date of determination,

 

(a) if such Sale and Leaseback Transaction is a Capital Lease Obligation, the amount of Debt represented thereby according to the definition of “Capital Lease Obligations,” and

 

(b) in all other instances, the present value (discounted at the interest rate implicit in such transaction, determined in accordance with GAAP) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended).

 

Average Life” means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing:

 

(a) the sum of the product of the numbers of years (rounded to the nearest one-twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by

 

(b) the sum of all such payments.

 

Board of Directors” means our board of directors.

 

Business Day” means day other than a Saturday, Sunday or other day on which commercial banking institutions in New York City are authorized or required by law to close.

 

Capital Lease Obligations” means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of “—Certain Covenants—Limitation on Liens,” a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased.

 

Capital Stock” means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest.

 

“Capital Stock Sale Proceeds” means the aggregate cash proceeds received by us from the issuance or sale (other than to one of our Subsidiaries or an employee stock ownership plan or trust established by us or any such Subsidiary for the benefit of their employees) by us of our Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

 

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Cash Equivalents” means any of the following:

 

(a) United States dollars or euros;

 

(b) Investments in U.S. Government Obligations maturing within 365 days of the date of acquisition thereof;

 

(c) certificates of deposit and eurodollar time deposits with maturities of 12 months or less from the date of acquisition, bankers’ acceptances with maturities not exceeding 12 months and overnight bank deposits, in each case with any domestic commercial bank or any commercial bank in a member state of the European Union, in each case, having capital and surplus in excess of $500.0 million;

 

(d) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (b) and (c) above entered into with any financial institution meeting the qualifications specified in clause (c) above;

 

(e) commercial paper, having the highest rating obtainable from Moody’s Investors Service, Inc. or Standard & Poor’s Rating Services and in each case maturing within one year after the date of acquisition; and

 

(f) money market funds at least 90% of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (e) of this definition.

 

Change of Control” means the occurrence of any of the following events:

 

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act, except that a person will be deemed to have “beneficial ownership” of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the total voting power of our Voting Stock; or

 

(b) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all our Property and the Property of the Restricted Subsidiaries, considered as a whole (other than a disposition of such Property as an entirety or virtually as an entirety to a Wholly Owned Restricted Subsidiary, shall have occurred) or we merge or consolidate with or into any other Person or any other Person merges or consolidates with or into us, in any such event pursuant to a transaction in which our outstanding Voting Stock is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where:

 

(1) our outstanding Voting Stock is reclassified into or exchanged for other Voting Stock of ours or for Voting Stock of the Surviving Person; and

 

(2) the holders of our Voting Stock immediately prior to such transaction own, directly or indirectly, not less than a majority of our Voting Stock or the Surviving Person immediately after such transaction and in substantially the same proportion as before the transaction; or

 

(c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment by such Board or whose nomination for election by our stockholders was approved by a vote of not less than a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute at least a majority of the Board of Directors then in office; or

 

(d) our stockholders shall have approved any plan of liquidation or dissolution of ours.

 

Code” means the Internal Revenue Code of 1986, as amended.

 

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Commission” means the U.S. Securities and Exchange Commission.

 

Consolidated Cash Flow” means, for any period, an amount equal to, for us and our Consolidated Restricted Subsidiaries:

 

(a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period:

 

(1) the provision for taxes based on income or profits or utilized in computing net loss,

 

(2) Consolidated Fixed Charges,

 

(3) depreciation and amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) of us and our Consolidated Restricted Subsidiaries for such period, and

 

(4) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of, or reserve for, cash expenditures in any future period), minus

 

(b) all non-cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period).

 

Consolidated Current Liabilities” means, as of any date of determination, the aggregate amount of our liabilities and the liabilities of our Consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after eliminating:

 

(a) all intercompany items between us and any Restricted Subsidiary or between Restricted Subsidiaries; and

 

(b) all current maturities of long-term Debt.

 

“Consolidated Fixed Charge Coverage Ratio” means, as of any date of determination, the ratio of:

 

(a) the aggregate amount of Consolidated Cash Flow for the most recent four consecutive fiscal quarters for which internal financial statements are available, to

 

(b) Consolidated Fixed Charges for such four fiscal quarters;

 

provided, however, that:

 

(1) if

 

(A) since the beginning of such period we or any Restricted Subsidiary have Incurred any Debt that remains outstanding or Repaid any Debt, or

 

(B) the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio is an Incurrence or Repayment of Debt,

 

Consolidated Fixed Charges for such four-quarter period shall be calculated after giving effect on apro formabasis to such Incurrence or Repayment as if such Debt was Incurred or Repaid on the first day of such four-quarter period;providedthat, in the event of any such Repayment of Debt, Consolidated Cash Flow for such period shall be calculated as if we or such Restricted Subsidiary had not earned any interest income actually earned during such period in respect of the funds used to Repay such Debt, and

 

(2) if

 

(A) since the beginning of such period we or any Restricted Subsidiary shall have made any Asset Sale or an Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an acquisition of Property which constitutes all or substantially all of an operating unit of a business,

 

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(B) the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio is such an Asset Sale, Investment or acquisition, or

 

(C) since the beginning of such period any Person, that subsequently became a Restricted Subsidiary or was merged with or into us or any Restricted Subsidiary since the beginning of such period, shall have made such an Asset Sale, Investment or acquisition,

 

then Consolidated Cash Flow for such four-quarter period shall be calculated after givingpro forma effect to such Asset Sale, Investment or acquisition as if such Asset Sale, Investment or acquisition had occurred on the first day of such four-quarter period.

