SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

February 1, 2008

QIMONDA AG

Gustav-Heinemann-Ring 212
D-81739 Munich
Federal Republic of Germany
Tel: +49-89-60088-0
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F þ		Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o		No þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-________.

This Report on Form 6-K is incorporated by reference into the registration statement on Form F-3, File No. 333-145983.

 

 

Explanatory Note

     This Report on Form 6-K contains the quarterly report for the first financial quarter ended December 31, 2007 of Qimonda AG dated February 1, 2008 and is hereby incorporated by reference into our Registration Statement on Form F-3, Registration No. 333-145983.

QIMONDA AG AND SUBSIDIARIES

 

QUARTERLY REPORT

FOR THE THREE MONTHS ENDED

DECEMBER 31, 2007

 

 

INDEX

 

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Three Months Ended December 31, 2007 Compared To Three Months Ended
December 31, 2006

 

  Net Sales

 

The following table presents data on our net sales for the periods indicated.

 

 

Our net sales in the three months ended December 31, 2007 decreased by €660 million, or 56%, from €1,173 million in the three months ended December 31, 2006 to €513 million in the three months ended December 31, 2007. This decrease was primarily due to:

 

 

Offsetting this decrease in part was

 

 

Price decreases.  Following the steep price decline of DRAM prices during the 2007 financial year, the three months period ended December 31, 2007 was characterized by a continued strong price decline. The main reason for this price decline was the ongoing over-supply in the DRAM market which, despite continued strong demand, drove down prices. DRAM bit production in the industry continued to grow due to capacity expansion and productivity growth resulting from the shift towards more efficient technologies. This growth of DRAM bit production continued to influence unfavorably the overall supply-demand ratio.

 

During the three months ended December 31, 2006, by contrast, average selling prices (for DDR2 memories in particular) had increased to levels above those of the preceding several quarters, due to product shortages based on insufficient worldwide memory production capacities.

 

Overall the average selling prices of our DRAM products were 72% lower in the three months ended December 31, 2007 as compared to the three months ended December 31, 2006.

 

We continue to expect that prices for standard DRAM products will decline over time across the industry as a whole. Such declines can sometimes be severe, as we experienced in the last several financial quarters. We intend to continue to follow our strategy to mitigate the impact of declining prices by reducing our costs per unit and continuing to diversify our product mix.

 

In the three months ended December 31, 2007, our share of bit shipments to non-PC applications was 45% compared to 58% for the three months ended December 31, 2006. This was mainly due to weaker than usual seasonality in the three months ended December 31, 2007 in the consumer and infrastructure markets and, as a result of our accelerated technology conversion, stronger shipments in the PC market to meet demand growth.

 

Exchange rate effects.  The U.S. dollar weakened against the euro in the first three months of the 2008 financial year, with the average exchange rate for the period 11% lower than it was for the corresponding period of our 2007 financial year. This unfavorable U.S. dollar to euro exchange rate negatively affected our revenues during the three months ended December 31, 2007. We have calculated the effects of this translation risk as follows: we would have achieved €65 million more in net sales in the three months ended December 31, 2007, had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the three months ended December 31, 2007 as they were in the three months ended December 31, 2006.

Increase in bit shipments.  Our bit shipments increased by 73% during the three months ended December 31, 2007 compared to the three months ended December 31, 2006 due to increasing manufacturing output, additional bit shipments out of inventory and improved demand in all geographical regions. Demand for our products was especially high in the PC market, as PC makers increased the amount of DRAM per system (or “bits per box”) in the current low price environment. As of December 31, 2007, 56% of our capacities were converted to the 80nm and below technology nodes, compared to less than 5% for the three months ended December 31, 2006.

 

  Net Sales by Region

 

The following table sets forth our sales by region for the periods indicated.

 

 

The relative increase in the share of sales in Asia/Pacific and decrease in North America and Rest of Europe during the three months ended December 31, 2007, was primarily caused by OEM customers shifting their production to Asia, as well as regional changes in product mix. The relative increase in the share of sales in Japan resulted predominantly from additional design-in wins, in particular for game consoles, and increased business share for existing customers.

 

For practical purposes, the Rest of Europe region also includes other countries and territories in the rest of the world outside of the listed main geographic regions with aggregate sales representing no more than 2% of total sales in any period. In addition, prior period amounts have been reclassified to conform to the current period presentation.

 

  Cost of Goods Sold and Gross Margin

 

The following table sets forth our cost of goods sold and related data for the periods indicated.

