AMD 1996 Annual Report Download - page 212

CPG net sales decreased from 1995 to 1996 as well as from 1994 to 1995. The
decline in CPG net sales was in each case due to increased market acceptance of
higher performance fifth-generation microprocessors from Intel Corporation
(Intel), coupled with the Company's delay in introducing competitive fifth-
generation microprocessors. The Company's fifth-generation microprocessor, the
AMD-K5 microprocessor, was introduced relatively late in the life cycle of
fifth-generation products. As such, the Company believes the AMD-K5
microprocessor will be a transitional product and will not generate levels of
sales achieved by the Am486 microprocessor over its product life. The Company
intends to begin volume shipments of the AMD-K6/(TM)/ products in the second
quarter of 1997, although no assurance can be made that such shipments will
occur.
Vantis net sales decreased in 1996 due to lower unit shipments. The Company
believes this decrease was caused by decreased market demand in the simple
programmable logic market. The increase from 1994 to 1995 was primarily due to
higher unit shipments. The Company is in the process of transferring its
programmable logic device operations to a wholly owned subsidiary, Vantis
Corporation. Vantis Corporation will rely upon the Company for manufacturing
services. A dedicated programmable logic device sales force was formed and began
operating as a separate unit in the second half of 1996.
All of the Company's products are in markets characterized by rapid
technological change and significant competition. As such, there can be no
assurance that trends, including falling prices for Flash memory devices,
reduced microprocessor sales and decreased unit shipments of programmable logic
devices, will not continue. See Risk Factors below.
Gross margin was 26 percent, 43 percent and 53 percent in 1996, 1995 and 1994,
respectively. The decline in gross margin in 1996 was primarily due to lower
sales, the underutilization of certain production facilities, and increased
purchases by the Company of Flash memory devices from its manufacturing joint
venture with Fujitsu Limited, Fujitsu AMD Semiconductor Limited (FASL), at
prices higher than the costs of similar products manufactured internally. The
decline in gross margin in 1995 was due to Am486 processor price declines;
increased purchases from FASL at prices higher than the costs of similar
products manufactured internally; negative gross margin, inventory and
manufacturing loss accruals associated with significantly reduced demand for
NexGen products; and the transition of Fab 25 costs from research and
development to cost of sales when production commenced in September 1995. The
impact of gross margin declines caused by purchases of FASL products during 1996
and 1995 was mostly offset by the Company's share of FASL income.
Research and development expenses were $401 million, $417 million and $295
million in 1996, 1995 and 1994, respectively. The decrease from 1995 to 1996
was due to the commencement of production at Fab 25 in the third quarter of
1995, when Fab 25 costs transitioned from research and development to cost of
sales. The increase from 1994 to 1995 was primarily due to higher Fab 25
research and development expenses and secondarily due to increased
microprocessor development costs.
Marketing, general and administrative expenses were $365 million, $413 million
and $378 million in 1996, 1995 and 1994, respectively. The decrease from 1995
to 1996 was primarily due to the cessation of expenses associated with products
from NexGen, which the Company no longer offers, coupled with effective expense
controls. The increase from 1994 to 1995 was primarily attributable to expenses
for the sale of Nx586/(R)/and other related products from NexGen, and
secondarily to higher advertising expenses.
Interest income and other, net was $59 million, $32 million and $17 million in
1996, 1995 and 1994, respectively. The increase from 1995 to 1996 was due to
realized gains of approximately $41 million from equity securities sold in
1996, which were partially offset by lower interest income as a result of lower
cash balances and lower interest rates during 1996. The increase from 1994 to
1995 was due to higher interest rates and a realized gain of approximately $3
million from equity securities. Interest expense was $15 million, $3 million
and $4 million in 1996, 1995 and 1994, respectively. The increase from 1995 to
1996 was primarily due to interest expense incurred on the Company's Senior
Secured Notes sold in August, 1996. Gross interest expense increased in 1996
and is expected to increase in the future, primarily due to interest expense
incurred on the Company's Senior Secured Notes and a four-year secured term
loan, as discussed below. Interest expense in 1995 decreased from 1994 due to
higher capitalized interest mainly related to the construction of Fab 25.
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Source: ADVANCED MICRO DEVIC, 10-K, March 20, 1997