UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 RELEASE No. 37730 / September 26, 1996 ACCOUNTING AND AUDITING ENFORCEMENT RELEASE No. 826 / September 26, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9102 ______________________________ In the Matter of : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 21C OF ADVANCED MICRO DEVICES, : THE SECURITIES EXCHANGE ACT INC. : OF 1934, MAKING FINDINGS AND : IMPOSING CEASE-AND-DESIST : ORDER I. The Commission deems it appropriate that public administrative proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Advanced Micro Devices, Inc. ("AMD" or the "Company"). II. In anticipation of the institution of these administrative proceedings, AMD has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. AMD, solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, without admitting or denying any of the findings herein (except that AMD admits to the jurisdiction of the Commission over it and over the subject matter of these proceedings), consents to the issuance of this Order Instituting Proceedings Pursuant To Section 21C of the Securities Exchange Act Of 1934, Making Findings and Imposing Cease And Desist Order ("Order"). ==========================================START OF PAGE 2====== III. On the basis of this Order and AMD's Offer, the Commission finds the following: A. Respondent AMD, a Delaware corporation headquartered in Sunnyvale, California, is a manufacturer of integrated circuits, commonly known as computer chips. AMD reported revenues of $2.13 billion and net income of $40,759,000 for the fiscal year ended December 25, 1994. AMD's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. B. Summary This matter involves inaccurate and misleading statements made by AMD to the public concerning its development in a "clean room" of a 486 microprocessor which would be fully compatible with Intel Corporation's ("Intel") 486 microprocessor. Beginning in June 1992 and continuing through August 1993, AMD led the public to believe that it was independently designing the microcode for its 486 microprocessor without access to Intel microcode when, in fact, AMD had provided its engineers in the "clean room" with Intel's copyrighted 386 microcode to accelerate the Company's development efforts.1/ AMD made these statements via press releases and filings with the Commission, as well as during conferences with industry analysts. The press releases containing the statements were disseminated to the public. Many were also incorporated in AMD's Form 8-K reports filed on December 15, 1992, April 22, 1993, and June 7, 1993. In addition, the Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") sections of AMD's Form 10-K report for its fiscal year ended December 27, 1992 and its Form 10-Q reports for its quarters ended March 28, 1993 and June 27, 1993 failed to disclose AMD's use of the Intel 386 microcode. On September 2, 1993, AMD issued a press release disclosing for the first time that its "clean room" engineers had been given Intel's 386 microcode and that some portion of Intel's 386 microcode was probably incorporated into AMD's 486 microcode. The following day, AMD announced that it had intentionally exposed its engineers to Intel's 386 microcode in order to accelerate the development process and that approximately 25% or 600-700 lines of AMD's Am486 microcode were "substantially similar" to Intel's copyrighted 386 microcode. Following these 1/ Microcode is the set of instructions inside a microprocessor that controls its functions. ==========================================START OF PAGE 3====== disclosures, AMD's common stock fell from 31 to 27 5/8, a price decline of over 10.8%, on unusually heavy trading volume. AMD's conduct violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. C. Facts 1. Background AMD designs, develops, and markets complex monolithic integrated circuits for use by manufacturers of a broad range of electronic equipment and systems. In 1976, AMD entered into a contract with Intel that gave AMD a license to certain Intel patents and microprocessor microcode copyrights (the "1976 Agreement"). In the early 1980's, IBM introduced its first personal computer. Its design subsequently became the industry standard in the personal computer market. IBM's choice of Intel's x86 microprocessor for its personal computer, in turn, made Intel's x86 microprocessor architecture a market standard, guaranteeing future sales of the x86's progeny as well. To ensure price competition and a steady source of supply, IBM wanted Intel to license its technology to another company to allow that company to serve as a second source of microprocessors for IBM. Consequently, in February 1982, Intel and AMD entered into a technology exchange agreement ("the 1982 Agreement") pursuant to which AMD agreed to become a second source manufacturer of Intel's x86 microprocessors and related computer chips. As part of a complex exchange of products and royalties, Intel provided