 

 

Cost of goods sold increased by €104 million, or 13%, from €823 million in the three months ended December 31, 2006 to € 927 million in the three months ended December 31, 2007. As a percentage of net sales, cost of goods sold increased from 70% to 181% over the same period. The absolute increase in our cost of goods sold was due primarily to:

 

 

Offsetting these increases in part were:

 

 

Higher bit shipments.  The 73% increase in bit shipments in the three months ended December 31, 2007 compared to the three months ended December 31, 2006 was due primarily to the substantial increase in demand described above, which we met through further ramp-up of production volumes at our

Richmond 300mm facility and higher purchases from foundries and joint ventures. In addition, we reduced our finished good inventory range measured in bits by approximately two weeks compared to the three months ended September 30, 2007.

 

Inventory revaluation and reserves.  We value our inventory on a quarterly basis at the lower of cost or market value. If the market price declines below the full production cost of a particular product group, then all inventories of that product group are written down to their market price. The significant price decline in the three months ended December 31, 2007 resulted in the write-down of inventory to market value in an amount of €122 million in accordance with our policy. Due to the volatility of the DRAM market, write-downs of this nature may occur in periods of sharp price decline.

 

Improved productivity.  Similar to our 2007 financial year, we achieved productivity improvements through the increased conversion of capacities to 80nm and 75nm process technologies and the increasing share of our chips produced on 300mm wafers. The ramp-up of 300mm capacities at our Richmond facility, our joint venture Inotera and our foundry partners SMIC and Winbond contributed to the increased share of production on 300mm wafers. Measured in wafer starts, 82% of our total production (including capacity sourced from our strategic and foundry partners) was on 300mm wafers in the three months ended December 31, 2007 as compared to 72% of our production in the three months ended December 31, 2006. We believe that productivity improvements, together with a larger sales volume over which our fixed costs are spread, permitted us to achieve a lower percentage increase in costs as compared to the percentage increase in bit shipments. As of December 31, 2007, 56% of our capacities were converted to the 80nm and below technology nodes, compared to less than 5% for the three months ended December 31, 2006. Other DRAM suppliers have been converting their capacities to smaller feature sizes very aggressively during the past few quarters and to keep pace we have implemented measures to accelerate our conversion.

 

Decreased purchase prices from joint ventures and foundries.  Cost of goods sold includes the cost of inventory purchased from our joint ventures, such as Inotera, and other associated and related companies as well as our foundry partners Winbond, SMIC and Infineon Dresden. Our purchases from these entities amounted to €197 million in the three months ended December 31, 2007 as compared to €378 million in the three months ended December 31, 2006. Our purchases from these entities declined in euro terms, as a result of the significant decline in DRAM prices, although in the three months ended December 31, 2007, we sourced 67% of our chips from these partners as compared to 56% during the three months ended December 31, 2006.

 

Exchange rate effects.  The decline in the exchange rate of the U.S. dollar against the euro in the three months ended December 31, 2007, as compared to the equivalent period one year earlier, decreased the euro value of our costs that are denominated in U.S. dollars by approximately €64 million. This means that we would have incurred approximately €64 million more in costs of goods sold in our three months ended December 31, 2007, had the average exchange rates we used to translate our non-euro expenses into euros been the same in the three months ended December 31, 2007 as they were in the three months ended December 31, 2006. However, considered together with the decrease in our net sales due to negative foreign exchange effects of €65 million, foreign currency movements overall had no significant net effect on our gross margin during the three months ended December 31, 2007.

 

Our gross margin decreased to a negative 81% during the three months ended December 31, 2007, from a positive 30% in the three months ended December 31, 2006, primarily due to lower average selling prices and inventory write downs due to lower selling prices which could not be compensated by lower production cost per unit resulting from increased manufacturing productivity and lower transfer prices from foundry partners.

 

While average selling prices, especially for standard DRAM products, generally decline over time, they can display significant volatility from period to period. Our gross margin suffers in periods, such as each of our most recent financial quarters, in which prices decline faster than we can reduce our unit costs. Conversely, our gross margin is stronger during periods when prices decrease more slowly or increase, such as at the end of our 2006 financial year.

  Research and Development (R&D) Expenses

 

The following table sets forth our R&D expenses for the periods indicated.

 

 

In the three months ended December 31, 2007, research and development expenses increased by 13% to €110 million, from €97 million in the three months ended December 31, 2006, due to our efforts to strengthen our development capabilities with respect to the next generation of memory technologies and further diversification our portfolio of memory products as well as to strengthen our development capabilities with respect to non-volatile memory technologies. In the three months ended December 31, 2006, our research and development expenses were low due to the substantial completion of technology development for 80nm and 75nm during September and October 2006, respectively.