 

If any Debt bears a floating rate of interest and is being givenpro forma effect, the interest expense on such Debt shall be calculated as if the base interest rate in effect for such floating rate of interest on the date of determination had been the applicable base interest rate for the entire period (taking into account any Interest Rate Agreement applicable to such Debt if such Interest Rate Agreement has a remaining term in excess of 12 months). In the event the Capital Stock of any Restricted Subsidiary is sold during the period, we shall be deemed, for purposes of clause (1) above, to have Repaid during such period the Debt of such Restricted Subsidiary to the extent we and our continuing Restricted Subsidiaries are no longer liable for such Debt after such sale.

 

Consolidated Fixed Charges” means, for any period, our total interest expense and the total interest expense of our Consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by us or our Restricted Subsidiaries, without duplication,

 

(a) interest expense attributable to leases constituting part of a Sale and Leaseback Transaction and to Capital Lease Obligations,

 

(b) amortization of debt discount and debt issuance costs, including commitment fees,

 

(c) capitalized interest,

 

(d) non-cash interest expense,

 

(e) commissions, discounts and other fees and charges owed with respect to letters of credit and banker’s acceptance financing,

 

(f) net costs associated with Hedging Obligations (including amortization of fees) related to Interest Rate Agreements,

 

(g) Disqualified Stock Dividends,

 

(h) Preferred Stock Dividends,

 

(i) interest Incurred in connection with Investments in discontinued operations, and

 

(j) interest actually paid by us or any Restricted Subsidiary under any Guarantee of Debt of any other Person.

 

Consolidated Net Income” means, for any period, the net income (loss) by us and our Consolidated Restricted Subsidiaries;provided, however, that there shall not be included in such Consolidated Net Income:

 

(a) any net income of any Person (other than us) if such Person is not a Restricted Subsidiary, except that, subject to the exclusion contained in clause (c) below, our equity and the equity of our Consolidated Restricted Subsidiaries in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to us or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (b) below),

 

(b) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to

 

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us, except that, subject to the exclusion contained in clause (d) below, our equity and the equity of our Consolidated Restricted Subsidiaries in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the greater of (i) the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to us or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause (b)) and (ii) the aggregate amount of cash that could have been distributed by such Restricted Subsidiary during such period to us or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause (b)),

 

(c) any gain or loss realized upon the sale or other disposition of any of our Property or any Property of our consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business,

 

(d) any net after-tax extraordinary gain or loss,

 

(e) to the extent non-cash, any unusual, non-operating or non-recurring gain or loss,

 

(f) the cumulative effect of a change in accounting principles,

 

(g) any non-cash compensation expense realized for grants of performance shares, stock options or other rights to our officers, directors and employees or any Restricted Subsidiary;provided that such shares, options or other rights can be redeemed at the option of the holder only for our Capital Stock (other than Disqualified Stock),

 

(h) any cash or non-cash expenses attributable to the closing of manufacturing facilities or the lay-off of employees, in either case which are recorded as “restructuring and other specific charges” in accordance with GAAP, and

 

(i) gains or losses due to fluctuations in currency values and the related tax effect.

 

Notwithstanding the foregoing, for purposes of the covenant described under “—Certain Covenants—Limitation on Restricted Payments” only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of Property from Unrestricted Subsidiaries to us or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(4) thereof.

 

“Consolidated Net Tangible Assets”means our Total Assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) and those of our Restricted Subsidiaries, after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of (without duplication):

 

(a) the excess of cost over Fair Market Value of assets or businesses acquired;

 

(b) any revaluation or other write-up in book value of assets subsequent to the last day of our fiscal quarter immediately preceding the Issue Date as a result of a change in the method of valuation in accordance with GAAP;

 

(c) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items;

 

(d) minority interests in consolidated Subsidiaries held by Persons other than us or any Restricted Subsidiary;

 

(e) treasury stock;

 

(f) cash or securities set aside and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and

 

(g) Investments in and assets of Unrestricted Subsidiaries.

 

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Consolidated Restricted Subsidiary” means, for any Person, each Restricted Subsidiary of such Person (whether now existing or hereinafter created or acquired) the financial statements of which are consolidated for financial statement reporting purposes with the financial statements of such Person in accordance with GAAP.

 

Convertible Notes” means (1) our $500 million 4.75% convertible senior debentures due 2022 issued pursuant to the indenture, dated as of January 29, 2002, by and among us and The Bank of New York, as trustee and (2) our $402.5 million 4.50% convertible senior notes due 2007 issued pursuant to the indenture, dated as of November 25, 2002, by and among us and The Bank of New York, as trustee, in each case, as amended, restated, modified, renewed, refunded, replaced or Refinanced in whole or in part from time to time.

 

Credit Facilities” means, with respect to us or any Restricted Subsidiary, one or more debt or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, notes, receivables or inventory financing (including through the sale of receivables or inventory to such lenders or to special purpose, bankruptcy remote entities formed to borrow from such lenders against such receivables or inventory) or trade or standby letters of credit, in each case as any such facility may be revised, restructured or Refinanced from time to time, including to extend the maturity thereof, to increase the amount of commitments thereunder (provided that any such increase is permitted under the covenant described under “—Certain Covenants—Limitation on Debt”), or to add Restricted Subsidiaries as additional borrowers or guarantors thereunder, whether by the same or any other agent, lender or group of lenders or investors and whether such revision, restructuring or Refinancing is under one or more Debt facilities or commercial paper facilities, indentures or other agreements, in each case with banks or other institutional lenders or trustees or investors providing for revolving credit loans, term loans, notes or letters or credit, together with related documents thereto (including, without limitation, any guaranty agreements and security documents). Notwithstanding the foregoing, Credit Facilities shall not include (x) Debt outstanding on the Issue Date evidenced by the Convertible Notes or (y) our Debt evidenced by the private notes (excluding any Additional Notes) issued in this offering and any exchange notes issued in exchange for the private notes (excluding any Additional Notes) pursuant to the Registration Rights Agreement.

