e424b2
CALCULATION
OF REGISTRATION FEE
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Title of Each Class of Securities
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Aggregate Offering
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Amount of
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Offered
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Price
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Registration
Fee(3)
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Ordinary Shares, no par value,
offered by Infineon
Technologies
AG(1)(2)
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$352,717,070
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$10,829
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(1) |
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Includes up to 3,750,000 ordinary shares represented by
3,750,000 American depositary shares that the underwriters have
the option to purchase solely to cover over-allotments, if any. |
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(2) |
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Each American depositary share represents one ordinary
registered share. American depositary shares issuable upon
deposit of the ordinary registered shares registered hereby have
been registered pursuant to a separate Registration Statement on
Form F-6
(File
No. 333-136068)
filed July 27, 2006. |
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(3) |
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Pursuant to Rule 457(p), the amount of registration fee
payable hereunder has been offset by $72,354 of filing fees
previously paid by Qimonda AG in respect of unsold securities
under the Registration Statement on
Form F-1
(File No.
333-135913)
filed July 21, 2006. |
Filed
Pursuant to Rule 424(b)(2)
Registration
No. 333-145983
PROSPECTUS
SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 11, 2007
Qimonda AG
28,550,098 American Depositary
Shares
Representing 28,550,098 Ordinary
Shares
This prospectus supplement relates to:
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A secondary public offering by Infineon Technologies AG, which
we refer to as Infineon, of 25,000,000 American Depositary
Shares, or ADSs, of Qimonda AG, a German stock
corporation and
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An offering of 3,550,098 ADSs, which we refer to as the Loaned
ADSs, that Infineon Technologies AG, which we refer to as
Infineon, is lending to an affiliate of J.P. Morgan
Securities Inc., which we refer to as J.P. Morgan, pursuant
to an ADS lending agreement, which we refer to as the ADS
Lending Agreement.
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The ADSs may be evidenced by American Depositary Receipts, or
ADRs. Each ADS will represent one ordinary share.
These ADSs are being offered to the public in the United States
and to institutional investors outside of the United States. We
will not receive any proceeds from any of the sales described in
this prospectus, and neither we nor Infineon will receive any
proceeds from sales of the loaned ADSs.
Infineon will loan the Loaned ADSs to J.P. Morgan. We have
been advised by J.P. Morgan that its affiliate intends to
use the proceeds from the sale of the Loaned ADSs to facilitate
transactions by which investors in notes exchangeable into our
ADSs, which an affiliate of Infineon is offering in a
simultaneous offering outside of the United States in accordance
with Regulation S under the U.S. Securities Act of
1933, as amended, will hedge their investments in the
exchangeable notes through privately negotiated derivatives
transactions.
Our ordinary shares are listed on the New York Stock Exchange
under the symbol QI. On September 19, 2007, the
closing sale price of our ADSs was $10.99 per share.
See Risk Factors beginning on
page S-10 to read about factors you should consider
before buying ADSs.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
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Per ADS
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Total
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Public offering price
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$
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10.92
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$
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311,767,070
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Underwriting discount
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$
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0.193
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$
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4,825,000
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Proceeds, before expenses, to
Infineon
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$
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10.727
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$
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268,175,000
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To the extent the underwriters sell more than 28,550,098 ADSs,
the underwriters have the option to purchase up to an additional
3,750,000 ADSs from Infineon at the public offering price per
share less the underwriting discount to cover over-allotments.
The underwriters expect to deliver the ADSs against payment in
New York, New York on or about September 25, 2007.
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Citi |
Credit
Suisse |
JP
Morgan |
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ABN
AMRO Rothschild LLC |
Deutsche
Bank Securities |
HVB
Capital Markets, Inc. |
The date of this Prospectus Supplement is September 20,
2007.
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where sale of these
securities is legally permitted. The information in this
document may only be accurate on the date of this document.
TABLE OF
CONTENTS
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S-1
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S-10
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S-37
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S-38
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S-39
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S-39
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S-40
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S-41
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S-42
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S-44
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S-46
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S-155
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S-156
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S-157
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S-161
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S-162
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S-163
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S-167
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S-170
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S-171
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In this prospectus supplement, references to:
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our company refers to Qimonda AG;
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we, us, Qimonda AG or
Qimonda refer to Qimonda AG and, unless the context
otherwise requires, to our subsidiaries and our predecessor, the
former Memory Products segment of Infineon;
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Infineon refers to Infineon Technologies AG, a
German stock corporation and, unless the context otherwise
requires, to its subsidiaries;
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the Infineon Group refers to Infineon and
Infineons subsidiaries, including Qimonda prior to the
carve-out but excluding Qimonda after the carve-out described
herein;
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Infineon Investment refers to Infineon Technologies
Investment B.V.; and
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J.P. Morgan or borrower refers to an affiliate of
J.P. Morgan Securities, Inc.
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Until October 30, 2007, all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a copy of this
prospectus supplement and the accompanying prospectus. This is
in addition to the dealers obligation to deliver a copy of
this prospectus supplement and the accompanying prospectus when
acting as an underwriter and with respect to unsold allotments
or subscriptions.
S-i
This summary highlights information contained elsewhere in this
prospectus supplement and the accompanying prospectus. Because
it is a summary, it does not contain all the information you
should consider before investing in our ADSs. You should
carefully read this entire prospectus supplement and the
accompanying prospectus, including the section entitled
Risk Factors, our combined financial statements and
the related notes included elsewhere in this prospectus
supplement and the accompanying prospectus, including the
documents incorporated by reference, before making an investment
decision. Special terms used in the semiconductor industry are
defined in the glossary.
Our
Company
We are one of the worlds leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. We began operations within the Semiconductor
Group of Siemens AG, whose roots in semiconductor R&D and
manufacturing date back to 1952, and operated as the Memory
Products segment of Infineon Technologies AG since its carve-out
from Siemens AG in 1999. In each of the past five calendar
years, we captured between 12% and 16% of the worldwide DRAM
market based on revenues, according to industry research firm
Gartner. Although our market share fluctuates, and we may gain
or lose market share quarter-to-quarter (for example, we lost
market share in the fourth quarter of the 2006 calendar year and
in the first quarter of the 2007 calendar year) or year-to-year,
in each of those five years, we remained among the four largest
DRAM suppliers worldwide based on revenues. For the calendar
year 2006, we were the worlds third largest supplier of
DRAM, with market share of approximately 16% both in revenues
and bit shipments, according to Gartner. For the first half of
the 2007 calendar year, we remained the third largest supplier
of DRAM by revenue and were the fourth largest supplier of DRAM
by bit shipments with market shares of approximately 13%
according to Gartners report in September 2007.
Our principal products are DRAM components and modules for use
in a wide variety of electronic products. In our 2006 financial
year, 50% of our net sales were of DRAM products for more
advanced infrastructure, graphics, mobile and consumer
applications, while 47% of our net sales were of standard DRAMs
for use in PC and workstation applications. In the nine months
ended June 30, 2007, 59% of our net sales were of DRAM
products for infrastructure, graphics, mobile and consumer
applications and 40% of our net sales were of standard DRAMs for
use in PC and workstation applications. Our infrastructure DRAMs
address the high reliability requirements of servers, networking
and storage equipment, our graphics DRAMs deliver advanced
performance to graphic cards and game consoles, and our mobile
and consumer DRAMs provide low power consumption benefits to
mobile phones, digital audio players, GPS devices, televisions,
set-top boxes, DVD recorders and other consumer electronic
devices.
The memory products business of Infineon, substantially all of
which Infineon contributed to us in May 2006, had a
long-standing reputation as a supplier of high-quality DRAMs. We
intend to continue to build on this reputation to broaden our
product portfolio and, in turn, our customer base, by focusing
on DRAM products for infrastructure and for graphics, mobile and
consumer applications. We serve a global base of customers, many
of which are among the worlds largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs, including HP, Dell, IBM, Sun
Microsystems and Sony. To expand our customer coverage and
breadth, we also sell a wide range of products to memory module
manufacturers that have diversified customer bases such as
Kingston, and to a number of distributors. More recently and in
connection with the ongoing expansion of our product portfolio,
especially into graphics applications, we have added customers
with a focus on enabling these applications, such as nVidia, AMD
and customers who are active in the game console market, such as
Microsoft, Sony and Nintendo. In addition, we have added
customers in the area of consumer and mobile applications, such
as LG, Spansion and SanDisk. We believe that having a close
relationship with these customers can benefit us in the
development of future memory generations by making it easier to
develop memory solutions for future end applications and improve
our product designs.
We have invested significant capital in the development of
leading process technologies and modern manufacturing capacity.
We have established a number of strategic alliances for research
and development, as
S-1
well as for manufacturing in order to improve the economies of
scale and the capital efficiency of our business model. We have
access to several front-end and back-end manufacturing
facilities worldwide, including our own, and facilities owned by
our strategic partners and our back-end subcontract
manufacturers. We operate these facilities as a coherent unit
using our fab cluster concept, which enables us to
share manufacturing best practice and gain operational
flexibility through customer qualification of our entire cluster
of fabs.
Our net sales in our financial year ended September 30,
2006 were 3,815 million. Our EBIT (which we define as
net income plus interest expense and income taxes) during that
period was 213 million and our net income was
74 million. Our net sales for the nine months ended
June 30, 2007 were 2,897 million. Our EBIT
during that period was 12 million and our net income
was 16 million.
We operate in the semiconductor memory industry, which is one of
the largest segments of the overall semiconductor industry.
According to the industry research firm Gartner, DRAM
represented the largest portion of the memory semiconductor
industry in 2006, followed by flash memory. Gartner expects DRAM
bit shipments to grow at a CAGR of 52% between 2006 and 2011,
driven in part by increased penetration of DRAM in new
applications including mobile and consumer devices. Underlying
this expected bit growth is Gartners belief that DRAM
content in traditional DRAM applications, primarily computing
devices, will also continue to increase and that sales of
DRAM-containing products will grow strongly in emerging markets
such as China and India. Overall semiconductor memory sales were
$61 billion in 2006, and DRAM sales were $34 billion
in that year. DRAM sales have demonstrated significant
volatility in the past, as the revenue effects of increases in
bit shipments are offset to varying extents each year by overall
declines in the average selling prices for DRAM products.
Gartner, among other market research firms, expects DRAM sales
to remain volatile over the next several years but estimates
that DRAM will continue to represent the largest portion of the
semiconductor memory industry through calendar year 2011.
Our
Strengths
We believe that we are well positioned to benefit from the
projected growth in the semiconductor memory industry and to
remain at its technological forefront. We consider our key
strengths to include the following:
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We are a leading supplier of DRAM
products. For the calendar year 2006, we were
the worlds third largest supplier of DRAM with market
share of approximately 16% both in revenues and bit shipments,
according to Gartner. For the first half of calendar year 2007,
we remained the third largest supplier of DRAM by revenue and
were the fourth largest supplier of DRAM by bit shipments, with
market shares of approximately 13%, according to Gartners
report in September 2007. We believe that our size and scale
will enable us to continue to improve our position as a
prominent developer of leading semiconductor memory
technologies, as a manufacturer with facilities among the most
modern in our industry and as a supplier of an increasingly
broad portfolio of competitive products to customers worldwide.
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We possess one of the broadest product portfolios in the
DRAM industry. We have in recent years
significantly broadened our product portfolio of DRAM products
for infrastructure, graphics, consumer and mobile applications,
which we believe offer on average higher and less volatile
prices than those for standard PC applications. Our broadened
product portfolio has enabled us to strengthen our customer
base, both by adding new customers and expanding existing
customer relationships to encompass more products.
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We demonstrate strong application and product design
know-how. We believe that strong application
and product design know-how is necessary to achieve design wins
in applications outside the PC area, and that this know-how is
not broadly available in the market. We believe that our
application and design know-how has been instrumental in our
successes in being selected as a lead supplier in many of the
more technologically advanced applications in the graphics,
consumer and mobile areas in recent years.
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We are a leading developer of semiconductor process
technologies and an active innovator. We have
successfully developed and implemented several generations of
process technologies. We believe that our accumulated
experience, including that which we have acquired through our
strategic alliances, is enabling us to introduce new memory
technology platforms with smaller feature sizes on a schedule
and at costs that enable us to remain among the leaders in
standardized DRAMs while focusing on more specialized products.
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S-2
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We are among the leaders in the transition to
manufacturing on 300mm wafers. We were among
the first DRAM suppliers to transition a substantial portion of
our manufacturing to 300mm technology and began volume
production on this basis in 2001. We believe the primary benefit
of this early transition to 300mm, and the corresponding
advantage relative to competitors who have not yet transitioned
as great a proportion of their capacity, has been and will
continue to be a reduction in our costs per bit, as our fixed
costs of production can be spread over a higher number of chips
per wafer.
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Our business model leverages strong strategic
alliances. We have entered into strategic
alliances that leverage our research and development
capabilities and augment our front- and back-end manufacturing
capacity in a capital-efficient manner. We believe that we use
strategic alliances to a greater extent than our competitors and
that the continued success of our fab cluster
concept is a key element of our business model. We believe that
our strategic alliances enable us to benefit from significant
economies of scale at a reduced level of capital expenditures
and increase our operating flexibility.
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Our
Strategy
In formulating our strategy, we aim to leverage our key
strengths to address our target markets and emerging
opportunities that we have identified. The key elements of our
strategy include the following:
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Improve our average selling price by maintaining our focus
on technologically advanced, customer and application specific
DRAM products for infrastructure, graphics, mobile and consumer
applications. We intend to focus on
application-specific DRAMs used in servers, graphics cards, game
consoles, mobile phones, digital audio players, GPS devices,
televisions, set-top boxes, DVD recorders and other consumer
electronic devices, where we believe significant growth
opportunities exist. At the same time, we seek to develop,
frequently together with research and development partners, new
solutions to the physical and economic challenges posed by the
ever-increasing technical demands of our customers regarding
products offering high performance, low power consumption and
small form factors, or shape and overall dimension,
at a competitive price.
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Leverage our technology leadership and increase our
presence in low cost regions to continue to reduce unit
costs. We intend to remain ahead of our major
competitors in the transition to 300mm manufacturing technology
and plan to substantially complete our transition to
manufacturing on 300mm wafers within the next few years. We are
also seeking to successfully ramp up manufacturing yield on the
80nm and the 75nm technology nodes and to successfully develop
and implement future process technology nodes by leveraging our
accumulated expertise, R&D capabilities and strategic
alliances. In addition, we are actively increasing the
proportion of our manufacturing located in low cost Asian
regions.
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Improve profitability and return on capital throughout our
industrys business cycle. We believe
that we will achieve significantly improved profitability
throughout our industrys business cycle through the
average selling price improvement and unit cost reduction
strategies outlined above, as well as by increasing the
flexibility of our operations through our foundry partnerships
and by maintaining or expanding the share of our revenues that
are from advanced infrastructure, graphics, mobile and consumer
DRAM products. We believe this capital efficiency, combined with
our targeted profitability, will enable us to significantly
improve our return on capital employed.
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Our
Carve-Out From Infineon
Effective May 1, 2006, Infineon contributed substantially
all of the assets, liabilities, operations and activities, as
well as the employees, of its former Memory Products segment to
us. This excluded the Memory Products operations in Korea and
Japan, which were placed in trust for us by Infineon pending
their contribution and transfer. The operations in Korea and
Japan have since been transferred to us. While Infineons
investment in the Advanced Mask Technology Center (AMTC) and the
Maskhouse Building Administration Company (BAC) in Dresden has
been contributed to us, the legal transfer of this investment is
not yet effective, since Infineons co-venturers have not
yet given the required consent to the transfer of the AMTC and
BAC interest. While pursuant to the AMTC and BAC limited
partnership agreements, such consent may not be unreasonably
withheld, we, Infineon and Infineons
S-3
co-venturers have included this consent in an agreement,
currently being finalized, that also addresses Infineons
intention to reduce its stake in us below 50%, as described
below. The AMTC and BAC interest is held by Infineon for our
economic benefit pursuant to the contribution agreement. For as
long as Infineon holds our interest in AMTC and BAC, we must
exercise our shareholder rights through Infineon, which is a
more cumbersome and less efficient method of exercising these
rights than if we held the interest directly. We do not expect
these administrative complexities to have a material adverse
effect on our business, financial condition and results of
operations. A similar arrangement was in place for our interest
in our Inotera joint venture which was principally transferred
to us in March 2007.
On August 9, 2006 we effected our initial public offering,
which we refer to as our 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.
We believe that operating as an independent company allows us to
realize the following benefits:
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increased market responsiveness through an exclusive focus on
the memory products business;
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direct access to a distinct investor base;
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incentives for our employees directly tied to our own
performance; and
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increased flexibility to pursue strategic cooperations.
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Infineon is our largest shareholder, with a direct and indirect
shareholding of 85.9% prior to the conclusion of this offering.
Upon conclusion of this offering, Infineon will remain our
largest shareholder, with a direct and indirect shareholding of
78.6% (or 77.5% if the overallotment option is exercised in
full). Infineon has publicly announced that it aims to reduce
its stake in Qimonda to significantly below 50% by the time of
Infineons Annual Shareholder Meeting in 2009, at the
latest. Disposition by Infineon of substantial amount of our
shares could depress the price of our shares. The temporary
majority ownership by Infineon permits us to use the entire
intellectual property umbrella as well as other benefits from
contracts between the Infineon group of companies and third
parties. Infineon and we have begun to re-negotiate or establish
intellectual property cross-licensing and other contractual
relationships with third parties.
We have entered into agreements with Infineon with respect to
various interim and ongoing relationships between the two
groups. 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. See Arrangements between Qimonda and the
Infineon Group.
Our Risks
and Challenges
Our business is subject to many material risks and challenges
that we describe in Risk Factors and elsewhere in
this prospectus supplement and the accompanying prospectus. If
any of these risks materialize or we are unable to overcome
these challenges, we may fail to achieve our strategic goals,
and our business, financial condition or results of operations
could suffer. Our key risks and challenges include the following:
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The highly cyclical and competitive nature of the DRAM
industry in which we operate and the pace of technological
advancement. Our results may be affected by
cyclical fluctuations of the DRAM industry, including periods of
oversupply and rapid declines in DRAM prices such as occurred in
the third quarter of our current financial year. Our competitive
position may deteriorate if we fail to keep pace with the
continuous advances in memory design and manufacturing
technologies. We have incurred substantial losses in the past,
including in our most recent financial quarter, and may incur
substantial losses in future periods; our results may continue
to be very volatile from period to period. Even as we exploit
the advantages of one technology, we must at the same time
develop improvements to that technology or alternative
technologies if we are to keep up with our competitors.
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Potential loss of benefits from our strategic alliances
and fab cluster. Because we do
not have sole control of our strategic alliances and foundry
partnerships, we are exposed to risks through these
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S-4
arrangements, such as our partners having potential
financial difficulties or disagreements with our partners. In
some cases political and economic risks may be higher in the
countries where these ventures are located than in the countries
where we operate our own manufacturing facilities. If these
risks materialize, we could lose the benefits of these
relationships, on which our strategy relies heavily, or these
relationships could be terminated altogether.
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Potential adverse consequences of our carve-out from
Infineon. We may encounter operational,
administrative and strategic difficulties as we adjust to
operating as a stand-alone company. We may be unable to achieve
the increased market responsiveness and flexibility we believe
the carve-out will bring. If Infineon were to cease to be our
majority shareholder, we might lose rights to intellectual
property arrangements and ownership of the shares of our Inotera
joint venture may revert to Infineon. Further, conflicts of
interest could arise between us and Infineon and we may not be
able to resolve these conflicts on favorable terms for us.
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You should refer to the section entitled Risk
Factors beginning on
page S-10
for a more complete discussion of these and other risks and
challenges.
Company
Information
We were registered in the commercial register of the local court
of Munich on May 25, 2004 as Invot AG, a German stock
corporation and wholly-owned subsidiary of Infineon Technologies
AG, under number HRB 152545. We changed our name to Qimonda AG
on April 6, 2006. Our principal executive offices are
located at Gustav-Heinemann-Ring 212, 81739 Munich, Germany, and
our telephone number is +49-89-60088-0. Our website is
http://www.qimonda.com.
This website address is included in this prospectus supplement
as an inactive textual reference only. The information and other
content appearing on our website are not part of this prospectus
supplement. Our agent for service of process in the United
States is Qimonda North America Corp., Corporation
Trust Center, 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801.
S-5
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Total ADSs being offered: |
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28,550,098 ordinary shares in the form of American Depositary
Shares, or ADSs. |
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ADSs being sold by Infineon: |
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25,000,000 ADSs |
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ADSs being loaned by Infineon: |
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3,550,098 ADSs. |
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Public offering price: |
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The public offering price is $10.92 per ADS. |
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The offering: |
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The offering consists of a secondary public offering by Infineon
and the offering of the ADSs that Infineon is lending to
J.P. Morgan pursuant to an ADS Lending Agreement, dated as
of September 20, 2007, which we refer to as the ADS Lending
Agreement. The ADSs will be offered to the public in the United
States and to institutional investors outside the United States.
We will not receive any proceeds from this offering. See
ADS Lending Agreement; Simultaneous Offering of
Exchangeable Notes and Underwriting in this
prospectus supplement. |
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American Depositary Shares: |
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The shares being sold pursuant to this prospectus supplement
will be delivered in the form of ADSs. Each ADS, which may be
evidenced by an American Depositary Receipt, or ADR, represents
an ownership interest in one of our ordinary shares. As an ADS
holder, we will not treat you as one of our shareholders. The
depositary, Citibank, N.A., will be the holder of the ordinary
shares underlying your ADSs. You will have ADS holder rights as
provided in the deposit agreement. To better understand the
terms of the ADSs, you should carefully read the section in the
accompanying prospectus entitled Description of American
Depositary Shares. We also encourage you to read the
deposit agreement, the form of which is attached as an exhibit
to the registration statement of which this prospectus
supplement and prospectus forms a part. |
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Investors in our ADSs will be able to trade our securities and
receive dividends on them in U.S. dollars if they wish. |
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Depositary: |
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Citibank, N.A. |
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Custodian: |
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Citigroup Global Markets Deutschland AG & Co. KGaA. |
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Over-allotment option: |
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If the underwriters exercise the over-allotment option described
in this prospectus supplement under the heading
Underwriting, Infineon may sell up to 3,750,000
additional ordinary shares in the form of ADSs. Unless otherwise
indicated, all information in this prospectus supplement assumes
the over-allotment option has not been exercised. |
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Shares outstanding before and after the offering: |
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342,000,001 ordinary shares. |
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Use of proceeds: |
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We will not receive any proceeds from any part of this offering. |
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Lock-up: |
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We, and our shareholders, Infineon and Infineon Investment, have
agreed that, subject to some exceptions, for a period of
60 days from the date of this prospectus supplement, we and
they will not, without the prior written consent of Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC and
J.P. Morgan Securities Inc., dispose of or hedge any of our
shares or ADSs or securities which are |
S-6
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convertible or exchangeable into these securities. Citigroup
Global Markets Inc., Credit Suisse Securities (USA) LLC and
J.P. Morgan Securities Inc. in their sole discretion may
release any of the securities subject to these
lock-up
agreements at any time without notice. The release of any
lock-up is
considered on a
case-by-case
basis. Factors in deciding whether to release shares or ADSs may
include the length of time before the
lock-up
expires, the number of shares or ADSs involved, the reason for
the requested release, market conditions, the trading price of
our ADSs and historical trading volumes of our ADSs. |
|
Dividend policy: |
|
We have not declared any cash dividends on our ordinary shares
and have no present intention to pay dividends in the
foreseeable future. See Dividend Policy for a
discussion of the factors that will affect the determination by
our Supervisory and Management Boards to declare dividends, as
well as other matters concerning our dividend policy. |
|
Risk factors: |
|
See Risk Factors and the other information included
in this prospectus supplement and accompanying prospectus for a
discussion of risks you should carefully consider before
deciding to invest in our ADSs. |
|
New York Stock Exchange symbol: |
|
QI. |
S-7
Summary
Combined and Consolidated Financial Data
The following table presents summary historical combined and
consolidated financial data for the periods indicated. We
derived the summary combined and consolidated financial data as
of and for the years ended September 30, 2004, 2005 and
2006 from our combined and consolidated financial statements for
those years. These combined and consolidated financial
statements have been audited by our independent registered
public accounting firm, KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we
refer to as KPMG. The combined and consolidated financial
statements as of September 30, 2005 and 2006 and for each
of the years in the three year period ended September 30,
2006 are included elsewhere in this prospectus supplement. We
derived the summary combined financial data as of and for the
year ended September 30, 2003 from our unaudited combined
financial statements for that year. We derived the selected
combined and consolidated financial data as of and for the nine
months ended June 30, 2006 and 2007 from our unaudited
condensed combined and consolidated financial statements for
those periods. These unaudited condensed combined and
consolidated financial statements are included elsewhere in this
prospectus supplement. In the opinion of our management, these
unaudited condensed combined and consolidated financial
statements include all adjustments necessary to present fairly
the financial information for the periods they represent.
We have been a segment of Infineon for all of the periods
indicated. Infineon did not allocate most non-operating
financial statement line items among its segments during the
periods prior to our carve-out from Infineon. We have not
prepared complete summary combined financial data reflecting
these items as of and for the financial year ended
September 30, 2002 because of the significant cost and
effort involved with properly preparing, compiling and verifying
all the financial information needed to present our complete
results of operations and financial position as a stand-alone
company for periods so long ago. We derived the summary
financial data for the financial year ended September 30,
2002 from Infineons reported data of its Memory Products
segment for that period. This financial data was prepared in
accordance with U.S. GAAP and on a basis consistent with
the financial data for the later periods we have presented.
Infineon contributed our business to our company on May 1,
2006. We refer to this contribution as our carve-out. Our
combined financial information for all periods before the date
of our carve-out from Infineon may not be representative of what
our results would have been had we been a stand-alone company
during any of those periods. In addition, historical results are
not necessarily indicative of the results that you may expect
for any future period.
In particular, the combined financial statements do not reflect
estimates of one-time and ongoing incremental costs required for
us to operate as a separate company. Infineon allocated to our
company costs it incurred relating to research and development,
logistics, purchasing, selling, information technology, employee
benefits, general corporate functions and other costs. General
corporate functions include accounting, treasury, tax, legal,
executive oversight, human resources and other services. These
and other allocated costs totaled 387 million for our
2004 financial year, 305 million for our 2005
financial year and 203 million before the carve-out
for our 2006 financial year. Following our carve-out from
Infineon, we are responsible for substantially all of these
items, subject to Infineons continued provision of some of
these services pursuant to service agreements. These agreements
are described in Arrangements between Qimonda and the
Infineon Group. As a result, costs are no longer allocated
after the carve-out, but rather charged on the basis of these
agreements. Had we been incurring these costs directly during
these periods before the carve-out, they may have been
materially different than the allocated amounts in the combined
financial statements.
S-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the nine months ended
|
|
|
|
As of and for the financial year ended September 30,
|
|
|
June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006(2)
|
|
|
2006
|
|
|
2007
|
|
|
2007(3)
|
|
|
|
(Unaudited)(1)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, except share and per share data)
|
|
|
Summary Combined and
Consolidated Statement of Operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,971
|
|
|
|
2,544
|
|
|
|
3,008
|
|
|
|
2,825
|
|
|
|
3,815
|
|
|
$
|
4,840
|
|
|
|
2,583
|
|
|
|
2,897
|
|
|
$
|
3,917
|
|
Cost of goods sold
|
|
|
2,106
|
|
|
|
2,090
|
|
|
|
2,063
|
|
|
|
2,164
|
|
|
|
3,048
|
|
|
|
3,867
|
|
|
|
2,158
|
|
|
|
2,572
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(135
|
)
|
|
|
454
|
|
|
|
945
|
|
|
|
661
|
|
|
|
767
|
|
|
|
973
|
|
|
|
425
|
|
|
|
325
|
|
|
|
440
|
|
Research and development expenses
|
|
|
311
|
|
|
|
298
|
|
|
|
347
|
|
|
|
390
|
|
|
|
433
|
|
|
|
549
|
|
|
|
325
|
|
|
|
291
|
|
|
|
393
|
|
Selling, general and administrative
expenses
|
|
|
179
|
|
|
|
209
|
|
|
|
232
|
|
|
|
206
|
|
|
|
215
|
|
|
|
273
|
|
|
|
161
|
|
|
|
140
|
|
|
|
189
|
|
Restructuring charges
|
|
|
7
|
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expenses,
net
|
|
|
(6
|
)
|
|
|
16
|
|
|
|
194
|
|
|
|
13
|
|
|
|
60
|
|
|
|
76
|
|
|
|
(13
|
)
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(626
|
)
|
|
|
(72
|
)
|
|
|
170
|
|
|
|
51
|
|
|
|
59
|
|
|
|
75
|
|
|
|
(74
|
)
|
|
|
(99
|
)
|
|
|
(133
|
)
|
Interest (expense) income, net
|
|
|
|
|
|
|
(35
|
)
|
|
|
(30
|
)
|
|
|
(7
|
)
|
|
|
(25
|
)
|
|
|
(32
|
)
|
|
|
(22
|
)
|
|
|
4
|
|
|
|
5
|
|
Equity in earnings (losses) of
associated companies
|
|
|
|
|
|
|
22
|
|
|
|
(16
|
)
|
|
|
45
|
|
|
|
80
|
|
|
|
102
|
|
|
|
38
|
|
|
|
103
|
|
|
|
139
|
|
Gain (loss) on associated company
share issuance
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
72
|
|
|
|
92
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Other non-operating income
(expense), net
|
|
|
|
|
|
|
56
|
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
12
|
|
|
|
16
|
|
Minority interests
|
|
|
|
|
|
|
11
|
|
|
|
17
|
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
(20
|
)
|
|
|
132
|
|
|
|
104
|
|
|
|
188
|
|
|
|
239
|
|
|
|
(24
|
)
|
|
|
16
|
|
|
|
22
|
|
Income tax expense
|
|
|
|
|
|
|
(55
|
)
|
|
|
(211
|
)
|
|
|
(86
|
)
|
|
|
(114
|
)
|
|
|
(145
|
)
|
|
|
(58
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(75
|
)
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
|
$
|
94
|
|
|
|
(82
|
)
|
|
|
16
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share and ADS
(unaudited)(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
(0.26
|
)
|
|
|
0.06
|
|
|
|
0.24
|
|
|
$
|
0.30
|
|
|
|
(0.27
|
)
|
|
|
0.05
|
|
|
$
|
0.06
|
|
Number of shares used in earnings
per share
computation(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (in thousands)
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
305,984
|
|
|
|
305,984
|
|
|
|
300,000
|
|
|
|
342,000
|
|
|
|
342,000
|
|
Diluted (in thousands)
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
305,984
|
|
|
|
305,984
|
|
|
|
300,000
|
|
|
|
342,000
|
|
|
|
342,000
|
|
Summary Combined and
Consolidated Balance Sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
544
|
|
|
|
577
|
|
|
|
632
|
|
|
|
932
|
|
|
$
|
1,182
|
|
|
|
438
|
|
|
|
629
|
|
|
$
|
850
|
|
Marketable securities
|
|
|
|
|
|
|
23
|
|
|
|
2
|
|
|
|
|
|
|
|
138
|
|
|
|
175
|
|
|
|
170
|
|
|
|
263
|
|
|
|
356
|
|
Working capital,
net(5)
|
|
|
|
|
|
|
787
|
|
|
|
78
|
|
|
|
437
|
|
|
|
1,328
|
|
|
|
1,684
|
|
|
|
733
|
|
|
|
1,079
|
|
|
|
1,459
|
|
Total assets
|
|
|
|
|
|
|
4,634
|
|
|
|
4,750
|
|
|
|
4,861
|
|
|
|
5,861
|
|
|
|
7,436
|
|
|
|
5,262
|
|
|
|
5,364
|
|
|
|
7,250
|
|
Short-term debt, including current
portion of long-term debt
|
|
|
|
|
|
|
51
|
|
|
|
551
|
|
|
|
524
|
|
|
|
344
|
|
|
|
435
|
|
|
|
451
|
|
|
|
21
|
|
|
|
28
|
|
Long-term debt, excluding current
portion
|
|
|
|
|
|
|
516
|
|
|
|
27
|
|
|
|
108
|
|
|
|
151
|
|
|
|
192
|
|
|
|
151
|
|
|
|
128
|
|
|
|
173
|
|
Business/shareholders equity
|
|
|
|
|
|
|
2,736
|
|
|
|
2,779
|
|
|
|
2,967
|
|
|
|
3,871
|
|
|
|
4,911
|
|
|
|
3,341
|
|
|
|
3,808
|
|
|
|
5,148
|
|
Summary Combined and
Consolidated Cash Flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
|
|
|
|
300
|
|
|
|
693
|
|
|
|
483
|
|
|
|
297
|
|
|
$
|
377
|
|
|
|
61
|
|
|
|
769
|
|
|
$
|
1,039
|
|
Net cash used in investing
Activities
|
|
|
|
|
|
|
(242
|
)
|
|
|
(1,048
|
)
|
|
|
(971
|
)
|
|
|
(772
|
)
|
|
|
(981
|
)
|
|
|
(725
|
)
|
|
|
(724
|
)
|
|
|
(978
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
815
|
|
|
|
752
|
|
|
|
528
|
|
|
|
703
|
|
|
|
892
|
|
|
|
524
|
|
|
|
496
|
|
|
|
671
|
|
|
|
|
(1) |
|
Figures for 2002, other than those
provided, are not available without undue effort to properly
prepare, compile and verify all the financial information needed
to present the complete results of operations and financial
position as a stand-alone company for periods so long ago.
|
|
(2) |
|
Translated into U.S. dollars solely
for convenience of the reader at the rate of 1.00 =
$1.2687, the noon buying rate of the Federal Reserve Bank of New
York for euro on September 29, 2006, the last currency
trading day in September 2006.
|
|
(3) |
|
Translated into U.S. dollars solely
for convenience of the reader at the rate of 1.00 =
$1.3520, the noon buying rate of the Federal Reserve Bank of New
York for euro on June 29, 2007, the last currency trading
day in June 2007.
|
|
(4) |
|
Before the carve-out, the Memory
Products business was wholly owned by Infineon, and there were
no earnings (loss) per share for our company. Following the
carve-out, earnings (loss) per share reflects the contributed
capital structure and the additions due to the IPO for all
periods presented. For presentation purposes, we used the number
of shares outstanding at the carve-out date for the presentation
of earnings (loss) per share for periods prior to our carve-out.
|
|
(5) |
|
Calculated by subtracting current
liabilities from current assets.
|
S-9
Investing in our ADSs involves a high degree of
risk. You should carefully consider the risk factors
set forth below and all other information contained in this
prospectus supplement, the accompanying prospectus and the
documents incorporated by reference, including our combined and
consolidated financial statements and the related notes, before
making an investment decision regarding our securities. The
risks described below are those significant risk factors,
currently known and specific to us, that we believe are relevant
to an investment in our securities. If any of these risks
materialize, our business, financial condition or results of
operations could suffer, the price of our ADSs could decline and
you could lose part or all of your investment. Additional risks
not currently known to us or that we now deem immaterial may
also harm us and adversely affect your investment in our
ADSs.
Risks
related to the semiconductor memory industry
The
DRAM industry is subject to cyclical fluctuations, including
recurring periods of oversupply, which result in large swings in
our operating results, including large losses.
The market for DRAM products is highly cyclical, with frequently
mismatched demand and supply cycles. Because the majority of
DRAM products shipped, especially those for the PC market, is of
a commodity nature, DRAM prices are driven primarily by changes
in worldwide DRAM supply, which in turn is driven by
manufacturing capacity and, in part, by fluctuations in demand
for the end products that use memory semiconductors. A typical
DRAM market cycle is characterized by an initial period of high
demand for DRAM products, resulting in rising DRAM prices.
Higher prices and suppliers perception of increasing
demand lead many suppliers and manufacturers to decide to
construct, equip or contract new facilities to increase
capacity. New capacity is currently coming on-stream from our
competitors and ourselves, in our case through our
ramp-ups at
our DRAM manufacturing facility in Richmond, Virginia and at the
manufacturing facility of our joint venture partner Inotera
Memories Inc. Several of our competitors and we have announced
the construction of new capacity, in our case a new DRAM
manufacturing facility in Singapore, which we expect will
commence production in 2009. However, the lead times for new or
improved facilities to become operational average one to two
years. By the time these facilities come on-stream, demand
growth may have slowed or even reversed. When many
suppliers additional manufacturing capacity comes
on-stream, which may occur almost simultaneously, industry-wide
supply often rises past the point where it exceeds demand and
DRAM prices fall, sometimes precipitously. This in turn can
cause DRAM manufacturers to incur losses. As a result of this
cyclicality, our results of operations have historically been
volatile from year to year and we expect them to remain so. The
average spot market price for 512Mb DDR2 DRAM as
reported by DRAMeXchange fell from $6.36 on December 29,
2006 to $1.70 on May 22, 2007, a drop of 73.3%. 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 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.
Although prices for DRAM products improved slightly in July 2007
compared to June 2007, in August 2007 prices resumed the decline
that has characterized the calendar year to date. These price
declines may have significant negative impact on operating
results of DRAM suppliers, including ours.
The
reluctance of DRAM manufacturers to run their facilities at less
than full capacity can cause oversupply-driven downturns to last
for prolonged periods, keeping DRAM prices low.
Because the fixed costs of building, equipping and operating
DRAM manufacturing facilities, or fabs, are very high and
constitute a high proportion of the costs of producing each DRAM
chip, DRAM manufacturers normally operate their factories at
full capacity, 24 hours per day and seven days per week,
even when prices are low or falling. A manufacturer would
typically continue production of DRAM products at full capacity
at a DRAM facility as long as the average selling price of the
DRAM chips the facility produces remains above that
facilitys variable cost of producing chips and provided
that the facility cannot be converted cost-effectively to
manufacture a more profitable product. For this reason, there is
typically little capacity or supply shrinkage in response to a
market downturn. Oversupply has in the past contributed to
substantial declines in average selling prices. It did so in the
six
S-10
months ended June 30, 2007, and is likely to do so again in
the future. DRAM prices only begin to recover when demand growth
strengthens sufficiently to match supply. While lower prices may
lead to an acceleration in demand if PC manufacturers, in
particular, increase the amount of DRAM bits per
box, or the amount of memory included in each device, the
absorption of the oversupply may require a substantial increase
in demand. As a result, oversupply- driven downturns can last
for prolonged periods. It is likely that the DRAM industry will
continue to suffer from cyclical downturns in the future and
that we will be adversely affected by these downturns. Such
downturns can have material adverse effects on our business,
financial condition and results of operations for extended
periods.
Demand
weakness in any of the end markets that use our products,
especially the personal computer industry, could have a material
adverse effect on our results of operations.
We sell our products for use in a variety of applications such
as PCs, servers, game consoles and mobile and consumer devices.
Our revenue growth depends not only on continued growth in the
number of these products sold into our customers end
markets, but also on the amount of DRAM bits per
box. We are likely to suffer slower growth or a decline in
demand for our products if our customers end markets do
not continue to grow or if the bits per box do not
continue to increase or if either decline. If this occurs during
a period already characterized by DRAM oversupply, our business
can suffer especially severe downturns. This occurred most
recently in 2001, when worldwide DRAM sales dropped from
$29 billion in 2000 to $11 billion in 2001, according
to WSTS. According to Gartner, 256Mb equivalent DRAM was priced
at $36 in the third quarter of 2000, but by the fourth quarter
of 2001, this price had fallen below $4. These declines had a
material adverse effect on our financial condition and results
of operations and those of our competitors in 2001 and 2002. Any
sustained decline in our customers markets for our
products that may occur in the future could have a material
adverse effect on our business, financial condition and results
of operations.
A
mismatch between the specific DRAM chips we or the DRAM industry
generally are producing and the platforms for which equipment
manufacturers require DRAMs can lead to declining prices for the
DRAMs we produce and consequently to material inventory
write-downs.
Which DRAMs are required by the market at any particular time
depends on the platforms the manufacturers of PCs and other
electronic devices are using in their products at that time. In
general, DRAMs are designed, manufactured and assembled into
modules for use on a specified platform, or logic chipset and
its associated interfaces. If DRAM manufacturers are producing
DRAMs for which there is not enough demand because the supply of
the related platforms is low, the supply of these DRAMs may
exceed the demand for them, causing prices for the affected DRAM
products to fall. For example, the DDR2 generation of DRAMs is
designed to work together with a DDR2 logic chipset to operate a
PC. In the first quarter of our 2006 financial year, we and many
of our competitors were producing large volumes of DDR2 DRAMs,
but the PC manufacturers sourced far fewer DDR2 logic chipsets
than would permit the manufacture of enough PCs to absorb all of
the DDR2 DRAMs being produced. The result was a dramatic
oversupply and price decline in DDR2 DRAMs industry-wide. A
portion of the DDR2 DRAMs that we produced remained unsold and
in our inventory until supply of appropriate logic chipsets
created sufficient demand for our accumulated DDR2 DRAMs.
Given the significant risk of demand and supply mismatches
characteristic of our industry, we may find it necessary to
write down the carrying value of inventories in the future
depending on market conditions. In the three months ended
June 30, 2007, we wrote down 66 million of the
carrying value of our unsold inventory in response to the
significant decline in prices for DRAM products in that period.
Any such write-downs could have a material adverse effect on our
business, financial condition and results of operations.
S-11
We may
not respond quickly enough to the rapid technological change in
our industry.
The semiconductor memory industry is characterized by rapid
technological change, both in the design of memory chips and in
the manufacturing processes used to produce them. The following
technological developments are continuously driving the
improvements in the performance standards of most DRAM products:
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increasing the amount of data storage capacity per DRAM chip, or
density (DRAM manufacturers have generally doubled the density
of DRAM chips approximately every 24 months);
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increasing data transfer rates, or bandwidth, between the DRAM
and the central processing unit, or CPU, of the host device,
such as a PC;
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decreasing operating voltage and power consumption of the
DRAM; and
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reducing and tailoring the form factor of DRAM chips and
components with a given density,
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In 2000, the industry-standard DRAM chip had a density of 64
megabits. By 2006, the density of the standard DRAM chip had
increased to 512 megabits with the 1 gigabit generation in
ramp-up
phase and higher densities in development. In the same period,
the interface generation has evolved from SDRAM past DDR to
DDR2, with DDR3 in the development phase. At the same time,
operating voltage has declined from 3.3 volts for SDRAM to 1.5
volts for DDR3. DRAM manufacturers have continuously reduced the
feature size of their technologies to enable them to manufacture
higher density memory offering higher speeds and requiring lower
operating voltages.
In addition, from time to time industry participants are able to
reduce the overall size of the storage cells on DRAM chips,
which could be a factor in reducing manufacturing costs by
increasing the number of chips that can be manufactured on a
wafer, and is becoming increasingly important for certain
applications that require very small and specifically tailored
form factors.
For us to maintain or increase the competitiveness of our
products, we must continually develop or acquire the
technologies that allow us to increase memory capacity while
shrinking the size of our chips and to do so faster than our
competition. Our commitment to the development of new products
and process technologies, including making the substantial
investments that are required for these developments, must be
made well in advance of the introduction of those products and
technologies into the market. As part of this commitment, we
must continually be reviewing the technologies, architectures
and processes we use to make sure that they have the
technological properties and robustness to permit volume
manufacturing at competitive costs. Technology and industry
standards or customer demands may change during the development
process, rendering our products outdated or uncompetitive. Our
failure to keep pace with the technological advancements, to
anticipate changes that might render our technologies,
architectures and processes uncompetitive or to respond quickly
to market changes may materially and adversely affect our
business, financial condition and results of operations.
The
semiconductor memory industry is characterized by intense
competition, which could reduce our sales or put continued
pressure on our prices.
The semiconductor memory industry is highly competitive and has
been characterized by rapid technological change, short product
lifecycles, high capital expenditures, intense pricing pressure
from major customers, periods of oversupply and continuous
advancements in process technologies and manufacturing
facilities. We compete globally with other major DRAM suppliers,
including Samsung Electronics, Hynix Semiconductor, Elpida
Memory, Micron Technology and Nanya Technology Corporation
(Nanya), which is our joint venture partner in Inotera Memories,
Inc. Some of our competitors have substantially greater capital,
human and other resources and manufacturing capacities, more
efficient cost structures, higher brand recognition, larger
customer bases and more diversified product lines than we have.
See Our Business Competition.
Competitors with greater resources and more diversified
operations may have long-term advantages, including the ability
to better withstand future downturns in the DRAM market and to
finance research and development activities. In addition, unfair
price competition, government support or trade barriers by or
for the benefit of our competitors would adversely affect our
competitive position.
S-12
To compete successfully in the DRAM market, we must:
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design and develop new products and introduce them in a timely
manner;
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develop and successfully implement improved manufacturing
process technologies to reduce our per-megabit costs; and
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broaden our DRAM customer base, to reduce our dependence on a
small number of customers and position us to increase our market
share.
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Other factors affecting our ability to compete successfully are
largely beyond our control. These include:
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the extent to which and the pace at which customers incorporate
our memory products into their devices;
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whether electronics manufacturers design their products to use
DRAM configurations or new types of memory products that we do
not offer;
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the number and nature of our competitors; and
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general economic conditions.
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Increased competitive pressure generally or the relative
weakening of our competitive position caused by these factors,
or other developments we have not anticipated, could materially
and adversely affect our business, financial condition and
results of operations.
Our
results of operations are subject to the effects of seasonal
sales patterns that apply to the demand for the products our
customers sell and these seasonal sales patterns may interact
with existing DRAM supply and demand dynamics in a way that
further harms our results.
Retail demand for our customers products fluctuates
throughout the year and typically varies from region to region.
For example, as our product mix shifts towards applications used
in consumer electronics, we are increasingly exposed to the
seasonal sales patterns around the Christmas season. In
addition, demand in the retail sector of the PC market is often
stronger during the last three months of the calendar year as a
result of the Christmas holiday season. Many of the factors that
create and affect seasonal trends are beyond our control.
Further, if DRAM prices are relatively low, our customers may
react to reduced demand for their products by increasing
bits per box to offer the end-user a higher
performing product in an attempt to spur demand, such as when a
PC or notebook manufacturer offers to upgrade the amount of
memory included in a product at no additional cost. However, if
DRAM prices are relatively high at that time, our customers may
not increase the bits per box but instead use
another method to spur demand for their products. Alternatively,
if DRAM prices are high during a period in which retail demand
is relatively high, our customers may seek to limit the growth
of the bits per box, which may in turn slow or
reduce demand for DRAM and cause DRAM prices to fall. Measures
like these can easily obscure the seasonal factors. These uneven
sales patterns, especially when combined with the existing
dynamics of DRAM demand and supply cyclicality, make prediction
of net sales for each financial period difficult and increase
the risk of unanticipated variations in our results and
financial condition on a quarterly basis.
Risks
related to our operations
Some
of our agreements with strategic partners, such as our Inotera
Memories, Inc. joint venture with Nanya, have restrictions on
transfers of the shares of the ventures they create that could
cause our ownership or equity interest in these ventures to
revert to Infineon, if Infineon ceases to be our majority
owner.
Our joint venture with Nanya, Inotera Memories, Inc.
manufactures DRAM products on the basis of technology jointly
developed by Nanya and us pursuant to a separate joint
development agreement. Infineon has transferred its shares in
Inotera to us, other than a portion representing 0.24% of the
total Inotera shares, which Infineon holds in trust for us due
to Taiwanese legal restrictions.
If Infineon were to reduce its shareholding in Qimonda to a
minority level before the fifth anniversary of our carve-out
from Infineon and the early mass production using 58nm process
technology at our manufacturing site in Dresden has not been
achieved by that time, the joint venture agreement with Nanya,
as amended, could require us
S-13
to retransfer these Inotera shares to Infineon. We have agreed
with Infineon that, in the event Nanya requests a retransfer, we
would transfer the Inotera shares to Infineon in compliance with
a trust agreement pursuant to which Infineon has agreed it would
hold the Inotera shares in trust for us until they could be
transferred back to us. If Infineon acquires our shares in
Inotera to hold in trust for us, we would have to exercise our
shareholder rights, including board membership and voting
rights, only through Infineon, which would be required under the
trust agreement to act according to our instructions. This
process is a more cumbersome and less efficient method of
exercising these rights than if we held the shares directly. We
do not believe that these administrative complexities would have
a material adverse effect on our business, financial condition
and results of operations.
Although the trust agreement was drafted in a manner designed
under German law to ensure that Qimonda could force the transfer
to it of the Inotera shares if Infineon were to become the
subject of insolvency proceedings, there is, in the absence of
any clear statutory provision or directly applicable judicial
interpretation on the issue, a risk that the shares would remain
subject to the insolvency proceeding in such a case. Were this
to occur, we would lose a portion or all of our investment in
Inotera.
In addition, our limited partnership agreement with Advanced
Micro Devices (AMD) and Toppan Photomasks Inc. relating to the
Advanced Mask Technology Center (AMTC) and the Maskhouse
Building Administration Company (BAC) in Dresden requires prior
written consent from the other partners before Infineon can
assign its partnership interest. In the case of a transfer to an
affiliate, the consent may not be unreasonably withheld. Under
the current agreement, the interest must be transferred back to
Infineon should Infineon cease to be our majority shareholder.
This could lead to similar administrative complexities as
described above in the case of Inotera. Infineon and we are
currently finalizing negotiations with AMD and Toppan concerning
an agreement that would include the consent to the assignment to
us and address Infineons intention to reduce its stake in
us below 50%. Under this agreement, a change of
control that could lead to termination of the agreements
with AMD and Toppan would only be deemed to occur if a direct
competitor of AMD or Toppan becomes the beneficial owner of 30%
or more of our equity interests or obtains the power to appoint
the majority of the members of our Supervisory Board.
We
have suffered substantial losses in the recent past. Even during
profitable years, we have suffered losses in individual
quarters. Losses in the future and the unpredictability of our
results may cause our share price to fall.
We have suffered substantial losses in prior periods, when the
price of our products has dropped at a rate for which we could
not compensate through volume increases or reduced costs. For
example, in our 2001 and 2002 financial years we incurred net
operating losses of 962 million and
626 million. In addition, we have incurred quarterly
losses in net income and EBIT terms for individual quarters
within financial years in which we were profitable, including in
our 2006 financial year, in which we experienced significant
losses in the first quarter and our 2007 financial year, in
which we experienced significant losses in the third quarter. We
may also incur losses in future periods. If we sustain losses
like these, it would materially and adversely affect our
business, financial condition and results of operations. In
addition, our share price is likely to fall if we incur losses
in the future or if we report quarterly or annual results that
do not meet the expectations of industry analysts or that are
weaker than those reported by our competitors.
The average selling prices of our principal DRAM products may
fluctuate significantly from quarter to quarter or even from
month to month. This may cause us to experience significant
fluctuations in our revenues. However, we have high fixed costs
of operations, resulting in large part from the
capital-intensive nature of our business. As a result, our
reported financial results can and often do fluctuate
significantly from period to period.
A high proportion of our revenues are derived from sales of
standard DRAM products for PC and workstation applications,
which accounted for 51% of our revenues in our 2005 financial
year, 47% of our revenues in our 2006 financial year and 40% of
our revenues for the first nine months of our 2007 financial
year. While we are, as part of our strategy to reduce
over-reliance on standard DRAMs, seeking to better balance our
product portfolio by offering a wider range of
application-specific DRAMs and to diversify our customer base by
focusing on customer-specific DRAMs, these products remain to a
greater or lesser extent exposed to the dynamics exemplified by
the standard DRAM market. Finally, after our carve-out, we are
no longer able to offer customers a range of logic products in
S-14
addition to memory products. Due to these factors, in the event
of a downturn in the DRAM market, our ability to offer
alternative products is very limited.
Some of our competitors have diversified production among DRAMs,
flash memory, image sensors and logic ICs, while at present we
remain generally focused on DRAMs. These competitors may be able
to offset the negative effects of DRAM downturns by selling
non-DRAM products, including flash memory. They may, when they
then perceive better pricing conditions in the DRAM market, be
able to quickly convert production to DRAM products,
significantly increasing their DRAM capacities in response to
positive environments and significantly decreasing their DRAM
capacities in response to negative environments. Conversely, if
the pricing for non-DRAM products such as flash memory
deteriorates, they can convert production back to DRAM products.
Because our production is more narrowly focused on DRAMs, we are
less able to adjust our capacities in response to cyclical
developments. This lower ability to adjust capacity could
adversely affect our business, financial condition and results
of operations.
In addition, the potential ability of these competitors to
offset the negative effects of DRAM downturns by shifting their
sales to non-DRAM products may permit them to use the proceeds
from those sales to invest in their DRAM business. This may
cause us to be at a competitive disadvantage with regard to
technological advancements taking place in the DRAM industry and
reduce our relative ability to keep pace with these competitors.
This could adversely affect our business, financial condition
and results of operations.
The ability of some of our competitors to shift their production
among memory products may leave us relatively more exposed to
downturns in the DRAM industry and less able to finance
technological advancement.
Our
results may suffer if we are not able to adequately forecast
demand for our products.
It is not industry practice to enter into firm, long-term
purchase commitments with respect to standard DRAMs. We
primarily use internal forecasts to determine the number and mix
of products that we manufacture. Although we also consult with
major customers, who typically provide us with short-term
rolling forecasts of their product requirements on a monthly
basis, customers may cancel orders or reduce quantities for a
number of reasons or discontinue their relationship with us at
any time. Customers frequently place orders requesting product
delivery almost immediately after the order is made, which makes
forecasting customer demand even more difficult. Other customers
also purchase chips on consignment, withdrawing from our stock
of products kept on our premises. They may reduce their
anticipated withdrawals from these stocks on very short notice.
Based on past experience, if we over-estimate demand for a
particular product, we may need to significantly reduce the
price for that product in order to sell our excess inventory. In
addition, due to the high fixed costs of operating manufacturing
facilities, it is not industry practice to reduce production in
response to or anticipation of demand slumps, which may lead to
excess inventory and cause us to incur additional inventory
carrying costs or write-downs. If we are unable to predict
accurately the appropriate amount of products needed to meet
customer requirements, or if our customers were to unexpectedly
cancel or reduce a large number of orders simultaneously, we
could fail to match our production with our customers
demand. This could materially and adversely affect our business,
financial condition and results of operations.
In addition, because our markets are volatile and subject to
rapid technological and price changes, our forecasts may be
incorrect, and we may make too many or too few of certain
products. For example, in the first quarter of our 2006
financial year, we produced an excess of DDR2 DRAMs because the
corresponding DDR2 logic chipsets, which are produced by logic
semiconductor manufacturers, were not available in quantities
sufficient for PC manufacturers to absorb the supply of DDR2
DRAMs in the market. A portion of the DDR2 DRAMs that we
produced remained unsold and in our inventory until supply of
appropriate logic chipsets created sufficient demand for our
accumulated DDR2 DRAMs.
We
expect the average selling prices of the semiconductor memory
products we sell to continue to decline irrespective of cyclical
fluctuations in the industry, and if prices decrease faster than
we are able to reduce our costs, our margins will be adversely
affected.
The average selling prices of semiconductor memory products,
including DRAMs, have declined in general for many years and we
expect that they will, irrespective of industry-wide
fluctuations, continue to decline as a
S-15
result of, among other factors, technological advancements and
cost reductions. Although we may from time to time be able to
take advantage of higher selling prices typically associated
with new products and technologies, the prices of new products
also generally decline over time, and in certain cases very
rapidly, in the face of market competition. Accordingly, we need
to reduce our per-megabit manufacturing costs even as we seek to
maintain our technological position. Despite our significant
investments in research and development and in modern
manufacturing facilities, the product and process technologies
that we develop may fail to keep pace with the industrys
continuous drive towards more powerful, smaller devices with
lower per-megabit costs. If our development fails to keep pace,
our competitors may be able to offer their products on a more
profitable basis. If the average per-megabit selling price for
DRAMs and other memory chips that we produce decreases faster
than we are able to reduce our per-megabit manufacturing costs,
our gross margins would decrease and our business, financial
condition and results of operations may be materially and
adversely affected.
To
reduce our costs, we need to make investments to implement
improvements and developments in our process technologies
quickly. If we are unable to do so, we may not be able to reduce
per-megabit manufacturing costs quickly enough to keep pace with
declines in average selling prices for DRAMs and other memory
products.
Implementing a significant new process technology, such as the
migration to a new process technology node (for example, from
90nm to 75nm), requires very significant long-term investments
and often many years of development effort. In addition, each
successive improvement in process technology generally involves
an increase in complexity that may increase the required level
of investment and demand more development effort. In 2003, we
experienced difficulties in our transition from the 140nm to the
110nm technology node because, at the same time, we moved our
development work from East Fishkill, New York to Dresden,
Germany and began to convert to 193nm lithography, both of which
introduced complexities to the technology node transition.
Product yields tend to be at relatively lower levels when new
process technologies are being implemented. If we experience
delays in implementing these technologies, we may not be able to
reduce our per-megabit manufacturing costs quickly enough to
avoid falling margins or keep our prices competitive. Our
business, results of operations and financial condition could be
hurt if we experience substantial delays in developing new
process technologies or if we do not implement production
technology transitions efficiently.
If we
are unable to respond to customer demand for diversified DRAM
products or are unable to do so in a cost efficient manner, we
may fail to gain, or even lose, market share.
The DRAM product needs of manufacturers of servers, networking
and storage equipment and graphics, mobile and consumer devices
are becoming increasingly diverse in terms of product
specifications. This diversification requires us to devote
significant resources to product design and development in
cooperation with our customers. If we are unable to invest
sufficient resources to meet our customers specialized
needs, if we do so in an inefficient or untimely manner, or if
our working relationships with our customers otherwise
deteriorate, we may lose business opportunities or market share
as a result. We also may encounter difficulties penetrating
markets where our relationship with manufacturers is less
developed. In addition, our competitors may be able to implement
similar strategies more effectively than we can.
We may
be unable to recoup our investments if we bring new production
facilities on-stream in times of overcapacity.
It is difficult to predict future supply and demand in the
market for DRAM and other memory products. Because it takes one
to two years to plan, finance, construct and equip a new
facility, we must make a decision to build a new facility, or to
re-equip an existing facility, with no reliable forecast of what
the supply and demand ratio is likely to be when the facility is
scheduled to come on-stream. The capital expenditures required
to construct and equip a semiconductor facility with competitive
economies of scale are typically between $2 to $3 billion.
In the 2005 financial year, commercial DRAM production began at
the 300mm facilities of our fab in Richmond, Virginia. In the
same year, our foundry partner SMIC ramped up its new 300mm
facility, in Beijing, China with our DRAM technology. In the
2006 financial year, our foundry partner Winbond ramped up a new
300mm fab in Taichung, Taiwan with our DRAM technology. In
addition, Inotera Memories, Inc. our joint venture
S-16
with Nanya, increased its capacity at its 300mm fab in Taoyuan,
Taiwan in the 2006 financial year, and has started manufacturing
in its second 300mm manufacturing module in December 2006. We
are also continuing the
ramp-up at
our 300mm manufacturing facility in Richmond, Virginia.
We recently announced plans to build a new 300mm manufacturing
facility in Singapore with production expected to start there in
2009. A number of our competitors have also opened, or announced
their intentions to open, new 300mm production facilities. If
several new 300mm DRAM manufacturing plants come on-stream at
the same time, there is a risk that the resulting supply growth
might exceed demand at that point in time. This could result in
strongly reduced prices for our DRAM products at a time when we
have just made very substantial investments in new production.
If this happens, it may take longer for us to recoup our
investments, or we may not be able to do so at all. This could
materially and adversely affect our business, financial
condition and results of operations.
If prices are significantly declining during the time when we
are ramping up production at new facilities, we may take
measures to limit our cash outflows. These measures could
include cancelling or delaying the delivery of manufacturing
equipment at those facilities. As a consequence, these
facilities might not ramp up to their expected capacity in the
short term. This could prevent them from achieving the economies
of scale they were designed to achieve, such that the costs of
manufacture at these facilities might exceed the revenues from
the sales of the products produced there. This could force us to
decide to suspend manufacturing at these facilities. This would
also prevent us from recouping our investments as planned or at
all, which could have a material and adverse effect on our
business, financial condition and results of operations.
We may
lose sales or customers or incur losses if we are unable to
successfully modify existing production facilities or bring new
production facilities on-stream in times of high
demand.
We may experience difficulty in ramping up production at new or
existing facilities in a timely manner, such as our 300mm fab in
Richmond, Virginia. Similarly, our joint ventures with Nanya and
CSVC, as well as SMIC and Winbond, foundry manufacturers who
provide some of our manufacturing capacity, may experience
similar difficulties in ramping up production at their
production facilities. We may also experience delays in
converting to the next step in the technology improvements that
enable us to reduce the feature sizes on chips. This could be
due to a variety of factors, including an inability to hire and
train new personnel in a timely fashion, the unavailability of
equipment, difficulties or delays in implementing new
fabrication processes and an inability to achieve required yield
levels.
In the future, we may face delays in the construction, equipping
or ramp-up
of new facilities or the conversion of existing facilities to
new process technologies. Our failure to ramp up our production
on a timely basis may result in loss of sales or customers and a
loss of market share, which in turn could reduce our ability to
exploit economies of scale, negatively affecting our cost
position and our ability to finance investments in the future.
This failure could also prevent us from recouping our
investments in a timely manner or at all. Any of these effects
could materially and adversely affect our business, financial
condition and results of operations.
The
loss of one or more of our significant customers may adversely
affect our business.
Historically, we have relied on a limited number of customers,
primarily among the largest PC manufacturers, for a substantial
portion of our total sales. In the nine months ended
June 30, 2007, our five largest customers accounted for
slightly more than 50% of our total sales. HP, our largest
customer, accounted for approximately 17% of our sales and Dell,
our second largest customer, accounted for 13% of our sales in
that period. These major customers generally purchase products
on the basis of short-term purchase orders, can easily cancel
these orders and have no long-term obligations to purchase
products from us. Although we are seeking to broaden our
customer base, there are a limited number of major manufacturers
that purchase standard DRAM products in large quantities, and
most of them are existing customers of ours. Our major customers
generally seek to maintain multiple sources of supply, and it
may be difficult for us to meaningfully increase our current
sales volumes of existing products to them where to do so would
move us towards being an exclusive source for them. The loss of
one of our major customers, or any substantial reduction in
sales to any of these customers, could have a material adverse
effect on our business, financial condition and results of
operations.