 

The goal of our current technology development efforts is to support our product designers in meeting customer requirements regarding high performance, low power consumption and small form factors at a competitive cost level as the industry migrates to even smaller feature sizes. In December, we presented our full integration scheme of a 48nm DRAM trench technology at the Institute of Electrical and Electronics Engineers’ annual International Election Devices Meeting. The technology we presented features an innovative wiring scheme that we believe enables a lower process complexity and power consumption across future DRAM architectures as compared to current approaches. At the same time we are working on new DRAM architectures that are implementing similar wiring schemes and that we believe will allow us to reduce the cell size of our DRAM products towards 4F² over the next several years, consistent with our views on the progression of the industry, while at the same time meeting customer requirements regarding high performance and low power consumption. These new architectures combine a variety of innovations on the cell and wiring level, and we are currently spending additional R&D efforts to introduce them in first product designs. Because the degree of innovation, testing and other development work that is involved with a progression to these new architectures exceeds that required for the reductions in feature sizes we have implemented in recent technology generations, we may be unable to meet our goals or keep pace with the rate of development in the industry in a timely manner or at all, or do so at competitive costs. In addition, the increased R&D work in which we are currently engaged and expect to continue in the coming financial periods will add to demands for capital. See “Liquidity — Capital Requirements.”

 

  Selling, General and Administrative (SG&A) Expenses

 

The following table sets forth information on our selling, general and administrative expenses for the periods indicated.

 

 

During the three months ended December 31, 2007, selling, general and administrative expenses increased by 9% as compared to the same period in the prior year. The increase as a percentage of sales was mainly attributable to the decrease in sales compared to the prior year. The primary reason for this increase in euro absolute terms is the shift of reporting category for our distribution center expenses from cost of goods sold to selling expenses.

  Restructuring Expenses

 

The following table sets forth information on our restructuring expenses for the periods indicated.

 

 

Our restructuring expenses comprise expenses for our research activities in North America and our phase-out of 200mm manufacturing. Due to continued efforts to improve cost and efficiency, we decided to consolidate our U.S. research and development facilities in a single development center located in Raleigh, North Carolina. As a result, the Company’s development center in Burlington, Vermont, is to be closed at the end of June 2008. Furthermore, as part of our focus on improved profitability and 300mm manufacturing, we terminated our wafer purchase contract with Infineon on November 30, 2007. We had previously agreed to share 50% of the restructuring costs which Infineon will occur in connection with the termination of this contract. In addition, included in cost of sales are €17 million related to purchase commitments for 200mm wafer contract manufacturing at Infineon Dresden. We currently anticipate additional costs of €4 million related to these measures which are to be expensed as they are incurred during our 2008 financial year. Additionally, the companies are presently discussing additional reimbursement from us for idle costs of approximately €20 million which have not been incurred or accrued as of December 31, 2007.

 

  Other Operating (Expense) Income, Net

 

The following table sets forth information on our other operating (expense) income, net for the periods indicated.

 

 

Other operating (expense) income, net contains various items related to our operations, and may fluctuate from period to period due to the more or less infrequent nature of these items, which include subsidies, grants, insurance proceeds and accruals for legal matters. No material costs of this nature were incurred in the three months ended December 31, 2006 as well as in the three months ended December 31, 2007.

 

  Equity in Earnings of Associated Companies

 

The following table sets forth information on our equity in earnings of associated companies for the periods indicated.

 

 

The equity in earnings of associated companies with financial year ends that differ by not more than three months from the Company’s financial year end is recorded with a three month delay. This applies in particular to our joint venture Inotera Memories, which has a December 31 financial year-end. Market price fluctuations during the three months ended December 31, 2007 would, to the extent these impact Inotera’s results, affect our equity in Inotera’s earnings during the three months ending March 31, 2008.

 

In both periods, Inotera contributed most of our equity in earnings from associated companies, which decreased in the three months ended December 31, 2007, mainly due to lower selling prices in the three months ended September 30, 2007. Our equity in Inotera’s earnings is, however, sensitive not only to fluctuations in the price of DRAM and production volumes, but also to changes in the portion of our

inventory which we purchased from Inotera and that remains unsold. This is because we eliminate Inotera’s profit from the inventory we have not yet sold.

 

  Loss on Associated Company Share Issuance

 

The following table sets forth information on our loss on associated company share issuance for the periods indicated.

 

 

On August 20, 2007 Inotera issued 40 million common shares, representing 1.2% of its outstanding share capital, as bonuses to its employees. This diluted our ownership interest to 35.6%, which amounted to a loss of €7 million.

 

  Other Non-Operating Income, Net

 

The following table sets forth information on other non-operating income for the periods indicated.

 

 

Other non-operating income, net consists of various items from period to period not directly related to our principal operations, including gains and losses on sales of marketable securities. In the three months ended December 31, 2007, other non-operating income related mainly to the valuation of derivatives and gains and losses on sales of marketable securities, whereas in the three months ended December 31, 2006, other non-operating income related principally to foreign currency transaction gains and a gain of €2 million on the sale of our investment in Ramtron.

