		Page No. ~~--------~~
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations -— Quarters Ended March 31, 2002 and April 1, 2001 ~~and April 2, 2000~~		3
Condensed Consolidated Balance Sheets ~~- April 1, 2001~~— March 31, 2002 and December ~~31, 2000~~ 30, 2001		4
Condensed Consolidated Statements of Cash Flows -— Quarters Ended March 31, 2002 and April 1, 2001 ~~and April 2, 2000~~		5
Notes to Condensed Consolidated Financial Statements		6

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk 37		38

Part II. Other Information ~~- ---------------------------~~

Item 2. Changes in Securities and Use of Proceeds		39

Item 6. Exhibits and Reports on Form 8-K 38		39

Signature 39		40

See accompanying notes.
3
ADVANCED MICRO DEVICES, INC. ~~----------------------------~~
CONDENSED CONSOLIDATED BALANCE SHEETS ~~------------------------------------- (Thousands)~~
(Thousands except per share amounts)

March 31,
2002

December 30,
2001*


(unaudited)

Assets
Current assets:
Cash and cash equivalents    $ 298,387    $ 427,288
Short-term investments    978,336    442,709


Total cash, cash equivalents and short-term investments    1,276,723    869,997
Accounts receivable, net of allowance for doubtful accounts    692,165    659,783
Inventories:
Raw materials    20,025    26,489
Work-in-process    266,401    236,679
Finished goods    90,369    117,306


Total inventories    376,795    380,474
Deferred income taxes    162,820    155,898
Prepaid expenses and other current assets    151,377    286,957


Total current assets    2,659,880    2,353,109
Property, plant and equipment:
Land    46,758    33,207
Buildings and leasehold improvements    1,232,130    1,461,228
Equipment    4,644,065    4,162,652
Construction in progress    483,867    469,191


Total property, plant and equipment    6,406,820    6,126,278
Accumulated depreciation and amortization    (3,637,586 )    (3,387,140 )


Property, plant and equipment, net    2,769,234    2,739,138
Investment in joint venture    353,352    363,611
Other assets    182,476    191,384


   $ 5,964,942    $ 5,647,242


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable    $ 383,495    $ 304,990
Accrued compensation and benefits    133,401    129,042
Accrued liabilities    321,953    443,995
Income taxes payable    56,113    56,234
Deferred income on shipments to distributors    68,016    47,978
Notes payable to banks    —      63,362
Current portion of long-term debt, capital lease obligations and other    264,029    268,336


Total current liabilities    1,227,007    1,313,937
Deferred income taxes    104,661    105,305
Long-term debt, capital lease obligations and other, less current portion    1,123,671    672,945
Stockholders’ equity:
Common stock, par value $0.01; 750,000,000 authorized; 341,389,966 shares issued and outstanding at March 31, 2002 and 340,502,883 at December 30, 2001    3,414    3,405
Capital in excess of par value    1,975,506    1,966,374
Treasury stock, at cost: 6,310,580 shares    (77,157 )    (77,157 )
Retained earnings    1,786,517    1,795,680
Accumulated other comprehensive loss    (178,677 )    (133,247 )


Total stockholders’ equity    3,509,603    3,555,055


   $ 5,964,942    $ 5,647,242


April 1, December 31, 2001 2000* ----------- ------------ (unaudited) Assets - ------ Current assets: Cash and cash equivalents $1,055,776 $ 591,457 Short-term investments 539,780 701,708 ---------- ---------- Total cash, cash equivalents and short-term investments 1,595,556 1,293,165 Accounts receivable, net of allowance for doubtful accounts 602,067 547,200 Inventories: Raw materials 44,470 34,413 Work-in-process 171,873 154,854 Finished goods 138,287 154,274 ---------- ---------- Total inventories 354,630 343,541 Deferred income taxes 189,185 218,527 Prepaid expenses and other current assets 139,661 255,256 ---------- ---------- Total current assets 2,881,099 2,657,689 Property, plant and equipment, at cost 5,621,154 5,461,801 Accumulated depreciation and amortization (2,957,250) (2,825,334) ---------- ---------- Property, plant and equipment, net 2,663,904 2,636,467 Investment in joint venture 249,866 261,728 Other assets 234,536 211,851 ---------- ---------- $6,029,405 $5,767,735 ========== ========== Liabilities and Stockholders' Equity - ------------------------------------ Current liabilities: Accounts payable $377,067 $477,369 Accrued compensation and benefits 139,477 172,815 Accrued liabilities 278,092 276,721 Income taxes payable 84,286 74,806 Deferred income on shipments to distributors 99,286 92,828 Current portion of long-term debt, capital lease obligations and other 183,525 129,570 ---------- ---------- Total current liabilities 1,161,733 1,224,109 Deferred income taxes 198,066 203,986 Long-term debt, capital lease obligations and other, less current portion 1,392,970 1,167,973 Commitments and contingencies Stockholders' equity: Common stock, par value 3,160 3,141 Capital in excess of par value 1,422,593 1,406,290 Retained earnings 1,981,098 1,856,261 Accumulated other comprehensive loss (130,215) (94,025) ---------- ---------- Total stockholders' equity 3,276,636 3,171,667 ---------- ---------- $6,029,405 $5,767,735 ========== ==========
*
Amounts as of December ~~31, 2000~~30, 2001 were derived from the December ~~31, 2000~~30, 2001 audited financial statements.
See accompanying notes. ~~---------------------- -4-~~
4
ADVANCED MICRO DEVICES, INC. ~~----------------------------~~
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~-----------------------------------------------~~
(Unaudited)
(Thousands)
Quarter Ended --------------------------- April 1, April 2, 2001 2000 ------------- ------------- Cash flows from operating activities: Net income $ 124,837 $ 189,349 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 152,933 127,892 Net change in deferred income taxes 23,422 (515) Foreign grant and subsidy income (10,937) (11,711) Net loss (gain) on disposal of property, plant and equipment 4,119 (3,035) Undistributed (income) loss of joint venture (13,183) 969 Recognition of deferred gain on sale of building (421) (420) Net compensation recognized under employee stock plans 984 1,053 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (55,160) 24,405 (Increase) in inventories (11,131) (6,752) (Increase) decrease in prepaid expenses (2,506) 692 Decrease (increase) in other assets 92,978 (4,926) Increase (decrease) in tax refund receivable and tax payable 7,152 (6,547) (Refund) receipt of customer deposits under purchase agreements (30,000) 100,000 (Decrease) increase in payables and accrued liabilities (107,473) 199,623 (Decrease) in accrued compensation (33,338) (223,314) Income tax benefits from employee stock option exercises 4,480 - ---------- --------- Net cash provided by operating activities 146,756 386,763 Cash flows from investing activities: Purchases of property, plant and equipment (162,713) (129,027) Proceeds from sale of property, plant and equipment 299 9,049 Purchases of available-for-sale securities (743,835) (729,799) Proceeds from sale/maturity of available-for-sale securities 886,956 495,666 ---------- --------- Net cash provided by (used in) investing activities (19,293) (354,111) Cash flows from financing activities: Proceeds from borrowings 330,138 3,598 Payments on debt and capital lease obligations (2,778) (4,246) Proceeds from issuance of stock and other 10,858 51,557 ---------- --------- Net cash provided by financing activities 338,218 50,909 Effect of exchange rate changes on cash and cash equivalents (1,362) 2,468 ---------- --------- Net increase in cash and cash equivalents 464,319 86,029 Cash and cash equivalents at beginning of period 591,457 294,125 --------- --------- Cash and cash equivalents at end of period $1,055,776 $ 380,154 ========== ========= Supplemental disclosures of cash flow information: Cash paid for: Interest $ 7,953 $ 25,507 ========== ========= Income taxes $ 8,351 $ 3,215 ========== =========

Quarter Ended


March 31,
2002

April 1,
2001

Cash flows from operating activities:
Net income (loss)    $ (9,163 )    $ 124,837
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation    165,743    148,167
Amortization    8,364    4,766
Provision for doubtful accounts    1,644    552
Net change in deferred income taxes    (7,566 )    23,422
Foreign grant and subsidy income    (13,808 )    (10,937 )
Net loss on disposal of property, plant and equipment    13,826    4,119
Undistributed income of joint venture    (2,959 )    (13,183 )
Recognition of deferred gain on sale of building    (420 )    (421 )
Net compensation recognized under employee stock plans    869    984
Changes in operating assets and liabilities:
Increase in accounts receivable    (33,969 )    (55,712 )
Decrease (increase) in inventories    3,834    (11,131 )
Increase in prepaid expenses    (23,636 )    (2,506 )
Decrease in other assets    129,354    92,978
Increase in tax payable    33,542    7,152
Refund of customer deposits under purchase agreements    (30,000 )    (30,000 )
Decrease in payables and accrued liabilities    (29,481 )    (107,473 )
Increase (decrease) in accrued compensation    4,359    (33,338 )
Income tax benefit from employee stock option exercises    —      4,480


Net cash provided by operating activities    210,533    146,756
Cash flows from investing activities:
Purchases of property, plant and equipment    (199,083 )    (162,713 )
Proceeds from sale of property, plant and equipment    —      299
Acquisition of Alchemy Semiconductor, net of cash acquired    (26,509 )    —
Purchases of available-for-sale securities    (1,934,438 )    (743,835 )
Proceeds from sales/maturities of available-for-sale securities    1,390,761    886,956


Net cash used in investing activities    (769,269 )    (19,293 )
Cash flows from financing activities:
Proceeds from borrowings    501,251    322,948
Payments on debt and capital lease obligations    (67,321 )    (2,778 )
Debt issuance costs    (14,057 )    —
Proceeds from foreign grants    8,295    7,190
Proceeds from issuance of stock    8,272    10,858


Net cash provided by financing activities    436,440    338,218
Effect of exchange rate changes on cash and cash equivalents    (6,605 )    (1,362 )


Net increase (decrease) in cash and cash equivalents    (128,901 )    464,319
Cash and cash equivalents at beginning of period    427,288    591,457


Cash and cash equivalents at end of period    $ 298,387    $ 1,055,776


Supplemental disclosures of cash flow information:
Cash paid (refund):
Interest    $ 8,158    $ 7,953


Income taxes    $ (28,890 )    $ 8,351


See accompanying notes. ~~- ---------------------- -5-~~
5
ADVANCED MICRO DEVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 30, 2001. In the opinion of the Company's management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The interim financial statements should be read in conjunction with the financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The Company uses a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended April 1, 2001 and April 2, 2000 included 13 weeks and 14 weeks, respectively. -6- ~~2. Available-For-Sale Securities~~
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Advanced Micro Devices, Inc. (the Company or AMD) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending December 29, 2002. In the opinion of the Company’s management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. The interim financial statements should be read in conjunction with the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 30, 2001.
The Company uses a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended March 31, 2002 and April 1, 2001 each included 13 weeks.
2.
New Accounting Pronouncements
The Company adopted FAS 141, FAS 142 and FAS 144 at the beginning of the 2002 fiscal year. The adoption of these standards did not have a material impact on the Company’s financial statements.
6
3.
Available-For-Sale Securities
The following is a summary of ~~available-for-sale securities:~~
~~April 1, (Thousands) 2001 --------~~ Cash equivalents: Certificates of deposit $ 33,982 Commercial paper 441,180 Money market funds 51,421 Federal agency note 62,711 -------- Total cash equivalents $589,294 ======== Short-term investments: Money market auction rate preferred stocks $246,478 Municipal bonds 283,333 Floating rate note 9,969 -------- Total short-term investments $539,780 ======== Long-term investments: Equity investments $ 18,455 Commercial paper 9,999 Treasury notes 2,105 -------- Total long-term investments (included in other assets) $ 30,559 ========
~~-7-~~ 3. Net Income per Common Share Basic net income per common share is computed using the weighted-average common shares outstanding. Diluted net income per common share is computed using the weighted-average common shares outstanding plus any potential dilutive securities. Dilutive securities include stock options, restricted stock and shares issuable upon the conversion of convertible debt. The following table sets forth the components of basic and diluted income per common share:
Quarter Ended ---------------------- April 1, April 2, (Thousands except per share data) 2001 2000 --------- --------- Numerator: Numerator for basic income per common share $ 124,837 $ 189,349 Effect of adding back interest expense associated with convertible debentures 5,275 7,763 --------- --------- Numerator for diluted income per common share $ 130,112 $ 197,112 Denominator: Denominator for basic income per share - weighted-average shares 314,347 302,257 Effect of dilutive securities: Employee stock options 9,484 14,158 Restricted stock - 2 Convertible debentures 27,954 27,964 --------- --------- Dilutive potential common shares 37,439 42,124 --------- --------- Denominator for diluted net income per common share - 351,785 344,381 adjusted weighted-average shares Net income per common share: --------- --------- Basic $ 0.40 $ 0.63 ========= ========= Diluted $ 0.37 $ 0.57 ========= =========
~~-8-~~ On August 21, 2000, the Company effected a two-for-one stock split in the form of a stock dividend of one share of common stock for each share of AMD common stock held on August 7, 2000. Share and per share amounts have been adjusted for prior periods presented to give effect to the stock split. 4. Investment in Joint Venture In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD Semiconductor Limited (FASL), for the development and manufacture of non- volatile memory devices. FASL operates advanced integrated circuit manufacturing facilities in Aizu-Wakamatsu, Japan, to produce Flash memory devices. FASL also uses foundry facilities in Iwate, Japan and Gresham, Oregon. The Company's share of FASL is 49.992 percent, and the investment is being accounted for under the equity method. At April 1, 2001, the cumulative adjustment related to the translation of the FASL financial statements into U.S. dollars resulted in a decrease in the investment in FASL of $39 million. The following are the significant FASL related-party transactions and balances recorded by AMD:
Quarter Ended ---------------------- April 1, April 2, (Thousands) 2001 2000 ---------- ----------- Royalty income $ 14,345 $ 6,542 Purchases 159,727 76,238 April 1, April 2, (Thousands) 2001 2000 ---------- ----------- Royalty receivable $ 20,855 $12,402 Accounts payable 89,917 43,614
~~The following is condensed unaudited financial data of FASL:~~
Quarter Ended ------------------------- April 1, April 2, (Thousands) 2001 2000 ---------- -------------- Net sales $316,467 $ 145,442 Gross profit 75,521 813 Operating income (loss) 74,435 (129) Net income (loss) 36,575 (247)
The Company's share of the above FASL net income (loss) differs from the equity in net income (loss) of joint venture reported on the condensed consolidated statements of operations. The difference is due primarily to adjustments resulting from the related party transactions between FASL and the Company which are reflected on the Company's condensed consolidated statements of operations. -9- 5. Segment Reporting In the first quarter of 2001, AMD operated in two reportable segments: the Core Products and Foundry Services segments. AMD has previously shown three reportable segments; however, as a result of the sale of Legerity, Inc. (Legerity), the Company's former Voice Communications product business, effective July 31, 2000, the Company re-evaluated its segment reporting structure and eliminated the Voice Communications segment. Segment information for the period ended April 2, 2000 has been restated to conform to the current period presentation. The Core Products segment includes microprocessors, Flash memory devices, Erasable Programmable Read-Only Memory (EPROM) devices, embedded processors, platform products and networking products. The Voice Communications segment included voice communications products of Legerity, until July 31, 2000, the effective date of its sale. The Foundry Services segment includes fees for wafer fabrication and assembly, test, mark and pack services provided to Legerity and Vantis Corporation (Vantis), the Company's former programmable logic subsidiary. The following table is a summary of the operating income by segment for the quarters ended April 1, 2001 and April 2, 2000:
Quarter Ended ------------------------- (Thousands) April 1, April 2, Net sales: 2001 2000 ------------ ------------ Core Products segment $1,147,140 $1,012,644 Voice Communications segment - 59,520 Foundry Services segment 41,607 19,865 ------------ ------------ Total net sales $1,188,747 $1,092,029 ============ ============ Segment operating income: Core Products segment $ 166,209 $ 159,137 Voice Communications segment - 16,297 Foundry Services segment 810 5,235 ------------ ------------ Total segment operating income 167,019 180,669 Interest income and other, net 18,823 21,128 Interest expense (21,645) (11,479) Provision for income taxes (52,543) - Equity in net income (loss) of FASL 13,183 (969) ------------ ------------ Net income $ 124,837 $ 189,349 ============ ============
~~-10-~~ ~~6. Comprehensive Income The following are the components of comprehensive income:~~
Quarter Ended -------------------------- April 1, April 2, (Thousands) 2001 2000 ----------- --------------- Net income $ 124,837 $ 189,349 Foreign currency translation adjustments (17,382) (25,369) Derivative financial instrument gains (losses), net (7,817) - Unrealized gains on securities, net of tax: Unrealized gains (losses) on investments arising during the period (10,990) 2,510 ----------- ------------- Other comprehensive income (loss) (36,189) (22,859) ----------- ------------- Comprehensive income $ 88,648 $ 166,490 =========== =============
~~The components of accumulated other comprehensive loss are as follows:~~
~~April 1, April 2, (Thousands) 2001 2000 ----------- ----------~~ Unrealized gain on investments, net of tax $ 2,152 $ 16,788 Derivatives - cash flow hedging adjustments (7,817) - Cumulative translation adjustments (124,550) (57,061) ----------- ---------- $(130,215) $(40,273) =========== ==========
~~-11-~~ 7. Share Repurchase Program On January 29, 2001, the Company announced that the Board of Directors had authorized a program to repurchase up to $300 million worth of the Company's common shares over a period of time to be determined by management. Any such repurchases will be made in the open market or in privately negotiated transactions from time to time in compliance with Rule 10b-18 of the Securities Exchange Act, subject to market conditions, applicable legal requirements and other factors. This plan does not obligate the Company to acquire any particular amount of its common stock, and the plan may be suspended at any time at the Company's discretion. No shares have been repurchased as of April 1, 2001. 8. Dresden Loan Agreements AMD Saxony, an indirect wholly owned subsidiary of the Company, operates the Company's manufacturing and design facility in Dresden, Germany (Dresden Fab 30). In 1997, AMD Saxony entered into a loan and related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank AG. In February 2001, the Dresden Loan Agreements were amended to reflect new capacity and increased capital spending plans for Dresden Fab 30. Under the February 2001 amendments, the Company agreed to extend its guaranty of AMD Saxony's obligations and to make available to AMD Saxony revolving loans of up to $500 million. The Company also expanded its obligation to reimburse AMD Saxony for the cost of producing wafers for the Company and agreed to cancel the cost overrun facility made available by the banks. Under these amendments, the Company has been released from financial covenants limiting capital expenditures and requiring AMD Saxony to achieve capacity and production cost targets by the end of 2001. The Dresden Loan Agreements, as amended, require that the Company: provide interim funding to AMD Saxony if either the remaining capital investment allowances or the remaining interest subsidies are delayed, such interim funding to be repaid as AMD Saxony receives the grants and subsidies from the State of Saxony; fund shortfalls in government subsidies resulting from any default under the subsidy agreements caused by AMD Saxony or its affiliates; and guarantee up to 35 percent of AMD Saxony's obligations under the Dresden Loan Agreement, which guarantee must not be less than $100 million or more than $275 million, until the bank loans are repaid in full. 9. Derivative Instrument and Hedging On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of ~~the derivative are either offset against the change~~investments in fair value of assets, liabilities, or firm commitments through earnings (fair value hedges) or recognized in other comprehensive income until the hedged item is recognized in earnings (cash flow hedges). The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. As of January 1, 2001 the Company's foreign currency forward contracts had been entered into solely to hedge the gains and losses generated by the remeasurement of foreign currency denominated intercompany accounts. These derivatives therefore did not qualify for hedge accounting and, therefore, the change in fair values of these derivatives are adjusted to fair value as a component of cost of sales and offset the change in fair values of the related intercompany accounts. Accordingly, the adoption of SFAS 133 had no impact on the Company's consolidated financial position or operating results. The Company purchases significant volumes of inventory from its unconsolidated joint venture in Japan, FASL, and from AMD Saxony. Purchases from FASL and AMD Saxony are denominated in yen and the euro, respectively. Therefore, in the normal course of business, the Company's financial position is routinely subjected to market risk associated with foreign currency rate fluctuations. The Company's general practice is to ensure that material business exposure to foreign exchange risks are identified, measured and minimized using the most effective and efficient methods to eliminate or reduce such exposures. To protect against the reduction in value of forecasted yen and euro denominated cash flows resulting from these transactions, the Company has instituted a foreign currency cash flow hedging program. The Company purchases foreign currency forward contracts and sells or purchases foreign currency option contracts generally expiringavailable-for-sale securities:

March 31,
2002
(Thousands)

Cash equivalents:
Commercial paper    $ 33,938
Money market funds    40,052
Federal agency notes    30,229

Total cash equivalents    $ 104,219

Short-term investments:
Commercial paper    $ 32,805
Money market auction rate preferred stocks    331,140
Federal agency notes    372,959
Corporate notes    236,407
Tax exempt money market fund    5,025

Total short-term investments    $ 978,336

Long-term investments:
Equity investments    $ 21,079
Commercial paper    10,196
Federal agency notes    3,323

Total long-term investments (included in other assets)    $ 34,598

7
4.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed using the weighted-average common shares outstanding. Diluted net income (loss) per common share is computed as though all potential dilutive common shares were outstanding during the period. Dilutive securities include stock options and shares issuable upon the conversion of convertible debt. The following table sets forth the components of basic and diluted income (loss) per common share:

Quarter Ended

March 31,
2002

April 1,
2001
(Thousands except per share data)

Numerator:
Numerator for basic income (loss) per common share    $ (9,163 )    $ 124,837


Effect of adding back interest expense associated with convertible debentures    —      5,275


Numerator for basic income (loss) per common share    $ (9,163 )    $ 130,112


Denominator:
Denominator for basic income (loss) per share—weighted-average shares    340,806    314,347
Effect of dilutive securities:
Employee stock options    —      9,484
Convertible debentures    —      27,954


Dilutive potential common shares    —      37,438


Denominator for diluted income (loss) per common share—adjusted weighted-average shares    340,806    351,785


Net income (loss) per common share:
Basic    $ (0.03 )    $ 0.40


Diluted    $ (0.03 )    $ 0.37


In the first quarter of 2002, approximately 21 million of shares of common stock issuable upon exercise of stock options and upon the conversion of convertible debt were excluded from the computation of diluted net loss per common share because the effect in periods with a net loss would be antidilutive.
8
5.
Investment in Joint Venture
In 1993, AMD and Fujitsu Limited formed a joint venture, Fujitsu AMD Semiconductor Limited (FASL), for the development and manufacture of non-volatile memory devices. FASL operates advanced integrated circuit (IC) manufacturing facilities in Aizu-Wakamatsu, Japan, for the production of Flash memory devices. The Company’s share of FASL is 49.992 percent, and the investment is being accounted for under the equity method. At March 31, 2002, the cumulative adjustment related to the translation of the FASL financial statements into U.S. dollars resulted in a decrease in the investment in FASL of $66.6 million.
The following are the significant FASL related party transactions and balances, which were included in the Company’s consolidated financial statements:

March 31,
2002

April 1,
2001
(Thousands)
Royalty income    $ 7,276    $ 14,345
Purchases    87,499    159,727

March 31,
2002

April 1,
2001
(Thousands)

Royalty receivable    $ 13,515    $ 20,855
Accounts payable    30,010    89,917
The following is condensed unaudited financial data of FASL:

Quarter Ended

March 31,
2002

April 1,
2001
(Thousands)

Net sales    $ 169,285    $ 316,467
Gross profit    49,195    75,521
Operating income    48,356    74,435
Net income    24,046    36,575
The Company’s share of FASL net income set forth above differs from the equity in net income of joint venture reported on the condensed consolidated statements of operations. The difference is due to adjustments resulting from the intercompany profit eliminations, which are reflected on the Company’s consolidated statements of operations. The Company has never received cash dividends from its investment in FASL.
In 2000, FASL further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the
9
Gresham Facility) to produce flash memory devices for sale to FASL, the Company agreed to guarantee the repayment of up to $125 million of Fujitsu’s obligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank (the Guarantee). On November 30, 2001, Fujitsu announced that it was closing the Gresham Facility due to the downturn of the flash memory market. On March 26, 2002, the Company received notice from Fujitsu that FMI requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to the Company’s obligations under the Guarantee. However, to date, the Company has not received a demand for payment under the terms of the Guarantee from Fujitsu. Furthermore, the Company continues to disagree with Fujitsu as to the amount, if any, of the Company’s obligations under the Guarantee. While the Company continues to discuss this matter with Fujitsu, the Company cannot at this time reasonably predict its outcome including any amounts the Company might be required to pay Fujitsu, and therefore, has not recorded any liability in its consolidated financial statements associated with the Guarantee.
6.
Segment Reporting
AMD operates in two reportable segments: the Core Products and Foundry Services segments. The Core Products segment includes PC processors, Flash memory products and other IC products. The Foundry Services segment includes fees for services provided to Legerity, the Company’s former voice communication products subsidiary, and Vantis Corporation, the Company’s former programmable logic subsidiary. The following table is a summary of sales and operating income (loss) by segment with a reconciliation to net income (loss) for the quarters ended March 31, 2002 and April 1, 2000:

Quarter Ended


March 31,
2002

April 1,
2001

(Thousands)

Segment net sales:
Core Products segment    $ 890,120    $ 1,147,140
Foundry Services segment    11,953    41,607


Total segment net sales    $ 902,073    $ 1,188,747


Segment operating income (loss):
Core Products segment    $ (12,540 )    $ 166,209
Foundry Services segment    (1,003 )    810


Total segment operating income (loss)    (13,543 )    167,019
Interest income and other, net    9,538    18,823
Interest expense    (12,158 )    (21,645 )
Benefit (provision) for income taxes    4,041    (52,543 )
Equity in net income of joint venture    2,959    13,183


Net income (loss)    $ (9,163 )    $ 124,837


10
7.
Comprehensive Income (Loss)
The following are the components of comprehensive income (loss):

Quarter Ended


March 31,
2002

April 1,
2001

(Thousands)

Net income (loss)    $ (9,163 )    $ 124,837

Net change in cumulative translation adjustments    (37,389 )    (17,382 )
Net change in unrealized losses on cash flow hedges    (6,872 )    (7,817 )
Unrealized gains (losses) on available-for-sale securities    (1,169 )    (10,990 )


Other comprehensive income (loss)    (45,430 )    (36,189 )


Comprehensive income (loss)    $ (54,593 )    $ 88,648


The components of accumulated other comprehensive loss are as follows:

March 31,
2002

December 30,
2001

(Thousands)

Unrealized gain on investments, net of tax    $ 3,902    $ 5,071
Net unrealized losses on cash flow hedges    (10,271 )    (3,399 )
Cumulative translation adjustments    (172,308 )    (134,919 )


   $ (178,677 )    $ (133,247 )


8.
Senior Convertible Debt
On January 29, 2002, the Company announced the closing of a private offering of $500 million aggregate principal amount of its 4¾% Convertible Senior Debentures Due 2022 issued pursuant to Rule 144A and Regulation S of the Securities Act. The Company intends to use the net proceeds generated from the offering for capital expenditures, working capital and general corporate purposes.
The debentures bear interest at a rate of 4¾ percent per annum. The interest rate will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to such date on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4¾ percent and will not exceed 6¾ percent. The debentures are convertible by the holders into the Company’s 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 debentures will be convertible into approximately 43 shares of the Company’s common stock.
11
The debentures will be redeemable at specified prices declining to 100 percent of the principal amount plus accrued and unpaid interest at the Company’s option beginning on February 5, 2005, provided that the Company may not redeem the debentures prior to February 1, 2006 unless the last reported sale price of the Company’s 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.
Holders of the debentures will have the ability to require the Company to repurchase the debentures, in whole or in part, on February 1, 2009, February 1, 2012 and February 1, 2017. The holders of the debentures will also have the ability to require the company to repurchase the debentures in the event that the Company undergoes 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 Debentures plus accrued and unpaid interest.
9.
Business Acquisition
On February 19, 2002, the Company completed the acquisition of Alchemy Semiconductor, Inc., a privately held company, for approximately $30 million in cash consideration to Alchemy stockholders. Alchemy designs, develops and markets low-power, high performance microprocessors for personal connectivity devices such as personal digital assistants (PDAs), web tablets and portable and wired internet access devices and gateways.
The Company has accounted for the acquisition using the purchase method, and the results of operations of Alchemy have been included in the Company’s operations since acquisition. Management determined that approximately $2.9 million of the purchase price represented acquired in-process research and development (IPR&D) that had not yet reached technological feasibility and had no alternative future use. The $2.9 million was expensed upon the acquisition of Alchemy. In addition, the Company recorded $18.7 million of goodwill in relation to the acquisition of Alchemy. Goodwill was determined based on the residual difference between the amount paid and the values assigned to identified tangible and intangible assets. The Company adopted SFAS 141 and SFAS 142 at the beginning of 2002. Pursuant to SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but will be reviewed annually for impairment.
10.
Restructuring and Other Special Charges
On September 25, 2001, due to the continued slowdown in the semiconductor industry, and a resulting decline in revenues, the Company announced a restructuring plan to accelerate key components of its strategy to reduce costs and enhance the financial performance of its core products. In connection with the plan, the Company will close Fabs 14 and 15 in Austin, Texas. These facilities support certain of the Company’s older products and its Foundry Service operations, which will be discontinued as part of the plan. The Company will also reorganize related manufacturing facilities and reduce related activities primarily in Penang, Malaysia along with associated administrative support.
12 months to hedge portions of its forecasted foreign currency denominated cash flows. These foreign currency contracts are carried on the Company's balance sheet at fair value with the effective portion of the contracts' gain or loss recorded in other comprehensive income (a component of stockholders' equity) and subsequently recognized in earnings in the same period the hedged forecasted transaction affects earnings. The Company does not use derivatives for trading purposes. The effectiveness test for these foreign currency contracts is a fair value to fair value comparison method. SFAS 133 permits the exclusion from the effectiveness assessment of the time value portion of the change in value of the currency forward contract. The change in fair value of the time value portion of the derivative is considered by the Company to be inherently ineffective and is immediately adjusted through earnings each accounting period. During the three-month period ended April 1, 2001 portions of the hedging instruments excluded from the assessment of hedge -12- effectiveness were not material to the Company's consolidated financial position or operating results and are included in earnings in the accompanying Consolidated Statements of Operations. At April 1, 2001 the Company expects to reclassify the amount accumulated in other comprehensive income to earnings within the next twelve months due to the recognition in earnings of the hedged forecasted transactions. If a cash flow hedge should be discontinued because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income will be reclassified into earnings as a component of income and expense. No such amounts were recorded in earnings during the three-month period ended April 1, 2001. The following table summarizes activity in other comprehensive income related solely to derivatives classified as cash flow hedges held by the Company during the period from January 1, 2001 through April 1, 2001: (Thousands) Cumulative effect of adopting FAS 133 $ - Changes in fair value of derivatives, net 7,817 Derivatives portion of other comprehensive income, net - --------- $ 7,817 ========= ~~ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~
The restructuring plan will result in the reduction of approximately 2,300 direct manufacturing and related administrative support positions, or approximately 15 percent of the Company’s worldwide workforce, by the end of the second quarter of 2002. Approximately 1,000 of these positions are associated with closing Fabs 14 and 15 in Austin. The balance of the reductions will result from reorganizing activities primarily in Penang, Malaysia.
Pursuant to the September 25, 2001 plan, the Company recorded restructuring costs and other special charges of $89.3 million, consisting of $34.1 million of anticipated severance and fringe benefit costs, $16.2 million of anticipated exit costs to close facilities in Austin and Penang and $39 million of non-cash asset impairment charges. The asset impairment charges relate primarily to buildings and production equipment and have been incurred as a result of the Company’s decision to implement the plan.
The following table summarizes activity under the plan through March 31, 2002:

Severance and Employee Benefits

Facilities and equipment impairment

Facility and equipment decommission costs

Other facility exit costs

Total

(Thousands)

Q3 2001 charges    $ 34,105    $ 39,000    $ 15,500      $ 700    $ 89,305
Non-cash charges    —      (39,000 )    —        —      (39,000 )
Cash charges    —      —      —        —      —





Accruals at September 30, 2001    34,105    —      15,500      700    50,305
Cash charges    (7,483 )    —      —        (54 )    (7,537 )





Accruals at December 30, 2001    26,622    —      15,500      646    42,768
Cash charges    (9,678 )    —      (420 )      —      (10,098 )





Accruals at March 31, 2002    $ 16,944    $ —      $ 15,080      $ 646    $ 32,670





The Company expects to substantially complete execution of its restructuring plan by the end of the second quarter of 2002. As of March 31, 2002, 1,297 employees were terminated resulting in cash payments of approximately $17 million in severance and employee benefit costs.
13
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The statements in this ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations that are forward-looking are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ ~~materially.~~materially from expectations. The forward-looking statements relate to, among other things: operating results; anticipated cash flows; capital expenditures; gross margins; adequacy of resources to fund operations and capital investments; our ability to produce AMD ~~Athlon(TM)~~Athlon^™ and AMD ~~Duron(TM)~~Duron^™ microprocessors with the performance and in the volume required by customers on a timely basis; our ability to maintain average selling prices of seventh-generation microprocessors despite aggressive marketing and pricing strategies of our competitors; our ability and the ability of third parties to provide timely infrastructure solutions (motherboards and chipsets) to support our microprocessors; our ability to increase customer and market acceptance of ~~the newest versions of~~ our seventh- ~~generation microprocessors, particularly in commercial~~ and ~~mobile markets;~~eighth-generation microprocessors; a recovery in the ~~communications industry~~communication and networking industries leading to an increase in the demand for Flash memory products; the effect of foreign currency hedging transactions; the ~~production ramp of~~process technology transition in our ~~new~~ submicron integrated circuit manufacturing and design facility in Dresden, Germany (Dresden Fab 30); and the financing, construction and ~~construction~~utilization of the Fujitsu AMD Semiconductor Limited (FASL) manufacturing facilities. See ~~"Financial Condition"~~“Financial Condition” and ~~"Risk Factors"~~“Risk Factors” below, as well as such other risks and uncertainties as are detailed in our other Securities and Exchange Commission reports and filings for a discussion of the factors that could cause actual results to differ materially from the forward-looking statements.
The following discussion should be read in conjunction with the Unaudited ~~Condensed~~Consolidated Financial Statements and related notes included in this report and our Audited Financial Statements and related notes as of December 30, 2001 and December 31, 2000 and ~~December 26, 1999 and~~for each of the three years in the period ended December ~~31, 2000~~30, 2001 as filed in our Annual Report on Form 10-K.
AMD, the AMD Arrow logo, and combinations thereof, Advanced Micro Devices, AMD-K6, AMD Athlon, AMD Duron, ~~AMD-760~~AMD Opteron and ~~3DNow!~~MirrorBit are either trademarks or registered trademarks of Advanced Micro Devices, Inc. in the United States and/or other jurisdictions. Vantis is a trademark of ~~Vantis~~Lattice Semiconductor Corporation. Legerity is a trademark of Legerity, Inc. Microsoft and Windows are either registered trademarks or trademarks of Microsoft ~~Corporation.~~Corporation in the United States and/or other jurisdictions. Other terms used to identify companies and products may be trademarks of their respective owners. ~~-14-~~
14
RESULTS OF OPERATIONS ~~During the three months ended April 1, 2001 we participated~~
We participate in all three technology areas within the digital integrated circuit (IC) ~~market--~~ market—microprocessors, memory circuits and logic ~~circuits--through~~circuits—through our Core Products and Foundry Services segments. Our Core Products segment includes our PC ~~processors,~~processor products, Memory products and Other IC products. PC ~~processors~~processor products include our ~~current~~ seventh-generation microprocessors, the AMD Athlon and AMD Duron microprocessors, and our sixth-generation microprocessors. Memory products include Flash memory devices and Erasable Programmable Read-Only Memory (EPROM) devices. Other IC products include embedded processors, networking products, personal connectivity solutions products and platform products, ~~and networking products. Our former Voice Communications segment consisted~~which primarily consist of ~~our voice communications products subsidiary, Legerity, Inc. (Legerity), until July 31, 2000, the effective date of its sale.~~chipsets. Our Foundry Services segment consists of service fees ~~for services that we provide to our former subsidiaries,~~from Legerity, Inc. and Vantis ~~corporation (Vantis), our former programmable logic subsidiary.~~ Corporation.
On ~~August 4, 2000,~~February 19, 2002, we completed the ~~sale~~acquisition of ~~90 percent of Legerity~~Alchemy Semiconductor, Inc., a privately held company, for approximately ~~$375~~$30 million in cash ~~effective July 31, 2000. We retained a ten percent ownership interest~~consideration to Alchemy stockholders. Alchemy designs, develops and markets low-power, high performance microprocessors for personal connectivity devices such as personal digital assistants (PDAs), web tablets and portable and wired internet access devices and gateways. These new personal connectivity solutions products are included in Legerity and a warrant to acquire approximately an additional ten percent. As part of the transaction, we entered into various service contracts with Legerity to continue to provide, among other things, wafer fabrication and assembly, test, mark and pack services to Legerity. We receive fees from Legerity for these services. Other IC Products in our Core Products segment.
We use a 52- to 53-week fiscal year ending on the last Sunday in December. The quarters ended March 31, 2002 and April 1, 2001 ~~and December 31, 2000~~ each included 13 ~~weeks and the quarter ended April 2, 2000 included 14~~ weeks. ~~-15-~~
The following is a summary of our net sales by segment for the periods presented below:
Quarter Ended --------------------------------- April 1, December 31, April 2, (Millions) 2001 2000 2000 --------- ------------ ---------- Core Products segment: PC Processors $ 661 $ 566 $ 563 Memory Products 411 458 327 Other IC Products 75 98 122 --------- ------------ ---------- 1,147 1,122 1,012 Foundry Services segment 42 53 20 Voice Communications segment - - 60 --------- ------------ ---------- $ 1,189 $1,175 $ 1,092 ========= ============ ==========

Quarter Ended

March 31,
2002

December 30,
2001

April 1,
2001
(Millions)

Core Products segment:
PC Processors    $ 684      $ 703    $ 661
Memory Products    160      196    411
Other IC Products    46      51    75



   890      950    1,147
Foundry Services segment    12      2    42



   $ 902      $ 952    $ 1,189



Net Sales Comparison of Quarters Ended ~~April 1, 2001~~March 31, 2002 and December ~~31, 2000~~ 30, 2001
Net sales of ~~$1,189~~$902 million for the first quarter of ~~2001 increased by one~~2002 decreased five percent compared to net sales of ~~$1,175~~$952 million for the fourth quarter of ~~2000.~~ 2001.
PC Processors net sales of ~~$661~~$684 million ~~increased 17~~decreased three percent in the first quarter of ~~2001~~2002 compared to the fourth quarter of ~~2000.~~2001. The ~~increase~~decrease in net sales was primarily due to ~~both higher~~a decline in average selling prices partially offset by an increase in unit ~~and dollar~~ sales of our ~~seventh generation microprocessors, partially offset by lower~~seventh-generation
15
microprocessors. In the second quarter of 2002, we expect PC processors unit sales to decline in the range of ~~AMD-K6(R) microprocessors. Overall~~five to ten percent due to normal seasonality. Maintaining seasonal PC ~~Processors~~Processor sales ~~growth~~levels in the second quarter of ~~2001~~2002 is dependent upon continuing a successful ~~production ramp~~technology transition in Dresden Fab 30, ~~market acceptance~~our ability to maintain average selling prices for our seventh-generation microprocessors, continuing growth in unit shipments of ~~the newest versions of the AMD Athlon and AMD Duron~~our PC processors, availability of chipsets and motherboards from third-party suppliers and increasing market acceptance of ~~our seventh generation microprocessors particularly in commercial~~the newest versions of the AMD Athlon and ~~mobile markets, as to which we cannot give any assurance.~~ AMD Duron processors.
Memory products net sales of ~~$411~~$160 million decreased 1018 percent in the first quarter of ~~2001~~2002 compared to the fourth quarter of ~~2000. The decrease was primarily the result of the communications and networking equipment industry downturn resulting in~~2001 due to a decrease in ~~the sales of Flash memory devices. We expect another significant sales decline~~average selling prices, partially offset by an increase in ~~Flash memory devices in~~unit shipments. In the second quarter of ~~2001. The~~ 2002, we expect substantial sequential growth in sales of flash memory devices.
Other IC products net sales of ~~$75~~$46 million decreased 24ten percent in the first quarter of ~~2001~~2002 compared to the fourth quarter of ~~2000~~2001 primarily due to ~~decreased net~~a decline in unit sales of ~~chipset~~platform products. We expect other IC products ~~and networking products. Networking product sales decreased as a result~~revenues to be relatively flat in the second quarter of 2002 compared to the ~~communications sector decline. The~~ first quarter of 2002.
Foundry Services segment ~~included~~ service fees of ~~$42~~$12 million increased in the first quarter of ~~2001~~2002 compared to ~~$53~~$2 million in the fourth quarter of ~~2000. This 21 percent decrease~~2001. The increase was primarily due to the ~~communications sector decline.~~increase in revenues recognized from sales to Legerity. We expect that service fees will ~~continue~~remain relatively flat in the second quarter of 2002 compared to ~~decline. -16-~~ the first quarter of 2002.
Net Sales Comparison of Quarters Ended March 31, 2002 and April 1, 2001 ~~and April 2, 2000~~
Net sales of $902 million for the first quarter of 2002 decreased by 24 percent compared to net sales of $1,189 million for the first quarter of ~~2001 increased by nine percent compared to net sales of $1,092 million for the first quarter of 2000.~~ 2001.
PC Processors net sales of ~~$661~~$684 million increased 17three percent in the first quarter of ~~2001~~2002 compared to the same quarter of ~~2000~~2001 primarily due to ~~increased net sales of our seventh generation microprocessors offset by a decrease in net sales of AMD-K6 microprocessors. The increase in net sales was primarily due to both~~ higher unit ~~and dollar~~ sales of our seventh-generation microprocessors, partially offset by ~~lower unit sales~~a decline in average selling prices of ~~AMD-K6 microprocessors which was due to market shift toward~~ our seventh-generation microprocessors.
Memory products net sales of ~~$411~~$160 million ~~increased~~decreased by 2661 percent in the first quarter of ~~2001~~2002 compared to the same quarter of ~~2000~~2001 due to decline in both unit shipments and average selling prices as a result of ~~strong growth~~the sustained weakness in ~~demand for Flash memory devices, which was slightly offset by a decline in net sales of EPROMs. The~~ the communications and networking equipment industries.
Other IC products net sales of ~~$75~~$46 million in the first quarter of ~~2001~~2002 decreased by 39 percent when compared to the same quarter of ~~2000 as a result of~~2001 due to decreased net sales from networking ~~products, chipsets~~ and embedded processors ~~products. The~~ products as a result of a decline in unit sales and market weakness.
Foundry Services segment service fees of ~~$42~~$12 million in the first quarter of ~~2001 increased~~2002 decreased by 71 percent compared to the same quarter of ~~2000.~~2001. The ~~increase~~decrease was primarily due to ~~the addition~~a significant reduction of service fees from both Legerity ~~in the first quarter of 2001.~~ and Vantis.
16
Comparison of Expenses, Gross Margin Percentage and Interest
The following is a summary of expenses, gross margin percentage and interest ~~income~~ and other income, net for the periods presented below:
Quarter Ended ---------------------------------- April 1, December 31, April 2, (Millions except for gross margin percentage) 2001 2000 2000 --------- ------------- ---------- Cost of sales $ 715 $ 657 $ 606 Gross margin percentage 40% 44% 45% Research and development $ 158 $ 162 $ 161 Marketing, general and administrative 149 161 144 Interest income and other, net 19 25 21 Interest expense 22 20 11

Quarter Ended


March 31,
2002

December 30,
2001

April 1,
2001

(Millions except for gross margin percentage)

Cost of sales    $ 587      $ 645    $ 715
Gross margin percentage    35 %      34 %    40 %
Research and development    $ 172      $ 161    $ 158
Marketing, general and administrative    157      164    149
Interest and other net income    10      6    19
Interest expense    12      10    22
We operate in an industry characterized by intense competition and high fixed costs due to ~~the capital- intensive~~capital-intensive manufacturing ~~process,~~processes, particularly the costs to build and maintain state-of-the-art production facilities required for PC processors and memory devices. As a result, our gross margin percentage is significantly affected by fluctuations in ~~product sales. The gross margin percentage growth depends on continually increasing~~unit sales ~~because fixed costs continue to rise due to the ongoing capital investments required to expand production capacity~~ and ~~capability. -17-~~ average selling prices.
The gross margin percentage of 4035 percent in the first quarter of ~~2001 decreased~~2002 increased slightly from 4434 percent in the fourth quarter of ~~2000~~2001 and decreased from 4540 percent in the same quarter of ~~2000.~~2001. The slight increase in gross margin percentage in the first quarter of 2002 compared to the fourth quarter of 2001 was primarily attributable to cost reduction programs resulting in a decrease in cost of sales, partially offset by a decrease in net sales. The decrease in gross margin percentage in the first quarter of 2001 compared to the fourth quarter of 2000 was primarily attributable to a decline in the average selling price for memory devices and charges for increased memory product inventories. The decrease in gross margin percentage in the first quarter of 20012002 compared to the same quarter in ~~2000~~2001 was primarily due to a decline in average selling prices for microprocessors and memory devices, partially offset by an increase in unit sales of PC processors. Maintaining our gross margin depends on continually increasing unit sales of microprocessors and memory products because of pricing pressures and the ~~aforementioned charges for increased memory product inventories combined with higher fixed manufacturing costs. Fixed costs will continue~~ongoing capital investments required to ~~increase as we ramp~~expand production ~~in Dresden Fab 30. Dresden Fab 30 went into production in the second quarter of 2000, which contributed to,~~capability and ~~will continue to contribute to, increases in cost of sales.~~ capacity.
Research and development expenses of ~~$158~~$172 million in the first quarter of ~~2001 decreased three~~2002 increased seven percent compared to the immediately prior quarter, and ~~two~~nine percent compared to the same quarter in ~~2000.~~2001. The ~~decrease~~increase in research and development expenses was primarily due to ~~a decrease in~~ expenses relating to the ~~technology~~acquisition of Alchemy Semiconductor and increased research and development ~~alliance we have with Motorola.~~ activities for our eighth-generation PC processors.
Included in research and development and cost of sales were the recognition of deferred credits on foreign capital grants and interest subsidies that were received for Dresden Fab 30. These credits of approximately $11 million per quarter (denominated in ~~deutsche marks)~~European Union euro) will continue to be offset against Dresden Fab 30 expenses in future quarters until June 2007.
Marketing, general and administrative expenses of ~~$149~~$157 million in the first quarter of ~~2001~~2002 decreased ~~seven~~four percent compared to the fourth quarter of ~~2000~~2001 as a result of spending controls and ~~discontinuing~~the discontinuation of certain marketing and promotional activities for the AMD Athlon XP microprocessor. Marketing, general and administrative expenses in the first quarter of ~~2001~~ 2002
17
increased ~~three~~five percent compared to the first quarter of ~~2000.~~2001. The increase was primarily due to increased advertising and marketing costs for the AMD Athlon XP microprocessor. ~~Interest income and other, net of $19 million in~~
In the first quarter of ~~2001 decreased 26~~2002, interest and other income, net increased 67 percent compared to the fourth quarter of ~~2000~~2001 primarily due to the absence of a $7.5 million charge for other than temporary declines in our equity investments that occurred in the fourth quarter of 2001. Interest and other income, net decreased 1047 percent compared to the same quarter of ~~2000.~~2001. The decrease was primarily due to ~~the cancellation of an interest rate swap~~lower investment income in the first quarter of ~~2001 and a lower short-term investment balance.~~ 2002.
Interest expense of ~~$22~~$12 million in the first quarter of ~~2001~~2002 increased ~~nine~~20 percent compared to the fourth quarter of ~~2000 and increased 89~~2001 primarily due to the issuance of $500 million of our 4¾% convertible senior debentures at the end of January 2002. The interest on the 4¾% convertible senior debentures is approximately $6 million per quarter. Interest expense decreased 45 percent compared to the same quarter of ~~2000. During~~2001 primarily due to the ~~construction~~absence of ~~Dresden Fab 30 we~~ capitalized interest ~~expense attributable~~and the interest on our outstanding 6% notes due 2005 senior convertible debt of $517.5 million, which had a higher interest rate than the debentures issued in 2002 and which were redeemed in May 2001.
On September 25, 2001, due to the ~~construction. Fab 30 began production at~~continued slowdown in the semiconductor industry and a resulting decline in revenues, we announced a restructuring plan to accelerate key components of our strategy to reduce costs and enhance the financial performance of our core products. In connection with the plan, we will close Fabs 14 and 15 in Austin, Texas by the end of June 2002. These facilities support certain of our older products and Foundry Service operations, which will be discontinued as part of our plan. We will also reorganize related manufacturing facilities and reduce related activities primarily in Penang, Malaysia, along with associated administrative support.
The restructuring plan will result in the reduction of approximately 2,300 direct manufacturing and related administrative support positions, or approximately 15 percent of our worldwide workforce, by the end of the second quarter of ~~2000~~2002. Approximately 1,000 of these positions are associated with closing Fabs 14 and ~~consequently~~15 in Austin. The balance of the reductions will result from reorganizing activities primarily in Penang, Malaysia.
Pursuant to the September 25, 2001 plan, we ~~no longer capitalize these interest costs. -18-~~ ~~Income Tax~~ recorded restructuring costs and other special charges of $89.3 million, consisting of $34.1 million of anticipated severance and employee benefit costs, $16.2 million of anticipated exit costs to close facilities in Austin and Penang and $39 million of non-cash asset impairment charges. The asset impairment charges relate primarily to buildings and production equipment and have been incurred as a result of our decision to implement the plan.
18
The following table summarizes activity under the plan through March 31, 2002:

Severance and
Employee
Benefits

Facilities and
equipment
impairment

Facility and
equipment
decommission
costs

Other
facility
exit costs

Total

(Thousands)

Q3 2001 charges    $ 34,105    $ 39,000    $ 15,500    $ 700    $ 89,305
Non-cash charges    —      (39,000 )    —      —      (39,000 )
Cash charges    —      —      —      —      —





Accruals at September 30, 2001    34,105    —      15,500    700    50,305
Cash charges    (7,483 )    —      —      (54 )    (7,537 )





Accruals at December 30, 2001    26,622    —      15,500    646    42,768
Cash charges    (9,678 )    —      (420 )    —      (10,098 )





Accruals at March 31, 2002    $ 16,944    $ —      $ 15,080    $ 646    $ 32,670





We ~~recorded~~expect to substantially complete execution of our restructuring plan by the end of the second quarter of 2002. As a ~~$53~~result of this restructuring plan, we expect to realize overall cost reductions of $125 million ~~income tax provision~~on an annualized basis. The actions taken to date had resulted in actual savings of approximately $6.9 million in the first quarter of ~~2001~~2002. As of March 31, 2002, 1,297 employees had been terminated resulting in cash payments of approximately $17 million in severance and noemployee benefit costs.
Income Tax
We recorded an income tax ~~provision~~benefit of $4 million in the first quarter of ~~2000.~~2002 and an income tax provision of $53 million in the first quarter of 2001. The effective tax ~~rate~~rates for the ~~quarter~~quarters ended March 31, 2002 and April 1, 2001 ~~was~~were 25 percent and 32 ~~percent. The effective~~percent respectively, reflecting the benefits of tax ~~rate for the quarter ended April 2, 2000 of zero percent reflected the utilization of net operating loss carryforwards.~~ credits and low-taxed foreign income.
Other Items
International sales as a percent of net sales were 65 percent in the first quarter of 2002 compared to 73 percent in the fourth quarter of 2001 and 63 percent in the first quarter of ~~2001 compared to 62 percent in the fourth quarter of 2000 and 59 percent in the first quarter of 2000.~~2001. During the first quarter of ~~2001,~~2002, approximately ~~five~~one percent of our net sales were denominated in foreign ~~currencies.~~currencies compared to five percent in the same period in 2001. We do not have sales denominated in local currencies in countries that have highly inflationary ~~economies, as defined by generally accepted accounting principles.~~economies. The impact on our operating results from changes in foreign currency rates individually and in the aggregate has not been significant. ~~-19-~~
Comparison of Segment Income (Loss)
For a comparison of segment net sales, refer to the previous discussions on net sales by product group.
19
The following is a summary of operating income (loss) by segment for the periods presented below:
Quarter Ended ---------------------------------- April 1, December 31, April 2, (Millions) 2001 2000 2000 --------- ------------- --------- Core Products $ 166 $ 190 $ 160 Foundry Services 1 5 5 Voice Communications - - 16 --------- ------------- --------- Total $ 167 $ 195 $ 181 ========= ============= =========

Quarter Ended

March 31,
2002

December 30,
2001

April 1,
2001
(Millions)

Core Products    $ (13 )      $ 2    $ 166
Foundry Services    (1 )      (20 )    1



Total segment operating income (loss)    $ (14 )      $ (18 )    $ 167



Core ~~Products'~~Products’ operating ~~income in~~results for the first quarter of ~~2001~~2002 decreased ~~13 percent~~$15 million compared to the fourth quarter of ~~2000. The decrease was primarily due to a downturn in the communications~~2001 and networking equipment industry resulting in a decrease in net sales of our Flash memory devices and Other IC products. The decrease was also attributable to a decline in average selling price for Flash memory devices and charges for increased memory product inventories. Core Products operating income in the first quarter of 2001 increased four percent$179 million compared to the first quarter of ~~2000 mainly~~2001. These decreases were primarily due to ~~higher net sales~~a decline in the average selling prices of our ~~seventh generation microprocessors. As a result of the sale of Legerity, effective July 31, 2000, we no longer operate~~core products, partially offset by an increase in ~~our former Voice Communications segment, resulting in no~~unit shipments.
20
FINANCIAL CONDITION
Net cash provided by operating ~~income in the first quarter of 2001 compared to an operating income of $16~~activities was $211 million in the first quarter of ~~2000. -20-~~ ~~- -------------------------------------------------------------------------------- FINANCIAL CONDITION~~ 2002 as a result of non-cash charges, including, $174 million of depreciation and amortization, $14 million of net loss on disposal of property, plant and equipment and other cash provided by operating activities of approximately $54 million due to net changes in operating assets and liabilities, offset by our net loss of $9 million and non-cash credits of $21 million from net changes in deferred income taxes and foreign grant and subsidy income.
Net cash provided by operating activities was $147 million in the first quarter of 2001 primarily due to net income of $125 million and depreciation and amortization of $153 million, offset by a decrease of $141 million in payables, accrued liabilities and accrued compensation.
Net cash ~~provided~~used by ~~operating~~investing activities was ~~$387~~$769 million induring the first quarter of ~~2000~~2002 primarily due to $199 million used for the purchases of property, plant, and equipment, primarily for Dresden Fab 30 and Asia manufacturing facilities, $27 million, net ~~income~~ of ~~$189~~cash acquired, to purchase Alchemy Semiconductor and $544 million ~~depreciation and amortization expenses~~ of ~~$128 million, and $100 million~~net cash outflow from ~~customer deposits under long-term purchase agreements, offset by a decrease~~purchases of ~~$24 million in payables, accrued liabilities and accrued compensation.~~ available-for-sale securities.
Net cash used by investing activities was $19 million during the first quarter of 2001. ~~Major uses~~Uses of cash during the period included $163 million for the purchases of property, plant and equipment, primarily for Dresden Fab 30 and Asia manufacturing facilities and ~~$736~~$763 million for purchases of ~~available-for- sale~~available-for-sale securities. Net cash provided by investing activities included $887 million of proceeds from the maturity of available-for-sale securities. Net cash used by investing activities was $354 million in the first quarter of 2000. Major uses of cash during the period included $129 million from purchases of property, plant and equipment, primarily for Dresden Fab 30 and Asia manufacturing facilities and $730 million from purchases of available-for-sale securities. Net cash provided by investing activities included $496 million of proceeds from the maturities of available-for-sale securities.
Net cash provided by financing activities was ~~$338~~$436 million during the first quarter of ~~2001. Major uses of cash during the period included $3~~2002 primarily due to $486 million in ~~payments on~~proceeds, net of $14 million in debt ~~and capital lease obligations offset by $320~~issuance cost, from our sale of convertible senior debentures, $8 million in proceeds from Dresden FAB 30 borrowing activities, $10 million in proceeds from Dresden FAB 30 foreign grants and subsidies and $9 million in proceeds from issuance of stock. Net cash provided by financing activities was $51 million in the ~~first quarter of 2000 primarily due to $52 million in proceeds from~~ issuance of stock in connection with stock option exercises and purchases under our Employee Stock Purchase ~~Plan. Under~~Plan and $8 million of capital investment grants from the German government as part of the Dresden loan agreement, offset by a $50 million payment on our short-term line of credit and $11 million payment on Alchemy debt.
Net cash provided by financing activities was $338 million during the first quarter of 2001 primarily due to $320 million in proceeds from Dresden Fab 30 borrowing activities, $10 million in proceeds from Dresden Fab 30 foreign grants and subsidies and $9 million in proceeds from issuance of stock, offset by $3 million in payments on debt and capital lease obligations.
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Notes Payable to Banks
We entered into a Loan and Security Agreement (the Loan Agreement) ~~effective~~with a consortium of banks led by a domestic financial institution on July 13, ~~1999, which~~1999. The Loan Agreement provides for a four-year secured revolving line of credit of up to $200 ~~million, we~~million. We can borrow, subject to amounts ~~which~~that may be set aside by the lenders, up to 85 percent of our eligible accounts receivable from Original Equipment Manufacturers (OEMs) and 50 percent of our eligible accounts receivable from distributors. We must comply with certain financial covenants if the level of domestic cash we hold declines to ~~certain levels,~~$200 million or the amount of borrowings under the Loan Agreement rises to ~~certain levels.~~50 percent of available credit. Under these circumstances the Loan Agreement restricts our ability to pay cash dividends on our common stock. Our obligations under the Loan Agreement are secured by a pledge of ~~most~~all of our accounts receivable, inventory, general intangibles and the related proceeds. As of ~~April 1, 2001,~~March 31, 2002, there was no ~~funds were drawn~~outstanding amount under the Loan Agreement. ~~In addition,~~
As of March 31, 2002, we had ~~available unsecured, uncommitted bank~~approximately $18 million in lines of credit ~~in the amount of $24 million, none~~available to our foreign subsidiaries under other financing agreements, of which ~~were~~approximately $12 million is outstanding. ~~-21-~~ We plan to make capital investments of approximately $1 billion during 2001. These investments include those relating to the continued facilitization of Dresden Fab 30 and our fabrication facility in Austin, Texas (Fab 25).
Senior Convertible Debt
On January 29, ~~2001,~~2002, we ~~announced that~~closed a private offering of $500 million aggregate principal amount of our ~~Board~~4¾% Convertible Senior Debentures due 2022 issued pursuant to Rule 144A and Regulation S of ~~Directors had authorized~~the Securities Act. The debentures bear interest at a ~~program~~rate of 4¾ percent per annum. The interest rate will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to ~~repurchase up~~a rate per annum equal to ~~$300 million worth~~the interest rate payable 120 days prior to such date on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4¾ percent and will not exceed 6¾ percent. The 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 debentures will be convertible into approximately 43 shares of our common ~~shares over a period of time~~stock. We intend to ~~be determined by management. Any such repurchases will be made in~~use the ~~open market or in privately negotiated transactions~~net proceeds generated from ~~time to time in compliance with~~ the ~~Rule 10b-18 of the Securities Exchange Act, subject to market conditions, applicable legal requirements~~offering for capital expenditures, working capital, and ~~other factors. This plan does not obligate us to acquire any particular amount of our common stock,~~general corporate purposes.
Dresden Term Loans and the plan may be suspended at any time at our discretion. No shares have been repurchased as of April 1, 2001. On May 7, 2001, we announced the redemption of all of our outstanding 6% Convertible Subordinated Notes due 2005 on May 21, 2001. Dresden Guarantee
AMD Saxony Manufacturing GmbH (AMD Saxony), an indirect wholly owned German subsidiary of AMD, ~~has constructed a fab and has installed equipment in~~continues to facilitize Dresden 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 are ~~supporting~~providing credit support for the ~~project. We~~project.We currently estimate that the construction and facilitization costs of Dresden Fab 30 will be ~~$2.3~~$2.5 billion when it is fully equipped by the end of 2003. ~~We have~~As of March 31, 2002, we had invested ~~$1.5 billion to date. In~~$1.9 billion.In March 1997, AMD Saxony entered into a loan agreement and other related agreements (the Dresden Loan Agreements) with a consortium of banks led by Dresdner Bank ~~AG.~~AG in order to finance the project. Because most of the amounts under the Dresden Loan Agreements are denominated in deutsche marks, the dollar amounts set forth below are subject to change based on applicable conversion rates. We used the exchange rate ~~at the end~~as of ~~first quarter of 2001,~~March 31, 2002, which was approximately ~~2.18~~
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2.24 deutsche marks to one U.S. dollar, to value the amounts denominated in deutsche marks. The Dresden Loan Agreements provide for the funding of the construction and facilitization of Dresden Fab 30. The funding consists of: . equity, subordinated loans and loan guarantees from AMD; . loans from a consortium of banks; and . grants, subsidies and loan guarantees from the Federal Republic of Germany and the State of Saxony.
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equity, subordinated loans and loan guarantees from AMD;
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loans from a consortium of banks; and
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grants, subsidies and loan guarantees from the Federal Republic of Germany and the State of Saxony.
The Dresden Loan Agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated loans to, or equity investments in, AMD Saxony. In accordance with the terms of the Dresden Loan Agreements, as of March 31, 2002, we have invested ~~$425~~$540 million ~~as of April 1, 2001~~ in the form of subordinated loans to and equity investments in AMD ~~Saxony.~~Saxony, which are eliminated in our consolidated financial statements. In addition to support from AMD, the consortium of banks referred to above has made available ~~$687~~up to $668 million in loans to AMD Saxony to help fund Dresden Fab 30 project costs. AsAMD Saxony had $581 million of ~~April 1, 2001, all of the available~~such loans ~~were outstanding.~~ outstanding through March 31, 2002, which are included in our consolidated balance sheets.
Finally, the Federal Republic of Germany and the State of Saxony are supporting the Dresden Fab 30 project, in accordance with the Dresden Loan Agreements, in the form of: . guarantees of the lesser of 65 percent of AMD Saxony bank debt or $687 million; . capital investment grants and allowances totaling $287 million; and . interest subsidies totaling $141 million. -22-
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guarantees equal to the lesser of 65 percent of AMD Saxony bank debt or $668 million;
•
capital investment grants and allowances totaling $286 million; and
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interest subsidies totaling $139 million.
Of these amounts, AMD Saxony had received approximately $284 million in capital investment grants and allowances and ~~$38~~$72 million in interest subsidies ~~as of April 1, 2001.~~through March 31, 2002, which are included in our consolidated financial statements. The grants and subsidies are subject to conditions, including meeting specified levels of employment inat December 2001 and maintaining those levels until June 2007. Noncompliance with the conditions of the grants and subsidies could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a portion of amounts received to date. As of ~~April 1, 2001,~~March 31, 2002, we were in compliance with all of the conditions of the grants and subsidies.
In February 2001, ~~we amended the~~ Dresden Loan Agreements were amended to reflect new capacity and increased capital expenditure plans for Dresden Fab 30. Under the February 2001 amendments, we agreed to increase and extend our guaranty of AMD ~~Saxony's~~Saxony’s obligations and to make available to AMD Saxony revolving loans of up to $500 million. We expanded our obligation to reimburse AMD Saxony for the cost of producing wafers ~~from~~for us, and we also agreed to cancel the cost overrun facility made available by the banks. Under the February 2001 amendments, we ~~have been~~were released from financial covenants limiting capital expenditures and requiring AMD Saxony to achieve capacity and production cost targets by the end of 2001. As of March 31, 2002, $118 million of revolving loans were outstanding. The revolving loan amounts are denominated in euros and are, therefore, subject to change due to foreign exchange rate fluctuation. We used the exchange rate on March 31, 2002, 1.15 euros to one U.S. dollar, to translate the amount of the
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revolving loans. Because the loans are due to be repaid by our subsidiary, AMD Saxony, the related receivable is not recorded on our consolidated financial statements.
The Dresden Loan Agreements, as amended, also require that we: .
•
provide interim funding to AMD Saxony if either the remaining capital investment allowances or the remaining interest subsidies are delayed, such funding to be repaid to AMD as AMD Saxony receives the grants or subsidies from the State of Saxony;
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fund shortfalls in government subsidies resulting from any default under the subsidy agreements caused by AMD Saxony or its affiliates; and
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guarantee up to 35 percent of AMD Saxony’s obligations under the Dresden Loan Agreements, which guarantee must not be less than $97 million or more than $267 million, until the bank loans are repaid in full.
AMD Saxony ~~if either the remaining capital investment allowances or the remaining interest subsidies are delayed, such funding to~~would be ~~repaid to AMD as AMD Saxony receives the grants or subsidies from the State of Saxony; . fund shortfalls~~ in ~~government subsidies resulting from any~~ default ~~under the subsidy agreements caused by AMD Saxony or its affiliates; and . guarantee up to 35 percent of AMD Saxony's obligations~~ under the Dresden Loan Agreements, which guarantee must not be less than $100 million or more than $275 million, until the bank loans are repaid in full. The definition of defaults under the Dresden Loan Agreements includes the failure of AMD,agreement if we, AMD Saxony or AMD Saxony Holding GmbH (AMD Holding), the parent company of AMD Saxony and a wholly owned subsidiary of AMD, fail to comply with certain obligations ~~in connection with the Dresden Loan Agreements, including: . material variances from the approved plans and specifications; . our failure to fund equity contributions~~thereunder or shareholder loans or otherwise comply with our obligations relating to the Dresden Loan Agreements; . the sale of shares in AMD Saxony or AMD Holding; . the failure to pay material obligations; .upon the occurrence of a material adverse change or filings or proceedings in bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and . the occurrence of default under the indenture dated August 1, 1996 between AMD and the United States Trust Company of New York (the Indenture) pursuant to which our Senior Secured Notes were issued or the Loan Agreement. -23- certain events including:
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material variances from the approved plan and specifications;
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our failure to fund equity contributions or shareholder loans or otherwise comply with our obligations relating to the Dresden Loan Agreements;
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the sale of shares in AMD Saxony or AMD Holding;
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the failure to pay material obligations;
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the occurrence of a material adverse change or filings or proceedings in bankruptcy or insolvency with respect to us, AMD Saxony or AMD Holding; and
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the occurrence of a default under the Loan Agreement.
Generally, any default with respect to borrowings made or guaranteed by AMD that results in recourse to us of more than ~~$10~~$2.5 million, and ifis not cured by us, would result in a cross-default under the Dresden Loan Agreements and the Loan Agreement. ~~Under certain circumstances, cross-defaults result under our Convertible Subordinated Notes due 2005 and the Dresden Loan Agreements.~~ As of ~~April 1, 2001,~~March 31, 2002, we were in compliance with all conditions of the Dresden Loan Agreements.
In the event we are unable to meet our ~~obligation~~obligations to ~~make loans to, or equity investments in,~~ AMD Saxony as required under the Dresden Loan Agreements, ~~AMD Saxony will be unable to complete the continued facilitization of Dresden Fab 30, and~~ we will be in default under the Dresden Loan Agreements and the Loan Agreement, which default would permit acceleration of certain indebtedness, which ~~would~~could have a material adverse effect on us. We cannot assure that we will be able to obtain the funds necessary to fulfill these obligations. Any such failure would have a material adverse effect on us.
FASL Facilities and Guarantees
FASL, a joint venture formed by AMD and Fujitsu Limited ~~(Fujitsu)~~ in 1993, operates advanced IC manufacturing facilities in Aizu-Wakamatsu, Japan (FASL JV1, FASL JV2 and FASL JV3), for the production of Flash memory devices, which are sold to us and Fujitsu. FASL is
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continuing the facilitization of ~~its second Flash memory device wafer fabrication facility,~~ FASL JV2 ~~in Aizu-Wakamatsu, Japan. The facility,~~and FASL JV3. We expect FASL JV2 and JV3, including equipment, ~~is expected~~ to cost approximately ~~$1.3~~$2.2 billion when fully equipped. As of April 1, 2001, approximately $858 million (denominated in yen) of this cost had been funded. In July 2000, FASL broke ground for a third fabrication facility for the manufacture of Flash Memory devices in Aizu- Wakamatsu, Japan. The facility, designated as FASL JV3, is expected to costMarch 31, 2002, approximately $1.5 billion ~~when fully equipped. Capital expenditures for FASL JV2 and FASL JV3 construction to date have~~of these costs had been funded by cash generated from FASL ~~operations~~operations. These costs are incurred in Japanese yen and ~~borrowings by FASL.~~are, therefore, subject to change due to foreign exchange rate fluctuations. On March 31, 2002, the exchange rate was 132.74 yen to one U.S. dollar, the rate we used to translate the amounts denominated in yen into U.S. dollars.
In 2000, FASL ~~has also~~further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI)., a wholly owned subsidiary of Fujitsu Limited. In connection with ~~this foundry arrangement,~~FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility) to produce flash memory devices for sale to FASL, we agreed to guarantee the repayment of up to $125 million of ~~Fujitsu's~~Fujitsu’s obligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank (the Guarantee). On November 30, 2001, Fujitsu announced that it was closing the Gresham Facility, due to the downturn of the flash memory market. On March 26, 2002, we received notice from Fujitsu that FMI requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to our obligations under ~~FMI's credit facility. As~~the Guarantee. However, to date we have not received a demand for payment under the terms of ~~April 1, 2001,~~the Guarantee from Fujitsu. Furthermore, we ~~had $125 million~~continue to disagree with Fujitsu as to the amount, if any, of our obligations under the Guarantee. While we continue to discuss this matter with Fujitsu, we cannot at this time reasonably predict its outcome including any amounts we might be required to pay Fujitsu, and, therefore, have not recorded any liability in ~~loan guarantees outstanding~~our consolidated financial statements associated with ~~respect to this agreement.~~ the Guarantee.
A significant portion of ~~the~~ FASL capital expenditures in ~~2001~~2002 will continue to be funded by cash generated from FASL operations. ~~In addition, both Fujitsu and AMD intend to make capital contributions of 15 billion yen (approximately $125 million) each to FASL during the second quarter of 2001. Further,~~However, to the extent that additional funds are required for the full facilitization of FASL JV2 ~~or ramp of~~and FASL JV3, ~~AMD may~~we will be required to contribute cash or guarantee ~~third- party~~third-party loans in proportion to our 49.992 percent interest in ~~FASL.~~FASL, up to 25 billion yen ($188 million). As of ~~April 1, 2001,~~March 31, 2002, we had ~~$16~~$144 million in loan guarantees outstanding with respect to these third-party loans. ~~These planned costs are denominated~~
UMC
On January 31, 2002, we announced an alliance with United Microelectronics Corporation (UMC) under which UMC and AMD will establish a joint venture to own and operate a state-of-the-art, 300-mm wafer fabrication facility in ~~yen~~Singapore for high-volume production of PC processors and ~~are, therefore, subject to change due to foreign exchange rate fluctuations. At the end~~other logic products. As part of the ~~first quarter~~alliance, UMC and AMD will collaborate in the development of ~~2001,~~advanced process technologies for semiconductor logic products. We separately announced a foundry agreement under which UMC will produce PC processors to augment Dresden Fab 30 production capacity for devices produced on 130-nanometer and smaller-geometry technology.
Other Financing Activities
We plan to make capital investments of approximately $850 million during 2002, including amounts related to the ~~exchange rate was approximately 123.54 yen to 1 U.S. dollar, which we used to calculate the amounts denominated in yen.~~continued facilitization of Dresden Fab 30. We believe that cash flows
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from our operations and current cash balances, together with available external financing, ~~and the extension of existing facilities,~~ will be sufficient to fund our operations and capital investments for ~~at least~~ the next 12twelve months. ~~RECENT DEVELOPMENTS On May 4, 2001, we, along with Intel Corporation, announced~~
Recently Adopted Accounting Pronouncements
We adopted FAS 141, FAS 142 and FAS 144 at the ~~renewal~~beginning of the ~~patent cross-license agreement between the companies.~~ 2002 fiscal year. The adoption of these standards did not have a material impact on our financial statements.
RISK FACTORS
Weak Market Demand for Our ~~business, results of operations and financial condition are subject to a number of risk factors, including the following: -24-~~ Flash Memory Products or Any Delay in Our Transition to MirrorBit Technology May Have a Material Adverse Impact on Us.    The demand for Flash memory devices ~~has decreased substantially~~continues to be weak due to the ~~recent sharp~~sustained downturn in the communications ~~sector. It is extremely difficult to forecast memory product sales given the uncertainties of the level of demand in a continuing soft communications sector. Therefore,~~and networking equipment industries and excess inventories held by our customers. In addition, we cannot be certain as to the level of demand for our Flash memory devices. If the communications sector does not recover and the sales of our Flash memory products continue to decline, our business could be materially and adversely affected. Competitionexpect competition in the market for ~~Flash~~flash memory devices ~~will~~to increase in ~~2001~~2002 and beyond as ~~existing~~competing manufacturers introduce new products and industry-wide production capacity increases. We may be unable to maintain or increase our market share in Flash memory devices as the market develops and ~~as existing~~Intel and ~~potential new~~other competitors introduce competitive products. A continued decline in unit sales of our Flash memory ~~device business~~ devices and/or ~~decline in revenue in this product line~~lower average selling prices could have a material adverse effect on us.
In 2001, we announced a new memory cell architecture, our ~~business. Microprocessor Products Dependence on AMD Seventh-Generation Microprocessors.~~MirrorBit^™ technology that enables Flash memory products to hold twice as much data as standard Flash memory devices. MirrorBit technology is expected to result in reduced cost of our products. We ~~must continue~~plan to ~~successfully market~~produce our seventh-generation Microsoft Windows compatible microprocessors, the AMD Athlon and AMD Duron microprocessors, in order to increase our microprocessor product revenues in 2001 and beyond, and to benefit fully from the substantial financial investments and commitments we have made and continue to make related to microprocessors. We began volume shipments of AMD Athlon microprocessorsfirst products with MirrorBit technology in the second half of ~~1999. We began shipments of AMD Duron processors, a derivative of~~2002. Any delay in our transition to MirrorBit technology, or failure to achieve the AMD Athlon processor designed to provide an optimized solution for value-conscious business and home users, in the second half of 2000. Our production and sales plans for AMD Athlon and AMD Duron microprocessors are subject to numerous risks and uncertainties, including: .cost savings we expect, could reduce our ability to maintain average selling prices of seventh-generation microprocessors despite aggressive Intel marketing programs and product bundling of microprocessors, motherboards, chipsets and combinations thereof; . whether Tier One OEM customers will use our seventh-generation microprocessors in systems developed for the commercial market; . our ability to successfully offer new higher performance versions of the AMD Athlon microprocessorbe competitive ~~with Intel's Pentium III and Pentium IV processors; . our ability on a timely basis to produce seventh-generation microprocessors~~ in the ~~volume~~market and ~~with the performance~~could have a material adverse effect on us.
If We are Unable to Develop, Produce and feature set required by customers; . our ability to expand our chipset and system design capabilities; . the pace at which we are able to ramp production in Dresden Fab 30 on 0.18- and 0.13-micron copper interconnect process technology; . the availability and acceptance of motherboards and chipsets designed for our seventh-generation microprocessors; and -25- . the use and market acceptance of a non-Intel processor bus (adapted by us from Digital Equipment Corporation's EV6 bus) in the design of our seventh- generation microprocessors, and the availability of chipsets from vendors who will develop, manufacture and sell chipsets with the EV6 interface in volumes required by us. If we fail to achieve continued market acceptance of our seventh-generation microprocessors our business will be materially and adversely affected. Investment in and Dependence on AMDSuccessfully Market Higher-Performing Microprocessor ~~Products. Our microprocessor product revenues have and will continue in 2001 and 2002 to make significant contributions to our overall revenues, profit margins and operating results.~~Products, We plan to continue to make significant capital expenditures to support our microprocessor products both in the near and long term. These capital expenditures will be a substantial drain on our cash flow and possibly on our cash balances as well. Our ability to increase microprocessor product revenues, and benefit fully from the substantial financial investments and commitments we have made and continue to make related to microprocessors, depends upon success of the AMD Athlon and AMD Duron microprocessors, which are our seventh-generation Microsoft Windows compatible microprocessors, and future generations of microprocessors beginning with the "Hammer" family of microprocessors that we plan to introduce in 2002. The Hammer processors will be our first processors capable of 64-bit operation, and are being designed to deliver leading-edge performance on both the 64-bit software used by high-end workstations and servers and the 32-bit software used by the majority of desktop and mobile computer users.May Be Materially Adversely Affected.    The microprocessor market is characterized by short product life cycles and migration to ever-higher performance microprocessors. To compete successfully against Intel in this market, we must transition to new process technologies at a fast pace and offer ~~higher performance~~higher-performance microprocessors in significantly greater volumes. We must achieve acceptable yields while producing microprocessors at higher speeds. Any significant difficulty in achieving microprocessor yield and volume plans may adversely affect our results of operations and liquidity. If we fail to achieve yield and volume goals or to offer ~~higher performance~~higher-performance microprocessors in significant volume on a timely basis, ~~in the future, our business~~we could be materially ~~and~~ adversely affected.
We ~~may not achieve~~must continue to market successfully our seventh-generation Microsoft Windows compatible microprocessors, the ~~production ramp necessary to meet our customers' volume requirements for higher performance~~AMD Athlon and AMD Duron microprocessors. ~~It is also possible that we may not increase our microprocessor revenues enough to achieve sustained profitability.~~ To sell the volume of AMD Athlon and AMD Duron microprocessors we currently plan to ~~make in 2001 and~~manufacture through 2002, we must increase sales to existing customers and develop new customers in both consumer and commercial markets. If we lose any current top tier OEM customers, or if we fail to attract additional customers through direct sales and through our distributors, we may not be able to sell the volume of units planned. This result could have a material adverse effect on our business. -26- Our production and sales plans for microprocessors are subject to other risks and uncertainties, including: .
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our ability to achieve a successful marketing position for the AMD Athlon XP microprocessor, which relies on market acceptance of a metric based on overall processor performance versus processor speed;
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our ability to maintain average selling prices of microprocessors despite increasingly aggressive Intel pricing strategies, marketing programs, new product introductions and product bundling of microprocessors, motherboards, chipsets and combinations thereof;
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our ability to continue offering new higher performance microprocessors competitive with Intel’s Pentium 4 processor;
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our ability, on a timely basis, to produce microprocessors in the volume and with the performance and feature set required by customers;
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the pace at which we are able to ramp production in Dresden Fab 30 on 130-nanometer copper interconnect process technology;
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our ability to expand our chipset and system design capabilities;
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the availability and acceptance of motherboards and chipsets designed for our microprocessors; and
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the use and market acceptance of a non-Intel processor bus, adapted by us from Digital Equipment Corporation’s EV6 bus, in the design of our seventh-generation and future generation microprocessors, and the availability of chipsets from vendors who will develop, manufacture and sell chipsets with the EV6 interface in volumes required by us.
Our ability to increase microprocessor product revenues and benefit fully from the ~~effects~~substantial investments we have made and continue to make related to microprocessors depends on the continuing success of ~~Intel's new product introductions, marketing strategies~~the AMD Athlon and ~~pricing; . adverse market conditions~~AMD Duron microprocessors, our seventh-generation processors, and the success of future generations of microprocessors.
We plan to introduce our eighth-generation of microprocessors at the end of 2002. Shipments of our eighth-generation processors for desktops and notebooks, AMD Athlon processors, are planned to begin in the ~~personal computer (PC) market~~fourth quarter of 2002. Shipments of our eighth-generation enterprise class processor for workstations and ~~consequent diminished demand~~servers, the AMD Opteron^™ processor, are planned to begin in the first half of 2003. These processors will be produced in Dresden Fab 30 on 130-nanometer process technology employing silicon on insulator (SOI) technology. These processors are designed to provide high performance for both 32-bit and 64-bit applications. The success of our ~~microprocessors; .~~eighth-generation processors are subject to risks and uncertainties including our ability to produce them in a timely manner on new process technologies in the volume and with the performance and feature set required by customers, market acceptance of ~~our microprocessors, including~~them and the ~~timely volume~~ availability of motherboards and chipsets designed for ~~these processors; . whether~~our eighth-generation processors.
If we ~~can successfully fabricate higher performance~~fail to achieve continued and expanded market acceptance of our seventh-generation microprocessors or if we fail to introduce in ~~planned volume and speed mixes; . whether~~a timely manner, or achieve market acceptance for, our eighth-generation microprocessors, we will have the financial and other resources necessary to continue to invest in the microprocessor products, including leading-edge wafer fabrication equipment and advanced process technologies; . the possibility that our newly introduced products may be ~~defective; and . unexpected interruptions~~materially adversely affected.
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Intel Corporation’s Dominance of the PC Processor Market May Limit Our Ability to Compete Effectively in ~~our manufacturing operations. See also the discussions below regarding Intel Dominance and Process Technology. Intel Dominance.~~that Market.    Intel has dominated the market for microprocessors used in PCs for many years. ~~Because of its dominant market position,~~As a result, Intel has ~~historically set and controlled~~been able to control x86 microprocessor and PC system standards and ~~thus, dictated~~dictate the type of ~~product~~products the market requires of ~~Intel's~~Intel’s competitors. In addition, ~~Intel may and does vary prices on its microprocessors and other products at will and thereby affects~~ the ~~margins and profitability of its competitors due to its~~ financial strength ~~and dominant position. Because Intel has dominated the microprocessor market for many years and has brand strength, we have in the past priced AMD microprocessors below the published price~~ of Intel ~~processors offering comparable performance. Thus, Intel's processor marketing~~allows it to market its product aggressively, target our customers and ~~pricing~~our channel partners with special incentives and discipline customers who do business with us. These aggressive activities can ~~impact and have impacted the~~result in lower average selling prices offor us and adversely affect our ~~microprocessors,~~margins and ~~consequently can impact and have impacted our overall margins.~~profitability. Intel also exerts substantial influence over PC manufacturers and their channels of distribution through the ~~"Intel Inside"~~“Intel Inside” brand program and other marketing programs. As long as Intel ~~invests billions of dollars~~remains in ~~and as a result exerts influence over, many other technology companies.~~ this dominant position, we may be materially adversely affected by its:
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pricing and allocation strategies;
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product mix and introduction schedules;
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product bundling, marketing and merchandising strategies;
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control over industry standards, PC manufacturers and other PC industry participants, including motherboard, chipset and basic input/output system (BIOS) suppliers; and
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user brand loyalty.
We expect Intel to maintain its dominant position in the marketplace as well as to continue to invest heavily in research and development, new manufacturing facilities and other technology companies, and to remain dominant: . through the Intel Inside and other marketing programs; . through other contractual constraints on customers, retailers, industry suppliers and other third parties; . by controlling industry standards; and . by controlling supply and demand of motherboards, chipsets and other system components. As an extension of its dominant microprocessor market share, companies.
Intel also dominates the PC system platform. As a result, PC manufacturers have been increasingly unable to innovate and differentiate their product offerings. We do not have the financial resources to compete with Intel on such a large scale. As long as Intel remains in this dominant position, we may be materially and adversely affected by its: -27- . product mix and introduction schedules; . product bundling, marketing, merchandising and pricing strategies; . control over industry standards, PC manufacturers and other PC industry participants, including motherboard, chipset and basic input/output system (BIOS) suppliers; and . end user brand loyalty. As Intel expanded its dominance over the PC system platform, many PC manufacturers reduced their system development expenditures and now purchase microprocessors together with chipsets or in assembled motherboards. PC OEMs are ~~increasingly~~highly dependent on Intel, less innovative on their own and, to a large extent, distributors of Intel technology.
In marketing our microprocessors to these OEMs and dealers, we depend on 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 only if Intel makes information about its products available to them in time to address market opportunities. Delay in the availability of such information makes, and will continue to make, it increasingly difficult for these third parties to retain or regain market share. To compete with Intel in the microprocessor market in the future, we intend to continue to form close relationships with third-party designers and manufacturers of chipsets, motherboards, graphics chips, BIOS software and other components. Similarly, we intend to expand our chipset and system design capabilities, and to offer OEMs licensed system designs incorporating ourIntel’s microprocessors, and companion products. We cannot be certain, however, that our efforts will be successful. We do not currently plan to develop microprocessors that are bus interface protocol compatible with the Pentium III, Pentium IV and Celeron processors because our patent cross-license agreement with Intel ~~does not extend to microprocessors that are bus interface protocol compatible with Intel's sixth and subsequent generation processors. Thus, the AMD Athlon and AMD Duron~~has significant leverage over their business opportunities.
Our microprocessors are not designed to function with motherboards and chipsets designed to work with Intel microprocessors. ~~The same will be true of our Hammer family microprocessors.~~ Our ability to compete with Intel in the market for ~~seventh-generation~~seventh- and ~~future generation~~eighth-generation microprocessors will depend on ~~our: . success in designing and developing the microprocessors; and .~~our ability to ensure that the microprocessors can be used in PC platforms designed to support our microprocessors or that platforms are available ~~which~~that support both Intel processors and our microprocessors. A failure ~~for any reason~~ of the designers and producers of motherboards, chipsets, processor modules and other system components to support our microprocessor offerings would have a material adverse effect on us.
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The Cyclical Nature of the Semiconductor Industry May Limit Our Ability to Maintain or Increase Revenue and Profit Levels During Industry Downturns.    The semiconductor industry is highly cyclical, to a greater extent than other less dynamic or less technology-driven industries. In the past, including during 2001 and currently, our ~~business. -28-~~ ~~Dependence~~financial performance has been negatively affected by significant downturns in the semiconductor industry as a result of:
•
the cyclical nature of the demand for the products of semiconductor customers;
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excess inventory levels by customers;
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excess production capacity; and
•
accelerated declines in average selling prices.
If current conditions do not improve in the near term or if these or other conditions in the semiconductor industry occur in the future, we will be adversely affected.
Fluctuations in the Personal Computer Market May Continue to Materially Adversely Affect Us.    Our business is closely tied to the personal computer industry. Industry-wide fluctuations in the PC marketplace have materially adversely affected us, including the industry downturn experienced during 2001 and currently, and may materially adversely affect us in the future.
Worldwide Economic and Political Conditions May Affect Demand for Our Products.    The economic slowdown in the United States and worldwide, exacerbated by the occurrence and threat of terrorist attacks and consequences of sustained military action, has adversely affected demand for our microprocessors, Flash memory devices and other integrated circuits. Similarly, a continued decline of the worldwide semiconductor market or a significant decline in economic conditions in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us.
If We Were to Lose Microsoft ~~and~~Corporation’s Support for Our Products or Its Logo ~~License.~~License, Our Ability to Market Our Processors May be Materially Adversely Affected.    Our ability to innovate beyond the x86 instruction set controlled by Intel depends on support from Microsoft in its operating systems. If Microsoft does not provide support in its operating systems for ~~the~~our x86 ~~instructions~~instruction sets, including our x86-64 technology that ~~we innovate~~will be introduced with our eighth-generation AMD Athlon and ~~design into our~~AMD Opteron processors, independent software providers may forego designing their software applications to take advantage of our innovations. This would adversely affect our ability to market our processors. For example, we cannot assure that Microsoft will support our Hammer family of microprocessors and its x86-64 bit instruction set. Microsoft's support is vital to the success of the Hammer family products currently in development. In addition, we have entered into logo license agreements with Microsoft that allow us to label our products as ~~"Designed~~“Designed for Microsoft ~~Windows." We have also obtained appropriate certifications from recognized testing organizations for our microprocessors.~~Windows,” which expire in November 2002. If we fail to ~~maintain~~retain the ~~logo~~support and certification of Microsoft or if we are unable to renew or renegotiate the license agreements ~~with Microsoft, we may lose our ability to label our microprocessors with the Microsoft Windows logo. This could impair~~on acceptable terms, our ability to market our processors could be materially adversely affected.
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We Plan for Significant Capital Expenditures in 2002 and Beyond and if We Cannot Generate that Capital Internally or Obtain it Externally, We May Be Materially Adversely Affected.    We plan to continue to make significant capital expenditures to support our microprocessor and Flash memory products both in the ~~products~~near and ~~could have~~long term, including $850 million in 2002. These capital expenditures will be a ~~material adverse effect~~substantial drain on our business. Fluctuations in the PC Market. Since most of our microprocessor products are used in PCs and related peripherals, our future growth is closely tied to the growth of the PC industry. Industry-wide fluctuations in the PC marketplace have in the pastcash flow and may ~~in the future materially and adversely affect~~also decrease our business. Demand for Our Products Affected by Worldwide Economic Conditions A continued decline of the worldwide semiconductor market could further decrease the demand for microprocessors, Flash memory devices and other integrated circuits. A significant decline in economic conditions in any significant geographic area, either domestically or internationally, could decrease the overall demand for our products, which could have a material adverse effect on our business. Financing Requirements We will have significant capital requirements over the next 12 months.cash balances. To the extent that we cannot generate the required capital internally or obtain such capital externally, ~~our business~~we could be materially adversely affected. We cannot assure the availability of such capital on terms favorable to us, or at all. We currently plan to make capital investments of approximately $1 billion in 2001 although the actual expenditures may vary. These investments include those relating to the continued facilitization of Dresden Fab 30 and Fab 25.
In March 1997, our indirect wholly owned subsidiary, AMD Saxony, entered into ~~the Dresden Loan Agreements~~a loan agreement and other related agreements with a consortium of banks led by Dresdner Bank AG. ~~The Dresden Loan Agreements~~These agreements require that we partially fund Dresden Fab 30 project costs in the form of subordinated loans to, or equity investments in, AMD Saxony. ~~In accordance with~~We currently estimate that the ~~terms~~construction and facilitization costs of Dresden Fab 30 will be $2.5 billion when fully equipped by the ~~Dresden Loan Agreements, we have~~end of 2003. We had invested ~~$425 million~~$1.9 billion as of ~~April 1, 2001, in the form of subordinated -29-~~ ~~loans and equity in AMD Saxony.~~March 31, 2002. If we are unable to meet our obligations to AMD Saxony as required under ~~the Dresden Loan Agreements,~~these agreements, we will be in default under the ~~Dresden Loan Agreement and the Loan Agreement,~~loan agreement, which would permit acceleration of ~~indebtedness, which would have a material adverse effect on our business. In July 2000,~~indebtedness.
We expect FASL ~~broke ground for a third fabrication facility,~~JV2 and FASL JV3, ~~for the manufacture of Flash memory devices in Aizu-Wakamatsu, Japan. As of December 2000, the building was complete and the clean room was under construction. FASL JV3 is expected~~including equipment, to cost ~~$1.5~~approximately $2.2 billion when fully equipped. ~~FASL capital expenditures to date have~~As of March 31, 2002, approximately $1.5 billion of this cost had been funded by cash generated from FASL operations and borrowings by FASL. A significant portion of the FASL capital expenditures in 2001 will continue to be funded by cash generated from FASL operations. In addition, both Fujitsu and AMD intend to make capital contributions of 15 billion yen (approximately $125 million) each to FASL during the second quarter of 2001. These planned costs are denominated in yen and are, therefore, subject to change due to foreign exchange rate fluctuations. At the end of the first quarter of 2001, the exchange rate was approximately 123.54 yen to 1 U.S. dollar, which was used to calculate the amounts denominated in yen. Further, tofunded. To the extent that additional funds are required for the full facilitization of FASL JV2 ~~or ramp of~~and FASL JV3, ~~AMD may~~we will be required to contribute cash or guarantee third-party loans in proportion to our 49.992 percent interest in FASL. In 2000, FASL further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility) to produce flash memory devices for sale to FASL, we agreed to guarantee the repayment of up to $125 million of Fujitsu’s obligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank (the Guarantee). On November 30, 2001, Fujitsu announced that it was closing the Gresham Facility, due to the downturn of the flash memory market. On March 26, 2002, we received notice from Fujitsu that FMI had requested an advance of funds from Fujitsu to avoid default under the Credit Facility. Although we disagree with Fujitsu as to the amount, if any, of our obligations under the Guarantee, Fujitsu has indicated its belief that we are obligated to pay the full $125 million. If we are unable to fulfill our obligations with respect to FASL, our business ~~will~~could be materially and adversely affected. ~~On July 13, 1999,~~
While the FASL joint venture has been successful to date, there can be no assurance that Fujitsu and AMD will elect to continue the joint venture in its present form or at all.
Our Inability to Quickly Adapt to Significant Fluctuations in Demand for Our Products Relative to the Capacity of Our Manufacturing Facilities Could Have a Material Adverse Effect on Us.    Because we entered into a Loan and Security Agreement (the Loan Agreement) with a consortium of banks led by Bank of America. Under the Loan Agreement, which provides for a four-year secured revolving line of credit of upcannot quickly adapt our manufacturing capacity to ~~$200 million,~~rapidly changing market conditions, at times we can borrow, subject to amounts which may be 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. We must comply with certain financial covenants if the level of domestic cash we hold declines to certain levels, or the amount of borrowings under the Loan Agreement rises to certain levels. Our obligations under the Loan Agreement are secured by a pledge of most of our accounts receivable, inventory, general intangibles and the related proceeds. Manufacturing Capacity. We underutilize our manufacturing facilities ~~from time to time~~ as a result of reduced demand for certain of our products. In the past, there have been times when our operations related to microprocessors have been particularly affected by this situation. If we underutilize our manufacturing facilities in the future, our gross margins may suffer. We are substantially increasing our manufacturing capacity by making significant capital investments in ~~Fab 25 and~~ Dresden Fab ~~30. FASL is currently constructing~~30, Fab 25, FASL JV3 and ~~increasing production capacity through foundry arrangements. We are continuing to increase production in~~ our test and assembly facility in Suzhou, China. ~~We have based our strategy of increasing our manufacturing capacity on industry projections for future growth.~~ If ~~these industry projections are inaccurate, or if~~the increase in demand for our products ~~does~~is not ~~increase~~ consistent with our ~~plans and~~ expectations, we ~~will likely~~may underutilize our manufacturing facilities, and ~~our business~~we could be materially ~~and~~ adversely affected. ~~In contrast to the above, there also have been situations~~This has in the past had, and in the future may have, a material adverse effect on our earnings.
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There may also be situations in which our manufacturing facilities ~~were~~are inadequate to meet the demand for certain of our products. Our inability to obtain sufficient manufacturing ~~capacities~~capacity to meet demand, either in our own facilities or through foundry or similar arrangements with others, could have a material adverse effect on ~~our business.~~ us.
At this time, the most significant risk is that we will have underutilized ~~capacity.~~capacity in Fab 25 as we continue to transition the production of microprocessors out of Fab 25 and into Dresden Fab 30 and as we convert Fab 25 to a Flash memory device production facility while demand for flash memory products remains depressed.
Further, during periods where we are implementing new process technologies, our manufacturing facilities may not be fully productive. For example, as we convert Fab 25 to Flash memory device production, Fab 25 will not be fully productive. Similarly, Dresden Fab 30 is expected to be fully transitioned to 130-nanometer technology by the end of 2002 and fully facilitized by the end of 2003. During these processes, Dresden Fab 30 will not be fully productive. A substantial delay in the successful conversion of Fab 25 or the technology transition and facilitization of Dresden Fab 30 could have a material adverse effect on us.
We Cannot Be Certain that Our Substantial Investments in Research and Development of Process ~~Technology. In order~~Technologies Will Result in the Leading Edge Technologies We Need to ~~remain competitive, we must~~Fabricate Our Products.    We make ~~continuing~~ substantial investments in ~~improving our process technologies. In particular, we have made and continue to make significant~~ research and development ~~investments~~of process technologies in an effort to improve the technologies and equipment used to fabricate our ~~microprocessor products and our Flash memory devices. Portions of these investments might not be fully recovered if we fail to continue to gain market acceptance, if~~products. For example, the communications sector does not recover or if the market for our Flash memory products should significantly deteriorate. Likewise, we are making a substantial investment in Dresden Fab 30. We have developed and installed 0.18- micron process technology and copper interconnect technology in Dresden Fab 30 in order to manufacture AMD Athlon microprocessors. We have entered into a strategic alliance with Motorola to co-develop logic process and embedded Flash technologies. The logic process technology which is the subject of the alliance includes the copper interconnect and silicon on insulator technology that is required for AMD Athlon microprocessors and subsequent generations of microprocessors. The successful development and implementation of ~~silicon on insulator~~SOI technology is ~~for example,~~ critical to ~~the success of~~ the Hammer family of ~~processors currently under development. We~~microprocessors. However, we cannot be certain ~~that the strategic alliance will be successful or~~ that we will be able to develop or obtain ~~the~~or successfully implement leading-edge process technologies ~~that will be required in Fab 25 or Dresden Fab 30~~needed to fabricate ~~microprocessors successfully.~~future generations of our products.
Any Substantial Interruption of or Problems with Our Manufacturing ~~Interruptions and Yields.~~Operations Could Materially Adversely Affect Us.    Any substantial interruption of our manufacturing operations, either as a result of a labor dispute, equipment failure or other cause, could materially ~~and~~ adversely affect ~~our business operations. We also have been and~~us. Further, manufacturing yields may ~~in the future~~ be ~~materially and~~ adversely affected by, ~~fluctuations in manufacturing yields. The design and manufacture of ICs is a complex process. Normal manufacturing risks include~~among other things, errors and interruptions in the fabrication process, ~~and~~ defects in raw materials, ~~as well as other risks, all~~implementation of ~~which can affect yields. Additional manufacturing risks incurred in ramping up new fabrication areas and/or~~ new manufacturing processes, ~~include~~ equipment performance and process ~~controls as well as other risks, all of which can affect yields. Product Incompatibility.~~controls. A decline in manufacturing yields may have a material adverse effect on our earnings.
If Our Products Are Not Compatible with Some or All Industry-Standard Software and Hardware, We Could be Materially Adversely Affected.    It is possible that our products may ~~possibly~~not be ~~incompatible~~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. ~~It is also possible that we may be unsuccessful in correcting any such compatibility problems that are discovered or that corrections will be unacceptable to customers or made in an untimely manner.~~ In addition, the mere announcement of an incompatibility problem relating to our products could have a material adverse effect on ~~our business. Product Defects. One~~us.
Costs Related to Defective Products Could Have a Material Adverse Effect on Us.    It is possible that one or more of our products may ~~possibly~~ be found to be defective after ~~we have already~~ the product has been
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shipped ~~such products~~to customers in ~~volume, requiring~~volume. The cost of a ~~product replacement,~~ recall, ~~or a~~ software fix, ~~which would cure such defect but impede performance. We may also be subject to~~product replacements and/or product returns ~~which~~may be substantial and could ~~impose substantial costs on us and~~ have a material ~~and~~ adverse effect on ~~our business.~~us. In addition, modifications needed to fix the defect may impede performance of the product.
If Essential ~~Manufacturing Materials.~~Raw Materials Are Not Available to Manufacture Our Products, We Could Be Materially Adversely Affected.    Certain raw materials we use in the manufacture of our products are available from a limited number of suppliers. ~~For example, we are dependent on key chemicals from a limited number of suppliers, and a few foreign companies principally supply several types of 31~~ ~~the integrated circuit packages purchased by us.~~ Interruption of supply or increased demand in the industry could cause shortages and price increases in various essential materials. ~~We would have to reduce our manufacturing operations if~~If we ~~were~~are unable to procure certain of these ~~materials. This reduction in~~materials, we might have to reduce our manufacturing ~~operations~~operations. Such a reduction could have a material adverse effect on ~~our business. International Manufacturing~~us.
Our Operations in Foreign Countries Are Subject to Political and ~~Foundries.~~Economic Risks, Which Could Have a Material Adverse Effect on Us.    Nearly all product assembly and final testing of our products are performed at our manufacturing facilities in Penang, Malaysia; Bangkok, Thailand; Suzhou, China; Japan; and Singapore; or by subcontractors in the United States and Asia. We also depend on foreign foundry suppliers and joint ventures for the manufacture of a portion of our finished silicon ~~wafers. Foreign manufacturing~~wafers and ~~construction of foreign facilities entail~~have international sales operations. The political and economic risks ~~including political instability, expropriation, currency controls and fluctuations, changes~~associated with our operations in ~~freight and interest~~foreign countries include:
•
expropriation;
•
changes in a specific country’s or region’s political or economic conditions;
•
trade protection measures and import or export licensing requirements;
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difficulty in protecting our intellectual property;
•
changes in foreign currency exchange rates and currency controls;
•
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 exemptions for taxes and tariffs. For example, if we were unable to assemble and test our products abroad, or if air transportation between the United States and our overseas facilities were disrupted, there could bewhich may have a material adverse effect on ~~our business.~~us.
Our Inability to Continue to Attract and Retain Key Personnel May Hinder Our Product Development Programs.    Our future success depends upon the continued service of numerous key engineering, manufacturing, marketing, sales and executive personnel. ~~We may or may~~If we are not be able to continue to attract, retain and motivate qualified personnel necessary for our ~~business. Loss~~business, the progress of ~~the service of, or failure to recruit, key engineering design personnel could be significantly detrimental to~~ our product development programs ~~including next generation microprocessors~~could be hindered, and ~~Flash memory devices, or~~we could be otherwise ~~have a material adverse effect on our business. Fluctuations in~~adversely affected.
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Our Operating Results are Subject to Substantial Quarterly, Annual and Seasonal Fluctuations.    Our operating results are subject to substantial quarterly and annual fluctuations due to a variety of factors, ~~including: . the effects~~including decreases in average selling prices of ~~competition with Intel in microprocessor and Flash memory device markets; .~~our products, general worldwide economic conditions, the gain or loss of significant ~~customers; .~~customers, market acceptance of our products and new product introductions by us or our ~~competitors; .~~competitors. In addition, changes in the mix of products produced and sold ~~and~~ in the mix of sales by distribution ~~channels; . market acceptance of new or enhanced versions of our products; . decreases~~channels, in ~~unit average selling prices of our products due to competitive pricing pressures or other factors; . production capacity levels and fluctuations in manufacturing yields; .~~the availability and cost of products from our ~~suppliers; . seasonal customer demand;~~suppliers or in production capacity and ~~. the timing of significant orders and the timing and extent of product development costs. 32~~ manufacturing yields can contribute to periodic fluctuations in operating results.
Our operating results also tend to vary ~~seasonally due to vacation and holiday schedules.~~seasonally. Our revenues are generally lower in the first, second and third quarters of each year than in the fourth quarter. This seasonal pattern is largely a result of decreased demand in Europe during the summer months and higher demand in the retail sector of the ~~personal computer~~PC market during the winter holiday season. ~~In addition, operating results have recently been, and may in~~
Our Inability to Adapt to the future be, adversely affected by general economic and other conditions causing a downturn in the market for semiconductor devices, or otherwise affecting the timing of customer orders or causing order cancellations or rescheduling. Our customers may change delivery schedules or cancel orders without significant penalty. ManyRapid Technological Change Characteristic of the factors listed above are outside of our control. These factors are difficult to forecast, and these or other factors could materially and adversely affect our quarterly or annual operating results. Other Risk Factors Technological Change and Industry Standards.Market for Our Products Could Materially Adversely Affect Us.    The market for our products is generally characterized by rapid technological developments, evolving industry standards, changes in customer requirements, frequent new product introductions and enhancements, short product life cycles and severe price competition. ~~Currently accepted industry standards may change.~~ Our success depends substantially on our ability, on a cost-effective and timely basis, to continue to enhance our existing products, ~~and to~~ develop and introduce new products that take advantage of technological advances and ~~adhere to evolving industry standards. An unexpected change~~meet the demands of our customers.
Intense Competition in ~~one or more of~~ the technologies related to our products, in market demand for products based on a particular technology or of accepted industry standards could materially and adversely affect our business. We may or may not be able to develop new products in a timely and satisfactory manner to address new industry standards and technological changes, or to respond to new product announcements by others. In addition, new products may or may not achieve market acceptance. Competition.Integrated Circuit Industry May Materially Adversely Affect Us.    The integrated circuit industry is intensely ~~competitive~~competitive. Products compete on performance, quality, reliability, price, adherence to industry standards, software and ~~historically, has experienced rapid technological advances in product~~hardware compatibility, marketing and ~~system technologies.~~distribution capability, brand recognition and availability. After a product is introduced, costs and average selling prices normally decrease over time as production efficiency improves, competitors enter the market and ~~competition increase, and as~~ successive generations of products are developed and introduced for sale. ~~Technological advances in the industry result in frequent product introductions, regular price reductions, short product life cycles~~Failure to reduce our costs on existing products or to develop and increased product capabilities that may result in significant performance improvements. Competition in the sale of ICs is based on: . performance; . product quality and reliability; . price; . adherence to industry standards; . software and hardware compatibility; . marketing and distribution capability; . brand recognition; 33 ~~. financial strength; and . ability to deliver in large volumes~~introduce, on a cost-effective and timely ~~basis. Order Revision and Cancellation Policies.~~basis, new products or enhanced versions of existing products with higher margins, would have a material adverse effect on us.
Our Customers Can Cancel or Revise Purchase Orders Without Penalty. We ~~manufacture and market standard lines~~Must Commit Resources to the Manufacture of ~~products.~~Products Without Any Advance Purchase Commitments from Customers, Which Could Result in Excess Costs to Us.    Sales of our products are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time, which may be revised or canceled without penalty. As a result, we must commit resources to the ~~production~~manufacture of products without any advance purchase commitments from customers. ~~Our inability~~Therefore, the failure of demand for our products to ~~sell~~match the supply of our products ~~after we devoted significant resources to them~~could result in the expenditure of excess costs, which could have a material adverse effect on us.
Our Obligations Under Specific Provisions in our ~~business.~~Agreements with Distributors Expose Us to Material Adverse Effects When We Experience an Unexpected Significant Decline in the Price of Our Products.    Distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their inventory of our products against price
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reductions, as well as products that are slow moving or have been discontinued. These agreements, which may be canceled by either party on a specified notice, generally allow for the return of our ~~products if the agreement with the distributor is terminated. The market for our products is generally characterized by, among other things, severe price competition.~~products. The price protection and return rights we offer to our distributors could materially ~~and~~ adversely affect us if there is an unexpected significant decline in the price of our products.
If We Cannot Adequately Protect Our Technology or Other Intellectual Property, ~~Rights. It is possible that: . we will~~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 may not be ~~unable~~able to adequately protect our technology or other intellectual property, ~~adequately~~in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other ~~measures; . patent applications that we may file will not be issued; . foreign intellectual property laws will not protect our intellectual property rights; . any~~measures. Any patent licensed by us or issued to us ~~will~~could be challenged, invalidated or circumvented or ~~that the~~ rights granted thereunder ~~will~~may not provide a competitive ~~advantages~~advantage to ~~us; and .~~us. Further, patent applications that we file may not be issued. Despite our efforts to protect our rights, others ~~will~~may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to cost-effectively monitor compliance with, and enforce, our intellectual property on a worldwide basis.
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~~party’s intellectual property rights. We cannot assure you that all necessary licenses can be obtained on satisfactory terms, if at all. 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 ~~our business.~~us. We cannot ~~give any assurance~~assure you that ~~all necessary licenses can be obtained on satisfactory terms, or whether~~ litigation ~~may~~related to the intellectual property rights of us and others will always be avoided or successfully concluded. ~~California Energy Crisis. California's two largest power companies~~
Our Inability to Effectively Transition to a New Enterprise Resource Planning Program Could Have a Material Adverse Effect on Us.    We are currently ~~experiencing a power shortage that has resulted~~ in ~~"rolling" blackouts~~the process of transitioning to ~~maintain the stability~~an SAP software system as our new enterprise resource planning system, which is intended to provide an integrated information system to serve all of AMD. The first phase of the ~~state power grid. Certain~~implementation was successfully completed in January 2002. Future phases of the implementation are expected to occur through 2003. We are heavily dependent on the proper function of our ~~California facilities, including headquarters, product design, sales and process technology development facilities, are susceptible~~internal systems to ~~power interruptions as long as the 34~~ ~~energy crisis continues. One of the power companies, PG&E, has filed an additional contingency plan with the California Public Utilities Commission that would, if implemented,~~conduct our business. System failure or malfunctioning may result in ~~lengthy~~disruptions of operations and ~~routine power interruptions that would directly impact our leading-edge~~inability to process ~~technology development efforts, which~~transactions. If we encounter unforeseen problems with respect to the system operations or future implementations, we could ~~have a material adverse impact on our business. We are continuing~~be materially adversely affected.
Failure to ~~assess~~Comply with Applicable Environmental Regulations Could Subject Us to Fines, Suspension of Production, Alteration of Our Manufacturing Operations or Regulatory Action.    Our business involves the ~~impact~~use of the energy crisis on our operations. Environmental Regulations. We could possibly be subject to fines, suspension of production, alteration of our manufacturing processes or cessation of our operations ifhazardous materials. If we fail to comply with ~~present or future~~ governmental regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in ~~the~~our manufacturing ~~process.~~process, we may be subject to fines, suspension of production, alteration of our manufacturing processes or cessation of our operations. Such regulations could require us to ~~acquire~~procure expensive remediation equipment or to incur other expenses to comply with environmental regulations. Any failure to control the use of, disposal or storage of, or adequately restrict the discharge of, hazardous substances could subject
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us to future liabilities and could have a material adverse effect on us. Violations of environmental laws may result in criminal and civil liabilities.
Terrorist Attacks, Such as the Attacks That Occurred in New York and Washington, DC on September 11, 2001, and Other Acts of Violence or War May Materially Adversely Affect the Markets in which We Operate, Our Operations and Our Profitability.    Terrorist attacks may negatively affect our operations. These attacks or 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 and ultimately affect our sales.
Also as a result of terrorism, the United States has entered into an armed conflict 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. ~~International Sales.~~ The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They also could result in or exacerbate economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenues and costs, volatility of the market price for our securities and on the future price of our securities.
Our ~~international sales~~Corporate Headquarters, Research and Development Activities and Other Critical Business Operations Are Located in an Earthquake Zone and these Operations Could Be Interrupted in the Event of an Earthquake.    Our corporate headquarters, research and development activities related to process technologies and certain other critical business operations ~~entail political~~are located near major earthquake fault lines. In the event of a major earthquake, we could experience business interruptions, destruction of facilities and/or loss of life, all of which could materially adversely affect us.
We Have a Substantial Amount of Debt and Debt Service Obligations, Which Could Adversely Affect Our Financial Position.    Our Loan Agreement provides for a four-year secured revolving line of credit of up to $200 million and currently expires on July 14, 2003. Under this agreement, we can borrow, subject to amounts that may be 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. We must comply with certain financial covenants if the level of cash we hold in the United States declines to certain levels. Our obligations under this agreement are secured by a pledge of most of our accounts receivable, inventory, general intangibles and the related proceeds. As of March 31, 2002, there was no outstanding amount under the Loan Agreement.
Our indirect wholly owned subsidiary, AMD Saxony, is a party to a loan agreement and other related agreements with a consortium of banks led by Dresdner Bank AG. These agreements
35
require that we partially fund Dresden Fab 30 project costs in the form of subordinated loans to, or equity investments in, AMD Saxony. If we are unable to meet our obligations to AMD Saxony as required under these agreements, we will be in default under the Loan Agreement, which would permit acceleration of indebtedness under both agreements. In addition, the Dresden Loan Agreement prohibits AMD Saxony from paying any dividends, so cash held by AMD Saxony will not be available for the repayment of the debentures.
To the extent that additional funds are required for the full facilitization of FASL JV2 and FASL JV3, we will be required to contribute cash or guarantee third-party loans in proportion to our 49.992 percent interest in FASL. If we are unable to fulfill our obligations to FASL, our business could be materially and adversely affected. In 2000, FASL further expanded its production capacity through a foundry arrangement with Fujitsu Microelectronics, Inc. (FMI), a wholly owned subsidiary of Fujitsu Limited. In connection with FMI equipping its wafer fabrication facility in Gresham, Oregon (the Gresham Facility) to produce flash memory devices for sale to FASL, we agreed to guarantee the repayment of up to $125 million of Fujitsu’s obligations as a co-signer with FMI under its global multicurrency revolving credit facility (the Credit Facility) with a third-party bank (the Guarantee). On November 30, 2001, Fujitsu announced that it was closing the Gresham Facility, due to the downturn of the flash memory market. On March 26, 2002, we received notice from Fujitsu that FMI had requested an advance of funds from Fujitsu to avoid default under the Credit Facility, which notice is required as a condition to our obligations under the Guarantee. However, to date we have not received a demand for payment under the terms of the Guarantee from Fujitsu. Furthermore, we continue to disagree with Fujitsu as to the amount, if any, of our obligations under the Guarantee. While we continue to discuss this matter with Fujitsu, we cannot at this time reasonably predict its outcome including any amounts we might be required to pay Fujitsu, and, therefore, have not recorded any liability in our consolidated financial statements associated with the Guarantee.
On January 29, 2002, we closed a private offering of $500 million aggregate principal amount of our 4¾% Convertible Senior Debentures Due 2022 (the Debentures). The debentures bear interest at a rate of 4¾ percent per annum. The interest rate will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the interest rate payable 120 days prior to such date on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4¾ percent and will not exceed 6¾ percent.
Our ability to make payments on and to refinance our debt 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 ~~risks,~~conditions and to financial, business and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our Loan Agreement in an amount sufficient to enable us to pay our debt or Debentures, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt, including ~~expropriation, currency controls, exchange rate fluctuations, changes~~the Debentures, on or before maturity. We cannot assure you that we will be able to refinance any of our debt, including our Loan Agreement or the Debentures, on commercially reasonable terms or at all.
36
We may incur substantial additional debt in ~~freight rates~~the future. As of March 31, 2002, we had the ability to borrow $200 million under the Loan Agreement. If new debt is added to our and ~~changes in rates and exemptions for taxes and tariffs. Volatility~~our subsidiaries’ current debt levels, the risk of our inability to repay our debt, including the Debentures, could intensify.
The Price of Our Common Stock ~~Price; Ability~~Continues to ~~Access Capital.~~Be Highly Volatile.    Based on the trading history of our common stock, we believe that the following factors have caused and are likely to continue to cause the market price of our common stock to fluctuate substantially: . quarterly fluctuations in our operating and financial results; . announcements of new products and/or pricing by us or our competitors; . the pace of new process technology and product manufacturing ramps; . production yields of key products; and . general conditions in the semiconductor industry.
•
quarterly fluctuations in our operating and financial results;
•
announcements of new technologies, products and/or pricing by us or our competitors;
•
the pace of new process technology and product manufacturing ramps;
•
fluctuations in the stock price and operating results of our competitors, particularly Intel;
•
changes in earnings estimates or buy/sell recommendations by financial analysts;
•
changes in the ratings of our debentures or other securities;
•
production yields of key products; and
•
general conditions in the semiconductor industry.
In addition, an actual or anticipated shortfall in revenue, gross margins or earnings from securities ~~analysts'~~analysts’ expectations could have an immediate effect on the trading price of our common ~~stock in any given period.~~stock. Technology company stocks in general have experienced extreme price and volume fluctuations that are often unrelated to the operating performance of the companies. ~~This market~~Market volatility may adversely affect the market price of our common stock, which could affect the price of our debentures and ~~consequently~~ limit our ability to raise capital or to make acquisitions. ~~Our current long term business plan envisions substantial cash outlays which may require external capital financing. It is possible that capital and/or long-term financing~~
37
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 29, 2002, we closed a private offering of $500 million aggregate principal amount of our 4¾% Convertible Senior Debentures due 2022 issued pursuant to Rule 144A and Regulation S of the Securities Act. The debentures bear interest at a rate of 4¾ percent per annum. The 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 debentures will be unavailable on terms favorable to us or in sufficient amounts to enable us to implement our strategic plans. Debt Restrictions. The Dresden Loan Agreements substantially prohibit AMD Saxony from transferring assets to us. Earthquake Danger. Our corporate headquarters, a portionconvertible into approximately 43 shares of our ~~manufacturing facilities, assembly~~common stock. We intend to use the net proceeds generated from the offering for capital expenditures, working capital, and research and development activities and certain other critical business operations are located near major earthquake fault lines. We could be materially and adversely affected in the event of a major earthquake. 35 Euro Conversion. On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies and the euro. The participating countries adopted the euro as their common legal currency on that date. The transition period will last through January 1, 2002. We do not expect the introduction and use of the euro to materially affect our foreign exchange activities, to affect our use of derivatives and other financial instruments or to result in any material increase in costs to us. We will continue to assess the impact of the introduction of the euro currency over the transition period. 36 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In February 2001, we cancelled the interest rate swap agreement with a counterparty under which the difference between fixed- and floating-rate interest amounts calculated on an agreed-upon notional principal amount ($400 million) were exchanged at specified intervals. The cancellation resulted in a gain to us of $475,000. For additional Quantitative and Qualitative Disclosures about Market Risk, including other foreign exchange risks associated with Dresden Fab 30, referencegeneral corporate purposes.
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December ~~31, 2000. 37~~ 30, 2001.
38
PART II.    OTHER INFORMATION ~~ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ***10.25(c) Amendment 3~~
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 2002, we closed a private offering of $500 million aggregate principal amount of our 4¾% Convertible Senior Debentures due 2022 issued pursuant to Rule 144A and Regulation S of the Securities Act. The debentures bear interest at a rate of 4¾ percent per annum. The interest rate will be reset on each of August 1, 2008, August 1, 2011 and August 1, 2016 to a rate per annum equal to the ~~Technology Development~~interest rate payable 120 days prior to such date on 5-year U.S. Treasury Notes, plus 43 basis points. The interest rate will not be less than 4¾ percent and ~~Licence Agreement, entered~~will not exceed 6¾ percent. The 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 debentures will be convertible into approximately 43 shares of our common stock. We intend to use the net proceeds generated from the offering for capital expenditures, working capital, and general corporate purposes.
Credit Suisse First Boston and Salomon Smith Barney acted as initial purchasers of January 18, 2001, by AMD and its subsidiaries and Motorola, Inc. and its subsidiaries. ***Confidential treatment has been requested with respect to certain parts of this exhibit. (b) Reports on Form 8-K 1. A Current Report on Form 8-K dated January 17, 2001 reporting under Item 5 - Other Events was filed announcing AMD's fourth quarter earnings. 2. A Current Report on Form 8-K dated January 29, 2001 reporting under Item 5 - Other Events was filed announcing a program to repurchase shares. 38 the debentures.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibits
*10.52
Joint Development Agreement, dated as of January 31, 2002, between AMD and United Microelectronics Corporation.
(b)
Reports on Form 8-K
1.
A Current Report on Form 8-K dated January 16, 2002, reporting under Item 5—Other Events, was filed announcing our fourth quarter results.
2.
A Current Report on Form 8-K dated January 23, 2002, reporting under Item 5—Other Events and Item 7—Financial Statements, Pro Forma Financial Information and Exhibits, was filed announcing our intention to offer $500,000,000 in principal amount of Convertible Senior Debentures to be issued pursuant to Rule 144A.
3.
A Current Report on Form 8-K dated January 24, 2002, reporting under Item 5—Other Events and Item 7—Financial Statements, Pro Forma Financial Information and Exhibits, was filed announcing the pricing of a private offering of $500 million aggregate principal amount of 4¾% Convertible Senior Debentures due 2022.
4.
A Current Report on Form 8-K dated January 29, 2002, reporting under Item 5—Other Events and Item 7—Financial Statements, Pro Forma Financial Information and Exhibits, was filed announcing the closing of a private offering of $500 million aggregate principal amount of 4¾% Convertible Senior Debentures due 2002.
*
Confidential treatment has been requested with respect to certain parts of this exhibit.
39
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVANCED MICRO DEVICES, INC. Date: May 14, 2001 By:/s/ Robert J. Rivet ------------------- Robert J. Rivet Senior Vice President, Chief Financial Officer Signing on behalf of the registrant and as the principal accounting officer 39


Delaware (State or other jurisdiction of incorporation or organization)				94-1692300 (I.R.S. Employer Identification No.)


One AMD Place Sunnyvale, California (Address of principal executive offices)				94088 (Zip Code)

	Quarter Ended
	March 31, 2002			April 1, 2001
Net sales	$	902,073		$	1,188,747
Expenses:
Cost of sales		586,874			714,830
Research and development		171,882			157,760
Marketing, general and administrative		156,860			149,138

		915,616			1,021,728

Operating income (loss)		(13,543	)		167,019
Interest and other income, net		9,538			18,823
Interest expense		(12,158	)		(21,645	)

Income (loss) before income taxes and equity in net income of joint venture		(16,163	)		164,197
Provision (benefit) for income taxes		(4,041	)		52,543

Income (loss) before equity in net income of joint venture		(12,122	)		111,654
Equity in net income of joint venture		2,959			13,183

Net income (loss)	$	(9,163	)	$	124,837

Net income (loss) per common share:
Basic:
Net income (loss)	$	(0.03	)	$	0.40

Diluted:
Net income (loss)	$	(0.03	)	$	0.37

Shares used in per share calculation:
Basic		340,806			314,347

Diluted		340,806			351,785

	March 31, 2002			December 30, 2001*
	(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	298,387		$	427,288
Short-term investments		978,336			442,709

Total cash, cash equivalents and short-term investments		1,276,723			869,997
Accounts receivable, net of allowance for doubtful accounts		692,165			659,783
Inventories:
Raw materials		20,025			26,489
Work-in-process		266,401			236,679
Finished goods		90,369			117,306

Total inventories		376,795			380,474
Deferred income taxes		162,820			155,898
Prepaid expenses and other current assets		151,377			286,957

Total current assets		2,659,880			2,353,109
Property, plant and equipment:
Land		46,758			33,207
Buildings and leasehold improvements		1,232,130			1,461,228
Equipment		4,644,065			4,162,652
Construction in progress		483,867			469,191

Total property, plant and equipment		6,406,820			6,126,278
Accumulated depreciation and amortization		(3,637,586	)		(3,387,140	)

Property, plant and equipment, net		2,769,234			2,739,138
Investment in joint venture		353,352			363,611
Other assets		182,476			191,384

	$	5,964,942		$	5,647,242

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	383,495		$	304,990
Accrued compensation and benefits		133,401			129,042
Accrued liabilities		321,953			443,995
Income taxes payable		56,113			56,234
Deferred income on shipments to distributors		68,016			47,978
Notes payable to banks		—			63,362
Current portion of long-term debt, capital lease obligations and other		264,029			268,336

Total current liabilities		1,227,007			1,313,937
Deferred income taxes		104,661			105,305
Long-term debt, capital lease obligations and other, less current portion		1,123,671			672,945

Stockholders’ equity:
Common stock, par value $0.01; 750,000,000 authorized; 341,389,966 shares issued and outstanding at March 31, 2002 and 340,502,883 at December 30, 2001		3,414			3,405
Capital in excess of par value		1,975,506			1,966,374
Treasury stock, at cost: 6,310,580 shares		(77,157	)		(77,157	)
Retained earnings		1,786,517			1,795,680
Accumulated other comprehensive loss		(178,677	)		(133,247	)

Total stockholders’ equity		3,509,603			3,555,055

	$	5,964,942		$	5,647,242

	March 31, 2002
(Thousands)
Cash equivalents:
Commercial paper	$	33,938
Money market funds		40,052
Federal agency notes		30,229

Total cash equivalents	$	104,219


Short-term investments:
Commercial paper	$	32,805
Money market auction rate preferred stocks		331,140
Federal agency notes		372,959
Corporate notes		236,407
Tax exempt money market fund		5,025

Total short-term investments	$	978,336


Long-term investments:
Equity investments	$	21,079
Commercial paper		10,196
Federal agency notes		3,323

Total long-term investments (included in other assets)	$	34,598

	March 31, 2002			December 30, 2001
(Thousands)
Unrealized gain on investments, net of tax	$	3,902		$	5,071
Net unrealized losses on cash flow hedges		(10,271	)		(3,399	)
Cumulative translation adjustments		(172,308	)		(134,919	)

	$	(178,677	)	$	(133,247	)

	Severance and Employee Benefits			Facilities and equipment impairment			Facility and equipment decommission costs			Other facility exit costs			Total
(Thousands)
Q3 2001 charges	$	34,105		$	39,000		$	15,500		$	700		$	89,305
Non-cash charges		—			(39,000	)		—			—			(39,000	)
Cash charges		—			—			—			—			—

Accruals at September 30, 2001		34,105			—			15,500			700			50,305
Cash charges		(7,483	)		—			—			(54	)		(7,537	)

Accruals at December 30, 2001		26,622			—			15,500			646			42,768
Cash charges		(9,678	)		—			(420	)		—			(10,098	)

Accruals at March 31, 2002	$	16,944		$	—		$	15,080		$	646		$	32,670

	Severance and Employee Benefits			Facilities and equipment impairment			Facility and equipment decommission costs			Other facility exit costs			Total
(Thousands)
Q3 2001 charges	$	34,105		$	39,000		$	15,500		$	700		$	89,305
Non-cash charges		—			(39,000	)		—			—			(39,000	)
Cash charges		—			—			—			—			—

Accruals at September 30, 2001		34,105			—			15,500			700			50,305
Cash charges		(7,483	)		—			—			(54	)		(7,537	)

Accruals at December 30, 2001		26,622			—			15,500			646			42,768
Cash charges		(9,678	)		—			(420	)		—			(10,098	)

Accruals at March 31, 2002	$	16,944		$	—		$	15,080		$	646		$	32,670

Date: May 10, 2002	ADVANCED MICRO DEVICES, INC.

	By:	/s/ ROBERT J. RIVET
		Robert J. Rivet Senior Vice President, Chief Financial Officer Signing on behalf of the registrant and as the principal accounting officer


Yes X		No