AMD 2005 Annual Report Download - page 54

Table of Contents
In accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” we record sales of Spansion’s Flash memory
products and the related cost of sales on a net basis on our consolidated statements of operations. As a result, the net impact to our net sales and cost of sales is
zero. With respect to our consolidated balance sheet, sales to Spansion’s customers are included in our “Accounts Receivable” line item whereas the payables to
Spansion that relate to the products we purchased from Spansion are reflected in our “Accounts Payable to Spansion” line item. These amounts are recorded
separately on the balance sheet because there is no legal right of offset in accordance with FIN 39, “Offsetting of Amounts Related to Certain Contracts.”
AMD/Spansion Service Agreements. We are party to various service agreements with Spansion. Under our IT Services Agreement and General Services
Agreement, we provide, among other things, information technology, facilities, logistics, legal, tax, finance, human resources, and environmental health and
safety services to Spansion. For services rendered, we are paid fees in an amount equal to cost plus five percent except for services procured by us from third
parties, which are provided to Spansion at cost.
Unless otherwise earlier terminated, each of these service agreements expires on June 30, 2007, but each of us may extend the term by mutual agreement.
Spansion has the ability to terminate individual services under the general services agreements at any time and for any reason upon at least six months’ advance
notice. With respect to the IT service agreements and general service agreements, if we failed to comply with applicable service levels for a particular service and
have not rectified such performance failure, Spansion may terminate such service after 60 days have elapsed since Spansion first notified us of the failure to
perform the service. Moreover, Spansion may terminate an entire IT service agreement or general services agreement if we breach our material obligations under
the respective agreement and do not cure the default within 90 days after receipt of a notice of default from Spansion. Similarly, we can terminate the respective
agreement for Spansion’s failure to make payments when due if Spansion fails to cure such default within 90 days after receipt of notice of default.
Outlook
We are focused on increasing sales and growing market share in a profitable manner. However we are in an extremely competitive business.
Microprocessor products compete on performance, quality, reliability, cost, selling price, adherence to industry standards, software and hardware compatibility,
marketing and distribution capability, brand recognition and availability. After a product is introduced, costs and average selling prices normally decrease over
time as production efficiency improves and successive generations of products are developed and introduced for sale.
We expect sales during the first quarter of 2006 to be flat to slightly down from the fourth quarter of 2005.
Also, during the first quarter of 2006, we expect operating expenses, which include research and development expenses and marketing, sales and
administrative expenses, to increase by approximately 6 percent from comparable operating expenses in the fourth quarter of 2005, which excludes those
operating expenses related to the Memory Products segment.
In 2006, we expect capital expenditures to be approximately $1.4 billion and depreciation and amortization expense to be approximately $825 million. We
expect our tax rate to be between 10 percent to 15 percent.
In addition, in 2006 Spansion’s results of operations will continue to impact our results of operations. These results will be reflected in the “Equity in
Income (Loss) of Unconsolidated Investee” line item on our statement of operations and for 2006 will be based on our ownership of Spansion, which was 37.9
percent as of December 25, 2005.
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Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006