 

  Earnings (Loss) Before Interest and Taxes (“EBIT”)

 

EBIT is a non-GAAP financial measure which is determined from our combined and consolidated statements of operations as follows:

 

 

  Interest Income, Net

 

The following table sets forth information on our net interest income, net for the periods indicated.

 

 

Interest expense mainly relates to interest on the recently completed sale and lease back transactions, while we earn interest income on cash and cash equivalents and marketable securities.

  Income Taxes

 

The following table sets forth information on our income taxes for the periods indicated.

 

 

On August 17, 2007 the Business Tax Reform Act of 2008 was enacted in Germany. This bill introduces several changes to the taxation of German business activities, including a reduction of the combined corporate and trade tax rate in Germany from approximately 39% to 30%. Most of the changes apply to us from October 1, 2007 and affect our current tax rate from that date.

 

In each of the three months ended December 31, 2006 and 2007, our effective tax rate was lower than the combined statutory tax rate in Germany of 39% and 30%, respectively. This resulted mainly from income in jurisdictions with lower than average corporate tax rates, tax credits, and in the three months ended December 31, 2007 additional valuation allowances against current period tax benefits.

 

Pursuant to SFAS No. 109, we have assessed our deferred tax asset and the need for a valuation allowance. The assessment was based on the benefits that could be realized from available tax strategies, forecasted future taxable income to the extent applicable, and the reversal of temporary differences in future periods. As a result of this assessment, we increased our deferred tax asset valuation allowance as of December 31, 2007 to reduce the deferred tax asset to an amount that is more likely than not expected to be realized in the future.

 

Despite our consolidated pretax loss, we generated taxable income in certain tax jurisdictions which resulted in the negative effective tax rate during the three months ended December 31, 2007.

 

On October 1, 2007 we adopted FIN 48, which prescribes the accounting and reporting of uncertainties in income tax law. The adoption did not affect our financial statements. We had a recorded liability for unrecognized tax benefits of €45 million as of December 31, 2007, which would favorably affect our effective tax rate, if recognized in future periods. We do not expect this amount to change significantly during the remainder of our 2008 financial year.

 

  Net Income (Loss)

 

We had a net loss of €598 million in the three months ended December 31, 2007 compared to net income of €177 million in the three months ended December 31, 2006.

 

Financial Condition

 

The following table sets forth selected items from our consolidated balance sheets for the periods indicated.

 

 

 

 

As of December 31, 2007, our current assets decreased significantly as compared to September 30, 2007 mainly due to lower cash and cash equivalents, lower inventories and lower trade accounts receivables. Trade accounts receivables decreased in the three months ended December 31, 2007 mainly due to lower sales. Inventories decreased as a result of lower gross inventories and higher inventory write-downs due to market price decline in the three months ended December 31, 2007 compared to September 30, 2007. As of December 31, 2007, non-current assets decreased slightly compared to September 30, 2007 mainly due to a decrease in property, plant and equipment because our capital expenditures were lower than our depreciation expense.

 

As of December 31, 2007, current liabilities decreased compared to September 30, 2007 mainly due to lower trade accounts payable as a result of lower capital expenditures in the three months ended December 31, 2007 compared to the three months ended September 30, 2007. As of December 31, 2007, non-current liabilities increased compared to September 30, 2007 mainly due to increased long-term debt as a result of our sale and leaseback transactions, partly offset by the redemption of other non-current liabilities.

 

As of December 31, 2007, our shareholders’ equity decreased to €2,873 million, mainly due to our net loss of €598 million during the three months ended December 31, 2007, and foreign currency translation losses affecting equity of €45 million.

 

Liquidity

 

Cash Flows

 

 

Our operating cash flow decreased significantly from an inflow of €438 million in the three months ended December 31, 2006 to an outflow of €158 million in the three months ended December 31, 2007. This was mainly caused by our net loss of €598 million in the three months ended December 31, 2007, which in turn was largely a result of lower net sales due to the strong decline in our average selling prices. This negative impact in our operating cash flow was partly offset by working capital improvements resulting from the decrease in our inventories and trade accounts receivable. The decrease in trade accounts payable also negatively impacted operating cash flow during the three months ended December 31, 2007 compared to the three months ended December 31, 2006.

 

Cash used in investing activities decreased substantially from an outflow of €208 million in the three months ended December 31, 2006 to an outflow of €35 million in the three months ended December 31, 2007. This resulted mainly from lower capital expenditures in property, plant and equipment and from proceeds we received from sales of marketable securities and the closings of our sale and leaseback transactions.

 

Cash used in financing activities during the three months ended December 31, 2007 refers mainly to changes in short term borrowing and repayments under capital lease obligations. During the three months ended December 31, 2006, cash used in financing refers principally to the repayment of €112 million of short-term debt to Infineon. In October 2007 we fully repaid €28 million short-term notes payable to banks which had been drawn as of September 30, 2007 for working capital purposes.

 

  Free Cash Flow

 

Free cash flow is a non-GAAP financial measure which is determined as follows from our combined and consolidated statements of cash flows:

 

 

Our free cash flow in the three months ended December 31, 2007, was negative mainly due to our current non-profitable operations and capital expenditures that were higher than our proceeds from sale and leaseback transactions.

 

The free cash flow was positive in the three months ended December 31, 2006 mainly due to our profitable operations and capital expenditures that were lower than cash provided from operating activities.

 

  Capital Expenditures

 

 

Our capital expenditures for the three months ended December 31, 2007, consisted primarily of equipment for the technology conversion at our 300mm fab in Richmond, Virginia and for our 300mm R&D facility in Dresden.

 

We have reduced our target for capital expenditures for the 2008 financial year to a range of €400 million to €500 million and put on hold the construction of a new 300mm fab in Singapore pending improving market conditions.

 

  Capital Requirements

 

We had aggregate cash, cash equivalents and available-for-sale marketable securities as of December 31, 2007 of €746 million, which we refer to as our gross cash position, compared to €1,011 million as of September 30, 2007. As of December 31, 2007 we had debt obligations of €68 million payable within one year. Our total short and long-term debt amounted to €372 million as of December 31, 2007, which represents 13 percent of our shareholders’ equity at the same date. We therefore believe that our capital structure provides us with flexibility to obtain financing suitable to our business, such as the sale and lease back transactions we have recently executed despite difficult global financial market conditions.

 

We intend to explore a wide range of potential sources of capital, including capital markets transactions, debt financing, leverage of selected assets and ventures with third parties. To the extent our performance remains at current levels or deteriorates further, which we view to a substantial extent as dependent on price developments for DRAM products, we may have difficulty obtaining capital.

 

Outlook for the Second Quarter and 2008 Financial Year

 

For the 2008 financial year, we are targeting an increase in our bit production between 30 to 40 percent as compared to our prior estimate of 50 percent, taking into account our accelerated reduction of 200mm capacities, which is partly offset by productivity improvements through our conversion to 80nm and 75nm technologies.

 

For the second quarter, we currently expect our bit production to increase by a mid single digit percentage compared to the first quarter. Additionally, we are currently reassessing our capacity corridors with foundry partners in light of the relatively low DRAM market price environment.

 

For the 2008 financial year, we continue to expect bit demand for DRAM to be driven by continued solid growth in graphics, consumer and communication applications and the move to higher density modules in the PC market. We expect our share of bit-shipments for use in non-PC applications to be greater than 50 percent for the full 2008 financial year.

Qimonda AG and Subsidiaries

For the three months ended December 31, 2006 and 2007

(in millions, except for share data)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

Qimonda AG and Subsidiaries

As of September 30, 2007 and December 31, 2007

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

Qimonda AG and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

For the three months ended December 31, 2006 and 2007

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

Qimonda AG and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended December 31, 2006 and 2007

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

Description of Business

 

Qimonda AG and its subsidiaries (collectively, the “Company” or “Qimonda”) is one of the world’s leading suppliers of semiconductor memory products. Qimonda designs memory technologies and develops, manufactures, markets and sells a large variety of memory products on a module, component and chip level. Qimonda has operations, investments and customers located mainly in Europe, Asia and North America. The Company is a majority-owned subsidiary of Infineon Technologies AG and its subsidiaries (“Infineon”). The financial year-end for the Company is September 30.

 

Formation

 

Effective May 1, 2006, substantially all the memory products-related assets and liabilities, operations and activities of Infineon (the “Memory Products business”) were contributed to the Company (the “Formation”). In conjunction with the Formation the Company entered into a contribution agreement and various other service agreements with Infineon.

 

At the Formation certain of the Company’s operations and investments that could not be directly transferred were initially held in trust for Qimonda’s benefit by Infineon until the legal transfer to Qimonda could take place. Pursuant to agreements entered into on December 14, 2007 Infineon’s investments in Advanced Mask Technology Center GmbH & Co. (“AMTC”) and Maskhouse Building Administration GmbH & Co. KG (“BAC”) are to be transferred to Qimonda subject to registration in the commercial register (note 19). The accompanying financial statements include the results of operations of these activities for all periods presented.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements as of and for the three months ended December 31, 2006 and 2007, have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying financial statements are condensed, because certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In addition, the condensed consolidated balance sheet as of September 30, 2007 was derived from audited financial statements and condensed for comparative purposes, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows of the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full financial year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited combined and consolidated financial statements for the year ended September 30, 2007. The accounting policies applied in preparing the accompanying condensed financial statements are consistent with those for the year ended September 30, 2007 (note 2).