AMD with database tapes for the 8086, 80186 and 80286 computer chips that contained all of the information necessary to produce copies of Intel's microprocessors. Instead of producing chips of its own design, AMD became a second source of Intel's x86 family of microprocessors. The 1982 Agreement extended the 1976 Agreement until 1996. The relationship between the two companies deteriorated over the next several years. In April 1987, AMD petitioned the California Superior Court to compel arbitration of the parties' disputes arising out of the 1982 Agreement. Shortly thereafter, Intel gave notice of termination of the agreement. The Superior Court subsequently granted AMD's petition to compel arbitration (the "Arbitration"). The Arbitration would last for four and one-half years. After Intel terminated the 1982 Agreement, it stopped providing AMD with database tapes for its new x86 products. To remain in the marketplace, AMD, relying on the license in the 1976 Agreement, began to reverse-engineer Intel's new ==========================================START OF PAGE 4====== microprocessors and co-processors.2/ In 1990, AMD successfully reverse-engineered Intel's 287 math co-processor.3/ AMD's 287 computer chip, although not an exact replica of Intel's math co- processor, contained a bit for bit copy of Intel's copyrighted 287 microcode. Intel immediately responded with a federal copyright action alleging that AMD did not have a license to copy Intel's microcode (the "287 Microcode Litigation"). AMD claimed that the 1976 Agreement, as extended in 1982, gave it a right to copy all Intel microcodes. In 1991, AMD introduced a reverse-engineered 386 microprocessor, the Am386. While the Am386 microprocessor contained a circuitry layout that differed from Intel's, it also contained an exact copy of Intel's copyrighted microcode. Intel immediately reacted with another copyright action - once again challenging AMD's right to manufacture any computer chips containing Intel's copyrighted microcode (the "386 Microcode Litigation").4/ In February 1992, the arbitrator in the Arbitration issued his ruling, finding that Intel had breached portions of the 1982 Agreement and awarding AMD a license to the Intel intellectual property embodied in AMD's reverse-engineered 386 computer chip. The arbitrator stated that the intent of the award was to allow AMD to produce and sell its reverse-engineered version of Intel's 386 computer chip. The arbitrator, however, specified that he was not expressing any opinion as to whether any Intel intellectual property rights were incorporated in any of the Am386 microprocessor family or whether any Am386 microprocessors infringed any Intel intellectual property rights. On June 1, 1992, the arbitrator's award was confirmed by the Santa Clara Superior Court, and Intel immediately appealed to the California Court of Appeal. While the arbitrator's decision represented an initial success for AMD, the award protected only AMD's use of Intel 386 microcode contained in the then current version of the Am386. A loss for AMD in any of the federal copyright actions could have 2/ Reverse engineering is the time consuming process of disassembling a computer chip, studying its structure, and using the knowledge so gained to re-engineer a functionally compatible product. The reverse-engineered microprocessor may have a different design layout but will perform the same or equivalent functions as the original microprocessor. 3/ Although AMD's engineers had no access to Intel's database tapes, they studied the Intel 287 chip design and micro- architecture, and copied Intel's microcode. 4/ During 1991 and 1992, AMD in turn filed a federal antitrust action and a state court business interference lawsuit against Intel. ==========================================START OF PAGE 5====== exposed the company to liability for damages in the millions of dollars. The federal copyright litigations all turned on the interpretation of the 1976 Agreement. A verdict favorable to AMD would permit AMD to copy all Intel x86 microprocessor microcodes introduced before January 1, 1996. Conversely, an adverse verdict would have barred AMD from copying any Intel microcodes (except for the 386 microcode, which had been awarded in arbitration). 