 

Currency Exchange Protection Agreement” means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates.

 

Debt” means, with respect to any Person on any date of determination (without duplication):

 

(a) the principal of and premium (if any) in respect of:

 

(1) debt of such Person for money borrowed; and

 

(2) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable;

 

(b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person;

 

(c) all obligations of such Person representing the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business);

 

(d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third business day following receipt by such Person of a demand for reimbursement following payment on the letter of credit);

 

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(e) the amount of all obligations of such Person with respect to the Repayment of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends);

 

(f) all obligations of the type referred to in clauses (a) through (e) above of other Persons and all dividends of other Persons the payment of which, in either case, such Person is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee;

 

(g) all obligations of the type referred to in clauses (a) through (f) above of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the Fair Market Value of such Property and the amount of the obligation so secured; and

 

(h) to the extent not otherwise included in this definition, Hedging Obligations of such Person.

 

The amount of Debt of any Person at any date shall be the outstanding balance, or the accreted value of such Debt in the case of Debt issued with original issue discount, at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. The amount of Debt represented by a Hedging Obligation shall be equal to:

 

(1) zero if such Hedging Obligation has been Incurred pursuant to clause (f) or (g) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt,” or

 

(2) the notional amount of such Hedging Obligation if not Incurred pursuant to such clauses.

 

Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

 

Disqualified Stock” means any of our Capital Stock or of our Restricted Subsidiaries that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise:

 

(a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise;

 

(b) is or may become redeemable or repurchasable at the option of the holder thereof, in whole or in part; or

 

(c) is convertible or exchangeable at the option of the holder thereof for Debt or Disqualified Stock,

 

on or prior to, in the case of clause (a), (b) or (c), 123 days following the Stated Maturity of the Notes. Notwithstanding the foregoing, any Capital Stock that would constitute Disqualified Stock solely because the holders of the Capital Stock have the right to require us to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale will not constitute Disqualified Stock if the terms of such Capital Stock provide that we may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption “—Certain Covenants—Limitation on Restricted Payments.”

 

Disqualified Stock Dividends” means all dividends with respect to our Disqualified Stock held by Persons other than a Restricted Subsidiary. The amount of any such dividend shall be equal to the quotient of such dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to us.

 

Event of Default” has the meaning set forth under “—Events of Default.”

 

Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

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Fair Market Value” means, with respect to any Property, the price that could be negotiated in an arm’s-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value shall be determined, except as otherwise provided,

 

(a) if such Property has a Fair Market Value equal to or less than $25.0 million, by any Officer of ours, or

 

(b) if such Property has a Fair Market Value in excess of $25.0 million, by at least a majority of the Board of Directors and evidenced by a resolution of the Board of Directors dated within 30 days of the relevant transaction.

 

GAAP” means generally accepted accounting principles consistently applied as in effect in the United States from time to time.

 

Guarantee” means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise),provided, however, that the term “Guarantee” shall not include:

 

(1) endorsements for collection or deposit in the ordinary course of business; or

 

(2) a contractual commitment by one Person to invest in another Person for so long as such Investment is reasonably expected to constitute a Permitted Investment under clause (a), (b) or (c) of the definition of “Permitted Investment.”

 

The term “Guarantee” used as a verb has a corresponding meaning. The term “Guarantor” shall mean any Person Guaranteeing any obligation.

 

Hedging Obligation” of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement or any other similar agreement or arrangement.

 

“holder”means a Person in whose name a Note is registered in the Note register.

 

Incur” means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and “Incurrence” and “Incurred” shall have meanings correlative to the foregoing);provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt;provided further,however, that any Debt or other obligations of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary; andprovided further, however, that solely for purposes of determining compliance with “—Certain Covenants—Limitation on Debt,” amortization of debt discount shall not be deemed to be the Incurrence of Debt,provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the aggregate principal amount at Stated Maturity.

 

Independent Financial Advisor” means an investment banking firm of national standing or any third-party appraiser of national standing in the United States,provided that such firm or appraiser is not our Affiliate.

 

Interest Rate Agreement” means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates.

 

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Investment” by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of the covenants described under “—Certain Covenants—Limitation on Restricted Payments” and “—Designation of Restricted and Unrestricted Subsidiaries” and the definition of “Restricted Payment,” the term “Investment” shall include (a) upon the issuance, sale or other disposition of Capital Stock of any Restricted Subsidiary to a Person other than us or another Restricted Subsidiary as a result of which such Restricted Subsidiary ceases to be a Restricted Subsidiary, the Fair Market Value of the remaining interest, if any, in such former Restricted Subsidiary held by us or such other Restricted Subsidiary, and (b) at the time that a Subsidiary of ours is designated an Unrestricted Subsidiary (excluding the designation of Spansion and its Subsidiaries as Unrestricted Subsidiaries on the Issue Date), the portion (proportionate to our equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary;provided, however, that upon a redesignation of any Unrestricted Subsidiary (including Spansion and its Subsidiaries) as a Restricted Subsidiary, we shall be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary of an amount (if positive) equal to:

 

(a) our “Investment” in such Subsidiary at the time of such redesignation, less

 

(b) the portion of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation (proportionate to our equity interest in such Subsidiary).

 

In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment.

 

“Investment Grade Rating” means a rating equal to or higher than Baa3 (or the equivalent) by Moody’s and BBB- (or the equivalent) by S&P (or the equivalent ratings from any other relevant Rating Agency).

