AMD 2005 Annual Report Download - page 108

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Table of Contents
guaranteed annual rate of return of between 11 percent to 13 percent. The Company records this periodic accretion to redemption value as interest expense.
The limited partnership contributions that AMD Fab 36 KG received from Leipziger Messe and Fab 36 Beteiligungs and the New Silent Partnership
Portion described above are not mandatorily redeemable, but rather are subject to redemption outside of the control of AMD Fab 36 Holding and AMD Fab 36
Admin. Upon consolidation, the Company initially recorded these contributions as minority interest, based on their fair value. Each accounting period, the
Company increases the carrying value of this minority interest toward its ultimate redemption value of these contributions by the guaranteed rate of return of
between 11 percent and 13 percent. The Company is classifying this periodic accretion of redemption value as an additional minority interest allocation. No
separate accounting is required for the put and call options because they are not freestanding instruments and not considered derivatives under SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities.”
As of December 25, 2005, AMD Fab 36 KG had received $166 million of silent partnership contributions and $214 million of limited partnership
contributions, which includes a New Silent Partnership Amount of $59 million, from the unaffiliated limited partners. These contributions were recorded as debt
and minority interest, respectively, in the accompanying consolidated balance sheet.
In addition to support from the Company and the consortium of banks referred to above, the Federal Republic of Germany and the State of Saxony have
agreed to support the Fab 36 project in the form of:
• a loan guarantee equal to 80 percent of the losses sustained by the lenders after foreclosure on all other security; and
• subsidies consisting of grants and allowances totaling up to approximately $644 million, depending on the level of capital investments by AMD Fab 36
KG.
In connection with the receipt of subsidies for the Fab 36 project, AMD Fab 36 KG is required to attain a certain employee headcount by December 2007
and maintain this headcount through December 2012. The Company records the subsidies as long-term liabilities on its financial statements and amortizes them
to operations ratably starting from December 2004 through December 2012. Currently, the Company amortizes the grant amounts as a reduction to research and
development expenses. At such time as Fab 36 begins producing revenue-generating products, which is expected to be in the first quarter of 2006, the Company
will amortize these amounts as a reduction to cost of sales. For allowances, the Company will amortize the amounts as a reduction of depreciation expense
ratably over the life of the equipment, starting from the first quarter of 2006 because these allowances are intended to subsidize the capital investments in
equipment. Noncompliance with the covenants contained in the subsidy grant documents could result in 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 December 25, 2005, AMD Fab 36 KG had received cash allowances of $68 million for capital investments made in 2003 and 2004 as well as cash
grants of $130 million for capital investments made in 2003 and 2004 and a prepayment for capital investments planned in 2005 and the first half of 2006.
The Fab 36 Loan Agreements also require that the Company:
• provides funding to AMD Fab 36 KG if cash shortfalls occur, including funding shortfalls in government subsidies resulting from any defaults caused
by AMD Fab 36 KG or its affiliates; and
• guarantees 100 percent of AMD Fab 36 KG’s obligations under the Fab 36 Loan Agreements until the bank loans are repaid in full.
Under the Fab 36 Loan Agreements, AMD Fab 36 KG, AMD Fab 36 Holding and AMD Fab 36 Admin are generally prevented from paying dividends or
making other payments to the Company. In addition, AMD Fab
103
Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006