2. AMD's Announcements Regarding Its Development of a "Clean Room" Version of its 486 Microprocessor In view of the uncertainty caused by the pending litigation, AMD concluded that it was prudent to develop a fully compatible version of Intel's 486 microprocessor that did not incorporate Intel's copyrighted 486 microcode. At AMD's annual shareholders meeting held on May 22, 1992, the Company disclosed that an adverse verdict in the then ongoing 287 Microcode Litigation would delay AMD's introduction of its reverse-engineered Am486 microprocessor inasmuch as the Company would have to develop an "independently engineered microcode." At the same time, AMD stated that it was confident that it could create a "clean room" version of 486 microcode. On June 17, 1992, the jury in the 287 Microcode Litigation, returned a verdict holding that AMD did not have a license to Intel's microcode and that AMD's 287 math coprocessor infringed Intel's 287 microcode copyright. AMD's reverse-engineered 486 computer chip also incorporated a bit-for-bit copy of Intel's 486 microcode. As a result, the verdict, unless overturned, would have precluded AMD from shipping Am486 microprocessors containing copies of Intel 486 microcode. Later that day, AMD issued a press release announcing that while the verdict would delay the Company's entry into the 486 microprocessor market, it would not prevent AMD from competing in the 486 marketplace. AMD stated "[w]e are fully confident that we can produce a clean room version of microcode that will enable us to build completely compatible products." This created the impression in the marketplace that, unlike AMD's previously reverse-engineered microprocessors, the "clean room version of microcode" was to be developed without access to and study of Intel microcode. Immediately after the 287 Microcode Litigation verdict, AMD embarked on a program designed to produce a clean room version of 486 microcode. The Company considered three approaches: (1) licensed use of a third company's microcode; (2) an externally staffed clean room without access to any Intel ==========================================START OF PAGE 6====== copyrighted microcode; or (3) an internally staffed clean room with access to Intel's copyrighted 386 microcode.5/ AMD chose the latter alternative because it was considered the "fastest, and best chance for success" in AMD's efforts to develop a clean room 486 microcode and get its 486 microprocessor to market. AMD projected that access to Intel's 386 microcode would accelerate development of the 486 microcode by approximately two months, thereby significantly increasing AMD's revenues.6/ 3. Management's Knowledge of the Clean Room's Use of Intel's 386 Microcode From the outset, AMD's senior management knew that the clean room engineers would study Intel's 386 microcode to develop AMD's 486 chip. At an August 6, 1992 meeting, AMD's senior management was advised that the "clean room" would be given access to Intel's 386 microcode to expedite the Company's development of the Am486 microcode. At a November 1992 meeting, AMD management was informed that the 386 microcode had been delivered into the clean room shortly after it opened in early October 1992 and that the engineers had been instructed to "[f]low chart/understand 386 microcode." Thereafter, a January 29, 1993 memorandum informed management that "[t]he clean room has the 386 microcode, and they have studied it in detail." 4. AMD's Disclosures Regarding the Clean Room 486 Microcode -- December 15, 1992 through June 4, 1993 On December 2, 1992, AMD moved for judgment notwithstanding the jury verdict in the 287 Microcode Litigation and a declaration that AMD's copyright license extended to future generations of Intel microcode. The Court denied AMD's motions. That same day AMD issued a press release announcing that while the Court's decision would cause a delay in the introduction of its 486 microprocessors, the ongoing "[d]evelopment of an independently derived microcode for the Am486 microprocessor family" was a contingency plan that had been in place for some time. The company reiterated its plans to introduce its Am486 microprocessors by mid-1993 but did not include a definition of 5/ While AMD believed that the arbitrator's decision gave the Company a license to Intel's 386 microcode, Intel had appealed the arbitration award and continued to allege copyright infringement in both the 287 Microcode Litigation and 386 Microcode Litigation. 6/ One Company forecast stated, "[e]very day that we can pull in our 486 introduction into June 1993 is worth an additional $1M in 1993 revenue. Incremental 486 capacity from FAB XV available in early 1994 could be conservatively worth an additional $100M in 1994 revenues." ==========================================START OF PAGE 7====== "independently derived" or mention the fact that AMD's clean room engineers had been given access to Intel's 386 microcode.7/ A copy of this December 2, 1992 News Release was attached as an exhibit to AMD's Form 8-K filed with the Commission on December 15, 1992. On March 26, 1993, AMD filed its Form 1O-K for the fiscal year ended December 27, 1992. While the MD&A contained broad, general statements about possible uncertainties that might affect AMD in the future, it contained no mention of AMD's actual use of Intel 386 microcode to develop its clean room 486 microcode.8/ In the MD&A, AMD noted that its microprocessor business accounted for approximately 35% of total sales, and acknowledged that its future outlook and growth depended in part on the successful introduction and market acceptance of its 486 computer chip with AMD microcode. However, the company did