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

July 27, 2007

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 contains the quarterly report for the third financial quarter ended June 30, 2007 of Qimonda AG dated July 27, 2007.

QIMONDA AG AND SUBSIDIARIES

 

QUARTERLY REPORT

FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2007

 

 

INDEX

 

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Three And Nine Months Ended June 30, 2007 Compared To Three And Nine Months Ended June 30, 2006

 

  Net Sales

 

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

 

 

Our net sales in the nine months ended June 30, 2007 increased by €314 million, or 12%, from €2,583 million in the nine months ended June 30, 2006 to €2,897 million in the nine months ended June 30, 2007. Primarily responsible for this increase were:

 

 

Offsetting these increases in part were

 

 

Increase in bit shipments.  Our bit shipments increased by 49% during the nine months ended June 30, 2007 compared to the nine months ended June 30, 2006 due to increasing manufacturing output 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”), and we believe we gained market share in non-PC applications, in particular in the markets for DRAM products for infrastructure, graphics and mobile applications. During the nine months ended June 30, 2007, close to 63% of our capacities were converted to the 90nm and below technology nodes, compared to approximately 17% for the nine months ended June 30, 2006. With the ramp-down of our flash business, we have shifted additional capacities to DRAM.

 

Price decreases.  The nine month period ended June 30, 2007 was characterized by strong price declines for DRAM products. After remaining stable until the end of December 2006, prices declined significantly thereafter. We believe that a part of this price decline, especially towards the end of March 2007, was driven by seasonal demand weakness, the effects of an earlier build-up of inventories at original equipment manufacturers (OEMs) ahead of the introduction of the new Windows Vista computer operating system and capacity conversions from NAND to DRAM by some competitors, following severe price erosion in the NAND Flash area. During the three months ended June 30, 2007 the price decline continued and was amplified by strong DRAM output growth across the industry driven, we believe, mostly by capacity increases and technology conversions to more efficient technologies.

 

During the nine months ended June 30, 2006, by contrast, average selling prices (for DDR2 memories in particular) first declined very substantially until the end of December 2005, due, we believe, to a mismatch caused by high worldwide production of DDR2 memories for which OEMs had not yet produced enough logic chipsets. DDR2 prices then started to rebound in the following six months to June 30, 2006 as the corresponding chipsets became more available.

 

Overall the average selling prices of our DRAM products were 17% lower in the nine months ended June 30, 2007 as compared to the nine months ended June 30, 2006, while our average selling prices declined by 48% during the three months ended June 30, 2007 compared to the three months ended June 30, 2006.

 

We continue to expect that prices for standard DRAM products will decline over time in line with the long-term trend across the industry as a whole. Such declines can sometimes be severe, as we experienced in the last six months. We intend 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 June 30, 2007, our share of bit shipments to non-PC applications was 49% due to seasonality in the consumer and infrastructure markets and stronger than expected bit growth in the PC market. However for the nine months ended June 30, 2007, our share of bit-shipments to non-PC applications was 52%.

 

Exchange rate effects.  The U.S. dollar weakened against the euro in the first nine months of financial year 2007, with the average exchange rate for the period 8% lower than it was for the corresponding period of our 2006 financial year. This unfavorable U.S. dollar to euro exchange rate negatively affected our revenues during the nine months ended June 30, 2007. We have calculated the effects of this translation risk as follows: we would have achieved €238 million more in net sales in the nine months ended June 30, 2007, had the average exchange rates we used to translate our non-euro denominated sales into euros been the same in the nine months ended June 30, 2007 as they were in the nine months ended June 30, 2006.

 

  Net Sales by Region

 

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

 

Net sales by region

 

 

The increased sales in Japan during the nine months ended June 30, 2007, resulted from a strong growth in demand for our specialty products, in particular for graphics and consumer applications as well as additional demand for standard DRAM, during the nine months ended June 30, 2007. The decrease in sales in North America for the three months ended June 30, 2007, as compared to the previous period, was primarily caused by OEM customers shifting their production to Asia. 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.