 

All amounts herein are shown in millions of euro (or “€”) except where otherwise stated. The accompanying balance sheet as of December 31, 2007, and the statements of operations and cash flows for the periods then ended are also presented in U.S. dollars (“$”), solely for the convenience of the reader, at the rate of €1 = $1.4603, the Federal Reserve noon buying rate on December 31, 2007.

 

Certain amounts in prior periods condensed consolidated financial statements and notes have been reclassified to conform to the current period presentation. Intangible assets, pension liabilities and minority interest are presented separately on the Company’s balance sheet. The Company’s consolidated results of operations, financial position or overall cash flows have not been affected by these reclassifications.

 

Estimates

 

The preparation of the accompanying condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

well as disclosure of contingent amounts and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from such estimates made by management.

 

 

Adopted in the year beginning October 1, 2007

 

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also provides guidance on the de-recognition measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. The Company adopted FIN 48 beginning October 1, 2007 (note 4).

 

Issued since October 1, 2007 but principally applicable in future financial years

 

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”. SFAS No. 141(R) replaces FASB Statement No. 141, Business Combinations and requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction even if the business is not acquired by 100% by the acquirer. The revised statement establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed. Further major differences to the current accounting practices are the definition of a “business”, the shift from the purchase method to the acquisition method, a changed treatment of acquisition and restructuring costs related to the acquirement and the recognition of contingent assets, contingent liabilities and contingent considerations. The new SFAS No .141(R) will be effective prospectively for fiscal years beginning on or after December 15, 2008. The company is currently evaluating the impact on its results of operations or financial position.

 

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financials Statements — an Amendment of ARB No .51”. SFAS No. 160 requires companies to measure an acquisition of a noncontrolling (minority) interest at fair value in the equity section of the acquiring entity’s balance sheet. The new SFAS No .160 will be effective prospectively for fiscal years beginning on or after December 15, 2008. For presentation and disclosure requirements the new statement has to be applied retrospectively for all periods presented. The company is currently evaluating the impact on its results of operations or financial position.

 

 

During the three months ended December 31, 2007 Qimonda announced restructuring measures aimed at reducing costs by focusing efforts on faster conversions to cost efficient technologies. The Company’s restructuring expenses comprise expenses for the phase-out of 200mm manufacturing and the combination of research activities in North America. The Company had accrued restructuring costs of €16 as of December 31, 2007 related to these measures. The Company currently anticipates additional costs of €4 related to these measures which are to be expensed as they are incurred during the year ending September 30, 2008.

 

Dresden 200mm Facility

 

In April 2006, Infineon and Qimonda entered into a product purchase agreement for the production of 200mm wafers by Infineon Technologies Dresden GmbH & Co. OHG (“DD200”) through September 30, 2007. In January 2007, the agreement was extended through September 30, 2009. Pursuant to the agreement, Infineon agreed to manufacture wafers at DD200, using the Company’s manufacturing technologies and masks, and to sell them to the Company at prices specified in the agreement. The Company agreed to pay for idle costs resulting from its purchasing fewer wafers from Infineon than agreed

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

upon, if Infineon cannot otherwise utilize the capacity. Infineon and the Company agreed to share equally any potential restructuring costs arising in connection with one DD200 module.

 

As part of its focus on improved profitability and 300mm manufacturing, on November 30, 2007, the Company terminated its product purchase agreement with Infineon for the production of wafers at DD200. As a result of the termination, the Company accrued restructuring costs of €12 during the three months ended December 31, 2007 for amounts to be reimbursed to Infineon for costs related to one DD200 module. In addition, included in cost of sales are €17 related to purchase commitments for 200mm wafer contract manufacturing at Infineon Dresden. Additionally, the companies are presently discussing additional reimbursement from the Company for idle costs of approximately €20 which have not been incurred or accrued as of December 31, 2007.

 

Burlington Development Center

 

Due to continued efforts to improve cost and efficiency, in December 2007, the Company announced plans to consolidate its U.S. research and development facilities in a single development center located in Raleigh, North Carolina. As a result, the Company’s development center in Burlington, Vermont, is to be closed at the end of June 2008. The Company accrued restructuring costs of €4 during the three months ended December 31, 2007 for lease termination costs and severance payments related to approximately 100 employees.

 

 

Income tax expense for the three months ended December 31, 2006 and 2007 is as follows:

 

 

On August 17, 2007 the Business Tax Reform Act of 2008 was enacted in Germany. This bill introduces several changes to the taxation of German business activities, including a reduction of the combined corporate and trade tax rate in Germany from approximately 39% to 30%. Most of the changes apply to the Company from October 1, 2007 and affect the Company’s current tax rate from that date.

 

In each of the three months ended December 31, 2006 and 2007, our effective tax rate was lower than the combined German statutory tax rate of 39% and 30%, respectively. This resulted mainly from income in jurisdictions with lower than average corporate tax rates, tax credits, and in the three months ended December 31, 2007 additional valuation allowances against current period tax benefits.

 

Pursuant to SFAS No. 109, the Company has assessed its deferred tax asset and the need for a valuation allowance. The assessment was based on the benefits that could be realized from available tax strategies, forecasted future taxable income to the extent applicable, and the reversal of temporary differences in future periods. As a result of this assessment, the Company increased its deferred tax asset valuation allowance as of December 31, 2007 to reduce the deferred tax asset to an amount that is more likely than not expected to be realized in future.

 

Despite the consolidated pretax loss, the Company generated taxable income in certain tax jurisdictions which resulted in the negative effective tax rate during the three months ended December 31, 2007.

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

Adoption of FIN 48

 

The Company adopted FIN 48, and related guidance on October 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

 

The adoption of FIN 48 as of October 1, 2007 did not affect the Company’s liability for unrecognized tax benefits. The total amount of gross unrecognized tax benefits as of the date of adoption was €37 which, if recognized, would favorably affect the Company’s effective tax rate. Interest and penalties related to income tax liabilities are classified as interest expense. The Company had no significant accrued interest and penalties recorded as of the date of adoption.

 

During the three months ended December 31, 2007 the total amount of unrecognized tax benefits was as follows:

 

 

The Company does not expect significant changes in the total amount of unrecognized tax benefits through September 30, 2008. As of the date of adoption, the Company’s tax returns since the Formation remain subject to examination in the majority of tax jurisdictions.

 

 

Basic earnings (loss) per share (“EPS”) are calculated by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the three months ended December 31, 2006 and 2007.

 

On November 24, 2006, the Company granted 1.9 million stock options pursuant to the Qimonda Stock Option Plan (note 11). None of these options were dilutive to EPS for the three months ended December 31, 2006 and 2007. The Company accounts for the potentially dilutive effects of its stock options according to the provisions of SFAS No. 123(R).

 

The computation of basic and diluted EPS for the three months ended December 31, 2006 and 2007 is as follows:

 

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

Trade accounts receivable at September 30, 2007 and December 31, 2007 consist of the following:

 

 

 

Inventories at September 30, 2007 and December 31, 2007 consist of the following:

 

 

 

On August 20, 2007, Inotera issued 40 million common shares, representing 1.2% of its outstanding share capital, as bonuses to its employees, which diluted the Company’s ownership interest to 35.6%. The Company recorded the related dilution loss of €7 as part of non-operating expense during the three months ended December 31, 2007.

 

In connection with the Formation, Infineon and Qimonda entered into a trust agreement under which Infineon placed the Inotera shares in trust for the Company until the shares could legally be transferred. In March 2007, the Inotera shares (except for a portion representing less than 1% of the total shares) were transferred to Qimonda. The Inotera shares remain subject to Taiwanese lock-up provisions related to the Inotera IPO through January 2008, after which the remaining less than 1% of the shares are to be transferred to Qimonda. Qimonda expects the final transfer to occur during the current financial year ending September 30, 2008.

 

During the three months ended December 31, 2007 Sony Corporation and Qimonda AG established the Qreatic Design joint venture. The scope of the joint venture is the design of high-performance, low power, embedded and customer specific DRAMs for consumer and graphic applications. According to the agreement, the 50:50 joint venture started with specialists from Sony and Qimonda, bringing together their engineering expertise for the mutual benefit of both companies. Qreatic Design, which is located in Tokyo, Japan, started operations during the three months ended December 31, 2007. The Company accounts for its investment in Qreatic Design using the equity method of accounting due to the lack of unilateral control.

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

Trade accounts payable at September 30, 2007 and December 31, 2007 consist of the following:

 

 

 

Debt at September 30, 2007 and December 31, 2007 consists of the following:

 

 

In September 2007, the Company entered into a four year sale and leaseback transaction of 200mm equipment in its Richmond facility. In December 2007, the Company entered into an additional four year sale and leaseback transaction of 200mm equipment and a five year sale and leaseback transaction of 300mm equipment, both at Richmond. The leases are accounted for as capital leases whereby the present values of the respective lease payments are reflected as capital lease obligations.

 

The Company can also draw, for short term purposes, on the working capital lines it maintains in several locations with an aggregate amount of €228 as of December 31, 2007. In October 2007 the Company fully repaid €28 short-term notes payable to banks which had been drawn as of September 30, 2007 for working capital purposes.