not mention the clean room's use of 386 microcode. Similarly, AMD noted that unfavorable outcomes in the 287 Microcode Litigation and the 386 Microcode Litigation, "could significantly impact the company's financial results in 1993." AMD did not disclose, however, that given the clean room's access to Intel 386 microcode to develop 486 microcode, adverse outcomes in the 287 and 386 Microcode Litigations and a reversal of the arbitration award in state court could adversely affect AMD's ability to enter the 486 microprocessor market. At an April 6, 1993 conference with securities analysts, in response to a question about the originality of its clean room microcode, AMD told attendees that "[w]e are absolutely confident that we have an immaculate conception. So we're not worried at all about the defensibility of our position." The clean room, however, had used Intel 386 microcode as a guide to understanding the functions the Am486 microcode needed to perform. 7/ As described below, in subsequent releases, Commission filings and at meetings with analysts through August 1993, AMD used a series of phrases, including "independently derived," "clean room," "proprietary," "immaculate conception," and "independently developed," to describe its 486 microcode. However, in none of these releases, filings or meetings did the Company disclose that its engineers had been given access to Intel's 386 microcode. 8/ The MD&A section for this Form 10-K report incorporated by reference the MD&A section in AMD's 1992 Annual Report to stockholders. ==========================================START OF PAGE 8====== On April 15, 1993, the judge in the 287 Microcode Litigation granted AMD's motion for a new trial.9/ This decision lifted the legal barrier that had prevented AMD from shipping Am486 microprocessors incorporating Intel microcode. On April 19th and 22nd, AMD issued press releases announcing the immediate shipment of Am486 microprocessors with Intel microcode. The Company also stated, however, that it had been developing "a `clean room' microcode in order to achieve technological independence" and that "members of the Am486 family incorporating the AMD microcode will be announced on July 4, 1993--Independence Day." As was the case in previous filings and press releases, AMD contrasted the "AMD 486 chip with Intel microcode" with the "AMD 486 chip with AMD's clean room microcode." The April 19, 1993 and April 22, 1993 press release were attached to a Form 8-K that AMD filed on April 22, 1993.10/ On May 11, 1993, AMD filed its Form 10-Q for the quarter ended March 28, 1993. In its Form 10-Q, AMD reiterated the importance of its microprocessor business, which represented more than 31 percent of total sales for the current quarter. The Company stated that despite recent legal developments allowing it to ship Am486 microprocessors with Intel microcode, it would "continue development of its clean room microcode in order to achieve technological independence from Intel" and that it expected to introduce its 486 microprocessor with AMD microcode in the second half of 1993. AMD stated that its future prospects were "highly dependent on x86 market conditions," and that the "successful introduction and market acceptance of both the Am486 with Intel microcode and the Am486 with AMD microcode" were critical to its future growth. The Company made no reference as to how the clean room's access to the Intel 386 microcode might affect pending or potential litigation with Intel and the introduction of the Am486 microprocessor with the AMD microcode. 5. AMD's Disclosures Regarding the Clean Room 486 Microcode -- June 4, 1993 through September 2, 1993 On June 4, 1993, California's Sixth District Court of Appeal reversed the arbitrator's award granting AMD a license to any Intel intellectual property contained in the Am386 microprocessor. Later that day, AMD issued a press release discussing the impact of the Court's opinion. The press release, 9/ On March 10, 1994, a jury in the retrial of the 287 Litigation returned a verdict in favor of AMD. 10/ On April 28, 1993, Intel filed a new federal lawsuit, alleging that both AMD's Am486 microprocessor containing Intel 486 microcode and the yet-to-be-introduced Am486 containing clean room microcode infringed Intel's 486 microcode copyrights. Among other things, Intel alleged that AMD's clean room failed to prevent access to Intel 486 microcode. ==========================================START OF PAGE 9====== however, made no mention that AMD had provided Intel's 386 microcode to the clean room or that the Court of Appeal's decision, if not overturned, would remove one source of legal authority for doing so. In addition, during a June 22, 1993 conference with analysts, an AMD spokesman stated that "this [appellate decision], incidentally, has no impact on our 486 business." The June 4, 1993 News Release was attached as an exhibit to AMD's Form 8-K filed on June 7, 1993.11/ Despite the Court of Appeal's