 

Issue Date” means October 29, 2004.

 

Lien” means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction).

 

Moody’s” means Moody’s Investors Service, Inc. or any successor to the rating agency business thereof.

 

Net Available Cash” from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other non-cash form), in each case net of:

 

(a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Sale;

 

(b) all payments made on or in respect of any Debt that is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale;

 

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(c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale; and

 

(d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed of in such Asset Sale and retained by us or any Restricted Subsidiary after such Asset Sale.

 

Non-Recourse Debt” means Debt:

 

(a) as to which neither we nor any Restricted Subsidiary provide any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Debt) or is directly or indirectly liable (as a guarantor or otherwise) or as to which there is any recourse to our assets; and

 

(b) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of our other Debt or the Debt of any Restricted Subsidiary to declare a default under such other Debt or cause the payment therefor to be accelerated or payable prior to its stated maturity.

 

Officer” means our Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President.

 

Officers’ Certificate” means a certificate signed by two of our Officers, at least one of whom shall be our principal executive officer or principal financial officer, and delivered to the Trustee.

 

Opinion of Counsel” means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to us or the Trustee.

 

Permitted Investment” means any Investment by us or a Restricted Subsidiary in existence on the Issue Date or in:

 

(a) us or any Restricted Subsidiary;

 

(b) any Person that will, upon the making of such Investment, become a Restricted Subsidiary;

 

(c) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, us or a Restricted Subsidiary;

 

(d) Cash Equivalents;

 

(e) receivables owing to us or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms;provided, however, that such trade terms may include such concessionary trade terms as we or such Restricted Subsidiary deem reasonable under the circumstances;

 

(f) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business;

 

(g) loans and advances to employees made in the ordinary course of business consistent with our past practices and the past practices of a Restricted Subsidiary, as the case may be;provided that such loans and advances do not exceed $10.0 million in the aggregate at any one time outstanding;

 

(h) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to us or a Restricted Subsidiary or in satisfaction of judgments;

 

(i) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with an Asset Sale consummated in compliance with the covenant described under “—Certain Covenants—Limitation on Asset Sales;”

 

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(j) Investments in Permitted Joint Ventures that do not exceed 15% of Total Assets in the aggregate outstanding at any one time;

 

(k) any acquisition of assets or Capital Stock solely in exchange for the issuance of our Capital Stock (other than Disqualified Stock);

 

(l) Investments represented by Hedging Obligations if such Hedging Obligation has been Incurred pursuant to clause (f) or (g) of the second paragraph of the covenant described under “—Certain Covenants—Limitation on Debt;”

 

(m) Guarantees by us and our Restricted Subsidiaries of Debt and other obligations of Spansion and its Subsidiaries and any payments made pursuant to such Guarantees provided that such Guarantees (plus, without duplication, the aggregate amount actually paid by us and our Restricted Subsidiaries after the Issue Date pursuant to such Guarantees and not reimbursed to them by Spansion and its Subsidiaries) do not exceed $500.0 million outstanding at any one time; and

 

(n) other Investments made for Fair Market Value that do not exceed $100.0 million in the aggregate outstanding at any one time.

 

Permitted Joint Venture” means any Person which is, directly or indirectly, engaged principally in a Related Business, and the Capital Stock, or securities convertible into Capital Stock, of which is owned by us and one or more Persons other than us or any of our Affiliates.

 

Permitted Liens” means:

 

(a) Liens securing the Notes;

 

(b) Liens to secure Debt permitted to be Incurred under clause (b) of the second paragraph under “—Certain Covenants—Limitation on Debt;”

 

(c) Liens to secure Debt permitted to be Incurred under clause (c) of the second paragraph under “—Certain Covenants—Limitation on Debt;”provided that any such Lien may not extend to any Property of ours, other than the Property acquired, constructed or leased with the proceeds of any such Debt and any improvements or accessions to such Property;

 

(d) Liens for taxes, assessments or governmental charges or levies on our Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings promptly instituted and diligently concluded;provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor;

 

(e) Liens imposed by law, such as carriers’, landlords’, warehousemen’s and mechanics’ Liens and other similar Liens, on our Property arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith and by appropriate proceedings;

 

(f) Liens on our Property Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of our business and the operation of business of our Restricted Subsidiaries taken as a whole;

 

(g) Liens on Property at the time we acquired such Property, including any acquisition by means of a merger or consolidation with or into us;provided, however, that any such Lien may not extend to any of our other Property;provided further, however, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by us;

 

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(h) pledges or deposits by us under workers’ compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which we are a party, or deposits to secure our public or statutory obligations, surety or appeal bonds, performance bonds or deposits for the payment of rent or margin deposits, in each case Incurred in the ordinary course of business;

 

(i) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character;

 

(j) Liens securing Debt permitted to be Incurred with respect to any Hedging Obligations pursuant to the covenant described under “—Certain Covenants—Limitation on Debt” or collateral for such Debt to which the Hedging Obligations relate;

 

(k) Liens on the Capital Stock of any Unrestricted Subsidiary to secure Debt of that Unrestricted Subsidiary;

 

(l) Liens in favor of us;

 

(m) Liens existing on the Issue Date not otherwise described in clauses (a) through (l) above;

 

(n) Liens on our Property to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (c), (g) or (m) above;provided, however, that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with any improvements and accessions to such Property) and the aggregate principal amount of Debt that is secured by such Lien shall not be increased to an amount greater than the sum of:

 

(1) the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (c), (g) or (m) above, as the case may be, at the time the original Lien became a Permitted Lien under the Indenture; and

 

(2) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, incurred by us in connection with such Refinancing; and

 

(o) other Liens to secure Debt, so long as the aggregate principal amount of Debt secured thereby at the time such Lien is created does not exceed 5% of our Consolidated Net Tangible Assets, shown on our consolidated balance sheet in accordance with GAAP on the last day of the most recent fiscal quarter ending at least 40 days prior to the date any such Lien shall be Incurred.