 

  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 €414 million, or 19%, from €2,158 million in the nine months ended June 30, 2006 to €2,572 million in the nine months ended June 30, 2007. As a percentage of net sales, cost of goods sold increased from 84% to 89% 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 49% increase in bit shipments in the nine months ended June 30, 2007 compared to the nine months ended June 30, 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.

 

Increased purchases from foundries.  We report as cost of goods sold the cost of inventory purchased from our joint ventures and other associated and related companies such as Inotera. Our purchases from these affiliated entities amounted to €403 million in the nine months ended June 30, 2007 as compared to €330 million in the nine months ended June 30, 2006. In addition, we purchased €571 million of inventory from our foundry partners Winbond, SMIC and Infineon in the nine months ended June 30, 2007 compared to €557 million in the nine months ended June 30, 2006. In the nine months ended June 30, 2007, we sourced 58% of our chips from these partners as compared to 57% during the nine months ended June 30, 2006.

 

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, then all inventories of that product are written down to its market price. For some of our products, the significant price decline in the three months ended June 30, 2007 resulted in the write-down of inventory to market value in an amount of €66 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 2006 financial year, we achieved productivity improvements through the increased conversion of capacities to 90nm, 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, 73% of our total production (including capacity sourced from our strategic and foundry partners) was on 300mm wafers in the nine months ended June 30, 2007 as compared to 67% of our production in the nine months ended June 30, 2006. We believe that productivity improvements, together with a larger sales volume over which our fixed costs are spread, permitted us to achieve a percentage increase in costs that was below the percentage increase in bit shipments.

 

Exchange rate effects.  The relative decrease of the exchange rate of the U.S. dollar against the euro in the nine months ended June 30, 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 €139 million. This means that we would have incurred approximately €139 million more in costs of goods sold in our nine months ended June 30, 2007, had the average exchange rates we used to translate our non-euro expenses into euros been the same in the nine months ended June 30, 2007 as they were in the nine months ended June 30, 2006. However, considered together with the decrease in our net sales due to negative foreign exchange effects of €99 million, net, foreign currency movements overall had a negative net effect on our gross margin during the nine months ended June 30, 2007.

 

Our gross margin decreased to 11% during the nine months ended June 30, 2007, from 16% in the nine months ended June 30, 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 in which prices decline faster than we can reduce our unit costs and is stronger during periods when prices decrease more slowly or increase. Due to the significant decline in average selling prices in the three months ended June 2007, our gross margin decreased from 20% for the three months ended March 31, 2007 to a negative margin of 30% for the three months ended June 30, 2007.

 

  Research and Development (R&D) Expenses

 

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

 

 

In the nine months ended June 30, 2007, research and development expenses decreased by 10% to €291 million, from €325 million in the nine months ended June 30, 2006, due to the completion of R&D work on our 80nm and 75nm technology platforms. However, we do expect our R&D expenses to increase in the current and future quarters as we continue to invest in product design for our broadening product portfolio and in advanced technologies that support new and next generation of our products.

 

  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 nine months ended June 30, 2007, selling, general and administrative expenses decreased by 13% as compared to the same period in the prior year. The primary reason for the decline was that during the nine months ended June 30, 2007 the combined costs under our post carve-out service agreements with Infineon and to build out our corporate functions were less than these costs and the costs Infineon allocated to us until our carve-out for the nine months ended June 30, 2006. We also incurred lower costs in the nine months ended June 30, 2007 than we did for the same period one year earlier for special projects, such as our carve-out and IPO.

 

  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. Other operating expenses, net for the nine months ended June 30, 2006 related principally to charges from our settlement of an antitrust investigation by the U.S. Department of Justice and related actions as well as a related ongoing investigation in Europe. Other operating income, net in the nine months ended June 30, 2007 related primarily to subsidies and proceeds from insurance claims.