reversal, AMD went forward with its "Independence Day" announcements. On July 6, 1993, the Company issued a press release introducing its Am486 microprocessor incorporating "proprietary" microcode developed by AMD. This press release went through at least ten revisions, but it still did not disclose the clean room's access to disputed intellectual property or discuss the possible impact of the arbitration reversal on the clean room's product.12/ Later that day during a telephonic press conference, AMD described the product as representing "AMD's technological independence at the 486 level," and as having AMD's "own derived microcode." Asked how AMD could prove that the microcode was independently derived, AMD emphasized: (1) the extensive effort AMD had undertaken to isolate the clean room engineers; (2) that all material that had come in and out of the clean room had been recorded; and (3) that the starting point did not include any Intel microcode. Stressing the engineers' prior lack of experience with Intel x86 products, the Company stated that no one inside the clean room had worked on an x86 compatible product before and that "the team inside the clean room were the `Intel virgins,' so to speak." 11/ Shortly after the Appellate Court's opinion, AMD entered into an agreement with an outside consultant to develop a "squeaky clean" version of 486 microcode in an externally staffed clean room. Unlike the first clean room program, the objective of the second clean room program was to develop a fully compatible 486 microcode, without access to any Intel microcode. 12/ Various drafts of the press release demonstrate AMD's awareness of the issue. The final version was revised to omit any references to "independently developed" or "independently derived" microcode. The phrase "microcode derived independently by AMD" was revised to "microcode developed by AMD." "Clean room Am486 microprocessor microcode" was changed to "proprietary Am486 microprocessor microcode." A statement - that AMD was technologically independent at the 486 level - was removed from the final version of the release but resurfaced in oral remarks at the accompanying analysts' conference. ==========================================START OF PAGE 10====== On August 2, 1993, AMD filed its Form 10-Q for the second quarter ended June 27, 1993. In the MD&A, AMD stated that shipments of its 486 microprocessors incorporating microcode developed by AMD would begin in the third quarter of 1993. The company went on to state that its future growth was dependent on market acceptance of both the Am486 microprocessor with Intel microcode and Am486 microprocessor with AMD microcode. AMD, however, did not reveal the clean room engineers' access to Intel's 386 microcode. AMD also noted that it had filed a Petition for Hearing with the California Supreme Court seeking review of the Court of Appeals' decision reversing the arbitration award. While the Company warned that an adverse decision by the California Supreme Court could, among other things, preclude AMD from selling Am386 microprocessors with Intel microcode, the Company did not mention that an adverse decision might also create legal risks for the Am486 microprocessors containing AMD's clean room microcode. 6. AMD's Corrective September 1993 Disclosures Result in 10.8% Drop in Stock Price In late August 1993, AMD conducted an analysis of the microcode and learned that 600 to 700 lines out of a total of 3300 of AMD's clean room 486 microcode appeared to be substantially similar to lines of Intel's 386 microcode. On September 2, 1993, AMD issued a press release that combined positive news -- namely, that the Supreme Court had agreed to review the appellate court ruling that overturned the arbitrator's award of Intel's 386 intellectual property to AMD13/ -- with the negative news that: (1) the AMD "engineers responsible for developing the company's independently derived Am486 SX microcode were exposed to Intel 386 microcode"; and (2) "some portion of the 386 microcode was probably incorporated." In a conference call with analysts the following day, AMD stated that: (1) it intentionally provided engineers with the 386 microcode "to ensure that we came to market quickly"; and (2) approximately 25% or 600-700 lines of AMD's 486 microcode was "substantially similar" to Intel's 386 microcode. For the first time, AMD also acknowledged the existence of the second clean 13/ On December 30, 1994, the California Supreme Court reversed the Court of Appeal's decision overturning the arbitrator's award. Thereafter, AMD and Intel called a truce to their long-standing litigation battles and entered into a global settlement of all pending litigation. Under the terms of the settlement, AMD received a license to manufacture and sell 287, 386 and 486 microprocessors incorporating Intel microcode. ==========================================START OF PAGE 11====== room and its ongoing effort to produce "squeaky clean" microcode. On September 