 

Permitted Refinancing Debt” means any Debt that Refinances any other Debt, including any successive Refinancings, so long as:

 

(a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of:

 

(1) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced; and

 

(2) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing;

 

(b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced;

 

(c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being Refinanced; and

 

(d) the new Debt shall not be senior in right of payment to the Debt that is being Refinanced;

 

provided, however, that Permitted Refinancing Debt shall not include:

 

(x) Debt of a Subsidiary that Refinances our Debt; or

 

(y) Our Debt or the Debt of a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary.

 

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“Person” means any individual, corporation, company (including any limited liability company), association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

 

Preferred Stock” means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person.

 

Preferred Stock Dividends” means all dividends with respect to Preferred Stock of Restricted Subsidiaries held by Persons other than us or a Restricted Subsidiary. The amount of any such dividend shall be equal to the quotient of such dividend divided by the difference between one and the maximum statutory federal income rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Preferred Stock.

 

pro forma” means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act.

 

Property” means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to the Indenture, the value of any Property shall be its Fair Market Value.

 

Purchase Money Debt” means Debt:

 

(a) consisting of the deferred purchase price of Property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the Property being financed; and

 

(b) Incurred to finance the acquisition, construction or lease by us or a Restricted Subsidiary of such Property, including additions and improvements thereto;

 

provided, however, that such Debt is Incurred within 180 days after the acquisition, construction or lease of such Property by us or such Restricted Subsidiary.

 

Qualified Equity Offering” means any public or private offering for cash of our Capital Stock (other than Disqualified Stock) other than (i) public offerings of Capital Stock registered on Form S-8 or (ii) other issuances upon the exercise of options of our employees or any of our Subsidiaries.

 

“Rating Agencies”means Moody’s and S&P (or, if either such entity ceases to rate the notes for reasons outside of our control, any other “nationally recognized statistical rating organization” within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act selected by us as a replacement agency).

 

Refinance” means, in respect of any Debt, to refinance, extend, renew, refund or Repay, or to issue other Debt, in exchange or replacement for, such Debt. “Refinanced” and “Refinancing” shall have correlative meanings.

 

Registration Rights Agreement” means the registration rights agreement among us and the initial purchasers entered into in connection with the Notes.

 

Related Business” means any business that is related, ancillary or complementary to our businesses and the businesses of the Restricted Subsidiaries on the Issue Date and any reasonable extension thereof.

 

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Repay” means, in respect of any Debt, to repay, prepay, repurchase, redeem, legally defease or otherwise retire such Debt. “Repayment” and “Repaid” shall have correlative meanings. For purposes of the covenant described under “—Certain Covenants—Limitation on Asset Sales” and the definition of “Consolidated Fixed Charge Coverage Ratio,” Debt shall be considered to have been Repaid only to the extent the related loan commitment, if any, shall have been permanently reduced in connection therewith.

 

Restricted Payment” means:

 

(a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of our Capital Stock or those of any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into us or any Restricted Subsidiary), except for any dividend or distribution that is made solely to us or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, to the other shareholders of such Restricted Subsidiary on apro ratabasis or on a basis that results in the receipt by us or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on apro ratabasis) or any dividend or distribution payable solely in shares of our Capital Stock (other than Disqualified Stock);

 

(b) the purchase, repurchase, redemption, acquisition or retirement for value of any our Capital Stock or those of any Restricted Subsidiary (other than from us or a Restricted Subsidiary and other than for our Capital Stock that is not Disqualified Stock);

 

(c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to the date for any scheduled maturity, sinking fund or amortization or other installment payment, of any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation purchased in anticipation of satisfying a scheduled maturity, sinking fund or amortization or other installment obligation, in each case due within one year of the date of acquisition); and

 

(d) any Investment (other than Permitted Investments) in any Person.

 

Restricted Subsidiary” means any of one of our Subsidiaries other than an Unrestricted Subsidiary.

 

S&P” means Standard & Poor’s Ratings Services or any successor to the rating agency business thereof.

 

Sale and Leaseback Transaction” means any direct or indirect arrangement relating to Property now owned or hereafter acquired whereby we or a Restricted Subsidiary transfer such Property to another Person and we or a Restricted Subsidiary lease it from such Person.

 

Securities Act” means the Securities Act of 1933, as amended.

 

Significant Subsidiary” means any Subsidiary that would be a “significant subsidiary” of ours within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission.

 

“Spansion” means Spansion LLC, a Delaware limited liability company, and its successors.

 

Stated Maturity” means, with respect to any Debt or security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred).

 

Subordinated Obligation” means any of our Debt (whether outstanding on the Issue Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes pursuant to a written agreement to that effect.

 

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Subsidiary” means, in respect of any Person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which at least a majority of the total voting power of the Voting Stock is at the time owned or controlled, directly or indirectly, by:

 

(a) such Person;

 

(b) such Person and one or more Subsidiaries of such Person; or

 

(c) one or more Subsidiaries of such Person.

 

“Surviving Person”means the surviving Person formed by a merger or consolidation and, for purposes of the covenant described under “—Merger, Consolidation and Sale of Property,” a Person to whom all or substantially all of our Property is sold, transferred, assigned, leased, conveyed or otherwise disposed.

 

Total Assets” means, with respect to any date of determination, our total consolidated assets shown on our consolidated balance sheet in accordance with GAAP on the last day of the fiscal quarter prior to the date of determination.