 

  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 are recorded on a three month lag. This applies in particular to our joint venture Inotera Memories, which has a December 31 financial year end. In both periods, Inotera contributed most of our equity in earnings from associated companies, which increased in the three and nine months ended June 30, 2007, primarily due to the increased volume production by Inotera and the on average higher selling prices during the respective three and nine month Inotera periods ended March 31, 2007 compared to Inotera’s three and nine months periods ended March 31, 2006. Our equity in this venture’s earnings has been sensitive to fluctuations in the price of DRAM and we reflect changes in our equity in Inotera’s earnings by adjusting the portion of carrying value of our unsold inventory that we purchased from Inotera that represents our inter-company profit.

 

  Gain on associated company share issuance

 

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

 

 

On March 17, 2006 Inotera successfully completed an initial public offering (“IPO”) on the Taiwanese stock exchange of 200 million ordinary shares, representing 7.97% of its outstanding share capital before IPO, for an issuance price of NT$33 per ordinary share. As a result, the Company’s ownership interest was diluted from 45.9% to 41.4% while its proportional share of Inotera’s equity increased by approximately €30 million, which gain the Company recognized as part of non-operating income during the nine months ended June 30, 2006.

 

  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 nine months ended June 30, 2007, other non-operating income related principally to the valuation of derivatives, dividend income and a gain of €2 million on the sale of our investment in Ramtron, whereas in the nine months ended June 30, 2006, other non-operating income related principally to foreign currency transaction gains.

 

  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 (Expense) Income, Net

 

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

 

 

Interest expense mainly relates to interest on short-term debt due to Infineon, while we earn interest income on cash and cash equivalents and marketable securities. Our interest expense decreased during the three and nine months periods ended June 30, 2007, due to our lower average borrowings from Infineon, as we repaid €48 million of outstanding debt to Infineon during the three months ended June 30, 2007 and a total of €344 million of outstanding debt to Infineon during the nine months ended June 30, 2007. We no longer have any outstanding debt to Infineon.

 

  Income Taxes

 

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

 

 

In the three and nine months ended June 30, 2007, our effective tax rate was lower than the combined German statutory tax rate of 39%. This resulted from income in jurisdictions with lower than average corporate tax rates, tax credits, and valuation allowances. In the three and nine months ended June 30, 2006, the effective tax rate did not fully reflect the income and loss, respectively, for the period due to deferred tax benefits that could not be recognized, because for certain jurisdictions losses prior to our carve out could not be used to offset taxable income after the carve-out.

 

In July 2007 the German legislature passed the Corporate Tax Reform Act 2008. 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%. If the bill is enacted into law, most of the changes would come into effect for our 2008 financial year. Upon enactment, which could be during the three months ending September 30, 2007, we would record the reduction in value of our deferred tax assets in Germany at that date as tax expense.

 

In China, as a result of enacted tax reform legislation, a new uniform income tax regime will become effective from January 1, 2008. We incorporated these changes in our effective and deferred tax rate which did not have a material impact for the three and nine months ended June 30, 2007.

 

  Net Income (Loss)

 

Our net result increased from a net loss of €82 million in the nine months ended June 30, 2006 to net income of €16 million in the nine months ended June 30, 2007.

 

Financial Condition

 

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

 

 

 

 

As of June 30, 2007, our current assets decreased significantly as compared to September 30, 2006 primarily due to lower trade accounts receivables, which resulted from lower revenues and faster collections in June 2007 compared to September 2006. Although bit production growth exceeded bit shipments during the nine months ended June 30, 2007, the reduction in our manufacturing cost and the write-down of inventory based on the market price decline in the three months ended June 30, 2007 caused a slight decrease in inventory compared to September 30, 2006. These effects were partially offset by investments made in marketable securities pending use in capital expenditures and an increase of other current assets mainly due to an increase of income tax refunds and the fair value of derivatives. Non-current assets increased slightly because increases from the combined effect of capital expenditures for our capacity expansion and equity in earnings of Inotera exceeded depreciation recorded during the nine months ended June 30, 2007.

 

As of June 30, 2007, current liabilities decreased substantially compared to September 30, 2006 primarily as a result of the full repayment of €344 million on our short-term loan due to Infineon and reduced current tax liabilities as a result of lower taxable income during the nine months ended June 30, 2007. In addition, trade accounts payable declined mainly due to reduced transfer prices from our foundries as result of the sharp decline of average selling prices in the DRAM market especially in the three months ended June 30, 2007 compared to the three months ended September 30, 2006. As of June 30, 2007, non-current liabilities decreased compared to September 30, 2006 mainly due to the reclassification of portions of long-term debt and other non-current liabilities approaching their current maturity to current liabilities.

 

As of June 30, 2007, our shareholders’ equity decreased to €3,808 million, mainly due to foreign currency translation losses affecting equity of €90 million during the nine months ended June 30, 2007, which were only partially offset by our net income of €16 million.

 

Liquidity

 

  Cash Flows

 

 

Our operating cash flow improved substantially from an inflow of €61 million in the nine months ended June 30, 2006 to an inflow of €769 million in the nine months ended June 30, 2007. This was caused in part by our return to profitability after the nine months ended June 30, 2006. We earned net income of €16 million in the nine months ended June 30, 2007. However, our net loss in the three months ended June 30, 2007 negatively impacted our operating cash flow compared to the three months ended March 31, 2007. Depreciation and amortization decreased by €28 million mainly as a result of lower capital expenditures in former periods and certain equipment reaching the end of its depreciable life prior to the beginning of the 2007 financial year. Our operating cash flow during the three and nine months ended June 30, 2007 benefited substantially from the faster collection of trade accounts receivable.

 

Cash used in investing activities reflect the capital expenditures we made as we continued to invest in Property, Plant & Equipment during all periods. Our cash used in investing activities was stable in the nine months ended June 30, 2007 as purchases of marketable securities offset a temporary decrease in our investment in property, plant and equipment.

 

Cash used in financing activities during the nine months ended June 30, 2007 refers principally to the repayment of €344 million of short-term debt to Infineon. During the nine months ended June 30, 2006, financing was principally provided by investments by and advances from Infineon.

 

  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 June 30, 2007, was negative as result of the significant decline of our net sales due to the sharp decline of average selling prices in this period. Nevertheless in the nine months ended June 30, 2007 our free cash flow remained positive mainly due to our profitable operations in the first six months and capital expenditures that were lower than cash provided from operating activities.

 

  Capital Expenditures

 

Our capital expenditures for the nine months ended June 30, 2007, consisted primarily of equipment upgrades at our 300mm facility in Dresden and capacity expansion at our 300mm fab in Richmond, Virginia.

 

In March 2007, we announced plans to expand capacity at our back-end manufacturing facility in Suzhou, China for which we expect capital expenditures of €250 million over the next three years. We also plan to invest up to €150 million over the next five years to build a new DRAM module manufacturing facility in Johor, Malaysia. In April 2007, we also announced plans to construct a new front-end manufacturing facility in Singapore, for which we plan to invest approximately €2 billion over the next five years.

 

For the 2007 financial year, we expect capital expenditures to be around €900 million. In a further response to the recent market weakness we have reduced our planned capital expenditures for the 2008 financial year to a range between €650 million to €750 million.

 

Outlook for the Fourth Quarter and 2007 Financial Year

 

In the fourth quarter of the 2007 financial year, we expect our bit production to grow by 15 to 20 percent, mainly based on increased in-house and partner capacities and continued productivity improvements from the ongoing conversion to 80nm and 75nm technologies. We target a share of bit-shipments to non-PC applications around 50 percent for the fourth quarter, and expect the trend of strong demand for PC-related products to continue.

 

For the full 2007 financial year, we expect bit demand for DRAM to be driven by the continued strong growth in graphics, consumer and communication applications, by price demand elasticity and the move to higher density modules in the PC market. For the 2007 financial year, we continue to estimate an increase in bit production of between 60 and 70 percent. We expect our share of bit-shipments to non-PC applications to be more than 50 percent for the full financial year.

Qimonda AG and Subsidiaries

For the three months ended June 30, 2006 and 2007

(in millions, except for share data)

 

 

See accompanying notes to the unaudited condensed combined and consolidated financial statements.

 

 

See accompanying notes to the unaudited condensed combined and consolidated financial statements.

 

 

See accompanying notes to the unaudited condensed combined and consolidated financial statements.

Qimonda AG and Subsidiaries

 

 

See accompanying notes to the unaudited condensed combined and consolidated financial statements.

Qimonda AG and Subsidiaries
Condensed Combined and Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended June 30, 2006 and 2007

 

 

See accompanying notes to the unaudited condensed combined and consolidated financial statements.

 

 

 

Qimonda AG and its subsidiaries (collectively, the “Company” or “Qimonda”) is one of the world’s leading suppliers of semiconductor memory products. It 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 (“Infineon”). The financial year-end for the Company is September 30.

 

 

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. In cases where physical contribution (ownership transfer) of assets and liabilities were not feasible or cost effective, the monetary value was transferred in the form of cash or debt.

 

On August 9, 2006 the Company completed its IPO on the New York Stock Exchange through the issuance of 42 million ordinary shares, which are traded as American Depositary Shares (ADSs) under the symbol “QI”. In addition, Infineon sold 6.3 million shares upon exercise of the underwriters’ over-allotment option. As a result, Infineon’s ownership interest in the Company decreased to 85.9%.

 

At the Formation the Company’s operations in Japan and Korea were initially held in trust for Qimonda’s benefit by Infineon until the legal transfer to Qimonda takes place. The Company’s Korea operations were legally transferred to Qimonda in October 2006. Infineon transferred the Japan operations into a separate legal entity and contributed additional equity of €12 during the three months ended December 31, 2006. In the three months ended June 30, 2007 Infineon transferred the ownership of the Japan entity to Qimonda (see note 18). The Company’s investment in Inotera Memories Inc. (“Inotera”), previously held in trust by Infineon, was transferred to Qimonda in March 2007 (see note 7). The Company’s investments in Advanced Mask Technology Center GmbH & Co. (“AMTC”) and Maskhouse Building Administration GmbH & Co. KG (“BAC”) are intended to be transferred by Infineon after approval by the other shareholders in the venture, although pursuant to the AMTC and BAC limited partnership agreement, such consent may not be unreasonably withheld. The accompanying financial statements include the results of operations of these activities for all periods presented.

 

  Basis of Presentation

 

The accompanying condensed combined and consolidated financial statements 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, 2006 was derived from audited financial statements and condensed for comparative purposes. In the opinion of management, the accompanying condensed combined and 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 combined and consolidated financial statements should be read in conjunction with the audited combined and consolidated financial statements for the year ended September 30, 2006. The accounting policies applied in preparing the accompanying condensed combined financial statements are consistent with those for the year ended September 30, 2006 (see note 2).

 

The accompanying combined and consolidated financial statements are presented on a combined basis for periods prior to the Formation and on a consolidated basis for all periods thereafter.

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Combined and Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

Periods prior to the Formation are presented on a “carve-out” basis and comprise the combined historical financial statements of the transferred Memory Products business assuming that the Company had existed as a separate legal entity. These combined financial statements have been derived from the consolidated financial statements and historical accounting records of Infineon, employing the methods and assumptions set forth below. Substantially all of the assets, liabilities, operations and activities of the Memory Products business are those that comprised the Memory Products segment of Infineon during the financial periods presented prior to the Formation.

 

All amounts herein are shown in millions of euro (or “€”) except where otherwise stated. The accompanying balance sheet as of June 30, 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 = $1.3520, the Federal Reserve noon buying rate on June 29, 2007, the last currency trading day in June 2007.

 

 

Through the Formation, the combined statements of operations were prepared on a carve-out basis and reflect all revenues and expenses that are attributable to the Memory Products business. Operating expenses or revenues of the Memory Products business specifically identified as pertaining to the Memory Products business were charged or credited directly to it without allocation or apportionment. This is the case for all of the revenues appearing on the combined statements of operations. Operating expenses that Infineon incurred were allocated to the Memory Products business to the extent that they were related and indirectly attributable to it.

 

In connection with the Formation, the Company entered into several service agreements with Infineon. As a result, costs are no longer allocated after the Formation, but rather charged on the basis of these agreements (see note 13). Allocations from Infineon during April 2006 and the seven months ended April 30, 2006 before the Formation are reflected in the combined statements of operations as follows:

 

 

For periods prior to the Formation, the income tax expense reflected in the accompanying combined and consolidated financial statements has been calculated as if the Company had filed separate tax returns for each of the years presented. The Company’s future effective tax rate after the Formation may differ from those indicated in the accompanying condensed combined and consolidated financial statements prior to the Formation.

 

 

Because a direct ownership relationship did not exist among the various entities comprising the Memory Products business prior to the Formation, Infineon’s investments in and advances to the Memory Products business represent Infineon’s interest in the recorded net assets of the Memory Products business, and are shown as business equity in lieu of shareholder’s equity in the combined financial statements. Prior to the Formation, net income (loss) of the Memory Products business forms part of business equity (investments by and advances from Infineon). Subsequent to the Formation net income (loss) is attributed to retained earnings since the Company exists as a separate legal entity. The effects of equity transactions prior to the Formation are included in “Investments by and advances from Infineon” in the accompanying combined and consolidated financial statements. At the Formation, net investments by and advances from Infineon were contributed to the company as equity, which is reflected as share capital and as additional paid in capital in the accompanying condensed combined and consolidated statement of business/shareholders’ equity. All inter-company transactions, including purchases of inventory, charges

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Combined and Consolidated Financial Statements

(euro in millions, except where otherwise stated)

and cost allocations for facilities, functions and services performed by Infineon for the Memory Products business are reflected in this amount.

 

 

The preparation of the accompanying condensed combined and consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as 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. In addition, due to the significant relationship between Infineon and the Company, the terms of the carve-out transactions, the allocations and estimations of assets and liabilities and of expenses and other transactions between the Memory Products business and Infineon may not be the same as those that would have resulted from transactions among unrelated third parties. Management believes that the assumptions underlying the condensed combined and consolidated financial statements are reasonable. However, these transactions, allocations and estimates may not be indicative of actual results that would have been obtained if the Company had operated on a stand-alone basis, nor are they indicative of future transactions or of the expenses or results of operations of the Company. In addition, the process of preparing the condensed combined and consolidated financial statements does not permit the revaluation of historical transactions to attempt to introduce an arms’-length relationship where one did not exist at the time. Management believes that it is not practicable to estimate what the actual costs of the Company would have been on a stand-alone basis if it had operated as an unaffiliated entity. Rather than allocating the expenses that Infineon actually incurred on behalf of the Memory Products business, management would have had to choose from a wide range of estimates and assumptions that could have been made regarding joint overhead, joint financing, shared processes and other matters. Any of these assumptions may have led to unreliable results and would not have been more useful as an indicator of historical business development and performance than the methods employed in preparing the condensed combined and consolidated financial statements.

 

 

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 replaces the Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting and reporting of a change in accounting principle. The Company adopted SFAS No. 154 on October 1, 2006. The adoption of SFAS No. 154 did not have a significant impact on the Company’s consolidated financial position or results of operations.

 

In July 2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax Uncertainties” 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. The recently issued literature also provides guidance on the de-recognition measurement and classification of income tax uncertainties, along with any related interest and penalties. Interpretation No. 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. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation No. 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is in the process of determining the impact, if any, that the adoption of Interpretation No. 48 will have on its consolidated financial position and results of operations.

 

In September 2006, the FASB released SFAS No. 157, “Fair Value Measurements”, which provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard also responds to investors’ requests for more information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect that fair value measurements have on earnings.

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Combined and Consolidated Financial Statements

(euro in millions, except where otherwise stated)

SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial statements issued for financial years beginning after November 15, 2007, and interim periods within those financial years. SFAS No. 157 is effective for the Company for financial years beginning after October 1, 2008, and interim periods within those financial years. The Company is in the process of evaluating the impact that the adoption of SFAS No. 157 will have on its consolidated financial position and results of operations.

 

In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132^®”, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization (“Recognition Provision”). SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions (“Measurement Date Provision”). The Company currently measures the funded status of its plans annually on June 30. The Recognition Provision of SFAS No. 158 is effective for the Company as of the end of the fiscal year ending September 30, 2007, and the Measurement Date Provision is effective for the Company as of the end of the fiscal year ending September 30, 2009. As of September 30, 2006 the application of the Recognition Provision of SFAS No. 158 would have resulted in an increase in other long-term liabilities of €7, an increase in non-current deferred tax assets of €3 and an increase in accumulated other comprehensive loss of €4. The Company does not expect the application of the Measurement Date Provision of SFAS No. 158 annually on September 30 to have a significant impact on its results of operations or financial position.

 

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both an income statement (“rollover”) and balance sheet (“iron curtain”) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior years are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the beginning of the year of adoption. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006, with earlier adoption encouraged. The Company does not expect that the adoption of SAB No. 108 will have a significant impact on its consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities and other eligible items at fair value, which are not otherwise currently required to be measured at fair value. Under SFAS No. 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. If elected, SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, with earlier adoption permitted provided that the entity also early adopts all of the requirements of SFAS No. 157. The Company is currently evaluating whether to elect the option provided for in this standard.

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Combined and Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

 

Income (loss) before income taxes and minority interests is attributable to the following geographic locations for the three and nine months ended June 30, 2006 and 2007:

 

 

Income tax benefit (expense) for the three and nine months ended June 30, 2006 and 2007 is as follows:

 

 

In the three and nine months ended June 30, 2007, the Company’s effective tax rate was lower than the combined German statutory tax rate of 39%. This resulted from income in jurisdictions with lower than average corporate tax rates, tax credits, and valuation allowances. In the three and nine months ended June 30, 2006, the effective tax rate did not fully reflect the income and loss, respectively, for the period due to deferred tax benefits that could not be recognized, because for certain jurisdictions losses prior to the Formation could not be used to offset taxable income after the Formation.

 

In July 2007 the German legislature passed the Corporate Tax Reform Act 2008. This bill introduces several changes to the taxation of German business activities, including a reduction of the combined statutory corporate and trade tax rate in Germany from approximately 39% to 30%. If the bill is enacted into law, most of the changes would come into effect for the Company’s 2008 financial year. Upon enactment, which could be during the three months ending September 30, 2007, the Company would record the reduction in value of its deferred tax assets in Germany at that date as tax expense.

 

In China, as a result of enacted tax reform legislation, a new uniform income tax regime will become effective from January 1, 2008. The Company incorporated these changes in its effective and deferred tax rate which did not have a material impact for the three and nine months ended June 30, 2007.

 

 

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the year.

 

In connection with the Formation, the ordinary shares outstanding were increased to 300 million owned by Infineon (see note 1). Accordingly, all applicable references to the number of ordinary shares and per share information for periods prior to the Formation have been restated to reflect the 300 million ordinary shares outstanding. On August 9, 2006 the Company completed its IPO on the New York Stock Exchange through the issuance of 42 million ordinary shares, which are traded as American Depositary Shares (ADSs).

 

Qimonda AG and Subsidiaries

Notes to the Unaudited Condensed Combined and Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

The Company did not have any potentially dilutive instruments outstanding for the three and nine months ended June 30, 2006. On November 24, 2006 the Company granted 1.9 million stock options pursuant to the Qimonda Stock Option Plan (see note 10). None of these options were dilutive to EPS for the three and nine months ended June 30, 2007. According to the provisions of FAS 123^®the Company accounts for potentially dilutive effects from this stock-based compensation program.

 

The computation of basic and diluted EPS for the three and nine months ended June 30, 2006 and 2007 is as follows (shares in million):

 

 

 

Trade accounts receivable at September 30, 2006 and June 30, 2007 consist of the following: