AMD 2008 Annual Report Download - page 87

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 us 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 us the immediate right to terminate the
transaction and entitling us to claim reimbursement for the loss in terminating and closing out the capped call
transaction. On December 15, 2008, we delivered a notice of termination to Lehman Brothers Derivatives of the
capped call transaction. The Lehman Brothers Derivatives bankruptcy proceedings are ongoing and our 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, we are
unable to predict whether, and to what extent, we may be able to recover any of our losses under the capped call
transaction. Moreover, our termination of the capped call transaction resulted in disadvantageous tax
consequences to us. Specifically, we recognized approximately $1.4 billion of taxable gains for 2008, which were
fully offset by our losses in 2008.
The net proceeds from the offering, after deducting discounts, commissions and offering expenses payable
by us, were approximately $2.2 billion. We 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, we 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, we purchased $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 our 2008 consolidated statement of operations. In February 2009,
we repurchased an aggregate of $158 million in principle amount of the 6.00% Notes for approximately $57
million cash. We expect to record a gain in the first quarter of 2009.
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 our accounting for our 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 discounted carrying value of
the 6.00% Notes to their face amount as interest expense over the term of the 6.00% Notes. We expect to have
higher interest expense beginning in its first quarter of 2009 due to the interest accretion, and the interest expense
associated with its 6.00% Notes for prior periods will also be higher than previously reported due to the
retrospective application of this FSP. Based on the preliminary analysis performed by us, the interest expense
associated with its 6.00% Notes will be approximately $16 million, $25 million and $27 million higher for fiscal
years 2007, 2008 and 2009, respectively, as a result of adopting this FSP.
We may elect to purchase or otherwise retire our 6.00% Notes with cash, stock or other assets from time to
time in open market or privately negotiated transactions, either directly or through intermediaries, or by tender
offer, when we believe the market conditions are favorable to do so. Such purchases may have a material effect
on our liquidity, financial condition and results of operations.
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