 

Treasury Rate” means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two business days prior to the redemption date (or, if such statistical release is no longer published, any publicly available source of similar market data)) most nearly equal to the period from the redemption date to November 1, 2008;provided, however that if the period from the redemption date to November 1, 2008 is not equal to the constant maturity of the United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the period from the redemption date to November 1, 2008 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.

 

Unrestricted Subsidiary” means:

 

(a) (x) on the Issue Date, Spansion and its Subsidiaries and (y) any one of our Subsidiaries that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries;” and in any case so long as the respective Unrestricted Subsidiary is not thereafter redesignated as a Restricted Subsidiary as permitted pursuant to the covenant described under “—Certain Covenants—Designation of Restricted and Unrestricted Subsidiaries;” and

 

(b) any Subsidiary of an Unrestricted Subsidiary.

 

U.S. Government Obligations” means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer’s option.

 

Voting Stock” of any Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

 

Wholly Owned Restricted Subsidiary” means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors’ qualifying shares) is at such time owned, directly or indirectly, by us and our other Wholly Owned Restricted Subsidiaries.

 

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BOOK-ENTRY; DELIVERY AND FORM

 

We will issue exchange notes in fully registered form, without interest coupons, in denominations of $1,000 and integral multiples of $1,000. The notes will be initially issued in the form of one or more Global Securities registered in the name of The Depository Trust Company, or DTC, or its nominee.

 

Upon the issuance of a Global Security, DTC or its nominee will credit the accounts of persons holding through it with the respective principal amounts of the notes represented by such global security purchased by such persons in the offering. Such accounts shall be designated by the initial purchasers. Ownership of beneficial interests in a global security will be limited to persons that have accounts with DTC (“participants”) or persons that may hold interests through participants. Any person acquiring an interest in a Global Security through an offshore transaction in reliance on Regulation S of the Securities Act may hold such interest through Clearstream Banking, S.A. or Euroclear Bank S.A./N.V., as operator of the Euroclear System. Ownership of beneficial interests in a global security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by DTC (with respect to participants’ interests) and such participants (with respect to the owners of beneficial interests in such global security other than participants). The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a global security.

 

Payment of principal of and interest on notes represented by a global security will be made in immediately available funds to DTC or its nominee, as the case may be, as the sole registered owner and the sole holder of the notes represented thereby for all purposes under the indenture. We have been advised by DTC that upon receipt of any payment of principal of or interest on any global security, DTC will immediately credit, on its book-entry registration and transfer system, the accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such global security as shown on the records of DTC. Payments by participants to owners of beneficial interests in a global security held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in “street name” and will be the sole responsibility of such participants.

 

A Global Security may not be transferred except as a whole by DTC or a nominee of DTC to a nominee of DTC or to DTC. A global security is exchangeable for certificated notes only if:

 

  DTC notifies us that it is unwilling or unable to continue as a depositary for such global security or if at any time DTC ceases to be a clearing agency registered under the Exchange Act;

 

  we may in our discretion at any time determine not to have all the notes represented by such global security; or

 

  there shall have occurred and be continuing a default or an event of default with respect to the notes represented by such global security.

 

Any global security that is exchangeable for certificated notes pursuant to the preceding sentence will be exchanged for certificated notes in authorized denominations and registered in such names as DTC or any successor depositary holding such global security may direct. Subject to the foregoing, a global security is not exchangeable, except for a global security of like denomination to be registered in the name of DTC or any successor depositary or its nominee. In the event that a global security becomes exchangeable for certificated notes:

 

  certificated notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof,

 

  payment of principal of, and premium, if any, and interest on, the certificated notes will be payable, and the transfer of the certificated notes will be registrable, at the office or agency of ours maintained for such purposes, and

 

  no service charge will be made for any registration of transfer or exchange of the certificated notes, although we may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith.

 

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So long as DTC or any successor depositary for a Global Security, or any nominee, is the registered owner of such Global Security, DTC or such successor depositary or nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such Global Security for all purposes under the indenture and the notes. Except as set forth above, owners of beneficial interests in a Global Security will not be entitled to have the notes represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of certificated notes in definitive form and will not be considered to be the owners or holders of any notes under such Global Security. Accordingly, each Person owning a beneficial interest in a Global Security must rely on the procedures of DTC or any successor depositary, and, if such Person is not a participant, on the procedures of the participant through which such Person owns its interest, to exercise any rights of a holder under the indenture. We understand that under existing industry practices, in the event that we request any action of holders or that an owner of a beneficial interest in a Global Security desires to give or take any action which a holder is entitled to give or take under the indenture, DTC or any successor depositary would authorize the participants holding the relevant beneficial interest to give or take such action and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them.

 

DTC has advised us that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered under the Exchange Act. DTC was created to hold the securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTC’s participants include securities brokers and dealers (which may include the initial purchasers), banks, trust companies, clearing corporations and certain other organizations some of whom (or their representatives) own DTC. Access to DTC’s book-entry system is also available to others, such as banks, brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

 

Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in Global Securities among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of us, the Trustee or the initial purchasers will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

The following is a summary of the material U.S. federal income tax considerations relating to the exchange of the private notes for exchange notes in the exchange offer, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the Internal Revenue Code of 1986, as amended, Treasury Regulations, Internal Revenue Service (“IRS”) rulings and pronouncements, and judicial decisions now in effect, all of which are subject to change at any time by legislative, administrative, or judicial action, possibly with retroactive effect. We have not sought and will not seek any rulings from the IRS with respect to the statements made and the conclusions reached in the following summary, and accordingly, there can be no assurance that the IRS will not successfully challenge the tax consequences described below. This summary only applies to you if you exchange your private notes for exchange notes in the exchange offer. This summary also does not discuss the effect of any applicable U.S. state and local or non-U.S. tax laws or U.S. tax laws other than U.S. income tax law. In addition, this summary does not discuss every aspect of U.S. federal income taxation that may be relevant to you in light of your personal circumstances or if you are otherwise subject to special tax treatment, including, without limitation, if you are:

 

  a bank;

 

  a financial institution;

 

  a holder subject to the alternative minimum tax;

 

  a broker or dealer in securities or currencies;

 

  an insurance company;

 

  a person whose functional currency is not the U.S. dollar;

 

  a tax-exempt organization;

 

  an investor in a pass-through entity holding the notes;

 

  a partnership or other entity treated as a partnership for tax purposes;

 

  a U.S. expatriate;

 

  a person holding notes as a part of a hedging or conversion transaction or a straddle for tax purposes; or

 

  a foreign person or entity.

 

YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

 

The exchange of the private notes for the exchange notes in the exchange offer will not be treated as an “exchange” for federal income tax purposes, because the exchange notes will not be considered to differ materially in kind or extent from the private notes. Accordingly, the exchange of private notes for exchange notes will not be a taxable event to holders for federal income tax purposes. Moreover, the exchange notes will have the same tax attributes as the private notes and the same tax consequences to holders as the outstanding notes have to holders, including without limitation, the same issue price, adjusted issue price, adjusted tax basis and holding period.

 

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PLAN OF DISTRIBUTION

 

Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of the exchange notes. Broker-dealers may use this prospectus, as it may be amended or supplemented from time to time, in connection with the resale of exchange notes received in exchange for private notes where the broker-dealer acquired the private notes as a result of market-making activities or other trading activities. We have agreed that after this registration statement is declared effective by the SEC and until 180 days after the exchange offer has been completed or such time as broker-dealers no longer own any transfer restricted securities, we will make this prospectus, as amended or supplemented, available to any broker-dealer that requests it in the letter of transmittal for use in connection with any such resale.

 

We will not receive any proceeds from any sale of exchange notes by broker-dealers or any other persons. Broker-dealers may sell exchange notes received by broker-dealers for their own account pursuant to the exchange offer from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to the prevailing market prices or negotiated prices. Broker-dealers may resell exchange notes directly to purchasers or to or through brokers or deals who may receive compensation in the form of commissions or concessions from any broker-dealer and/or the purchasers of the exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of the exchange notes may be deemed to be “underwriters” within the meaning of the Securities Act, and any profit on any resale of exchange notes and any commissions or concessions received by any such persons my be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

 

We have agreed to pay all expenses incident to our performance of, or compliance with, the registration rights agreement and will indemnify the holders of the notes (including any broker-dealers) against liabilities under the Securities Act.

 

By its acceptance of the exchange offer, any broker-dealer that receives exchange notes pursuant to the exchange offer agrees to notify us before using the prospectus in connection with the sale or transfer of exchange notes. The broker-dealer further acknowledges and agrees that, upon receipt of notice from us of the happening of any event which makes any statement in the prospectus untrue in any material respect or which requires the making of any changes in the prospectus to make the statement in the prospectus not misleading or which may impose upon us disclosure obligations that may have a material adverse effect on us, which notice we agree to deliver promptly to the broker-dealer, the broker-dealer will suspend use of the prospectus until we have notified the broker-dealer that delivery of the prospectus may resume and have furnished copies of any amendment or supplement to the prospectus to the broker-dealer.

 

LEGAL MATTERS

 

Certain legal matters relating the validity of the exchange notes will be passed upon for us by Latham & Watkins LLP, San Francisco, California.

 

EXPERTS

 

Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedule included in our Annual Report on Form 10-K for the year ended December 28, 2003, as set forth in their report, which is incorporated by reference in this prospectus and elsewhere in the registration statement. Our financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

 

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AVAILABLE INFORMATION

 

We are subject to the information requirements of the Securities Exchange Act of 1934, as amended. Accordingly, we file annual, quarterly and periodic reports, proxy statements and other information with the SEC relating to our business, financial statements and other matters (File No. 1-7882). You may read and copy any documents we have filed with the SEC at prescribed rates at the SEC’s Public Reference Room at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. You may also obtain copies of these materials at prescribed rates by mail by writing to the SEC’s Public Reference Section at the address set forth above, or by calling (800) SEC-0330. Our SEC filings are also available to you free of charge at the SEC’s web site at http://www.sec.gov. Information contained in our web site is not part of this prospectus.

 

INCORPORATION BY REFERENCE

 

We have elected to “incorporate by reference” certain information into this prospectus. By incorporating by reference, we can disclose important information to you by referring you to another document we have filed with the SEC. The information incorporated by reference is deemed to be part of this prospectus, except for information incorporated by reference that is superseded by information contained in this prospectus. This prospectus incorporates by reference the documents set forth below that we have previously filed with the SEC:

 

AMD SEC Filings (File No. 1-7882)


  Period ended

Annual Report on Form 10-K (including information specifically incorporated by reference into our Form 10-K from our Proxy Statement for our 2004 Annual Meeting of Stockholders)

  December 28, 2003

Quarterly Report on Form 10-Q

  March 28, 2004

Quarterly Report on Form 10-Q

  June 27, 2004

Quarterly Report on Form 10-Q

  September 26, 2004

Current Report on Form 8-K

  filed on April 26, 2004

Current Report on Form 8-K

  filed on September 21, 2004

Current Report on Form 8-K

  filed on October 13, 2004

Current Report on Form 8-K

  filed on October 21, 2004

Current Report on Form 8-K

  filed on October 22, 2004

Current Report on Form 8-K

  filed on November 2, 2004

Current Report on Form 8-K

  filed on November 8, 2004

Current Report on Form 8-K

  filed on November 17, 2004

Current Report on Form 8-K

  filed on January 11, 2005

 

All documents that we file with the SEC from the date of this prospectus and prior to the termination of the exchange offer under this prospectus shall also be deemed to be incorporated in this prospectus by reference.

 

You may obtain copies of these documents from us without charge (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents) by writing to us at Advanced Micro Devices, Inc., One AMD Place, P.O. Box 3453, Sunnyvale, California 94088-3453, or calling us at (408) 749-4000.

 

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Advanced Micro Devices, Inc.

 

OFFER TO EXCHANGE

up to $600,000,000 aggregate principal amount of its

7.75% Senior Notes due 2012,

which have been registered under the Securities Act,

for any and all of its outstanding 7.75% Senior Notes due 2012

 


 

PROSPECTUS

 

                    ,        

 


 

 

 

 

 


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PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

ITEM 20. Indemnification of Officers and Directors

 

We are a Delaware corporation. Subsection (b)(7) of Section 102 of the Delaware General Corporation Law (the “DGCL”), enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for violations of the director’s fiduciary duty, except (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction from which a director derived an improper personal benefit.

 

Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding provided that such director or officer acted in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, provided further that such director or officer had no reasonable cause to believe his conduct was unlawful.

 

Subsection (b) of Section 145 empowers a corporation to indemnify any director or officer, or former director or officer, who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit provided that such director or officer acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such director or officer shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all of the circumstances of the case, such director or officer is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

 

Section 145 further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith; that indemnification and advancement of expenses provided for, by, or granted pursuant to Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the corporation against any liability asserted against him or incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liabilities under Section 145.

 

We have the power to indemnify its directors, officers and other persons against liability for certain acts pursuant to Section 145 of the DGCL and pursuant to Article 8 of our Bylaws.

 

In addition, we maintain a standard form of directors’ and officers’ liability insurance policy. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable.

 

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Item 21. Exhibits and Financial Statement Schedules.

 

A list of exhibits filed with this registration statement on Form S-4 is set forth on the Exhibit Index and is incorporated in this Item 21 by reference.

 

Item 22. Undertakings.

 

(a) The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

provided, however, that paragraphs (a)(l)(i) and (a)(l)(ii) of this section do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be thebona fide offering thereof.

 

(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being

 

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registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

(d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into this prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

 

(e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Sunnyvale, state of California, on January 19, 2005.

 

ADVANCED MICRO DEVICES, INC.

By

 

/S/    ROBERT J. RIVET        


  

Robert J. Rivet

Executive Vice President and

Chief Financial Officer

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Hector de J. Ruiz or Robert J. Rivet to be his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this registration statement and any and all amendments thereto (including without limitation any post-effective amendments thereto and any registration statement pursuant to Rule 462(b)), and to file each of the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, and every act and thing necessary or desirable to be done, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorney-in-fact and agent, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

SIGNATURE


  

TITLE


 

DATE


/S/    HECTORDE J. RUIZ        


Hector de J. Ruiz

  

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

 January 18, 2005

/S/    ROBERT J. RIVET        


Robert J. Rivet

  

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 January 14, 2005

/S/    W. MICHAEL BARNES        


W. Michael Barnes

  

Director

 January 14, 2005

/S/    CHARLES M. BLALACK


Charles M. Blalack

  

Director

 January 12, 2005

/S/    R. GENE BROWN        


R. Gene Brown

  

Director

 January 12, 2005

/S/    BRUCE L. CLAFLIN


Bruce L. Claflin

  

Director

 January 13, 2005

 

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SIGNATURE


  

TITLE


 

DATE


/S/    H. PAULETT EBERHART        


H. Paulett Eberhart

  

Director

 January 16, 2005

/S/    DAVID J. EDMONDSON        


David J. Edmondson

  

Director

 January 20, 2005

/S/    ROBERT B. PALMER        


Robert B. Palmer

  

Director

 January 14, 2005

/S/    LEONARD M. SILVERMAN        


Leonard M. Silverman

  

Director

 January 14, 2005

 

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EXHIBIT INDEX

 

Exhibit

Number


  

Exhibit Description


4.4  Indenture, dated as of October 29, 2004, by and between the Company and Wells Fargo Bank, N.A, filed as Exhibit 4.1 to AMD’s Form 8-K dated November 2, 2004, is hereby incorporated by reference.
4.5  Registration Rights Agreement, dated as of October 29, 2004, by and among Advanced Micro Devices, Inc. and Citigroup Global Markets Inc., filed as Exhibit 10.1 to AMD’s Form 8-K dated November 2, 2004, is hereby incorporated by reference.
4.6  Form of 7.75% Senior Note due 2012, filed as Exhibit 4.2 to AMD’s Form 8-K dated November 2, 2004, is hereby incorporated by reference.
5.1  Opinion of Latham & Watkins LLP
12.1  Statement of Computation of Ratios
23.1  Consent of Latham & Watkins LLP (included in Exhibit 5.1)
23.2  Consent of Ernst & Young LLP
24.1  Power of Attorney (included on signature page hereto)
25.1  Statement of Eligibility under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee of Bankers Trust Company (Form T-1)
99.1  Letter of Transmittal with Respect to the Exchange Offer
99.2  Notice of Guaranteed Delivery with Respect to the Exchange Offer
99.3  Letter to DTC Participants Regarding the Exchange Offer
99.4  Letter to Beneficial Holders Regarding the Exchange Offer
99.5  Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9

 

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