 

Aggregated amounts of debt, including capital lease obligations, maturing subsequent to December 31, 2007 are as follows:

 

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

A summary of the status of the Qimonda stock option plan 2006 as of December 31, 2007, and changes during the three months then ended is presented as follows:

 

 

Stock-Based Compensation Expense

 

Stock-based compensation expenses for the Infineon and the Qimonda SOP were allocated as follows for the three months ended December 31, 2006 and 2007:

 

 

The amount of stock-based compensation cost which was capitalized and remained in inventories during the three months ended December 31, 2006 and 2007 was immaterial. Stock-based compensation expense does not reflect income tax benefits, since stock options are primarily granted in tax jurisdictions where the expense is not deductible for tax purposes. In addition, stock-based compensation expense did not have a cash flow effect during the three months ended December 31, 2007, since no exercises of stock options occurred during the period. As of December 31, 2007, for Infineon related stock options there was a total of €2 in unrecognized compensation expense related to unvested stock options which is expected to be recognized over a remaining total period of 2.25 years, and for Qimonda related stock options there was a total of €4 in unrecognized compensation expense related to unvested stock options which is expected to be recognized over a remaining total period of 2.02 years.

 

Options on Infineon stock do not represent potential dilutive instruments for Qimonda AG and accordingly, they have no dilutive impact on diluted EPS (note 5). The Qimonda stock options were not dilutive to EPS for the three months ended December 31, 2007 (note 5).

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

The changes in the components of other comprehensive income (loss) for the three months ended December 31, 2006 and 2007 are as follows:

 

Total comprehensive income (loss) for the three months ended December 31, 2006 and 2007 was as follows:

 

 

 

 

 

The Company has transactions in the normal course of business with Infineon group companies and with Related and Associated Companies (together, “Related Parties”). The Company purchases certain of

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

its raw materials, especially chipsets, from, and sells certain of its products to, Related Parties. Purchases and sales to Related Parties are generally based on market prices or manufacturing cost plus a mark-up.

 

Related Party receivables as of September 30, 2007 and December 31, 2007 consist of the following:

 

 

Related Party payables as of September 30, 2007 and December 31, 2007 consist of the following:

 

 

Related Party receivables and payables have been segregated first between amounts owed by or to Infineon group companies and companies in which the Company has an ownership interest, and second based on the underlying nature of the transactions. Trade receivables and payables include amounts for the purchase and sale of products and services. Financial and other receivables and payables represent amounts owed relating to loans and advances and accrued interest at interbank rates.

 

Transactions with Related Parties during the three months ended December 31, 2006 and 2007 include the following:

 

 

Purchases from Infineon during the three months ended December 31, 2006 and 2007 are principally related to products purchased from the DD200 facility and are based on Infineon’s cost plus a margin.

 

Since the Formation, the Company entered into several service agreements with Infineon. These include general support services (including sales support, logistics services, purchasing services, human resources services, facility management services, patent support, finance, accounting and treasury support, legal services and strategy services), R&D services and IT services. Transactions under these agreements during the three months ended December 31, 2006 and 2007 are included in purchases from Infineon (see above) and reflected in the consolidated statements of operations as follows:

 

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

In connection with the Formation, the Company entered into a global service agreement with Infineon, whereby the parties intend to provide standard support services to one another based on actual costs plus a margin of 3%. The Company and Infineon have also entered into a research and development services agreement for the provision of research and development services between the parties based on actual cost plus a margin of 3%.

 

Under the master information technology cost sharing agreement, Infineon and the Company generally agree to share costs of a variety of information technology services provided by one or both parties in the common interest and for the common benefit of both parties. In general, the parties agree to share the fixed costs of the services provided (accounting for approximately 53% of total costs) roughly equally and to share variable costs in a manner that reflects each party’s contribution to those costs. Under the master information technology service agreement, Infineon and the Company agree to provide information technology services to one another. In general, under all of these agreements, the service recipient pays a fee based on actual or estimated total costs incurred plus a margin of 3% for the period from May 1, 2006 to September 30, 2008 and thereafter as mutually agreed from year to year.

 

 

The components of net periodic pension cost (“NPPC”) for the three months ended December 31, 2006 and 2007 are presented as follows:

 

Qimonda contributed €1 and €0, respectively, to fund its pension plans during the three months ended December 31, 2006 and 2007.

 

 

The Company periodically enters into financial instruments, including foreign currency forward contracts. The objective of these transactions is to reduce the impact of exchange rate fluctuations on the Company’s foreign currency denominated net future cash flows. The Company does not enter into derivatives for trading or speculative purposes.

 

The euro equivalent notional amounts in millions and fair values of the Company’s derivative instruments as of September 30, 2007 and December 31, 2007 are as follows:

 

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

Gains and losses from foreign currency derivatives and transactions are principally included in cost of goods sold, and were as follows for the three months ended December 31, 2006 and 2007: