AMD 2008 Annual Report Download - page 135

Additionally, an event of default (as defined in the 6.00% Indenture) may result in the acceleration of the
maturity of the 6.00% Notes.
The 6.00% Notes rank equally with the Company’s existing and future senior debt and are senior to all of
the Company’s future subordinated debt. The 6.00% Notes rank junior to all of the Company’s existing and
future senior secured debt to the extent of the collateral securing such debt and are structurally subordinated to all
existing and future debt and liabilities of the Company’s subsidiaries.
In connection with the issuance of the 6.00% Notes, on April 24, 2007, the Company purchased a capped
call with Lehman Brothers OTC Derivatives Inc., or Lehman Brother Derivatives, represented by Lehman
Brothers Inc. The capped call had an initial strike price of $28.08 per share, subject to certain adjustments, which
matches the initial conversion price of the 6.00% Notes, and a cap price of $42.12 per share. The capped call was
intended to reduce the potential common stock dilution to then existing stockholders upon conversion of the
6.00% Notes because the call option allowed the Company to receive shares of common stock from the
counterparty generally equal to the number of shares of common stock issuable upon conversion of the 6.00%
Notes.
Lehman Brothers Derivatives filed a voluntary Chapter 11 bankruptcy petition on October 4, 2008, which
was an event of default under the capped call arrangement, giving the Company the immediate right to terminate
the transaction and entitling the Company to claim reimbursement for the loss in terminating and closing out the
capped call transaction. On December 15, 2008, the Company delivered a notice of termination to Lehman
Brothers Derivatives of the capped call transaction. The Lehman Brothers Derivatives bankruptcy proceedings
are ongoing and the Company’s ability to reduce the potential dilution upon conversion of the 6.00% Notes
through the capped call transaction has effectively been eliminated. As a result of the uncertain recoverability of
this counterparty exposure, the Company is unable to predict whether, and to what extent, it may be able to
recover any of its losses under the capped call transaction. Moreover, the Company’s termination of the capped
call transaction resulted in disadvantageous tax consequences. Specifically, the Company recognized
approximately $1.4 billion of taxable gains for 2008, which were fully offset by its losses in 2008.
The net proceeds from the offering, after deducting discounts, commissions and offering expenses payable
by the Company, were approximately $2.2 billion. The Company used approximately $182 million of the net
proceeds to purchase the capped call and applied $500 million of the net proceeds to prepay a portion of the
amount outstanding under the October 2006 Term Loan. In connection with this repayment, the Company
recorded a charge of approximately $5 million to write off unamortized debt issuance costs associated with the
October 2006 Term Loan repayment.
In November 2008, the Company repurchased $60 million in principal amount of the 6.00% Notes by
paying approximately $20 million in cash, which resulted in a gain of approximately $39 million. The gain is
included in the caption “Other income (expense), net” on the Company’s 2008 consolidated statement of
operations.
In May 2008, the FASB issued FSP APB No. 14-1, Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). This FSP requires the
issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option) components of the instrument in a
manner that reflects the issuer’s nonconvertible debt borrowing rate. The effective date of this FSP is for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years and it does not permit earlier application. However, the transition guidance requires retroactive
application to all periods presented. This FSP will impact the Company’s accounting for its 6.00% Notes
whereby the equity component would be included in the paid-in-capital portion of stockholders’ equity on the
balance sheet and the value of the equity component would be treated as an original issue discount for purposes
of accounting for the debt component. Higher interest expense will result by recognizing accretion of the
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