4, 1993, AMD's common stock fell 2 points; it was the New York Stock Exchange's most active issue. On September 7, 1993, after the Labor Day weekend had passed, AMD's stock fell an additional 1 3/8 points on a volume of 2,239,000 shares. The cumulative drop of 3 3/8 points represented a price decline of over 10.8%. D. APPLICABLE LAW 1. Section 13(a) of the Exchange Act a. AMD's Duty to File Accurate Reports Section 13(a) of the Exchange Act requires all issuers whose securities are registered pursuant to Section 12 of the Exchange Act to file periodic and other reports containing such information as the Commission by rule prescribes. Pursuant to Section 13(a), the Commission has promulgated Rules 13a-1, 13a-11, and 13a-13, which require issuers to file with the Commission annual, current and quarterly reports, respectively. Courts have long held that the requirement to file periodic and other reports pursuant to Section 13(a) necessarily includes a requirement that the information contained in the reports be true and correct. In other words, while Section 13(a) does not specifically so state, all periodic reports filed with the Commission under the Exchange Act must be accurate in all material respects. The Commission, by Rule, has expressly adopted the requirement found by the courts to be implicit within Section 13(a). Rule 12b-20, promulgated under Section 13(a), requires that reports filed under the Exchange Act contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances in which they are made, misleading. b. Management's Discussion and Analysis as Required by Item 303 of Regulation S-K In addition to the general obligation of full and accurate disclosure imposed by the courts and Rule 12b-20, the Commission has established specific disclosure requirements for annual and quarterly reports on Forms 10-K and 10-Q. Among other things, these reports must contain an MD&A section that includes the information required by Item 303 of Regulation S-K. See Part I, Item 2 of Form 10-Q and Part II, Item 7 of Form 10-K. Item 303(a) of Regulation S-K (applicable to annual reports) requires management to discuss the liquidity, capital resources, and results of operations of the registrant and to "provide such ==========================================START OF PAGE 12====== other information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations." The registrant is to discuss "any known trends ... or ... uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales and revenues or income from continuing operations." Item 303(a)(1). "The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results." Instruction 3 to Item 303(a). Registrants must discuss new matters which will have an impact on future results and matters which have previously had an impact on reported operations but which are not expected to have an impact on-future operations. Id. Item 303(b) of Regulation S-K (applicable to interim reports, including quarterly reports) requires a discussion and analysis of the results of operations to enable the reader to assess material changes in financial condition and results of operations that have occurred since the end of the preceding fiscal year. Discussion of material changes in any of the areas set forth in Item 303(a) is also required. In 1989, the Commission interpreted a number of the requirements for MD&A disclosure. See Release Nos. 33-6835, 34-26831, IC-16961, FR-36 (May 18, 1989) (hereafter "MD&A Release"). Drawing on earlier releases, the MD&A Release discussed the underlying rationale for requiring MD&A disclosure. The Commission stated that without the MD&A's narrative explanation, a company's financial statements and accompanying footnotes may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. MD&A Release III.A (quoting Securities Act Release No. 6349 (September 28, 1981)). Since no two companies are identical, "[t]he MD&A requirements are intentionally flexible and general." MD&A Release IV. The MD&A Release also set forth the following test for determining when disclosure of prospective information is required: Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments: (1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management ==========================================START OF PAGE 13====== determines that it is not reasonably likely to occur, no disclosure is required. (2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant's financial condition or results of operations is not reasonably likely to occur. MD&A Release III.B. Where the test for disclosure is met, "MD&A disclosure of the effects of the uncertainty, quantified to the extent reasonably practicable, [is] required." Id. 2. Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit making any untrue statement of material fact, or omitting to state a material fact necessary in order to make the statements made not misleading, in connection with the purchase and sale of a security. A violation of Section 10(b) and Rule 10b-5 thereunder requires a showing of scienter. E. ANALYSIS In each instance that AMD undertook to make representations to the public regarding its "clean room" operations, whether the statements were made via press releases, conferences with analysts, voluntary reports on Form 8-K or in mandatory reports on Form 10-K or Form 10-Q, AMD had a duty to speak completely and accurately. AMD did not do so. As discussed below, because the sources of AMD's duty to speak fully and accurately varied according to the type of communication made, AMD's resulting violations of the federal securities laws also varied. AMD's press releases and statements made during conferences with analysts violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, AMD's inaccurate filings with the Commission on Forms 8-K, 10-K and 10-Q violated Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. 1. AMD's Violations of Section 13(a) of the Exchange Act-- December 15, 1992 through August 2, 1993 AMD's reports on Forms 8-K, 10-K and 10-Q filed with the Commission from December 15, 1992 through August 2, 1993 were materially inaccurate. From December 15, 1992 to June 4, 1993, AMD's filings led the public to believe that although the ongoing litigation rendered AMD's ability to use Intel's intellectual property uncertain, its "clean room" operations served as a protection against a possible adverse decision in the ongoing ==========================================START OF PAGE 14====== litigation. From June 4, 1993 through August 2, 1993, AMD's filings failed to disclose that due to the appellate court's ruling, there was a substantial question as to whether the clean room's use of the Intel 386 microcode would jeopardize AMD's ability to sell the "486 chip with AMD microcode" without violating Intel's 386 microcode copyright. AMD's Form 8-K filed December 15, 1992 contained the press release regarding the effect of the court's ruling in the 287 Microcode Litigation that AMD's copyright license did not extend to Intel microcode. By characterizing the clean room's ongoing "[d]evelopment of an independently derived microcode for the Am486 microprocessor family" as a contingency plan that had been in place for some time, AMD, in effect, represented that the decision would only have the effect of delaying the introduction of the 486 chip. By failing to include a definition of "independently derived" or mentioning the fact that clean room engineers had been intentionally exposed to Intel's 386 microcode, AMD overstated the protection that the clean room approach afforded investors. AMD's Form 10-K filed on March 26, 1993 (for the fiscal year ended December 27, 1992) also failed to disclose the clean room's use of Intel's 386 microcode in developing AMD's microcode for its 486 chips. As discussed above, this uncertainty might have had a "material unfavorable impact on net sales and revenues from continuing operations" of a business division which accounted for about 35 percent of total 1992 sales. The possibility that AMD's 486 microcode might have been tainted by the clean room's use of Intel's 386 microcode was also a "matter that would have had an impact on future operations and have not had an impact in the past." Therefore, disclosure was required within the MD&A. AMD's Form 8-K filed April 22, 1993 contained the press releases of April 19th and 22nd stating that AMD had been developing "a `clean room' microcode in order to achieve technological independence" by July 4, 1993. These press releases contrasted the "Am486 with Intel microcode" with the "Am486 with the AMD microcode" when, in fact, the clean room 486 microcode was developed by engineers who had access to Intel 386 microcode. AMD's Form 10-Q filed May 11, 1993 (for the quarter ended March 28, 1993) failed to disclose the clean room's access to Intel's 386 microcode and thereby precluded the reasonable investor from assessing material changes in financial condition and results of operations that had occurred since the end of the preceding fiscal year. Disclosure of the clean room's access to Intel's 386 microcode would have enabled the reasonable investor to better assess the possible impact of the litigations on AMD's operations and sales. AMD's Form 8-K filed June 7, 1993 contained the June 4th press release discussing the impact of the California's Sixth ==========================================START OF PAGE 15====== District Court of Appeal's opinion. The press release, however, made no mention of the clean room's access to Intel's 386 microcode and the possible effect on AMD's efforts to compete in the 486 market if the Court of Appeal's opinion became the final decision in the case. AMD's Form 1O-Q filed on August 2, 1993 (for the second quarter ended June 27, 1993) claimed that shipments of its 486 microprocessors incorporating microcode developed by AMD would begin in the third quarter of 1993. While the Company warned that an adverse decision by the California Supreme Court could preclude AMD from selling 386 microprocessors with Intel microcode, the Company did not mention that, depending on the outcome of other pending or potential litigation with Intel, an adverse decision might preclude it from selling Am486 microprocessors with AMD's clean room microcode. As of June 4, 1993, there was a substantial question as to whether AMD had the right to use Intel's intellectual property contained in AMD's reverse-engineered Am486 computer chip. California's Sixth District Court of Appeal had reversed the arbitrators award, which had granted AMD the right to use Intel 386 microcode. This reversal put into question whether AMD's decision to give the clean room engineers access to Intel 386 microccode would cause AMD's "clean room" 486 microcprocessor to infringe Intel's 386 copyrights. As discussed above, AMD's 8-K filed on June 7, 1993, and its Form 10-Q filed on August 2, 1993, failed to disclose this material litigation outcome uncertainty. These filings constituted inaccurate statements to the public. 2. AMD's Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder - June 4, 1993 to September 2, 1993 AMD's statements made via press releases directly to the public and during conferences with analysts were materially misleading and support a finding of violations of Section 10(b) and Rule 10b-5.14/ The June 4th and July 6th press releases discussing the impact of the Court of Appeal's opinion did not disclose the effect of the appellate court's decision on AMD's efforts to compete in the 486 market, in light of the clean room engineers' access to Intel's 386 microcode. AMD's failure to disclose this fact and the resulting legal risks constitutes a 14/ It is well established under the federal securities laws that statements made by an issuer to the general public - whether via press releases or in conferences with analysts - must be accurate in all material respects. All of the U.S. Circuit Courts to address the issue have held that when an publicly held company chooses to speak, it must do so completely and truthfully and that failure to do so may constitute a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. ==========================================START OF PAGE 16====== material omission. During its June 22nd conference with analysts AMD inaccurately claimed that the Court of Appeal's decision "had no impact" on AMD's 486 business. During its July 6th telephone conference call with analysts, AMD overstated its "technological independence at the 486 level" and inaccurately claimed that "[t]he starting point for the 486 chip did not include any Intel microcode."15/ AMD's commencement in June 1993 of the second clean room without 386 microcode as a back-up or contingency underscored its awareness of the risks associated with the clean room's use of Intel's microcode. The revisions to AMD's July 6, 1993 press release, none of which rose to the level of a corrective disclosure, also demonstrate the Company's awareness of the disclosure issues that the June 4th court decision presented. Nonetheless, from June 4th through September 2nd, AMD continued to overstate the legal protection the clean room approach afforded the company. F. FINDINGS Based on the above, the Commission finds that AMD willfully violated Sections 10(b) and 13(a) of Exchange Act and Rules 10b- 5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder IV. AMD has submitted an Offer of Settlement, in which, solely for the purpose of these proceedings, or any other proceeding brought by or on behalf of the Commission, or in which the Commission may be a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R.  201.1 et seq., and without admitting or denying any of the above, except that AMD admits the jurisdiction of the Commission over it and over the subject matter of these proceedings, AMD consents to the issuance of this Order. 15/ As discussed above, AMD repeatedly used terms such as "independently developed," "independently derived," "proprietary" and "clean room," to describe the purported independence of AMD's development efforts. Even if each one of these terms could be interpreted as fairly describing the situation, their use was nevertheless misleading. Phrases and terms, although literally accurate, can, through their context and manner of presentation, act as devices which mislead investors. For this reason, the disclosure required by the federal securities laws is measured not by whether some interpretation of a word or phrase can be viewed as literally true, but by whether the reader is accurately informed. ==========================================START OF PAGE 17====== V. In view of the foregoing, the Commission deems it appropriate and in the public interest to accept AMD's Offer and, accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that AMD cease and desist from committing or causing any violation of, and committing or causing any future violation of, Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary