Crucial 2012 Annual Report Download - page 60

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In the second quarter of 2012, we loaned $133 million to Inotera under a 90-day note with a stated annual interest rate of
2% to facilitate the purchase of capital equipment necessary to implement new process technology. The loan was repaid to us
with accrued interest in March 2012.
The net carrying value of our initial and subsequent investments was less than our proportionate share of Inotera's equity at
the time of those investments. These differences are being amortized as a net credit to earnings through equity in net loss of
equity method investees (the "Inotera Amortization"). As of August 30, 2012, $19 million of Inotera Amortization remained to
be recognized, of which $7 million is estimated to be amortized in 2013 with the remaining amount to be amortized through
2034. The $56 million gain recognized in the first quarter of 2010 on Inotera's issuance of shares included $33 million of
accelerated Inotera Amortization.
Due to significant market declines in the selling prices of DRAM, Inotera incurred net losses of $259 million for its six-
month period ended June 30, 2012 and $737 million for its fiscal year ended December 31, 2011. Also, Inotera's current
liabilities exceeded its current assets by $1.85 billion as of June 30, 2012, which exposes Inotera to liquidity risk. As of June
30, 2012 and December 31, 2011, Inotera was not in compliance with certain loan covenants, and had not been in compliance
for the past several years, which may result in its lenders requiring repayment of such loans during the next year. Inotera
obtained a waiver from complying with its financial covenants through June 30, 2012 and has requested an additional waiver
from these requirements. Inotera's management has developed plans to improve its liquidity. There can be no assurance that
Inotera will be successful in obtaining an additional waiver or improving its liquidity.
As of August 30, 2012, based on the closing trading price of Inotera's shares in an active market, the market value of our
equity interest in Inotera was $370 million, which exceeded our net carrying value of $321 million. The net carrying value is
our investment balance less cumulative translation adjustments in accumulated other comprehensive income (loss). As of
August 30, 2012 and September 1, 2011, there were gains of $49 million and $65 million, respectively, in accumulated other
comprehensive income (loss) for cumulative translation adjustments from our equity investment in Inotera.
We have a supply agreement with Inotera, under which Nanya is also a party, for the rights and obligations to purchase
50% of Inotera's wafer production capacity (the "Inotera Supply Agreement"). As a result of our March 2012 $170 million
equity contribution to Inotera, we expect to receive a higher share of Inotera's 30-nanometer output when it becomes available
as a result of Inotera capital investments enabled by our contribution. Our cost of wafers purchased under the Inotera Supply
Agreement is based on a margin-sharing formula among Nanya, Inotera and us. Under such formula, all parties' manufacturing
costs related to wafers supplied by Inotera, as well as our and Nanya's revenue for the resale of products from wafers supplied
by Inotera, are considered in determining costs for wafers acquired from Inotera. Under the Inotera Supply Agreement, we
purchased $646 million, $641 million, and $693 million of DRAM products in 2012, 2011 and 2010 respectively. In 2012, we
recognized losses on our purchase commitment under the Inotera Supply Agreement of $17 million, $19 million and
$40 million in our fourth, second and first quarters, respectively. In 2011, we recognized purchase commitment losses of
$28 million, $3 million, $12 million and $11 million in the fourth, third, second and first quarters, respectively.
We recognized $65 million to net sales in 2010 from a licensing arrangement with Nanya, which ceased in April
2010. Under a cost-sharing arrangement beginning in April 2010, we generally share DRAM development costs with Nanya.
As a result of the cost-sharing arrangement, our research and development ("R&D") costs were reduced by $138 million,
$141 million, and $51 million in 2012, 2011 and 2010, respectively. In addition, we recognized royalty revenue from Nanya of
$11 million, $25 million, and $6 million in 2012, 2011 and 2010, respectively, for sales of DRAM products manufactured by or
for Nanya on process nodes of 50nm or higher. We recognized $13 million of revenue in 2010 under a technology transfer
agreement with Inotera.
Transform
In the second quarter of 2010, we acquired a 50% interest in Transform, a developer, manufacturer and marketer of
photovoltaic technology and solar panels, from Origin. In exchange for the equity interest in Transform, we contributed
nonmonetary assets, which consisted of manufacturing facilities, equipment, intellectual property and a fully-paid lease to a
portion of our Boise, Idaho manufacturing facilities. As of August 30, 2012, we and Origin each held a 50% ownership interest
in Transform. During 2012, 2011 and 2010, we and Origin each contributed $17 million, $30 million and $26 million,
respectively, of cash to Transform. We recognized net sales of $13 million, $20 million and $15 million in 2012, 2011 and
2010, respectively, for transition services provided to Transform. Revenue on our sales to Transform approximated costs.
As of August 30, 2012 and September 1, 2011, other noncurrent assets included $26 million and $29 million, respectively,
for the manufacturing facilities leased to Transform and other noncurrent liabilities included $26 million and $29 million for
deferred rent revenue on the fully-paid lease.