AMD 2005 Annual Report Download - page 93

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Table of Contents
Dilution in Ownership Interest
Prior to the IPO, the Company held a 60 percent controlling ownership interest in Spansion. Consequently, Spansion’s financial position, results of
operations and cash flows through December 20, 2005 have been included in the Company’s consolidated statements of operations and cash flows. Following the
IPO, the Company’s ownership interest was diluted from 60 percent to 37.9 percent and the Company no longer exercises control over Spansion’s operations.
Therefore, the Company has used the equity method of accounting to reflect its share of Spansion’s net income from December 21, 2005 through December 25,
2005. In connection with the Company’s reduction in its ownership interest in Spansion, the Company recorded a loss of $110 million which represents the
difference between Spansion’s book value per share before and after the IPO multiplied by the number of shares owned by the Company. To the extent that the
Company’s ownership in Spansion decreases in the future whether it is caused by disposal of its ownership interest or by Spansion’s issuance of additional
common stock, the Company would record either a gain or a loss on such further dilution depending on the Spansion’s book value and fair value at that time,
which could have a material effect on the Company’s results of operations in the period in which this ownership dilution occurs.
In addition, prior to Spansion’s IPO, as required by SFAS 142, “Goodwill and Other Intangible Assets,” the Company performed the annual goodwill
impairment analysis associated with Spansion during the fourth quarter of 2005. Goodwill in the amount of approximately $16 million was originally recorded in
June 30, 2003 as a result of the formation of Spansion LLC which was accounted for as a partial step acquisition and purchase business combination under SFAS
141, “Business Combinations,” and EITF Consensus No. 01-02, “Interpretations of APB Opinion No. 29.” After considering the fact that the estimated fair value
of Spansion was less than its net book value and after comparing the estimated fair value of Spansion’s assets (other than goodwill) to their carrying value, the
Company concluded that the implied fair value of goodwill was zero and therefore the entire $16 million was written off. This impairment charge was included
in the Memory Products segment and is included in the marketing, general and administrative line of the Company’s consolidated statements of operations.
As of December 25, 2005, the carrying net book value of the Company’s net equity investment in Spansion amounted to approximately $721 million and
the fair value of this investment was approximately $680 million based on Spansion’s market closing price on December 23, 2005, the last trading day of the
fiscal year. Based on the relevant factors including the share price of Spansion during the period, its book value and its business plan, the Company concluded
that there was no further impairment of the investment. In accordance with APB Opinion No. 18 (As Amended), “The Equity Method of Accounting for
Investments in Common Stock,” if future factors indicate that a decline in the fair value of the investment is other than temporary, the Company would recognize
a loss on investment at that time.
Purchase of Spansion LLC 12.75% Senior Subordinated Notes Due 2016
On December 21, 2005, Spansion LLC, a wholly-owned, indirect subsidiary of Spansion Inc., issued to the Company $175 million aggregate principal
amount of its 12.75% Senior Subordinated Notes Due 2016 (Spansion Senior Notes). The Company purchased the Spansion Senior Notes for cash of
approximately $158.9 million, or 90.828 percent of face value. The Spansion Senior Notes are general unsecured obligations of Spansion LLC and rank junior to
any existing and future senior debt of Spansion Inc. or Spansion LLC. Interest is payable on April 15 and October 15 of each year beginning April 15, 2006 until
the maturity date of April 15, 2016. Spansion LLC’s obligations under the Spansion Senior Notes are guaranteed by Spansion Inc., Spansion Technology Inc., a
subsidiary of Spansion Inc., and any restricted subsidiary of Spansion that guarantees any of Spansion’s debt in the future.
Because the Company can sell these notes to a third party in a private transaction, and the Company intends to sell them in 2006, the Company classified
them as short-term investment in the consolidated balance sheet.
88
Source: ADVANCED MICRO DEVIC, 10-K, February 27, 2006