AMD 1998 Annual Report Download - page 212

to be between $15 million and $20 million per quarter in 1999. We cannot give
any assurance that we will benefit from this additional research and development
spending through future copper interconnect-based product offerings, and any
such failure could have a material adverse effect on our business.
Research and development expenses increased in 1997 compared to 1996. In 1996, a
significant portion of our Submicron Development Center (SDC) in Sunnyvale,
California, capacity was devoted to the production of products for sale. In
1997, a higher percentage of SDC capacity was devoted to process development.
Marketing, general and administrative expenses increased in 1998 compared to
1997 primarily due to depreciation expense and labor costs associated with the
installation of new order management and accounts receivable systems and related
software upgrades. In 1997, marketing, general and administrative expenses
increased compared to 1996 primarily due to higher advertising and marketing
expenses associated with the introduction of the AMD-K6 micro processor.
Additionally, business systems expenses increased in 1997 due to new system
installation and upgrade expenses.
A litigation settlement of approximately $12 million was recorded in the first
quarter of 1998 for the settlement of a class action securities lawsuit against
AMD and certain of our current and former officers and directors. We paid the
settlement during the third quarter of 1998.
Interest expense increased in 1998 compared to 1997 due to the increase in debt
balances including the $517.5 million of Convertible Subordinated Notes sold in
May 1998 (the Convertible Subordinated Notes). There was no significant change
in interest income and other, net in 1998 compared to 1997. Interest expense
increased in 1997 compared to 1996 due to the increase in debt balances,
including the $400 million of Senior Secured Notes sold in August 1996 (the
Senior Secured Notes) and the $250 million four-year secured term loan received
under the 1996 syndicated bank loan agreement, which also provides for a
currently unused $150 million revolving line of credit (the Credit Agreement).
This increase was partially offset by higher capitalized interest related to the
second phase of construction of Fab 25 and construction of Dresden Fab 30.
Interest income and other, net decreased in 1997 compared to 1996 due to the
absence in 1997 of realized gains recorded in 1996 of approximately $41 million
from sales of equity securities. This reduction in 1997 was partially offset by
higher interest income in 1997 as a result of higher cash balances.
Income Tax
We recorded tax benefits of $92 million in 1998, $55 million in 1997 and $85
million in 1996, resulting in an effective tax benefit rate of approximately 44
percent in 1998, 55 percent in 1997 and 41 percent in 1996. The tax benefit rate
is greater than the federal statutory rate due to fixed tax benefits that
increase the benefit rate in a loss year. The lower tax benefit rate in 1998 and
1996 compared to 1997 reflects a lesser impact of these fixed benefits relative
to a larger pre-tax loss in 1998 and 1996 compared to 1997. Realization of our
net deferred tax assets ($171 million at December 27, 1998) is dependent on
future taxable income. While we believe that it is more likely than not that
such assets will be realized, other factors, including those mentioned in the
discussion of "Risk Factors," may impact the ultimate realization of such
assets.
Other Items
International sales as a percent of net sales were 55 percent in 1998, 57
percent in 1997 and 53 percent in 1996. During 1998, approximately 8 percent of
our net sales were denominated in foreign currencies. We do not have sales
denominated in local currencies in those countries which have highly
inflationary economies (as defined by generally accepted accounting
principles). The impact on our operating results from changes in foreign
currency rates individually and in the aggregate has not been material.
Comparison of Segment Income (Loss)
We operate in two segments: (1) our AMD segment, which consists of our three
product groups - Computation Products Group, Memory Group and Communications
Group; and (2) our Vantis segment, which consists of Vantis. For a comparison of
segment net sales, refer to the previous discussions on net sales by product
group.
The following is a summary of operating income (loss) by segment for
1998, 1997 and 1996:
(Millions) 1998 1997 1996
- -------------------------------------------------------------------------
AMD segment $(185) $(127) $(270)
Vantis segment 22 37 17
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Total $(163) $ (90) $(253)
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Source: ADVANCED MICRO DEVIC, 10-K, March 29, 1999