S-17
Sanctions
in the United States and other countries against us and other
DRAM producers for anticompetitive practices in the DRAM
industry and related civil litigation may have a direct or
indirect material adverse effect on our
operations.
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with the DOJs investigation of alleged
antitrust violations in the DRAM industry. Pursuant to this plea
agreement, Infineon agreed to plead guilty to a single count of
conspiring with other unspecified DRAM manufacturers to fix the
prices of DRAM products between July 1, 1999 and
June 15, 2002, and pay a fine of $160 million. The
plea agreement requires Infineon to pay the fine (plus accrued
interest) in equal annual installments through 2009. Subsequent
to the commencement of the DOJ investigation, a number of
putative class action lawsuits were filed against Infineon, its
principal U.S. subsidiary and other DRAM suppliers in
various state and federal courts in the United States alleging
violations of the Sherman Act, Californias Cartwright Act,
other state laws and unfair competition law as well as unjust
enrichment in connection with the sale and pricing of memory
products. Each of the cases purports to be on behalf of a class
of individuals and entities who purchased DRAMs directly or
indirectly from Infineon in periods commencing in or after 1999.
Infineon has reached a settlement agreement in the sixteen class
action cases filed by direct U.S. purchasers that were
transferred to the U.S. District Court for the Northern
District of California for coordinated proceedings. Under the
terms of the settlement agreement Infineon agreed to pay
approximately $21 million. We recorded a corresponding
charge to other operating expense in our financial year ended
September 30, 2005. In addition to this settlement payment,
Infineon agreed to pay an additional amount if it is proven that
sales of DRAM products to the settlement class after opt-outs
during the settlement period exceeded $208.1 million. We
would also be responsible for this payment. The additional
amount payable is calculated by multiplying the amount by which
these sales exceed $208.1 million by 10.53%. We do not
currently expect to pay any additional amount to the class. In
November 2006, the District Court for the Northern District of
California approved the settlement with the direct
U.S. purchasers, entered final judgment and dismissed the
class action claims with prejudice. Between March 2006 and March
2007, six separate lawsuits were filed by six direct and
indirect purchasers of DRAM against Infineon and various other
DRAM suppliers seeking unspecified damages and other relief
based on the same allegations. One of those lawsuits was
voluntarily dismissed on April 26, 2007 pursuant to a
settlement. In October 2006, these six plaintiffs along with a
number of other individuals and entities gave notice that they
are opting out of the direct U.S. purchaser class and
settlement. As a consequence their claims will not be released
by that settlement. As of the date hereof, 62 indirect
U.S. purchaser class action cases are still pending in
federal and state courts. A putative class action brought on
behalf of
non-U.S. direct
purchasers of DRAM was dismissed with prejudice by the court.
Between July and September 2006, plaintiffs filed their opening
brief on appeal in that case and defendants filed their joint
opening brief in September 2006. No hearing date has yet been
scheduled for the appeal. Furthermore, in July 2006, the state
attorneys general of New York, California and 39 other states
and territories filed two separate actions in federal court in
New York and California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities and consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs
claims involve the same allegations of DRAM price-fixing and
artificial price inflation practices discussed above. The
plaintiffs are seeking to recover actual and treble damages in
unspecified amounts, penalties, costs and other relief. In
August 2007, the court granted the defendants motion to
dismiss in part, dismissing the claims on behalf of consumers,
businesses and governmental agencies in a number of states and
dismissing certain other claims with leave to amend by October
2007.
Between December 2004 and February 2005, two putative class
proceedings were also filed in the Canadian province of Quebec
and one was filed in each of Ontario and British Columbia
against Infineon, its principal U.S. subsidiary and other
DRAM manufacturers on behalf of all direct and indirect
purchasers resident in Canada who purchased DRAM or products
containing DRAM between July 1999 and June 2002. Plaintiffs
primarily allege conspiracy to unduly restrain competition and
to illegally fix the price of DRAM. In the British Columbia
action, the certification motion has been scheduled for August
2007 and will resume in November 2007. In one Quebec class
action, a tentative date for the motion for authorization
(certification) has been set for May 2008 (with the possibility
of a March 2008 date if the court calendar opens); the other
Quebec action has been stayed pending developments in the one
that is going forward.
S-18
Infineon received a request for information regarding DRAM
industry practices from the European Commission in April 2003
and a notice of formal inquiry into alleged DRAM industry
competition law violations from the Canadian Competition Bureau
in May 2004. Infineon is fully cooperating with the
Commissions investigation and the Competition
Bureaus inquiry.
In the contribution agreement we entered into with Infineon, we
agreed to indemnify Infineon for all of the potential
liabilities and risks in connection with the civil and criminal
antitrust proceedings, including the costs of defending these
proceedings. As of June 30, 2007, we have accrued
liabilities in the amount of 114 million related to
potential liabilities and risks with respect to the DOJ and
European antitrust investigations and the direct and indirect
purchaser litigation and settlements described above, as well as
for legal expenses relating to the securities class actions and
the Canadian antitrust investigation and litigation described in
Our Business Legal Matters. As
additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on our financial condition and results
of operations.
An adverse final resolution of the investigations or the civil
claims described above could cause us to bear significant
financial liability and other adverse effects. Irrespective of
the validity or the successful assertion of the above claims,
Infineon could incur significant costs in connection with the
defense or settlement of these claims, for which we are required
to indemnify Infineon under the contribution agreement. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. See Our
Business Legal Matters for more information on
these matters.
An
unfavorable outcome in the pending securities litigation against
Infineon or the incurrence of significant costs in the defense
of this litigation may have a direct or indirect material
adverse effect on our operations.
A consolidated putative class action lawsuit is pending against
Infineon and its U.S. subsidiary, and three of
Infineons current and former officers, one of which is
currently the chairman of our Supervisory Board, in
U.S. federal court on behalf of a putative class of
purchasers of Infineons shares who purchased them during
the period from March 2000 to July 2004. The plaintiffs allege
violations of the U.S. securities laws arising out of an
alleged failure to disclose Infineons alleged
participation in DRAM price fixing activities and seek
unspecified damages. In September 2006, the court dismissed the
complaint with leave to amend and in October 2006 the plaintiffs
filed a second amended complaint. In March 2007 the plaintiffs
have withdrawn the second amended complaint and were granted a
motion for leave to file a third amended complaint. The
plaintiffs filed a third amended complaint in July 2007. In the
contribution agreement we entered into with Infineon, we agreed
to share any future liabilities arising out of this lawsuit
equally with Infineon, including the cost of defending the suit.
We are currently unable to provide an estimate of the likelihood
of an unfavorable outcome to us or of the amount or range of
potential loss arising from the action. An adverse final
resolution of the class action litigation could cause us to bear
significant financial liability and other adverse effects.
Irrespective of the validity or the successful assertion of the
securities claims, Infineon could incur significant costs in
connection with the defense of these claims, and we are required
to indemnify Infineon for one-half of these, as stated above. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. Infineons
directors and officers insurance carriers have
denied coverage in the securities class action and Infineon
filed suit against the carriers in December 2005 and August
2006. Infineons claims against one D&O insurance
carrier were finally dismissed in May 2007. The claims against
the other insurance carrier were dismissed in November 2006;
Infineon filed an appeal against this decision. See Our
Business Legal Matters for more information on
this matter.
We may
not be able to protect our proprietary intellectual property or
obtain rights to intellectual property of third parties needed
to operate our business.
Our success depends on our ability to obtain and maintain
patents, licenses and other intellectual property rights
covering our products and our design and manufacturing
processes. The process of seeking patent protection
S-19
can be long and expensive. Patents may not be granted on
currently pending or future applications or may not be of
sufficient scope or strength to provide us with meaningful
protection or commercial advantage. In addition, effective
copyright and trade secret protection may be unavailable or
limited in some countries, and our trade secrets may be
vulnerable to disclosure or misappropriation by employees,
strategic partners and other persons. See
Risks related to our carve-out as a stand-alone company and our
continuing relationship with Infineon We may lose
rights to intellectual property arrangements if Infineons
ownership in our company drops below certain levels.
Infineon transferred to us substantially all of the patents
attributable to the Memory Products segment of Infineon in
connection with the carve-out of our company, while Infineon
retained ownership of all other Infineon patents. Qimondas
patent portfolio at the end of June 2007 included more than
19,480 patents and patent applications (representing more than
5,850 patent families) compared to more than 23,000 patents and
patent applications remaining with Infineon at the time of the
carve-out. Each of we and Infineon has granted the other a
perpetual, royalty free license to use these patents in each of
our respective businesses. However, our rights to use these
patents are subject to the limitations and restrictions
described in Our Business Intellectual
Property.
We also may require rights to use patented technology owned by
third parties, including other semiconductor manufacturers, and
have entered into licenses and cross-license agreements to
obtain such rights (ourselves or through Infineon). We
anticipate that we will continue to enter into more of these
agreements in the future. If we are unable to enter into or
renew our technology licensing agreements on acceptable terms,
or not at all, we may lose the legal right to use some of the
processes we require to produce our products, which may prevent
us from manufacturing and selling some of our products,
including our key products. In addition, we could be at a
disadvantage if our competitors obtain licenses for protected
technologies on more favorable terms than we do, or if we are
unable to acquire on favorable terms any licenses we require for
patented technologies which we may determine we need to obtain
from third parties in order to maintain our competitive
situation.
In addition, our rights to use some third party patents are
currently based on cross-license agreements between Infineon and
those third parties. Some of these cross-license agreements will
terminate with respect to us if we cease to be a controlled
subsidiary of Infineon. Although our own patent portfolio may
provide us with leverage in negotiating cross-license agreements
with third parties, these agreements may be less favorable to us
than the existing Infineon agreements. If we are unable to
protect our intellectual property, or retain or obtain the
intellectual property we need from third parties to operate our
business, our business, financial condition and results of
operations could be materially and adversely affected.
We may
be accused of infringing the intellectual property rights of
others.
Our industry is characterized by a complex series of license and
cross license agreements covering technology used in our
products and manufacturing processes and those of our
competitors. Accordingly, other companies have developed and
will continue to develop technologies that are protected by
patents and other intellectual property rights and that we may
require to manufacture our products. These technologies may
become unavailable to us or be offered to us only on unfavorable
terms and conditions. In other cases, other companies may claim
technology as theirs and seek to force us to stop using it, even
if we believe that we have developed or otherwise have rights to
exploit the technology in question. In either case, litigation,
which could require substantial financial and management
resources, is often necessary to defend against claims of
infringement of intellectual property rights brought against us
by others. In some cases, we might be able to avoid or settle
litigation on favorable terms because we in turn possess patents
that we could assert against a plaintiff or potential plaintiff.
In other cases, the plaintiffs are engaged principally in the
development and licensing of technology, and do not require
access to other parties patent portfolios, such as ours.
For example, in August 2006, we entered into a six year license
agreement with Tessera under which Tessera granted us a
worldwide, non exclusive, non transferable and non sublicensable
license to use a portfolio of Tessera patents and we paid
Tessera a one time fee of $40 million and are required to
pay additional royalities based on volume of components we sell
that are subject to the license.
At any given time, Infineon and we are engaged in negotiations
with a number of third parties regarding assertions that
technologies we are using infringe those parties rights.
Infineon and we are currently in negotiations in a small number
of matters of this nature. In part as a result of the complex
series of license and cross-license agreements and the
uncertainty, time and expense of litigation, it is sometimes in
our interests to settle with these
S-20
claimants in a way that avoids litigation. These settlements may
involve the payment of license fees, royalties or other
consideration over lengthy periods in amounts that could be
material for us. In the contribution agreement we entered into
with Infineon, we agreed to indemnify Infineon for all of the
potential liabilities and risks in connection with any such
settlement or litigation relating to our business, and to bear
60% of the combined license fee payments that Infineon and we
must or may in the future have to pay related to two of these
negotiations, one of which is still ongoing.
If any intellectual property infringement claims that may be
asserted against us in the future are successful, we may be
forced to refrain from selling DRAM products in certain markets,
seek to develop non-infringing technology, which may not be
feasible, license the underlying technology upon economically
unfavorable terms and conditions,
and/or pay
damages for prior use of the technology at issue. In addition,
our insurance excludes liability arising out of claims that we
have infringed the patent or other intellectual property rights
of third parties. Any of these results may have a material and
adverse effect on our business, financial condition and results
of operations.
We may
face difficulties in implementing next generations of our
proprietary DRAM trench cell architecture.
We manufacture our products using our trench DRAM
architecture. In 2006, approximately 24% of DRAM chips produced
worldwide were manufactured using trench cell architecture, of
which we produced approximately two-thirds, according to
Gartner. The remaining 76% were produced using different kinds
of an alternative architecture known as stack
architecture. Although we believe that the physical
characteristics of trench cell technology can be exploited
during the 90nm node, which currently accounts for more than
half of our production and the next several technology nodes,
including the 58nm node that is currently in development, to
yield advantages over the various stack architectures, this
technology may not continue to perform as well as, or better
than, stack technology when migrating to smaller chip feature
sizes. As part of our commitment to the development of new
products and process technologies, we must continually be
reviewing the technologies, architectures and processes we use
to make sure that they provide the technological properties,
also regarding performance, power consumption and form factor as
well as the robustness to permit volume manufacturing at
competitive costs. If we were required to transition from trench
to other technology platforms, the transition could require a
substantial period of time and a substantial investment of
capital, and may require us to acquire rights to additional
technology.
To manufacture our trench cells, we need etching equipment that
is specially modified to etch the deep trench capacitors. We
cannot be certain that equipment manufacturers will continue to
develop and supply such equipment on favorable terms, if at all.
We may
face difficulties in shifting to new memory technologies that
are not based on silicon
In the longer term, we face the potential risk of a fundamental
shift from the silicon-based technology on which the memory
industry has long been based. Although we do not believe that
any technology to rival silicon-based memory is likely to prove
feasible in at least the near- to medium-term, and although we
devote resources to basic research in order to keep abreast of a
wide range of potential new memory technologies, the fundamental
technology of the semiconductor memory business may not continue
to be broadly based on current technology. We may be unable to
respond quickly enough to any fundamental technological shift in
the industry. Our failure to implement successfully subsequent
technology generations or respond to technology developments may
materially and adversely affect our business, financial
condition and results of operations.
We may
misallocate our research and development resources or have
insufficient resources to conduct the necessary level of
research and development to remain competitive.
We may also devote research and development resources to
technologies or products that turn out to be unsuccessful.
Commitments to developing any new product must be made well in
advance of sales, and customer demands and technology may change
while we are in development, rendering our products outdated or
uncompetitive before their introduction. We must therefore
anticipate both future demand and the technology features that
will be required to supply such demand. If we incur losses as a
result of a market downturn or
S-21
otherwise, we may not be able to devote sufficient resources to
the research and development needed to remain competitive. Our
failure to properly allocate research and development resources
could materially and adversely affect our business, financial
condition and results of operations.
We
have a limited number of suppliers of manufacturing equipment
and raw materials, and our business would be harmed if they were
to interrupt supply or increase prices.
Our manufacturing operations depend upon obtaining deliveries of
the equipment used in our manufacturing facilities and adequate
supplies of raw materials, including silicon wafers, masks,
chemicals and resists, at reasonable prices and on a timely
basis.
Although there are multiple sources for most types of equipment
that we use, the equipment is sophisticated and complex and it
is difficult for us to rapidly substitute one supplier for
another or one piece of equipment for another. We currently have
only one significant sole-source equipment supplier, Advantest,
which supplies some of our testing equipment. If we were to
experience supply or quality problems with Advantest, it could
take a long time for us to locate a secondary source of supply
for that equipment.
The expansion of fabrication facilities by us, our joint venture
counterparts, our foundry partners and other semiconductor
companies may put additional pressure on the supply of
equipment. Shortages of equipment could result in an increase in
prices and longer delivery times. The lead time for delivery of
some equipment may be as long as six to twelve months. If we are
unable to obtain equipment in a timely manner, we may be unable
to ramp up production according to our plan or fulfill our
customer orders, which could negatively impact our business,
financial condition and results of operations.
We generally have more than one source available for raw
materials, but materials meeting our standards are in some cases
available only from a limited number of vendors. The principal
suppliers for our silicon wafers are Siltronic, SEH, MEMC and
SUMCO. Our revenues and earnings could decline if we were unable
to obtain adequate supplies of high-quality raw materials in a
timely manner (for instance, due to interruption of supply or
increased industry demand) or if there were significant
increases in the costs of raw materials that we could not pass
on to our customers. In addition, the raw materials we need for
our business could become scarcer or more expensive as worldwide
demand for semiconductors and other products also produced with
the same raw materials increases. If we are unable to obtain
sufficient raw materials in a timely manner, we may experience
interruptions in production, which could in turn, leave us
unable to fulfill our customer orders, which could negatively
impact our business, financial condition and results of
operations.
The
success of our business may be dependent on our ability to
maintain our third-party foundry relationships.
In 2002, Infineon entered into agreements with each of SMIC, a
Chinese foundry, and Winbond, a Taiwanese foundry, for the
production of some of our memory products in their fabs. We
sourced 22% of our DRAM capacity from these unaffiliated foundry
partners in the 2006 financial year compared to 26% in the nine
months ended June 30, 2007, and plan to reduce those levels
somewhat in the coming months as we increase the proportion of
our capacity sourced from Inotera. In addition, we sourced about
8% of our capacity from Infineons 200mm fab in Dresden. We
intend to source at least 50% of our production capacity from
our own facilities to enable us to continue to develop our
manufacturing process technologies. There are relatively few
foundries that could manufacture our products, and we might not
be able to secure an agreement with an alternative foundry on
acceptable terms, particularly in a period of industry-wide
under-capacity. In the event that manufacturing capacity is
reduced or eliminated at one or more foundry facilities, or if
we are unsuccessful in negotiating additional capacity with our
existing foundry partners or in obtaining new foundry partners,
we could have difficulties fulfilling our customers needs,
and our sales could decline.
Our reliance on third-party manufacturing relationships also
subjects us to the following risks:
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the potential inability of our manufacturing partners to develop
manufacturing methods appropriate for our products;
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S-22
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inability of our partners to construct and equip manufacturing
facilities or to ramp up production in a timely manner;
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unwillingness or inability of partners to devote adequate
capacity to the manufacture of our products;
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potential product quality issues, where we do not have
sufficient control to resolve them quickly or at all;
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our partners inability to acquire manufacturing machinery
and equipment required to manufacture our products due to
controls on the export or import of technology into the country
where the partner is located or limited supply of the necessary
equipment; and
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reduced control over delivery schedules and product costs.
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If any of these events, or others we have not foreseen, were to
occur, we could experience an interruption in our supply chain
or an increase in costs, which could delay or decrease our sales
or otherwise adversely affect our business, financial condition
and results of operations.
While building new capacity of our own would require
significantly higher capital expenditures than purchasing
products from foundries, purchasing products from foundries may
result in lower profit margins than we could obtain by
manufacturing the products on our own because we base the price
we pay for wafers from our foundry partners on a margin sharing
principle. Therefore, in times of high DRAM prices, the prices
we pay for wafers produced by our foundry partners are likely to
be higher than the cost of manufacturing using our own
capacities, resulting in lower profit margins.
If our
strategic alliance partners or joint ventures fail to meet their
business or technological goals we may lose the value of our
investments in them, and we may fail to keep pace with the rapid
developments in our industry.
As part of our strategy, we have entered into a number of
long-term strategic alliances with leading industry
participants, both to manufacture memory products and to develop
new manufacturing process technologies and products. For
example, we have entered into development agreements with Nanya
to develop the 75nm and 58nm process technology nodes and have
formed a joint venture with Nanya called Inotera Memories, Inc.
to manufacture DRAM. We participate in a joint venture with
Advanced Micro Devices and Toppan Photomasks to develop and
manufacture lithographic masks. We also established a joint
venture with China Singapore Suzhou Industrial Park Venture Co.
in Suzhou, China pursuant to which we constructed a facility for
assembly and testing of our memory products. We expect that our
investments in our Chinese joint venture until the end of our
2008 financial year pursuant to our current contractual
obligations will be $86.5 million.
These strategic relationships and joint ventures are subject to
various risks that could cause us to lose the value of these
investments and damage our business. Some of those risks are:
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our alliance partners could encounter financial difficulties;
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our interests could diverge from those of our alliance partners
in the future;
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we may not be able to agree with a joint venture or alliance
partner on the amount or timing of further investments in our
joint projects;
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the management of one of our joint ventures may not be able to
control costs;
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a joint venture may experience ramp up or manufacturing problems;
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a joint venture may experience delays or difficulties in
reaching its research and development targets;
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political instability may occur in the countries where our joint
ventures
and/or
alliance partners are located; and
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economic instability, including currency devaluations or
exchange rate fluctuations, may occur in the countries where our
joint ventures
and/or
alliance partners are located.
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S-23
For example, the failure of Inotera Memories, Inc. to
successfully reach and continue production at anticipated output
levels could leave us with inadequate capacity to meet
customers needs and our growth targets. If any of our
strategic alliances do not accomplish our intended goals, we may
fail to keep pace with the rapid technological developments in
our industry, our revenues could be reduced and our business,
financial condition and results of operations could be
materially and adversely affected.
We may
be unable to fund our research and development efforts and
capital expenditures if we do not have adequate access to
capital.
We require significant amounts of capital to build, expand,
modernize and maintain our sophisticated manufacturing
facilities and to fund our research and development efforts. For
example, we invested 686 million in property, plant
and equipment in the 2006 financial year and a further
601 million in the nine months ended June 30,
2007, largely to ramp up our manufacturing facility in Richmond,
Virginia. We expect capital expenditures of approximately
900 million during the 2007 financial year. Part of
this is intended to be for the continued
ramp-up of
our 300mm facility in Richmond, Virginia and most of the
remainder for improving productivity and upgrading technology at
existing facilities, especially at our 300mm facility in
Dresden, Germany. Due to the lead times between ordering and
delivery of equipment, a substantial amount of capital
expenditures typically is committed well in advance. As of
September 30, 2006, approximately 379 million of
capital expenditures have been included in unconditional
purchase commitments, mostly for investments to be made in our
front-end and back-end manufacturing facilities.
Because of the cyclical nature of DRAM demand, the need to
invest in manufacturing facilities may arise at a time when our
cash flow from operations is low. We used net cash in our
investing activities of 971 million in the 2005
financial year, 772 million in the 2006 financial
year and 724 million in the nine months ended
June 30, 2007. Our research and development expenses were
390 million in the 2005 financial year,
433 million in the 2006 financial year and
291 million in the nine months ended June 30,
2007. We plan to make research and development expenditures in
the range of 410 million to 430 million
during the 2007 financial year. We intend to continue to invest
heavily in our manufacturing facilities, including in the new
manufacturing facility we plan to construct in Singapore, and
research and development, while continuing the policy of
cooperation with other semiconductor companies to share these
costs with us where appropriate.
As of June 30, 2007, our external debt included
149 million resulting from a dedicated financing for
our manufacturing facility in Portugal and a note payable to a
government entity related to our production facility in
Richmond, Virginia. We plan to service these financings from
cash generated from our operations beginning in 2008 and to
refinance them upon their maturities in 2013 and 2027. In August
2006, we entered into a multicurrency revolving loan facility in
an aggregate principal amount of 250 million, which
has been committed to us. The original maturity of the facility
had been three years from the date of our initial public
offering, and was extended for one additional year in June 2007.
No amounts are outstanding under this facility.
In the future, we may not be able to raise the amount of capital
required for our business or the repayment of our existing
financial obligations on acceptable terms due to a cyclical or
other downturn in the semiconductor memory industry, general
market and economic conditions, inadequate cash flow from
operations, unsuccessful asset management or other factors.
Because of the high risk profile of DRAM manufacturers (due
largely to the volatility of the DRAM market cycle) and our lack
of an independent credit history, we may be unable to secure
debt financing on acceptable terms. In general, our access to
capital on favorable terms may also be more limited now that we
are a stand-alone entity than it was when we operated as a
segment of the Infineon Group. In particular, we no longer have
access to Infineons pool of capital. Our business,
financial condition and results of operations may be materially
and adversely affected if we are not able to fund necessary
capital expenditures and research and development expenses.
S-24
If our
manufacturing processes are delayed or disrupted, our business,
financial condition and results of operations could be
materially adversely affected.
We manufacture our products using processes that are highly
complex and require advanced and costly equipment that must
continuously be maintained and modified to improve yields and
performance when implementing new technology generations.
We may face interruptions due to human error in the operation of
the machines, power outages, earthquakes and other natural
disasters or other incidences that have an impact on the
productive availability of machines, material or manpower.
Difficulties encountered in the manufacturing process can reduce
production yields or interrupt production and may make it
difficult for us to deliver products on time or in a
cost-effective, competitive manner.
In addition, semiconductors must be produced in a tightly
controlled, clean environment. Even small impurities in the
manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer,
the use of defective raw materials, defective vendor-provided
lead frames or component parts, or other factors can cause a
substantial percentage of wafers to be rejected or numerous
chips on each wafer to be non-functional. We may experience
problems in achieving an acceptable yield rate in the production
of chips. Reduced yields will reduce our sales revenues, which
could have a material adverse effect on our business, financial
condition and results of operations.
Our
business can be hurt by changes in exchange rates.
Our business, financial condition and results of operations have
been and may in the future be adversely affected by changes in
exchange rates, particularly between the euro and the
U.S. dollar. We are exposed both to the risk that currency
changes will reduce our revenues or margins on the products we
sell and the risk arising in connection with the translation
into euro of the results of subsidiaries using non-euro
currencies. In addition, we could lose money on the currency
transactions, such as currency hedging contracts, that we use to
help us manage our exchange rate risk.
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as costs
relating to our design, manufacturing, selling and marketing,
general and administrative, and research and development
activities are denominated in other currencies, principally the
U.S. dollar.
Memory products are generally priced worldwide in
U.S. dollars, even if invoices are denominated in another
currency, while 58% of our expenses in our 2006 financial year
were denominated in euro and other currencies. In addition, the
balance sheet impact of currency translation adjustments has
been material in some periods and varies widely, and we expect
these characteristics to continue. Net foreign currency
derivative and transaction gains totaled 17 million
in the 2005 financial year, while net foreign currency
derivative and transaction losses were 2 million in
the 2006 financial year. Net foreign currency derivative and
transaction losses were 11 million in the nine months
ended June 30, 2007. We attempt to mitigate the effects of
foreign currency fluctuations on our business by entering into
foreign currency hedging contracts. These contracts can subject
us to risks of losses if the values of the hedged currencies
move in the opposite direction from what we expected when we
entered into the contracts.
Since its introduction in 1999, the euro has fluctuated in value
against the U.S. dollar, ranging from a high of 1.00
= $1.3950 on September 19, 2007 to a low of 1.00 =
$0.8270 on October 25, 2000. The relative weakness of the
euro against the dollar positively affected our revenues and
results of operations in the 2001 and 2002 financial years.
Since the beginning of 2003, the dollar has weakened sharply
against the euro, which has had a substantial negative effect on
our revenues and profitability, as reported in euro. The
exchange rate varied in the 2006 financial year between
1.00 = $1.1667 on November 14, 2005, and 1.00 =
$1.2953 on June 5, 2006. On September 29, 2006, the
last currency trading day in September 2006, the noon buying
rate of the Federal Reserve Bank of New York for euro was
1.00 = $1.2687. The dollar continued to weaken during the
nine months ended June 30, 2007. On June 29, 2007, the
last currency trading day in June 2007, the noon buying rate of
the Federal Reserve Bank of New York for euro was 1=
$1.3520. Any further weakening of the dollar against the euro
would negatively affect our reported results of operations.
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Our
business could suffer as a result of negative economic
developments, political instability, unfavorable legal
environments or negative currency developments in the different
parts of the world in which we operate, especially in the United
States, Taiwan and the developing markets of China and
Malaysia.
We operate in many locations around the world, with
manufacturing, assembly and testing, and research and
development facilities in eight countries on three continents,
including in Taiwan and the developing markets of China and
Malaysia. Manufacturing, assembly and testing sometimes take
place in different countries and even on different continents.
In the nine months ended June 30, 2007, 44% of our revenues
were invoiced in the Asia-Pacific region (including Japan), 38%
were invoiced in North America, 18% were invoiced in the Rest of
Europe (including Germany and in other regions) see Our
Business Customers, Sales and Marketing). In
many cases, our products were shipped to different countries
than those from which our invoices were paid. Our business is
subject to risks involved in international business, including:
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negative economic developments in foreign economies, in
particular the United States, China, Malaysia and Taiwan, where
we have or share substantial manufacturing facilities;
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political instability, including the threat of war, terrorist
attacks, epidemic or civil unrest, in particular in Taiwan,
which experiences recurring tensions with China;
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uncertainties as to the effectiveness of intellectual property
protection, especially in China;
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devaluations of local currencies, especially in Asia;
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changes in laws and policies affecting trade and investment,
including exchange controls and expropriation, particularly in
China; and
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varying laws and varying practices of the regulatory, tax,
judicial and administrative bodies in the jurisdictions where we
operate, especially in developing Asian countries.
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Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
Reductions
in the amount of government subsidies we receive or demands for
repayment could increase our reported expenses.
As is the case with many other semiconductor companies, our
reported expenses have been reduced in recent years by various
subsidies received from governmental entities. In particular, we
have received, and expect to continue to receive, subsidies for
investment projects as well as for research and development
projects, including our 300mm manufacturing facility in Dresden,
Germany, and our fab in Porto, Portugal. We recognized
governmental subsidies as a reduction of research and
development and of cost of goods sold in aggregate amounts of
112 million in the 2006 financial year and
97 million in the first nine months of the 2007
financial year. In addition, we had received grants of
179 million and 152 million as of
September 30, 2006 and June 30, 2007, respectively,
which are deferred and will be recognized in earnings over the
useful life of the related assets in future periods.
The availability of government subsidies is largely outside our
control. We may not continue to benefit from such support,
sufficient alternative funding may not be available on a timely
basis if necessary and any alternative funding would probably be
provided to us on terms less favorable to us than those we
currently receive. As a general rule, we believe that government
subsidies are becoming less available in each of the countries
in which we have received funding in the past, and the
competition for government funding is intensifying.
The application for and implementation of such subsidies often
involves compliance with extensive regulatory requirements,
including, in the case of subsidies to be granted within the
European Union, notification to the European Commission of the
contemplated grant prior to disbursement. In particular,
establishment of compliance with project related ceilings on
aggregate subsidies defined under European Union law often
involves highly complex economic evaluations. Many of the legal
and other criteria for receiving subsidies are more stringent
than they were in the past. If we fail to meet applicable formal
or other requirements, we may not be able to receive the
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relevant subsidies or may be obliged to repay them, which could
have a material and adverse effect on our business, financial
condition and results of operations.
In addition, the terms of certain of the subsidies we have
received impose conditions that may limit our flexibility to
utilize the subsidized facility as we deem appropriate, to
divert equipment to other facilities, to reduce employment at
the site, or to use related intellectual property outside the
European Union. This could impair our ability to operate our
business in the manner we believe is most cost effective.
An
inability to attract and retain skilled technical personnel
could adversely impact our business.
Competition for qualified employees among companies that rely
heavily on engineering and technology is intense, and the loss
of qualified employees or an inability to attract, retain and
motivate additional highly skilled employees required for the
operation and expansion of our business could hinder our ability
to conduct research activities successfully and to develop
marketable products. The availability of highly skilled workers,
while generally constrained worldwide, is particularly
constrained in places such as Singapore, China, Germany and
Japan where the need for qualified employees in our industry is
strong. Since our carve-out, we have been competing, and will
continue to compete, directly with other semiconductor companies
for qualified personnel in certain geographic markets, which may
make our recruitment and retention efforts even more difficult.
Environmental
laws and regulations may expose us to liability and increase our
costs.
As with other companies engaged in similar activities, we face
inherent risks of environmental liability in our current and
historical manufacturing activities. The manufacturing of
semiconductors involves the use of metals, solvents and other
chemical substances that, if handled improperly, can cause
damage to the environment or to the people working with them.
Recently, there has been increased media scrutiny and reporting
regarding a potential link between working in semiconductor
manufacturing clean room environments and certain illnesses,
primarily different types of cancers. Regulatory agencies and
associations have begun to study the issue to see if any actual
correlation exists. While we have monitored our employees using
bio-monitoring programs since 1990, we cannot be certain that in
the future no link between working in a clean room environment
and certain illnesses will be established.
Our operations are subject to many environmental laws and
regulations wherever we operate that govern, among other things,
air emissions, wastewater discharges, the use and handling of
hazardous substances, waste disposal and the investigation and
remediation of soil and ground water contamination. A recent
directive in the European Union known as Waste Electrical and
Electronic Equipment Directive, or WEEE, imposes
take-back obligations on manufacturers for the
financing of the collection, recovery and disposal of electrical
and electronic equipment. The implementation of the WEEE
directive has not been completed in most EU Countries and
therefore the potential costs are not foreseeable. We have begun
supplying WEEE-compliant products in the German market. The
related cost impact is minor in Germany, but could be higher in
other countries depending on their implementations of the
directive.
The Registration, Evaluation and Authorization of Chemicals used
in the European Union, or REACH Regulation, is a regulatory
framework that concerns the registration, evaluation and
authorization of certain chemicals. This regulatory framework
came into effect in December 2006. While it has not been fully
determined which chemicals will fall under these regulations, we
believe the regulation is targeted towards chemical companies
and industries in which significant volumes of chemicals are
used. As we use very few chemicals whose volume exceeds 100 tons
per year, we are classified as a downstream user category
II under this legislation. Furthermore, this legislation
contains a proposal to exempt companies who meet certain
standards from the authorization process. Due to these
uncertainties, we believe it is premature to estimate the
potential costs this regulation could impose on us.
In 2006 a European directive on the Restriction of the use of
Hazardous Substances, or RoHS, restricting the usage of
lead-based and other chemicals and compounds in products went
into effect and we were successful in limiting the cost impact
of this new legislation upon our business. A similar set of
rules has recently been implemented in the Peoples
Republic of China. These rules impose labeling requirements on
all electronic information products, as defined in those rules,
that are sold in the Chinese retail market. In addition, a self-
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declaration containing details on the affected chemicals and
compounds must be created and communicated within the supply
chain. The future implementation obligations of this new law may
impose additional costs upon our business or may have an effect
on our ability to timely meet customer demand for our products
in China.
Costs associated with future additional environmental
compliance, with remediation obligations or the costs of
litigation if claims were made with respect to damages resulting
from our operations or the former operations of Infineon or
Siemens at a site that we currently own or operate could have a
material and adverse effect on our business, financial condition
and results of operations. For a further description of
environmental issues that we face, see Our
Business Environmental Protection, Safety and
Health. For more information on our ongoing relationship
with Infineon, see Arrangements between Qimonda and the
Infineon Group and note 27 Related
Parties to the combined and consolidated financial
statements, and for more information on our ongoing relationship
with Siemens see Our Business Relationship
with Siemens and note 27 Related Parties
to the combined and consolidated financial statements appearing
elsewhere in this prospectus.
Products
that do not meet customer specifications or that contain, or are
perceived to contain, defects or errors or that are otherwise
incompatible with their intended end use could impose
significant costs on us.
The design and production processes for memory products are
highly complex. It is possible that we may produce products that
do not meet customer specifications, contain or are perceived to
contain defects or errors, or are otherwise incompatible with
their intended uses. We may incur substantial costs in remedying
such defects or errors, which could include material inventory
write-downs. Moreover, if actual or perceived problems with
nonconforming, defective or incompatible products occur after we
have shipped the products, we might not only bear liability for
providing replacements or otherwise compensating customers for
damages incurred but could also suffer from long-term damage to
our relationship with important customers or to our reputation
in the industry generally. This could have a material adverse
effect on our business, financial condition and results of
operations.
We may
be unable to make desirable acquisitions or to integrate
successfully any businesses we acquire.
Our future success may depend in part on the acquisition of
businesses or technologies intended to complement, enhance or
expand our current business or products or that might otherwise
offer us growth opportunities. Our ability to complete such
transactions may be hindered by a number of factors, including
potential difficulties in obtaining financing or in issuing our
own securities as payment in acquisitions. In particular, as
long as Infineon is our majority shareholder, it will have
substantial control over our ability to incur certain debt or to
issue equity, and may seek to limit any dilution of its interest
in our company. In addition, we may wish to avoid any securities
issuances that would dilute Infineons interest in our
company below the levels that would trigger adverse consequences
under any intellectual property licenses or other third-party
agreements from which we benefit as a majority-owned subsidiary
of Infineon.
Any acquisition that we do make would pose risks related to the
integration of the new business or technology with our business.
We cannot be certain that we will be able to achieve the
benefits we expect from a particular acquisition or investment.
Acquisitions may also strain our managerial and operational
resources, as the challenge of managing new operations may
divert our staff from monitoring and improving operations in our
existing operations. Our business, financial condition and
results of operations may be materially and adversely affected
if we fail to coordinate our resources effectively to manage
both our existing operations and any businesses we acquire.
We are
subject to the risk of loss due to explosion and fire because
some of the materials we use in our manufacturing processes are
highly combustible.
We use highly combustible materials such as silane and hydrogen
in our manufacturing processes and are therefore subject to the
risk of loss arising from explosion and fire which cannot be
completely eliminated. Although we maintain comprehensive fire
and casualty insurances, including insurance for loss of
property and loss of profit resulting from business
interruption, our insurance coverage may not be sufficient to
cover all of our
S-28
potential losses. If any of our fabs were to be damaged or cease
operations as a result of an explosion and fire, it could reduce
our manufacturing capacity and may cause us to lose important
customers.
Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon
We
have limited experience operating as an independent
company.
Our company was formed as a wholly-owned subsidiary of Infineon
in May 2004 as Invot AG. Substantially all of the assets and
liabilities of the Memory Products segment of Infineon were
contributed to our company on May 1, 2006. This excluded
the Memory Products operations in Korea and Japan, which have
since been transferred to us. Legal transfer of Infineons
investment in AMTC and BAC is subject to approval by the other
shareholders in the venture. Although we operated as a separate
segment within the Infineon Group, we had no experience in
conducting our operations on a stand-alone basis until May 2006.
We may encounter operational, administrative and strategic
difficulties as we adjust to operating as a stand-alone company,
which may cause us to react more slowly than our competitors to
market conditions, may divert our managements attention
from running our business or may otherwise harm our operations.
While we were, as a business within Infineon, indirectly subject
to requirements to maintain an effective internal control
environment, and Infineon, as a U.S. listed company, is
currently in the process of ensuring that its own internal
control procedures comply with the regulatory requirements, our
management has been evaluating and continues to evaluate the
applicability of those procedures to Qimonda in light of our new
status as an independent company, and has been implementing
necessary changes to those procedures to account for that
status. We cannot guarantee that we will be able to do so in a
timely and effective manner.
Our
ability to operate our business effectively may suffer if we do
not, quickly and cost-effectively, establish our own financial,
administrative and other support functions in order to operate
as a stand-alone company, and we cannot assure you that the
transitional services Infineon has agreed to provide us will be
sufficient for our needs.
Historically, we have relied on financial, administrative and
other resources of Infineon to operate our business. In
conjunction with our carve-out, we will need to create our own
financial, administrative and other support systems or contract
with third parties to replace Infineons systems, as well
as the independent internal controls referred to above. We have
entered into agreements with Infineon under which Infineon
provides certain transitional services to us, including services
related to information technology systems and financial and
accounting services. See Arrangements between Qimonda and
the Infineon Group for a description of these services.
These services may not be sufficient to meet our needs, and,
after these agreements with Infineon expire, we may not be able
to replace these services at all or obtain these services at
prices and on terms as favorable as we currently have. Any
failure or significant downtime in our own financial or
administrative systems or in Infineons financial or
administrative systems during the transitional period could
impact our results and prevent us from paying our suppliers and
employees, executing foreign currency transactions or performing
other administrative services on a timely basis and could
materially harm our business, financial condition and results of
operations.
Our
pre-carve-out financial information may not be representative of
our results as an independent company.
The combined financial information included in this prospectus
supplement, the accompanying prospectus and the documents
incorporated by reference for periods prior to the legal
carve-out of our company has been prepared on a carve-out basis.
We have made numerous estimates, assumptions and allocations in
our financial information because Infineon did not account for
us, and we did not operate, as a single stand-alone business for
any period prior to May 1, 2006. The historical financial
information included in this prospectus for these periods does
not reflect many significant changes that have occurred since we
have begun to operate as a separate company. The primary
categories of assumptions we have made relate to our allocation
of expenses that could not be specifically identified as
belonging to the Memory Products business.
Use of these assumptions and estimates means that the combined
financial statements for periods prior to our carve-out
presented in this prospectus supplement, the accompanying
prospectus and the documents incorporated
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by reference are likely not to be representative of what our
financial condition, results of operations and cash flows would
have been had we been a separate, stand-alone entity during the
periods presented. Furthermore, the combined financial
statements cannot be used to forecast or predict our future
financial condition, results of operations or cash flows.
We may
lose rights to intellectual property arrangements if
Infineons ownership in our company drops below certain
levels.
As a majority-owned subsidiary of Infineon, we are the
beneficiary of some of Infineons intellectual property
arrangements, including cross-licensing arrangements with other
semiconductor companies and licenses from third parties of
technology incorporated in our products and used to operate our
business. We will no longer be a beneficiary under some of these
agreements if Infineons direct or indirect equity
ownership in our company no longer exceeds 50%. Infineon has
pubilicly announced that it aims to reduce its stake in Qimonda
to significantly below 50% by the time of Infineons Annual
Shareholder Meeting in 2009, at the latest.
With Infineons support, we are engaged in negotiating
assignments of existing agreements as well as our own agreements
and arrangements with some third parties for intellectual
property and technology that is important to our business and
that was previously obtained through our relationship with
Infineon. We may be unable to enter into these agreements
successfully. If we do not successfully conclude such agreements
and Infineons direct or indirect equity ownership of our
company no longer exceeds 50%, we may be exposed to infringement
claims or lose access to important intellectual property and
technology. We may not then be able to obtain or renegotiate
licensing arrangements or supply agreements on favorable terms
or at all. Qimondas patent portfolio at the end of June
2007 included more than 19,480 patents and patent applications
(representing more than 5,850 patent families) compared to more
than 23,000 patents and patent applications remaining with
Infineon at the time of the carve-out. This smaller patent
portfolio may make it more difficult for us to negotiate third-
party patent cross licenses on terms that are as favorable to us
as those previously negotiated by Infineon, especially since
partners under existing cross-license agreements with Infineon
will generally be able to continue to use patents transferred to
us as part of the carve-out under these agreements even after
Infineons ownership in us no longer exceeds 50%. If as a
result we were to infringe intellectual property rights of
others or otherwise lose access to intellectual property or
technology important in the conduct of our business, it could
have a material and adverse effect on our business, financial
condition and results of operations. We could, for example, be
forced to agree to make substantially higher royalty payments to
continue using that intellectual property or technology or, if
we are unable to agree on licensing terms on our own, could have
to cease manufacturing products that use that intellectual
property or technology. For a detailed description of the
intellectual property rights contributed to us and retained by
Infineon and the circumstances under which our access to the
rights retained by Infineon may be affected if we cease to be a
controlled subsidiary of Infineon, see Our
Business Intellectual Property.
We may
not be successful in establishing a brand
identity.
We are still in the early stages of establishing our own brand
identity. Prior to our carve-out, all memory products sold by
the Infineon Group were sold under either the Infineon or
AENEON®
brand names. The Infineon and
AENEON®
brand names are well known by memory customers, suppliers and
potential employees. We will need to expend significant time,
effort and resources to continue to establish the Qimonda brand
name in the marketplace. This effort may not be successful. If
we are unsuccessful in establishing our brand identity, our
business, financial condition or results of operations may be
materially adversely affected. We have applied for protection of
our Qimonda brand as a trademark, domain and company name, but
may not be successful in actually gaining much protection in
some jurisdictions.
We may
face additional costs under our agreements with Infineon
relating to Infineons 200mm fab in Dresden.
During our 2004 financial year, we transferred ownership of the
entire 200mm fab in Dresden to Infineons Communications
segment. We continue to own the newer 300mm fab and the research
and development center in Dresden.
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In April 2006, we entered into an agreement with Infineon for
the production of wafers in the Dresden 200mm fab. Pursuant to
the agreement, as amended in January 2007, Infineon has agreed
to manufacture specified semiconductor memory products at the
Dresden 200mm fab, using our manufacturing technologies and
masks, and to sell them to us at prices specified in the
agreement. These prices are based on the cost of manufacture. We
are required under this agreement to pay for idle costs
resulting from our purchasing fewer wafers from Infineon than
agreed upon, if Infineon cannot otherwise utilize the capacity.
We are also obliged to indemnify Infineon against any third
party claims based on or related to any products manufactured
for us under this agreement and against any intellectual
property infringement claims related to the products covered by
the agreement. In addition, we agreed to share equally with
Infineon any potential restructuring costs that might be
incurred in connection with the ramp-down of production in the
Dresden 200mm fab if neither company can use that capacity.
Restructuring costs may include severance payments and costs
relating to lower levels of production in the Dresden 200mm fab.
Although no restructuring plan has been established or is
currently anticipated, these costs could be material and
adversely affect our financial condition and results of
operations. The agreement terminates on September 30, 2009.
We may
experience increased costs resulting from a decrease in the
purchasing power we have historically had as a segment of
Infineon.
We have historically been able to take advantage of
Infineons size and purchasing power in procuring goods,
technology and services, including insurance, employee benefit
support and audit services. Following our carve-out from
Infineon, we are a smaller and less diversified company than
Infineon. Although we anticipate that, while we are a
majority-owned subsidiary of Infineon, we will be able to
continue to take advantage of many of these benefits, we cannot
guarantee that this will continue to be the case. As a separate,
stand-alone company, we may be unable to obtain goods,
technology and services at prices and on terms as favorable as
those available to us prior to the carve-out, which could have a
material adverse effect on our business, financial condition and
results of operations.
Our
agreements with Infineon relating to our carve-out may be less
favorable to us than similar agreements negotiated between
unaffiliated third parties.
We entered into our contribution and related agreements with
Infineon while we were a wholly owned subsidiary of Infineon,
and they may be less favorable to us than would be the case if
they were negotiated with unaffiliated third parties. Pursuant
to our contribution agreement with Infineon, we agreed to
indemnify Infineon for, among other things, liabilities arising
from litigation and other contingencies related to our business
such as guarantee commitments, and assumed these liabilities as
part of our carve-out from Infineon. The allocation of assets
and liabilities between Infineon and our company may not reflect
the allocation that would have been reached by two unaffiliated
parties.
Infineon
will initially control the outcome of shareholder actions in our
company, and may thereby limit our ability to obtain additional
financing or make acquisitions.
Infineon currently holds, directly or indirectly an 85.9% equity
interest in our company. Upon completion of this offering
Infineon will hold, directly or indirectly a 78.6% equity
interest in our company (or 77.5% if the underwriters exercise
their overallotment option in full). Infineon has publicly
announced that it aims to reduce its stake in Qimonda to
significantly below 50% by the time of Infineons Annual
Shareholder Meeting in 2009, at the latest. Its equity
shareholding gives it the power to control actions that require
shareholder approval, including the election of the four
shareholder representatives on our Supervisory Board, which
appoints our Management Board.
Even if Infineon ceases to own or control more than 50% of our
shares, for so long as it continues to have a substantial equity
interest in our company it may, as a practical matter, be in a
position to control many or all actions that require shareholder
approval. Under German law, for so long as Infineon holds more
than 25% of our shares, it will be in a position to block
shareholder action on any capital increase or decrease, merger,
consolidation, spin-off, sale or other transfer of all or
substantially all of our assets, a change in the corporate form
or business purpose of our company or the dissolution of our
company.
Significant corporate actions, including the incurrence of
material indebtedness or the issuance of a material amount of
equity securities, may require the consent of our shareholders.
Infineon might oppose any action that
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would dilute its equity interest in our company, and may be
unable or unwilling to participate in a future financing of our
company. Infineon, as our majority shareholder, could block any
such action and thereby materially harm our business or
prospects.
We may
have conflicts of interest with Infineon and, because of
Infineons controlling ownership interest in our company,
may not be able to resolve such conflicts on favorable terms for
us.
Conflicts of interest may arise between Infineon and us in a
number of areas relating to our past and ongoing relationships.
Potential conflicts of interest that we have identified include
the following:
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Indemnification arrangements in connection with our carve-out
from Infineon. We have agreed to indemnify
Infineon with respect to lawsuits and other matters as part of
our carve-out from Infineon. These indemnification arrangements
could result in us having interests that are adverse to those of
Infineon, for example different interests with respect to
settlement arrangements in a litigation matter. In addition,
under these arrangements, we agreed to reimburse Infineon for
liabilities incurred (including legal defense costs) in
connection with certain litigation, while Infineon will be the
party prosecuting or defending the litigation.
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Employee recruiting and retention. Because we
operate in many of the same geographical areas, we expect to
compete with Infineon in the hiring and retention of employees,
in particular with respect to highly-skilled technical
employees. We have no agreement with Infineon that would
restrict either Infineon or us from hiring any of the
others employees.
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Members of our Supervisory Board and Management Board may
have conflicts of interest. Certain members of
our Supervisory Board and Management Board own shares in
Infineon or options to purchase Infineon shares. In addition,
Peter Fischl, a member of our Supervisory Board, is the Chief
Financial Officer of Infineon and a member of its Management
Board. These relationships could create, or appear to create,
conflicts of interest when these persons are faced with
decisions with potentially different implications for Infineon
and us, even though these persons owe a duty of loyalty to take
into account only our interests.
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Sale of shares in our company. Infineon may
decide to sell all or a portion of the shares that it holds in
us to a third party, including to one of our competitors,
thereby giving that third party substantial influence over our
business and our affairs. Such a sale could be contrary to the
interests of certain of our stakeholders, including our
employees or our public shareholders.
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Allocation of business opportunities. Business
opportunities may arise that both we and Infineon find
attractive, and which would complement our respective
businesses. Infineon may decide to take the opportunities
itself, which would prevent us from taking advantage of the
opportunity ourselves.
|
Although our company is an independent entity, we expect to
operate for as long as Infineon is our majority shareholder as a
part of the Infineon Group. Infineon may from time to time make
strategic decisions that it believes are in the best interests
of its business as a whole, including our company. These
decisions may be different from the decisions that we would have
made on our own. Infineons decisions with respect to us or
our business may be resolved in ways that favor Infineon and
therefore Infineons own shareholders, which may not
coincide with the interests of our companys other
shareholders. We may not be able to resolve any potential
conflicts and, even if we do so, the resolution may be less
favorable to us than if we were dealing with an unaffiliated
party. Even if both parties seek to transact business on terms
intended to approximate those that could have been achieved
among unaffiliated parties, this may not succeed in practice.
Third
parties may seek to hold us responsible for liabilities of
Infineon that we did not assume in the contribution
agreement.
Pursuant to the contribution agreement we entered into with
Infineon, Infineon agreed to retain all of its liabilities that
we do not expressly assume under that agreement. Liabilities we
expressly assumed include those arising out of legal matters
that relate to the business that was transferred to us at the
time of our carve-out. See Our Business Legal
Matters for a description of the relevant indemnification
provisions.
S-32
Third parties may seek to hold us responsible for
Infineons retained liabilities. Under the contribution
agreement, Infineon agreed to indemnify us for claims and losses
relating to these retained liabilities. However, if those
liabilities are significant and we are ultimately held liable
for them, we might not be able to recover the full amount of our
losses from Infineon.
We may
experience difficulty in separating our assets and resources
from Infineon.
We may face difficulty in completing the final steps in the
separation of our assets and resources from Infineons
assets and resources. In particular, we may experience
additional costs and delay in finalizing the transfers to us of
our interest in AMTC and BAC. Our business, financial condition
and results of operations could be harmed if we incur unexpected
costs in completing the separation.
Risks
related to the securities markets and ownership of our shares or
ADSs
Sales
of substantial numbers of shares or ADSs in the public market
could adversely affect the market price of our
securities.
Prior to completion of this offering, Infineon holds, directly
or indirectly, an 85.9% equity interest in our company. Upon
completion of this offering, Infineon will remain our largest
shareholder, with a direct and indirect equity interest in our
company of 78.6% (or 77.5% if the overallotment option is
exercised in full). Infineon may deliver up to 6% of our equity
(based on our current number of shares outstanding) upon
exercise by investors in the exchangeable notes Infineon
Investment is offering simultaneously with this offering of
their rights to receive Qimonda shares. Infineon has publicly
announced that it aims to reduce its stake in Qimonda to
significantly below 50% by the time of Infineons Annual
Shareholders Meeting in 2009, at the latest. Infineon and
Infineon Investment have also agreed, with some exceptions, not
to sell or transfer any of the remaining shares it holds after
this offering until 60 days after the date of this
prospectus. The underwriters may, however, waive this
restriction in their discretion. However, sales of substantial
numbers of the shares of our company by Infineon, either in the
public market or in private transactions, or the perception that
such sales may occur, could adversely affect the market price of
the shares and ADSs and could adversely affect our ability to
raise capital through subsequent offerings of equity or
equity-related securities.
The
price of our ADSs may be subject to wide
fluctuations.
The trading price of our ADSs may fluctuate widely and may fall
below the price at which ADSs were sold in our IPO or below our
net asset value. Among the factors that could affect the price
of our ADSs are the risk factors described in this section and
other factors, including:
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the volatility of DRAM prices and therefore of our revenues;
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changes in market valuations of technology companies in general
and memory product companies in particular;
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variations in our operating results;
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changes in demand for, and supply of, our products;
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technological changes that hurt our competitive position;
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unfavorable developments in litigation or governmental
investigations in which we are involved;
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strategic moves by us or our competitors, such as acquisitions
or restructurings;
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failure of our quarterly operating results to meet market
expectations;
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changes in expectations as to our future financial performance,
including financial estimates by securities analysts;
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S-33
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review of the long-term values of our assets, which could lead
to impairment charges that could reduce our earnings; and
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general market conditions.
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Stock markets have experienced extreme volatility in recent
years that has often been unrelated to the operating performance
of a particular company. These broad market fluctuations may
adversely affect the trading price of our securities.
Exchange
rate fluctuations may reduce the amount of U.S. dollars you
receive in respect of dividends or other distributions in
respect of your ADSs.
Exchange rate fluctuations will affect the amount of
U.S. dollars our shareholders receive upon the payment of
cash dividends or other distributions paid in euro, if any.
Therefore, such fluctuations could also adversely affect the
value of our ADSs, and, in turn, adversely affect the
U.S. dollar proceeds holders receive from the sale of our
ADSs.
You
may not be able to participate in rights offerings and may
experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. Under the deposit
agreement for the ADSs, the depositary will not offer those
rights to ADS holders unless both the rights and the underlying
securities to be distributed to ADS holders are either
registered under the Securities Act or exempt from registration
under the Securities Act with respect to all holders of ADSs. We
are under no obligation to file a registration statement with
respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared
effective. In addition, we may not be able to take advantage of
any exemptions from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in
our rights offerings and may experience dilution in their
holdings as a result.
If the depositary is unable to sell the rights that are not
exercised or not distributed or if the sale is not lawful or
reasonably practicable, it will allow the rights to lapse, in
which case you will receive no value for these rights.
You
may not be able to exercise your right to vote the ordinary
shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the
ordinary shares represented by our ADSs only in accordance with
the provisions of the deposit agreement. The deposit agreement
provides that, upon receipt of notice of any meeting of holders
of our common shares, the depositary will, as soon as
practicable thereafter, fix a record date for the determination
of ADS holders who shall be entitled to give instructions for
the exercise of voting rights. Upon timely receipt of notice
from us, the depositary shall distribute to the holders as of
the record date (i) the notice of the meeting or
solicitation of consent or proxy sent by us, (ii) a
statement that such holder will be entitled to give the
depositary instructions and a statement that such holder may be
deemed, if we have appointed a proxy bank as set forth in the
deposit agreement, to have instructed the depositary to give a
proxy to the proxy bank to vote the ordinary shares underlying
the ADSs in accordance with the recommendations of the proxy
bank and (iii) a statement as to the manner in which
instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the
ordinary shares underlying your ADSs but only if we ask the
depositary to ask for your instructions. Otherwise, you will not
be able to exercise your right to vote, unless you withdraw our
ordinary shares underlying the ADSs you hold. However, you may
not know about the meeting far enough in advance to withdraw
those ordinary shares. If we ask for your instructions, the
depositary, upon timely notice from us, will notify you of the
upcoming vote and arrange to deliver our voting materials to
you. We cannot guarantee you that you will receive the voting
materials in time to ensure that you can instruct the depositary
to vote your ordinary shares. In addition, the depositary and
its agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise
your right to vote, and there may be nothing you can do if the
ordinary shares underlying your ADSs are not voted as you
requested.
S-34
Under the deposit agreement for the ADS, we may choose to
appoint a proxy bank. In this event, the depositary will receive
a proxy which will be given to the proxy bank to vote our
ordinary shares underlying your ADSs at shareholders
meetings if you do not vote in a timely fashion and in the
manner specified by the depositary.
The effect of this proxy is that you cannot prevent our ordinary
shares underlying your ADSs from being voted, and it may make it
more difficult for shareholders to influence the management of
our company, which could adversely affect your interests.
Holders of our ordinary shares are not subject to this proxy.
You
may not receive distributions on our ordinary shares represented
by our ADSs or any value for them if it is illegal or
impractical to make them available to holders of
ADSs.
The depositary of our ADSs has agreed to pay to you the cash
dividends or other distributions it or the custodian receives on
our ordinary shares or other deposited securities after
deducting its fees and expenses. You will receive these
distributions in proportion to the number of our ordinary shares
your ADSs represent. However, the depositary is not responsible
if it decides that it is unlawful or impractical to make a
distribution available to any holders of ADSs. We have no
obligation to take any other action to permit the distribution
of our ADSs, ordinary shares, rights or anything else to holders
of our ADSs. This means that you may not receive the
distributions we make on our ordinary shares or any value from
them if it is illegal or impractical for us to make them
available to you. These restrictions may have a material adverse
effect on the value of your ADSs.
You
may be subject to limitations on transfer of your
ADSs.
Your ADSs, which may be evidenced by ADRs, are transferable on
the books of the depositary. However, the depositary may close
its books at any time or from time to time when it deems
expedient in connection with the performance of its duties. The
depositary may refuse to deliver, transfer or register transfers
of your ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary
think it is advisable to do so because of any requirement of law
or government or governmental body, or under any provision of
the deposit agreement, or for any other reason.
The
rights of shareholders in German companies differ in material
respects from the rights of shareholders of corporations
incorporated in the United States.
Our company is incorporated in Germany, and the rights of our
shareholders are governed by German law, which differs in many
respects from the laws governing corporations incorporated in
the United States. For example, individual shareholders in
German companies do not have standing to initiate a shareholder
derivative action, either in Germany or elsewhere, including the
United States unless they meet thresholds set forth under German
corporate law. Therefore, our public shareholders may have more
difficulty protecting their interests in the face of actions by
our management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a jurisdiction in
the United States. See Description of American Depositary
Shares in the accompanying prospectus.
It may
be difficult for you to bring any action or enforce any judgment
obtained in the United States against our company or members of
our Supervisory Board or Management Board, which may limit the
remedies otherwise available to our shareholders.
Our company is incorporated in Germany and the majority of our
assets are located outside the United States. In addition, most
of the members of our Supervisory Board, Management Board and
other senior management, named in this prospectus, are nationals
and residents of Germany. Most or all of the assets of these
individuals are located outside the United States. As a result,
it may be difficult or impossible for you to bring an action
against us or against these individuals in the United States if
you believe your rights have been infringed under the securities
laws or otherwise. In addition, a German court may prevent you
from enforcing a judgment of a United States court against us or
these individuals based on the securities law of the United
States or any state thereof. A German court may not allow you to
bring an action in Germany against us or these individuals based
on the securities laws of the United States or any state
thereof. See Enforcing Civil Liabilities in the
accompanying prospectus.
S-35
We
have no present intention to pay dividends on our ordinary
shares in the foreseeable future and, consequently, your only
opportunity to achieve a return on your investment during that
time is if the price of our ADSs appreciates.
We have no present intention to pay dividends on our ordinary
shares in the foreseeable future. No earnings were available for
distribution as a dividend for the 2006 financial year, since
Qimonda AG, on a stand alone basis, as parent company, incurred
a cumulative loss (Bilanzverlust) as of
September 30, 2006, despite our consolidated profit for the
financial year. Any determination by our Supervisory and
Management Boards to pay dividends will depend on many factors,
including our financial condition, results of operations, legal
requirements and other factors. Accordingly, if the price of our
ADSs falls in the foreseeable future, you will lose money on
your investment, without the likelihood that this loss will be
offset in part or at all by cash dividends.
The
effect of the loan of our ADSs pursuant to the ADS Lending
Agreement, any exercise of the exchange rights under the
exchangeable notes Infineon Investment is offering
simultaneously with this offering or any sales of our ADSs in
short sale transactions by the purchasers of the exchangeable
notes may have a negative effect on the market price of our
ADSs. In addition, purchases of ADSs in connection with the
termination of the ADS Lending Agreement may result in a
temporary increase in the market price of our ADSs during the
loan unwind period.
Infineon has agreed pursuant to the ADS Lending Agreement to
lend to J.P. Morgan up to 3,550,098 of the ADSs that are
being offered pursuant to this prospectus supplement. In
addition, Infineon Investment is simultaneously offering notes
outside the United States, in sales it has advised us are exempt
from registration under the U.S. Securities Act of 1933, as
amended, pursuant to Regulation S thereunder, that are
exchangeable, at specified times until August 31, 2010,
into ADSs to be issued in exchange for shares in our company
currently held by Infineon. We have been advised by
J.P. Morgan that, in connection with the offering of the
exchangeable notes, its affiliate intends to facilitate the
establishment by the exchangeable note investors of hedged
positions in the exchangeable notes through the entry into
privately negotiated derivative transactions with those
investors. The increase in the number of our ADSs outstanding
upon exchanges of the exchangeable notes could have a negative
effect on the market price of our ADSs. The market price of our
ADSs also could be negatively affected by other short sales of
our ADSs by or on behalf of the purchasers of the exchangeable
notes to hedge their investment in the exchangeable notes. In
addition, purchases of ADSs in connection with the termination
of the ADS Lending Agreement may result in a temporary increase
in the market price of our ADSs during the loan unwind period.
S-36
PRESENTATION
OF FINANCIAL AND OTHER INFORMATION
Our combined and consolidated financial statements are prepared
in accordance with U.S. GAAP and expressed in euro, the
single currency of the participating member states in the Third
Stage of the European Economic and Monetary Union (EMU) of the
Treaty Establishing the European Community, as amended from time
to time. In this prospectus supplement, references to
euro or are to euro and
references to U.S. $ or $ are to
U.S. dollars. In this prospectus supplement, for
convenience only, we have translated the euro amounts reflected
in our combined and consolidated financial statements as of and
for the financial year ended September 30, 2006 into
U.S. dollars at the rate of 1.00 = $1.2687, the noon
buying rate of the Federal Reserve Bank of New York for euro on
September 29, 2006, the last currency trading day in
September 2006, and we have translated the euro amounts
reflected in our combined and consolidated financial statements
as of and for the nine months ended June 30, 2007 into
U.S. dollars at the rate of 1.00 = $1.3520, the noon
buying rate of the Federal Reserve Bank of New York for euro on
June 29, 2007, the last currency trading day in June 2007.
You should not assume that, on these or on any other dates, one
could have converted these amounts of euros into dollars at
these or any other exchange rates. The noon buying rate of the
Federal Reserve Bank of New York for euro was $1.3950 on
September 19, 2007. Unless otherwise specified, we have
used this rate for translations related to this offering which
are calculated in this prospectus supplement.
Our financial year ends on September 30 of each year. References
to any financial year refer to the year ended September 30 of
the calendar year specified.
This prospectus supplement contains market data that have been
prepared or reported by Gartner Inc. (Gartner), International
Data Corporation (IDC), iSuppli Corporation (iSuppli) and World
Semiconductor Trade Statistics (WSTS).
The trademarks
Qimondatm,
TwinFlash®,
AENEON®
and
RLDRAM®
have been assigned to us by Infineon in connection with our
carve-out. Pursuant to a co-development agreement between
Infineon and Micron Technology, Inc., Micron has trademark
rights to
CellularRAM®
used on or in connection with products sold inside the United
States, whereas Infineon has those rights with respect to
products sold outside the United States. All other trademarks,
trade names or service marks appearing in this prospectus
supplement are the property of their respective owners.
Figures presented in tabular format may not add up to 100% due
to rounding.
Special terms used in the semiconductor industry are defined in
the glossary.
S-37
SPECIAL
NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND MARKET DATA
This prospectus supplement, the accompanying prospectus and the
documents incorporated by refererence, including particularly
the sections entitled Prospectus Summary, Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
The Semiconductor Memory Industry and Our
Business contains forward-looking statements. These
forward-looking statements include statements regarding our
financial position; our expectations concerning future
operations, margins, profitability, liquidity and capital
resources; our business strategy and other plans and objectives
for future operations; and all other statements that are not
historical facts. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
expects, intends, plans,
anticipates, believes,
thinks, estimates, seeks,
predicts, potential, and similar
expressions. Although we believe that these statements are based
on reasonable assumptions, they are subject to numerous factors,
risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These
factors, risks and uncertainties include those listed under
Risk Factors and elsewhere in this prospectus. Those
factors, among others, could cause our actual results and
performance to differ materially from the results and
performance projected in, or implied by, the forward-looking
statements. As you read and consider this prospectus supplement,
the accompanying prospectus and the documents incorporated by
refererence, you should carefully understand that the
forward-looking statements are not guarantees of performance or
results.
These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting
on our behalf. New risks and uncertainties arise from time to
time, and we cannot predict those events or how they may affect
us. Except for any ongoing obligations to disclose material
information as required by the federal securities laws, we do
not have any intention or obligation to update forward-looking
statements after we distribute this prospectus.
In addition, this prospectus contains information concerning the
semiconductor memory products market generally and the DRAM
market in particular, that is forward-looking in nature and is
based on a variety of assumptions regarding the ways in which
the semiconductor market and the DRAM market in particular will
develop. These assumptions have been derived from independent
market research and industry reports referred to in this
prospectus. Some data are also based on our good faith
estimates, derived from our review of internal surveys and the
independent sources listed above.
If any of the assumptions regarding the market are incorrect,
actual market results may differ from those predicted. Although
we do not know what impact any such differences may have on our
business, our future results of operations and financial
condition and the market price of our ADSs may be materially
adversely affected.
S-38
ADSs representing our companys shares have traded on the
New York Stock Exchange since August 9, 2006. The table
below sets forth, for the periods indicated, the high and low
closing sales prices for the ADSs on the New York Stock
Exchange:
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Price per ADS in
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U.S. dollars
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High
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Low
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August 2006 (beginning August 9)
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$
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16.28
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$
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13.54
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September 2006
|
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$
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17.91
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$
|
15.90
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October 2006
|
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$
|
17.05
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|
|
$
|
13.95
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November 2006
|
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$
|
18.85
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|
|
$
|
14.11
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December 2006
|
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$
|
18.65
|
|
|
$
|
17.00
|
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January 2007
|
|
$
|
17.45
|
|
|
$
|
15.17
|
|
February 2007
|
|
$
|
15.60
|
|
|
$
|
14.45
|
|
March 2007
|
|
$
|
14.93
|
|
|
$
|
13.81
|
|
April 2007
|
|
$
|
15.68
|
|
|
$
|
14.09
|
|
May 2007
|
|
$
|
15.16
|
|
|
$
|
14.14
|
|
June 2007
|
|
$
|
17.00
|
|
|
$
|
14.94
|
|
July 2007
|
|
$
|
17.04
|
|
|
$
|
14.80
|
|
August 2007
|
|
$
|
14.81
|
|
|
$
|
12.20
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September 2007 (through September
19, 2007)
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$
|
13.42
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$
|
10.99
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On September 19, 2007, the closing sales price per ADS on
the New York Stock Exchange was $10.99.
We have not declared any cash dividends on our ordinary shares
and have no present intention to pay dividends on our ordinary
shares in the foreseeable future. Any determination by our
Supervisory and Management Boards to pay dividends will depend
on many factors, including our financial condition, results of
operations, legal requirements and other factors. We may also
become subject to debt instruments or other agreements that
limit our ability to pay dividends.
Under the German Stock Corporation Act (Aktiengesetz),
the amount of dividends available for distribution to our
shareholders is based on the level of earnings
(Bilanzgewinn) of the parent company, Qimonda AG, as
determined in accordance with the German Commercial Code. All
dividends must be approved by shareholders. No earnings are
available for distribution as a dividend for the 2006 financial
year, since Qimonda AG, on a standalone basis, as the parent
company, incurred a cumulative loss (Bilanzverlust) as of
September 30, 2006 despite our consolidated profit for the
financial year.
All of the shares represented by ADSs offered by this prospectus
supplement and the accompanying prospectus will have the same
dividend rights as all of our other outstanding shares. Any
distribution of dividends jointly proposed by our Management and
Supervisory Boards requires the approval of our shareholders in
a general meeting. The section Articles of
Association Dividend Rights explains in more
detail the procedures we must follow and the German law
provisions that determine whether we are entitled to declare a
dividend.
For information regarding the German withholding tax applicable
to dividends and related United States refund procedures, see
Taxation German Taxation.
S-39
Fluctuations in the exchange rate between the euro and the
U.S. dollar will affect the U.S. dollar amounts
received by owners of our ADSs on conversion of dividends, if
any, paid in euro on the ordinary shares and will affect the
U.S. dollar price of our ADSs on the New York Stock
Exchange. In addition, to enable you to ascertain how the trends
in our financial results might have appeared had they been
expressed in U.S. dollars, the table below shows the
average exchange rates of U.S. dollars per euro for the
periods shown. Average rates are computed by using the noon
buying rate of the Federal Reserve Bank of New York for the euro
on the last business day of each month during the period
indicated.
Average
exchange rates of the U.S. dollar per euro
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Financial year
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Average
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2002
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0.9208
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2003
|
|
|
1.0919
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|
2004
|
|
|
1.2199
|
|
2005
|
|
|
1.2727
|
|
2006
|
|
|
1.2361
|
|
2007 (through September 19,
2007)
|
|
|
1.3397
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The table below shows the high and low Federal Reserve noon
buying rates for euro in U.S. dollars per euro for each
month from August 2006 through September 19, 2007:
Recent
high and low exchange rates of the U.S. dollar per
euro
|
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High
|
|
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Low
|
|
|
August 2006
|
|
|
1.2914
|
|
|
|
1.2735
|
|
September 2006
|
|
|
1.2833
|
|
|
|
1.2648
|
|
October 2006
|
|
|
1.2773
|
|
|
|
1.2502
|
|
November 2006
|
|
|
1.3261
|
|
|
|
1.2705
|
|
December 2006
|
|
|
1.3327
|
|
|
|
1.3073
|
|
January 2007
|
|
|
1.3286
|
|
|
|
1.2904
|
|
February 2007
|
|
|
1.3246
|
|
|
|
1.2933
|
|
March 2007
|
|
|
1.3374
|
|
|
|
1.3094
|
|
April 2007
|
|
|
1.3660
|
|
|
|
1.3363
|
|
May 2007
|
|
|
1.3616
|
|
|
|
1.3419
|
|
June 2007
|
|
|
1.3526
|
|
|
|
1.3295
|
|
July 2007
|
|
|
1.3831
|
|
|
|
1.3592
|
|
August 2007
|
|
|
1.3808
|
|
|
|
1.3402
|
|
September 2007 (through
September 19, 2007)
|
|
|
1.3950
|
|
|
|
1.3606
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|
The noon buying rate on September 19, 2007 was 1.00 =
$1.3950.
S-40
The following table sets forth our actual consolidated
capitalization as of June 30, 2007. You should read this
table in conjunction with Selected Combined and
Consolidated Financial Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our unaudited condensed combined and
consolidated financial statements and related notes included
elsewhere in this prospectus supplement, the accompanying
prospectus and the documents incorporated by refererence.
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|
|
As of June 30, 2007
|
|
|
|
(in millions)
|
|
|
Current maturities of long-term
debt(1)
|
|
|
21
|
|
|
|
|
|
|
Total short-term debt and current
maturities
|
|
|
21
|
|
|
|
|
|
|
Long-term
debt(1)
|
|
|
128
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
Ordinary share capital
|
|
|
684
|
|
Additional paid-in capital
|
|
|
3,113
|
|
Retained earnings
|
|
|
240
|
|
Accumulated other comprehensive
loss
|
|
|
(229
|
)
|
|
|
|
|
|
Total shareholders equity
|
|
|
3,808
|
|
|
|
|
|
|
Total capitalization
|
|
|
3,936
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of June 30, 2007, we had a 124 million
project-related term loan for our production facility in
Portugal, of which 21 is classified as current maturity,
as it is payable in March 2008, and a 25 million note
payable to a government entity in connection with our Richmond
plant. Both loans are unsecured. The term loan is unguaranteed. |
Our capitalization will remain unaffected upon completion of
this offering, as we will not receive any proceeds from any part
of the offering being made by this prospectus supplement.
S-41
ADS
LENDING AGREEMENT; SIMULTANEOUS OFFERING OF EXCHANGEABLE
NOTES
Simultaneously with this offering of ADSs Infineon Investment,
which is an affiliate of Infineon, is offering
215 million in aggregate principal amount at maturity
of notes exchangeable into Qimonda ADSs by means of a separate
offering being made outside of the United States in transactions
it advises us are not subject to registration under the
Securities Act of 1933, as amended, pursuant to
Regulation S thereunder. We are not offering any of these
exchangeable notes, and no one is offering those notes, by means
of this or any other document in the United States.
To make the purchase of exchangeable notes more attractive to
those non-U.S. prospective investors, Infineon has entered
into the ADS Lending Agreement with J.P. Morgan under which
Infineon has agreed to loan to J.P. Morgan
3,550,098 ADSs (representing ADSs with an aggregate
offering price of $38,767,070) for a period beginning on the
date on which the ADSs being offered in this prospectus
supplement are delivered to investors. The loan will end on the
3rd business day after notice that 80% of the principal amount
of the exchangeable notes has ceased to be outstanding as a
result of exchange, repurchase or redemption or, if earlier, in
full or in part on 14 days prior notice if the
aggregate share of the voting rights in Qimonda beneficially
owned by Infineon has fallen below 55% and our public float (as
described and defined in the ADS Lending Agreement) is
sufficiently high or in part, in monthly increments of
1 million shares, down to a level of outstanding loan that
is calculated by reference to that measure of public float.
Under the ADS Lending Agreement, J.P. Morgan and its
affiliate are permitted to use the borrowed ADSs only for the
purpose of directly or indirectly facilitating the sale of the
exchangeable notes and the hedging of the exchangeable notes by
or on behalf of the holders of those notes.
The ADS loan under the ADS Lending Agreement will also terminate
and the borrowed ADSs must be returned to Infineon under the
following circumstances:
|
|
|
|
|
J.P. Morgan may terminate all or any portion of the loan at any
time.
|
|
|
|
Either party may terminate any or all of the outstanding loans
upon default by the other party under the ADS Lending Agreement.
|
|
|
|
The ADS loan terminates automatically on the occurrence of
specified bankruptcy-related events relating to either party.
|
In addition, when noteholders exchange their notes, a number of
ADSs must be returned to Infineon based on the relationship
between the volume of the loan and the volume of underlying
ADSs. Borrowed ADSs returned to Infineon cannot be reborrowed.
The holders of the borrowed ADSs will have all of the rights of
a holder of our outstanding ADSs, including the right, through
the ADS depositary, to vote on all matters on which our ADSs
holders have a right to vote and the right, though the ADS
depositary, to receive any dividends or other distributions that
we may pay or make on our outstanding shares.
J.P. Morgan Securities Inc. as agent for one of its affiliates
is offering for sale pursuant to this prospectus supplement the
entire amount of Loaned ADSs it is entitled to borrow under the
ADS Lending Agreement. J.P. Morgan has advised us that its
affiliate intends to use the proceeds from the sale of these
ADSs to facilitate the establishment by or on behalf of the
exchangeable note investors of hedged positions in the
exchangeable notes through the entry into privately negotiated
derivative transactions with those investors.
S-42
The existence of the ADS Lending Agreement and the short
positions established in connection with the sale of the
exchangeable notes could have the effect of causing the market
price of our ADSs to be lower over the term of the ADS Lending
Agreement than it would have been had Infineon not entered into
the agreement. However, the purchase of ADSs in connection with
the termination of any portion of the ADS Lending Agreement may
result in a temporary increase in the market price of our ADSs
during the loan unwind period. See Risk
Factors Risks related to the securities markets and
ownership of our shares or ADSs The effect of the
issuance of our ADSs pursuant to the ADS Lending Agreement and
upon exercises of the exchange rights under the exchangeable
notes Infineon is offering simultaneously with this offering,
including sales of our ADSs in short sale transactions by the
purchasers of the exchangeable notes, may have a negative affect
on the market price of our ADSs.
S-43
SELECTED
COMBINED AND CONSOLIDATED FINANCIAL DATA
The following table presents summary historical combined and
consolidated financial data for the periods indicated. We
derived the selected combined and consolidated financial data as
of and for the years ended September 30, 2004, 2005 and
2006 from our combined and consolidated financial statements for
those years. These combined and consolidated financial
statements have been audited by our independent registered
public accounting firm, KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we
refer to as KPMG, and are included elsewhere in this prospectus
supplement, the accompanying prospectus and the documents
incorporated by refererence. We derived the selected combined
financial data as of and for the year ended September 30,
2003 from our unaudited combined financial statements for that
year. We derived the selected consolidated financial data as of
and for the nine months ended June 30, 2006 and 2007 from
our unaudited condensed combined and consolidated financial
statements for those periods. These unaudited condensed combined
and consolidated financial statements are included elsewhere in
this prospectus supplement, the accompanying prospectus and the
documents incorporated by refererence. In the opinion of our
management, these unaudited condensed combined and consolidated
financial statements include all adjustments necessary to
present fairly the financial information for the periods they
represent.
We have been a segment of Infineon for all of the periods
indicated. Infineon did not allocate most non-operating
financial statement line items among its segments during the
periods prior to our carve-out from Infineon. We have not
prepared complete selected combined financial data reflecting
these items as of and for the financial year ended
September 30, 2002 because of the significant cost and
effort involved with properly preparing, compiling and verifying
all the financial information needed to present our complete
results of operations and financial position as a stand-alone
company for periods so long ago. We derived the selected
financial data for the financial year ended September 30,
2002 from Infineons reported data of its Memory Products
segment for that period. This financial data was prepared in
accordance with U.S. GAAP and on a basis consistent with
the financial data for the later periods we have presented.
Infineon contributed our business to our company on May 1,
2006. We refer to this contribution as our carve-out. Our
combined financial information for all periods before the date
of our carve-out from Infineon may not be representative of what
our results would have been had we been a stand-alone company
during any of those periods. In addition, historical results are
not necessarily indicative of the results that you may expect
for any future period.
In particular, the combined financial statements do not reflect
estimates of one-time and ongoing incremental costs required for
us to operate as a separate company. Infineon allocated to our
company costs it incurred relating to research and development,
logistics, purchasing, selling, information technology, employee
benefits, general corporate functions and other costs. General
corporate functions include accounting, treasury, tax, legal,
executive oversight, human resources and other services. These
and other allocated costs totaled 387 million for our
2004 financial year, 305 million for our 2005
financial year and 203 million before the carve-out
for our 2006 financial year. Following our carve-out from
Infineon, we are responsible for substantially all of these
items, subject to Infineons continued provision of some of
these services pursuant to service agreements. These agreements
are described in Arrangements between Qimonda and the
Infineon Group. As a result, costs are no longer allocated
after the carve-out, but rather charged on the basis of these
arrangements. Had we been incurring these costs directly during
these periods before the carve-out, they may have been
materially different than the allocated amounts in the combined
financial statements.
S-44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the financial year ended September 30,
|
|
|
As of and for the nine months ended June 30,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006(2)
|
|
|
2006
|
|
|
2007
|
|
|
2007(3)
|
|
|
|
(Unaudited)(1)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(in millions, except share and per share data)
|
|
|
Summary Combined and
Consolidated Statement of Operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,971
|
|
|
|
2,544
|
|
|
|
3,008
|
|
|
|
2,825
|
|
|
|
3,815
|
|
|
$
|
4,840
|
|
|
|
2,583
|
|
|
|
2,897
|
|
|
$
|
3,917
|
|
Cost of goods sold
|
|
|
2,106
|
|
|
|
2,090
|
|
|
|
2,063
|
|
|
|
2,164
|
|
|
|
3,048
|
|
|
|
3,867
|
|
|
|
2,158
|
|
|
|
2,572
|
|
|
|
3,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit
|
|
|
(135
|
)
|
|
|
454
|
|
|
|
945
|
|
|
|
661
|
|
|
|
767
|
|
|
|
973
|
|
|
|
425
|
|
|
|
325
|
|
|
|
440
|
|
Research and development expenses
|
|
|
311
|
|
|
|
298
|
|
|
|
347
|
|
|
|
390
|
|
|
|
433
|
|
|
|
549
|
|
|
|
325
|
|
|
|
291
|
|
|
|
393
|
|
Selling, general and administrative
expenses
|
|
|
179
|
|
|
|
209
|
|
|
|
232
|
|
|
|
206
|
|
|
|
215
|
|
|
|
273
|
|
|
|
161
|
|
|
|
140
|
|
|
|
189
|
|
Restructuring charges
|
|
|
7
|
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expenses,
net
|
|
|
(6
|
)
|
|
|
16
|
|
|
|
194
|
|
|
|
13
|
|
|
|
60
|
|
|
|
76
|
|
|
|
(13
|
)
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(626
|
)
|
|
|
(72
|
)
|
|
|
170
|
|
|
|
51
|
|
|
|
59
|
|
|
|
75
|
|
|
|
(74
|
)
|
|
|
(99
|
)
|
|
|
(133
|
)
|
Interest (expense) income, net
|
|
|
|
|
|
|
(35
|
)
|
|
|
(30
|
)
|
|
|
(7
|
)
|
|
|
(25
|
)
|
|
|
(32
|
)
|
|
|
(22
|
)
|
|
|
4
|
|
|
|
5
|
|
Equity in earnings (losses) of
associated companies
|
|
|
|
|
|
|
22
|
|
|
|
(16
|
)
|
|
|
45
|
|
|
|
80
|
|
|
|
102
|
|
|
|
38
|
|
|
|
103
|
|
|
|
139
|
|
Gain (loss) on associated company
share issuance
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
72
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-operating income
(expense), net
|
|
|
|
|
|
|
56
|
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
8
|
|
|
|
10
|
|
|
|
9
|
|
|
|
12
|
|
|
|
16
|
|
Minority interests
|
|
|
|
|
|
|
11
|
|
|
|
17
|
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
(20
|
)
|
|
|
132
|
|
|
|
104
|
|
|
|
188
|
|
|
|
239
|
|
|
|
(24
|
)
|
|
|
16
|
|
|
|
22
|
|
Income tax expense
|
|
|
|
|
|
|
(55
|
)
|
|
|
(211
|
)
|
|
|
(86
|
)
|
|
|
(114
|
)
|
|
|
(145
|
)
|
|
|
(58
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(75
|
)
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
|
$
|
94
|
|
|
|
(82
|
)
|
|
|
16
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share and ADS
(unaudited)(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
(0.26
|
)
|
|
|
0.06
|
|
|
|
0.24
|
|
|
$
|
0.30
|
|
|
|
(0.27
|
)
|
|
|
0.05
|
|
|
$
|
0.07
|
|
Number of shares used in earnings
per share
computation(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (in thousands)
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
305,984
|
|
|
|
305,984
|
|
|
|
300,000
|
|
|
|
342,000
|
|
|
|
342,000
|
|
Diluted (in thousands)
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
305,984
|
|
|
|
305,984
|
|
|
|
300,000
|
|
|
|
342,000
|
|
|
|
342,000
|
|
Summary Combined and
Consolidated Balance Sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
544
|
|
|
|
577
|
|
|
|
632
|
|
|
|
932
|
|
|
$
|
1,182
|
|
|
|
438
|
|
|
|
629
|
|
|
$
|
850
|
|
Marketable securities
|
|
|
|
|
|
|
23
|
|
|
|
2
|
|
|
|
|
|
|
|
138
|
|
|
|
175
|
|
|
|
170
|
|
|
|
263
|
|
|
|
356
|
|
Working capital,
net(5)
|
|
|
|
|
|
|
787
|
|
|
|
78
|
|
|
|
437
|
|
|
|
1,328
|
|
|
|
1,684
|
|
|
|
733
|
|
|
|
1,079
|
|
|
|
1,459
|
|
Total assets
|
|
|
|
|
|
|
4,634
|
|
|
|
4,750
|
|
|
|
4,861
|
|
|
|
5,861
|
|
|
|
7,436
|
|
|
|
5,262
|
|
|
|
5,364
|
|
|
|
7,252
|
|
Short-term debt, including current
portion of long-term debt
|
|
|
|
|
|
|
51
|
|
|
|
551
|
|
|
|
524
|
|
|
|
344
|
|
|
|
435
|
|
|
|
451
|
|
|
|
21
|
|
|
|
28
|
|
Long-term debt, excluding current
portion
|
|
|
|
|
|
|
516
|
|
|
|
27
|
|
|
|
108
|
|
|
|
151
|
|
|
|
192
|
|
|
|
151
|
|
|
|
128
|
|
|
|
174
|
|
Business/shareholders equity
|
|
|
|
|
|
|
2,736
|
|
|
|
2,779
|
|
|
|
2,967
|
|
|
|
3,871
|
|
|
|
4,911
|
|
|
|
3,341
|
|
|
|
3,808
|
|
|
|
5,148
|
|
Summary Combined and
Consolidated Cash Flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
|
|
|
|
300
|
|
|
|
693
|
|
|
|
483
|
|
|
|
297
|
|
|
$
|
377
|
|
|
|
61
|
|
|
|
769
|
|
|
$
|
1,039
|
|
Net cash used in investing
Activities
|
|
|
|
|
|
|
(242
|
)
|
|
|
(1,048
|
)
|
|
|
(971
|
)
|
|
|
(772
|
)
|
|
|
(981
|
)
|
|
|
(725
|
)
|
|
|
(724
|
)
|
|
|
(978
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
815
|
|
|
|
752
|
|
|
|
528
|
|
|
|
703
|
|
|
|
892
|
|
|
|
524
|
|
|
|
496
|
|
|
|
671
|
|
|
|
|
(1) |
|
Figures for 2002, other than those
provided, are not available without undue effort to properly
prepare, compile and verify all the financial information needed
to present the complete results of operations and financial
position as a stand-alone company for periods so long ago.
|
|
(2) |
|
Translated into U.S. dollars solely
for convenience of the reader at the rate of 1.00 =
$1.2687, the noon buying rate of the Federal Reserve Bank of New
York for euro on September 29, 2006, the last currency
trading day in September 2006.
|
|
(3) |
|
Translated into U.S. dollars solely
for convenience of the reader at the rate of 1.00 =
$1.3520, the noon buying rate of the Federal Reserve Bank of New
York for euro on June 29, 2007, the last currency trading
day in June 2007.
|
|
(4) |
|
Before the carve-out, the Memory
Products business was wholly owned by Infineon, and there were
no earnings (loss) per share for our company. Following the
carve-out, earnings (loss) per share reflects the contributed
capital structure and the additions due to the IPO for all
periods presented. For presentation purposes, we used the number
of shares outstanding at the carve-out date for the presentation
of earnings (loss) per share for periods prior to our carve-out.
|
|
(5) |
|
Calculated by subtracting current
liabilities from current assets.
|
S-45
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of our financial condition and
results of operations is based on, and should be read in
conjunction with, our audited combined and consolidated
financial statements as of and for the years ended
September 30, 2004, 2005 and 2006, our unaudited condensed
combined and consolidated financial statements as of and for the
nine months ended June 30, 2006 and 2007 and the
accompanying notes and the other financial information included
elsewhere in this prospectus supplement, accompanying prospectus
and the documents incorporated by reference. We have prepared
our combined and consolidated financial statements in accordance
with accounting principles generally accepted in the United
States of America (U.S. GAAP).
This discussion and analysis of our financial condition and
results of operations contains forward-looking statements.
Statements that are not statements of historical fact, including
expressions of our beliefs and expectations, are forward-looking
in nature and are based on current plans, estimates and
projections. Forward-looking statements are applicable only as
of the date they are made, and we undertake no obligation to
update any of them in light of new information or future events.
Forward-looking statements involve inherent risks and
uncertainties. We caution you that a number of important factors
could cause actual results or outcomes to differ materially from
those expressed in any forward-looking statement. These factors
include those identified under the headings Risk
Factors and Special Note Regarding Forward-Looking
Statements and Market Data.
Executive
Summary
Effective May 1, 2006, Infineon contributed substantially
all of the assets, liabilities, operations and activities, as
well as the employees, of its former Memory Products segment to
us. On August 9, 2006 we completed our 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. We used the offering proceeds of
415 million, net of offering costs and tax benefits
thereon, to finance investments in our manufacturing facilities
and for research and development. In addition, Infineon sold
6.3 million shares upon exercise of the underwriters
over-allotment option, which reduced its shareholding in our
company to 85.9%.
Our financial performance in our financial years ended
September 30, 2005 and 2006 and in the nine months ended
June 30, 2007, as shown by the combined and consolidated
financial statements we prepared in connection with the
carve-out and our consolidated financial statements since the
carve-out, demonstrated important elements of the strategy we
are adopting in response to developments in our industry.
Compared to the 2005 financial year, we accelerated the growth
of the volume of memory we sold, based on bits of data storage
(which we refer to as our bit shipments), during our 2006
financial year mainly due to the
ramp-up of
additional capacities and increased sourcing of chips from our
foundry partners. As a consequence, we achieved bit shipment
growth of 79% in the 2006 financial year, which was well above
the market growth rate of 43%, as reported by WSTS, thereby
increasing our market share in the DRAM market. The trend to
higher bit shipments continued during the first nine months of
2007, with stronger than expected bit growth in the PC market.
During our 2006 financial year we accelerated the shift of our
product mix towards the relatively higher priced graphics,
mobile and infrastructure DRAM products. Although DRAM products
for PC applications accounted for a larger proportion of our bit
shipments in the first nine months of 2007 than in the fourth
quarter of the financial year ended September 30, 2006 due
to seasonality in the consumer and infrastructure markets and
the strong growth in the PC market, the share of our bit
shipments to non-PC applications remained above 50% for the
period. While our average selling prices declined overall, the
general shift in our product mix towards DRAMs for non-PC
applications caused this decline to be smaller than it would
have been had our product mix remained unchanged from several
years ago. Our average per-megabit selling prices (expressed in
U.S. dollars) were 20% lower in the 2006 financial year
than in the 2005 financial year. In our 2005 financial year this
decline was 27% compared to our 2004 financial year. These price
declines were offset by significantly higher bit shipments,
which led to the strong improvement in our net sales in our 2006
financial year. Our average selling prices declined 17% during
the nine months ended June 30, 2007 compared with the
corresponding period one year earlier, due to a significant
deterioration of average selling prices in the last six months
of the period in the current financial year. Whereas in our 2005
financial year the depreciation of the U.S. dollar against
the euro exacerbated the effects of these price
S-46
declines, in our 2006 financial year, the U.S. dollar
gained slightly against the euro, which had a positive effect on
our net sales. The resumed depreciation of the U.S. dollar
against the euro in the first nine months of the 2007 financial
year again had a negative effect on our net sales.
Despite the continuous price pressure, we were able to retain
positive operating income in our 2005 and 2006 financial years
and in the first six months of our 2007 financial year as we
focused on our strategic direction. However, for the nine months
ended June 30, 2007, we incurred an operating loss due to
the significant price decline for DRAM products in the second
and third quarter of our 2007 financial year. We increased the
share of our production based on 300mm wafers to approximately
73% in the first nine months of the 2007 financial year and
enhanced our productivity in other ways, primarily through
conversion of capacities to the 110nm process node in the 2005
financial year and to the 90nm process node in the 2006
financial year. Late in the 2006 financial year and also early
in the 2007 financial year, we began commercial production based
on the 75nm and 80nm nodes, respectively, and have continued
these conversions in the current financial year. Our net income
was 74 million in our 2006 financial year, compared
to 18 million in our 2005 financial year and a net
loss of 79 million in the 2004 financial year. Our
net income was 16 million in the nine months ended
June 30, 2007 compared to a net loss of
82 million in the nine months ended June 30,
2006.
During the first three months of the 2006 financial year the
DRAM market experienced a very substantial price decline in DDR2
DRAM products due to a mismatch between the high volume of DDR2
memories being produced and other semiconductor
manufacturers lower supply of logic chipsets compatible
with them. This led to a significant loss in the first quarter.
However, the market situation improved markedly in the months
thereafter. Combined with the effects described above, our
increasing proportion of higher priced products resulted in
improved profitability, especially in the fourth quarter.
Consequently, we ended the 2006 financial year with
substantially higher sales and net income than we generated in
our 2005 financial year.
The average spot market price for 512Mb DRAM as
reported by DRAMeXchange fell from $6.36 on December 29,
2006 to $1.70 on May 22, 2007, a drop of 73.3% in less than
five months. 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. Although prices for DRAM products improved
slightly in July 2007 as compared to June 2007, in August 2007
prices resumed the decline that has characterized the calendar
year to date.
We generated significant amounts of cash from operations in the
first nine months of our 2007 financial year. We invested this
cash together with proceeds from our IPO in our manufacturing
facilities, as we continued our migration to 300mm wafers and
the 90nm, 80nm and 75nm process nodes and repaid the remainder
of our outstanding debt to Infineon.
Overview
Business
Overview
We are one of the worlds leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. For the full calendar year 2006, we were the
worlds third largest supplier of DRAM by revenue and bit
shipments, with a market share of approximately 16%, according
to Gartner. For the first half of the 2007 calendar year, we
remained the third largest supplier of DRAM by revenue and were
the fourth largest supplier of DRAM by bit shipments with market
shares of approximately 13% according to Gartners report
in September 2007. In each of the past five calendar years, we
captured between 12% and 16% of the worldwide DRAM market based
on revenues, according to Gartner. In each of those five years,
we remained among the four largest DRAM suppliers worldwide
based on revenues.
S-47
Our principal products are DRAM components and modules for use
in a wide variety of electronic products. In our 2006 financial
year 47% of our net sales were of standard DRAMs for use in PC,
notebook and workstation applications and 50% were of DRAM
products for more advanced infrastructure applications and
graphics, mobile and consumer DRAMs. Flash memory, other
products and licensing revenue accounted for the remaining 3%.
In our financial year ended September 30, 2005, 51% of our
net sales were of standard DRAMs for use in PC, notebook and
workstation applications, 38% were of DRAM products for more
advanced infrastructure applications and graphics, mobile and
consumer DRAMs and flash memory, other products and licensing
revenues accounted for the remaining 11%. In the nine months
ended June 30, 2007, 40% of our net sales were of standard
DRAMs for use in PC notebook and workstation applications and
59% were of DRAM products for more advanced infrastructure
applications and graphics, mobile and consumer DRAMs. Flash
memory, other products and licensing revenue accounted for about
1% of our net sales. For the financial year ended
September 30, 2006, our net sales were
3,815 million, our EBIT was 213 million
and our net income was 74 million. For the financial
year ended September 30, 2005, our net sales were
2,825 million, our EBIT was 111 million
and our net income was 18 million. For the nine
months ended June 30, 2007, our net sales were
2,897 million, our EBIT was 12 million and
our net income was 16 million.
Our
Carve-Out from Infineon
On November 17, 2005, Infineon announced its intention to
separate its Memory Product business from the remainder of its
activities and place the Memory Products business in a
stand-alone legal structure, with the preferred goal of
conducting a public offering of the shares of the new company.
For this purpose, substantially all of the assets, liabilities,
operations and activities, as well as the employees, of
Infineons former Memory Products segment were contributed
to us effective May 1, 2006. This excluded the Memory
Products operations in Korea and Japan, which have since been
transferred to us. While Infineons investment in the
Advanced Mask Technology Center (AMTC) and the Maskhouse
Building Administration Company (BAC) in Dresden has been
contributed to us, the legal transfer of this investment is not
yet effective because Infineons co-venturers have not yet
given the required consent to the transfer of the AMTC and BAC
interest. While pursuant to the AMTC and BAC limited partnership
agreements, such consent may not be unreasonably withheld, we,
Infineon and Infineons co-venturers have included this
consent in an agreement, currently being finalized, that also
addresses Infineons intention to reduce its stake in us to
below 50%. Infineon is obligated under the contribution
agreement to hold the AMTC and BAC interest for our economic
benefit. For as long as Infineon holds our interest in AMTC and
BAC, we must exercise our shareholder rights through Infineon,
which is a more cumbersome and less efficient method of
exercising these rights than if we held the interest directly. A
similar arrangement was in place for our joint venture with
Nanya, Inotera Memories, Inc., where Infineon held our shares in
trust until March 2007. Infineon transferred nearly all of these
shares to us on March 13, 2007. Only a portion of shares
representing less than 1% of the total Inotera share capital
remains in the trust. We do not expect these administrative
complexities to have a material adverse effect on our business,
financial condition and results of operations. We refer to the
former segments assets, liabilities, operations and
activities as the Memory Products business. Infineon
owns 85.9% of our company prior to this offering.
Basis
of Presentation of Our Combined Financial
Statements
Our combined and consolidated financial statements have been
prepared in accordance with U.S. GAAP. They are presented
on a carve-out or combined basis for all periods
prior to our carve-out and comprise the combined historical
financial statements of the transferred Memory Products business
assuming that we had existed as a separate legal entity for all
of the financial periods presented. Our financial statements are
presented on a consolidated basis for all periods thereafter.
The combined financial statements have been derived from the
consolidated financial statements and historical accounting
records of Infineon, employing the methods and assumptions we
describe below and in note 1 to the combined and
consolidated financial statements. Most 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.
Methodology. Infineon took two broad steps to
reflect the structure of the Memory Products business in the
historical financial data for the periods presented in this
prospectus supplement. The first step was to determine
S-48
which companies and business areas of Infineon belong to the
Memory Products business. The second step was to combine these
companies and business areas for accounting purposes.
The combined financial statements differ from the segment data
in Infineons consolidated financial statements in terms of
their stated objectives as well as in aspects of the information
they convey. The objective of Infineons segment reporting
was to present its Memory Products business as an integral part
of Infineon. Infineon historically allocated most financial
statement items among its segments, including the Memory
Products segment. However, for purposes of reporting segment
data, Infineon did not allocate some items among its various
segments, including certain corporate overhead costs that
supported Infineons businesses overall, including the
Memory Products business. The combined financial statements are
intended to present the Memory Products business on a
carve-out basis, which means as if it had been a
separate legal entity during all of the periods presented in
this prospectus supplement. In other words, the combined
financial statements present our historical financial condition,
statements of operations and cash flows based on the fictitious
assumption that our structure as it stands after the carve-out
had already existed in the past. The combined financial
statements therefore reflect further allocations to us,
consistent with our post-carve-out operation as a separate legal
entity.
Statements of Operations. The combined
statements of operations reflect all revenues and expenses that
were attributable to the Memory Products business. Operating
expenses or revenues of the Memory Products business that could
be specifically identified as pertaining to the Memory Products
business were charged or credited directly to it without
allocation or apportionment. This was the case for all of the
revenues appearing on the combined statements of operations.
Operating expenses that could not be specifically identified as
pertaining solely to the Memory Products business were allocated
to us to the extent they were related to us. The combined
statements of operations include expense allocations for certain
corporate functions historically provided to us by Infineon,
including basic research costs, employee benefits, incentives
and pension costs, interest expense, restructuring costs, the
costs of our share of central departments such as finance and
treasury and controlling and other costs. These allocations were
made on a specifically identifiable basis or using the relative
percentages, as compared to Infineons other businesses, of
total sales, cost of goods sold, other cost measures, headcount
or other reasonable methods. We and Infineon considered these
allocations to be a reasonable reflection of the utilization of
services provided. Our expenses as a separate, stand-alone
company may be higher or lower than the amounts reflected in the
statement of operations for historical periods. We describe the
allocation methods we used in note 1 to the combined and
consolidated financial statements.
Balance Sheets. As a general rule, the assets
and liabilities attributable to the Memory Products business
were contributed to us at their historical book values as shown
in Infineons balance sheet. Unless otherwise noted, all
assets and liabilities specifically identifiable as pertaining
to the Memory Products business are included in the combined
financial statements. Where legal entities and their businesses
are wholly allocable to the Memory Products business, the shares
of these entities were transferred to the Memory Products
business. In some cases, including at the Infineon parent
company level, the memory-related assets and liabilities were
identified and carved out by means of asset and liability
transfer transactions.
The assets and liabilities that were directly identifiable as
pertaining to Infineons Memory Products business include
inventories, fixed assets and accounts receivable. The
assumptions and allocations used for assets and liabilities that
were not specifically identifiable as being part of
Infineons Memory Products business are set forth in
note 1 to the combined and consolidated financial
statements.
Investments by and Advances from Infineon and our Capital
Structure. Because a direct ownership
relationship did not exist among the various entities comprising
the Memory Products business prior to our carve-out,
Infineons investments in and advances to the Memory
Products business represent Infineons interest in the
recorded net assets of the Memory Products business. These are
shown as business equity in lieu of shareholders equity in
the combined financial statements. All intercompany
transactions, including purchases of inventory and charges and
cost allocations for facilities, functions and services
performed by Infineon for the Memory Products business, are
reflected in this business equity. After we became a separate
company and Infineon contributed the Memory Products business to
us, this business equity in the amount of
3,372 million became our shareholders equity.
S-49
Capital Structure. The Memory Products
business has historically relied on Infineon to provide
financing of its operations. Because we have historically used
more cash in our investing activities than we have generated
through our operations, we have historically relied on Infineon
to provide a portion of the financing necessary to fund our
capital expenditures. These financings are reflected in our
short-term debt (which reflected 524 million of
interest-bearing advances to us from Infineon at
September 30, 2005) and in our business equity. The
capital structure attributed to the Memory Products business in
connection with the preparation of the combined financial
statements is based on the business equity concept and shows
only 108 million of independent financing on our
combined balance sheet as of September 30, 2005. As such,
it is not indicative of the capital structure that the Memory
Products business would have required had it been an independent
company during the financial periods presented. In April 2007,
we completely repaid our shareholder loan from Infineon.
The preparation of the accompanying combined and consolidated
financial statements required us to make estimates and
assumptions, as described in Critical Accounting
Policies below. We believe that the estimates and
assumptions underlying the combined financial statements are
reasonable. However, the combined financial statements included
herein may not necessarily reflect our results of operations,
financial position and cash flows in the future or what our
results of operations, financial position and cash flows would
have been had we been a separate, stand-alone company during the
periods presented.
Factors
that Affect our Results of Operations
Relationship
between DRAM prices and reduced unit costs
The average selling prices of standard DRAMs and, to a certain
extent, other semiconductor memory products, have generally
declined throughout the semiconductor memory industry during the
past ten years. We expect them to continue to do so in future
periods irrespective of industry-wide fluctuations as a result
of, among other factors, technological advancements and cost
reductions. Although we may from time to time be able to take
advantage of higher selling prices typically associated with new
products and technologies, we nevertheless expect the prices of
new products to also decline over time, in certain cases very
rapidly, primarily as a result of market competition. We have
adopted enhancements to our technology to reduce our per-megabit
manufacturing costs. These efforts have included the
introduction of new technology such as smaller feature sizes and
manufacturing using 300mm wafers. We expect that these measures
will enable us to reduce our costs per chip and thereby offset
declining chip prices. We will realize the full effects of these
manufacturing unit cost reductions after our conversion to the
80nm and 75nm technology nodes. In the meantime, we are
incurring higher
per-unit
costs in connection with this conversion which is expected to
extend through the 2007 financial year. We have also increased
our production in Asia, where we can take advantage of
lower-cost economies. Our margins are to a significant extent
dependent on the extent to which we can reduce our unit
manufacturing costs as prices decline.
Relationship
between the Capital Intensive Nature of our Business and the
Industrys Cyclicality
Declining prices have driven manufacturers, including ourselves,
to invest substantial sums to shrink die sizes and to construct
modern manufacturing facilities that permit the manufacture
using larger wafers at lower costs per chip. We have made
significant investments, individually and together with the
other companies with which we cooperate, to meet the challenges
these lower prices have brought. We invested a total of
601 million in the nine months ended June 30,
2007, a total of 686 million during our 2006
financial year and a total of 926 million in our 2005
financial year in property, plant and equipment, mainly related
to our 300mm fab in Richmond, Virginia. As a result of this
investment we have substantially increased our ratio of bits
manufactured using 300mm wafers to the point where we believe we
are ahead of our major competitors on this measure. However, as
we continue to ramp up our 300mm capacity, many of our
competitors are expanding their own capacities. To the extent
that demand for DRAM does not keep pace with these capacity
increases, an oversupply situation could arise in the industry,
as has occurred on a cyclical basis in the past and as we
believe occurred during the first two quarters of calendar year
2007.
We anticipate capital expenditures of approximately
900 million during our 2007 financial year. We
recently announced plans to construct a new 300mm manufacturing
facility in Singapore, which we plan to fully own. Depending on
the growth and development of the world semiconductor market, we
intend to invest approximately
S-50
2 billion in this facility over the next five years.
This facility may contribute to oversupply in the industry in
the future and we may have difficulty recovering our investment.
Exchange
Rate Fluctuations
We are subject to two categories of exchange rate risks,
transaction and translation risk.
Transaction risk arises where sales of a product are generated
in one currency but costs relating to those revenues are
incurred in a different currency. In the case of transaction
risk, changes in the value of the euro relative to the
U.S. dollar and other currencies generally have
interrelated consequences. For example, an increase in the value
of the euro relative to the U.S. dollar and other
currencies generally has these effects:
|
|
|
|
|
our margins (in euros) decline or become negative to the extent
our costs were incurred in euros and the sales were generated in
currencies weaker than the euro, and
|
|
|
|
our competitiveness may decline as compared with competitors
based in the countries with weaker currencies because our
products manufactured in Europe will have been produced at
constant costs (in euro) while their (constant) costs
denominated in weaker currencies will appear to have declined.
|
Conversely, a decrease in the value of the euro relative to the
U.S. dollar and other currencies generally has these
effects:
|
|
|
|
|
our margins (in euros) increase to the extent our costs were
incurred in euros and the sales were generated in currencies
stronger than the euro, and
|
|
|
|
our competitiveness may increase as compared with competitors
based in the countries with stronger currencies because our
products manufactured in Europe will have been produced at
constant costs (in euro) while their (constant) costs
denominated in stronger currencies will appear to have increased.
|
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as many of our
worldwide costs, primarily those relating to our design,
manufacturing, selling and marketing, general and
administrative, and research and development activities, are
denominated in other currencies, principally the
U.S. dollar. The portions of our sales and costs
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. If our non-euro denominated expenses do
not match our non-euro denominated sales, this currency
difference may have an adverse effect on our operating result.
Over time, transaction risk could adversely affect our cash
flows and results of operations to the extent we are unable to
reflect changes in exchange rates in the pricing of the products
in local currency. Given our revenue and expense structure, in
which most of our revenues are denominated in dollars but a
substantial portion of the costs relating to those revenues are
in euro, we experienced pressure, on our gross margin in
particular, in our 2004 and 2005 financial years and in the nine
months ended June 30, 2007 as a result of transaction risk.
In our 2006 financial year we benefited from changes in exchange
rates. The effects of transaction risk are not quantified in our
combined and consolidated financial statements.
Translation risk refers to the fact that the euro-denominated
amounts in our consolidated financial statements will differ
based on the exchange rates we use to prepare our
euro-denominated financial statements. Our subsidiaries located
outside the euro zone prepare their financial statements in
their local currencies. For us the most important currency
outside the euro zone is the U.S. dollar. The
U.S. dollar depreciated against the euro during our 2004
and 2005 financial years and appreciated against the euro during
our 2006 financial year, based on the average exchange rates we
use in our financial statements. The U.S. dollar
depreciated again during the nine months ended June 30,
2007, with the noon buying rate of the Federal Reserve Bank of
New York for euro falling from 1.00=$1.2687 on
September 29, 2006, the last currency trading day in
September 2006, to 1.00=$1.3520 on June 29, 2007, the
last currency trading day in June 2007. The U.S. dollar
depreciated further after that date, to a low of
1.00=$1.3950 on September 19, 2007. When we prepare
our financial statements, we translate the local currency
amounts in which the financial statements of our non-euro zone
subsidiaries are prepared into euro. Changes in the value of
these currencies relative to the euro from period to period
therefore affect our results of operations and financial
condition as expressed in euro. Currency translation risks do
not affect
S-51
local currency cash flows or results of operations, but do
affect our consolidated annual financial statements. In general,
an increase in the euro value relative to the U.S. dollar
and other currencies will result in a lower euro value of the
sales generated in currencies that have depreciated relative to
the euro. Even if the margin on these sales remains constant in
a non-euro currency, its value translated into euro will be
reduced.
Additional information on transaction and currency translation
risks and our efforts to manage them are contained in
Quantitative and Qualitative Disclosure About
Market Risk.
Strategic
Cooperations
We believe that cooperations, such as alliances for research and
development, and manufacturing and foundry partnerships, provide
us with access to several benefits that can be derived from
improved economies of scale. These benefits include sharing
risks and costs with our business partners, reducing our capital
requirements, developing a broader range of products, gaining
inter-cultural know-how and accessing additional production
capacities. We have invested substantial sums in these
cooperations in past periods. In addition, we have extensive
commitments to purchase products from our manufacturing
partners. The commitments relating to those purchases can not
accurately be quantified because they are dependent on future
market prices for memory products. These purchases aggregated
approximately 520 million in our 2005 financial year,
1,185 million in our 2006 financial year and
975 million in the first nine months of our 2007
financial year, as we increased our share of foundry purchases
from Winbond and SMIC, and from Inotera.
The most significant of our current co-operations in terms of
impact on our financial statements are:
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Nanya. In November 2002, Infineon entered into
agreements with Nanya Technology Corporation, a Taiwanese
corporation, that set out the terms of a strategic cooperation
for the development of DRAM products and DRAM process technology
and for the foundation of a joint venture to construct and
operate a 300mm manufacturing facility in Taiwan, called Inotera
Memories, Inc. Inoteras 300mm manufacturing facilities in
Taiwan employs production technology developed under
Infineons joint development agreements with Nanya. Under
the first of these agreements, we were co-developing and sharing
the development costs for advanced 90nm and 75nm process
technologies. Infineon also entered into a new agreement with
Nanya in September 2005, under which we are jointly developing
advanced 58nm technologies. Inoteras current capacity is
approximately 62,000 300 mm wafer starts per month in its first
manufacturing module. Inotera constructed a second manufacturing
module in our 2006 financial year. The
ramp-up of
capacities in this module has started and Inotera expects its
total capacity of both modules to reach 120,000 300mm wafer
starts per month by the end of the third quarter of the 2007
calendar year. Under the terms of the venture, Nanya and we each
purchase 50% of Inoteras output. Inotera completed an
initial public offering of its common stock in Taiwan in March
2006. In May 2006, Inotera listed Global Depositary Receipts, or
GDRs, on the Luxembourg Stock Exchange. After these transactions
we owned 36.0% of Inoteras shares. We account for Inotera
by the equity method. Because of Inoteras significance for
us within the meaning of
Rule 3-09
of the SECs
Regulation S-X,
we have included, elsewhere in this prospectus supplement,
Inoteras audited consolidated financial statements as of
and for the years ended December 31, 2005 and 2006.
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CSVC. In June 2003, Infineon established a
venture with China Singapore Suzhou Industrial Park Ventures
Co., Ltd. (CSVC) in Suzhou, China. CSVC is a limited liability
company organized under the laws of the Peoples Republic
of China. The venture, Infineon Technologies Suzhou Co., Ltd.
(recently renamed Qimonda Technologies (Suzhou) Co., Ltd. and
herein referred to as Qimonda Suzhou), constructed a back-end
facility for the assembly and testing of our products, which
officially opened in September 2004. We are required to purchase
the entire output of the facility. Infineon contributed its
ownership in Qimonda Suzhou to us in the carve-out effective
May 1, 2006 (45% of the ventures share capital,
representing 72.5% of the voting rights in the venture). We
currently hold 63% of Qimonda Suzhou. Because we from the
beginning exercised voting control over this venture, we have
consolidated it in our combined and consolidated financial
statements. We expect to invest a further $86.5 million in
Qimonda Suzhou by the end of our 2008 financial year pursuant to
our current contractual obligations, and will hold approximately
72.5% of its share
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S-52
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capital by that date, with CSVC owning the remaining 27.5%. We
have the option to acquire CSVCs stake at the nominal
investment value plus accrued and undistributed returns on that
investment.
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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. The joint venture intends to arrange external
financing for any further investment required to purchase
additional equipment. We cannot assure you that this external
financing can be obtained on favorable terms or at all.
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SMIC. In December 2002 Infineon entered into
an agreement, as most recently amended in August 2007, with
Semiconductor Manufacturing International Corporation (SMIC), a
Cayman Islands corporation with head offices in Shanghai, China.
As amended, the agreement provides access to additional DRAM
manufacturing capacity (up to 20,000 200mm wafer starts per
month plus up to 15,000 300mm wafer starts per month). This
agreement has been assigned to us as part of the carve-out.
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Winbond. In May 2002 and August 2004, Infineon
entered into product purchase and capacity reservation
agreements with Winbond Electronics Corporation, a Taiwanese
corporation, which give us access to additional DRAM production
capacity (up to 19,000 200mm wafer starts per month plus up to
18,000 300mm wafer starts per month). We procure an immaterial
quantity of our finished products under the 2002 agreement.
These agreements have been assigned to us as part of the
carve-out. On August 29, 2006, we signed agreements with
Winbond to expand our existing cooperation with Winbond and our
reservation of capacity at Winbonds facility. Under the
terms of the agreements, we will provide our 80nm DRAM trench
technology to Winbonds
300mm-wafer
facility. In return, Winbond will manufacture DRAMs for
computing applications using this technology exclusively for us.
On June 27, 2007, we signed agreements with Winbond to
expand our existing cooperation with Winbond and our reservation
of capacity at Winbonds facility for up to 24,000 300mm
wafer starts per month). Under the terms of the agreements, we
will provide our 75nm and 58nm DRAM trench technology to
Winbonds
300mm-wafer
facility. In return, Winbond will manufacture DRAMs for
computing applications using this technology exclusively for us.
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Please see Our Business and Arrangements
between Qimonda and the Infineon Group for more details on
these strategic cooperations.
In connection with our carve-out, some agreements, including
licensing, purchase and shareholding agreements, and investments
of Infineon relating to our business, could not be transferred
to us, or restrictions are delaying this transfer or, in the
future, could cause our interests to revert to Infineon or be
terminated. Any such reversion or termination could materially
adversely affect our financial condition and results of
operations. See Risk Factors Risks related to
our operations Some of our agreements with strategic
partners, such as our Inotera Memories, Inc. joint venture with
Nanya, have restrictions on transfers of the shares of the
ventures they create that could cause our ownership or equity
interest in these ventures to revert to Infineon or allow Nanya
to terminate for cause, if Infineon ceases to be our majority
owner.
Critical
Accounting Policies
The preparation of our combined and consolidated financial
statements required us to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the
years reported. We have identified the following critical
accounting policies and related assumptions, estimates and
uncertainties, which we believe are essential to understanding
the underlying financial reporting risks and the impact that
these accounting methods, assumptions, estimates and
uncertainties have on our reported financial results. These
policies have the potential to have a significant impact on our
combined and consolidated financial statements, either because
of the significance of the combined and consolidated financial
statement item to which they relate or because they require
judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are
continuous in nature. Actual results may differ from our
estimates under different assumptions and conditions. Our
critical accounting policies include:
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those made in connection with our initial preparation of the
combined financial statements;
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recoverability of long-lived assets;
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S-53
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valuation of inventory;
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pension plan accounting;
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realization of deferred tax assets;
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revenue recognition; and
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contingencies.
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Assumptions
and Estimates We Made in Preparing Our Combined Financial
Statements
The preparation of our combined financial statements requires us
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 dates of the
financial statements and the reported amounts of revenues and
expenses during the financial periods we present. Actual results
could differ materially from those estimates. In addition, due
to the significant relationship between Infineon and our
company, the terms of the carve-out transactions, the
allocations and estimations of assets and liabilities and of
expenses and other transactions between our business and
Infineon are not the same as those that would have resulted from
transactions among unrelated third parties. We believe that the
assumptions underlying the combined financial statements are
reasonable.
Allocations from Infineon during the financial years ended
September 30, 2004, 2005 and the seven months ended
April 30, 2006 are reflected in the combined statements of
operations as follows:
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For the
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For the
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financial year
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seven months
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ended
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ended
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September 30,
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April 30,
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2004
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2005
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2006
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(in millions)
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Cost of goods sold
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180
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168
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111
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Research and development expenses
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43
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27
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17
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Selling, general and
administrative expenses
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160
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109
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75
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Other operating expenses, net
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2
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Restructuring charges
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2
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1
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387
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305
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203
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The allocation during the 2006 financial year relates to the
seven-month period between October 1, 2005 and
April 30, 2006. After our carve-out on May 1, 2006,
costs are charged according to agreements with Infineon, which
amounted to 119 million for the five months period
ended September 30, 2006. See note 1 to the combined
and consolidated financial statements for a description of the
assumptions used for periods prior to the carve-out. However,
these transactions, allocations and estimates are not indicative
of those that would have obtained had our company actually been
operated on a stand-alone basis, nor are they indicative of our
future transactions or of our expenses or results of operations.
In addition, the process of preparing the combined financial
statements does not permit the revaluation of historical
transactions to attempt to introduce an arms length
relationship where one did not at the time exist. We believe
that it is not practicable to estimate what the actual costs of
our 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 our
business, we 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 combined financial statements.
Recoverability
of Long-Lived Assets
Our business is extremely capital-intensive, and requires
significant investment in property, plant and equipment. Due to
rapid technological change in the semiconductor industry, we
anticipate the level of capital
S-54
expenditures to be significant in future periods. During the
2006 financial year, we spent 686 million, and during
the first nine months of our 2007 financial year, we spent
601 million to purchase property, plant and equipment.
At September 30, 2006, the carrying value of our property,
plant and equipment was 2,080 million and at
June 30, 2007, the carrying value was
2,129 million. We have acquired other businesses,
which resulted in the generation of significant amounts of
long-lived intangible assets, including goodwill. At
September 30, 2006 we had long-lived intangible assets of
143 million and at June 30, 2007 we had
long-lived intangible assets of 149 million, mainly
because we entered into license agreements for intellectual
property.
We adopted the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, as of October 1, 2001.
Pursuant to the requirements of SFAS No. 142, a test
for impairment is done at least once a year.
We review long-lived assets, including intangible assets, for
impairment when events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying value of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment recognized is measured
by the amount by which the carrying value of the assets exceeds
the fair value of the assets. Estimated fair value is generally
based on either appraised value or discounted estimated future
cash flows. Considerable judgment is necessary to estimate
discounted future cash flows.
We test goodwill for impairment pursuant to
SFAS No. 142, however did not recognize any goodwill
impairment charges during the years ended September 30,
2004 or 2005. In light of the weak market conditions for
commodity NAND flash memories in the three months ended
September 30, 2006, we decided to ramp down our flash
production and stop the current development of NAND-compatible
flash memory products based on Saifuns proprietary NROM
technology. We and Saifun amended the license agreement relating
to this technology to terminate the payment of quarterly
installments as of December 31, 2006. As a result of the
partial termination, we reduced payables, goodwill and other
intangible assets, and recognized an impairment charge of
9 million related to the license
(7 million) and fixed assets (2 million)
that were not considered to be recoverable as of
September 30, 2006.
Valuation
of Inventory
The memory industry has historically experienced periods of
extreme volatility in product demand and in industry capacity,
resulting in significant price fluctuations. See
Factors that Affect our Results of
Operations and Risk Factors Risks
related to the semiconductor memory industry The
DRAM industry is subject to cyclical fluctuations, including
recurring periods of oversupply, which result in large swings in
our operating results, including large losses. These
significant price fluctuations have often occurred within
relatively short timeframes. For example, the average
spot market price for 256Mb DDR 400 DRAM as reported
by DRAMeXchange fell from $4.00 at January 26, 2005 to
$2.42 at March 30, 2005, a decline of nearly 40% in two
months. The average spot market price for 512Mb DDR2
DRAM as reported by DRAMeXchange fell from $5.07 at
October 3, 2005 to $3.71 at December 14, 2005, a
decline of nearly 27% in two and a half months. In the nine
months ended June 30, 2007, there were further significant
declines in market prices. The average spot market
price for 512Mb DDR2 DRAM as reported by DRAMeXchange fell from
$6.36 on December 29, 2006 to $1.70 on May 22, 2007, a
drop of 73% in less than six months. Rapid price increases can
also occur. For example, the average spot market
price for 512Mb DDR2 DRAM as reported by DRAMeXchange increased
from $3.75 on January 2, 2006, to $5.15 on February 2,
2006, a gain of over 37% in just one month. Over the long term,
however, DRAM prices have generally tended to decline.
We value inventory on a quarterly basis at the lower of cost or
market value. Market value of inventory represents the net
realizable value for finished goods and
work-in-process.
As of September 30, 2005 and 2006, we had inventory of
484 million and 622 million, respectively.
We review the recoverability of inventory based on regular
monitoring of the size and composition of inventory positions,
current economic events and market conditions, projected future
product demand and the pricing environment. This evaluation is
inherently judgmental and requires material estimates. These
estimates relate both to forecasted product demand and to the
pricing environment. Both of these are susceptible to rapid and
significant change.
S-55
In the 2004, 2005 and 2006 financial years as well as in the
first nine months of the 2007 financial year, we recorded
recurring mark-to-market adjustments to value our inventory
according to this policy. This adjustment amounted to
66 million in the three months ended June 30,
2007. Likewise, in future periods write-downs on inventory may
become necessary due one or more of the following:
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temporary or fundamental price declines as a consequence of an
imbalance of demand and supply, which can occur due to weak
demand
and/or
greatly increased supply;
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technological obsolescence due to rapid developments of new
products and technological improvements; and
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changes in economic circumstances or in other conditions that
impact the market price for our products.
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These factors could result in adjustments to the valuation of
inventory in future periods, and have a material adverse effect
on our consolidated financial statements.
Pension
Plan Accounting
We account for our pension-benefit liabilities and related
postretirement benefit costs in accordance with
SFAS No. 87 Employers Accounting for
Pensions. Until our own pension plan takes effect, our
employees will continue to participate in Infineons
pension plans. Infineons plans generally specify the
amount of pension benefit that each employee will receive for
services performed during a specified period of employment
(so-called defined benefit plans). Nearly all of
Infineons pension plans are defined benefit plans. As part
of the carve-out, Infineon transferred to us the portion of
pension liabilities related to our employees. In our combined
and consolidated financial statements, the level of plan assets,
or funding, of our pension obligations is proportional to
Infineons funding of its pension plans in relation to its
pension obligations. On September 13, 2006, Qimonda AG
established the Qimonda Pension Trust for the purpose of funding
future pension benefit payments for employees in Germany. In
September and October 2006, Infineons pension trust
transferred 26 million of cash, representing our
proportion of the funding in Infineons pension trust
(determined on an actuarial basis as of the carve-out date) to
this trust for use in funding these pension benefit obligations.
The Qimonda Pension Trusts investment strategy is to
invest this cash in a well-diversified portfolio of investments
aimed at maximizing long-term returns. In February 2007, we
established a uniform Qimonda Pension Plan for Germany with
effect from October 1, 2006. The plan qualifies as a
defined benefit plan and, accordingly, the change from the
previous defined benefit plans is treated as a plan amendment
pursuant to SFAS No. 87. We believe that the impact of
this pension plan amendment on projected benefit obligations and
net periodic pension costs is immaterial. We are in the process
of measurement of the pension obligations on its regular
measurement date June 30, 2007 and will report the related
effects, if any, in the three months ending September 30,
2007.
Our pension benefit costs and liabilities are actuarially
calculated using various assumptions, including discount rates,
expected return on plan assets, rate of compensation increase
and rate of projected future pension increases. These
assumptions are based on prevailing market conditions, long-term
historical averages, and estimates of future developments of
rates of returns. Please see note 28 to the combined and
consolidated financial statements for a quantification of the
major assumptions underlying our pension plan accounting,
information on our plan asset allocations and a discussion of
our current funding status. A significant variation in one or
more of the underlying assumptions could have a material effect
on the measurement of our long-term obligation or our pension
cost and therefore our financial condition or results of
operations.
If the assumptions used to calculate the pension liabilities and
expected return on plan assets turn out to be accurate, we will
pay our recorded net liability as pension benefits to our
employees after they retire, and no adjustments to our balance
sheet accrual will be necessary. Differences between actual
experience and these assumptions, however, can result in
differences between our recorded net liability and the related
actuarially calculated amount. These differences, also referred
to as actuarial gains and losses, are generally not recognized
in the consolidated statements of operations as they occur.
Instead, due to the long-term nature of pensions and the related
assumptions, they affect pension costs over the remaining
service years of the relevant employees. However, differences
exceeding a standard significance threshold are recorded
immediately as pension cost. Our actuarial losses amounted to
1 million in the 2004 financial year,
4 million in the 2005 financial year and
0 million in the
S-56
2006 financial year. The decrease in actuarial losses in the
2006 financial year was primarily the result of our use of new
mortality tables in the actuarial calculations for our domestic
(German) pension plans in the 2005 financial year. The increase
in actuarial losses in the 2005 financial year was primarily the
result of the reduction of the discount rate used to determine
the benefit obligation and our use of the new mortality tables
in the actuarial calculations mentioned above.
Pension
Benefits Sensitivity Analysis
The expense related to pension plans and similar commitments we
recognize in our consolidated financial statements is referred
to as net periodic pension cost (NPPC) and consists
of several separately calculated components. We estimate that
our NPPC for our 2007 financial year will be
7.4 million. A one percentage point change in the
major assumptions mentioned above would result in the following
impact on the estimated pension cost for the 2007 financial year:
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Effect on net periodic
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pension costs
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One percent
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One percent
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increase
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decrease
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(in millions)
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Discount rate
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(2.3
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2.8
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Rate of compensation increase
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1.4
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(1.7
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Rate of projected future pension
increases
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1.4
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(1.6
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Expected return on plan assets
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(0.5
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0.0
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Increases and decreases in the discount rate, rate of
compensation increase and rate of projected future pension
increases, which are used in determining the pension obligation,
do not have a symmetrical effect on NPPC primarily due to the
compound interest effect created when determining the present
value of the future pension obligation. If more than one
assumption were changed simultaneously, the impact would not
necessarily be the same as if only one assumption were changed
in isolation.
Our pension plans were underfunded by an aggregate of
29 million as of September 30, 2006, and after
adjusting for unrecognized actuarial losses as described above
of 7 million, we recognized the remaining
22 million as a liability on our balance sheet. Our
pension plans were underfunded by an aggregate of
31 million as of September 30, 2005, and after
adjusting for unrecognized actuarial losses of
4 million as described above, we recognized the
remaining 27 million as a liability on our balance
sheet. As the present value of our expected future benefits
payable over the years through 2016 was 12 million on
September 30, 2006, we do not perceive a need to increase
our plan funding in the immediate future.
In February 2007, we established a uniform Qimonda Pension Plan
for Germany with retroactive effect from October 1, 2006.
The plan qualifies as a defined benefit plan and, accordingly,
the change from the previous defined benefit plans is treated as
a plan amendment pursuant to SFAS No. 87. We believe
that the impact of this pension plan amendment on projected
benefit obligations and net periodic pension costs is
immaterial. We will measure the pension obligations on its
regular measurement date June 30, 2007 and report the
related effects, if any, in the three months ending
September 30, 2007.
Realization
of Deferred Tax Assets
Income taxes as presented in the accompanying combined and
consolidated financial statements are determined on a separate
return basis. Although in numerous tax jurisdictions, including
Germany, the company was included in the consolidated tax
returns of Infineon, where the Memory Products business was only
a part of an Infineon entity, the tax provision has been
prepared on an as-if separate company basis except that,
pursuant to the terms of the contribution agreement between us
and Infineon, any net operating losses generated by the Memory
Products business and carried forward are treated as a reduction
of equity at the end of the year, as such losses were retained
by Infineon. Infineon evaluates its tax position and related tax
strategies for its entire group as a whole, which may differ
from the tax strategies we would have followed as a stand-alone
company.
We recognize deferred income tax assets only if we determine
that it is more likely than not that we will be able to realize
the tax benefits in the future from accumulated temporary
differences and tax loss carry-forwards. At
S-57
September 30, 2005 and 2006, our total net deferred tax
assets were 165 million and 153 million,
respectively. Included in this amount are the tax benefits of
net operating loss and credit carry-forwards of approximately
87 million as of September 30, 2005 and of
approximately 32 million as of September 30,
2006. We provided valuation allowance against our total deferred
tax asset of 59 million and 70 million,
respectively. These tax credit carry-forwards are generally
limited to the amount used by the particular entity that
generated the loss or credit and in certain circumstances do not
expire under current law. Because as a general matter net
operating loss carry-forwards are not transferable, certain net
operating loss and credit carry-forwards remain on
Infineons balance sheet because they were generated by
legal entities not transferred to us in connection with the
carve- out. In the future, Infineon will be able to offset its
tax expense with these carry-forwards. This is shown on our
balance sheets prior to our carve-out as a reduction in our
business equity of 6 million as of September 30,
2005.
We evaluate our deferred tax asset position and the need for a
valuation allowance on a regular basis. The assessment requires
the exercise of judgment on the part of our management with
respect to, among other things, benefits that can be realized
from available tax strategies and future taxable income. Our
ability to realize deferred tax assets depends on our ability to
generate future taxable income sufficient to use tax loss
carry-forwards or tax credits before their expiration. The
assessment is based on the benefits that could be realized from
available tax strategies, the reversal of taxable temporary
differences in future periods and the impact of forecasted
future taxable income. As a result of this assessment, we
increased the deferred tax asset valuation allowance in the 2006
financial year by 11 million and in the 2005
financial year by 14 million to reduce the deferred
tax asset to an amount that we believe is more likely than not
expected to be realized in the future. This amount excluded tax
losses of 101 million before the carve-out that could
not be transferred to us and will instead be available to
Infineon in the future. The highly subjective character of many
of the determinations Statement of Financial Accounting
Standards (SFAS) No. 109 Accounting For
Income Taxes requires in measuring the valuation allowance
means that our deferred tax assets may be subject to further
reduction if our expectations, especially those relating to the
future taxable income from operations (and to benefits from
available tax strategies), prove to be too optimistic.
Revenue
Recognition
We sell our memory products throughout the world. Our policy is
to record revenue when persuasive evidence of an arrangement to
sell products exists, the price is fixed or determinable,
shipment is made and collectibility is reasonably assured. In
general, persuasive evidence of an arrangement exists when the
customers written purchase order has been accepted. More
judgment is required in the case of our licensing agreements,
while the revenues from most of our DRAM business can be
recognized using standardized processes.
We record reductions to revenue for estimated product returns
and allowances for discounts and price protection, based on
actual historical experience, at the time the related revenue is
recognized. We also establish reserves for sales discounts,
price protection allowances and product returns based upon our
evaluation of a variety of factors, including industry demand.
This process requires the exercise of substantial judgments in
evaluating the above-mentioned factors and requires material
estimates, including forecasted demand, returns and industry
pricing assumptions.
We have entered into licensing agreements for our technology in
the past, and anticipate that we will continue our efforts to
monetize the value of our technology in the future. As with
certain of our existing licensing agreements, any new licensing
arrangements may include capacity reservation agreements with
the licensee. Such transactions could represent multiple element
arrangements pursuant to SEC Staff Accounting Bulletin
(SAB) 104, Revenue Recognition, and
Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Elements. This
treatment can have the result of deferring license revenues and
recognizing them over the period in which we are purchasing
products from the licensee. The process of determining the
appropriate revenue recognition in such transactions is highly
complex and requires significant judgment, which includes
evaluating material estimates in the determination of fair value
and the level of our continuing involvement.
Contingencies
We are subject to various legal actions and claims that arise in
the normal course of business. In particular, we are subject to
significant civil lawsuits that relate to the operations of the
Memory Products business prior to the carve-out, including the
civil antitrust litigation in the United States and Canada,
securities class actions and patent litigation. These matters
are described in Our Business Legal
Matters. As part of our carve-out, we agreed to
S-58
indemnify Infineon with respect to claims (including any related
expenses) arising in connection with certain matters, which are
described under Arrangements between Qimonda and the
Infineon Group.
We regularly assess the likelihood of any adverse outcome or
judgments related to these matters and, where appropriate,
estimate the range of possible losses and recoveries. We record
liabilities, including accruals for significant litigation costs
related to legal proceedings, when it is probable that a
liability has been incurred and the associated amount of the
loss can be reasonably estimated. Where the estimated amount of
loss is within a range of amounts and no amount within the range
is a better estimate than any other amount or the range cannot
be estimated, we accrue the minimum amount. Accordingly, we have
accrued a liability and charged operating income in our combined
and consolidated financial statements related to certain
asserted and unasserted claims existing as of each balance sheet
date. As additional information becomes available, we assess any
potential liability related to these actions and revise the
estimates, if necessary. These accrued liabilities may be
insufficient and are subject to change in the future based on
new developments in each matter, or changes in circumstances.
Any change we make in them could have a material impact on our
results of operations, financial position and cash flows. See
Risk Factors Risks related to our operations
Sanctions in the United States and other countries
against us and other DRAM producers for anticompetitive
practices in the DRAM industry and related civil litigation may
have a direct or indirect material adverse effect on our
operations and An unfavorable outcome in
the pending securities litigation against Infineon or the
incurrence of significant costs in the defense of this
litigation may have a direct or indirect material adverse effect
on our operations.
Results
of Operations
The following table presents the various line items in our
combined and consolidated statements of operations expressed as
percentages of net sales for the periods indicated.
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|
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|
For the financial year ended
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|
For the nine months ended
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|
September 30,
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|
June 30,
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|
2004
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|
2005
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|
2006
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2006
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2007
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|
(in percent)
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|
Net sales
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100.0
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%
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|
100.0
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%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
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|
68.6
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|
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|
76.6
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|
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|
79.9
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|
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83.5
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88.8
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|
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|
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|
Gross profit
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31.4
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23.4
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20.1
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16.5
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11.2
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Research and development expenses
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11.5
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13.8
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11.3
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12.6
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10.0
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Selling, general and
administrative expenses
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7.7
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7.3
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5.6
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6.2
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4.8
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Restructuring charges
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0.1
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|
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|
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|
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Other operating (expenses) income,
net
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(6.4
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)
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(0.5
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)
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|
(1.6
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)
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|
(0.5
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)
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0.2
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|
|
|
|
|
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|
|
|
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|
|
|
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Operating income (loss)
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|
5.7
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|
|
|
1.8
|
|
|
|
1.5
|
|
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|
(2.9
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)
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(3.4
|
)
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Interest income (expense), net
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|
(1.0
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)
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(0.2
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)
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|
(0.7
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)
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|
(0.9
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)
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|
(0.1
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)
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Equity in (losses) earnings of
associated companies
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|
(0.5
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)
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1.6
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|
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2.1
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|
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1.5
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|
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3.6
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Gain on associated company share
issuance
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|
0.1
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|
|
|
|
|
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|
1.9
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|
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|
1.2
|
|
|
|
|
|
Other non-operating income
(expense), net
|
|
|
(0.4
|
)
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Minority interests
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|
|
0.6
|
|
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|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
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)
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|
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|
|
|
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|
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|
Income (loss) before income taxes
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|
|
4.4
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|
|
|
3.7
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|
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|
4.9
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|
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|
(0.9
|
)
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|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income tax (expense) benefit
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|
|
(7.0
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)
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|
(3.0
|
)
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|
(3.0
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)
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|
(2.2
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)
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|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(2.6
|
)%
|
|
|
0.6
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%
|
|
|
1.9
|
%
|
|
|
(3.2
|
)%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
S-59
Financial Year Ended September 30, 2006 Compared to
Financial Year Ended September 30, 2005 and Financial Year
Ended September 30, 2005 Compared to Financial Year Ended
September 30, 2004
Net
Sales
We generate our net sales primarily from the sale of our memory
products. Our memory products consist primarily of dynamic
random access memory (DRAM) products, which are used in
computers and other electronic devices. We also offer a limited
range of non-volatile flash memory products, which are used in
consumer applications such as digital still cameras or cellular
handsets. We generate the vast majority of our memory product
sales through our direct sales force, with approximately 13% of
our total revenue in the 2006 financial year derived from sales
made through distributors.
We also generate a small stream of revenues from royalties and
license fees earned on technology that we own and license to
third parties. This often enables us to gain access to
manufacturing capacity at foundries through joint licensing and
capacity reservation arrangements, and also permits us to
recover a small portion of our research and development expenses.
The following table presents data on our net sales for the
periods indicated.
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|
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|
For the financial year ended
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September 30,
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|
|
2004
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|
2005
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|
2006
|
|
|
|
(in millions, except percentages)
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|
Net sales:
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|
|
|
|
|
|
|
|
|
|
|
|
Memory products
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|
2,947
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|
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|
2,665
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|
|
|
3,808
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|
% of net sales
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|
98
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%
|
|
|
94
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%
|
|
|
100
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%
|
License revenue
|
|
|
61
|
|
|
|
160
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net sales
|
|
|
2
|
%
|
|
|
6
|
%
|
|
|
0
|
%
|
Total net sales
|
|
|
3,008
|
|
|
|
2,825
|
|
|
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange over
prior year
|
|
|
|
|
|
|
(132
|
)
|
|
|
117
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|
% of net sales
|
|
|
|
|
|
|
(5
|
)%
|
|
|
3
|
%
|
Our total net sales in the 2006 financial year increased by
990 million, or 35%, from 2,825 million in
the 2005 financial year to 3,815 million in the 2006
financial year. Primarily responsible for the increase were:
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|
|
|
|
higher bit shipments, which increased 79%; and
|
|
|
|
a 3% increase in the average exchange rate of dollar for euro.
|
Offsetting these increases in part were decreases related to:
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|
|
|
|
DRAM price declines of 20%; and
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|
|
|
the positive effect in the prior year period of license income
from ProMOS of 118 million.
|
We increased the proportion of our total sales accounted for by
graphics, mobile and consumer DRAMs during our 2006 financial
year. These types of products generally command higher and more
stable prices than standard DRAMs. In our 2006 financial year we
made considerable progress with our diversification strategy by
successfully entering the DRAM market for game consoles. Sales
of DRAM products for use in game consoles drove significant
growth in bit shipments of graphic products that contributed to
the increasing share of net sales from DRAMs for infrastructure,
graphics, mobile and consumer applications to 50% compared to
38% in the 2005 financial year.
Our total net sales in the 2005 financial year declined by
183 million, or 6%, from 3,008 million in
the 2004 financial year to 2,825 million in the 2005
financial year. Primarily responsible for the decline were:
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|
|
DRAM price declines of 27%;
|
|
|
|
a 4% decline in the average exchange rate of dollar for
euro; and
|
|
|
|
the transfer to Infineon of the Dresden 200mm facility.
|
S-60
Offsetting the decline in part were increases from:
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|
|
|
|
higher sales volumes, or bit shipments, of 31%; and
|
|
|
|
the recognition of license income from ProMOS of
118 million.
|
Increase in bit shipments. Our bit shipments
increased by 79% during the 2006 financial year compared to the
2005 financial year due to:
|
|
|
|
|
our progress in increasing the yield of our 110nm technology,
|
|
|
|
the conversion of an increasing share of our capacities to our
90nm technology,
|
|
|
|
our access to additional capacities of our joint venture
partners and our foundries,
|
|
|
|
the overall demand growth in the DRAM market and our successful
diversification in new market segments, particularly with our
graphic DRAM products, and
|
|
|
|
the ramp-up
of production volumes at our Richmond 300mm facility.
|
Our bit shipments increased by 31% during the 2005 financial
year as compared to the 2004 financial year. This growth was
primarily a result of:
|
|
|
|
|
our progress in converting our capacities towards the 110nm
technology node and increasing the yield of those facilities
that are using that technology;
|
|
|
|
the ramp-up
of our manufacturing joint venture Inotera and the access to
additional capacity through our cooperation with Winbond and
SMIC; and
|
|
|
|
the overall increased sales volume during the 2005 financial
year. This resulted from increased market demand, particularly
for PCs, increased bits per box and increasing
demand for non-PC products including infrastructure and
graphics, mobile and consumer DRAMs.
|
The majority of our semiconductor memory product sales comprised
256Mb DRAMs (68% of total bit shipments) in the first half of
the 2005 financial year and 512Mb DRAMs (56% of total bit
shipments) in the second half of the 2005 financial year as the
market shifted to the next higher-density product generation.
The shift to higher density products we experienced in 2005
continued in 2006. In the 2006 financial year, 74% of total bit
shipments were of 512Mb DRAMs, while 51% were of 256Mb DRAMs in
the 2005 financial year. The share of capacities converted to
the 90nm technology node increased from on average 3% in the
2005 financial year to on average 22% in the 2006 financial year
based on wafer starts.
Exchange rate effects. The U.S. dollar
strengthened against the euro in the 2006 financial year, with
the average exchange rate for the period 3% higher than it was
for the 2005 financial year. This favorable U.S. dollar
euro exchange rate contributed to an increase in our revenues
during our 2006 financial year. We have calculated the effects
of this translation risk as follows: we would have achieved
117 million less in net sales in the 2006 financial
year, had the average exchange rates we used to translate our
non-euro denominated sales into euros been the same in the 2006
financial year as they were in the 2005 financial year.
The U.S. dollar/euro exchange rate had an opposite effect
in our 2005 financial year. Although the U.S. dollar was
slightly stronger on September 30, 2005 than it had been
one year earlier, the average exchange rate of U.S. dollars
for euro over the financial year was 4% lower than it was for
the 2004 financial year. We have calculated the effects of this
translation risk as follows: we would have achieved
132 million more in net sales in our 2005 financial
year had the average exchange rates we used to translate our
non-euro denominated sales into euros been the same in the 2005
financial year as they were in the 2004 financial year.
Price declines and increases. DRAM prices were
under substantial pressure during the first quarter of our 2006
financial year, after which they recovered over the remaining
three quarters. Our average per-megabit selling prices for DRAM
products (expressed in U.S. dollars) were approximately 20%
less in the 2006 financial year compared with the 2005 financial
year. The per-megabit selling prices in U.S. dollars in the
spot market of our major products with DDR2 interfaces declined
sharply at the start of our financial year, declining around 26%
over the first
S-61
three months. During this quarter, we produced an excess of DDR2
DRAMs because the corresponding DDR2 logic chipsets, which are
produced by logic semiconductor manufacturers, were not
available in quantities sufficient for PC manufacturers to
absorb the supply of DDR2 DRAMs in the market. A portion of the
DDR2 DRAMs that we produced remained unsold and in our inventory
until supply of appropriate logic chipsets created sufficient
demand for our accumulated DDR2 DRAMs. After December 2005
prices recovered somewhat and after a period of stable pricing
until May, DDR2 pricing experienced some price erosion until
July before again rising through to September 30, 2006 due
to tight market supply. DDR prices recovered steadily, albeit
more slowly than DDR2, from the December 2005 low points,
continuing to increase through to the end of our financial year.
DRAM prices were under substantial pressure during our 2005
financial year, especially during the first half. Our average
per-megabit selling prices for DRAM products (expressed in
U.S. dollars) were approximately 27% less in the 2005
financial year compared with the 2004 financial year. Average
per-megabit selling prices in U.S. dollars of our major
products with DDR and DDR2 interfaces, declined sharply,
especially early in the year. After April, prices for DDR
products stabilized, while those for DDR2 products remained
under pressure as a result of a supply overhang and slower than
expected conversion by PC manufacturers to DDR2 as one of the
primary memory interfaces they use. Both contract and spot
prices followed this trend. Average per-megabit selling prices
for lower-density SDRAM products declined during the financial
year as well. The following graph shows the price declines in
DRAM (expressed in 256Mb equivalents) during the three year
period ended September 30, 2006.
(Source: WSTS)
Dresden 200mm transfer. A decline in net sales
of 84 million in the 2005 financial year compared to
the 2004 financial year was due to the transfer, effective
October 1, 2004, of the 200mm front-end manufacturing
facility in Dresden, Germany from Infineons Memory
Products segment to its Communications segment. In preparing our
combined and consolidated financial statements, we treated as
external sales those sales the Dresden 200mm facility made to
other Infineon businesses while it was part of our business.
Following the transfer, these sales are no longer included in
our net sales. The wafers produced by the Dresden 200mm facility
for use in our business appear in our net sales for the 2005 and
2006 financial years because these are sold to customers outside
the Infineon Group.
Fluctuation in license revenue. In the 2005
financial year our license revenue increased from
61 million to 160 million, primarily due
to the settlement Infineon reached with ProMOS in November 2004.
Under this agreement, which resolved an intellectual property
dispute that had begun in 2003, Infineon licensed DRAM
technology to ProMOS for ongoing use by ProMOS, resulting in our
recognition of 118 million in revenue during
S-62
the 2005 financial year. This 118 million represents
the present value of the aggregate $156 million payment
ProMOS agreed to make to Infineon in four equal payments under
this settlement. Excluding these ProMOS-related revenues, our
license revenues fell as a result of the timing of payments
under our other outstanding licenses. Our license income
remained relatively constant at this lower level for the 2006
financial year. We do not expect license revenues in future
periods to be as substantial as they were in prior periods.
Net
Sales by Region
The following table sets forth our sales by region for the
periods indicated. We categorize our sales geographically based
on the location where the customer chooses to be billed.
Delivery might be to another location and the customer may ship
the products on for further use.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Germany
|
|
|
398
|
|
|
|
13
|
%
|
|
|
232
|
|
|
|
8
|
%
|
|
|
316
|
|
|
|
8
|
%
|
Rest of Europe
|
|
|
343
|
|
|
|
12
|
|
|
|
333
|
|
|
|
12
|
|
|
|
482
|
|
|
|
12
|
|
North America
|
|
|
1,135
|
|
|
|
38
|
|
|
|
1,067
|
|
|
|
38
|
|
|
|
1,591
|
|
|
|
42
|
|
Asia/Pacific
|
|
|
1,001
|
|
|
|
33
|
|
|
|
1,091
|
|
|
|
38
|
|
|
|
1,174
|
|
|
|
31
|
|
Japan
|
|
|
131
|
|
|
|
4
|
|
|
|
102
|
|
|
|
4
|
|
|
|
252
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,008
|
|
|
|
100
|
%
|
|
|
2,825
|
|
|
|
100
|
%
|
|
|
3,815
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We experienced increased sales of specialty products, in
particular to consumer electronics and game-console
manufacturers, in the North America and Japan regions during the
2006 financial year. This resulted in a proportional increase
relative to the other regions compared to the 2005 financial
year.
Due to the recognition of the 118 million in revenue
of the Asia/Pacific region relating to the ProMOS License
agreement in the 2005 financial year, the percentage of net
sales in the Asia/Pacific region is relatively high in the 2005
financial year. Without this license recognition the percentages
of net sales on the Asia/Pacific region would have been 2% lower
and closer to the 2004 percentage of 33%. The Rest of
Europe region also includes other countries and territories in
the rest of the world outside of the other listed geographic
regions with aggregate sales representing no more than 2% of
total sales in any period.
Cost
of Goods Sold and Gross Margin
Our cost of goods sold consists principally of expenses relating
to:
|
|
|
|
|
direct materials, principally raw wafers;
|
|
|
|
employee costs;
|
|
|
|
overhead, including maintenance of production equipment,
indirect materials (such as photomasks) and royalties;
|
|
|
|
depreciation and amortization;
|
|
|
|
subcontracted assembly and testing services;
|
|
|
|
production support, including facilities, utilities, quality
control, automated systems and management functions; and
|
|
|
|
foundry production (including chips we purchase from our Inotera
joint venture).
|
In addition to factors that affect our revenues and those
affecting the components of cost of goods sold listed above, the
following factors, not all of which were material in the periods
under review, affected our gross margin:
|
|
|
|
|
foreign currency conversion gains (or losses) on transactions in
non-euro currencies and translations into euro;
|
S-63
|
|
|
|
|
amortization of purchased intangible assets;
|
|
|
|
product warranty costs;
|
|
|
|
provisions for excess or obsolete inventories; and
|
|
|
|
government grants, which we recognize over the remaining useful
life of the related manufacturing assets.
|
Our purchases from our joint ventures and other associated and
related companies, such as Inotera, amounted to
438 million in the 2006 financial year,
247 million in the 2005 financial year and
23 million in the 2004 financial year. In addition,
we purchased 747 million in our 2006 financial year
of inventory from our foundry partners compared to
273 million in our 2005 financial year and
91 million in our 2004 financial year. These amounts
are included in cost of goods sold.
The following table sets forth our cost of goods sold and
related data for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year ended
|
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Cost of goods sold
|
|
|
2,063
|
|
|
|
2,164
|
|
|
|
3,048
|
|
% of net sales
|
|
|
69
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
Gross margin
|
|
|
31
|
%
|
|
|
23
|
%
|
|
|
20
|
%
|
Cost of goods sold increased by 884 million, or 41%
from 2,164 million in 2005 financial year to
3,048 million in 2006 financial year. The increase in
our cost of goods sold was due primarily to:
|
|
|
|
|
higher bit shipments;
|
|
|
|
higher absolute costs from production
ramp-up and
increased purchases from foundries; and
|
|
|
|
exchange rate effects.
|
Offsetting these increases in part were improvements in our
productivity.
Cost of goods sold increased by 101 million, or 5%,
from 2,063 million in the 2004 financial year to
2,164 million in the 2005 financial year. The
increase in our cost of goods sold was due primarily to:
higher bit shipments; and
offsetting these increases in part were decreases related to:
the Dresden 200mm transfer;
exchange rate effects; and
increases in our productivity.
Higher bit shipments. The 79% increase in bit
shipments in the 2006 financial year was due primarily to the
ramp-up of
production volumes at our Richmond 300mm facility, at Inotera
and at those of our foundry partners manufacturing on 300mm
wafers. In the 2006 financial year, we sourced in bits over 198%
more chips from these partners than we had during the 2005
financial year. As discussed below, we believe that productivity
improvements were partially responsible for holding the
percentage increase in costs below the percentage increase in
bit shipments, as was the spreading of our fixed costs against a
greater level of bit shipments.
The 31% increase in bit shipments in our 2005 financial year led
to an increase in material and personnel costs. As discussed
below, we believe that productivity improvements were partly
responsible for holding the percentage increase in costs below
the percentage increase in bit shipments, as was the spreading
of our fixed costs across greater bit shipments.
Higher absolute costs from production
ramp-up and
increased purchases from foundries. While we
expect our ongoing shift to production on 300mm wafers to lead
to reduced manufacturing costs once the conversions are
complete, during the 2006 financial year our gross margin was
adversely affected by the increased depreciation and
S-64
amortization charges of 175 million mainly associated
with the commencement of production in our 300mm production
facilities in Richmond, Virginia and the back-end manufacturing
facility in Suzhou.
Increased average costs per wafer and
personnel. In addition to the general increases
in materials and personnel costs that result from increased bit
shipments, our migration to a higher proportion of production on
300mm wafers has led to increased costs per wafer. These larger
wafers are more expensive per wafer than 200mm wafers, although
due to the substantially higher bit output per 300mm wafer, the
per bit costs for using these wafers are considerably lower. The
personnel costs included in cost of goods sold also increased as
we ramped up production in our 300mm facility in Richmond,
Virginia.
Exchange rate effects. The relative strength
of the exchange rate of the U.S. dollar against the euro in
the 2006 financial year, as compared to the 2005 financial year,
increased the euro value of our costs that are denominated in
U.S. dollars by approximately 45 million. This
means that we would have incurred approximately
45 million less in costs of goods sold in our 2006
financial year, had the average exchange rates we use to
translate our non-euro expenses into euros been the same in the
2006 financial year as they were in the 2005 financial year.
However, given the increase in our net sales due to foreign
exchange effects, foreign currency movements overall had a
positive net effect on our gross margin during the 2006
financial year.
The depreciation of the U.S. dollar against the euro in the
2005 financial year reduced the euro value of our expenses that
are denominated in dollars by approximately
40 million. This means that we would have incurred
approximately 40 million more in costs of goods sold
in our 2005 financial year had the average exchange rates we use
to translate our non-euro expenses into euros been the same in
the 2005 financial year as they were in the 2004 financial year.
However, given the relatively large decline in our net sales due
to foreign exchange effects, foreign currency movements overall
had a negative net effect on our gross margin.
Dresden 200mm transfer. In the 2005 financial
year 72 million of the decrease in cost of goods sold
related to the transfer of the Dresden 200mm facility. Following
the transfer of this facility, we no longer included in our cost
of goods sold the costs relating to the chips the facility
produces for Infineons logic business. We did, however,
begin paying Infineon a margin for the chips we began to
purchase from Infineon. Although the transfer of the Dresden
200mm facility did impact both net sales and cost of goods sold,
the net impact on our gross margin was not significant.
Productivity increase. We achieved
productivity improvements through the increased conversion of
capacities to 110nm and 90nm process technologies and the
increasing share of our chips produced on 300mm wafers. The
ramp-up of
300mm capacities at our manufacturing facility at Richmond,
Virginia, at our joint venture Inotera and at our foundry
partner SMIC contributed to the increased share of production on
300mm wafers. Measured in wafer starts, 68% of our total
production (including capacity sourced from our strategic and
foundry partners) was on 300mm wafers in the 2006 financial year
as compared to 53% of our production in the 2005 financial year.
In the 2005 financial year we achieved productivity improvements
through the conversion of capacities from 140nm to 110nm process
technology and the increasing share of our chips produced on
300mm wafers. The share of wafer starts based on 110nm
technology increased from almost 50% in the 2004 financial year
to more than 80% in the 2005 financial year. By the end of the
2005 financial year, we had begun mass production at the 90nm
node, such that on average 3% of our DRAMs were being
manufactured using that process technology, which improved to on
average 22% at the end of the 2006 financial year.
Our gross margin decreased slightly during the 2006 financial
year, falling to 20% from 23% in the 2005 financial year,
primarily as a result of the lower level of license income.
Excluding the changes in license income, our gross margins would
have remained nearly unchanged. The sales price declines
experienced in the first months of the 2006 financial year had
an adverse impact on the gross margin. The recovery in prices in
the later part of the year and our bit growth led to an increase
in gross margin, particularly in the fourth quarter of the 2006
financial year. Since our average selling price declined at a
faster rate than our cost per unit did during the 2005 financial
year, our gross margin decreased, falling from 31% in the 2004
financial year to 23% in the 2005 financial year.
S-65
Research
and Development (R&D) Expenses
Research and development (R&D) expenses consist primarily
of salaries and benefits for research and development personnel,
materials costs, depreciation and maintenance of equipment used
in our research and development efforts and contracted
technology development costs. Materials costs include expenses
for development wafers and costs relating to pilot production
activities prior to the commencement of commercial production.
R&D expenses also include our joint technology development
arrangements with partners such as Nanya.
The following table sets forth our R&D expenses and
government subsidies for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Research and development expenses
|
|
|
347
|
|
|
|
390
|
|
|
|
433
|
|
% of net sales
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
11
|
%
|
Government subsidies
|
|
|
25
|
|
|
|
16
|
|
|
|
17
|
|
% of net sales
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
*
|
|
In the 2006 financial year, research and development expenses
increased by 11%, from 390 million to
433 million, due to our effort to strengthen the
development capabilities with respect to the next generation of
memory technologies and further diversification of our portfolio
of memory products. We also paid 10 million for
research services provided by Infineon in the 2006 financial
year after the carve-out.
In the 2005 financial year, research and development expenses
increased by 12%, from 347 million to
390 million, due to increased spending on the
acceleration of the development of next generation memory
technologies, the broadening of our overall portfolio of memory
products and reduced government subsidies. We recognized less in
government subsidies, which decreased from 25 million
in the 2004 financial year to 16 million in the 2005
financial year, mainly due to the transfer to Infineon of the
Dresden 200mm facility to which a portion of prior subsidies
relates.
Some of our research and development projects qualify for
subsidies from local and regional governments where we do
business. If the criteria to receive a grant are met, the
subsidies received reduce R&D expenses over the project
term as expenses are incurred.
Selling,
General and Administrative (SG&A) Expenses
Selling expenses consist primarily of salaries and benefits for
personnel engaged in sales and marketing activities, costs of
customer samples, non-R&D costs related to developing
prototypes, other marketing incentives and related marketing
expenses.
General and administrative expenses consist primarily of
salaries and benefits for administrative personnel,
non-manufacturing related overhead costs, consultancy, legal and
other fees for professional services, and recruitment and
training expenses.
The following table sets forth information on our selling,
general and administrative expenses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Selling, general and
administrative expenses
|
|
|
232
|
|
|
|
206
|
|
|
|
215
|
|
% of net sales
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
6
|
%
|
S-66
During the 2006 financial year selling, general and
administrative expenses increased by 4% as compared to the 2005
financial year, from 206 million to
215 million. The increase was driven by higher cost
allocations from Infineon through April 30, 2006 and
project costs related to the carve-out and IPO. We also paid
14 million for corporate services provided by
Infineon in the 2006 financial year after the carve-out. In
addition, in the 2006 financial year we had expenses of
8 million relating to stock based compensation, of
which 3 million are included in selling, general and
administrative expenses. The remainder are in other categories
based on the cost centers of the employees concerned. These
employees received these options on Infineon shares when they
were Infineon employees in periods prior to our carve-out. We
have not issued any options through September 30, 2006.
During the 2005 financial year, selling, general and
administrative expenses declined by 11% from
232 million to 206 million as a result of
lower cost allocations from Infineon reflecting mainly cost
savings measures, particularly with respect to central services
and information technology (IT).
Restructuring
Charges
We did not incur any restructuring charges in the 2006 financial
year. In the 2004 and 2005 financial years, we accrued charges
of 2 million and 1 million, respectively,
for restructuring and cost-saving efforts taken by Infineon,
which included downsizing our workforce and consolidating
certain functions and operations.
Other
Operating Expense, Net
The following table sets forth information on our other
operating expense, net for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Other operating expense, net
|
|
|
194
|
|
|
|
13
|
|
|
|
60
|
|
% of net sales
|
|
|
6
|
%
|
|
|
0
|
%
|
|
|
2
|
%
|
In the 2006 financial year other operating expense, net
reflected expenses related to litigation settlement charges of
54 million as well as impairment charges of
9 million related to our decision to ramp down our
flash production and NROM development activities. Other
operating expense, net in the 2004 financial year related
principally to charges from our settlement of an antitrust
investigation by the U.S. Department of Justice, related
settlements with customers and a related ongoing investigation
in Europe. We accrued reserves in respect of these matters in
the amount of 194 million in our 2004 financial year.
Other operating expense in the 2005 financial year principally
reflected expenses related to antitrust matters.
Equity
in (Losses) Earnings of Associated Companies
The following table sets forth information on our equity in
losses or earnings of associated companies for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Equity in (losses) earnings of
associated companies
|
|
|
(16
|
)
|
|
|
45
|
|
|
|
80
|
|
% of net sales
|
|
|
(1
|
)%
|
|
|
2
|
%
|
|
|
2
|
%
|
Our principal associated company is Inotera. Inotera is a DRAM
manufacturer that we established as a joint venture with Nanya.
Our equity in this ventures earnings has been sensitive to
fluctuations in the price of DRAM. Inotera contributed most of
our equity in earnings from associated companies, which
increased in the 2006 financial year, reflecting the increased
volume production by this joint venture.
S-67
Gain
on Associated Company Share Issuance
The following table sets forth information on Gain on associated
company share issuance for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Gain on associated company share
issuance
|
|
|
2
|
|
|
|
0
|
|
|
|
72
|
|
% of net sales
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
2
|
%
|
On March 17, 2006 Inotera successfully completed its
initial public offering on the Taiwanese stock exchange of
200 million ordinary shares. On May 10, 2006 Inotera
successfully completed a public offering on the Luxembourg stock
exchange of 40 million global depositary shares
(representing 400,000,000 common shares). As a result, our
ownership was diluted from 45.9% to 36.0% while our proportional
share of Inoteras equity increased by
72 million. We reflected this gain as part of
non-operating income during the 2006 financial year.
Other
Non-Operating (Expense) Income, Net
The following table sets forth information on other
non-operating expenses or income for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Other non-operating (expense)
income, net
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
8
|
|
% of net sales
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Other non-operating (expense) 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 2006 financial year, other non-operating income related
principally to non-operating foreign currency transaction gains.
In the 2005 financial year, other non-operating income, net
included 18 million related principally to
non-operating foreign currency transaction gains, which were
partially offset by investment-related impairment charges of
6 million.
Other non-operating expense, net in the 2004 financial year
consisted primarily of 7 million in non-operating
foreign currency transaction losses, partially offset by
4 million in gains on sales of marketable securities,
together with 7 million of investment-related
impairment charges.
Earnings
Before Interest and Taxes (EBIT)
We define EBIT as net income (loss) plus interest expense and
income tax expense. EBIT is not defined under U.S. GAAP and
may not be comparable with measures of the same or similar title
that are reported by other companies. Under SEC rules, EBIT is
considered a non-GAAP financial measure. It should not be
considered as a substitute for, or confused with, any
U.S. GAAP financial measure. We believe the most comparable
U.S. GAAP measure is net income. Our management uses EBIT
as a measure to establish budgets and operational goals, to
manage our business and to evaluate its performance. Because
many operating decisions, such as allocations of resources to
individual projects, are made on a basis for which the effects
of financing the overall business and of taxation are of
marginal relevance, management finds a metric that excludes the
effects of interest on financing and tax expense useful. In
addition, in measuring operating performance, particularly for
the purpose of making internal decisions such as those relating
to personnel matters, it is useful for management to consider a
measure that excludes items over which the individuals being
evaluated have minimal control, such as enterprise-level
taxation and financing. We report EBIT information because we
believe that it provides investors with meaningful information
about our operating performance in a manner similar to that
which management uses to assess and
S-68
direct the business. EBIT is not a substitute for net income,
however, because the exclusion of interest and tax expense is
not appropriate when reviewing the overall profitability of our
company. Although EBIT is our primary measure of evaluating
operating performance, we also evaluate the costs and benefits
associated with various financing structures and the income tax
consequences, where relevant and material independent of the
operational assessment.
EBIT is determined from the consolidated statements of
operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Net income (loss)
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
Add: Income tax expense
|
|
|
211
|
|
|
|
86
|
|
|
|
114
|
|
Add: Interest expense, net
|
|
|
30
|
|
|
|
7
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
162
|
|
|
|
111
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income (Expense), Net
We derive interest income primarily from cash, cash equivalents
and marketable securities. Interest expense is primarily
attributable to loans from Infineon and external banks and
excludes interest capitalized on manufacturing facilities under
construction.
The following table sets forth information on our net interest
expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Interest expense, net
|
|
|
(30
|
)
|
|
|
(7
|
)
|
|
|
(25
|
)
|
% of net sales
|
|
|
(1
|
)%
|
|
|
0
|
%
|
|
|
(1
|
)%
|
Capitalized interest
|
|
|
9
|
|
|
|
7
|
|
|
|
0
|
|
Interest expense mainly relates to interest on amounts due to
Infineon, net of interest earned. The increase in the 2006
financial year was due to higher average borrowings from
Infineon.
Interest expense in the 2004 financial year included
21 million paid upon the redemption of the other
investors ownership interests in the 300mm venture
Infineon Technologies SC300 GmbH & Co. OHG
(SC300) in Dresden, which we now refer to as our
Dresden 300mm facility. Interest expense was partially reduced
in both the 2004 and 2005 financial years as a result of
capitalization of interest related to facilities under
construction (principally Inotera and Richmond), as well as
interest income from financial derivatives.
Income
Taxes
The following table sets forth information on our income taxes
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
ended September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in millions, except percentages)
|
|
|
Income tax expense
|
|
|
(211
|
)
|
|
|
(86
|
)
|
|
|
(114
|
)
|
% of net sales
|
|
|
(7
|
)%
|
|
|
(3
|
)%
|
|
|
(3
|
)%
|
Effective tax rate
|
|
|
160
|
%
|
|
|
83
|
%
|
|
|
61
|
%
|
We assess our deferred tax asset and the need for a valuation
allowance pursuant to SFAS No. 109. As a result of
this assessment, we have increased our deferred tax asset
valuation allowance in our 2004, 2005 and 2006
S-69
financial years to reduce the net deferred tax asset to an
amount that is more likely than not expected to be realized in
future periods. Our effective tax rate in the 2005 financial
year was substantially higher than our statutory tax rate due to
increases in our valuation allowances, for losses which can not
be utilized by us and have been retained by Infineon. In the
2006 financial year our effective rate was still higher than our
statutory rate, but lower than in the 2005 financial year, as a
result of reduced losses in jurisdictions for which tax benefits
could not be recognized, since for certain jurisdictions losses
prior to our carve-out could not be used to offset taxable
income after our carve-out.
Net
Income (Loss)
Our net income increased from 18 million in the 2005
financial year to 74 million in the 2006 financial
year and improved from a net loss of 79 million in
the 2004 financial year to net income of 18 million
in the 2005 financial year.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
For the three months
|
|
|
months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Net sales
|
|
|
977
|
|
|
|
740
|
|
|
|
2,583
|
|
|
|
2,897
|
|
Effect of foreign exchange over
prior period
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
(238
|
)
|
% of net sales
|
|
|
|
|
|
|
(7
|
)%
|
|
|
|
|
|
|
(8
|
)%
|
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:
|
|
|
|
|
substantially higher bit shipments.
|
Offsetting these increases in part were
|
|
|
|
|
decreases in our average selling prices for DRAM
products, and
|
|
|
|
decreases related to exchange rate effects.
|
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
S-70
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 DRAMs then started to rebound in the following
six months to June 30, 2006 as the corresponding chipsets
became more available. The following graph shows the price
declines in DRAM (expressed in 256Mb equivalents) from the
beginning of our 2006 financial year through the end of the
third quarter of our 2007 financial year on June 30,
2007.
(Source: WSTS)
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.
S-71
Net Sales
by Region
The following table sets forth our sales by region for the
periods indicated.
Net sales
by region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Germany
|
|
|
74
|
|
|
|
8
|
%
|
|
|
52
|
|
|
|
7
|
%
|
|
|
223
|
|
|
|
9
|
%
|
|
|
212
|
|
|
|
7
|
%
|
Rest of Europe
|
|
|
142
|
|
|
|
14
|
%
|
|
|
65
|
|
|
|
9
|
%
|
|
|
331
|
|
|
|
13
|
%
|
|
|
331
|
|
|
|
11
|
%
|
North America
|
|
|
406
|
|
|
|
42
|
%
|
|
|
244
|
|
|
|
33
|
%
|
|
|
1,078
|
|
|
|
42
|
%
|
|
|
1,093
|
|
|
|
38
|
%
|
Asia/Pacific
|
|
|
312
|
|
|
|
32
|
%
|
|
|
229
|
|
|
|
31
|
%
|
|
|
837
|
|
|
|
32
|
%
|
|
|
898
|
|
|
|
31
|
%
|
Japan
|
|
|
43
|
|
|
|
4
|
%
|
|
|
150
|
|
|
|
20
|
%
|
|
|
114
|
|
|
|
4
|
%
|
|
|
363
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
977
|
|
|
|
100
|
%
|
|
|
740
|
|
|
|
100
|
%
|
|
|
2,583
|
|
|
|
100
|
%
|
|
|
2,897
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
products for PC applications during the nine months ended
June 30, 2007. The decrease in sales in North America for
the nine 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
For the three months
|
|
|
months
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Cost of goods sold
|
|
|
(762
|
)
|
|
|
(964
|
)
|
|
|
(2,158
|
)
|
|
|
(2,572
|
)
|
% of net sales
|
|
|
78
|
%
|
|
|
130
|
%
|
|
|
84
|
%
|
|
|
89
|
%
|
Gross margin (loss)
|
|
|
22
|
%
|
|
|
(30
|
)%
|
|
|
16
|
%
|
|
|
11
|
%
|
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:
|
|
|
|
|
substantially higher bit shipments;
|
|
|
|
increased purchases from foundries; and
|
|
|
|
effects from inventory revaluation and reserves.
|
Offsetting these increases in part were:
|
|
|
|
|
improvements in our productivity; and
|
|
|
|
exchange rate effects.
|
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,
S-72
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.
S-73
Research
and Development (R&D) Expenses
The following table sets forth our R&D expenses for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Research and development expenses
|
|
|
(110
|
)
|
|
|
(98
|
)
|
|
|
(325
|
)
|
|
|
(291
|
)
|
% of net sales
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
10
|
%
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Selling, general and
administrative expenses
|
|
|
(48
|
)
|
|
|
(48
|
)
|
|
|
(161
|
)
|
|
|
(140
|
)
|
% of net sales
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Other operating income (expense),
net
|
|
|
1
|
|
|
|
4
|
|
|
|
(13
|
)
|
|
|
7
|
|
% of net sales
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
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
S-74
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Equity in earnings of associated
companies
|
|
|
11
|
|
|
|
38
|
|
|
|
38
|
|
|
|
103
|
|
% of net sales
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
1
|
%
|
|
|
4
|
%
|
The equity in earnings of associated companies with financial
year ends that differ by not more than three months from the
Companys 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 Inoteras
three and nine month periods ended March 31, 2006. Our
equity in this ventures earnings has been sensitive to
fluctuations in the price of DRAM and we reflect changes in our
equity in Inoteras 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Gain on associated company share
issuance
|
|
|
30
|
|
|
|
0
|
|
|
|
30
|
|
|
|
0
|
|
% of net sales
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
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
Companys ownership interest was diluted from 45.9% to
41.4% while its proportional share of Inoteras 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.
S-75
Other
Non-Operating Income, Net
The following table sets forth information on other
non-operating income for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Other non-operating income, net
|
|
|
3
|
|
|
|
6
|
|
|
|
9
|
|
|
|
12
|
|
% of net sales
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
For the nine months ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Net income (loss)
|
|
|
54
|
|
|
|
(218
|
)
|
|
|
(82
|
)
|
|
|
16
|
|
Add: interest expense (income)
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
(4
|
)
|
Add: income tax expense (benefit)
|
|
|
40
|
|
|
|
(104
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
100
|
|
|
|
(323
|
)
|
|
|
(2
|
)
|
|
|
12
|
|
Interest
(Expense) Income, Net
The following table sets forth information on our net interest
(expense) income, net for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine
|
|
|
|
|
|
|
months ended
|
|
|
|
For the three months ended June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Interest (expense) income, net
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
(22
|
)
|
|
|
4
|
|
% of net sales
|
|
|
(1
|
)%
|
|
|
0
|
%
|
|
|
(1
|
)%
|
|
|
0
|
%
|
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.
S-76
Income
Taxes
The following table sets forth information on our income taxes
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
For the nine months ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Income tax (expense) benefit
|
|
|
(40
|
)
|
|
|
104
|
|
|
|
(58
|
)
|
|
|
0
|
|
% of net sales
|
|
|
4
|
%
|
|
|
(14
|
)%
|
|
|
2
|
%
|
|
|
0
|
%
|
Effective tax rate
|
|
|
43
|
%
|
|
|
32
|
%
|
|
|
(242
|
)%
|
|
|
0
|
%
|
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.
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 come into effect
for our 2008 financial year. We are evaluating the impact of the
Business Tax Reform Act of 2008 and expect to record a charge
during the three months ending September 30, 2007,
subject to the final analyis of deferred taxes as of that date,
reflecting the reduction in value of our deferred tax assets in
Germany.
In China, as a result of recently 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. This did not
have a material impact on our results of operations or financial
condition 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
|
|
|
As of
|
|
|
|
|
|
|
September 30
|
|
|
June 30
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change(1)
|
|
|
|
(in millions, except percentages)
|
|
|
Current assets
|
|
|
2,807
|
|
|
|
2,185
|
|
|
|
(22
|
)%
|
Non-Current assets
|
|
|
3,054
|
|
|
|
3,179
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,861
|
|
|
|
5,364
|
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
1,479
|
|
|
|
1,106
|
|
|
|
(25
|
)%
|
Non-current liabilities
|
|
|
511
|
|
|
|
450
|
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,990
|
|
|
|
1,556
|
|
|
|
(22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
3,871
|
|
|
|
3,808
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentage changes from September 30, 2006 to June 30,
2007. |
S-77
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
maturities 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 consolidated statement of cash flows shows the sources and
uses of cash during the reported periods. It is of key
importance for the evaluation of our financial position.
Although our combined and consolidated statements of operations
and balance sheets include allocations of financial statement
line items from Infineons financial statements, the
combined and consolidated statements of cash flows are
determined indirectly from these statements and do not reflect
any additional allocations.
Cash flows from investing and financing activities are both
indirectly determined based on payments and receipts. Cash flows
from operating activities are determined indirectly from net
income (loss). In accordance with U.S. GAAP, the line items
on the cash flow statement that reflect changes in balance sheet
items have been adjusted for the effects of foreign currency
exchange fluctuations and for changes in the scope of
consolidation. Therefore, they do not conform to the
corresponding changes you will find on the balance sheets
themselves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
For the nine months
|
|
|
|
ended September 30,
|
|
|
ended June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
693
|
|
|
|
483
|
|
|
|
297
|
|
|
|
61
|
|
|
|
769
|
|
Net cash used in investing
activities
|
|
|
(1,048
|
)
|
|
|
(971
|
)
|
|
|
(772
|
)
|
|
|
(725
|
)
|
|
|
(724
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
388
|
|
|
|
538
|
|
|
|
773
|
|
|
|
466
|
|
|
|
(343
|
)
|
Effect of foreign exchange rate
changes on cash and cash equivalents
|
|
|
|
|
|
|
5
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(5
|
)
|
Cash and cash equivalents at end
of period
|
|
|
577
|
|
|
|
632
|
|
|
|
932
|
|
|
|
438
|
|
|
|
629
|
|
Financial
Year Ended September 30, 2006 Compared to Financial Year
Ended September 30, 2005
Our operating cash flow in the 2006 financial year declined from
an inflow of 483 million to a 297 million
inflow. The reduction in cash generated was primarily due to
increases in our trade accounts receivable, inventory and trade
accounts payable, reflecting our sales growth. This was in part
offset by our higher net income and by
S-78
depreciation and amortization, which increased by
175 million mainly as a result of our new facilities
in Richmond, Virginia and Suzhou.
Cash used in investing activities in both periods reflect the
capital expenditures and investments in associated companies
during both periods. Our cash used in investing activities was
lower in the 2006 financial year, mainly because we had lower
capital expenditures compared to the 2005 financial year, which
was partially offset by increased investments in marketable
securities.
Cash provided by financing activities in both periods relates
principally to investments by and advances from Infineon and, in
the 2006 financial year, our IPO proceeds of
415 million, net of offering costs and tax benefits
thereon. Infineon advanced 484 million to us in the
2006 financial year, as compared to 500 million in
the comparable period one year earlier. We repaid
163 million to Infineon in the 2006 financial year.
Financial
Year Ended September 30, 2005 Compared to Financial Year
Ended September 30, 2004
Our operating cash flow in the 2005 financial year was 30% less
than in the 2004 financial year, falling from
693 million to 483 million. While our net
income increased by 97 million in the 2005 financial
year, this positive effect on operating cash flow was more than
offset by a lower share of non-cash expenses including
depreciation and amortization. Depreciation and amortization
decreased by 224 million as a result of our transfer
of the Dresden 200mm facility to Infineon. Changes in our usage
of our working capital also reduced operating cash flow. Our
inventory consumed an additional 172 million in
working capital in the 2005 financial year (after releasing
73 million in the 2004 financial year), as higher
production output increased our inventories. Our trade accounts
payable also increased, primarily reflecting increased purchases
from Inotera.
Cash used in investing activities in the 2005 financial year
reflected increased capital expenditures compared to the 2004
financial year related principally to equipping our 300mm
facilities in Dresden and Richmond, Virginia. This was partially
offset by lower investments in associated companies, mostly in
our Inotera joint venture.
Cash provided by financing activities in the 2005 financial year
principally relates to investments by and advances from Infineon
totaling 500 million, which were partly offset by the
repayment of a 450 million loan entered into in
connection with the expansion of our 300mm facility in Dresden.
In the 2004 financial year, Infineon advanced
165 million to us.
Nine
Months Ended June 30, 2007 Compared To Nine Months Ended
June 30, 2006
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.
S-79
Free Cash
Flow
We define free cash flow as cash from operating and investing
activities excluding purchases or sales of marketable
securities. Free cash flow is not defined under U.S. GAAP
and may not be comparable with measures of the same or similar
title that are reported by other companies. Under SEC rules,
free cash flow is considered a non-GAAP financial
measure. It should not be considered as a substitute for, or
confused with, any U.S. GAAP financial measure. We believe
the most comparable U.S. GAAP measure is net cash provided
by operating activities. Since we operate in a capital-intensive
industry, we report free cash flow to provide investors with a
measure that can be used to evaluate changes in liquidity after
taking capital expenditures into account. It is not intended to
represent residual cash flow available for discretionary
expenditures, since debt service requirements or other
non-discretionary expenditures are not deducted. Free cash flow
is a non-GAAP financial measure which is determined as follows
from our combined and consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
For the nine months ended
|
|
|
|
ended September 30,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
693
|
|
|
|
483
|
|
|
|
297
|
|
|
|
61
|
|
|
|
769
|
|
Net cash used in investing
activities
|
|
|
(1,048
|
)
|
|
|
(971
|
)
|
|
|
(772
|
)
|
|
|
(725
|
)
|
|
|
(724
|
)
|
Net (proceeds) purchases of
marketable securities
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
138
|
|
|
|
168
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
|
(372
|
)
|
|
|
(489
|
)
|
|
|
(337
|
)
|
|
|
(496
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow was negative in each financial year because
capital expenditures exceeded the cash provided from operating
activities. Prior to the carve-out this shortfall was financed
principally by advances from Infineon and subsequent to the
carve-out was financed by our available cash balances.
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 of our financial
year and capital expenditures that were lower than cash provided
from operating activities.
Net Cash
Position
The following table presents our gross and net cash positions
and the maturity of our debt. It is not intended to be a
forecast of cash available to us in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
As of September 30, 2006
|
|
Total
|
|
|
1 year
|
|
|
1-2 years
|
|
|
2-3 years
|
|
|
3-4 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
|
(in millions)
|
|
|
Cash and cash equivalents
|
|
|
932
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
138
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cash position
|
|
|
1,070
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
151
|
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
67
|
|
Short-term debt and current
maturities
|
|
|
344
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial debt
|
|
|
495
|
|
|
|
344
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash position
|
|
|
575
|
|
|
|
726
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross cash position increased to 1,070 million at
September 30, 2006, compared with 632 million at
the prior year end. As part of Infineon, our historical capital
structure was based on the assumption that our net cash position
is zero. The capital structure attributed to us in connection
with the preparation of the combined financial
S-80
statements, based as it is on the business equity concept and
without independent financing, is not indicative of the capital
structure that we would have required had we been an independent
company during the financial periods presented, and will almost
certainly differ from our capital structure in the future.
Short-term debt consists of loans from Infineon totaling
344 million at September 30, 2006, which do not
carry any restrictions on their use. These loans bear interest
at floating rates determined by reference to market interest
rates. Long-term debt principally consists of an unsecured loan
from banks of 124 million at September 30, 2006,
which is restricted to use in Module 2 of our backend facility
in Porto, Portugal, and used primarily for the financing of
R&D projects and construction at that facility. A
27 million note payable to a governmental entity in
connection with our Richmond plant had been fully drawn as of
September 30, 2006. These loans bear interest at a floating
rate.
The following table presents our gross and net cash positions as
of June 30, 2007:
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
Cash and cash equivalents
|
|
|
629
|
|
Marketable securities
|
|
|
263
|
|
|
|
|
|
|
Gross cash position
|
|
|
892
|
|
|
|
|
|
|
Less:
|
|
|
|
|
Long-term debt
|
|
|
128
|
|
Short-term debt and current
maturities
|
|
|
21
|
|
|
|
|
|
|
Total financial debt
|
|
|
149
|
|
|
|
|
|
|
Net cash position
|
|
|
743
|
|
|
|
|
|
|
To secure our cash position and to maintain flexibility with
regards to liquidity, we have implemented a risk management
policy with risk limits with respect to counterparty, credit
rating, sector, duration, credit support and type of instrument.
See note 30 to the combined and consolidated financial
statements included elsewhere in this prospectus supplement, the
accompanying prospectus and the documents incorporated by
reference.
Capital
Requirements
We require capital in our 2007 financial year to:
|
|
|
|
|
finance our operations;
|
|
|
|
make scheduled debt payments;
|
|
|
|
settle contingencies if and when they occur; and
|
|
|
|
make planned capital expenditures.
|
We expect to meet these requirements through:
|
|
|
|
|
cash flow generated from operations;
|
|
|
|
cash on hand and securities we can sell;
|
|
|
|
available credit facilities;
|
|
|
|
the proceeds from the IPO; and
|
|
|
|
capital market and other financing transactions in which we may
engage in the future.
|
As of September 30, 2006, we required funds for the 2007
financial year aggregating 1,175 million. This
consisted of 831 million for commitments and our
344 million shareholder loan from Infineon
Technologies Holding B.V., which we fully repaid by April 2007.
In addition, known contingencies as of September 30, 2006
totaled 113 million. We also plan to invest
approximately 900 million in capital expenditures
during the 2007 financial year (of which 379 million
had been otherwise committed as of September 30, 2006). We
had a gross
S-81
cash position (which we define as cash and cash equivalents plus
marketable securities) of 1,070 million as of
September 30, 2006 and 892 million as of
June 30, 2007. Our sources of funding, in addition to this
cash position, include our cash flows from operations (we
generated cash flows from operations of 297 million
in our 2006 financial year and 769 million during the
nine months ended June 30, 2007) and our ability to
draw 250 million from our revolving credit facility
described below. We can also draw, for short-term purposes, on
the working capital lines we maintain in several locations in an
aggregate amount of 166 million; there were no
amounts outstanding under these facilities as of June 30,
2007. We are also exploring whether other kinds of longer term
financing transactions may be arranged on favorable terms. One
kind of transaction that is common in our industry is sale and
leaseback transactions involving manufacturing equipment. We are
currently discussing with several market participants potential
transactions of this nature involving some of our equipment. As
these discussions are at an early stage, we cannot predict
whether these or similar transactions will be attractive for us
or when or whether we will engage in this kind of financing.
Commitments
and Contingencies
The following table sets forth information on our commitments
and known contingencies by due date or expiration.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due/expirations by
period(1)
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
As of September 30,
2006(2)(3)
|
|
Total
|
|
|
1 year
|
|
|
1-2 years
|
|
|
2-3 years
|
|
|
3-4 years
|
|
|
4-5 years
|
|
|
5 years
|
|
|
|
(in millions)
|
|
|
Other contractual liabilities
reflected on the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement for antitrust related
matters(4)
|
|
|
88
|
|
|
|
24
|
|
|
|
22
|
|
|
|
22
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease payments
|
|
|
107
|
|
|
|
27
|
|
|
|
26
|
|
|
|
24
|
|
|
|
9
|
|
|
|
8
|
|
|
|
13
|
|
Unconditional purchase
commitments(5)
|
|
|
954
|
|
|
|
738
|
|
|
|
50
|
|
|
|
38
|
|
|
|
38
|
|
|
|
40
|
|
|
|
50
|
|
Other long-term commitments
|
|
|
132
|
|
|
|
66
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
|
1,193
|
|
|
|
831
|
|
|
|
142
|
|
|
|
62
|
|
|
|
47
|
|
|
|
48
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contingencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees(6)
|
|
|
71
|
|
|
|
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
9
|
|
|
|
53
|
|
Contingent government
grants(7)
|
|
|
452
|
|
|
|
113
|
|
|
|
111
|
|
|
|
18
|
|
|
|
43
|
|
|
|
22
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contingencies
|
|
|
523
|
|
|
|
113
|
|
|
|
113
|
|
|
|
25
|
|
|
|
43
|
|
|
|
31
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The above table should be read together with note 31 to our
combined and consolidated financial statements. |
|
(2) |
|
Certain payments of obligations or expiration of commitments
that are based on the achievement of milestones or other events
that are not date-certain are included in this table, based on
our estimate of the reasonably likely timing of payments or
expirations in each particular case. Actual outcomes could
differ from those estimates. |
|
(3) |
|
Product purchase commitments associated with capacity
reservation agreements are not included in this table, since the
purchase prices are based in part on future market prices, and
are accordingly not quantifiable as of September 30, 2005
and 2006. Purchases under these agreements aggregated
approximately 1,185 million for the 2006 financial
year and 520 million for the 2005 financial year. |
|
(4) |
|
These amounts are recorded as other current or other non-current
liabilities on our balance sheet and reflect payments to be made
under settlement agreements relating to antitrust matters. |
|
(5) |
|
Primarily purchase orders that have been placed with suppliers
of fixed assets, raw materials and services. Fixed price orders
for products from our foundry partners are also shown here. |
|
(6) |
|
Guarantees are mainly issued by the parent company for the
payment of import duties, rentals of buildings, contingent
obligations related to government grants received. |
|
(7) |
|
Contingent government grants refers to amounts
previously received that are related to the construction and
financing of certain production facilities, but that are not
guaranteed otherwise. These could be repayable if the total
project requirements are not met. |
S-82
Capital
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the financial year
|
|
|
|
|
|
|
ended September 30,
|
|
|
For the nine months ended June 30
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Purchases of property, plant and
equipment
|
|
|
770
|
|
|
|
926
|
|
|
|
686
|
|
|
|
571
|
|
|
|
601
|
|
As of September 30, 2006, approximately
379 million of capital expenditures have been
committed and included in unconditional purchase commitments for
the 2007 fiscal year. Due to the lead times between ordering and
delivery of equipment, a substantial amount of capital
expenditures typically is committed well in advance. The
majority of these expected capital expenditures will be made in
our front-end and back-end manufacturing facilities.
Our capital expenditures in the 2004 financial year consisted
primarily of capacity increases at our 300mm facility in Dresden
and the recommencement of the expansion of capacity in our 300mm
fab in Richmond, Virginia. In the 2005 financial year, we
completed the construction of the 300mm fab in Richmond and
ramped up production there. We also invested in our back-end
venture in Suzhou.
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.
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. For the 2007 financial year, we expect
capital expenditures of approximately 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.
Credit
Facilities
We have historically relied (directly or indirectly) on Infineon
to provide financing for a portion of our financing and capital
requirements. Under our Master Loan Agreement with Infineon
Technologies Holding B.V., we had $435 million
(344 million) drawn at September 30, 2006 with
initial maturities in July and August 2007. We fully repaid this
shareholder loan by April 2007. We have also agreed not to draw
further amounts under the agreement.
In addition we have established both short- and long-term credit
facilities with a number of different financial institutions in
order to meet our anticipated funding requirements. We have the
ability to draw 250 million from our revolving credit
facility described below. We can also draw, for short term
purposes, on the working capital lines we maintain in several
locations in an aggregate amount of 166 million as of
June 30, 2007; there are no amounts outstanding under these
facilities.
In August 2006 we entered into a multicurrency revolving loan
facility in an aggregate principal amount of
250 million which has been committed to us.
Affiliates of several of the underwriters of this offering act
as mandated lead arrangers of this facility. The original
maturity of the facility had been three years from the date of
our initial public offering, and was extended for one additional
year in June 2007. We entered into this facility primarily as a
source of backup liquidity. Loans made under the facility, which
may be used for our working capital requirements
and/or
general corporate purposes may have various maturities, ranging
from one to twelve months, or longer as agreed by the parties.
Under the facility, loans may be extended to our company or,
with a guarantee from our company, to those of our subsidiaries
identified in the agreement.
The facility contains several covenants, agreements and
financial ratios customary for such transactions including the
following:
S-83
|
|
|
|
|
Limitation on indebtedness;
|
|
|
|
Restriction on asset dispositions;
|
|
|
|
Limitations on mergers and reorganizations;
|
|
|
|
Required maintenance of minimum liquidity levels and financial
ratios; and
|
|
|
|
Limitation on dividend payments.
|
Loans under the facility will bear interest at either EURIBOR or
LIBOR, depending on the currency borrowed, plus a margin based
in part on a measure of our earnings. If we issue senior
unsecured bonds, or if we provide a senior guarantee for such
bonds issued by a finance subsidiary, we will have to repay any
outstanding amounts we have borrowed under the facility and
redraw them from our subsidiary Qimonda Holding B.V. prior to
the bonds issuance. In that case, we will also have to use
all commercially reasonable efforts to arrange for the transfer
of our interest in Inotera Memories, Inc. to our subsidiary
Qimonda Holding B.V.
The facility is subject to a provision permitting lenders to
terminate their advances if a person or group of persons, acting
in concert, other than Infineon, gains either 35% of our
companys voting power or other indices of control or share
ownership exceeding 35% of our issued share capital.
Subject to conditions in the capital markets, we expect from
time to time during the period after this offering (but subject
to the
lock-up
agreement we have agreed with the underwriters for this
offering) to consider engaging in additional financing
transactions.
A 124 million non-recourse project financing facility
for the expansion of the Porto, Portugal manufacturing facility
was executed in May 2005. As of June 30, 2007, this
facility was fully drawn. This loan is on the books of the Porto
entity, which was transferred to us as part of the carve-out.
A 25 million note payable to a government entity in
connection with our Richmond plant had been fully drawn as of
June 30, 2007.
At September 30, 2006 and June 30, 2007, we were in
compliance with our debt covenants under the relevant facilities.
We plan to fund our working capital requirements from cash
provided by operations, available funds, bank loans, other
potential financing transactions, government subsidies and, if
needed, the issuance of additional debt or equity securities. We
have also applied for governmental subsidies in connection with
certain capital expenditure projects, but can provide no
assurance that such subsidies will be granted on a timely basis
or at all. We can provide no assurance that we will be able to
obtain additional financing for our research and development,
working capital or investment requirements or that any such
financing, if available, will be on terms favorable to us.
Taking into consideration the financial resources available to
us, including our internally generated funds and currently
available borrowing facilities, we believe that we will be in a
position to fund our capital requirements for the remainder of
the 2007 financial year.
Pension
Plan Funding
Our companys projected benefit obligation, which considers
future compensation increases, amounted to 56 million
at September 30, 2006, compared to 65 million at
September 30, 2005. The fair value of plan assets as of
September 30, 2006 was 27 million, compared to
34 million as of September 30, 2005.
We have estimated the return on plan assets for the next
financial year to be 5.86% for domestic plans and 6.41% for
foreign plans. The actual return on plan assets between the last
measurement dates amounted to 4.40% for domestic plans and 6.40%
for foreign plans, compared to the expected return on plan
assets for that period of 6.47% for domestic plans and 6.63% for
foreign plans.
At September 30, 2005 and 2006, the funding status of our
domestic and foreign pension plans reflected an underfunding of
31 million and 29 million, respectively,
and we recognized these amounts on our balance sheets on those
dates net of unrecognized actuarial losses of
4 million and 7 million, respectively. As
the value of our
S-84
expected future benefits payable over the years through 2016 was
12 million on September 30, 2006, we do not
perceive a need to increase our plan funding in the immediate
future.
Our investment approach with respect to the pension plans
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program. The
pension plans assets are invested with an investment
manager in co-operation with an investment consultant.
Considering the duration of the underlying liabilities, a
portfolio of investments of plan assets in equity securities,
debt securities and other assets is targeted to maximize the
long-term return on plan assets for a given level of risk.
Investment risk is monitored on an ongoing basis through
periodic portfolio reviews, meetings with investment managers
and liability measurements. Investment policies and strategies
are periodically reviewed to ensure the objectives of the plans
are met considering any changes in benefit plan design, market
conditions or other material items.
Our asset allocation targets for pension plan assets are based
on our assessment of business and financial conditions,
demographic and actuarial data, funding characteristics, related
risk factors, market sensitivity analyses and other relevant
factors. The overall allocation is expected to help protect the
plans level of funding while generating sufficiently
stable real returns (i.e., net of inflation) to meet
current and future benefit payment needs. Due to active
portfolio management, the asset allocation may differ from the
target allocation up to certain limits. As a matter of policy,
our pension plans are not be permitted to invest in our company
or Infineon Technologies AG shares. The Qimonda Pension Trust
has adopted an asset allocation strategy similar to that of the
Infineon Pension Trust, which employs a mix of active and
passive investment management programs. In September and October
2006 Infineon Pension Trust transferred 26 million of
cash to the Qimonda Pension Trust for use in funding these
pension benefit obligations, thereby reducing accrued pension
liabilities. In October the Qimonda Pension Trust has invested
this cash in a diversified portfolio of investments aimed at
maximizing long term returns.
Research
and Development
Research and development form a significant part of our
operations. Our research and development expenses were
433 million in the 2006 financial year and
390 million in the 2005 financial year. In the first
nine months of our 2007 financial year, our research and
development expenses were 291 million compared to
325 million in the first nine months of our 2006
financial year. We plan to make research and development
expenditures in the range of 410 million to
430 million during the 2007 financial year. We intend
to fund these expenditures in the normal course of business
through cash provided by operating activities. For a description
of our research and development policies, please see Our
Business Research and Development.
Quantitative
and Qualitative Disclosure About Market Risk
Market risk is the risk of loss related to adverse changes in
market prices, including commodity prices, foreign exchange
rates and interest rates, of financial instruments. We are
exposed to various financial market risks in our ordinary course
of business transactions, primarily from changes in commodity
prices, foreign exchange rates and interest rates. We use
derivative instruments to manage these risks. Since the
carve-out from Infineon, Qimonda has set up a separate financial
risk management function. We enter into diverse financial
transactions with several counterparties to limit our risk.
Derivative instruments are only used for hedging purposes and
not for speculative purposes. You should read the following
discussion of the categories of market risk to which we are
exposed in conjunction with notes 2, 29 and 30 to our
combined and consolidated financial statements.
Commodity
Price Risk
A significant portion of our business is exposed to fluctuations
in market prices for standard DRAM products. For these products,
the sales price responds to market forces in a way similar to
that of other commodities. This price volatility can be extreme
and has resulted in significant fluctuations within relatively
short time-frames. We attempt to mitigate the effects of
volatility by continuously improving our cost position, by
entering into new strategic partnerships and by focusing our
product portfolio on application-specific products that are
subject to less volatility, such as DRAM products for
infrastructure, graphics, mobile and consumer applications.
S-85
We are also exposed to commodity price risks with respect to raw
materials used in the manufacture of our products. We seek to
minimize these risks through our sourcing policies (including
the use of multiple sources, where possible) and our operating
procedures.
We do not use derivative financial instruments to manage any
exposure to fluctuations in commodity prices remaining after the
operating measures we describe above.
Foreign
Exchange Rate Risk
Although we prepare our combined and consolidated financial
statements in euro, most of our sales volumes, as well as
slightly over one-half of our costs, (primarily those relating
to design, manufacturing, selling, marketing, general and
administrative functions, and research and development of
products), are denominated in other currencies, primarily
U.S. dollars. The portions of our sales and expenses
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. We are therefore subject to both
transaction and translation risk. For more information on these
risks, please refer to Factors that Affect our
Results of Operations Exchange Rate
Fluctuations. Exchange rate fluctuations may have
substantial effects on our sales, our costs and our overall
results of operations. Although the U.S. dollar was weaker
on September 30, 2006 than it had been one year earlier,
the average exchange rate of U.S. dollars for euro over the
2006 financial year was stronger, increasing 3% from
U.S. $1.00 = 0.7869 to U.S. $1.00 =
0.8117. During the first nine months of the financial
year, by contrast, the average exchange rate decreased by 7%
from U.S. $1.00 = 0.8117 to U.S. $1.00 =
0.7584.
The table below provides information about derivative financial
instruments as of September 30, 2006 and as of
June 30, 2007, including those foreign currency forward
contracts sensitive to changes in foreign currency exchange and
interest rates. For foreign currency forward contracts related
to certain sale and purchase transactions, the table presents
the notional amounts and the weighted average contractual
foreign exchange rates.
The euro equivalent notional amounts in millions and fair values
of our derivative instruments as of September 30, 2006 and
as of June 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Forward contracts sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
168
|
|
|
|
(1
|
)
|
|
|
507
|
|
|
|
4
|
|
Japanese yen
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese yen
|
|
|
22
|
|
|
|
|
|
|
|
83
|
|
|
|
(3
|
)
|
Singapore dollar
|
|
|
3
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Malaysian ringgit
|
|
|
5
|
|
|
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|
10
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|
|
|
|
|
Other currencies
|
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|
|
|
|
|
|
|
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|
2
|
|
|
|
|
|
Currency options sold:
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|
U.S. dollar Call
|
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|
|
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|
|
|
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|
U.S. dollar Put
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency options purchased:
|
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|
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|
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|
U.S. dollar Call
|
|
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|
U.S. dollar Put
|
|
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|
|
|
|
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|
|
|
|
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|
|
|
Other
|
|
|
94
|
|
|
|
5
|
|
|
|
107
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, net
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
17
|
|
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|
S-86
Before our carve-out occurred, these financial instruments were
financial instruments of Infineon that were specifically
identified to the Memory Products business. We have entered into
our own financial instruments for hedging purposes.
Our policy with respect to limiting short-term foreign currency
exposure generally is to economically hedge at least 75% of our
estimated net exposure for a minimum period of two months in
advance and, depending on the nature of the underlying
transactions, a significant portion of the period thereafter.
Our foreign currency exposure resulting from differences between
actual and forecasted amounts cannot be mitigated. We calculate
this net exposure on a cash-flow basis taking into account
balance sheet items, actual orders received or made and all
other planned revenues and expenses.
We record our derivative instruments according to the provisions
of SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended.
SFAS No. 133 requires all derivative instruments to be
recorded on the balance sheet at their fair value. Gains and
losses resulting from changes in the fair values of those
derivatives are accounted for depending on the use of the
derivative instrument and whether it qualifies for hedge
accounting. Our economic hedges are generally not considered
hedges under SFAS No. 133. We report these derivatives
at fair value in our combined and consolidated financial
statements, with changes in fair values recorded on our
statement of operations.
In the 2006 financial year, our allocated foreign exchange
transaction gains amounted to 2 million and were
offset by losses from our economic hedge transactions of
4 million, resulting in a net loss of
2 million. This compares to foreign exchange gains of
18 million, offset by hedging losses of
1 million, resulting in a net gain of
17 million in the 2005 financial year. During the
nine months ended June 30, 2007, we had net foreign
exchange losses of 11 million compared to net losses
of 5 million during the nine months ended
June 30, 2006. For purposes of the carve-out, foreign
exchange gains and losses were allocated based on
Infineons segments proportions of total costs.
Interest
Rate Risk
We are exposed to interest rate risk through our fixed term
deposits and loans. Due to the high volatility of our core
business and to maintain high operational flexibility, we have
historically kept a substantial amount of cash and cash
equivalents. These assets are mainly invested in instruments
with contractual maturities ranging from three to twelve months,
bearing interest at short-term rates. To reduce the risk caused
by changes in market interest rates, we attempt to align the
duration of the interest rates of our debts and current assets
by the use of interest rate derivatives. We had no outstanding
interest rate derivatives at June 30, 2007. However, we
anticipate making use of such instruments depending on the
nature of our debt financing in the future.
Fluctuating interest rates have an impact on parts of our
financial instruments such as cash and marketable securities as
well as our interest-bearing debt obligations.
Based on our long and short term debt outstanding on
June 30, 2007 and the interest rates in effect at that time
for those loans a 1% increase or decrease in our overall
interest rate environment would (keeping all other variables
constant) have increased or decreased our annualized debt
service cost by an estimated 2 million.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements other than operating
leases in respect of office space, manufacturing land and office
equipment including PCs and workstations. As of
September 30, 2006, we had contractual commitments for
operating lease payments of 107 million. As of
June 30, 2007, those contractual commitments decreased to
104 million.
Outlook
Our revenues are a function of the bit volume we ship and the
selling price we achieve for our products. While we have an
influence over our production growth, through capacity additions
and productivity improvements, our sales volume depends on the
extent to which our product offerings match market demand. Our
selling prices are a function of the supply and demand
relationship in the DRAM market. These market forces are beyond
our control
S-87
and accordingly, we can not reliably estimate what these future
sales prices, and the resulting revenues and the contribution to
our earnings will be.
In the fourth quarter of the 2007 financial year, we expect our
bit production to grow by 15% to 20%, 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% for the fourth quarter, and expects 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 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%. We expect our share of bit
shipments to non-PC applications to be more than 50% for the
full financial year.
We are continuously taking steps to reduce our
cost-per-bit
in manufacturing, such as the introduction of advanced process
technologies featuring smaller die-sizes, the
ramp-up of
more productive
300-mm
capacities and other cost savings and productivity improvement
measures. By the fourth quarter of our current financial year we
expect 75% of our manufacturing capacity to be using 90nm and
smaller die sizes, and we are targeting that 50% of our capacity
will be using 80nm and smaller die sizes by the end of calendar
year 2007.
We expect to make capital expenditures in the 2007 financial
year of approximately 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.
In the years thereafter our aim is to have capital expenditures
of approximately 15% to 25% of revenues on average over the DRAM
cycle.
Depreciation and amortization is estimated to range between
650 million and 750 million for the 2007
financial year, and between 700 million and
800 million for the 2008 financial year. For the
years thereafter depreciation and amortization is expected to be
in line with capital expenditures.
Research and development expenses are anticipated to be between
410 million and 430 million for the 2007
financial year, and between 480 million and
520 million for the 2008 financial year. In the years
thereafter our aim is to have research and development expenses
of approximately 10% of sales on average over the DRAM cycle.
Selling, general and administrative expenses are expected to
range between 200 million and 220 million
for the 2007 financial year, and between 210 million
and 230 million for the 2008 financial year. In the
years thereafter our aim is to have selling, general and
administrative expenses of approximately 5% of sales on average
over the DRAM cycle.
We anticipate that our number of employees will increase
moderately in certain areas in the coming year due to the
expansion of our business and the diversification of our product
portfolio.
Historically we have received financing from our parent company,
Infineon Technologies. As of June 30, 2007, we have fully
repaid the balance of the short-term loan from Infineon
Technologies.
Recent
Accounting Pronouncements
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. We adopted SFAS No. 154 on
October 1, 2006. The adoption of SFAS No. 154 did
not have a significant impact on our 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
S-88
balance of retained earnings. We are in the process of
determining the impact, if any, that the adoption of
Interpretation No. 48 will have on our 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. 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 us for financial years
beginning after October 1, 2008, and interim periods within
those financial years. We are in the process of evaluating the
impact that the adoption of SFAS No. 157 will have on
our 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(R), 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). We currently measure the funded status of our
plans annually on June 30. The Recognition Provision of
SFAS No. 158 is effective for us as of the end of the
fiscal year ending September 30, 2007, and the Measurement
Date Provision is effective for us 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 million, an increase
in non-current deferred tax assets of 3 and an increase in
accumulated other comprehensive loss of 4 million. We
do not expect the application of the Measurement Date Provision
of SFAS No. 158 annually on September 30 to have a
significant impact on our 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.
We do not expect that the adoption of SAB No. 108 will
have a significant impact on our 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. We are currently evaluating whether to
elect the option provided for in this standard.
S-89
THE
SEMICONDUCTOR MEMORY INDUSTRY
Semiconductor devices, generally referred to as integrated
circuits, or ICs, enable a wide variety of everyday electronic
products and systems to capture, process, store and transmit
data. In addition to their familiar use in computers,
semiconductors also increasingly enable or control functions in
mobile telephones, digital still cameras, digital audio players,
GPS devices, DVD recorders, digital TVs, electronic gaming
consoles and other telecom, consumer, automotive and industrial
electronic devices.
Semiconductor devices generally fall within three broad
categories: processors, which process instructions; logic
devices, which capture, manipulate and transmit data or monitor
or control functions within electronic devices; and memory
devices, which store data in digital form. Electronic devices
generally require a combination of processing, logic and memory
functions. Although these may be combined on a single chip, the
three are more typically produced on separate chips and then
integrated in a module or chipset or in an end product through
hardware and software interfaces.
There are three major types of semiconductor memory:
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Dynamic Random Access Memory, or DRAM, products, which are the
most common volatile memories. A volatile memory IC
retains information only while electrical power is switched on,
while a non-volatile memory IC retains its data
content after the power supply is switched off. DRAM products
offer large densities at low cost with relatively fast access
times and virtually unlimited endurance for the life of the
product. They are dynamic because they must be
electronically refreshed frequently in order to retain the
stored data;
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Flash memory products, which are non-volatile
memories offering large densities at low cost with slower access
times and limited endurance; and
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Static Random Access Memory, or SRAM, products, which are
volatile memories offering low densities at relatively higher
cost with very fast access times and virtually unlimited
endurance for the life of the product.
|
DRAM manufacturers can sell either individual DRAM chips, known
as dies, or components, which are packaged dies, or DRAM
modules, which are printed circuit boards generally containing
between four and thirty-six components.
According to Gartner, DRAM sales in calendar year 2006 were
$34 billion, representing 56% of the $61 billion
semiconductor memory industry, which in turn represented 23% of
the $263 billion semiconductor industry. Sales of NAND
flash memory reached $14 billion or 22% of the
semiconductor memory industry in calendar year 2006.
Semiconductor
Memory Product Features
The increasing complexity of the electronic devices in which
memory ICs are used, including the ever more sophisticated
software needed to operate them, has required growing amounts of
memory to permit efficient and high-speed operation. At the same
time, many of these electronic devices are themselves becoming
smaller or more portable, with limited room to accommodate, and
limited power to operate, the additional semiconductors they
contain. These factors have driven continuous efforts to improve
semiconductor design and process technologies over the years to
enable manufacturers to produce ever smaller, more complex and
more powerful memory products at a lower
cost-per-megabit.
The principal technical features that DRAM suppliers have
focused on to meet these requirements are:
Memory
density
Density of a DRAM chip is the amount of data it can store and is
usually measured in megabits (Mb) or gigabits (Gb). Density of a
DRAM module is measured in megabytes (MB) and gigabytes (GB),
where each byte contains eight bits. DRAM chips are currently
offered in a variety of densities for different end uses,
generally ranging from 4Mb to 2Gb per chip, or 128MB to 8GB per
module for high-end modules. In recent years, the maximum
density of standard DRAM chips has generally doubled every
24 months. Smaller amounts of older generations of DRAM
(4Mb, 16Mb, 64Mb and 128Mb densities) continue to be supplied
for applications where memory density is less
S-90
critical, such as printers. The industry has migrated from a
256Mb standard density to a 512Mb standard density. According to
Gartner, the percentage of standard chips produced with 512Mb
was 14% in calendar year 2004 and increased to 75% in 2006.
The following table shows the percentage of worldwide DRAM bit
shipments in the period from 2000 to 2006 according to Gartner.
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Year ended December 31
|
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|
2000
|
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2001
|
|
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2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
4Mb
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
16Mb
|
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|
5.9
|
%
|
|
|
2.4
|
%
|
|
|
1.5
|
%
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
64Mb
|
|
|
51.4
|
%
|
|
|
16.8
|
%
|
|
|
7.0
|
%
|
|
|
3.8
|
%
|
|
|
2.5
|
%
|
|
|
1.3
|
%
|
|
|
0.9
|
%
|
128Mb
|
|
|
37.3
|
%
|
|
|
61.8
|
%
|
|
|
35.7
|
%
|
|
|
14.2
|
%
|
|
|
7.7
|
%
|
|
|
4.2
|
%
|
|
|
2.5
|
%
|
256Mb
|
|
|
5.0
|
%
|
|
|
18.8
|
%
|
|
|
55.5
|
%
|
|
|
78.9
|
%
|
|
|
74.0
|
%
|
|
|
48.0
|
%
|
|
|
17.9
|
%
|
512Mb
|
|
|
|
|
|
|
|
|
|
|
0.2
|
%
|
|
|
2.2
|
%
|
|
|
14.3
|
%
|
|
|
43.2
|
%
|
|
|
74.9
|
%
|
1Gb
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
%
|
|
|
0.9
|
%
|
|
|
2.8
|
%
|
|
|
3.5
|
%
|
2Gb
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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0.1
|
%
|
Data
transfer rates and interfaces
Data transfer rate is the rate at which the IC transfers data
and is usually measured either in megabytes per second or by the
clock frequency, which is measured in megahertz. DRAM interfaces
have constantly developed towards increasing the data transfer
rate from the DRAM to a devices CPU, or central processing
unit, over the last decade. Data transfer rate is important
because it affects overall system performance, causing loss of
CPU speed if the data transfer rate is low compared to the
computation power of CPU. The rate of data transfer between the
DRAM and the CPU is governed by the clock frequency, which
operates in a wave-like cycle and has driven increasing clock
frequencies for CPUs and demand for faster data transfer from
the DRAM. In a synchronous DRAM (SDRAM) interface, data is
transferred from the DRAM to the CPU according to the system
clock rate. The most common current interfaces are double data
rate (DDR) SDRAM and double data rate 2 (DDR2) SDRAM. DDR SDRAM
supports data transfer on both edges of each clock cycle. Clock
frequencies for DDR reach a maximum of 200MHz, resulting in a
data transfer rate of approximately 3.2GB per second for a
standard PC module. The industry standard DRAM chip interface
has transitioned from DDR to DDR2. The DDR2 interface further
improves data transfer rates to a maximum of 6.4GB per second
for a standard PC module operating at the highest clock
frequencies. In the area of high-end specialty DRAM products,
such as graphics DRAM, clock frequencies today reach up to 1GHz,
resulting in data transfer rates of 32GB per second on a high
end graphic card. According to Gartner, the percentage of chips
produced with the DDR2 interface was 7% in calendar year 2004
and increased to 55% in calendar year 2006. The next generation,
higher bandwidth interface, double data rate 3 (DDR3), is
currently in the sampling phase at some manufacturers, including
ourselves.
The following table shows the percentage of worldwide DRAM bit
shipments by interface generation in the period from 2000 to
2006, according to Gartner.
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|
|
|
|
|
|
Year ended December 31,
|
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|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
FPM/EDO DRAM
|
|
|
9.9
|
%
|
|
|
3.2
|
%
|
|
|
0.9
|
%
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
SDR SDRAM
|
|
|
87.0
|
%
|
|
|
81.0
|
%
|
|
|
55.5
|
%
|
|
|
22.4
|
%
|
|
|
17.6
|
%
|
|
|
12.3
|
%
|
|
|
9.7
|
%
|
DDR SDRAM
|
|
|
|
|
|
|
8.6
|
%
|
|
|
37.9
|
%
|
|
|
72.5
|
%
|
|
|
72.6
|
%
|
|
|
58.2
|
%
|
|
|
31.4
|
%
|
DDR2 SDRAM
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1.3
|
%
|
|
|
6.6
|
%
|
|
|
26.3
|
%
|
|
|
55.1
|
%
|
DDR3 SDRAM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
%
|
RDRAM
|
|
|
2.7
|
%
|
|
|
6.4
|
%
|
|
|
4.2
|
%
|
|
|
1.9
|
%
|
|
|
0.9
|
%
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
Other
|
|
|
0.3
|
%
|
|
|
0.8
|
%
|
|
|
1.5
|
%
|
|
|
1.6
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%
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2.1
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%
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2.7
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%
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3.5
|
%
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Voltage
and power consumption
Another trend that is becoming increasingly important for DRAM
products is the continuous reduction of operating voltage and
power consumption. Whereas SDR SDRAM products are operated at
3.3 Volt, the voltage has been reduced to 2.5 Volt for DDR SDRAM
and to 1.5 Volt for DDR3 SDRAM products, thus constantly
reducing the power consumption by mainstream DRAMs. With the
increasing number of battery powered mobile applications such as
mobile phones, smart handheld devices and digital audio players,
the demand for ultra low-power memories has increased
significantly. Specifically designed DRAM products, such as
mobile DRAM, include active power saving features
that allow the further reduction of power consumption and thus
an increase in battery life for mobile applications. Recently,
heat dissipation has become an additional important driver for
low-power demand for DRAM products. The heat produced by high
density DRAM content in server farms and the related
expenditures for electricity has reached a level that has driven
server manufacturers to focus on low power DRAM products in the
market. Heat dissipation is also an important topic for
non-portable consumer applications such as digital TVs that use
slim cases and must avoid noisy cooling systems such as fans for
aesthetic reasons.
DRAM
Technologies
DRAM
architecture
A DRAM storage cell consists of a capacitor and a transistor,
and a key element in the physical layout of DRAM chips produced
today is the arrangement of capacitors and transistors on the
chip. In early DRAM chips, capacitors and transistors were
arranged in a plane across the surface of the chip. As DRAM
feature sizes have become smaller, the planar space for the
capacitor has become too small to hold a sufficient amount of
charges and the capacitor had to move in the third dimension.
Two different technological approaches have evolved to address
this issue, one in which the capacitor is laid into holes etched
into the surface of the silicon, commonly referred to as the
trench process, and another in which the capacitor
is laid on top of the silicon, commonly referred to as the
stack process. In the market today, each of several
manufacturers using stack technology has developed a unique
stack architecture, while all manufacturers using trench
architecture use technology first developed by Infineon, Toshiba
and IBM during the 1990s. The trench technology was later
advanced by Qimonda and is currently being further developed
cooperatively by Qimonda and Nanya. Both stack and trench cell
technology have to date been accepted in the market. According
to Gartner, based on bit shipments, in 2006, trench-based DRAMs
accounted for approximately 24% of the worldwide DRAM market,
while the various stack technologies accounted for the remainder.
Feature
size
DRAM technology development has generally followed
Moores Law, which estimates that the number of
transistors per square inch of silicon doubles every two years.
Manufacturers have achieved this progress in chip productivity
by shrinking the circuitry on chips that
is, by reducing the minimum distance between circuits, known as
the feature size. Smaller feature sizes require increasingly
sophisticated manufacturing process technology, including
advanced masks and photolithography techniques for printing the
circuitry on the chip. The distance between circuits on a
standard DRAM chip is measured in nanometers (nm) where one nm
equals one-billionth of a meter. The minimum feature size has
declined from 250nm in 1998 to 75nm today. The future shrinkage
of feature sizes is estimated by the International Technology
Roadmap for Semiconductors, or ITRS, which provides details and
naming conventions for upcoming feature sizes called
technology nodes. The current and next technology
nodes outlined by the ITRS also generally referred to as the
shrinkage roadmap, are 90nm, 80nm, 70nm, 65nm, 57nm
and 50nm. However, the actual feature sizes of the technology
nodes that individual industry participants implement may differ
from the node naming convention because each participant adjusts
its technology to meet its manufacturing and capital
requirements. Industry participants are currently introducing
and ramping process technology for 75/70nm and are in the
advanced stages of developing process technology for 65/60nm
feature sizes. They anticipate the development down to
approximately 50nm in the coming years. We believe that industry
participants are currently working on concepts for smaller
process technologies and alternative platforms. The transition
from one generation to the next, for example from 170nm to 140nm
technology, has typically occurred every 12 to 18 months.
Due to increasing space restrictions necessitated by feature
sizes of 70nm and below, transistors are starting to move into
the third dimension in future feature size generations of both
trench
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and stack architectures. It is not yet clear if either approach
will produce greater space or cost efficiencies as chips become
still smaller and memory densities continue to increase.
The
Semiconductor Manufacturing Process
Semiconductor manufacturing is a very capital intensive process,
with substantial fixed costs for fabrication facilities, known
as fabs, and for manufacturing equipment. Moreover,
given the rapid technology transitions in the industry,
manufacturers must depreciate this equipment over short time
periods, increasing the ratio of fixed costs to variable costs
per chip produced. The manufacturing process, which is
substantially the same for both DRAM and flash memory products,
is generally divided into two steps, referred to as the
front-end process and the back-end process.
The
front-end process
In the front-end process, electronic circuits are produced on a
silicon wafer. This process involves several hundred process
steps and takes place over a period of approximately two months
in a clean room environment in which humidity, temperature and
particle contamination are precisely controlled. Because of the
very small geometries involved in wafer processing, highly
complex and specialized equipment, materials and techniques are
used. The main process steps to build the circuit structures
include oxidation or deposition steps, photolithography, etching
and ion implantation. At the end of the front-end process the
chips are tested on the wafer for functionality.
Wafer processing is conducted in specialized fabrication
facilities, or fabs. A fabs capacity is generally stated
in terms of the number of wafers on which processing can begin
in a given period, or wafer starts per week or
month. The standard diameter of silicon wafers used to produce
semiconductors increased from 50mm in 1970, to 100mm by 1980,
150mm by 1990 and 200mm by 1995, and has increased to 300mm
since 2000, although the industry transition to 300mm wafers is
still underway. To transition a fabrication facility to larger
wafer sizes requires the acquisition of adequate equipment and a
lengthy testing and
ramp-up
period to achieve satisfactory manufacturing yields. The
transition to still larger 450mm wafers, if and when it occurs,
will likely require a similarly long transition and substantial
investments.
While larger silicon wafers cost more than smaller ones and the
equipment used to manufacture chips on larger wafers costs more
than equipment used for smaller wafers, these additional costs
are more than offset by the productivity gains provided by the
larger wafer. These productivity gains are primarily driven by
the increase in the number of chips produced from each wafer.
For example, the surface area of 300mm wafers is approximately
2.25 times greater than that of 200mm wafers, which yields
approximately 140% more chips per wafer. Because the cost of
labor and certain other fixed costs are largely independent of
the size of the wafers used, the use of larger wafers results in
reduction of the costs per chip.
Increasing complexity and capital intensiveness of front-end
processing has facilitated emergence of front-end foundries, who
partner with semiconductor designers or manufacturers to perform
front-end processing services.
The
back-end process
In the back-end process, also called the packaging, assembly and
test phase, processed wafers are diced into individual chips,
which, after having interconnecting pins added, are encapsulated
into a packaged component using a compound material. Packaged
components are tested extensively to ensure quality and
technical specifications are maintained. After final testing,
components are often soldered onto printed circuit boards to
create modules, which themselves undergo application testing.
Increasing requirements for higher component performance and
smaller size have led to development of back-end processing
technologies and innovative package types that optimize speed
and reliability of device interconnects while reducing the extra
size added by a chips packaging. Because back-end
processing can take place in a different location than the
front-end processing, several back-end foundries have emerged to
specialize on back-end processing and offer outsourced services
to semiconductor manufacturers who would like to specialize on
front-end processing alone or augment their in-house back-end
capacity.
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DRAM
Applications
DRAM, the most common type of memory IC, is found in a wide
variety of electronic devices, including servers and
workstations, personal and notebook computers, upgrade modules,
graphic cards, game consoles, mobile phones, printers, digital
TVs, set-top boxes and other consumer electronic devices.
Because these applications require different DRAM products, we
believe the DRAMs intended application determines its
pricing and competitive dynamics. We have identified the
following main applications for DRAMs:
Standard
DRAMs for PC and Workstation Applications
PCs, workstations and other computing applications were the
first users of DRAM and have historically represented the
majority of DRAM sales. DRAM components and modules for use in
desktop and notebook PCs and workstations accounted for
approximately 54% of global DRAM bit shipments in 2006,
according to Gartners report for the second quarter of the
2007 calendar year. These components and modules can be best
described as standard DRAMs, because they are
standardized across suppliers with respect to performance and
package specifications and trade like a commodity in a
relatively liquid market. They combine high-density and
high-speed data storage and retrieval with the lowest cost
per-megabit of any volatile memory product.
Typical customers of these standard DRAMs are large PC
manufactures, such as Dell, HP and Lenovo, either directly or
through contract manufacturers that assemble PCs for the large
manufacturers, as well as local original equipment
manufacturers, or OEMs, and module manufacturers, such as
Kingston. We believe that these customers tend to select their
standard DRAM suppliers on the basis of price and ability to
supply high volumes of product reliably. Some standard DRAM
customers also produce infrastructure equipment such as servers,
and networking and storage equipment, and we believe a
suppliers ability to offer other DRAM products is an
additional factor that may influence these customers
selection of standard DRAM suppliers.
The market for standard DRAMs has been characterized by intense
competition, often involving price cuts, and significant
volatility of revenues and operating results of market
participants. The major DRAM manufacturers typically have
contracts with each of their major OEM customers, with specific
prices negotiated twice per month. However, there are many
suppliers in the standard DRAM market, including module
manufacturers and smaller DRAM manufacturers, whose DRAM sales
prices are often based on spot market average selling prices, or
ASPs, which fluctuate daily.
DRAMs
for Infrastructure Applications
The high performance equipment that forms the backbone of the
Internet, such as servers and other networking and storage
equipment, also use DRAMs. DRAMs for these applications
accounted for approximately 18% of global DRAM bit shipments in
2006, according to Gartners report for the second quarter
of the 2007 calendar year. Due to the large data volume that is
handled by these applications, these customers usually demand
DRAM products with higher memory capacities. DRAM modules for
infrastructure applications differ from the modules used in PCs
by providing extra high densities and error correction features
to provide highest reliability. We believe that, because these
high-performance products often perform critical tasks, their
producers select DRAM suppliers whose DRAMs display advanced
features and reliability and whose manufacturing processes have
proven to be of high quality. In addition there is also demand
for customized products by some customers, who typically provide
their product specifications to DRAM suppliers, who in turn
design and produce the requested product. The customer will
validate the DRAM supplied, testing it rigorously
over a process that may last several months. DRAM products for
infrastructure applications such as Registered DIMMs generally
command a higher
per-unit
price than standard DRAM products. Typical customers who
purchase DRAM products for infrastructure applications are
server producers such as Sun Microsystems and network and
storage equipment vendors such as Cisco Systems and EMC.
Because DRAMs used in infrastructure applications tend to be
less standardized and more customer- or application-specific,
interchangeability is lower relative to standard DRAMs and
consequently the level of competition among suppliers is less
intense. In addition, there are fewer suppliers of these types
of DRAM products than standard DRAMs and these suppliers
typically sell infrastructure DRAM products pursuant to
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contract. The smaller number of suppliers and high percentage of
these products sold pursuant to contract tends to result in the
prices for these DRAM products being less volatile than those
for standard DRAM products.
DRAMs
for Other Applications including Graphics, Mobile and Consumer
Applications
With the growth of the mobile communication industry and the
digitalization of consumer products during the last decade, the
range of applications using DRAM products has significantly
broadened. Graphics applications such as game consoles and
graphics cards are requiring and driving demand for
high-performance graphics DRAMs that support the increasingly
advanced graphics in computer games. The increasing number of
communication and consumer mobile devices, including mobile
phones and digital still cameras and audio players, has driven
growth in demand for low-power DRAM products that allow for
longer battery lifetimes. As a result, a variety of specialty
DRAM components have been developed to address the specific
needs of these applications. In addition there is a growing
number of other consumer applications such as digital TVs, DVD
players and recorders and set-top boxes that require a whole
range of standard or even customized DRAM products. Products for
graphics, mobile and consumer applications accounted for about
19% of DRAM bit shipments in 2006, according to Gartners
report for the second quarter of the 2007 calendar year.
Successful DRAM suppliers maintain close relationships with
mobile phone, game console and consumer electronic device
producers, to understand the customers requirements early
in their product development stage. Many of these customers
expect their DRAM suppliers to be able to proactively provide
advanced products so that customers can integrate them into
their product design. As a result, compared to standard DRAMs
with the same density, these DRAMs tend to be relatively higher
in price. Typical customers of these types of DRAMs include
mobile handset manufacturers such as Motorola, Nokia and Sony
Ericsson, graphic card manufacturers such as AMD and nVidia,
game console manufacturers such as Microsoft, Sony and Nintendo
and major consumer electronics manufacturers.
Unlike standard DRAMs, DRAM products for graphics, mobile and
consumer applications tend to be customer- and
application-specific, and, therefore, prices for these DRAM
products tend to be more stable, with prices fixed by
comparatively long-term contracts.
Drivers
of DRAM Demand and Recent Trends
According to Gartners report for the second quarter of the
2007 calendar year, between calendar years 1998 and 2006, bit
shipments grew at a CAGR of 55% over the period. Historically,
growth of DRAM bit shipments was driven by DRAMs primary
application, computing, and depended on growth in units shipped
and DRAM content per unit. Rapid adoption of PCs by business and
home users, combined with operating system upgrades that
demanded more DRAM per unit, drove strong growth in bit demand.
However, as more DRAM components began to be used in a broader
range of applications, DRAMs for infrastructure and graphics,
mobile and consumer applications began to represent a larger
share of total DRAM bit shipments. In calendar year 2006, PCs,
workstations and memory modules and upgrades represented only
54% of total DRAM consumption compared to 64% in 2001.
Current estimates by Gartner predict continued strong growth in
DRAM bit shipments at a CAGR of 52% between calendar years 2006
and 2011 according to Gartners report for the second
quarter of the 2007 calendar year. Overall semiconductor memory
sales were $61 billion in 2006, and DRAM sales were
$34 billion in that year. Market research firms expect DRAM
sales to remain volatile, as increases in bit shipments are
offset to varying levels of declines in the average selling
prices for DRAM products. Key drivers of the growth in DRAM bit
demand include the following:
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Emergence of mobile phones as a significant consumer of
DRAM. While mobile phones consumed nearly no
DRAM six years ago, in calendar year 2006 this application
represented 3% of DRAM consumption and is expected to reach 6%
in calendar year 2011, according to Gartner. The 10% CAGR of
units shipped between calendar years 2006 and 2011, combined
with 57% CAGR in megabytes per unit, is expected to lead to 72%
CAGR of total DRAM consumption by mobile phones. Rapid growth in
DRAM content in phones is driven by emergence of multimedia
phones and adoption of sophisticated digital audio and video
functions into handsets.
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New or increased DRAM consumption by graphics applications
and digital consumer devices. Evolution of
consumer electronics has created several device categories that
offer sophisticated functionality and require substantial amount
of DRAM to operate. These devices, including digital TVs and
digital audio players, are often characterized by strong unit
growth and represent a significant incremental opportunity for
DRAM suppliers. In addition, technological advances in
established consumer devices have led newer models to require
more advanced DRAM and consume more DRAM per unit. Such devices
include game consoles, where the latest products include 512 or
256 MB of highly specialized GDDR3 DRAM. All three major
game console developers introduced new consoles using these
technologies within the last twelve months. Newer DVD
technologies, including advanced optical drives that demand more
discrete DRAM chips per DVD player or recorder, are also
expected to contribute to this growth. These and other trends
are expected to drive 36% CAGR of DRAM consumption in consumer
devices between calendar years 2006 and 2011, according to
Gartner.
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Continuing strong growth in DRAMs for
infrastructure. DRAM consumption in servers
is expected to grow at a 45% CAGR between 2006 and 2011 and for
Infrastructure at 51%, according to Gartner, driven by an
estimated increase of DRAM content per unit at a CAGR of over
39% and continued unit growth of entry-level servers. Evolution
of processor architectures, combined with increasing complexity
of systems, places significant demands on DRAM components used
in these systems, including power efficiency, speed and density.
However, demand for such DRAMs tends to be contract-based and
therefore relatively steady, resulting in more stable and
favorable pricing than the overall DRAM market.
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Multiple drivers of growth in DRAMs for PC and
workstations. PCs, workstations and memory
modules and upgrades are expected to increase DRAM consumption
at a 56% CAGR between 2006 and 2011, according to Gartner. One
of the drivers of this growth involves increasing adoption of
dual-core and 64-bit processors, which are expected to be
incorporated in almost half of total PC shipments by the end of
2007, according to IDC. In addition, Microsofts first
mainstream 64-bit operating system, Windows Vista, which was
launched in January 2007, is expected to stimulate DRAM demand
by facilitating higher DRAM per unit and by triggering PC
upgrades by consumers, followed by companies. Gartner expects
mobile PCs to play an important role in DRAM demand as their
strong unit growth is expected to continue at 19% CAGR in the
period between calendar years 2006 and 2011, driven by improved
power efficiency, wireless and multimedia functionality and
other trends, including substitution of desktop PCs. Given the
space and power constraints present in mobile devices, this is
expected to lead to increase in demand for advanced DRAM
components that address the above constraints. Significant DRAM
market potential also exists in desktop PC penetration in
emerging markets such as China and India.
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Drivers
of DRAM Supply and Recent Trends
Given the standardized nature of a significant share of DRAM bit
shipments, supply plays a crucial role in determining DRAM
selling prices, which, in turn, drive industry revenues and the
financial performance of suppliers. Historically, DRAM supply
has grown at high rates to meet the increasing bit demand,
although time lags associated with increasing supply, coupled
with unexpected changes in demand have resulted in periods of
excess DRAM supply or demand. These mismatches of supply and
demand have caused severe price fluctuations that, in turn have
led to revenue fluctuations, such as the 51% increase in DRAM
revenues from calendar years 1998 to 1999, the 63% decline from
calendar years 2000 to 2001 and the 50% increase from calendar
years 2003 to 2004, according to Gartner. Further, DRAM supply
is relatively inelastic. In periods of declining selling prices,
suppliers nonetheless continue production at full capacity as
long as prices exceed their variable costs of production, while
in periods of increasing selling prices, suppliers usually need
a long time, up to two years, to bring new capacities on-stream.
Supply of DRAM components involves constructing and equipping
complex and expensive fabrication, assembly and test facilities
as well as developing and continuously improving semiconductor
manufacturing technologies. Growth of DRAM supply is driven by
several factors, including:
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Capacity additions. DRAM suppliers
periodically build new manufacturing facilities or upgrade
existing facilities to increase their overall capacity.
Historically, periods of supply shortages led many market
participants to decide to add more capacity or accelerate
existing capacity addition plans. Given the long
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time required to bring new capacity on-stream, these capacity
additions may result in excess supply if a significant amount of
capacity comes on-stream simultaneously, in particular when
demand had subsided. Recently, several market participants have
experienced strong revenue growth and have announced (or
completed) increased investment in new manufacturing capacities.
However, some of these capacities have been or will be used to
produce non-DRAM products as well, as discussed below.
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Wafer size, process technology and other manufacturing
improvements. Successive generations of
semiconductor manufacturing technology enable higher output and
productivity, resulting in growth of supply without investments
in incremental capacity. For example, the transition from 200mm
to 300mm wafer-based manufacturing yields higher output given
the larger size of wafers being processed. The production
capacity on 300mm wafers has increased almost eight fold since
the beginning of calendar year 2004. According to iSuppli, the
worldwide percentage of DRAM bits output on 300mm wafers was 19%
in the first quarter of calendar year 2004. By the end of the
fourth quarter of calendar year 2005, the percentage of bit
output produced on 300mm wafers was 49%, according to iSuppli,
which further reported that this percentage had increased to 67%
in the fourth quarter of the 2006 calendar year. In addition,
transition to smaller process technology, for example from 110nm
to 90nm and then to 75nm nodes, reduces the die size and
increases the density per unit of die surface. As a result, more
chips are produced from the same wafer and higher bit shipments
are achieved without adding incremental capacity. When these
major transitions occur in DRAM manufacturing, lithography
methods or materials used, initial manufacturing yields tend to
be low, resulting in output below full potential. Over time, as
DRAM suppliers solve the manufacturing problems and increase
their yield, a higher proportion of usable components are
produced per wafer and bit supply increases.
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We have observed the following trends in DRAM supply in recent
periods:
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Consolidation among DRAM
suppliers. Market dynamics have driven
significant consolidation in the DRAM industry, as a number of
major manufacturers have withdrawn from the industry. NEC and
Hitachi combined their DRAM operations into Elpida Corporation
in December 1999, later consolidating some of Mitsubishis
DRAM development activities. Texas Instruments sold its DRAM
operations to Micron Corporation in calendar year 1998 and
Toshiba sold its U.S. DRAM fab to Micron in calendar year
2002. In January 2006, Micron combined its flash activities with
Intel. Hyundai merged its DRAM operations with those of LG in
calendar year 1999 (later renaming its DRAM operations as
Hynix). According to Gartner, market share (measured by revenues
in U.S. dollars) commanded by the four largest vendors has
increased during the last decade from 46% in calendar year 1995
to 72% in calendar year 2006. We believe the market to be
moderately concentrated as, according to Gartner, only nine DRAM
suppliers had revenue market share of over 1% in 2006.
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Increasing cost of technology development and
manufacturing facilities. The level of
complexity increases with each successive generation of
semiconductor manufacturing technology, as the leading edge
processes are nearing limits caused by the physical properties
of materials employed in the process. To solve such problems and
to successfully introduce technologically advanced manufacturing
capacity, DRAM suppliers need to consistently make significant
investments in research and development and in expensive
manufacturing equipment.
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Increasing use of foundries, joint ventures and licensing
agreements. In recent years, the high costs
of constructing fabs have led to the expansion of the use of
semiconductor foundries, which are contract manufacturers that
produce chips to the specifications of others. Historically,
foundries have produced chips for what are known as
fabless semiconductor companies, which are firms
that design chips but that do not have their own manufacturing
facilities. Increasingly, however, even large semiconductor
companies that do have their own facilities are supplementing
their capacity by making use of foundries. Using foundries
involves less capital investment and may provide greater
flexibility to increase or decrease output in a volatile market.
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Among companies seeking to share the risks and costs of
manufacturing investments, these factors have likewise increased
the attractiveness of joint venture and partnership
arrangements, as well as of licensing and cross-licensing
arrangements. For companies with substantial intellectual
property portfolios, including
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manufacturing know-how, licensing arrangements present an
opportunity to supplement income from manufacturing
semiconductors. Because technological know-how is very
concentrated in the semiconductor memory industry, many
manufacturers would be unable to produce memory chips were it
not for their access to the relevant technology through
licensing. For example, we estimate that four of the nine
largest DRAM suppliers today license most of their technology
from the other top-nine suppliers.
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Expansion of DRAM suppliers into flash memory
products. Driven by the historical and
projected strong growth in the NAND flash market, and taking
advantage of similarities between DRAM and NAND flash
manufacturing, some DRAM suppliers have entered or expanded
their presence in particular in the NAND flash market by adding
new NAND flash manufacturing capacity or converting existing
DRAM capacity to the manufacture of NAND flash memory. DRAM
manufacturing capacity can generally be transferred to NAND
flash and back without major cost or investment and in
relatively short time. We believe that this gives suppliers
flexibility to allocate capacity away from a product in periods
of excess supply of that product. As suppliers convert capacity
from DRAM to NAND flash, the impact may be beneficial to DRAM
producers because the resulting reduced rate of growth in the
supply of DRAM could operate to moderate price declines for DRAM
products that would likely have occurred had the new capacity
been dedicated to DRAM production. After capacity conversions
from DRAM to NAND flash memory products in the calendar year
2006, the industry has recently seen capacity conversions back
to DRAM in reaction to the severe price erosion for NAND flash
products. We believe that capacity conversions will continue to
take place in both directions whenever substantial differences
arise in margins between those product types.
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We believe that the above trends are having an effect on the
fundamentals of the DRAM industry and may be facilitating a
reduction in the severity of supply and demand imbalances, and
of price fluctuations, in the future.
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OUR
BUSINESS
Overview
We are one of the worlds leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. We began operations within the Semiconductor
Group of Siemens AG, whose roots in semiconductor R&D and
manufacturing date back to 1952, and operated as the Memory
Products segment of Infineon Technologies AG since its carve-out
from Siemens AG in 1999. In each of the past five calendar
years, we captured between 12% and 16% of the worldwide DRAM
market based on revenues, according to industry research firm
Gartner. Although our market share fluctuates, and we may gain
or lose market share quarter-to-quarter (for example, we lost
market share in the fourth quarter of the 2006 calendar year and
in the first quarter of the 2007 calendar year) or year-to-year,
in each of those five years, we remained among the four largest
DRAM suppliers worldwide based on revenues. For the full
calendar year 2006, we were the worlds third largest
supplier of DRAM, with market share of approximately 16% both in
revenues and bit shipments, according to Gartner. For the first
half of the 2007 calendar year, we remained the third largest
supplier of DRAM by revenue and were the fourth largest supplier
of DRAM by bit shipments with market shares of approximately
13%, according to Gartners report in September 2007.
Our revenues are derived from:
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Technologically advanced DRAM products used in infrastructure,
graphics, mobile and consumer applications. Our infrastructure
DRAMs address the high reliability requirements of servers,
networking and storage equipment. Our graphics, mobile and
consumer DRAMs principally include specialty DRAMs
that are designed for high performance or incorporate logic
circuitry to enable low power consumption. Our graphics DRAMs
deliver advanced performance to graphics cards and game
consoles, and our mobile and consumer DRAMs provide low power
consumption benefits to mobile phones, digital audio players,
GPS devices, televisions, set-top boxes, DVD recorders and other
consumer electronic devices. Sales of infrastructure, graphics,
mobile and consumer DRAM products accounted for approximately
38% of our net sales in our 2005 financial year, for
approximately 50% of our net sales in our 2006 financial year
and for approximately 59% of our net sales for the nine months
ended June 30, 2007;
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Standard DRAM products used in personal computers, or PCs and
workstations. Sales of these standard DRAM products accounted
for approximately 51% of our net sales in our 2005 financial
year, approximately 47% of our net sales in our 2006 financial
year and approximately 40% of our net sales in the nine months
ended June 30, 2007; and
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Other products, including embedded DRAM, technology licensing
and NAND-compatible flash memory products. We ramped down flash
memory products during the 2007 financial year. Sales of these
products and revenues from technology licensing and royalties
accounted for approximately 11% of our net sales in our 2005
financial year, for approximately 3% of our net sales in our
2006 financial year and for approximately 1% of our net sales in
the nine months ended June 30, 2007.
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The memory products business of Infineon, substantially all of
which Infineon has contributed to us, had a long-standing
reputation as a supplier of high-quality DRAMs. We intend to
continue to build on this reputation to broaden our product
portfolio and, in turn, our customer base, by focusing on DRAM
products for infrastructure and for graphics, mobile and
consumer applications. In our experience, demand for DRAM
products used in these applications is generally more stable
than the demand for standard DRAM products due to their
customized nature and advanced features, making them subject to
relatively less price volatility. We believe that increasing the
share of our revenues from these products will improve our
average selling price and make our operating results more stable.
Our customers include the worlds largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs in the PC and Server markets, including
HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer
coverage and breadth, we also sell a wide range of products to
memory module manufacturers that have diversified customer bases
such as Kingston, and to a number of distributors. More recently
and in connection with the ongoing expansion of our product
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portfolio, especially into graphics applications, we have added
customers with a strong focus on enabling these applications,
such as nVidia, AMD and customers who are active in the game
console market, such as Microsoft, Sony and Nintendo. In
addition, we have added customers in the area of consumer and
mobile applications, such as LG, Spansion and SanDisk. We
believe that having a close relationship with these customers
can benefit us in the development of future memory generations
by making it easier to develop memory solutions for future end
applications and improve our product designs.
We supply our customers through our own front-end facilities in
Germany and the United States, and through our back-end
facilities in Germany, Portugal and Malaysia. We supplement our
manufacturing capacity through two joint ventures, Inotera
Memories, Inc. and Qimonda Technologies (Suzhou) Co., Ltd.,
China, and through supply agreements with the DRAM foundries
SMIC and Winbond. In addition, we supplement our back-end
manufacturing through agreements with several subcontractors. We
operate these facilities as a coherent unit via our fab
cluster concept, which enables us to share manufacturing
best practice and gain operational flexibility through customer
qualification of our entire cluster of fabs.
Our
Strengths
We believe that we are well positioned to benefit from the
projected growth in the semiconductor memory industry and to
remain at its technological forefront. We consider our key
strengths to include the following:
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We are a leading supplier of DRAM
products. We have grown our operations
significantly over the last decade and, as the suppliers in our
industry have continued to consolidate, we have increased our
market share from 3% to 16% (based on revenues) between calendar
years 1995 and 2006, according to Gartner. Although our market
share fluctuates from quarter-to-quarter and year-to-year, by
the end of calendar year 2006, we were among the four largest
DRAM suppliers, which together accounted for 72% of the global
DRAM market in calendar year 2006. For the calendar year 2006,
we were the worlds third largest supplier of DRAM with
market share of approximately 16% both in revenues and bit
shipments, according to Gartner. For the first half of calendar
year 2007, we remained the third largest supplier of DRAM by
revenue and were the fourth largest supplier of DRAM by bit
shipments, with market shares of approximately 13%, according to
Gartners report in September 2007. We believe that our
size and scale will enable us to continue to improve our
position as a prominent developer of leading semiconductor
memory technologies, as a manufacturer with facilities among the
most modern in our industry and as a supplier of an increasingly
broad portfolio of competitive products to customers worldwide.
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We possess one of the broadest product portfolios in the
DRAM industry. We have in recent years
significantly broadened our product portfolio of DRAM products
for infrastructure, graphics, consumer and mobile applications,
which we believe offer on average higher and less volatile
prices than those for standard PC applications. In the nine
months ended June 30, 2007, our product portfolio included
in excess of 100 distinct products in these application areas
that each accounted for revenues in excess of
1 million, as compared with about 70 such products in
our 2005 financial year. Within these application areas, we have
focused on products that we design to meet the particular
specifications customers identify for individual applications
(which we refer to as design ins). We believe that
this focus on individual applications and customers can help us
mitigate the effects of price declines. In addition, our
broadened product portfolio has enabled us to strengthen our
customer base, both by adding new customers and expanding
existing customer relationships to encompass more products.
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We demonstrate strong application and product design
know-how. We believe that strong application
and product design know-how is necessary to achieve design wins
in applications outside the PC area, and that this know-how is
not broadly available in the market. We have strengthened our
product design know-how in recent years through experienced
design teams, and have continued to view the further
strengthening of our capabilities in these areas as a priority.
We believe that our application and design know-how has been
instrumental in our successes in being selected as a lead
supplier in many of the more technologically advanced
applications in the graphics, consumer and mobile areas in
recent years. For example, we increased the number of customers
who are among the leading suppliers in the area of consumer and
mobile applications from 5 in the financial year 2005 to 19 in
the first nine months of the 2007 financial year.
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S-100
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We are a leading developer of semiconductor process
technologies and an active innovator. We have
successfully developed and implemented several generations of
process technologies. We believe that our accumulated
experience, including that which we have acquired through our
strategic alliances, is enabling us to introduce new memory
technology platforms with smaller feature sizes on a schedule
and at costs that enable us to remain among the leaders in
standardized DRAMs while focusing on the more specialized
products and design-ins described above. For example, we
achieved the qualification of our 75nm node in approximately 30%
less time than we did when shrinking from the 110nm to the 90nm
node and have fully converted the production of standard DRAM
products in our lead manufacturing facility in Dresden to the
latest 80nm and 75nm technologies. We are also maintaining, as a
focus of our continuing research and development efforts, the
development of process technologies and architectures that
possess physical characteristics that can be utilized to yield
advantages for customer specific applications in terms of
performance and power consumption. We believe these
characteristics are important in DRAM products for use in
applications such as infrastructure, graphics, mobile and
consumer devices and have enabled us to achieve important design
wins for products for use in applications ranging from game
consoles and MP3 players to advanced servers. In this context,
we are currently preparing for the qualification of our trench
technology at the 58nm technology node by the end of financial
year 2008. We are at the same time working on designs beyond
this technology node with an open platform approach and a range
of architectures and technologies under review.
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We are among the leaders in the transition to
manufacturing on 300mm wafers. We were among
the first DRAM suppliers to transition a substantial portion of
our manufacturing to 300mm technology and began volume
production on this basis in 2001. Today, we own and operate two
300mm facilities and have access through our Inotera Memories,
Inc. joint venture to one of the largest 300mm facilities in the
world, according to Gartner. In the first quarter of the
calendar year 2007, about 78% of the DRAM bits we produced were
manufactured using 300mm wafers. This compares favorably to the
industry average of 72%, as reported by iSuppli for the same
quarter. We believe this places us ahead of our major
competitors, many of which still manufacture to a larger extent
on 200mm technology. We believe the primary benefit of this
early transition to 300mm has been and will continue to be a
reduction in our costs per bit, as our fixed costs of production
can be spread over a higher number of chips per wafer. Because
implementation of 300mm technology is complex and requires time
and substantial capital investments, we expect our 300mm
leadership to give us an advantage relative to competitors who
have not yet transitioned as great a proportion of their
capacity to 300mm as we have.
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Our business model leverages strong strategic
alliances. We have entered into strategic
alliances that leverage our research and development
capabilities and augment our front- and back-end manufacturing
capacity in a capital-efficient manner. We believe that we use
strategic alliances to a greater extent than our competitors and
that the continued success of our fab cluster
concept is a key element of our business model. We believe that
our strategic alliances, including our Inotera and Qimonda
Suzhou joint ventures, as well as our foundry partnerships with
SMIC and Winbond, enable us to benefit from significant
economies of scale at a reduced level of capital expenditures,
even as we seek, through productivity improvements and new
capacity such as the manufacturing facility we plan to construct
in Singapore, to maintain at least half of our production
capacity in house. We also believe that these arrangements
increase our operating flexibility by reducing our fixed costs,
which, in turn, can help us reduce volatility in our operating
margins throughout our industrys business cycle.
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Our
Strategy
In formulating our strategy, we aim to leverage our key
strengths to address our target markets and emerging
opportunities that we have identified. The key elements of our
strategy include the following:
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Improve our average selling price by maintaining our focus
on technologically advanced, customer and application specific
DRAM products for infrastructure, graphics, mobile and consumer
applications. We believe significant growth
opportunities exist for application-specific DRAMs used in
servers, graphics cards, game consoles, mobile phones, digital
audio players, GPS devices, televisions, set-top boxes, DVD
recorders and other consumer electronic devices. Our customers
and the other original equipment
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S-101
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manufacturers we target in these areas increasingly require DRAM
products with higher performance, lower power consumption and
smaller form factors, all at an attractive price. We intend to
focus on memory products for applications in these areas as we
seek to develop, frequently together with research and
development partners, new solutions to the physical and economic
challenges posed by the ever-increasing technical and financial
demands of these customer requirements. We plan to meet and
drive this demand by continuing to exploit our strengths in
technology innovation, not only in the form of our trench
technology but also in the form of new architectures and
platforms that may result from these research and development
activities. We have substantially enhanced our product
development capabilities and have recruited a significant number
of product development engineers, many of whom work directly
with customers on application- and customer-specific product
designs. This has already enabled us to substantially expand our
product offerings and market share in these areas. Because in
our experience these application-specific products generally
command higher and more stable prices, we believe that these
efforts will result in a higher blended average selling price
for our DRAMs as compared with the industry as a whole and
reduced volatility of our operating results.
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Leverage our technology leadership and increase our
presence in low cost regions to continue to reduce unit
costs. We believe that our leadership in the
transition to 300mm manufacturing technology will enable us to
realize the potential benefits of reduced unit costs offered by
this transition earlier than our major competitors. We intend to
remain ahead of our major competitors in this process and plan
to substantially complete our transition to manufacturing on
300mm wafers within the next few years. We are also seeking to
successfully ramp up manufacturing yield on the 80nm and the
75nm technology nodes and to introduce a 58nm technology by the
end of the 2008 financial year, which we believe will enable us
to derive unit cost improvements. We further intend to
successfully develop and implement future process technology
nodes by leveraging our accumulated expertise, R&D
capabilities and strategic alliances. In addition, we are
actively increasing the proportion of our manufacturing located
in low cost Asian regions. We expect our focus on Asia to remain
a key part of our strategy as we seek further opportunities to
reduce our fixed and variable production costs.
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Improve profitability and return on capital throughout our
industrys business cycle. We believe
that we will achieve significantly improved profitability
throughout our industrys business cycle through the
average selling price improvement and unit cost reduction
strategies outlined above. We also believe that we will reduce
the volatility of our operating results by increasing the
flexibility of our operations through our foundry partnerships
and by maintaining or expanding the share of our revenues that
are from advanced infrastructure, graphics, mobile and consumer
DRAM products. While we intend to maintain at least half of our
production capacity in-house, through productivity improvements
and new capacity such as the manufacturing facility we plan to
construct in Singapore, we plan to continue to focus on our
strategic alliances and our fab cluster-based business model to
optimize capital efficiency of our operations. We believe this
capital efficiency, combined with our targeted profitability,
will enable us to significantly improve our return on capital
employed.
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Our
History
We began operations as a part of Siemenss Semiconductor
Group, whose roots in semiconductor R&D and manufacturing
date back to 1952, four years after the invention of the
transistor. In 1999, Siemens contributed substantially all of
its Semiconductor Group, including both logic and memory
semiconductor activities, to its subsidiary, Infineon
Technologies AG. Following the formation of Infineon, we
continued operations as the Memory Products segment of Infineon.
Infineon contributed substantially all of the assets,
liabilities, operations and activities, as well as the
employees, of its Memory Products segment to our company
effective May 1, 2006. This excluded the Memory Products
operations in Korea and Japan, which were placed in trust for us
by Infineon pending their contribution and transfer. The
operations in Korea and Japan have since been transferred to us.
While Infineons investment in the Advanced Mask Technology
Center (AMTC) and the Maskhouse Building Administration Company
(BAC) in Dresden has been contributed to us, the legal transfers
of these investments are not yet effective, since
Infineons co-venturers have not yet given the required
consent to the transfer of the AMTC and BAC interest. While
pursuant to the AMTC and BAC limited partnership agreements,
such consent may not be
S-102
unreasonably withheld, we, Infineon and Infineons
co-venturers have included this consent in an agreement
currently being finalized, that also addresses Infineons
intention to reduce its stake in us below 50%. The AMTC and BAC
interest is held by Infineon for our economic benefit pursuant
to the contribution agreement. For as long as Infineon holds our
interests in AMTC and BAC, we must exercise our shareholder
rights with respect to these investments through Infineon, which
is a more cumbersome and less efficient method of exercising
these rights than if we held the interests directly. We do not
expect these administrative complexities to have a material
adverse effect on our business, financial condition and results
of operations.
Benefits
of our Carve-out
We believe that operating as an independent company allows us to
realize the following benefits:
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Increased market responsiveness through an exclusive focus
on the memory products business: DRAMs are
subject to different market dynamics compared to Infineons
other products. By operating as a separate business we are able
to react more effectively to the dynamics of the memory market
through simplified decision-making processes independent from
the requirements of Infineons remaining businesses. We
believe that this independence permits us to focus exclusively
and quickly on our customers, and anticipate their specific
needs.
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Direct access to a distinct investor
base: We believe that as a stand-alone
U.S.-listed
semiconductor memory company, with distinct opportunities and
risk characteristics, we appeal more readily to those investors
interested in a focused semiconductor memory company.
Furthermore, as a stand-alone company, we enjoy direct access to
the capital markets.
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Incentives for our employees directly tied to our own
performance: We believe that our share price
reflects our performance more accurately than Infineons
share price did and therefore can be used as a more effective
compensation tool for our employees. Our shareholders have
authorized the Supervisory Board to grant to the members of the
Management Board, and the Management Board to grant to certain
key executives in our group, through September 30, 2009, a
total of 6,000,000 non-transferable option rights to receive our
ordinary shares in the form of ADSs. As of June 30, 2007, a
total of 1,895,000 options were outstanding. We have not granted
any options since that date.
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Increased flexibility to pursue strategic
cooperations: We believe that by becoming an
independent business, we have substantially increased our
flexibility to engage in strategic cooperations such as
alliances or joint ventures of particular benefit to the
semiconductor memory business. In addition, we are in a position
to issue our own securities, which may enable us to participate
more readily in the further consolidation of the memory business
should opportunities, which are attractive from a strategic,
operating and financial perspective, arise.
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Products
and Applications
We design semiconductor memory technologies and develop,
manufacture, market and sell a large variety of semiconductor
memory products with various packaging and configuration
options, architectures and performance characteristics on a
chip, component and module level. We currently offer
technologically more advanced DRAM products for infrastructure,
graphics, mobile and consumer applications, as well as standard
DRAM products for PCs, notebooks and workstations. We also
offered a small number of non-volatile NAND-compatible flash
memory products, but have recently discontinued production of
these products.
S-103
The following table sets forth our revenues provided by category
of activity for the periods indicated:
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For the financial year ended
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For the nine months
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September 30,
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ended June 30,
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2004
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2005
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2006
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2006
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2007
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(in
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(in percent
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(in
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(in percent
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(in
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(in percent
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|
(in
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(in percent
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(in
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(in percent
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millions)
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of total)
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millions)
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of total)
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millions)
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of total)
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millions)
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of total)
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millions)
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of total)
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DRAMs:
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Standard DRAMs for PCs, Notebooks
and workstations
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1,905
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63
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%
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1,435
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51
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%
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1,784
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47
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%
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1,336
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52
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%
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1,157
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40
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%
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DRAMs for infrastructure, graphics,
mobile and consumer applications
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877
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29
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%
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1,089
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38
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%
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1,928
|
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50
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%
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1,158
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45
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%
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1,701
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59
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%
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Total DRAMs
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2,782
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92
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%
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2,524
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89
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%
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3,712
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|
97
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%
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2,494
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|
97
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%
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2,858
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|
99
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%
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Other products and
services(1)
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226
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8
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%
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301
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|
11
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%
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|
103
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3
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%
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89
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3
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%
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39
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1
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%
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Total
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3,008
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100
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%
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2,825
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100
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%
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3,815
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|
100
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%
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2,583
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100
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%
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2,897
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100
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%
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(1) |
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Primarily includes embedded DRAM products, flash memory products
and technology licensing revenues. Technology licensing revenues
consists of revenues from licensing our technology to third
parties in connection with manufacturing agreements that provide
us with access to manufacturing capacity. See
Strategic Alliances and Agreements. |
Brands
Most of our products are sold under our Qimonda brand, and we
are working to establish a brand identity for ourselves using
the Qimonda name. See Risk Factors Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon We may not be
successful in establishing a brand identity. We have
applied for protection of our Qimonda brand as a trademark,
domain and company name, but may not gain protection in all
jurisdictions. We also sell DRAM products under our
AENEON®
brand. This brand addresses desktop PC and notebook PC
applications. AENEON products are designed to serve the needs of
smaller PC manufacturers, PC system builders and the DRAM
upgrade retail market. Retail upgrades typically
refer to consumers adding memory to their existing computers,
mainly in their homes. Qimonda has begun selectively to grant
licenses to third parties to market their products under the
AENEON brand (initially, AENEON USB memory sticks). This brand
addresses the so-called white box PC market and the
retail upgrade market. White box refers to PCs
manufactured by hundreds of small PC manufacturers worldwide and
to unbranded PCs manufactured by larger, well-known OEMs, and
retail upgrade refers to consumers adding memory to
their existing computers, typically in their homes.
DRAMs
for Infrastructure, Graphics, Mobile and Consumer
Applications
We design, manufacture and sell technologically advanced DRAM
components and modules for use in servers, networking and
storage equipment and a variety of specialty DRAMs for use
primarily in graphics, as well as in mobile and consumer
applications.
Infrastructure
Applications
Our current portfolio of DRAMs for use in servers, networking
and storage equipment includes FB-DIMMs, which we believe will
serve as the next generation of memory used in high-end servers,
and very-low-profile-DIMMs, intended for the blade server
market. DRAM consumption in entry level servers is expected to
enjoy 60% compound annual growth rate (CAGR) (based on bits
shipped) from 2006 to 2011, according to iSuppli. We believe we
are the only FB-DIMM supplier who has in-house capabilities to
design a key component of this module, a logic chip called
Advanced Memory Buffer, or AMB. This allows us to customize the
AMB design specifically for our
S-104
memory modules, providing us better know-how transfer from chip
to system level and vice versa. We also provide customized
modules to server manufacturers, in each case specifically
designed to meet the individual customers unique platform
requirements. We expect the markets for servers to grow
substantially in the next few years, and we are currently
engaged in the development of products we believe will address
that growth. For example, we are developing new generations of
standard DRAM with 2 gigabits of capacity for use in future IT
infrastructure applications.
Graphics
Applications
We offer a broad portfolio of graphics DRAMs that support
applications with performance ranging from entry level to very
advanced. Due to their speed, low power consumption and limited
heat generation, our graphics DRAM components are used in game
consoles, graphics cards and PC and notebook computers. In some
cases, we make customized products for use in entertainment
applications, including game consoles and imaging devices. We
believe that the trend towards the extensive use of
sophisticated graphics applications will result in strong growth
in high performance graphics systems which we believe will in
turn drive the demand for our graphics DRAM products.
Mobile
and Consumer Applications
We offer low-power specialty DRAM products, such as Mobile-RAM
and
CellularRAM®,
that are suited for use in a variety of mobile and consumer
applications, such as:
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mobile phones;
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mobile consumer products, such as digital still cameras and
digital audio players; and
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stationary consumer products, such as digital televisions and
DVD recorders.
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Our Mobile-RAM is specifically designed for ultra-low power
consumption that is increasingly demanded by todays
battery powered mobile communication, especially in high end
phones and handheld consumer products. We intend to focus
further on driving technological innovations in this area and we
believe we were the first to produce chips with a temperature
sensor integrated onto the chip as well as the first to
introduce a DDR interface for a Mobile-RAM to further reduce
power consumption or alternatively offer higher performance. We
also expect that new consumer products that combine more
features will require DRAMs that consume very low power, yet
operate at adequate speeds. We believe that the
trench-architecture-based products we currently offer allow for
a significantly longer battery life and reduced heat
dissipation, both important features for potential customers and
their end users.
Our
CellularRAM®
is designed to be the best choice of memory for entry and mid
range handset models. This market segment is characterized by
stringent low power requirements, but more moderate density and
bandwidth needs. CellularRAM balances low power efficiency with
high data throughput. We are also a founding member of the
CellularRAM®
specification co-development team and, together with six other
industry members create common specifications for
high-performance pseudo-SRAM devices, enabling us to take an
active role in the development of DRAM memory products for one
of the fastest-growing technology sectors.
Both our Mobile-RAM and
CellularRAM®
products are offered as components and as so-called
Known-Good-Dies, or KGDs, for use in Multi-Chip-Packages, or
MCPs. MCPs combine different memory chips, usually a
non-volatile flash chip, and a faster, volatile RAM, and are
increasingly used in mobile communication and consumer devices
due to their lower space consumption. We supply our Mobile-RAM
and
CellularRAM®
as KGDs on wafer level to MCP manufacturers.
We also offer a broad range of DRAM products for consumer
applications, some of which are of smaller memory densities or
older interface generations, such as SDRAM. These are often
referred to as legacy DRAM products. For example the
manufacturers of hard disk drives, DVD players, home gateways
and some printers do not require large amounts of DRAM, but do
require a DRAM product that is guaranteed to be available for
the printers entire life cycle, which may be many years.
In addition, we sell products with industrial-level tolerance
for cases when consumer applications require a broader
guaranteed temperature range. For high-end digital televisions,
we
S-105
offer modules with up to DDR2 800. Demand for these
dedicated consumer DRAM products is often less
volatile, and their prices are relatively more steady, compared
to other standard DRAM products.
Standard
DRAMs for PC, Notebook and Workstation
Applications
In addition to the DRAMs for infrastructure, graphics, mobile
and consumer applications, we believe we offer a complete
portfolio of standard DRAM products that provide a variety of
speeds, configurations and densities suited to particular end
uses. We sell the majority of our standard DRAM products for use
in PCs and workstations, to desktop and notebook computer
manufacturers and to distributors who sell DRAMs on to smaller
original equipment manufacturers and contract manufacturers. Our
standard modules, including Unbuffered DIMMs and SO-DIMMs, are
used primarily for PCs and notebooks, while our more specialized
modules such as High-Density SO-DIMMs and Micro-DIMMs are
typically used in high-end notebook computers and sub-notebooks.
We believe our engineering capabilities permit us to offer these
specialized modules and differentiate us from suppliers focused
primarily on standard DRAM products. Many of our customers that
produce PCs and workstations also produce servers, networking
and storage equipment or graphics, mobile and consumer products.
We believe these customers expect us to offer both standard DRAM
products and other types of DRAM products so that we can supply
their entire product ranges. We intend to invest in technology
development and anticipate playing an active role in the
development of future DRAM architectures, including
third-generation DDR, or DDR3.
The large size of the standard DRAM market has made possible the
substantial capital investments required to achieve ever more
advanced manufacturing capabilities. Being active in the
high-volume standard DRAM market enabled us to build our current
scale and develop our existing manufacturing capabilities
forming the basis to expand our production of DRAMs for advanced
infrastructure applications and specialty DRAM products.
Other
Products and Technology Licensing
In the 2006 financial year, we offered data flash memory
products, primarily in the form of cards and to a lesser extent
in component form, for use in digital still cameras, USB flash
drives, digital audio players and mobile phones. Due to the
significant price decline for data flash memories since the
beginning of the 2006 calendar year, we have decided to ramp
down the production of our flash products during the 2007
financial year and to convert our flash production capacities to
DRAM production capacities. We have stopped the development of
NAND-compatible flash memory products based on Saifuns
proprietary NROM technology, which we licensed from Saifun when
we purchased its remaining interest in our joint venture. See
Intellectual Property Amendment
and Partial Termination of Our License Agreement with
Saifun.
We continue to be engaged in technology development for
non-volatile memories to address a market, if one develops, in
which we can provide a competitive platform for flash systems
(which are modules containing flash memory and a controller). We
conduct our non-volatile memory development activities through
our wholly-owned subsidiary Qimonda Flash at our facilities in
Dresden and Munich, Germany and Padua, Italy.
We sell a relatively small volume of embedded DRAM products in
the form of
system-on-chip
ICs that integrate memory and logic circuitry on a single chip.
In addition, we grant technology licenses of our intellectual
property to our alliance partners, including Winbond and Nanya.
These licenses are often granted as part of cross licensing
arrangements. They often enable us to gain access to
manufacturing capacity at foundries through these kinds of cross
licenses and capacity reservation arrangements.
S-106
The following table presents summary information regarding our
principal products.
|
|
|
|
|
|
|
|
|
Products
|
|
Principal features
|
|
Principal applications
|
|
Standard DRAM
Components
|
|
Memory components in different
package configurations with different interfaces
|
|
Mainstream bandwidths
from DDR-333 to
DDR2-800
|
|
Memory modules
Components-on-mainboards
|
|
|
(DDR, DDR2) and densities (128Mb,
256Mb, 512Mb and 1Gb)
|
|
Organization:
x4, x8, x16
|
|
|
Personal Systems DRAM
Modules
|
|
Unbuffered Dual Inline Memory
Modules (DIMMs) based on DDR and DDR2 components, with densities
ranging from 256MB to 2GB
|
|
Mainstream bandwidths
from DDR-333 to
DDR2-800
|
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Desktop computers
Workstations
|
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|
|
|
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|
|
|
|
Unbuffered Dual Inline Memory
Modules (DIMMs) with ECC (Error Correction Code) based on DDR
and DDR2 components, with densities ranging from 256MB to 2GB
|
|
Mainstream bandwidths from DDR-333 to DDR2-800
Error correction code
|
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Workstations
Entry-level Servers
|
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|
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SO (Small-Outline)-DIMMs based on
DDR or DDR2 components, with densities ranging from 256MB to 2GB
|
|
Mainstream bandwidths
from DDR-333 to
DDR2-800
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Notebook computers
|
|
|
|
|
|
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Micro-DIMMs based DDR2 components,
with densities ranging from 256MB to 1GB
|
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Bandwidths from DDR2-400 to DDR2-667
35% smaller than standard SO-DIMMs
|
|
Sub-Notebooks
Ultra-mobile PCs
|
Infrastructure DRAM
modules
|
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Registered DIMMs and customized
DIMMs based on DDR and DDR2 components, with densities ranging
from 256MB to 8GB
|
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Mainstream bandwidths
from DDR-266 to
DDR2-800
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Servers
|
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|
|
|
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|
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FB (Fully Buffered) DIMMs based on
DDR2 components, with densities from 512MB to 4GB
|
|
Bandwidths from DDR2-533 to DDR2-800
Advanced Memory Buffer technology
|
|
Servers
Workstations
|
|
|
|
|
|
|
|
|
|
Very-low-profile-Registered DIMMs
based on DDR2 components, with densities ranging from 512MB to
4GB
|
|
Bandwidths from DDR2-533 to DDR2-800
Reduced height
|
|
Blade servers
|
S-107
|
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|
|
|
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Products
|
|
Principal features
|
|
Principal applications
|
|
Networking, Storage and
Industrial DRAM Products
|
|
Memory components and modules in
different package configurations with different interfaces (SDR,
DDR, DDR2) and densities (128Mb, 256Mb, 512Mb, 1Gb, 2Gb) High
Density DIMMs (DDR1, DDR2) and Fully Buffered DIMMs (DDR2)
|
|
Industrial temperature capabilities
Lead-containing DRAM packages
Low power self refresh
Mainstream bandwidths from DDR-266 to DDR2-800
|
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Networking, Telecom and Industrial equipment
Storage
|
Graphics
|
|
Graphics RAM (256Mb, 512Mb) based
on DDR2 and GDDR3 interfaces
|
|
Bandwidth per pin from 0.8Gb per second up to 2Gb per second
Organization: x16, x32
Manufactured in 80nm, 90nm and 110nm process technology
|
|
Graphics cards in desktop and note-book computers
Game consoles
|
Mobile and
Consumer(1)
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|
Mobile-RAM (128Mb, 256Mb, 512Mb,
1Gb) based on SDR and DDR interfaces; also available as
known good dies
CellularRAM®
(64Mb, 128Mb); also available as known good dies
|
|
Ultra low power
FGBA-package
Organization: x16, x32 (Mobile RAM)
Low operating current
Low standby current
Refresh-free operation
Low power consumption
Manufactured in 110nm process technology
|
|
Top range mobile phones (2.5G/3G)
PDAs
Digital still cameras
Digital audio players
Mid-range mobile phones (2.5G/3G)
GPS
|
|
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|
(1) |
|
We also sell our range of standard DRAM components to customers
who manufacture infrastructure equipment and consumer electronic
devices including digital televisions, set-top boxes and DVD
recorders. |
S-108
DRAM
Density and Interface Development
We believe we are an industry leader in transitioning to next
generation memory density and interface. According to iSuppli,
we were the largest supplier of 512M DDR2 products, based on
bits shipped, during the
ramp-up
phase of this product density in the market, which occurred in
the first half of the 2006 calendar year. The following table
sets forth the percentage of our total DRAM bit shipments (by
density and interface) for the periods indicated:
|
|
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|
|
|
For the financial year ended September 30,
|
|
DRAM:
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
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|
(in percent)
|
|
|
By density:
|
|
|
|
|
|
|
|
|
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|
|
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128Mb
|
|
|
4
|
|
|
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1
|
|
|
|
0
|
|
256Mb
|
|
|
90
|
|
|
|
51
|
|
|
|
24
|
|
512Mb
|
|
|
6
|
|
|
|
47
|
|
|
|
74
|
|
1Gb
|
|
|
0
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|
|
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1
|
|
|
|
2
|
|
By interface:
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|
|
|
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|
|
|
|
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|
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|
SDRAM
|
|
|
11
|
|
|
|
5
|
|
|
|
3
|
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DDR
|
|
|
83
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|
|
|
60
|
|
|
|
30
|
|
DDR2
|
|
|
1
|
|
|
|
27
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|
|
51
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Specialty DRAMs
|
|
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5
|
|
|
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8
|
|
|
|
16
|
|
We believe, we are one of the first suppliers to deliver DDR3
components and modules in the third quarter of the 2007
financial year to leading motherboard vendors and manufacturers
of overclocking memory modules. In addition, our DDR3 products
have been validated on Intel reference platforms.
Customers,
Sales and Marketing
Our customers include the worlds largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs in the PC and Server markets, including
HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer
coverage and breadth, we also sell a wide range of products to
memory module manufacturers that have diversified customer bases
such as Kingston, and to a number of distributors. More recently
and in connection with the ongoing expansion of our product
portfolio, especially into graphics applications, we have added
customers with a strong focus on enabling these applications,
such as nVidia, AMD and customers who are active in the game
console market, such as Microsoft, Sony and Nintendo. In
addition, we have added customers in the area of consumer and
mobile applications, such as LG, Spansion and SanDisk. We
believe that having a close relationship with these customers
can benefit us in the development of future memory generations
by making it easier to develop memory solutions for future end
applications and improve our product designs.
We have been a primary DRAM supplier to major OEMs, including HP
and Dell, in a number of recent years. These customers generally
provide relatively more stable demand for standard DRAM than is
available on the spot market, and we believe they are good
partners for product development. In the infrastructure area, we
believe that we have been able to establish a strong presence
based on our high performance and high quality products,
including application-specific and customized products. For
example, we have received supplier awards from Sun Microsystems
in each of the last four years.
The number of customers we serve has increased over recent years
from about 150 in our 2003 financial year to about 170 in the
2006 financial year as we continued to diversify our product
portfolio. In the first nine months of our 2007 financial year
the number of customers we serve declined slightly compared to
the 2006 financial year due to the phase out of our flash
production and of our support to certain Infineon customers. In
the first nine months of our 2007 financial year, our five
largest customers accounted for 50% of our total sales. HP, our
largest customer, accounted for 17% of our sales and Dell, our
second largest customer, accounted for 13% of our sales during
that period. In our 2006 financial year, our five largest
customers accounted for 49% of our total sales. HP, our largest
customer, accounted for 18% of our sales and Dell, our second
largest customer, accounted for 16% of our sales
S-109
during that period. In our 2005 financial year, our five largest
customers accounted for 52% of our sales and our 20 largest
customers accounted for nearly 76% of our sales. HP accounted
for nearly 19% of our sales, Dell accounted for 14% of our sales
and three additional customers each accounted for more than 5%
of our sales during that period. In our 2004 financial year, our
five largest customers accounted for 52% of our sales and our 20
largest customers accounted for 82% of our sales.
We sell our semiconductor memory products throughout the world,
primarily in the United States, Europe and the Asia/Pacific
region. We make our sales primarily through direct sales
channels and, in order to ensure best possible customer coverage
and reach, make use of distributors. We focus our principal
sales and marketing efforts on the technology leaders in each of
the DRAM markets we serve. We believe we have strong customer
relationships and that our customers, many of which are leaders
in their respective fields, provide us with special insights
into the current state of their respective markets. We tailor
our sales approach to our customers, serving our largest
customers, primarily global PC and Server OEMs, via our Key
Account Centers and serving our local OEMs, module manufacturers
and distributors via our regional sales organizations. Each Key
Account Center is comprised of a Key Account Center Head, the
individual responsible for developing the account strategy who
serves as the customers primary point of contact, and a
team of their engineering experts. Our engineering experts work
directly with our customers to tailor our products to each of
their specific needs as well as to the needs of their quality
and supply chain experts. Because most of our sales employees
are trained engineers, these teams are able to provide crucial
technical support to ensure that each of our customers
requirements are met. Each Key Account Center team is
responsible for the needs of its customers on a global basis,
and we expect them to achieve or maintain a position as a top
supplier of DRAM to that customer in terms of quality and
volume. We believe that our key account approach, as the first
among three focus points of our sales strategy, assists us in
developing and maintaining strong relationships with our major
customers, which is particularly important for customers who
purchase primarily standard DRAMs who could easily migrate to
other suppliers.
Because many of our Key Accounts in the PC and Server markets
also produce graphics, mobile and consumer products, the second
focus of our sales strategy is to leverage our existing
relationships to expand the applications in which we serve them.
For example, during the last year, we have been increasing our
efforts to market customer- and application-specific DRAMs for
graphics, mobile and consumer applications, because we believe
the market for these applications will be attractive with
respect to price, stability and demand growth. The third key
focus of our sales strategy is to continue to expand the product
portfolio we deliver to each of our customers by leveraging our
strong technical skills and working directly with them to design
specific memory products for use in their end products. Our
development engineering teams, composed of trained engineers,
work directly with customers, creating products specifically
designed for particular customers in a process we call
design-in. In some cases, several DRAM producers may
attempt to design their product into the customers
application, each vying to best meet the customers
requirements. Our development engineering teams play a key role
in this regard.
Our regional sales teams are located in Europe, North America,
Asia/Pacific and Japan, and are supported by our headquarters in
Germany. These regional sales centers enable us to bring our
business to our customer base and to provide local contact and
support to the Key Account Center teams in those regions. Each
of our regional sales centers is equipped to perform all key
sales support, and each of our regional sales organizations is
responsible for acquiring new customers and managing the
regions product mix and inventory.
We sell the majority of our products under our new brand name
Qimonda. However, we also established a second brand,
AENEON®,
in 2004 to address the so-called white box PC
markets and retail upgrade markets. White box refers
to PCs manufactured by hundreds of small PC manufacturers
worldwide and to unbranded PCs manufactured by larger,
well-known OEMs, and retail upgrade refers to
consumers adding memory to their existing computers, typically
in their homes. Worldwide, approximately 40% of PC and notebook
DRAM revenues were expected to be derived from the white
box and retail upgrade markets in calendar year 2006
according to a report of iSuppli in November 2006. These markets
exist worldwide, and we believe that emerging markets such as
China and Latin America will drive strong growth in the future.
Customers in these markets typically seek the lowest cost
products that have dependable quality. We ensure the quality of
our
AENEON®
products through testing the compatibility with major PC and
notebook platforms. This process is often shorter and more
cost-efficient than the testing required by high-end
applications of our OEM customers. We sell our
AENEON®
products via an
S-110
extensive network of distributors and retailers worldwide, and
have recently begun to offer them through a dedicated Internet
sales channel.
We generally enter into agreements with our customers specifying
the terms and conditions under which they agree to purchase our
products and the terms and conditions under which we agree to
supply them. The period of time over which prices and volume are
fixed depends on the application market in which the customer
operates. In general, prices and volumes are negotiated for
periods ranging from a few days, for standard DRAMs for PC,
notebook and workstation products in the spot market, up to one
year for customer-and application-specific DRAMs used in
graphics, mobile and consumer applications. The majority of our
sales volume, however, is based on contracts in which prices and
volumes are re-negotiated twice a month. The majority of our
customer agreements require our customers to provide us with a
regular forecast of their DRAM demand. Our determination of the
mix of products to be manufactured is primarily based on our own
internal forecasts in combination with the forecasts our
customers provide.
We categorize our sales geographically based on chosen billing
location.
In many cases, our customers then choose to ship our products to
locations other than the billing locations. Accordingly, we do
not believe that the geographical distribution of our sales are
necessarily indicative of where our products are actually used.
The geographical distribution of our sales by percentage during
the periods indicated was as follows:
Sales by
Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
financial year
|
|
|
For the nine months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
|
(in percent)
|
|
|
Germany
|
|
|
13
|
|
|
|
8
|
|
|
|
8
|
|
|
|
9
|
|
|
|
7
|
|
Rest of Europe
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
13
|
|
|
|
11
|
|
North America
|
|
|
38
|
|
|
|
38
|
|
|
|
42
|
|
|
|
42
|
|
|
|
38
|
|
Asia/Pacific
|
|
|
33
|
|
|
|
38
|
|
|
|
31
|
|
|
|
32
|
|
|
|
31
|
|
Japan
|
|
|
4
|
|
|
|
4
|
|
|
|
7
|
|
|
|
4
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
products for PC applications during the nine months ended
June 30, 2007. The decrease in sales in North America for
the nine 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.
As of June 30, 2007, we had 367 sales and marketing
employees worldwide. In connection with our focus on expanding
our customer and product portfolios, we have added employees to
our marketing teams in recent years, many of which are directly
engaged with our customers.
Our marketing teams determine the products required to meet our
customers needs and support both our Key Account Centers
and regional sales forces. Our marketing organization is divided
into product marketing groups and various regional marketing
groups, and both groups work closely with our customers and with
our sales and R&D organizations. Our product marketing
groups help plan our product roadmap, to enable us to develop
and manufacture products that we believe will meet our
customers changing requirements. Our regional marketing
teams collect local customer requirements, work together with
the product marketing groups and support their respective
regional sales organization. Our product marketing organization
is primarily based in Germany.
S-111
Competition
We compete generally on the basis of price, product design,
technical performance, production capacity, product features,
product system compatibility, quality, product reliability, and
support. Production capacity and quality, in addition to the
ability to deliver products reliably and within a very short
period of time, play particularly important roles. The
importance, however, of these factors varies based on the market
for the product group in question.
|
|
|
|
|
Standard DRAMs for PC and workstation
applications. We compete in this market on
the basis of price, delivery reliability and logistical support.
We consider a strong reputation in delivery reliability to be
vital for this market.
|
|
|
|
DRAMs for infrastructure, graphics, mobile and consumer
applications. We compete in these markets on
the basis of product quality, performance, reliability and
engineering support. Logistical support is particularly
important for infrastructure applications. Our engineering teams
are able to design customer-specific products based on our DRAM
trench technology, with high performance for uses such as in
graphics applications, and with relatively lower power
consumption, which enables longer battery life and lower heat
generation in mobile and consumer electronics devices, key areas
of concern for our customers. We believe the Sun Microsystems
(Best In Class Memory Supplier) award we earned in 2006 for
the second consecutive year is an indicator of the high quality
and reliability of our products geared toward infrastructure
applications.
|
The markets for our products, especially our standard DRAM
products, are intensely competitive. Our principal competitors
include other major international DRAM producers as well as many
smaller manufacturers that manufacture DRAM using design and
manufacturing technologies licensed from the major DRAM
producers. Several of these companies license technology from us
and, in some cases, we purchase a portion of their DRAM output,
while at the same time competing with them for sales. See
Strategic Alliances and Agreements for a
description of our manufacturing arrangements with strategic
partners.
The following table sets forth the market share in percentage
based on DRAM revenues in the 2006 calendar year of our
principal competitors, according to Gartner, and the primary
areas in which we believe we compete with them:
|
|
|
|
|
|
|
Principal Competitor
|
|
Areas of competition
|
|
Market share
|
|
|
Samsung Electronics
|
|
Standard, infrastructure,
graphics, mobile and consumer DRAMs
|
|
|
29
|
%
|
Hynix Semiconductor, Inc.
|
|
Standard, infrastructure,
graphics, mobile and consumer DRAMs
|
|
|
17
|
%
|
Micron Technology, Inc.
|
|
Standard, infrastructure, mobile
and consumer DRAMs
|
|
|
11
|
%
|
Elpida Memory, Inc.
|
|
Standard, infrastructure, mobile
and consumer DRAMs
|
|
|
10
|
%
|
Nanya Technology
Corporation(1)
|
|
Standard DRAMs
|
|
|
6
|
%
|
|
|
|
(1) |
|
Nanya Technology Corporation is our joint venture partner in
Inotera Memories, Inc. |
According to Gartner, we had the third largest market share
based on DRAM revenue and bits in the 2006 calendar year, with a
16% share. For the first half of the 2007 calendar year, we
remained the third largest supplier of DRAM by revenue and were
the fourth largest supplier of DRAM by bit shipments with market
shares of approximately 13% according to Gartners report
in September 2007.
Research
and Development
We believe that research and development, or R&D, will
continue to be critical in developing technologically advanced
products that are sought after by our customers, as well as
manufacturing processes that improve our productivity. Our
R&D efforts are intended to build upon our past successes.
We believe that we remain at the forefront of our industry in
the process of converting DRAM manufacturing from 200mm wafers
to 300mm wafers
S-112
and were the first to implement 193nm lithography in mass
production. In the late 1990s, we were among the first to
introduce the 256Mb density generation to the market, and we
believe we were among the leaders in the industrys
transition to 512Mb DDR2 DRAM. We believe we were the first DRAM
developer to bring DDR MobileRAM to the market in October 2004
and we believe that as of the date of this prospectus
supplement, we are the only DRAM supplier that has developed and
is producing an Advanced Memory Buffer Chip for use in FB-DIMMs
for server applications.
Our R&D activities are broadly divided into two major
steps. First we develop a manufacturing process technology and a
design platform in conjunction with a lead product.
Subsequently, the rest of the product portfolio is developed as
follower products which utilize the design platform
established in the first step.
Product
Development
Our product development activities focus on those specialized
and advanced products that we believe provide us more stable and
higher selling prices than standard DRAMs. To enable this, we
have increased the number of product development engineers from
around 560 at the end of the 2003 financial year to more than
1,100 worldwide at the end of the third quarter of the 2007
financial year. We believe these enhanced resources have
resulted in the recent successes we have had developing new
products. For example, we expanded our graphic DRAM product
portfolio from a single product in 2003 to a range of seven
products we currently offer in different densities, interfaces
and speed for the full range of graphics applications from entry
level to high-end.
We have placed particular emphasis in recent years to the
expansion of our R&D resources in lower cost locations. For
example, we rapidly built up our team in Xian, China, in
the 2005 financial year. In addition, we plan to set up a new
development center for the development of memory products in
Suzhou, China, that is scheduled to start activities in October
2007. We believe that appropriate use of skilled R&D
personnel in lower-cost locations will improve our ability to
maintain our technical position while managing costs.
We define our products in close cooperation with lead customers
and industry partners. We actively drive new standards and
participate in standardization committees such as the Joint
Electron Device Engineering Council (JEDEC). Our worldwide
operating Application Engineering teams help our customers to
design in our products into their systems. These teams provide
technical support to our customers and work to qualify our
memory components and modules for inclusion in our
customers products. They also work with the suppliers of
components designed to function together with DRAMs to ensure
that our products are validated for use with their products.
Process
Technologies
Process technologies have been a key focus for our R&D
activities, as we seek to reduce feature sizes and develop new
processes. We have successfully developed and implemented
several generations of process technologies. We believe that our
accumulated experience, including that which we have acquired
through our strategic alliances, is enabling us to introduce new
memory technology platforms with smaller feature sizes on a
schedule and at costs that enable us to remain among the leaders
in standardized DRAMs while focusing on more specialized
products and design-ins for applications in the graphics,
consumer and mobile areas. The goal of our technology
development efforts is to support our product designers to meet
the customer requirements regarding high performance, low power
consumption, small form factors at a competitive cost level.
To maintain a competitive technology roadmap at an affordable
cost level, we have been pursuing strategic alliances with
several partner companies and consortia. Strategic development
alliances, such as the one we maintain with Nanya for DRAM
technology and lead product development, allow us to share costs
and resources. In particular, our Nanya alliance finalized the
process technology development of the 75nm process technology in
2006. Since September 2005, this alliance has been developing
58nm process technology for DRAM products, including the lead
products which will use these new technologies. We also
cooperate with Advanced Micro Devices Inc. and Toppan Photomasks
Inc. in the joint ventures AMTC and BAC. AMTC is currently
developing and pilot manufacturing the next generation of
photomasks. BAC operates and leases the facility in which AMTC
and Toppan Photomasks Germany GmbH are located. All of our DRAM
and flash technology development takes place at our DRAM and
Flash technology development center in Dresden, Germany.
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We are also maintaining as a focus of our continuing research
and development efforts the development of process technologies
that possess physical characteristics that can be utilized to
yield advantages for customer specific applications in terms of
performance and power consumption. We believe these
characteristics are important in DRAM products for use in
applications such as infrastructure, graphics, mobile and
consumer devices and have enabled us to achieve important design
wins for products for use in applications ranging from game
consoles and MP3 players to advanced servers. In this context,
we are currently preparing for the qualification of our trench
technology at the 58nm technology node by the end of our 2008
financial year.
We are at the same time working on designs beyond this
technology node with an open platform approach and a range of
architectures and technologies under review. We are also engaged
in the research and development of various emerging memory
technologies. We are focusing primarily on Phase Change Random
Access Memories (PCRAM), Conductive Bridging RAM (CBRAM) and
Magnetoresistive RAM (MRAM). These emerging memories use
alternative methods to store information. Among them may be
candidates to replace existing mainstream memory technologies in
the long-term, although it is too early for us to make any
prediction about the potential for any of these technologies.
Packaging
Technology
Since 2002, we have concentrated our development activities for
packaging technology in Dresden, at our back-end pilot fab,
where work focuses on both development of new packages and
assembly innovation. The development of follower packages or
products is conducted at our high volume backend sites in Porto,
Portugal, Suzhou, China and Malacca, Malaysia. We also cooperate
with Infineon on various aspects of package development as well
as with United Test and Assembly Center, Singapore on the
development of multichip packages. In August 2007, we
established a jointly owned company with SanDisk for the
development of multichip packages for use in mobile
communication applications such as mobile phones.
Cooperation
with Infineon
In connection with our carve-out, we have entered into various
agreements with respect to our R&D activities. In
particular, the Framework Agreement on Research and Development
Services defines the parameters of our cooperation with Infineon
with respect to certain R&D areas. See Arrangements
between Qimonda and the Infineon Group for more details on
these parameters. Under the Framework Agreement on Research and
Development Services, we will continue to work together with
Infineon on various common development activities, including
jointly funded R&D projects that focus on process
development and packaging technologies. We anticipate that most
of these projects will be carried out in Germany. We expect to
continue to cooperate with Infineon, sharing equipment and
making use of synergies at our Reliability Lab, and failure
analysis, both of which help us reduce yield loss, or
manufacturing errors, in production.
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Locations
We conduct R&D activities in various locations around the
world. The following table shows our major R&D locations
and their areas of competence, including the principal R&D
joint ventures in which we participate:
Principal
Research and Development Locations
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Location
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Areas of competence
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Burlington, Vermont
|
|
Low power and mobile and consumer
DRAMs
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Dresden,
Germany(1)
|
|
DRAM technology, flash technology,
emerging memory technology, package technology and photomask
technology development
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Munich,
Germany(2)
|
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Computing and graphic DRAMs, as
well as emerging memory research; flash product development
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Padua, Italy
|
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Flash product development and
design
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Raleigh, North Carolina
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Product development for standard
and specialty DRAM
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Xian, China
|
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Computing and consumer DRAMs
|
|
|
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(1) |
|
Includes our own research and research conducted in conjunction
with our development partner, Nanya ,our photomask related
research and development conducted in conjunction with AMD and
Toppan, our process and tool development in the Center for
Nanoelectronic Technologies together with AMD and the Fraunhofer
Society and our material research conducted in
namlab in cooperation with the Technical University
of Dresden |
|
(2) |
|
Includes our own research and research conducted in conjunction
with our development partner, Nanya. |
In addition to our principal locations, we have smaller
locations in San Jose, California, and Tokyo, Japan, where
we support development of specific applications or specific
customers lead products. At our back-end location in
Porto, Portugal, we support high speed test and back-end
technology development. We are currently establishing an
additional development center in Suzhou, China focused on
product development for computing and consumer DRAM. The center
is scheduled to start activities in October 2007.
We conduct DRAM product and process technology development on
three continents at a number of major development centers. Our
Dresden 300mm fab has an R&D center integrated directly
into it, enabling us to conduct R&D at the production site,
which we believe enables us to quickly transfer know-how from
development into manufacturing. Our Research and Development
Center, where we conduct manufacturing process technology
development, is located at the Dresden center. The Center for
NanoelectronicTechnology, operated in cooperation with the
Fraunhofer Society and Advanced Micro Devices, is also located
at our Dresden facility. The Center further strengthens our
research capabilities with respect to both DRAM and non-volatile
memory process technology. Also, the AMTC, the Advanced Mask
Technology Center operated together with AMD and Toppan, is
located at Dresden. Together with the Technical University of
Dresden, we operate the new Nanoelectronic Materials Laboratory
(namlab) at the university campus focusing on material research.
Our development center in Munich, Germany focuses on lead
products for computing and graphics applications. The design
center in Raleigh, North Carolina, focuses on
follower products for computing and graphics, while
our design center at Burlington, Vermont, focuses on mobile
products. Our design center in Xian, China focuses on
computing and consumer DRAM products. In addition to DRAM
products, we also design and develop flash memory products in
Padua, Italy, and Munich, Germany, and develop high speed AMB
chips in Munich, Germany. Additional customer specific product
development work is done in smaller development centers.
Finally, we maintain an extensive network of cooperation
arrangements with technical institutes and universities to
remain current with technological developments.
At June 30, 2007, our research and development staff
consisted of 2,345 employees working in our R&D units
throughout the world, a net increase of 589 compared to 1,756 at
September 30, 2006. The net increase of R&D
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employees in the nine months ended June 30, 2007 resulted
mainly from organizational changes implemented at the beginning
of our 2007 financial year which dedicate the activities of
existing employees to the field of R&D.
Strategic
Alliances and Agreements
Our strategic alliances include both research and development
and manufacturing alliances. We believe that these strategic
alliances confer a number of important benefits, including:
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worldwide access to the expertise of other industry
participants, including manufacturing competence in new
locations and additional experienced R&D employees;
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sharing the risks inherent in the development and manufacture of
new products;
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sharing costs, including the costs of R&D and production
ramp-up; and
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efficiency gains, including reduced time-to-market of new
generations of semiconductor devices and greater economies of
scale.
|
We believe that a key element of the success of our strategic
alliances and foundry agreements results from our philosophy
that these alliances should be mutually beneficial. For example,
our foundry agreements provide us access to flexible
manufacturing capacity, while our partners can benefit from
access to our technology and manufacturing expertise.
The following table shows our principal strategic manufacturing
and R&D alliances, as well as their respective activities
and locations, as of June 30, 2007:
Principal
Strategic Alliances
|
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|
Partner
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Relationship
|
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Principal Activity
|
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Location
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Nanya
|
|
Joint venture participant in
Inotera, in which we hold a 36.0%
interest(1)
|
|
DRAM manufacturing at
Inoteras new 300mm facility
|
|
Taoyuan, Taiwan
|
Nanya
|
|
Joint R&D activities
|
|
R&D in both product and
technology development for 90nm, 75nm and 58nm process
technologies
|
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Dresden and Munich, Germany
|
CSVC
|
|
Joint venture participant in
Qimonda Suzhou in which we hold a 72.5% economic
interest(2)
|
|
Back-end assembly and test at the
joint ventures new facility
|
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Suzhou, China
|
SMIC
|
|
Foundry manufacturing
|
|
Manufacturing capacity at
SMICs facilities
|
|
Shanghai and Beijing, China
|
Winbond
|
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Foundry manufacturing
|
|
Manufacturing capacity at
Winbonds facilities
|
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Hsinchu, and Taichung, Taiwan
|
|
|
|
(1) |
|
Nanya holds slightly more Inotera shares than we do, and the
public and employees of Inotera own the remainder. |
|
(2) |
|
We are obligated to inject additional equity of $87 million
into the joint venture by the year 2008. This would increase our
ownership percentage accordingly. |
In addition to these principal alliances, we also participate or
have participated in a number of smaller alliances, especially
in the area of emerging memory development. These include a
development alliance with IBM on Phase Change Memories (PCRAM)
and development activities with Altis concerning Conductive
Bridging (CBRAM) and Magnetoresistive RAM (MRAM). We are also
cooperating with Advanced Micro Devices, Inc., (AMD), and Toppan
Photomasks (formerly DuPont Photomasks Inc.) on the development
and production of photomasks at the Advanced Mask Technology
Center GmbH & Co. KG, (AMTC), in Dresden, Germany. We
maintain an equity investment in Maskhouse Building
Administration GmbH & Co. KG, (BAC) a German limited
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partnership company that owns the premises used by AMTC
described below and Toppan Photomasks Germany. Infineons
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest to us. While pursuant to
the AMTC and BAC limited partnership agreements, such consent
may not be unreasonably withheld, we, Infineon and
Infineons co-venturers are finalizing an agreement that
provides such consent and also addresses Infineons
intention to reduce its stake in us below 50%. The AMTC and BAC
interest is held in trust by Infineon for our economic benefit
pursuant to the contribution agreement.
We also had an equity investment in Hwa-Keng, a Taiwanese
company formed for the purpose of facilitating the distribution
of Inotera shares to Inoteras employees. This company was
liquidated because its business purpose has been fulfilled with
the completion of the initial public offering of Inoteras
shares. We and Nanya purchased half of the Inotera shares held
by Hwa-Keng. Upon completion of the liquidation, Hwa-Kengs
assets (principally the proceeds from the sale of the shares)
were distributed to its shareholders, Nanya and Infineon. As
required by the contribution agreement, Infineon has transferred
these assets to us.
Research
and Development Alliances
Infineon has entered into a number of agreements to cooperate
with industry participants to conduct R&D related to the
development of new products and manufacturing process
technologies. These agreements enable us to benefit from the
expertise of other industry participants and to share the costs
and risks inherent in the development of new products and
process technologies. Our principal R&D alliance is with
Nanya Technology Corporation, a Taiwanese company with which we
also have a manufacturing collaboration through our Inotera
joint venture.
In November 2002, Infineon entered into agreements with Nanya to
establish a strategic cooperation for the development of DRAM
products and to form Inotera Memories, Inc. Inotera is a
joint venture the purpose of which is to construct and operate a
300mm manufacturing facility with two manufacturing modules in
Taiwan. Under the terms of the initial development agreement, we
were jointly developing and sharing development costs with Nanya
for advanced 90nm and 75nm process technologies. By June 2005,
we and Nanya had qualified the 90nm DRAM technology and achieved
validation by Intel. By September 2006, we and Nanya had
qualified the 75nm DRAM technology and achieved validation by
Intel.
In September 2005, Infineon entered into another agreement with
Nanya to expand their joint development cooperation on DRAM
process technologies. The new agreement provides for the joint
development of advanced 58nm production technologies for 300mm
wafers. Joint development began upon signing the agreement. The
research is being conducted in Dresden and Munich. We believe
the extension of the existing co-development of projects could
help us expand our position in the DRAM market and reduce our up
front development costs.
The November 2002 agreement, as amended, entitles Nanya to
receive from us or our then-existing foundry partners 60% of
that amount of our foundry capacity that is in excess of the
foundry capacity we receive as of December 2006. Nanya may also
receive 50% of our foundry capacity for which we contract after
March 1, 2006 with new foundry partners. Our obligation to
provide foundry capacity is capped at one third of our total
90nm foundry capacity. In combination, the 2002 and 2005
agreements also entitle Nanya to receive from us or our foundry
partners one third of our 75nm foundry capacity and one third of
our 58nm foundry capacity. As of the date of this prospectus
supplement, we have not contracted for foundry capacity that
would require us to cede capacity to Nanya under these
agreements. We do not expect that any foundry capacity that we
may be required to provide to Nanya will have a material adverse
effect on our business, financial condition or results of
operations.
Infineon was free to assign the agreements mentioned above to us
and has done so in connection with the carve-out. The 2002
development agreement remains in effect until the date of
completion of the last technical cooperation project, but may be
terminated by either party for cause, such as a material breach
by the other party, insolvency or bankruptcy of the other party,
or the acquisition, by a third party, of at least half of the
voting stock or control of the other party. The 2005 development
agreement remains in effect at least until December 2007, at
which point, if the goals of the cooperation project have not
been completed, the parties agree to continue working for an
additional six months and then discuss the extension of the
timeframe for the project. The agreement may also be terminated
by either party for cause, such as a material breach by the
other party, insolvency or bankruptcy of the other party, or the
acquisition, by a third party, of at least half of the voting
stock or control of the other party.
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Inotera completed an initial public offering of its shares on
March 17, 2006 and an offering of its global depositary
shares on May 10, 2006. Its shares are now listed on the
Taiwan Stock Exchange and its global depositary shares are
listed on the Luxembourg Stock Exchange. The initial public
offering of shares and the offering of global depositary shares
raised approximately $619 million which will, together with
debt financing, be used to fund the second manufacturing module.
Manufacturing
Alliances
We also have a number of long-term strategic agreements with
leading industry participants to manufacture products. We intend
to use these agreements to assist us in maintaining our strong
technological position and sharing
start-up
costs inherent in transitioning to successive generations of
semiconductor memory products. We believe these alliances allow
us to reduce the capital we would have had to invest if we were
to engage in these activities alone. In addition, they provide
us with access to modern manufacturing capacity in low cost
regions. Our manufacturing alliances are part of our global
fab cluster. This concept permits us to share
engineering know-how, manufacturing and quality control best
practices and common rollouts of process improvements among all
of the facilities in which our products are produced.
Inotera
As described above, in November 2002 Infineon entered into
agreements with Nanya to establish a strategic cooperation in
the development of DRAM products and to form Inotera
Memories, Inc., a joint venture to construct and operate a 300mm
manufacturing facility with two manufacturing modules in Taiwan.
We expect that Inoteras 300mm manufacturing facility in
Taiwan will employ the production technology developed under our
separate joint development agreement with Nanya. The
construction of the first Inotera module was completed and mass
production began in the 2004 financial year. The capacity
ramp-up of
this first module with a capacity of up to 62,000 wafer starts
per month, was completed during our 2006 financial year. In May
2005, the groundbreaking for the second manufacturing module
took place. Construction of this manufacturing module was
completed in the 2006 financial year and the
ramp-up of
capacities in this module has started and Inotera expects its
total capacity of both modules to reach 120,000 300mm wafer
starts per month by the end of the third quarter of the 2007
calendar year. Under the terms of the venture, Nanya and we each
purchase 50% of Inoteras output. The joint venture
agreement does not have a fixed term. It can be terminated by
either party upon material breach by the other party of the
agreement, the 2002 development agreement, the product purchase
agreement or the ancillary know-how transfer agreement, if the
2002 development agreement is terminated, upon bankruptcy or
liquidation of the other party or if the other partys
share ownership in Inotera drops below 33.5%. The party serving
termination notice under the agreement can choose to either sell
its shares to the other party at 120% of the higher of either
the net asset value or market value, or purchase the other
partys shares at 80% of the lower of either the net asset
value or market value. The joint venture agreement is
automatically terminated when one of the parties transfers or
sells all of its shares in Inotera unless such shares are
transferred to an affiliate or were previously offered to the
other party on the same terms as any proposed sale or transfer
and any third-party purchaser has agreed to enter into the joint
venture agreement.
The purchase price per DRAM wafer we pay to Inotera is
calculated using a profit and loss sharing formula set forth in
the product purchase and capacity reservation agreement we have
entered into with Nanya and Inotera. The calculation is
performed monthly and the purchase price is equal to the sum of:
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an amount representing the front-end cost per wafer Inotera
incurs, plus
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a fixed percentage of the notional total profit (or loss) the
buyers realize when they sell the wafer.
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The profit (or loss) per wafer is calculated by subtracting the
following items from the average selling price per wafer the
buyers realize when they sell to their customers the functional
chips on the wafer:
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the front-end cost per wafer Inotera incurred (including its
cost of goods sold and research and development expenses,
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the back-end cost per wafer the buyers incurred (including the
costs of back-end assembly and testing processes); and
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a fixed percentage of the average selling price per wafer we
realize to cover overhead costs we incur, which is in line with
other companies in the industry.
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This profit and loss sharing formula, including the fixed
percentages, cannot be modified without the consent of the three
parties and the approval of such change by the Board of
Directors of Inotera. The product purchase and capacity
reservation agreement remains in effect for as long as the joint
venture agreement is in effect. It can also be terminated upon
material breach by the other party of this agreement or by both
parties concurrently with the termination for cause of the joint
venture agreement or 2002 development agreement.
The agreement governing our joint venture with Nanya allowed
Infineon to transfer its shares in Inotera to us. However, under
Taiwanese law, Infineons shares in Inotera were subject to
a compulsory restriction on transfer
(lock-up) as
a result of Inoteras IPO in March 2006. For that reason we
had established a separate trust agreement pursuant to which
Infineon agreed to hold title to the Inotera shares in trust for
us until they could be transferred. In October 2006, the
Taiwanese authorities granted an exemption to Infineon
permitting it to transfer the shares. The transfer from Infineon
to us was completed on March 13, 2007 other than a portion
representing 0.24% of the total Inotera shares which Infineon
holds in trust for us due to Taiwanese legal restrictions.
If Infineon were to reduce its shareholding in our company to a
minority level before the earlier of the fifth anniversary of
our carve-out from Infineon and the achievement of early mass
production using 58nm process technology at our manufacturing
site in Dresden, the joint venture agreement with Nanya, as
amended, could require us to transfer these Inotera shares back
to Infineon. We agreed with Infineon that, in this event, we
would transfer the Inotera shares back to the trust. The trust
agreement provides for Infineon to again hold the Inotera shares
in trust for us until they could be transferred back to us.
CSVC
Infineon established a joint venture, Infineon Technologies
Suzhou Co., Ltd. (recently renamed Qimonda Technologies (Suzhou)
Co., Ltd., and referred to herein as Qimonda Suzhou) with China
Singapore Suzhou Industrial Park Venture Co., Ltd. (CSVC) in
Suzhou, China and constructed a back-end facility for the
assembly and testing of our products. The joint venture
agreement was entered into in July 2003 and has an initial term
of 50 years. Infineon contributed this agreement to us in
the carve-out. It can generally be terminated upon material
breach by the other party, a partys bankruptcy or
insolvency and various other events relating to a partys
financial condition. The facility officially opened in September
2004 and is scheduled to have capacity of up to one billion
chips per year. The facility is being ramped up in a number of
stages as dictated by growth and trends in the global
semiconductor memory market. We are required to purchase the
entire output of the facility. We have invested
$155 million in Qimonda Suzhou and expect to invest a
further $86.5 million in the venture by the end of our 2008
financial year pursuant to our current contractual obligations.
Infineon contributed its ownership in Qimonda Suzhou to us in
the carve-out effective May 1, 2006 (45% of the
ventures share capital, representing 72.5% of the voting
rights in the venture). We currently hold 63% of Qimonda Suzhou.
We plan to increase our investment in Qimonda Suzhou such that
we will hold approximately 72.5% of its share capital by the end
of 2008, with CSVC owning the remaining 27.5%. We have the
option to acquire the remaining CSVC stake at the nominal
investment value plus accrued and unpaid return. The joint
venture intends to arrange external financing for any further
investment required to purchase additional equipment. There can
be no assurance that this external financing can be obtained at
favorable terms or at all. We have always consolidated Qimonda
Suzhou as a subsidiary due to our management and voting right
control and eliminate income or losses as minority interests.
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. The joint venture intends to arrange external
financing for any further investment required to purchase
additional equipment. We cannot assure you that this external
financing can be obtained on favorable terms or at all.
S-119
SMIC
In December 2002, we entered into a Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2007, with Semiconductor Manufacturing International
Corporation (SMIC), a Chinese foundry. As amended, this
agreement provides us access to additional DRAM manufacturing
capacity. Under the terms of this agreement, SMIC agreed to
manufacture, and we have agreed to purchase, up to 20,000 wafers
per month at SMICs 200mm production facility in Shanghai
at least until 2007 and up to 15,000 wafers per month at
SMICs 300mm production facility in Beijing at least until
2010. The agreement remains in effect until December 31,
2010 and may be extended. We have the unilateral right to
terminate this agreement in the event that one of our
semiconductor competitors acquires 50% of SMICs voting
shares. In addition, either party may terminate the agreement
upon material breach by the other party of any obligation under
this or the ancillary know-how transfer agreement or upon
bankruptcy or insolvency of the other party.
Under the terms of the agreements, Infineon was free to assign
the agreement to us and has done so in connection with the
carve-out.
Winbond
In May 2002, we entered into a Product Purchase and Capacity
Reservation Agreement with Winbond, a Taiwanese foundry. This
agreement provides us access to additional DRAM production
capacity. Under the terms of this agreement, Winbond agreed to
manufacture, and we agreed to purchase, up to 19,000 wafer
starts per month from Winbonds 200mm production facility
in Hsinchu, Taiwan until 2007. We are currently phasing down our
purchases of 200mm wafers from Winbond.
In August 2004, we entered into an extended Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2006, with Winbond. This agreement gives us access to
additional DRAM production capacity of up to 18,000 wafers per
month in Winbonds 300mm facility in Taiwan until 2009. We
have exceeded this level from time to time. Under the terms of
this agreement we agreed to provide our 80nm DRAM trench
technology to Winbonds
300mm-wafer
facility and Winbond agreed to manufacture DRAMs for computing
applications using this technology exclusively for us. Under the
terms of these agreements, Infineon was free to assign these
agreements to us and has done so in connection with the
carve-out. Each agreement remains in effect until the last
shipment of, and payment for, products manufactured under the
agreement unless it is earlier terminated for breach.
On June 27, 2007, we signed agreements with Winbond to
expand our existing cooperation with Winbond and our reservation
of capacity at Winbonds facility for up to 24,000 300mm
wafer starts per month. Under the terms of the agreements, we
will provide our 75nm and 58nm DRAM trench technology to
Winbonds
300mm-wafer
facility. In return, Winbond will manufacture DRAMs for
computing applications using this technology exclusively for us.
Facilities
and Manufacturing
Manufacturing
Facilities
Including our joint ventures and foundry relationships, we
operate manufacturing facilities in Europe, North America
and Asia. The following table shows information with respect to
our current manufacturing
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facilities and our facilities that are either under construction
or in the ramp up phase and the portion of the output of the
facility to which we are entitled. Output is measured in wafer
starts per month, or wspm.
Current
and Planned Manufacturing Facilities
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Year production line
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came or is expected
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Output to which
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to come on-stream
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Clean room
m(2)
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we are entitled
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Front-end facilities (wafer
fabrication):
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Our Own
Facilities
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300mm facility, Dresden, Germany
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2001
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10,177
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All
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200mm facility, Richmond, Virginia
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1998
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16,771
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All
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300mm facility, Richmond, Virginia
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2005
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12,218
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All
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300mm facility,
Singapore(1)
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2009
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20,000
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All
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Joint Venture
Facilities
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|
300mm Inotera Memories facility,
first module,
Taiwan(2)
|
|
|
2004
|
|
|
|
N/A
|
|
|
|
Half
|
|
300mm Inotera Memories facility,
second module,
Taiwan(2)
|
|
|
2006
|
|
|
|
N/A
|
|
|
|
Half
|
|
Foundry
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
|
200mm Infineon facility, Dresden,
Germany(3)
|
|
|
1996
|
|
|
|
|
|
|
|
Variable corridor
|
|
200mm Winbond facility,
Taiwan(4)
|
|
|
1999
|
|
|
|
|
|
|
|
up to 19,000 wspm
|
|
300mm Winbond facility,
Taiwan(4)
|
|
|
2006
|
|
|
|
|
|
|
|
up to 24,000 wspm
|
|
200mm SMIC facility, Shanghai,
China(4)
|
|
|
2003
|
|
|
|
|
|
|
|
up to 20,000 wspm
|
|
300mm SMIC facility, Beijing,
China(4)
|
|
|
2004
|
|
|
|
|
|
|
|
up to 15,000 wspm
|
|
Back-end facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
(packaging, assembly and
testing):(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dresden, Germany
|
|
|
1996
|
|
|
|
3,211
|
|
|
|
All
|
|
Malacca,
Malaysia(6)
|
|
|
1973
|
|
|
|
12,163
|
|
|
|
All
|
|
Porto, Portugal
|
|
|
1997
|
|
|
|
17,697
|
|
|
|
All
|
|
Suzhou,
China(7)
|
|
|
2004
|
|
|
|
14,124
|
|
|
|
All
|
|
Johor,
Malaysia(8)
|
|
|
2008
|
|
|
|
25,000
|
|
|
|
All
|
|
|
|
|
(1) |
|
On April 25, 2007, we announced plans to construct a
fully-owned manufacturing facility in Singapore. Depending on
the growth and development of the world semiconductor market, we
plan to invest approximately 2 billion in the
facility over the next five years. |
|
(2) |
|
Owned by Inotera Memories, Inc., our joint venture with Nanya in
which we and Nanya each own minority shares. We own 36.0% of the
shares as of June 30, 2007. Our share in the production of
the joint venture is 50%. The 36% of the shares we own include
0.24% of the share capital that remained held by Infineon
Investments B.V. at the time of the carve-out. These shares
cannot be transferred to us because of Taiwanese legal
restrictions, and Infineon Investments holds them in trust for
us. |
|
(3) |
|
During our 2006 financial year, approximately 63% of this
facilitys capacity was used for the production of our
products. As described under Arrangements between Qimonda
and the Infineon Group, we use capacity at Infineons
200mm manufacturing facility in Dresden pursuant to an agreement
with Infineon, as amended in January 2007. Under this agreement
we have agreed to share equally with Infineon any potential
restructuring costs that might be incurred in connection with
the ramp-down of production, if neither company can use that
capacity. |
|
(4) |
|
We own no equity interest in this facility but have licensed
technology to the third-party owner. We are contractually
entitled to a stated amount of the facilitys DRAM output,
which is manufactured using our |
S-121
|
|
|
|
|
technology. See Strategic Alliances and
Agreements for more detail on these arrangements. We have
recently phased out capacity utilization at the 200mm line at
Winbond. |
|
(5) |
|
In addition, we have agreements with EEMS Italia SpA and UTAC,
which provide additional back-end subcontracting services at
their facilities in Italy and China and Singapore. We have also
entered into a partnership with EEMS Italia SpA for the assembly
and testing of memories in a dedicated facility in Suzhou, China. |
|
(6) |
|
Includes about
2,000m2
cleanroom and
10,000m2
not cleanroom classified production area. |
|
(7) |
|
We constructed this facility pursuant to our joint venture
agreement with CSVC. See Strategic Alliances
and Agreements for more detail on these arrangements. We
recently announced plans to construct a second manufacturing
module with an additional cleanroom area of about
10,000m2
in calendar year 2007 for which we expect capital expenditures
of 250 million over the next three years. |
|
(8) |
|
We recently announced plans to construct a new facility for
module manufacturing in Johor, Malaysia for which we expect to
invest 150 million over the next five years. |
In the third quarter of our 2007 financial year we had access to
a total front-end capacity of about 187,000 wafer starts in
300mm equivalents per month (equivalent to approximately 412,000
wafer starts in 200mm equivalents) through our own facilities,
our joint venture and our foundry agreements. The capacities
provided by our joint venture Inotera constituted 28%, the
capacities sourced from our non-affiliated foundry partners SMIC
and Winbond together constituted about 23% and the capacities
sourced from Infineons 200mm facility at Dresden
constituted about 7% of these capacities.
Process
technology
In the front-end process, electronic circuits are produced on a
silicon wafer. This process involves several hundred process
steps and takes place over a period of approximately two months
in a clean room environment in which humidity, temperature and
particle contamination are precisely controlled. Because of the
very small geometries involved in wafer processing, highly
complex and specialized equipment, materials and techniques are
used. The main process steps to build the circuit structures
include oxidation or deposition steps, photolithography, etching
and ion implantation. At the end of the front-end process the
chips are tested on the wafer for functionality.
Our trench architectures requires a special deep trench etch
process to etch the holes for the capacitors into the bare
silicon wafer surface, a process which is undertaken early in
the chip manufacturing process. These holes can be etched into
silicon with very high aspect ratios (depth divided by the
diameter of the hole). As a result, the trench capacitor has a
very high surface area and therefore a high capacitance, or
ability to store electrical charges. The higher the capacitance,
the higher the number of electric charges a capacitor can store.
We have used the high capacitance of the chips we have been
manufacturing to reduce the voltage required to power the cell
array.
Front-End
Manufacturing
In the front-end manufacturing process chips are produced on
silicon wafers. Our front-end fabs generally operate
24 hours per day, 7 days per week, not including
scheduled maintenance downtime (which generally involves only
individual pieces or clusters of equipment, rather than entire
facilities) and unscheduled stoppages. We do not generally
adjust our manufacturing schedule in response to changes in
demand. Maximum utilization of our facilities allows us to
spread our high fixed-costs over a larger number of chips. In
addition, given the complexity involved, our manufacturing
processes are more stable if operated continuously. We had no
significant unplanned production stoppages at our own front-end
fabs during our 2006 financial year or in our 2007 financial
year to date.
Wafer
Size Roadmap
In our efforts to continue to reduce our
per-unit
manufacturing costs, we continue to ramp up our volume of
production on 300mm wafers. In the 2006 financial year, we
continued to increase our share of DRAM manufacturing on 300mm
wafers. Our 300mm Dresden facility has started commercial
production using 75nm technology. In addition, our 300mm
facility at Richmond, Virginia started commercial production in
September
S-122
2005 and completed the first phase of its
ramp-up to a
capacity of approximately 25,000 wafer starts in April 2006. The
maximum capacity of this facility is expected to amount to
50,000 wafer starts per month and we plan to ramp up production
based on market developments; we target a capacity of 36,000
wafer starts per month by the end of the 2007 financial year.
The first manufacturing module of Inotera, our 300mm
manufacturing joint venture with Nanya, reached a maximum of
62,000 wafer starts per month during the 2006 financial year.
The second manufacturing module of Inotera was constructed in
the 2006 financial year and is currently in
ramp-up.
Inotera plans to reach an aggregate maximum capacity of 120,000
wafer starts per month by the end of the third quarter of the
2007 calendar year. Qimonda and Nanya each are entitled to 50%
of Inoteras capacity. Our foundry and development partner
Winbond has officially opened its new 300mm facility in Taiwan
end of April 2006 and began volume production in 2006. In April
2007 we announced plans to construct a fully-owned 300mm
manufacturing facility in Singapore. Construction of the new
facility is expected to start by the end of the 2007 calendar
year, with the first wafer produced in the 2009 calendar year.
We are planning a cleanroom size for a maximum capacity of
60,000 wafer starts per month. Given the cost efficiencies of
production on larger wafer sizes, we believe that increasing the
share of our 300mm production will substantially reduce our
overall
per-unit
production cost for memory chips.
We believe that, among our principal competitors we are one of
only two that have made substantial progress in ramping up 300mm
production. With 78% of the DRAM bits we produced in the first
quarter of the 2007 calendar year taking place on 300mm wafers,
we believe, based on iSuppli research, that we have the highest
percentage of bit production on 300mm wafers of the three
largest DRAM suppliers. Through our early
ramp-up, we
have gained expertise in 300mm manufacturing techniques and
technologies. We believe that, as we equip our remaining owned
facilities with 300mm wafer technology, we will be able to gain
additional cost advantages over competitors that have not yet
switched a substantial portion of their manufacturing to 300mm
technology.
Feature
Size Roadmap
The increase in memory density and resulting reduction of chip
feature sizes through the introduction of advanced process
technologies is one of the key factors in reducing manufacturing
costs. Innovations in process technologies and continual
reductions in per-bit manufacturing costs have been driven
largely by the needs of the standard DRAM market. The dynamics
of this market have caused continuous evolution of process
technologies, with an ongoing race for smaller die sizes and
higher memory densities at lower prices. During the 2006
financial year, we increased the capacity share based on 90nm
DRAM technology and started commercial production based on our
75nm DRAM technology. In addition, we developed and released for
production in October 2006 an 80nm technology, which contains
fewer technological upgrades than previous new technologies, but
which we believe will improve the number of dies we are able to
produce per wafer. In the third quarter of our 2007 financial
year, approximately 16% of our capacities used to manufacture
DRAMs had been converted to 80nm and 75nm technologies. With our
joint venture partner Nanya, we have already started development
of the 58nm technology node.
We intend to leverage the advantageous physical characteristics
provided by our trench technology to develop three different
platforms that address the specific needs of different customers
for DRAM products that emphasize high performance, low-power
consumption or low cost. We believe the ability to offer
customers products tailored to their specific application
requirements will increase our flexibility and help us improve
the breadth of our product design-ins.
Back-End
Manufacturing
In back-end manufacturing, chips are packaged, assembled and
tested. We believe that our back-end facilities are equipped
with state-of-the-art equipment and highly automated
manufacturing technology, enabling us to perform assembly and
test on a cost-efficient basis. In an effort to further enhance
our back-end manufacturing efficiency and improve our cost
position, we have increased our production volumes in lower-cost
countries such as Malaysia and China. In March 2007, we
announced plans to further expand our backend operations at
Suzhou, China, with the construction of a second manufacturing
module. In addition, we announced the construction of a new
module house at Johor, Malaysia to increase our capacities for
module manufacturing. Our back-end facilities provide us with
the flexibility needed to customize products according to
individual customer specifications.
S-123
To ensure the commercial viability of our products, we have
completed the conversion of all Qimonda product packages to
comply with the European Directive on the restriction of use of
certain hazardous substances in electronic and electrical
equipment, or RoHS Directive. In particular, the RoHS Directive
sets forth lead-free standards for many types of electronic and
electrical equipment. The obligation to comply with the RoHS
Directive ultimately lies with the equipments producer.
These customers therefore require us to supply lead-free
products, and we regularly provide certificates that document
our products compliance with the RoHS Directives
lead-free standards.
To address the needs of electronic equipment manufacturers whose
products require an exemption from the application of the RoHS
Directive, typically for technical or economic reasons,
exemptions are available which permit the use of lead-containing
parts for specific applications. In addition, certain
manufacturers have been individually exempted from compliance
with the RoHS Directive by the relevant governmental
authorities. We continue to supply a small number of
lead-containing products for these exempted applications and
manufacturers. Additionally, we have a number of customers who
require delivery of lead-containing products to non-European
markets, where the RoHS Directive does not apply.
Fab
Cluster System
In 1998, we introduced our fab cluster system, through which we
link and coordinate activities at our own front-end and back-end
sites with those sites that are operated by our alliance,
foundry and back-end partners. We operate these facilities as a
cohesive unit which enables us to align these facilities through
synchronized technical, quality and reporting guidelines. This
system allows us to:
|
|
|
|
|
implement identical technology roadmaps at all sites where the
equipment permits this;
|
|
|
|
synchronize manufacturing processes and quality control at all
sites; and
|
|
|
|
quickly move best practices developed at one
facility to all operations, which helps us to maximize quality
and accelerate
ramp-up
times. For example, we continuously monitor yield at each of the
sites in our fab cluster. Differences in yield lead to a
comparison of practices and to an identification of each
sites comparative strengths. This results in our ability
to set best practices for the entire fab cluster.
|
When one of our fab clusters facilities is qualified by a
customer to make a specific product, qualification of the
remaining fabs in the cluster is typically easy to achieve. By
qualifying the entire cluster to a customer, we can supply that
customer with products from any of our fabs, which affords us
significant operational flexibility. Further, by maintaining
access to facilities around the world, we are also able to
attract highly skilled workers on a more global basis, and
maintain access to lower-cost workers as required. This system
permitted our joint venture Inotera to complete its first fab
ramp-up to
50,000 wafer starts per month in four quarters which we believe
is the benchmark in the industry.
Currently, our fab cluster includes our own front-end facilities
in Dresden and Richmond, Virginia, our back-end facilities in
Dresden, Malacca and Porto, as well as our front-end
manufacturing joint venture Inotera, our back-end manufacturing
joint venture Qimonda Suzhou, our front-end foundry partners
Winbond, SMIC and Infineon (Dresden 200mm) and the dedicated
back-end facility in Suzhou, China, of EEMS Italia SpA that is
currently under construction and scheduled to start operations
early in the 2008 calendar year.
Mask
Manufacturing
High-end photomask technology is a prerequisite for achieving
small feature size. Since May 2002, the Advanced Mask Technology
Center, or AMTC, Infineons joint venture with Advanced
Micro Devices and Toppan Photomasks in Dresden, Germany, has
developed advanced photomasks. Since 2004 the joint venture has
developed and produced high-end photomasks at AMTCs pilot
production facility. We purchase some of our mask supply from
that pilot production facility. We also purchase masks from
Toppan Photomasks under a cooperative arrangement with Infineon,
and expect to continue to do so for as long as Infineon is our
majority shareholder.
S-124
ISO
Qualification
We have held ISO 9001 certification since 1986 and ISO/TS 16949
certification (which elaborates on particular requirements for
the application of ISO 9001) since 2004. Qimonda has passed
the re-certification audit in December 2006, with the result
that the certifications will be valid until June 2010. Annual
surveillance audits are performed by our Third Party Body, DNV
Det Norske Veritas Zertifizierung und Umweltgutachter GmbH,
Essen, Germany.
ISO quality management standards are developed by the
International Organization for Standardization (ISO), the
worlds leading developer of international standards to
specify the requirements for state-of-the-art products,
processes and managerial practices. ISO quality management
certification is an indispensable condition to enjoying sound
relationships with our customers.
Intellectual
Property
Our intellectual property rights include patents, copyrights,
trade secrets, trademarks, utility models, designs and maskwork
rights. The subjects of our patents primarily relate to IC
designs and process technologies. We believe that our
intellectual property is a valuable asset which protects our
investment in technology, and supports our licensing efforts
with third parties.
Allocation
of Existing Patents
In connection with our carve-out, the Infineon Group transferred
to us ownership of all those patents and patent applications
(which we refer to simply as patents in this section)
attributable to the Memory Products business. The ownership of
all other patents remained with the Infineon Group.
Qimondas patent portfolio at the end of June 2007 included
more than 19,480 patents and patent applications (representing
more than 5,850 patent families) compared to more than 23,000
patents and patent applications that remained on the side of
Infineon at the time of the carve-out.
Pursuant to the contribution agreement, the Infineon Group may
continue to use any patents transferred to us outside the memory
products business for their lifetimes. The contribution
agreement likewise permits us to use those patents remaining
with the Infineon Group within the memory products business
under terms corresponding to those we extended to Infineon under
this agreement.
Cross-License
Under Future Patents
We will own any patents that have been or will be applied for in
our name after the carve-out.
As part of the contribution agreement, we agreed to the
following terms with respect to patents applied for by either
party and its subsidiaries within five years of the effective
date of the carve-out or as long as Infineon owns a majority of
the shares of our company, whichever period is longer.
The Infineon Group will receive royalty-free licenses to use our
patents outside the memory products business for the lifetimes
of the patents or until a change of control of Infineon occurs.
If a change of control of Infineon occurs, the licenses would
continue if we received corresponding licenses for the memory
products field from the third party then controlling Infineon.
The contribution agreement likewise permits us to use those
patents applied for by Infineon in the memory products business,
under terms equivalent to those we extended to Infineon under
this agreement, including a mechanism for handling any change of
control equivalent to the one described above.
Sublicense
Rights
In connection with a spin-off or the creation of a joint
venture, Infineon has the right to sub-license any patents
transferred to us as part of the carve-out, as well as any
Qimonda patents subject to the cross-license arrangements
between Infineon and us, as described above, as long as:
|
|
|
|
|
the patents are used outside the memory products business;
|
S-125
|
|
|
|
|
we receive a grant-back license from the spin-off or joint
venture and its majority shareholder in the memory products
business; and
|
|
|
|
such majority shareholder has no pending patent law suit with us.
|
In connection with a spin-off or joint venture involving
Qimonda, the contribution agreement likewise permits us to
sub-license those patents remaining with Infineon, as well as
any of Infineons patents subject to the cross-license
arrangements, described above, within the memory products
business, under terms equivalent to those we extended to
Infineon under this agreement.
As
long as we are a Majority-Owned Subsidiary of
Infineon
Infineon is permitted to license any patents for which we apply
while Infineon is our majority shareholder within cross-license
agreements it had already concluded with third parties as of the
carve-out date and which require the licensing of patents of
subsidiaries.
Furthermore, as long as Infineon holds a majority share in our
company, Infineon is permitted to license any patents created by
us within cross-license agreements it concludes with third
parties after the carve-out, subject to our consent, which we
may not unreasonably withhold.
Patent
Licensing Negotiations with Third Parties
Under the contribution agreement, Infineon is entitled to raise
claims against third parties with respect to a small number of
transferred patents that are the subject of licensing
negotiations between Infineon and these third parties. We agreed
to take the steps necessary to enable Infineon to make such
claims. For as long as these negotiations have not been
completed and we remain a majority-owned subsidiary of Infineon,
we may not license the relevant patents to such third parties or
pursue claims against such parties without Infineons
consent.
Cross-License
Agreements with Third Parties
It is common in the semiconductor industry for companies,
including competitors, to enter into patent cross-license
agreements with each other. In the event of an imbalance in the
size of the respective portfolios of two companies or other
factors, such as revenue, such an agreement may also provide for
a cash payment from one party to the other. Infineon is a party
to a number of patent cross-license agreements from which we
benefit as a majority-owned subsidiary of Infineon. Although we
believe that our own substantial patent portfolio will position
us to conclude patent cross-license agreements on favorable
terms and conditions with other semiconductor companies, we may
find that our bargaining position is substantially less than
that of the Infineon Group as a whole. In addition, if Infineon
ceases to own at least a majority of our shares, we will lose
the benefit of coverage under certain of Infineons
cross-license agreements with other parties while the parties
may continue to be licensed under the patents Infineon has
transferred to us. We are currently in patent cross-license
negotiations with several major semiconductor industry
participants and expect to enter into additional patent
cross-license agreements with other parties in the future.
If Infineon ceases to own the majority of our shares, our rights
to use patents under some of these cross licensing agreements
will terminate. See Risk Factors Risks related
to our operations We may not be able to protect our
proprietary intellectual property or obtain rights to
intellectual property of third parties needed to operate our
business and Risk Factors Risks related
to our carve-out as a stand-alone company and our continuing
relationship with Infineon We may lose rights to
intellectual property arrangements if Infineons ownership
in our company drops below certain levels.
Protecting
Our Intellectual Property
Our success depends in part on our ability to obtain patents,
licenses and other intellectual property rights covering our
products and their design and manufacturing processes. To that
end, we have obtained many patents and patent licenses and
intend to continue to seek patents on our developments. The
process of seeking patent protection can be lengthy and
expensive. Patents might not be issued from currently pending or
future applications or if patents are issued, they may not be of
sufficient scope or strength to provide us with meaningful
protection or a
S-126
commercial advantage. In addition, effective copyright and trade
secret protection may be limited in some countries or even
unavailable.
Many of our competitors also seek to protect their technology by
obtaining patents and asserting other forms of intellectual
property rights. Third-party technology that is protected by
patents and other intellectual property rights may be
unavailable to us or available only on unfavorable terms and
conditions. Third parties may also claim that our technology
infringes their patents or other intellectual property rights,
and they may bring suit against us to protect their intellectual
property rights. From time to time, it may also be necessary for
us to initiate legal action to enforce our own intellectual
property rights. We believe that, while as a stand-alone company
we may enjoy more flexibility to vigorously defend our
intellectual property, we also will not be able to make use in
litigation of those patents that remained with the Infineon
Group. Furthermore, litigation can be very expensive and can
divert financial resources and management attention from other
important uses. It is difficult or impossible to predict the
outcome of most litigation matters, and an adverse outcome can
result in significant financial costs that can have a material
adverse effect on the losing party. We are currently engaged in
several material disputes over intellectual property rights.
Several disputes were settled in 2006, in particular those
relating to MOSAID and Tessera.
While it may be possible that Infineon could compete with us on
the basis of those patents that remained with Infineon we do not
view this possibility as a material threat to our business.
Infineon transferred all patents to us that were attributable to
the Memory Products business and are licensed to use those
patents in the future only outside of the memory products
business. In addition, since Infineon transferred to us all of
the assets and development resources attributable to the Memory
Products business, Infineon would need to make very substantial
investments or independently acquire technology to re-enter and
compete with us in the memory products business.
Settlement
Agreement with Rambus
In March 2005, Infineon reached an agreement with Rambus Inc.,
settling all claims between them and licensing the Rambus patent
portfolio for use in current and future Infineon products.
Rambus has granted to Infineon a worldwide license to existing
and future Rambus patents and patent applications for use in
Infineon memory products. The agreement provides that the
duration of the license shall continue until the last of the
licensed Rambus patents has expired. The license includes an
unspecified number of patents, which expire on different dates
over a period ending in 2026. Neither party may terminate the
agreement for any reason prior to its expiration. In exchange
for this worldwide license, Infineon agreed to pay
$50 million in quarterly installments of $6 million
between November 15, 2005 and November 15, 2007. After
November 15, 2007, and only if Rambus enters into
additional specified licensing agreements with certain other
DRAM manufacturers, Infineon would be required to make
additional quarterly payments which may total an additional
$100 million. Because Rambus ability to conclude the
agreements is not within our control, we are not able to
estimate whether additional payment obligations may arise. The
agreement also provides Infineon an option for acquiring certain
other licenses. All licenses provide for Infineon to be treated
as a most-favored customer of Rambus. Infineon has
simultaneously granted to Rambus a fully-paid perpetual license
for memory interfaces. These contingencies were assigned to us
pursuant to the contribution agreement.
Amendment
and Partial Termination of Our License Agreement with
Saifun
In April 2001, we established the Infineon Technologies Flash
joint venture with Saifun in which we held a 51% ownership
interest. In the 2003 financial year, we increased our ownership
interest to 70% by contributing additional capital and
converting existing shareholder loans to equity. The joint
venture operated through two companies, Infineon Technologies
Flash GmbH & Co. KG, located in Dresden, Germany, and
Infineon Technologies Flash Ltd., located in Netanya, Israel.
During December 2004, we modified the cooperation agreement with
Saifun. As a consequence, we consummated the acquisition of
Saifuns remaining 30% share in the joint venture in
January 2005 and were granted a license for the use of Saifun
NROM®
technologies, in exchange for $95 million to be paid in
quarterly installments over 10 years and additional
purchase consideration primarily in the form of net liabilities
assumed aggregating 7 million. We retained the option
to terminate the entire license or parts thereof at any time
without penalty. During the quarter ended June 30, 2005, we
exercised our termination option and cancelled the portion of
the license encompassing
NROM®
Code Flash products. As a result of the partial termination, the
license asset and related liability were reduced to
28 million and 29 million, respectively,
as of
S-127
June 30, 2005. In light of the weak market conditions for
commodity NAND flash memories in the fourth quarter of our 2006
financial year, we decided to ramp down our Flash production and
cease the current development of NAND-compatible flash memory
products based on Saifuns proprietary
NROM®
technology. We and Saifun amended the license agreement to
terminate quarterly installment payments as of December 31,
2006. As a result, we reduced our payables, goodwill and other
intangible assets, and recognized an impairment charge of
9 million related to license and fixed assets which
were not considered to be recoverable as of September 30,
2006.
Equipment
We purchase most of our front-end equipment from Applied
Materials, ASM Lithography and Tokyo Electron. In periods of
high market demand, the lead times from order to delivery of
such specialized equipment can be as long as six to twelve
months. We seek to manage this process through early reservation
of appropriate delivery slots and constant communication with
our suppliers, as well as by pursuing a multiple-vendor strategy
to avoid undue dependence on a single supplier. Because we
manufacture DRAMs using trench cell technology, we require
special equipment for etching the ultra deep trenches into the
silicon. These so called trench etchers are based on
common etch tools that we have modified together with our
equipment suppliers to suit our special needs. We currently
source our trench etch equipment from two etch equipment
suppliers.
We purchase testing equipment for front-end and back-end
principally from Advantest. In addition to specialized testing
equipment, we maintain a variety of other types of equipment
that are used in the testing process.
Raw
Materials
The most important raw materials in our front-end process are
polished silicon wafers, chemicals, precious and other metals,
and gases. The principal suppliers for our wafers are Siltronic,
SEH, MEMC, and SUMCO. The principal raw materials used in
back-end packaging, assembly and test are leadframes or laminate
substrates, gold wire and molding compound. Purchased materials
and supplies in our 2006 financial year were approximately 38%
of our net sales and 28% in the first nine months of our 2007
financial year.
We generally purchase raw materials based on the non-binding
forecasts provided to us by our customers. We are not dependent
on any one supplier for a substantial portion of our raw
material requirements for packaging, assembly and test. Our raw
material procurement policy is to select vendors that have
demonstrated quality control and reliability with respect to
delivery time. In addition, we maintain multiple sources for
each raw material so that a quality or delivery problem with any
one vendor will not adversely affect our operations. We
generally enter into one-year supply agreements with raw
material suppliers that offer competitive prices. Although
shortages have occurred from time to time and lead times have
been extended on occasion in the industry, we have not
experienced any significant production interruption as a result
of difficulty in obtaining raw materials to date.
S-128
Employees
The numbers, functions and geographic locations of our employees
at the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September
|
|
|
As of June
|
|
|
|
2004
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2006**
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
Function:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
9,259
|
|
|
|
84
|
%
|
|
|
7,686
|
|
|
|
80
|
%
|
|
|
9,113
|
|
|
|
77
|
%
|
|
|
9,571
|
|
|
|
74
|
%
|
Research & development
|
|
|
1,420
|
|
|
|
13
|
%
|
|
|
1,440
|
|
|
|
15
|
%
|
|
|
1,756
|
|
|
|
15
|
%
|
|
|
2,345
|
|
|
|
18
|
%
|
Sales & marketing
|
|
|
166
|
|
|
|
1
|
%
|
|
|
264
|
|
|
|
3
|
%
|
|
|
320
|
|
|
|
3
|
%
|
|
|
367
|
|
|
|
3
|
%
|
Administrative
|
|
|
213
|
|
|
|
2
|
%
|
|
|
216
|
|
|
|
2
|
%
|
|
|
613
|
|
|
|
5
|
%
|
|
|
691
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,058
|
|
|
|
100
|
%
|
|
|
9,606
|
|
|
|
100
|
%
|
|
|
11,802
|
|
|
|
100
|
%
|
|
|
12,974
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
6,284
|
|
|
|
57
|
%
|
|
|
4,058
|
|
|
|
42
|
%
|
|
|
4,684
|
|
|
|
40
|
%
|
|
|
4,990
|
|
|
|
39
|
%
|
Other Europe
|
|
|
1,335
|
|
|
|
12
|
%
|
|
|
1,405
|
|
|
|
15
|
%
|
|
|
1,666
|
|
|
|
14
|
%
|
|
|
1,896
|
|
|
|
15
|
%
|
North America
|
|
|
2,167
|
|
|
|
20
|
%
|
|
|
2,494
|
|
|
|
26
|
%
|
|
|
2,763
|
|
|
|
23
|
%
|
|
|
2,916
|
|
|
|
23
|
%
|
Asia/Pacific (excl. Japan/incl.
Korea)
|
|
|
1,233
|
|
|
|
11
|
%
|
|
|
1,622
|
|
|
|
17
|
%
|
|
|
2,651
|
|
|
|
23
|
%
|
|
|
3,116
|
|
|
|
24
|
%
|
Japan
|
|
|
10
|
|
|
|
|
*
|
|
|
27
|
|
|
|
|
*
|
|
|
38
|
|
|
|
|
*
|
|
|
56
|
|
|
|
|
*
|
Other
|
|
|
29
|
|
|
|
|
*
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,058
|
|
|
|
100
|
%
|
|
|
9,606
|
|
|
|
100
|
%
|
|
|
11,802
|
|
|
|
100
|
%
|
|
|
12,974
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Less than 1% of total numbers.
|
|
**
|
|
On the dates indicated, our
operations in Japan and Korea legally belonged to Infineon.
|
|
***
|
|
The Rest of Europe region also
includes for this year other areas outside the listed geographic
regions with aggregate employees representing less than 1% of
our total staff.
|
In the first nine months of the 2007 financial year, our
headcount increased by 1,172 employees, principally due to
increased capacities, especially in the production areas in
Suzhou, Porto and Richmond. In addition, we further increased
the number of product design engineers at various development
centers and filled positions at our sales, marketing and general
administration departments. The numbers presented in this table
as of September 30, 2004 and 2005 represent the headcount
of the memory products business and exclude any allocation of
corporate functions performed by Infineon. The numbers presented
as of and after September 30, 2006 show the headcount of
Qimonda and include our corporate functions. The net increase of
R&D employees results mainly from organizational changes
implemented at the beginning of our 2007 financial year which
dedicate the activities of existing employees from production to
the field of R&D.
Our employees in Germany are represented by local works councils
(lokale Betriebsräte) and a Qimonda group works
council (Konzernbetriebsrat). Works councils are
employee-elected bodies established at each location in Germany
and also at a company/group level (on the basis of German labor
laws). Close cooperation between management and works councils
can be a strong source of stability, minimizing employee unrest
and strikes, and ensuring management the ability to execute
strategy changes
and/or
restructuring in a cooperative manner. Works councils have
numerous rights to receive notice and participate in policy
making in matters regarding personnel, social and economic
matters. Under the German Works Constitution Act
(Betriebsverfassungsgesetz), the works councils must be
notified in advance of any proposed employee termination, they
must confirm hirings and relocations and similar matters, and
they have a right to participate in policy making regarding
social matters such as work schedules and rules of conduct.
Management considers its relations with the works councils to be
good. A separate works council exists at our subsidiary in
Dresden, Qimonda Dresden GmbH & Co. OHG. The members
of our senior management are represented by a senior management
committee (Sprecherausschuss) in Germany.
Approximately 700 Infineon employees in Germany who were
transferred to our company are covered by the terms of
collective bargaining agreements between unions and the
Employers Association (Arbeitgeberverband)
S-129
of which Infineon is a member. The agreements cover both working
conditions (Rahmentarifvertrag) such as hours and
holidays as well as wages (Gehaltstarifvertrag). The
working conditions and similar types of agreements applicable as
of April 30, 2006 to these 700 employees will remain
applicable until their planned revision by the end of 2008. The
wage agreements are typically re- negotiated each year. The wage
agreement for this year was signed in May 2007. No short
warning work stoppages took place during these
negotiations.
Although we will not be a member of the Employers
Association, and therefore not obligated by future collective
bargaining agreements, the approximately 700 employees who
transferred from Infineon to us will receive wages equal to
those agreed between the unions and Employers Association
during their yearly re-negotiations through June 2008. Beginning
in the first quarter of our 2009 financial year, we plan to be
no longer bound by these collective bargaining agreements and
will introduce our own compensation systems, based on the
outcome of negotiations with the works council.
During the last three years we have not experienced any major
labor disputes resulting in significant work stoppages.
Backlog
The prices for portions of our standard DRAM products are
generally set every two weeks, based on market demand. Customers
enter into purchase orders for supply during two-week periods.
While DRAMs for infrastructure applications and graphics, mobile
and consumer products are sometimes priced like standard DRAM,
they are often sold under longer-term contracts with fixed
prices. We do not consider our backlog at any time to be a
reliable indicator of future sales and do not rely on backlog to
manage our business or to evaluate performance.
Legal
Matters
Infineon is the subject of a number of governmental
investigations and civil lawsuits that relate to the operations
of its Memory Products business prior to our carve-out. The most
significant of these matters are described in this section. In
addition, under the contribution agreement, we are required to
indemnify Infineon, in whole or in part as specified below, for
any liability Infineon incurs in connection with the matters
described below.
The contribution agreement is based on the principle that all
potential liabilities and risks in connection with legal matters
existing as of the carve-out date are generally to be borne by
the business unit which caused the risk or liability or where
the risk or liability arose. Except to the limited extent
described below for the securities class action litigation and
the settled Tessera litigation (for which we have different
arrangements), we have agreed to indemnify Infineon for all
liabilities arising in connection with all legal matters
specifically described below, including court costs and legal
fees. Infineon will not settle or otherwise agree to any of
these liabilities without our prior consent.
Liabilities and risks relating to the securities class action
litigation, including court costs, will be equally shared by
Infineon and us, but only with respect to the amount by which
the total amount payable exceeds the amount of the corresponding
accrual that Infineon transferred to us pursuant to the
contribution agreement. Infineon has agreed not to settle this
lawsuit without our prior consent. Any expenses incurred in
connection with the assertion of claims against the provider of
directors and officers (D &
O) insurance covering Infineons two current or former
officers named as defendants in the suit will also be equally
shared. The D & O insurance provider has so far
refused coverage. We have agreed to indemnify Infineon for 80%
of the court costs and legal fees relating to the litigation
settled with Tessera.
In accordance with the general principle that all potential
risks or liabilities are to be borne by the entity which caused
the risk or liability or where the risk or liability arose, the
indemnification provisions of the contribution agreement include
the following specific allocation keys with respect to claims or
lawsuits arising after the carve-out date:
|
|
|
|
|
liabilities arising in connection with intellectual property
infringement claims relating to memory products were fully
allocated to us; and
|
S-130
|
|
|
|
|
liabilities arising in connection with actual or alleged
antitrust violations with respect to DRAM products were fully
allocated to us.
|
Subsequent developments in any pending matter, as well as
additional claims that may arise from time to time, including
additional claims similar to those described below, could become
significant to Infineon or us.
We cannot predict with certainty the outcome of any proceedings
in which we are or may become involved. An adverse decision in a
lawsuit seeking damages from Infineon or us, or Infineons
or our decision to settle certain cases, could result in
monetary payments to the plaintiff and other costs and expenses.
If Infineon or we lose a case in which we seek to enforce our
patent rights or in which we have been accused of infringing
another companys patent rights, we will sustain a loss of
future revenue if we no longer can sell the product covered by
the patent or command prices for the affected products that
reflect the exclusivity conferred by the patent. While payments
and other costs and expenses we might have to bear as a result
of these actions are covered by insurance in some circumstances,
other payments may not be covered by our insurance policies in
full or at all. Accordingly, each of the legal proceedings
described in the following discussion could be significant to
us, and any payments, costs and expenses we may incur in
addition to any that have already been incurred or accrued could
have a material adverse effect on our results of operations,
financial position or cash flows.
Antitrust
Matters
U.S.
Department of Justice Investigation
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its investigation of alleged antitrust
violations in the DRAM industry. Pursuant to this plea
agreement, Infineon agreed to plead guilty to a single count of
conspiring with other unspecified DRAM manufacturers to fix the
prices of DRAM products between July 1, 1999 and
June 15, 2002, and to pay a fine of $160 million. The
fine plus accrued interest is being paid in equal annual
installments through 2009. Infineon has a continuing obligation
to cooperate with the DOJ in its ongoing investigation of other
participants in the DRAM industry. The price fixing charges
related to DRAM product sales to six Original Equipment
Manufacturer (OEM) customers that manufacture computers and
servers. Infineon has entered into settlement agreements with
five of these OEM customers and is considering the possibility
of a settlement with the remaining OEM customer, which purchased
only a very small volume of DRAM products from Infineon.
U.S.
Civil Litigation
Subsequent to the commencement of the DOJ investigation, a
number of putative class action lawsuits were filed against
Infineon, its principal U.S. subsidiary and other DRAM
suppliers.
Direct Purchaser Litigation
Sixteen cases were filed between June 21, 2002 and
September 19, 2002 in the following U.S. federal
district courts: one in the Southern District of New York, five
in the District of Idaho, and ten in the Northern District of
California. Each of the federal district court cases purports to
be on behalf of a class of individuals and entities who
purchased DRAM directly from the various DRAM suppliers in the
United States during a specified time period, which was
originally alleged to have commenced on or after October 1,
2001 (the Direct U.S. Purchaser Class). The
complaints allege price-fixing in violation of the Sherman Act
and seek treble damages in unspecified amounts, costs,
attorneys fees, and an injunction against the allegedly
unlawful conduct.
In September 2002, the Judicial Panel on Multi-District
Litigation ordered that the foregoing federal cases be
transferred to the U.S. District Court for the Northern
District of California for coordinated or consolidated pretrial
proceedings as part of a Multi District Litigation (MDL). On
June 5, 2006, the court issued an order certifying a direct
purchaser class.
In September 2005, Infineon and its principal
U.S. subsidiary entered into a definitive settlement
agreement with counsel to the Direct U.S. Purchaser Class
(subject to approval by the U.S. District Court for the
Northern District of California and to an opportunity for
individual class members to opt out of the settlement). The
settlement agreement was approved by the court on
November 1, 2006 and the court entered final judgment and
dismissed the class action
S-131
with prejudice on November 2, 2006. Under the terms of the
settlement agreement Infineon agreed to pay approximately
$21 million. In addition to this settlement payment,
Infineon agreed to pay an additional amount if it is proven that
sales of DRAM products to the settlement class after opt-outs
during the settlement period exceeded $208.1 million. We
would also be responsible for this payment. The additional
amount payable would be calculated by multiplying the amount by
which these sales exceed $208.1 million by 10.53%. We do
not currently expect to pay any additional amount to the class.
We have secured individual settlements with eight direct
customers in addition to those OEMs identified by the DOJ.
On April 28, 2006, Unisys Corporation filed a complaint
against Infineon and its principal U.S. subsidiary, among
other DRAM suppliers, alleging state and federal claims for
price fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International,
Inc. filed a complaint against Infineon and its principal
U.S. subsidiary, among other DRAM suppliers, alleging a
claim for price fixing under federal law, and seeking recovery
as a direct purchaser of DRAM. Both Unisys and Honeywell opted
out of the direct purchaser class and settlement, and therefore
their claims are not barred by the Companys settlement
with the Direct U.S. Purchaser Class. Both of these
complaints were filed in the Northern District of California,
and have been related to the MDL described above. On
April 5, 2007 the court dismissed the initial complaint
with leave to amend for failing to give proper notice of its
claims. Unisys filed a First Amended Complaint on May 4,
2007. Infineon, its principal U.S. subsidiary, and the
other defendants again filed a motion to dismiss certain
portions of the Unisys First Amended Complaint on June 4,
2007. After Honeywell had filed a stipulation of dismissal
without prejudice of its lawsuit against Infineon, the court
entered the dismissal order on April 26, 2007.
Between February 28, 2007 and March 8, 2007 four more
opt-out cases were filed by All American Semiconductor, Inc.,
Edge Electronics, Inc., Jaco Electronics, Inc. and DRAM Claims
Liquidation Trust, by its Trustee, Wells Fargo Bank, N.A.. The
All American Semiconductor complaint alleges claims for
price-fixing under the Sherman Act. The Edge Electronics, Jaco
Electronics and DRAM Claims Liquidation Trust complaints allege
state and federal claims for price-fixing. As with Unisys and
Honeywell, the claims of these plaintiffs are not barred by
Infineons settlement with the Direct U.S. Purchaser
Class, since they opted out of the Direct U.S. Purchaser
Class and settlement before or on October 3, 2006. All four
of these cases were filed in the Northern District of California
and have been related to the MDL described above. Based upon the
Courts order dismissing portions of the initial Unisys
complaint above, the plaintiffs in all four of these opt-out
cases decided to file amended complaints on May 4, 2007. On
June 4, 2007 Infineon and its principal
U.S. subsidiary answered the amended complaints filed by
All American Semiconductor, Inc., Edge Electronics, Inc., and
Jaco Electronics, Inc. Also on June 4, 2007, Infineon and
its principal U.S. subsidiary, along with its co-defendants
filed a joint motion to dismiss certain portions of the DRAM
Claims Liquidation Trust amended complaint.
Indirect
Purchaser Litigation
Sixty-four additional cases (including a lawsuit discussed
separately under Foreign Purchaser Litigation
below) were filed between August 2, 2002 and
October 12, 2005 in numerous federal and state courts
throughout the United States. Each of these state and federal
cases (except the lawsuit discussed under Foreign
Purchaser Litigation) purports to be on behalf of a class
of individuals and entities who indirectly purchased DRAM in the
United States during specified time periods commencing in or
after 1999. The Eastern District of Pennsylvania case purporting
to be on behalf of a class of foreign individuals and entities
who directly purchased DRAM outside of the United States from
July 1999 through at least June 2002, was dismissed with
prejudice and without leave to amend on March 1, 2006. On
July 31, 2006, plaintiffs filed their opening brief on
appeal, and defendants filed their joint opening brief on
September 20, 2006. No hearing date has yet been scheduled
for the appeal. The complaints variously allege violations of
the Sherman Act, Californias Cartwright Act, various other
state laws, unfair competition law and unjust enrichment and
seek treble damages in generally unspecified amounts,
restitution, costs, attorneys fees and injunctions against
the allegedly unlawful conduct.
Subsequently, twenty-three of the state (outside California) and
federal court cases and the U.S. District Court for the
Eastern District of Pennsylvania case were ordered transferred
to the U.S. District Court for the Northern District of
California for coordinated and consolidated pre-trial
proceedings as part of the MDL described above. After this
transfer, the plaintiffs dismissed two of the transferred cases.
Two additional transferred cases were subsequently remanded back
to their relevant state courts. Nineteen of the twenty-three
transferred cases are currently pending in the
S-132
MDL-litigation. The California state cases were ordered
transferred for coordinated and consolidated pre-trial
proceedings to the San Francisco County Superior Court. The
plaintiffs in the indirect purchaser cases originated outside
California which have not been transferred to the MDL agreed to
stay proceedings in those cases in favor of proceedings on the
indirect purchaser cases pending as part of the MDL
pretrial-proceedings. The defendants have filed two motions for
judgment on the pleadings directed at several of the claims. The
court entered an order on June 1, 2007 granting in part and
denying in part the defendants motions. The order
dismissed a large percentage of the indirect purchaser
plaintiffs claims, and granted leave to amend with regard
to claims, under three specific state statutes. The court ruled
that the indirect purchaser plaintiffs must file a motion for
leave to amend the complaint with regard to any of the other
dismissed claims. On June 29, 2007, the indirect plaintiffs
filed both a First Amended Complaint, and a motion for leave to
file a Second Amended Complaint that attempted to resurrect some
of the claims that were dismissed. On August 17, 2007, the
court entered an order granting the motion to file the Second
Amended Complaint, which repleaded part of the previously
dismissed claims. The defendants response to the Second
Amended Complaint is due on September 17, 2007. The
indirect plaintiffs motion for class certification was
filed on July 10, 2007.
Foreign
Purchaser Litigation
A lawsuit filed on May 5, 2005 in the Easter District of
Pennsylvania, purporting to be on behalf of a class of foreign
individuals and entities who directly purchased DRAM outside of
the United States from July 1999 through at least June 2002, was
dismissed with prejudice and without leave to amend on
March 1, 2006. Plaintiffs in that case have filed a notice
of appeal. On July 31, 2006, Plaintiffs filed their opening
brief on appeal, and defendants filed their joint opening brief
on September 20, 2006. No hearing date has yet been
scheduled for the appeal. Infineon intends to defend itself
vigorously if the court of appeals remands this lawsuit.
State
Investigations
On July 13, 2006, the New York state attorney general filed
an action in the U.S. District Court for the Southern
District of New York against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of New York governmental entities and New York consumers
who purchased products containing DRAM beginning in 1998. The
plaintiffs allege violations of state and federal antitrust laws
arising out of the same allegations of DRAM price-fixing and
artificial price inflation practices discussed above, and seek
recovery of actual and treble damages in unspecified amounts,
penalties, costs (including attorneys fees) and injunctive
and other equitable relief. On October 23, 2006, the New
York case was made part of the MDL proceeding. On July 14,
2006, the state attorneys general of California, Alaska,
Arizona, Arkansas, Colorado, Delaware, Florida, Hawaii, Idaho,
Illinois, Iowa, Louisiana, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Nebraska, Nevada, New Mexico,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South
Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
West Virginia and Wisconsin filed a lawsuit in the
U.S. District Court for the Northern District of California
against Infineon, its principal U.S. subsidiary and several
other DRAM manufacturers on behalf of governmental entities,
consumers and businesses in each of those states who purchased
products containing DRAM beginning in 1998. On September 8,
2006, the complaint was amended to add claims by the state
attorneys general of Kentucky, Maine, New Hampshire, North
Carolina, the Northern Mariana Islands and Rhode Island. This
action is based on state and federal law claims relating to the
same alleged anticompetitive practices in the sale of DRAM and
plaintiffs seek recovery of actual and treble damages in
unspecified amounts, penalties, costs (including attorneys
fees) and injunctive and other relief. On October 10, 2006,
Infineon joined the other defendants in filing motions to
dismiss several of the claims alleged in these two actions. A
hearing on these motions to dismiss was held on February 7,
2007. On August 31, 2007, the court entered orders granting
the motions in part and denying the motions in part. The
courts order dismissed the claims on behalf of consumers,
businesses and governmental entities in a number of states, and
dismissed certain other claims with leave to amend, with any
amended complaints to be filed by October 1, 2007. Between
June 25 and August 15, 2007, the state attorneys general of
three states, Ohio, New Hampshire and Texas, filed requests for
dismissal of their claims without prejudice.
S-133
European
Commission Investigation
In April 2003, Infineon received a request for information from
the European Commission (the Commission) to enable
the Commission to assess the compatibility with the
Commissions rules on competition of certain practices of
which the Commission has become aware in the European market for
DRAM products. Infineon has reassessed the matter after its plea
agreement with the DOJ and made an accrual during the 2004
financial year for an amount representing the probable minimum
fine that may be imposed as a result of the Commissions
investigation. Any fine actually imposed by the Commission may
be significantly higher than the reserve established, although
Infineon cannot more accurately estimate the amount of the
actual fine. Infineon is fully cooperating with the Commission
in its investigation.
Canadian
Competition Bureau Investigation
In May 2004, the Canadian Competition Bureau advised
Infineons principal U.S. subsidiary that it, its
affiliates and present and past directors, officers and
employees are among the targets of a formal inquiry into an
alleged conspiracy to prevent or lessen competition unduly in
the production, manufacture, sale or supply of DRAM, contrary to
the Canadian Competition Act. No formal steps (such as
subpoenas) have been taken by the Competition Bureau to date.
Infineon is cooperating with the Competition Bureau in its
inquiry.
Canadian
Civil Litigation
Between December 2004 and February 2005, two putative class
proceedings were filed in the Canadian province of Quebec and
one was filed in each of Ontario and British Columbia against
Infineon, its principal U.S. subsidiary and other DRAM
manufacturers on behalf of all direct and indirect purchasers
resident in Canada who purchased DRAM or products containing
DRAM between July 1999 and June 2002, seeking damages,
investigation and administration costs, as well as interest and
legal costs. Plaintiffs primarily allege conspiracy to unduly
restrain competition and to illegally fix the price of DRAM. In
the British Columbia action, a hearing on the certification
motion has been scheduled for August 2007 and will resume in
November 2007. In one Quebec class action, a tentative date for
the motion for authorization (certification) has been set for
May 2008 (with some possibility of a March 2008 date if the
court calendar opens); the other Quebec action has been stayed
pending developments in the one that is going forward.
Securities
Class Actions
Between September 30, 2004 and November 4, 2004, seven
securities class action complaints were filed against Infineon
and three of its current or former officers (of which one
officer was subsequently dropped as defendant and one of which
is currently the chairman of our Supervisory Board) in the
U.S. District Courts for the Northern District of
California and the Southern District of New York. The plaintiffs
voluntarily dismissed the New York cases, and on
June 30, 2005 filed a consolidated amended complaint in
California on behalf of a putative class of purchasers of
Infineons publicly-traded securities, who purchased them
during the period from March 13, 2000 to July 19,
2004, effectively combining all lawsuits. The consolidated
amended complaint added Infineons principal
U.S. subsidiary and four then-current or former employees
of Infineon and its affiliate as defendants. It alleges
violations of the U.S. securities laws and asserts that the
defendants made materially false and misleading public
statements about Infineons historical and projected
financial results and competitive position because they did not
disclose Infineons alleged participation in DRAM
price-fixing activities and that, by fixing the price of DRAM,
defendants manipulated the price of Infineons securities,
thereby injuring its shareholders. The plaintiffs seek
unspecified compensatory damages, interest, costs and
attorneys fees. Infineon, its principal
U.S. subsidiary and the two Infineon officers filed motions
to dismiss the consolidated amended complaint. In September
2006, the court dismissed the complaint with leave to amend and
in October 2006 the plaintiffs filed a second amended complaint.
In March 2007, pursuant to a stipulation agreed with the
defendants, the plaintiffs withdrew the second amended complaint
and were granted a motion for leave to file a third amended
complaint. The plaintiffs filed a third amended complaint on
July 17, 2007. In the contribution agreement we entered
into with Infineon, we agreed to share any future liabilities
arising out of this lawsuit equally with Infineon, including the
cost of defending the suit.
S-134
Infineon believes these claims are without merit. We are
currently unable to provide an estimate of the likelihood of an
unfavorable outcome to Infineon or of the amount or range of
potential loss arising from these actions. If the outcomes of
these actions are unfavorable or if Infineon incurs substantial
legal fees in defending these actions regardless of outcome, it
may have a material adverse effect on our financial condition
and results of operations. Infineons directors and
officers insurance carriers have denied coverage in the
securities class actions and Infineon filed suits against the
carriers in December 2005 and August 2006. Infineons
claims against one D&O insurance carrier were finally
dismissed in May 2007. The claims against the other insurance
carrier were dismissed in November 2006. Infineon filed an
appeal against this decision.
Patent
Litigation
Lin
Packaging Technologies, Ltd.
On April 10, 2007, Lin Packaging Technologies, Ltd. (Lin)
filed a lawsuit against Infineon, Infineon Technologies North
America Corp. and an additional DRAM manufacturer in the
U.S. District Court for the Eastern District of Texas,
alleging that certain DRAM products were infringing two Lin
patents. In May 2007, Lin amended its complaint to include
Qimonda AG, Qimonda North America Corp. and Qimonda Richmond
LLC. Under the contribution agreement with Infineon, we are
required to indemnify Infineon for claims (including any related
expenses), if any, arising in connection with the aforementioned
suit.
Accruals
and the Potential Effect of these Lawsuits on Our
Business
Liabilities related to legal proceedings are recorded when it is
probable that a liability has been incurred and the associated
amount can be reasonably estimated. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
June 30, 2007, we have accrued liabilities in the amount of
114 million related to potential liabilities and
risks with respect to the DOJ and European antitrust
investigations and the direct and indirect purchaser litigation
and settlements described above, as well as for legal expenses
relating to the securities class actions and the Canadian
antitrust investigation and litigation described above. The
accrued liabilities, other current and non-current liabilities,
and other commitments and contingencies related to legal
proceedings are further reported in Notes 16 and 18 of our
unaudited condensed combined and consolidated financial
statements.
As additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on our financial condition and results
of operations.
An adverse final resolution of the investigations or lawsuits
described above could result in significant financial liability
to, and other adverse effects on, Infineon, and most likely us,
which would have a material adverse effect on our business,
results of operations, financial condition and cash flows. In
each of these matters we are continuously evaluating the merits
of the respective claims and defending ourselves vigorously or
seeking to arrive at alternative resolutions in our best
interest, as we deem appropriate. Irrespective of the validity
or the successful assertion of the claims described above, we
could incur significant costs with respect to defending against
or settling such claims, which could have a material adverse
effect on our results of operations, financial condition and
cash flows.
Other
Matters
We are subject to various other lawsuits, legal actions, claims
and proceedings related to products, patents and other matters
incidental to our businesses. We have accrued a liability for
the estimated costs of adjudication of various asserted and
unasserted claims existing as of the balance sheet date. Based
upon information presently known to management, we do not
believe that the ultimate resolution of such other pending
matters will have a material adverse effect on our financial
condition, although the final resolution of such matters could
have a material adverse effect on our results of operations or
cash flows at that time.
S-135
Environmental
Protection, Safety and Health
Our global Environmental, Safety and Health Management System is
structured and designed to mitigate the risks associated with
our manufacturing processes. These risks include the integrity
of our operations, risks relating to the health and well-being
of our employees, risks relating to the environment, our assets
and third parties. All production sites worldwide and our
headquarters are certified according to EN/ISO 14001 and OSHAS
18001.
In the last few years, there has been increased media scrutiny
and reports focusing on a potential link between working in
semiconductor manufacturing clean room environments and certain
illnesses, primarily different types of cancers. Regulatory
agencies and industry associations have begun to study the issue
to see if any actual correlation exists. We have carried out
bio-monitoring programs since 1990, testing both those employees
who work in clean room environments and those who do not.
Employees that do not work in clean room environments thus serve
as a control group, enabling us to determine whether clean room
environment employees have been exposed to hazardous chemicals.
Our testing has consistently shown that employees who work in
our clean rooms have not been exposed to elevated levels of the
relevant chemicals. Our bio-monitoring program is a pro-active
approach to employee health and safety, and we believe it
exceeds the health monitoring efforts of others in our industry.
Accordingly, we do not believe that scrutiny of these potential
links will negatively affect our ability to recruit and retain
employees.
Where we are not able to eliminate adverse environmental impacts
entirely, we aim to minimize any such impact. For example, in
some of our manufacturing processes we use Perfluorinated
Compounds, or PFCs. As early as 1992, we began to install
exhaust air filter systems to reduce PFC emissions. We have
documented our commitment to protect the environment by signing
the global voluntary agreement designed by World Semiconductor
Council to reduce greenhouse gases as defined under the Kyoto
Protocol. The target is to reduce total PFC emissions of this
substance group by 10% compared with the baseline emission level
from 1995. After 5 years of data collection, we have
determined that our reduction measures, including using
alternative chemistry, improving efficiency and installing
abatement systems, were appropriate to meet this goal. Assuming
an annual production volume growth within the semiconductor
industry of 15%, this would represent an emission reduction by
2010 of approximately 90% from the 1995 level, calculated in
CO2
equivalents.
Another aspect of our efforts to minimize our impact on the
environment is our comprehensive green product
strategy, which refers to our efforts to eliminate lead and
halogen from our products. We first produced green products and
modules in December 2002 and as of September 30, 2006, 90%
of all our products were green while 98% of our
manufactured modules used green components. The
remaining products that cannot be classified as
green are produced with these substances due, in
most cases, to customers specific requirements.
Due to the fact that a damage and loss of a semiconductor
facility caused by a fire can be substantial, we have installed
automatic protection systems such as sprinklers into all of our
production facilities. We have also standardized the loss
prevention procedures in all of our facilities. We regularly
review our protection status at all of our facilities including
audits by external property protection engineers and continue to
invest in loss prevention equipment and training at our
facilities.
Relevant
Environmental Laws and Regulations
We are subject to a variety of laws relating to the use,
disposal, cleanup of and human exposure to hazardous materials
in most of the jurisdictions we operate in. Within the past
decade, the European Union has proposed or enacted certain
environmental directives that may be or are required to be
enacted in each EU member state. A brief discussion of the most
important directives, in terms of their effect, or potential
effect, on our business of these follows.
The Restriction of the use of certain Hazardous Substances in
electrical and electronic equipment, or the RoHS Directive,
prohibits placing products on the EU market that contain more
than certain levels of lead, cadmium, mercury and other
substances. We comply with this law through implementation of
our green products strategy discussed above.
To ensure the commercial viability of our products, we have
completed the conversion of all Qimonda product packages to
comply with, in particular, the RoHS Directive which sets forth
lead-free standards for many types of
S-136
electronic and electrical equipment. The obligation to comply
with the RoHS Directive ultimately lies with the
equipments producer. These customers therefore require us
to supply lead-free products, and we regularly provide
certificates that document our products compliance with
the RoHS Directives lead-free standards.
To address the needs of electronic equipment manufacturers whose
products require an exemption from the application of the RoHS
Directive, typically for technical or economic reasons,
exemptions are available which permit the use of lead-containing
parts for specific applications. In addition, certain
manufacturers have been individually exempted from compliance
with the RoHS Directive by the relevant governmental
authorities. We continue to supply a small number of
lead-containing products for these exempted applications and
manufacturers. Additionally, we have a number of customers who
require delivery of lead containing products to non-European
markets, where the RoHS Directive does not apply.
A similar set of rules has recently been implemented in the
Peoples Republic of China. Beginning on March 1,
2007, these rules imposed labelling requirements on all
electronic information products, as defined in those rules, that
are sold in the Chinese retail market. In addition, a
self-declaration containing details on the affected chemicals
and compounds must be created and communicated within the supply
chain. The future implementation obligations of this new law may
impose additional costs upon our business or may have an effect
on our ability to timely meet customer demand for our products
in China.
The Waste Electrical and Electronic Equipment Directive, or
WEEE, imposes take back obligations on manufacturers
for the financing of the collection, recovery and disposal of
electrical and electronic equipment. The implementation of the
WEEE directive has not been completed in most EU Countries and
therefore the potential costs are not foreseeable. We have begun
supplying WEEE-compliant products in the German market. The
related cost impact is minor in Germany, but could be higher in
other countries depending on their implementation of the
directive.
The Registration, Evaluation and Authorization of Chemicals used
in the European Union, or REACH Regulation, is a regulatory
framework that concerns the registration, evaluation and
authorization of certain chemicals. This regulatory framework
came into effect in December 2006. While it has not been fully
determined which chemicals will fall under these regulations, we
believe the regulation is targeted towards chemical companies
and industries in which significant volumes of chemicals are
used. As we use very few chemicals whose volume exceeds 100 tons
per year, we are classified as a down-stream user category
II under this legislation. Furthermore, this legislation
contains a proposal to exempt companies who meet certain
standards from the authorization process. Due to these
uncertainties, we believe it is premature to estimate the
potential costs this regulation could impose on us.
The Energy-using Products, or EuP Directive establishes
ecologically sound development requirements for electrical
devices. This directive applies generally to consumer products
such as home appliances, and does not specifically regulate our
products. However, our customers who do produce electronic or
electrical consumer devices need to be able to demonstrate to
consumers that their products do conform to the directive and so
we may need to supply our customers with information that will
enable them to comply with these obligations. We believe this
Directive may have a positive influence on those of our DRAM
products that consume relatively less power than comparable
products of our competitors.
S-137
Real
Property
The following table sets forth, as of June 30, 2007, the
location, size and primary use of our major real properties and
whether such real properties are owned or leased.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate size
|
|
|
|
|
Owned or leased
|
Location
|
|
Land
|
|
|
Building
|
|
|
Primary uses
|
|
Land
|
|
|
Building
|
|
|
|
|
|
|
|
|
(in square meters)
|
|
|
|
|
|
|
Burlington, Vermont
|
|
|
*
|
|
|
|
2,862
|
|
|
Research
|
|
|
*
|
|
|
Leased
|
Dresden,
Germany(1)
|
|
|
131,840
|
|
|
|
153,904
|
|
|
Research, Wafer fabrication,
|
|
|
Owned
|
|
|
Partly owned
|
|
|
|
|
|
|
|
|
|
|
Assembly and Testing
|
|
|
|
|
|
and leased
|
Malacca,
Malaysia(2)
|
|
|
13,467
|
|
|
|
16,400
|
|
|
Assembly and Testing
|
|
|
Leased
|
|
|
Partly owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and leased
|
Munich,
Germany(3)
|
|
|
*
|
|
|
|
47,828
|
|
|
Headquarters and
|
|
|
*
|
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
Research
|
|
|
|
|
|
|
Padua, Italy
|
|
|
*
|
|
|
|
750
|
|
|
Research
|
|
|
*
|
|
|
Leased
|
Porto,
Portugal(4)
|
|
|
217,265
|
|
|
|
27,792
|
|
|
Assembly and Testing
|
|
|
Owned
|
|
|
Owned
|
Raleigh, North Carolina
|
|
|
*
|
|
|
|
9,265
|
|
|
Research
|
|
|
*
|
|
|
Leased
|
Richmond,
Virginia(5)
|
|
|
853,351
|
|
|
|
126,006
|
|
|
Wafer Fabrication
|
|
|
Owned
|
|
|
Owned
|
Suzhou,
China(6)
|
|
|
200,102
|
|
|
|
34,399
|
|
|
Assembly and Testing
|
|
|
Leased
|
|
|
Owned
|
Xian, China
|
|
|
*
|
|
|
|
2,456
|
|
|
Research
|
|
|
*
|
|
|
Leased
|
|
|
|
* |
|
Not applicable for leased properties. |
|
(1) |
|
Refers to our 300mm wafer fabrication, back-end manufacturing
and research facility, including research conducted in
conjunction with our development partner, Nanya. The building
space is at two locations,
133,637m2
owned and
20.267m2
leased. |
|
(2) |
|
Includes a
13,300m2
building owned by our company and
3,100m2
of space leased from Infineon. |
|
(3) |
|
Includes research and office space at our five locations in and
around Munich. |
|
(4) |
|
Subject to limited exceptions, under the terms of the financing
arrangements relating to the site, we must receive the consent
of Portuguese authorities to sell, lease or assign this property. |
|
(5) |
|
We currently have five buildings on this property. |
|
(6) |
|
In 2003, Infineon Technologies Suzhou Co., Ltd. secured the use
of this land pursuant to a
50-year
contract. We are currently constructing an additional building
with a total size of
15,500m2
and expect it to be completed in February 2008. |
As of June 30, 2007, we also leased more than
10,000m2
for administrative, sales, logistics and other use, at various
locations around the world.
We are currently in negotiations to lease approximately
80,000m2
of land in Malaysia.
We have recently decided to consolidate most of the executive
office space we use in and around Munich in a single cluster of
buildings where our principal executive offices are currently
located.
Relationship
with Siemens
Until 1999, the entire business of Infineon, including the
Memory Products business, formed the Semiconductor Group of
Siemens AG, a large German electronics conglomerate. In 1999,
Siemens formed Infineon as a separate legal entity, transferred
its semiconductor business to Infineon, and conducted an initial
public offering of Infineons ordinary shares with listing
on the Frankfurt Stock Exchange and the New York Stock Exchange.
Siemens subsequently took a variety of steps to further reduce
its ownership interest in Infineon. On April 3, 2006
Siemens disposed of its remaining shares in Infineon.
Transactions between us and Siemens subsequent to this date are
no longer reflected as related party transactions.
S-138
In the 2004 and 2005 financial years, 4% and 3% of our net sales
resulted from direct sales to the Siemens-Fujitsu joint venture,
a member of the Siemens group, and in the 2006 financial year
through to Siemens disposal of its remaining Infineon
shares such sales amounted to 17 million. We believe
that these transactions are on terms no less favorable to us
than we could obtain from third parties.
Group
Structure
The following table shows information about our significant
subsidiaries as of June 30, 2007:
Significant
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportion of
|
|
|
|
Country of
|
|
Field of
|
|
our ownership
|
|
Corporate Name
|
|
Residence
|
|
activity
|
|
interest
|
|
|
Qimonda Europe GmbH
|
|
Germany
|
|
Distribution,
Sales & Marketing
|
|
|
100
|
%
|
Qimonda Flash GmbH
|
|
Germany
|
|
Research and
Development
|
|
|
100
|
%
|
Qimonda Dresden GmbH &
Co. oHG
|
|
Germany
|
|
Production
|
|
|
100
|
%
|
Qimonda Holding B.V
|
|
The Netherlands
|
|
Holding
|
|
|
100
|
%
|
Qimonda Investment B.V
|
|
The Netherlands
|
|
Holding
|
|
|
100
|
%
|
Qimonda Portugal S.A.
|
|
Portugal
|
|
Production
|
|
|
100
|
%
|
Infineon Technologies Flash
Ltd.
|
|
Israel
|
|
Research and
Development
|
|
|
100
|
%
|
Qimonda Richmond, LLC
|
|
United States
|
|
Production
|
|
|
100
|
%
|
Qimonda North America Corp.
|
|
United States
|
|
Distribution,
Sales & Marketing,
Research and
Development
|
|
|
100
|
%
|
Qimonda Asia Pacific Pte Ltd.
|
|
Singapore
|
|
Distribution
|
|
|
100
|
%
|
Qimonda Malaysia Sdn. Bhd
|
|
Malaysia
|
|
Production
|
|
|
100
|
%
|
Qimonda Module (Suzhou) Co.
Ltd.
|
|
China
|
|
Production
|
|
|
100
|
%
|
Qimonda Technologies (Suzhou) Co.,
Ltd.
|
|
China
|
|
Production
|
|
|
62.8
|
%
|
Qimonda Japan K.K
|
|
Japan
|
|
Sales and Marketing
|
|
|
100
|
%
|
At the time of our carve-out, our operations in Japan (Sales and
Marketing) were initially held in trust for Qimondas
benefit until the legal transfer to Qimonda takes place. On
October 28, 2006, Infineon transferred this operation into
a separate legal entity, Qimonda Japan K.K. Effective as of
June 25, 2007, the legal transfer of this entity to us took
place.
S-139
MANAGEMENT
Overview
of Corporate Governance Structure
In accordance with the German Stock Corporation Act
(Aktiengesetz), our company has a Supervisory Board and a
Management Board. The two boards are separate and no individual
may simultaneously serve as a member of both boards. The
Management Board is responsible for managing our business in
accordance with applicable laws, the Articles of Association of
our company and the rules of procedure of the Management Board.
Moreover, it represents us in our dealings with third parties.
The Supervisory Board appoints and removes the members of the
Management Board and oversees the management of our company but
may not make management decisions.
In carrying out their duties, members of both the Management
Board and Supervisory Board must exercise the standard of care
of a prudent and diligent businessman, and they are liable to
our company for damages if they fail to do so. Both boards are
required to take into account a broad range of considerations in
their decisions, including the interests of our company and its
shareholders, employees and creditors. The Management Board is
required to respect the shareholders rights of equal
treatment and equal information.
The Supervisory Board has comprehensive monitoring functions. To
ensure that these functions are carried out properly, the
Management Board must, among other things, regularly report to
the Supervisory Board with regard to current business operations
and future business planning. The Supervisory Board is also
entitled to request special reports at any time. The Management
Board is required to ensure appropriate risk management within
our company and must establish an internal monitoring system.
Under German law, shareholders of a company, like other persons,
are liable to the company for damages if they intentionally use
their influence on the company to cause a member of the
Management Board, the Supervisory Board or holders of special
proxies to act in a way that is harmful to the company. If a
member of the Management Board or Supervisory Board neglects his
or her duties, such member is jointly and severally liable with
the persons exercising such influence. Infineon is, and will
remain immediately after the offering, our controlling
shareholder. Under German law, a controlling shareholder may not
cause us to act against our interests unless we are compensated
by the controlling shareholder for any resulting detriment or we
have entered into a control agreement governed by German law
(Beherrschungsvertrag). Infineon and we have not entered
into a control agreement. Members of our Supervisory and
Management Boards who have not acted in our interest in their
dealings with a controlling shareholder are, together with the
controlling shareholder, jointly and severally liable to our
company for damages.
We must bring an action against members of the Supervisory and
Management Boards for breach of duty in our name if a majority
of the shares voting at a shareholders meeting so resolve.
We may only waive our right to damages under, or settle claims
arising out of, an action like this three years after the date
that the cause of action accrued and if the shareholders approve
the waiver or settlement at a meeting of the shareholders by
majority vote, as long as shareholders holding 10% or more of
our share capital do not object and have their opposition
formally noted in the minutes maintained by a German notary.
Under German law, individual shareholders can sue members of the
Supervisory and Management Boards on behalf of the company in a
manner analogous to a shareholders derivative action under
U.S. law only if they hold at least 1% of the
companys share capital or shares with a notional value of
100,000 and only with court permission. Under German law,
directors may be liable for breach of duty to shareholders (as
opposed to a duty to the company itself) only where a breach of
duty to the company also constitutes a breach of a statutory
provision enacted specifically for the protection of
shareholders. As a practical matter, shareholders are able to
assert liability against directors for breaches of this sort
only in unusual circumstances.
We adopted new Articles of Association in connection with our
carve-out and amended them at the occasion of our extraordinary
shareholders meetings on July 14, 2006 and on
July 27, 2006. These, taken together with German corporate
law, provide as follows with respect to our Supervisory Board
and our Management Board.
S-140
Supervisory
Board
After the transfer of employees from Infineon to us in
connection with our carve-out, our Management Board determined,
and publicly announced on May 4, 2006, that under the
German Act on the One-Third Participation of Employees in
Supervisory Boards (Gesetz über die Drittelbeteiligung
der Arbeitnehmer im Aufsichtsrat), one third of the members
of our Supervisory Board must henceforth be elected by our
employees. In accordance with this announcement, we amended our
Articles of Association to provide that our Supervisory Board
must consist of six members, four of whom must be elected by our
shareholders in a shareholders meeting, and two of whom
must be elected by our employees.
In general, the four shareholder representatives on the
Supervisory Board are elected by a majority of the votes cast at
a shareholders meeting. During our extraordinary
shareholders meeting held on July 14, 2006, four new
Supervisory Board members were elected. With effect as of the
close of the Supervisory Boards meeting on July 24,
2007, Mr. Michael von Eickstedt resigned from office as a
shareholder representative on the Supervisory Board. As our next
annual general meeting will not take place before 2008, we,
together with other applicants, initiated a court proceeding in
accordance with Section 104 of the German Stock Corporation
Act to have the competent court appoint a shareholder
representative for a transitional period, that will continue
until the next annual general meeting has taken place.
Section 104 of the German Stock Corporation Act generally
provides that application for a court appointment can be made if
the actual number of Supervisory Board members is below the
number required by law or the articles of association for a
period in excess of three months or, if the matter is urgent,
before expiration of the three month period. On August 27,
2007, the court appointed Prof. Dr. Claus Weyrich as a
member of the Supervisory Board.
The two employee representatives on our Supervisory Board come
from the ranks of our employees (excluding executive employees
(leitende Angestellte)). As the voting procedure with
respect to the employee representatives is time-consuming, the
two employee representatives, Messrs. Johann Grundbacher
and Lothar Armbrecht, were appointed by the court on
July 20, 2006 based on the court proceeding in accordance
with Section 104 of the German Stock Corporation Act.
Our Articles of Association allow the shareholders, by a vote of
three quarters of the votes cast in a general meeting, to remove
any member of the Supervisory Board they have elected. The
employee representatives may be removed by the group of
employees that were entitled to elect them by a vote of
three-quarters of the votes cast. The Supervisory Board will
elect a chairman and a deputy chairman from among its members.
The Supervisory Board normally acts by simple majority vote with
the chairman having a casting vote. Supervisory Board
resolutions are subject to a quorum of half of the members of
which the Supervisory Board must be composed.
The Supervisory Board meets at least twice during each half of a
calendar year. Its main functions are:
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to appoint our Management Board;
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to monitor our management;
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to approve matters in areas that the Supervisory Board has made
generally subject to its approval; and
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to approve matters that the Supervisory Board decides on a case
by case basis to make subject to its approval.
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S-141
Supervisory
Board Members
The following table lists current members of our Supervisory
Board, their ages, their functions and their principal
occupations:
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Name
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Age
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Function
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Principal occupation
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Peter J. Fischl
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61
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Chairman
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CFO and Member of the Management
Board of Infineon Technologies AG.
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Richard Previte
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72
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Deputy Chairman
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Former President, Advanced Micro
Devices, Inc.
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Prof. Dr. Claus Weyrich
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63
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Member
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Former Member of the Management
Board of Siemens AG
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Yoshio Nishi
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67
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Member
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Professor, Stanford University
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Johann Grundbacher
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43
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Member
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Electrical Engineer, Qimonda AG
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Dr. Lothar Armbrecht
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54
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Member
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Member of Works Council
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Under German law, the shareholders may determine the term of
each shareholder-elected member of the Supervisory Board. The
maximum term of office of each Supervisory Board member runs
until the close of the meeting of the shareholders that passes a
resolution concerning the discharge (Entlastung) of the
respective member in respect of the fourth financial year after
the beginning of his or her term. The financial year in which
the term begins is not included in this calculation. Under
German law, discharge in this context means to
approve, in a general manner, the members actions in his
or her capacity as a Supervisory Board member. It does not
relieve the member of his or her legal liability under German
law for his or her actions as a Supervisory Board member.
Neither we nor any of our subsidiaries have entered into special
service contracts with the members of the Supervisory Board that
provide for benefits during or upon termination of their board
membership other than as described under
Management Board
Compensation.
The current members of our Supervisory Board do not own,
directly or indirectly, any of our share capital. The business
address of each of the members of our Supervisory Board is
Gustav-Heinemann-Ring 212, 81739 Munich, Germany.
Significant
Differences between our Corporate Governance Practices and those
of U.S. Companies Listed on the New York Stock
Exchange
A brief, general summary of the significant differences between
our corporate governance practices under German law and the
practices applicable to U.S. companies listed on the New
York Stock Exchange is available at
http://www.qimonda.com/about/investorrelations/corporate
governance/significant differences.html. This website address is
included in this prospectus supplement as an inactive textual
reference only.
Committees
of the Supervisory Board
Our Supervisory Board has established the following committees:
Investment,
Finance and Audit Committee
Our Supervisory Board has established an Investment, Finance and
Audit Committee, comprising two shareholder representatives on
the Supervisory Board and one employee representative. The
Investment, Finance and Audit Committee carries out the
functions normally carried out by the audit committee of a
U.S. company, among other duties, including:
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preparing the decisions of the Supervisory Board concerning
approval of our companys annual financial statements,
including review of the financial statements, our annual
reports, the proposed application of earnings and the reports of
our registered public accounting firm;
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reviewing the interim financial statements of our company that
are made public or otherwise filed with any securities
regulatory authority;
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S-142
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handling auditor independence issues, mandating our auditor to
audit our consolidated and unconsolidated annual financial
statements (including the determination of the focus of the
audit), approving any consulting services by the auditor and
supervising the auditor;
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approving decisions of our Management Board or one of its
committees regarding increases of our companys capital
through the issuance of new shares from our authorized or
conditional capital, to the extent that we are not either
issuing the shares to employees or using them for a share option
plan;
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approving decisions of our Management Board in relation to any
investment or disposition if its value exceeds 10% of our total
investment budget, in relation to securities, guarantees and
loans to third parties outside our group of companies, which
exceed 5% of our shareholders equity (Eigenkapital)
on the consolidated balance sheet of our group of companies, and
in relation to the Management Boards finance and
investment plans (including the budget) as well as the level of
indebtedness;
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handling risk management issues and supervising the risk
management system;
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establishing procedures pursuant to which our employees can
report to the Investment, Finance and Audit Committee, on an
anonymous and confidential basis, complaints regarding our
accounting and auditing practices, and enacting rules pursuant
to which such complaints received by us from third parties will
be reported to the Investment, Finance and Audit Committee;
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discussing any flaws relating to our internal control systems,
as reported by the Management Board to the Investment, Finance
and Audit Committee;
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examination of our bookkeeping, documents and assets;
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approval of Management Board resolutions on the utilization of
the authorization granted by our shareholders to issue
convertible bonds, including, in particular, the maximum amount
of the issuance and the exclusion of shareholders
preemptive rights.
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The Investment, Finance and Audit Committee also supports the
Supervisory Board in its exercise of its duty to supervise our
business. It may exercise the oversight powers conferred upon
the Supervisory Board by German law for this purpose. Decisions
of the Investment, Finance and Audit Committee are subject to
the quorum that all of its members are present and require a
simple majority.
Messrs. Previte (chairman), Weyrich and Armbrecht sit on
the Investment, Finance and Audit Committee.
Technology
Committee
Our Supervisory Board has established a Technology Committee.
This committee advises the Management Board on technology
related issues. Messrs. Nishi, Fischl and Grundbacher sit
on this committee.
Presidential
Committee
Our Supervisory Board has established a Presidential Committee.
Among other things, this committee handles, and prepares
resolutions of the full Supervisory Board on, all matters
relating to the relationship between us and the Management
Board, including the execution, amendment and termination of the
service agreements with the Management Board members, as well as
the appointment and removal of Management Board members. In this
function, the Presidential Committee carries out tasks that are
normally carried out by compensation committees of
U.S. public companies. Messrs. Fischl, Weyrich and
Previte sit on this committee.
Management
Board
Our Articles of Association require our Management Board to have
at least two members. Our Supervisory Board may increase the
size of the Management Board and appoints its members.
Currently, our Management Board consists of three members.
The Management Board has adopted rules of procedure for the
conduct of its affairs and a plan for the assignment of business
(Geschäftsverteilungsplan) which have been approved
by the Supervisory Board. The Management Board may substantially
amend them at any time. The adoption and amendment of these
rules require the unanimous vote of the Management Board and the
consent of the Supervisory Board. The Supervisory Board may,
however, decide to adopt rules of procedure for the Management
Board instead.
S-143
The rules of procedure provide that the chairman of the
Management Board will be required to notify the chairman of the
Supervisory Board of any pending matter that is significant. The
chairman of the Supervisory Board will be required, at the next
meeting of the Supervisory Board, to notify the other members of
the Supervisory Board of such matter, and the Supervisory Board
will then be able, on a
case-by-case
basis, to designate such matter as one requiring Supervisory
Board approval.
In general, our Management Board members are jointly responsible
for all management matters and, pursuant to the rules of
procedure, will be required to decide jointly on a number of
issues, including:
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preparation of the annual financial statements;
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calling shareholders meetings;
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matters for which the consent of the shareholders or of the
Supervisory Board must be obtained; and
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matters involving basic organizational policy, business policy
and investment and financial planning questions for our company.
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Notwithstanding the joint responsibility of all Management Board
members for management matters, the rules of procedure provide
that the Management Board may, with the consent of the
Supervisory Board, establish a plan on the internal allocation
of responsibilities among the Management Board members.
According to the plan we have established, Mr. Kin Wah Loh
is responsible for strategy and business development, personnel
strategy, regions, law, communications, technology, innovation,
patents, products, product development, quality management, IT
and procurement. Mr. Seifert is responsible for the areas
computing, graphics, consumer and mobile, AENEON, purchasing,
production, supply chain and logistics, sales and regional
centers. Dr. Majerus is responsible for planning and
controlling, bookkeeping, accounting and reporting, tax,
participation management, finance, internal audit and
compliance, security (including data protection and
environmental matters), investor relations, export control and
duties and personnel.
The rules of procedure provide that the Management Board shall,
in general, pass its resolutions by unanimous vote.
Under German law, the Supervisory Board appoints the members of
the Management Board for a maximum term of five years. They may
be reappointed or have their terms extended for one or more
terms of up to five years each. The Supervisory Board may remove
a member of the Management Board prior to expiration of such
members term for good cause, as defined in
German law. Good cause includes a serious breach of
duty or a bona fide vote of no confidence by the shareholders. A
member of the Management Board may not deal with, or vote on,
matters that relate to proposals, arrangements or contracts
between that member and our company.
Management
Board Members
The members of our Management Board, their ages, the year in
which their current term expires and their position and
principal business activities outside our company, including
principal directorships, is as follows:
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Principal business
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activities outside
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Term
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Position
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company (including
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Name
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Age
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expires
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within company
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principal directorships)
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Kin Wah Loh
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53
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2011
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Chairman of the
Management Board
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Dr. Michael Majerus
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46
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2010
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Member of the
Management Board
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Director, Inotera Memories, Inc.
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Thomas Seifert
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43
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2009
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Member of the
Management Board
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Director, Inotera Memories, Inc.
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Kin Wah Loh has served on Infineons Management
Board since December 2004, serving from January to July 2005 as
the Head of the Communication segment, and, since July 28,
2005, as the Executive Vice President of the Memory Products
segment. From 1999 until 2004 he served as President and
Managing Director of Infineon Technologies Asia Pacific,
Singapore. Mr. Loh began his career at Siemens Components
in 1978 as a quality engineer in Malacca, Malaysia, later
serving as General Manager (Production) of Siemens Components
Singapore between 1993 and 1996. In 1997, he was appointed
Managing Director of Siemens Components. He holds an honors
S-144
degree in chemical engineering University of Malaysia, Kuala
Lumpur and a certified diploma in finance and accounting from
ACCA UK.
Dr. Michael Majerus has served as the Chief
Financial Officer of the Memory Products Group of Infineon since
December 2000. He has been a member of the Board of Directors of
Inotera in Taiwan since its founding. Previously,
Dr. Majerus held various positions in finance within the
Mannesmann Group, including as the head of controlling and
accounting at Mannesmann AG, which he joined in 1989. He holds a
diploma in business administration from the University of
Cologne, Germany, and a doctorate in economics from the
University of Siegen, Germany, where he served as assistant at
the Institute of Business Administration and Production.
Thomas Seifert has served on the Memory Products Group
Management Board since 2004. He is also a member of the Board of
Directors of Inotera in Taiwan. From 2000 to 2004,
Mr. Seifert worked with the Wireline Communications
Business Group, where he served first as Chief Operating Officer
and then Chief Executive Officer. From 1996 to 2000,
Mr. Seifert led the White Oak Semiconductor plant,
Infineons joint venture with Motorola in Richmond,
Virginia. Starting in 1993, he spent three years working on the
manufacturing cooperation with IBM on the Management Board in
Essonnes, France. Mr. Seifert joined the Corporate
Management Group of Siemens in 1990. Mr. Seifert holds a
diploma in business administration from the University of
Erlangen, Germany and a masters degree in economics from Wayne
State University, Michigan, United States of America.
These Management Board members have served in their positions
since April 15, 2006.
The current members of our Management Board do not own, directly
or indirectly, any of our share capital. We do not expect that
the members of our Management Board will, individually or in the
aggregate, own, directly or indirectly, more than 1% of our
companys outstanding share capital, including for these
purposes any ADSs or options they may acquire in or at the time
of the offering. The business address of each of the members of
our Management Board is Gustav-Heinemann-Ring 212, 81739 Munich,
Germany.
Compensation
Our Articles of Association provide that the annual compensation
for each member of the Supervisory Board will be $50,000. The
chairman of the Supervisory Board will receive $150,000 and the
deputy chairman, as well as each chairman of a Supervisory Board
committee, will receive $100,000, in each case per full
financial year. Shareholder representatives on the Supervisory
Board affiliated with Infineon have waived their right to
receive compensation for as long as Infineon remains a
significant shareholder of the Company. Our Articles of
Association provide that each member of the Supervisory Board
will receive, for each full financial year, 5,000 ADS
appreciation rights. These are automatically granted, and may
later be exercised, under the same terms and conditions that
apply under the stock option plan approved by the
shareholders meeting that will be in force in the year of
the grant of the ADS appreciation rights. See
Employee Stock Option Program. These
rights will provide the member the cash benefit of any
appreciation in our ADS price during the time the right is held
but will not entitle any member to receive ADSs or the
underlying shares. That is, upon exercise of such rights, we
will pay the member the amount of cash equal to the difference
between the grant price and the average ADS price over a several
day period before the exercise date. The appreciation rights for
the financial year 2006 were automatically granted on
November 24, 2006, the date on which the stock options were
granted under our stock option program. No compensation was paid
to the members of our Supervisory Board for the 2005 financial
year.
For our 2006 financial year, the individual members of the
Supervisory Board received the following cash remuneration:
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Fixed
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remuneration
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Peter J. Fischl
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$
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Richard Previte
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20,833
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Yoshio Nishi
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20,833
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Michael v. Eickstedt
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Dr. Lothar Armbrecht
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10,416
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Johann Grundbacher
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10,416
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Total
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$
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62,498
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S-145
We entered into employment service contracts with each of the
members of the Management Board. Pursuant to these contracts,
the members of the Management Board are entitled to receive an
annual base salary plus a regular annual bonus, the amount of
which will depend upon Qimondas return on invested
capital. We will pay a total of 2,250,000 in base salary
to the members of our Management Board each year under these
contracts. We may pay between 700,000 and 2,460,000
in total to the members of our Management Board under their
service contracts in the form of a yearly bonus dependent on
company performance as measured by return on assets (year-end
EBIT divided by the sum of equity and debt). The yearly bonus
for each member may be increased in 20,000 increments for
each percentage point return on assets exceeding 12% in any
given year. In addition, each member is eligible to receive a
discretionary bonus in the event the member achieves additional
performance targets established by the Supervisory Board. The
Management Board may also receive other compensation, including
continued remuneration in the event of sickness, allowances for
insurances, and non cash benefits for business trips, as well as
company cars. Under the service contracts, Management Board
members are also entitled to receive a fixed annual pension that
increases over time depending on the number of years served on
the Management Board. We will pay up to a maximum of
750,000 per year in pension to the members of our
Management Board. In principle, members of the Management Board
are entitled to such pension after the age of 65. Upon a
Management Board members death, benefits may be payable to
the deceaseds spouse or orphaned children. Each of the
service contracts expires when the Management Board
members term of office is terminated. In the absence of
arrangements to the contrary, the contract expires on the
members 65th birthday.
None of Infineon, us or our subsidiaries have extended any loans
to any member of our Supervisory or Management Boards.
If a person (alone or together with others) acquires 30% or more
of the voting rights in our company, which the service
agreements with our Management Board members define as a change
of control, and a member of the Management Board then resigns or
his service agreement is terminated, that member of the
Management Board is entitled to a severance payment calculated
based on the members fixed annual salary and in some
circumstances taking into account the otherwise remaining term
on the Management Board of that member. The pension rights and
rights with respect to granted stock options of any member of
the Management Board that resigns or whose service agreement is
terminated in the event of a change of control remain unaffected.
For our 2006 financial year, beginning on April 15, 2006,
the individual members of the Management Board were entitled to
following compensation:
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Additional
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Other
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Yearly bonus dependent
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performance
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Total
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Base salary
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compensation
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on company performance
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targets
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compensation
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Loh Kin Wah
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481,250
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8,845
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425,333
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500,000
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1,415,428
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Dr. Michael Majerus
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275,000
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5,714
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370,333
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300,000
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951,047
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Thomas Seifert
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275,000
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4,389
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370,333
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300,000
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949,722
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Total
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1,031,250
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18,948
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1,165,999
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1,100,000
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3,316,197
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Employee
Stock Option Program
Our shareholders have authorized the Supervisory Board to grant
to the members of the Management Board, and the Management Board
to grant to certain key executives in our group, through
September 30, 2009, a total of 6,000,000 non-transferable
option rights to receive ordinary shares issued by us.
The option rights may be allocated as follows: the first group,
consisting of the members of our Management Board, may receive a
total of up to 1,200,000 option rights. Our Supervisory Board
has allocated 400,000 options for grant in the 2007 fiscal year
of which 200,000 are for Mr. Loh, 100,000 are for
Mr. Majerus and 100,000 are for Mr. Seifert. These
options were granted on November 24, 2006. The second
group, consisting of the members of the executive boards of our
subsidiaries in Germany and abroad, may receive a total of up to
1,000,000 option rights. The third group, consisting of further
key executives who will be nominated based on their performance
to receive up to a specific number of options based on their job
classification, may receive a total of up to 3,800,000 option
rights. For the second group, 215,600 options and for the third
group 1,283,600 options were granted on November 24, 2006.
In total, about 4% of our work force participates in the plan.
During any fiscal year, not more than 40% of the total option
rights allocable to the respective group may be issued to the
members of such
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group. No option rights may be issued to executives of any of
our group companies that are listed on a stock exchange and
their subsidiaries, if and for as long as such companies
maintain their own stock option plans.
Option rights may be granted within 45 days upon the
publication of our results for the preceding fiscal year or
within 45 days of publication of our results for the first
or second quarter of a fiscal year, but, in each case, no later
than two weeks prior to the end of the respective quarter.
The option rights may be exercised within six years after their
grant, but not before the expiration of a vesting period that
will be at least three years. The exercise of each option right
is subject to the condition that the exchange price of our ADSs
on the New York Stock Exchange will, during the life of the
respective option right, exceed the index Philadelphia
Semiconductor Sector (SOX) on at least three consecutive
days. In order to determine whether such exceeding has taken
place, the SOX and the strike price of the respective option
right will be set at 100 at the day on which the option right is
granted.
For as long as our shares are not listed on any organized market
with the European Union or the European Economic Area, the
strike price will be the average of the opening prices of our
ADSs on the New York Stock Exchange on the five trading days
prior to the day of the grant (or a fraction thereof, if an ADS
does not represent exactly one of our ordinary shares).
Otherwise, the strike price will be the average of the opening
prices of our shares on the respective organized market on the
five trading days prior to the day of the grant.
The holders of option rights will benefit from certain
anti-dilution protection provisions, particularly in the case of
certain capital measures performed by us.
Upon exercise of an option right, the holder will generally
receive new ordinary shares to be issued by us. Our Management
Board (with approval by the Supervisory Board) will, however,
instead be allowed to deliver existing shares or pay a cash
compensation to be calculated on the basis of the difference
between the strike price and the exchange price of our ADSs or
shares on the exercise date.
The Management Board and, to the extent options to be granted to
the Management Board are concerned, the Supervisory Board are
entitled to determine further details of the option plan,
including, in particular, the inclusion of the new shares
granted upon exercise of the option rights into our ADS program.
S-147
ARRANGEMENTS
BETWEEN
QIMONDA AND THE INFINEON GROUP
We have provided in this section a summary description of the
contribution agreements between Infineon and us, as well as the
key agreements governing our interim and ongoing relationship
with Infineon, including, among others, the global services
agreement. This description summarizes the material terms of
these agreements. You should read the full text of these
agreements, which have been filed with the SEC and included in
the documents incorporated by reference. For more information,
please see Incorporation of Certain Information by
Reference in the accompanying prospectus.
Carve-out
and Control
We were carved out as a wholly-owned subsidiary of Infineon
effective May 1, 2006. Pursuant to the contribution
agreements Infineon and we entered into in connection with the
carve-out, Infineon contributed substantially all of the assets,
liabilities, operations and activities, as well as the
employees, of its Memory Products segment to us. This excluded
the Memory Products operations in Korea and Japan, which have
since been transferred to us. While Infineons investment
in the Advanced Mask Technology Center (AMTC) and in the
Maskhouse Building Administration Company (BAC) in Dresden have
been contributed to us, only the legal transfer of this
investment is not yet effective, because Infineons
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest. While pursuant to the
AMTC and BAC limited partnership agreements, such consent may
not be unreasonably withheld, we, Infineon and Infineons
co-venturers have included this consent in an agreement,
currently being finalized, that also addresses Infineons
intention to reduce its stake in us below 50%. The assets,
liabilities, operations and activities that have not yet been
contributed or legally transferred are described in greater
detail under Contribution
Agreements Arrangements relating to Inotera, Memory
Products Japanese and Korean Operations, AMTC and
BAC.
The contribution took legal effect as of its registration in the
commercial register (Handelsregister) at the local court
(Amtsgericht) of Munich. In the contribution agreement,
however, Infineon had granted us an unrestricted license to use
all resources of the transferred business beginning on
May 1, 2006. As of that date, Infineon transferred direct
or indirect possession to us of all of the assets that are the
subject of the contribution.
We agreed with Infineon that, if the legal transfer of specific
assets or other rights was not possible as of the effective date
of the contribution, we would position ourselves in relation to
each other as if the transfer of these assets or rights had
occurred as of that date. We also agreed with Infineon that, if
further legal steps are necessary to transfer the assets or
other rights, both parties will take the relevant steps without
delay. If third party consent is required for the transfer of
specific liabilities, or the assignment of specific contracts,
offers or permits, Infineon and we agreed to attempt to obtain
that consent without delay and position ourselves in relation to
each other as if the transfer of these liabilities, or the
assignment of these contracts, offers or permits had occurred as
of the effective date of the contribution.
We have entered into arrangements with Infineon with respect to
various interim and ongoing relationships between the two
groups. Some of these arrangements are covered in the
contribution agreement. Others are the subject of separate
agreements, the principal of which are described below.
Infineon is currently our largest shareholder, with a direct and
indirect shareholding of 85.9% in our company. Upon conclusion
of this offering, Infineon will remain our largest shareholder,
with a direct and indirect shareholding of 78.6% (or 77.5% if
the overallotment option is exercised in full). Infineon has
publicly announced that it aims to reduce its stake in Qimonda
to significantly below 50% by the time of Infineons Annual
Shareholder Meeting in 2009, at the latest. The temporary
majority ownership by Infineon permits us to use the entire
intellectual property umbrella as well as other benefits from
contracts between the Infineon group of companies and third
parties. Infineon has already begun to re-negotiate or establish
intellectual property cross-licensing and other contractual
relationships with third parties for our benefit. For as long as
Infineon, directly or indirectly, owns a majority of our shares,
it will also have the majority of votes in our
shareholders general meeting and will therefore be in a
position to elect all of the shareholder-elected members of our
Supervisory Board. The composition of the Supervisory Board is
set forth under Management Supervisory
Board.
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All of the agreements relating to our carve-out from Infineon,
including those governing our ongoing relationship with
Infineon, were and will be concluded in the context of a
parent-subsidiary relationship and in the overall context of our
carve-out from Infineon. The terms of these agreements may be
less favorable to us than had they been negotiated with
unaffiliated third parties. See Risk Factors
Risks related to our carve-out as a stand-alone company and our
continuing relationship with Infineon.
Contribution
Agreements
Contribution
Agreement between Infineon AG and Qimonda AG
The contribution agreement between Infineon AG and Qimonda AG
contains provisions that:
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define the assets, liabilities and employees that were
transferred to us;
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govern the intercompany licensing of intellectual
property; and
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delineate the indemnification claims that Infineon will have
against us in respect of legal matters and other liabilities and
contingencies.
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Pursuant to the contribution agreement, Infineon contributed
substantially all of the operations of its Memory Products
segment, including the assets that were used exclusively for
these operations, to Qimonda AG with economic effect as of
May 1, 2006. As consideration, we granted Infineon
132,288,975 of our no-par value ordinary registered shares
(Namensaktien). In order to issue the shares to be
granted to Infineon, we increased our capital from 50,000
to 264,627,950 on April 25, 2006.
Contributed
assets and liabilities
The individual assets and liabilities contributed to us under
the contribution agreement include:
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fixed assets and current assets attributable to the Memory
Products segment (not including trade accounts receivable for
products and services provided to third parties and certain
related parties, which are netted against trade accounts
payable);
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intellectual property, including patents (as described in more
detail in Our Business Intellectual
Property), trade marks, know-how, software and other
intellectual property;
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contracts and offers relating exclusively to products and
services provided by the Memory Products segment;
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rights and obligations arising under permits and other legal
relationships with governmental entities (including those
arising under subsidies), so long as they do not relate to
individual persons;
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liabilities attributable exclusively to the Memory Products
segment, including those contained in the carve-out balance
sheet, those arising under contracts with third parties and
employment relationships (including pension liabilities),
contingencies (including those arising in the future on the
basis of events that occurred prior to the carve-out date) and
other liabilities attributable exclusively to the Memory
Products segment and which have arisen by the carve-out date
(not including trade accounts payable see above);
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risks and liabilities arising out of financings, credit lines,
leases and guarantees, which Infineon entered into for the
benefit of the Memory Products segment; and
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ownership in certain equity investments, including in Inotera
Memories, Inc., Infineon Technologies SC 300 GmbH &
Co. OHG, Maskhouse Building Administration GmbH & Co.
KG, Advanced Mask Technology Center GmbH & Co. KG
(legal transfer is still pending) and Hwa-Keng Investment Inc.
(meanwhile liquidated. Pursuant to the contribution agreement
Infineon has transferred to us the assets it received upon the
liquidation.)
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Infineon did not contribute any real estate to us in the
carve-out other than the property held in legal entities that it
transferred to us.
S-149
Arrangements
relating to Inotera, Memory Products Japanese and Korean
Operations, AMTC and BAC
Infineons Memory Products assets in Japan and Korea were
not contributed to us at the time of the initial contribution. A
contribution of our Japanese assets had, for practical reasons,
to be preceded by the rollout of new software. The contribution
of the Korean assets and employees, which represent an
insignificant portion of Qimondas total assets and
employees, was also postponed for practical reasons. We entered
into an agreement with Infineon on June 27, 2006, pursuant
to which Infineon agreed to hold these Japanese and Korean
assets in trust pending the contribution. The Korean assets were
transferred to us in October 2006. Infineon transferred the
operations in Japan into a wholly-owned subsidiary of Infineon.
The legal transfer of that subsidiary to us took place in July
2007.
The agreement governing our joint venture with Nanya, named
Inotera Memories, Inc. (Inotera), allows Infineon to transfer
its shares of Inotera to us. However, under Taiwanese law,
Infineons shares in Inotera are subject to a compulsory
restriction on transfer
(lock-up) as
a result of Inoteras IPO in March 2006. For that reason we
had established a separate trust agreement pursuant to which
Infineon held title to the Inotera shares in trust for us and
exercised shareholder rights (including board appointments and
voting) at our instructions until they could be transferred. See
Our Business Strategic Alliances and
Agreements for a description of these arrangements.
Taiwanese law generally provides that Infineon may only transfer
these shares to us gradually over the four years following
Inoteras IPO. In October 2006, the Taiwanese authorities
granted an exemption to Infineon permitting it to release the
shares from the restriction. We completed the share transfer
from Infineon to us in the first quarter of the 2007 calendar
year other than a portion representing 0.24% of the total
Inotera shares which Infineon holds in trust for us due to
Taiwanese legal restrictions.
In addition, our limited partnership agreement with Advanced
Micro Devices (AMD) and Toppan Photomask relating to the
Advanced Mask Technology Center (AMTC) and to the Maskhouse
Building Administration Company (BAC) in Dresden requires prior
written consent from the other partners before Infineon can
assign its partnership interest to us. This consent may not be
unreasonably withheld. Under the current agreement, the interest
must be transferred back to Infineon should Infineon cease to be
our majority shareholder. Infineon and we are currently
finalizing negotiations with AMD and Toppan concerning an
agreement that would include the consent to the assignment to us
and address Infineons intention to reduce its stake in us
below 50%. Under this agreement, a change of control
that could lead to termination of the agreements with AMD and
Toppan would only be deemed to occur if a direct competitor of
AMD or Toppan becomes the beneficial owner of 30% or more of our
equity interests or obtains the power to appoint the majority of
the members of our Supervisory Board. Infineons investment
in the AMTC and BAC is being held by Infineon for our economic
benefit pursuant to the contribution agreement.
A number of additional contracts with respect to which the
economic benefits and obligations had been assigned to Memory
Products in the carve-out require third party consent before the
benefits and obligations can be assigned. As disclosed above, to
the extent these consents are not received, Infineon and we
agreed to position ourselves in relation to each other as if
assignment of these contracts had occurred as of May 1,
2006.
Employment
Matters
The employment relationships that Infineon had with its Memory
Products employees, including all rights and obligations
relating to these relationships, were automatically transferred
to us to the extent employees did not object to that transfer.
Arrangement
concerning the Licensing of Intellectual Property
In connection with the transfer of intellectual property to us,
Infineon and we have entered into certain cross-licensing
arrangements, which are described in Our
Business Intellectual Property.
Indemnification
The contribution agreement includes provisions pursuant to which
we agreed to indemnify Infineon against any claim (including any
related expenses) arising in connection with the liabilities,
contracts, offers, incompleted
S-150
transactions, continuing obligations, risks, encumbrances and
other matters relating to the Memory Products segment that were
transferred to us in the carve-out. We also agreed to indemnify
Infineon against any losses it may suffer under several
guarantee and financing arrangements that relate to our business
but that cannot be transferred to us for legal, technical or
practical reasons. In addition, the contribution agreement
provides for indemnification of Infineon with respect to certain
existing and future legal claims (as described in Our
Business Legal Matters) and if a ramp-down of
production in the Dresden 200mm fab is needed, 50% of any
restructuring costs that may be incurred (as described in
Dresden 200mm Fab). With the exception
of the securities and certain patent infringement and antitrust
claims identified in Our Business Legal
Matters, for which different arrangements apply as
described in that section, we are obligated to indemnify
Infineon against any liability arising in connection with the
claims described in that section. Finally, the contribution
agreement in principle provides for us to bear 60% of the total
license fee payments payable by Infineon and us to which
Infineon and we may agree in connection with two cases in which
negotiations relating to licensing and cross-licensing were
ongoing at the time of the carve-out, one of which is still
ongoing. These payments could be substantial and could remain in
effect for lengthy periods. The contribution agreement does not
limit the aggregate liability we may incur as a result of our
indemnification obligations, nor does it restrict the
obligations to a certain time period after the carve-out as long
as the events giving rise to them occurred prior to the
carve-out.
Costs and
taxes; future tax liabilities
Infineon agreed to bear the costs and taxes in conjunction with
entering into the contribution agreement, while expenses
incurred on or after May 1, 2006 are divided between
Infineon and us. Infineon has agreed to bear all tax liabilities
arising in the future that relate to Memory Products businesses
that were previously part of legal entities that remain with
Infineon for periods prior to the carve-out.
Contribution
Agreement between Infineon Technologies Holding B.V. and Qimonda
AG
Prior to our carve-out, Infineon Technologies Holding B.V. held
the entire share capital of Qimonda Holding B.V., an entity
recently established to hold Infineons equity in foreign
companies that form part of the Memory Products business.
Pursuant to a separate contribution agreement we entered into
with Infineon Technologies Holding B.V., all shares in Qimonda
Holding B.V. were contributed to us as of May 1, 2006. In
return for this contribution, we granted Infineon Technologies
Holding B.V. 167,686,025 of our no-par value ordinary registered
shares. To issue these shares, we had previously increased our
share capital from 264,627,950 to 600,000,000.
Shares that were not either granted to Infineon or Infineon
Technologies Holding B.V. in connection with the carve-out are
reflected in our capital reserves. The contribution by Infineon
Technologies Holding B.V. took legal effect as of its
registration in the commercial register (Handelsregister)
at the local court (Amtsgericht) of Munich.
On July 17, 2006, Infineon Technologies Holding B.V.
transferred its Qimonda shares, representing approximately 55.9%
of our total share capital at that time to its wholly-owned
subsidiary Infineon Technologies Investment B.V., a private
limited liability company under Dutch law. In return, Infineon
Technologies Investment B.V. issued 50 of its shares with a
nominal value of 1,000 each to Infineon Technologies
Holding B.V.
Dresden
200mm Fab
The current production capacity for memory products of
Infineons Dresden 200mm fab is approximately 7,500 wafer
starts per week. We entered into an agreement with Infineon for
the production of wafers in the Dresden 200mm fab. Pursuant to
the agreement, as amended in January 2007, Infineon has agreed
to manufacture specified semiconductor memory products at the
Dresden 200mm fab, using our manufacturing technologies and
masks, and to sell them to us at prices specified in the
agreement. These prices are based on the cost of manufacture. We
are required under this agreement to pay for idle costs
resulting from our purchasing fewer wafers from Infineon than
agreed upon, if Infineon cannot otherwise utilize the capacity.
We are also obliged to indemnify Infineon against any third
party claims based on or related to any products manufactured
for us under this agreement and against any intellectual
property infringement claims related to the products covered by
the agreement. In addition, we agreed to share equally with
Infineon any potential restructuring costs that might be
incurred in connection with the ramp-down of production of the
Dresden 200mm fab if neither company can use the capacity.
Restructuring costs may
S-151
include severance payments and costs relating to lower levels of
production in that module. The agreement terminates on
September 30, 2009.
Ongoing
Services Relationships
Prior to our carve-out, most of the administrative, financial,
risk management, information technology and other services that
we required were provided centrally by Infineon. The Infineon
Group will continue to provide some of these services under
services agreements described below. The terms of these
agreements may be less favorable to us than they might have been
had they been negotiated with unaffiliated third parties.
General
Support Services
Framework
Agreement on Standard Support Services
In connection with our carve-out, we entered into a Global
Service Agreement (the GSA) with Infineon, which
took effect as of our carve-out date and which serves as the
framework under which we have entered into individual standard
service agreements, the most important of which are listed
below. Under these agreements, the Infineon Group and we provide
standard support services to one another. Certain services in
the areas of manufacturing, product supply and distribution,
licensing, research and development, accounting and information
technology support, as well as comprehensive services provided
to us by the Infineon Group in specified countries, including
Japan, have been covered under separate agreements.
Under the GSA, the service recipient agrees to pay the service
provider 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, 2006 and thereafter as mutually agreed from
year to year. The fee for the 2007 financial year is also based
on actual or estimated total costs incurred plus a margin of 3%.
Unless otherwise agreed in individual service level agreements,
the service provider may choose to provide the services itself
or through an affiliated or unaffiliated subcontractor. If the
service provider chooses to subcontract to a non-affiliate
services it had previously provided itself, the service
recipient must agree to the subcontractor and the terms of the
subcontract. If this agreement cannot be reached, the service
level agreement may be terminated with 90 days prior
notice. Under the GSA, each service provider must perform
services using the level of care that it customarily applies in
its own matters of a similar nature. Damages under this
agreement are payable only if caused by grossly negligent or
malicious behavior and, in the case of grossly negligent
behavior, are subject to an annual cap represented by the total
payments received by the service provider under the relevant
standard service agreement in the relevant calendar year. The
GSA allows either party to an individual standard service
agreement to terminate that agreement upon 90 days written
notice, unless otherwise agreed in the individual agreement or
in a subcontract between the service provider and a
subcontractor, or upon 30 days written notice in case of
default of the other party. The GSA will terminate once all
standard service agreements concluded under the GSA have expired
or been terminated. Most of the standard service agreements are
terminating on September 30, 2007. However, several of the
agreements including in the accounting, infrastructure, facility
management and research and development will continue beyond
that date.
General
Support Services
The general support services that Infineon has agreed to provide
under the umbrella of the GSA, and with respect to which
Infineon and we have entered into individual standard service
agreements included:
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sales support in various countries, most significantly France,
Hong Kong, Ireland, Japan, Korea, Switzerland, United Kingdom
and the United States;
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logistics services, including call center services in Europe,
logistics support services in the Asia-Pacific region and
freight forwarding services in the United States;
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purchasing services at locations
and/or with
respect to areas of expertise where we do not have sufficient
purchasing resources;
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human resources services, including recruiting, compensation and
benefits, payroll, site health care and training;
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S-152
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facility management, including office and manufacturing space
leasing, security, storage and transportation management;
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patent support, including patent administration, external
support and reverse engineering;
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finance, accounting, including risk management and back-office
support, for as long as we have not reached full staffing levels
in this area
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legal services;
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strategy services, including support relating to market
research; and
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certain other services in which our staff still needs to develop
expertise.
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In addition we agreed to provide Infineon with purchasing
services in locations where Infineon does not have sufficient
purchasing power, as well as with finance and treasury, tax,
human resources and communications services under the GSA.
Other
Services
Framework
Agreements on Information Technology Services
We entered into two master information technology agreements
with Infineon effective May 1, 2006.
Under the master information technology cost sharing agreement,
Infineon and we agreed 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 agreed 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 partys consumption. The
parties respective shares of the variable costs are
subject to adjustment on an annual basis in accordance with the
agreement. Any material or related intellectual property rights
created by the parties in the course of the performance of the
agreement will be jointly owned by each party, unless otherwise
agreed to by the parties. Either party may terminate any
individual shared service upon 90 days written notice,
unless otherwise agreed in a subcontract between the service
provider and a subcontractor. Any ramp down costs will be shared
by the parties. The agreement will terminate once all shared
services provided under the agreement have expired or been
terminated; neither party can terminate a shared service for
convenience prior to September 30, 2007 without mutual
agreement. The parties have started negotiations with the goal
to terminate and ramp down all individual shared services by
March 31, 2008.
Under the master information technology service agreement,
Infineon and we agreed to provide information technology
services to one another. The scope of the services (generally
including the designing, building, module testing, documenting,
deployment and rollout of IT projects), fees payable for the
services and other service-specific provisions will be contained
in individual statements of work entered into
between the Infineon and Qimonda entities providing and
receiving the respective services. In general, 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, 2006 and thereafter as mutually
agreed from year to year. The fee for the 2007 financial year is
also based on actual or estimated total costs incurred plus a
margin of 3%. The agreement grants either party termination
rights upon 90 days written notice, unless otherwise agreed
in the individual statements of work or in a subcontract between
the service provider and a subcontractor, or upon 30 days
written notice in case of default of the other party. Costs
associated with an early termination by the service recipient
will be borne by the service recipient. The master information
technology service agreement will terminate once all statements
of work concluded under the agreement have expired or been
terminated. We generally expect the statements of work to
terminate by the end of the first half of our 2008 financial
year.
Both agreements specify that, unless otherwise agreed in
individual statements of work, the service provider may choose
to provide the services itself or through an affiliated or
unaffiliated subcontractor. If the service provider chooses to
subcontract to a non-affiliate services it had previously
provided itself, the service recipient must agree to the
subcontractor and the terms of the subcontract. If this
agreement cannot be reached, the relevant services may be
terminated with 90 days prior notice. If a party chooses to
terminate any individual shared service or statement of
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work under either agreement, it is obligated to enter into a
termination assistance agreement with the other party, the
purpose of which is to secure the operational stability of the
service during the wind down phase. Under both master
agreements, each service provider must perform services using
the level of care that it customarily applies in its own matters
of a similar nature. Damages under both agreements are excluded
to the extent legally permissible.
Framework
Agreement on Research and Development Services
In 2006, we negotiated a Global Research and Development
Services Agreement with Infineon, which provides a framework
surrounding the provision of research and development services
between Infineon on one hand and Qimonda AG and its subsidiaries
on the other hand. The service recipient agrees to pay the
service provider a fee based on actual or estimated total costs
incurred (where total costs include depreciation on equipment
and tools as well as the cost of materials) plus a margin of 3%
for the period from May 1, 2006 to September 30, 2006
and thereafter as mutually agreed from year to year. The fee for
the 2007 financial year is also based on actual or estimated
total costs incurred plus a margin of 3%. The agreement grants
either party termination rights upon 90 days notice, unless
otherwise agreed in a subcontract between the service provider
and a subcontractor.
Under the Global Research and Development Services Agreement,
the deliverables to be developed by the service provider are
owned by the recipient of the deliverables, except background
intellectual property rights of the provider. The recipient
grants the provider a non-exclusive, perpetual license to use
the deliverables and the related intellectual property rights in
its respective field of business. Expenses incurred in research
and development in connection with employee inventions are to be
paid by the recipient of the invention.
Special
Services
In addition to the general services scheduled to be provided
under the GSA, the information technology services agreements
and the research and development services agreement and the
services provided under the agreement for the production of
wafers in the Dresden 200mm fab, Infineon intends to provide to
us special services, including manufacturing services for the
supply of advanced module buffers for use in our modules.
Any other services not covered under the above agreements will
be provided as mutually agreed on a
case-by-case
basis.
S-154
RELATED
PARTY TRANSACTIONS
We have previously entered into various short-term borrowing
arrangements with Infineon. The largest amount outstanding under
these arrangements during the two financial years ended
September 30, 2004 and 2005 was 524 million, as
determined on a pro-forma basis for these periods only. As of
September 30, 2006, our indebtedness to Infineon amounted
to $435 million (344 million) bearing interest
at a weighted average rate of 6.23%. We repaid the outstanding
amount of this loan in April 2007 from available funds.
We sometimes extend travel and moving expenses and other types
of advances to our employees. As a matter of policy, such
advances are not provided to the members of our Supervisory
Board and Management Board. See Notes 14 and 27 to the
combined and consolidated financial statements included
elsewhere in this prospectus supplement.
A member of our Supervisory Board, Mr. Fischl, is a member
of Infineons Management Board and serves as
Infineons chief financial officer. See
Management Supervisory Board
Supervisory Board Members. Two members of our Management
Board, Dr. Majerus and Mr. Seifert, are members of the
Board of Directors of Inotera Memories, Inc. our joint venture
with Nanya. See Our Business Strategic
Alliances and Agreements for a discussion of our
relationship with Nanya, Inotera and CSVC.
S-155
The following table shows the beneficial ownership of our
companys share capital by (1) the principal
shareholders (each person or entity who owns beneficially 5% or
more of our shares), (2) the public and (3) the
members of our Management Board and Supervisory Board, each as a
group, on September 19, 2007. It also shows how many shares
and ADSs they will own after the offering is completed. This
table assumes no exercise of the underwriters
overallotment option. We are not directly or indirectly owned or
controlled by any foreign government.
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Shares and ADSs owned
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prior to the offering
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Shares and ADSs owned after the offering
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Percent
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Number
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Percent
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Number
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Infineon Technologies Investment
B.V.(1)
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49.0
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167,686,026
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49.0
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167,686,026
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Infineon Technologies AG
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36.9
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126,013,975
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29.6
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101,013,975
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Public Shareholders
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14.1
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48,300,000
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21.4
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73,300,000
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All the members of our Supervisory
and Management Boards as a group (nine persons)
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0
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0
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0
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0
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100.0
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%
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342,000,001
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100.0
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%
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342,000,001
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(1)
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On July 17, 2006, Infineon Technologies Holding B.V., a
wholly-owned subsidiary of Infineon Technologies AG, which we
refer to as Infineon Investment, transferred its Qimonda shares,
representing approximately 55.9% of our total share capital at
that time, to its wholly-owned subsidiary Infineon Technologies
Investment B.V., a private limited liability company under Dutch
law. On July 18, 2007, in connection with the transfer of
ownership of Qimonda Japan K.K. from Infineon, a capital
increase of Qimonda AG comprising a single share was registered
with the Commercial Register. The current registered share
capital of Qimonda AG amounts to 684,000,002. Infineon
Technologies Investment B.V. is offering notes which the
investors may exchange for an aggregate of up to 20,515,267 ADSs
(representing approximately 6% of our current share capital)
currently held by Infineon Technologies Investment B.V. These
ADSs are included in this table both before and after the
offering.
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The major shareholders appearing in the table above do not have
different voting rights from any of our other shareholders.
Under German law, for so long as Infineon holds more than 25% of
the shares in our company, it will be in a position to block
shareholder action on a variety of matters, such as:
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a resolution not to give effect to existing shareholders
preemptive rights in a capital increase;
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any capital decrease, merger, consolidation, spin-off, sale or
other transfer of all or substantially all of our assets;
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a change in the corporate form or business purpose of the
company; or
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the dissolution of our company.
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This section summarizes the material rights of holders of the
shares of our company under German law and the material
provisions of our Articles of Association. This description is
only a summary and does not describe everything that the
Articles of Association contain. Copies of the Articles of
Association will be publicly available from the Commercial
Register in Munich, and an English translation is included as an
exhibit to this registration statement.
Share
Capital
The issued share capital of our company consists of
684,000,002 divided into 342,000,001 individual registered
shares. The individual shares do not have a par value but they
do have a notional value that can be determined by dividing the
share capital amount by the number of shares.
On July 27, 2006, our shareholders resolved to increase our
share capital by 84 million against cash
contributions through the issuance of 42 million no-par
value ordinary registered shares. The capital increase became
effective on August 8, 2006. Shareholders preemptive
rights were excluded.
On May 27, 2007, our management board resolved to increase
our share capital by 2.00 against the contribution of
Qimonda Japan K.K. from 684,000,000 to 684,000,002
through the issuance of one no-par value ordinary registered
share from our authorized capital. The capital increase was
approved by a committee of our supervisory board and became
effective on July 18, 2007. Shareholders preemptive
rights were excluded. Qimonda Japan K.K. comprises our
operations in Japan (Sales and Marketing). These were not
contributed to us at the time of the initial contribution of
Infineons Memory Products assets but initially held in
trust for Qimondas benefit; the share capital increase
described above was carried out in order to effect the
contribution of these assets. See Arrangements between
Qimonda and the Infineon Group Carve-out and
Control Contribution Agreements.
Registrar Services GmbH, the transfer agent and registrar of our
company in Germany, will register record holders of shares in
the share register on our behalf pursuant to a transfer agency
agreement. The transfer agent will also maintain the register of
our shareholders.
Authorized
Capital
Under the German Stock Corporation Act, a stock
corporations shareholders can authorize the Management
Board to issue shares in a specified aggregate nominal amount of
up to 50% of the issued share capital at the time the resolution
becomes effective. The shareholders authorization may
extend for a period of no more than five years after
registration of the capital increase in the commercial register
(Handelsregister).
On July 14, 2006, our shareholders resolved to amend our
Articles of Association to authorize the Management Board to
increase the share capital with the Supervisory Boards
consent. The Management Board may use this authorization until
July 13, 2011 to increase the share capital by up to
30 million through the issuance, in one or more
tranches, of new ordinary registered shares with no par value
against cash contributions for the purpose of issuing shares to
our and our subsidiaries employees. Shareholders
preemptive rights are excluded. This increase in our authorized
capital became effective with its registration in the commercial
register on July 24, 2006.
In addition on July 27, 2006, our shareholders resolved to
amend the Articles of Association of our company to authorize
the Management Board to increase the share capital with the
Supervisory Boards consent against contributions in cash
or in kind. The Management Board may use these authorizations
until July 26, 2011 to issue new shares in one or more
tranches for any legal purpose:
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in an aggregate amount of up to 239.4 million, in
which case existing shareholders have pre-emptive rights, which
may be excluded in the following circumstances:
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(i)
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to the extent that new shares must be granted to holders of
subscription warrants or convertible bonds that we have issued,
in accordance with the terms of issuance of such warrants or
convertible bonds;
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(ii)
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if (1) the new shares represent 10% or less of the existing
share capital when the authorized capital or issuance of the new
shares is registered and (2) the issue price of the new
shares is not considerably less than the stock exchange price of
the shares in our company; or
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(iii)
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to the extent necessary to avoid balancing out fractional
residual amounts;
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In the case of a capital increase against contributions in kind,
the Management Board may exclude the shareholders
preemptive rights with the consent of the Supervisory Board.
This increase in our authorized capital became effective with
its registration in the commercial register on August 8,
2006.
In connection with the share capital increase by 2.00
described above, our authorized share capital was decreased from
239,400,000 to 239,399,998.
Conditional
Capital
Under the German Stock Corporation Act, a stock
corporations shareholders can authorize conditional
capital of up to 50% of the issued share capital at the time of
the resolution. During our extraordinary shareholders
meeting on July 14, 2006, our shareholders passed the
following resolutions with regard to conditional capital:
First, our share capital is conditionally increased by up to
12 million through the issuance of up to
6 million ordinary registered shares with no par value in
connection with the employee stock option and share purchase
plans described above under Management
Employee Stock Option Program and Employee Share
Purchase Programs.
Second, our share capital is conditionally increased by up to
240.1 million through the issuance of up to
120.05 million ordinary registered shares with no par
value. This conditional capital may only be used in connection
with an issuance of a convertible bond, which our shareholders
authorized by resolution of July 14, 2006.
These resolutions on conditional capital were registered in the
commercial register on July 24, 2006.
Preemptive
Rights
Under the German Stock Corporation Act, an existing shareholder
in a stock corporation has a preferential right to subscribe for
new shares to be issued by that corporation in proportion to the
number of shares he holds in the corporations existing
share capital. These rights do not apply to shares issued out of
conditional capital. Preemptive rights also apply to securities
that may be converted into shares, securities with warrants,
profit-sharing certificates and securities with dividend rights.
The German Stock Corporation Act only allows the exclusion of
this preferential right in limited circumstances. At least three
quarters of the share capital represented at the relevant
shareholders meeting must vote for exclusion. In addition
to approval by the shareholders, the exclusion of preemptive
rights requires a justification. The justification must be based
on the principle that the interest of the company in excluding
preemptive rights outweighs the shareholders interest in
their preemptive rights.
Shareholders
Meetings and Voting Rights
A general meeting of the shareholders of our company may be
called by the Management Board or, under certain circumstances,
by the Supervisory Board. Shareholders holding in the aggregate
at least 5% of our issued share capital may also require the
Management Board to call a meeting. The annual general meeting
must take place within the first eight months of the financial
year. The Management Board calls this meeting upon the receipt
of the Supervisory Boards report on the annual financial
statements.
Under German law and the Articles of Association of our company,
our company must publish invitations to shareholders
meetings in the electronic version of the German Federal Gazette
(elektronischer Bundesanzeiger) at least thirty days
before the last day on which the shareholders must notify our
company that they intend to attend the meeting (not counting the
date of publication and the last day of notification).
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A shareholder or group of shareholders holding a minimum of
either 5% of the share capital of our company or shares
representing at least 500,000 of its registered capital
may require that additional items be put on the agenda of our
shareholders general meeting.
Shareholders who are registered in the share register may
participate in and vote at the shareholders general
meeting. A notice by a shareholder of his intention to attend a
shareholders general meeting must be given to our company
at least six days (or a shorter period, if so determined by
management) before the meeting, not counting the day of notice
and the day of the meeting. In certain cases, a shareholder can
be prevented from exercising his voting rights. This would be
the case, for instance, for resolutions on the waiver or
assertion of a claim by our company against the shareholder.
Each share carries one vote at general meetings of the
shareholders. Resolutions are generally passed with a simple
majority of the votes cast. Resolutions that require a capital
majority are passed with a simple majority of the issued
capital, unless statutory law or the Articles of Association of
our company require otherwise. Under the German Stock
Corporation Act, a number of significant resolutions must be
passed by a majority of at least 75% of the share capital
represented in connection with the vote taken on that
resolution. The majority required for some of these resolutions
may be lowered by the Articles of Association. The shareholders
of our company have lowered the majority requirements to the
extent permitted by law.
Although our company must notify shareholders of an ordinary or
extraordinary shareholders meeting as described above,
neither the German Stock Corporation Act nor the Articles of
Association of our company has a minimum quorum requirement.
This means that holders of a minority of our shares could
control the outcome of resolutions not requiring a specified
majority of the outstanding share capital of our company.
According to the Articles of Association of our company,
resolutions to amend the Articles of Association must be passed
by at least a majority of the nominal capital represented at the
meeting of shareholders at which the resolution is considered.
However, resolutions to amend the business purpose stated in the
Articles of Association of our company also require a majority
of at least three-quarters of the share capital represented at
the meeting. The 75% majority requirement also applies to the
following matters:
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the exclusion of preemptive rights in a capital increase;
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capital decreases;
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the creation of authorized capital or conditional capital;
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dissolution;
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a merger (Verschmelzung) with another company or another
corporate transformation;
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a transfer of all or virtually all of the assets of our
company; and
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the conclusion of any direct control, profit and loss pooling or
similar intercompany agreements.
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Dividend
Rights
Shareholders participate in profit distributions in proportion
to the number of shares they hold.
Under German law, our company may declare and pay dividends only
from balance sheet profits as they are shown in our
companys unconsolidated annual financial statements
prepared in accordance with applicable German law. In
determining the distributable balance sheet profits, the
Management Board and the Supervisory Board may allocate to
profit reserves up to one half of the annual surplus remaining
after allocations to statutory reserves and losses carried
forward. Under certain circumstances all or part of the
remaining half of the annual surplus may also be allocated to
the statutory reserves.
The shareholders, in determining the distribution of profits,
may allocate additional amounts to profit reserves and may carry
forward profits in part or in full.
Dividends approved at a shareholders general meeting are
payable on the first stock exchange trading day after that
meeting, unless otherwise decided at the shareholders
general meeting. If you hold shares that are entitled
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to dividends through a clearing system, the dividends will be
paid according to that clearing systems rules. We will
publish notice of dividends paid and the paying agent or agents
that we have appointed in the German Federal Gazette.
Liquidation
Rights
In accordance with the German Stock Corporation Act, if we are
liquidated, any liquidation proceeds remaining after all of our
liabilities have been paid off would be distributed among our
shareholders in proportion to their holdings.
Repurchase
of Our Own Shares
We may not acquire our own shares unless authorized by the
shareholders general meeting or in other very limited
circumstances set out in the German Stock Corporation Act.
Shareholders may not grant a share repurchase authorization
lasting for more than 18 months. The rules in the German
Stock Corporation Act generally limit repurchases to 10% of our
share capital and resales must be made either on a stock
exchange, in a manner that treats all shareholders equally or in
accordance with the rules that apply to preemptive rights
relating to a capital increase. On July 27, 2006, our
shareholders granted us such an authorization.
Corporate
Purpose of Our Company
The corporate purpose of our company, described in
section 2 of the Articles of Association, is direct or
indirect activity in the field of research, development,
manufacture and marketing of electronic components, electronic
systems and software, as well as the performance of related
services.
Registration
of the Company with Commercial Register
Our company was entered into the commercial register of Munich,
Germany, as a stock corporation on May 25, 2004 under the
number HRB 152545.
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SHARES
ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of our ADSs in the public market
could adversely affect prevailing market prices of our ADSs.
Furthermore, since no shares or ADSs will be available for sale
from our principal shareholders shortly after this offering
because of the contractual and legal restrictions on resale
described below, other than shares Infineon Investment may
deliver under exchangeable notes it has issued, sales of
substantial numbers of ADSs in the public market after these
restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Our company has outstanding an aggregate of
342,000,001 shares. All of the shares sold in this offering
in the form of ADSs will be freely tradable without restriction
or further registration under the U.S. Securities Act of
1933 except for shares or ADSs that are purchased by
affiliates as that term is defined in Rule 144
under the Securities Act.
Lock-up
Agreements
We, and our shareholders, Infineon and Infineon Investment, have
agreed that, subject to several exceptions, for a period of
60 days from the date of this prospectus supplement, we and
they will not, without the prior written consent of each of
Citigroup Global Markets Inc., Credit Suisse Securities (USA)
LLC and J.P. Morgan Securities, Inc., dispose of or hedge
any of our shares or ADSs or securities which are convertible or
exchangeable into these securities. Citigroup Global Markets
Inc., Credit Suisse Securities (USA) LLC and J.P. Morgan
Securities, Inc. in their sole discretion may release any of the
securities subject to these
lock-up
agreements at any time without notice. The release of any
lock-up is
considered on a
case-by-case
basis. Factors in deciding whether to release shares or ADSs may
include the length of time before the
lock-up
expires, the number of shares or ADSs involved, the reason for
the requested release, market conditions, the trading price of
our ADSs and historical trading volumes of our ADSs.
Rule 144
In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year is entitled to
sell within any three-month period a number of shares (or ADSs,
evidencing shares) that does not exceed the greater of:
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1% of the number of our shares then outstanding, or
approximately 3,420,000 shares; or
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the average weekly trading volume of our ADSs on the New York
Stock Exchange during the four calendar weeks preceding the
filing with the SEC of a notice on Form 144 with respect to
such sale.
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Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about our company.
Rule 144(k)
Under Rule 144(k) under the Securities Act, a person who is
not deemed to have been one of our affiliates at any
time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner other
than an affiliate, may sell shares or ADSs
representing shares without regard to the manner of sale, public
information, volume limitations or notice provisions of
Rule 144.
Regulation S
Regulation S under the Securities Act provides that shares
owned by any person may be sold without registration in the
United States, provided that the sale is effected in an offshore
transaction and no directed selling efforts are made in the
United States (as these terms are defined in Regulation S),
subject to certain other conditions. In general, this means that
our shares, including shares held by Infineon, may be sold in
some other manner outside the United States without requiring
registration in the United States.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchases shares from us in connection with a
compensatory stock plan or other written agreement is eligible
to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without
compliance with certain restrictions, including the holding
period, contained in Rule 144.
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EXCHANGE
CONTROLS AND LIMITATIONS AFFECTING SHAREHOLDERS
There are currently no legal restrictions in Germany on
international capital movements and foreign exchange
transactions, except in limited embargo circumstances relating
to certain areas, entities or persons as a result of applicable
resolutions adopted by the United Nations and the European
Union. Restrictions currently exist with respect to, among
others, Burma, Cote d Ivoire, Republic of Congo, North
Korea, Iran, Iraq, Lebanon/Syria, Zimbabwe, Somalia and Sudan.
For statistical purposes, with some exceptions, every
corporation or individual residing in Germany must report to the
German Central Bank any payment received from or made to a
non-resident corporation or individual if the payment exceeds
12,500 (or the equivalent in a foreign currency).
Additionally, corporations and individuals residing in Germany
must report to the German Central Bank any claims of a resident
corporation or individual against, or liabilities payable to, a
non-resident corporation or individual exceeding an aggregate of
1.5 million (or the equivalent in a foreign currency)
at the end of any calendar month.
German residents are also required to report annually to the
German Central Bank any shares or voting rights of 10% or more
they hold in non-resident corporations with total assets of more
than 3 million. Corporations residing in Germany with
assets in excess of 3 million must report annually to
the German Central Bank any shares or voting rights of 10% held
by a non-resident.
Neither German law nor our Articles of Association restricts the
right of non-resident or foreign owners of shares to hold or
vote the shares.
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German
Taxation
The following is a summary discussion of the material German tax
consequences for holders of ADSs who are not resident in Germany
for income tax purposes and who do not hold ADSs as business
assets of a permanent establishment or fixed base in Germany
(Non-German Shareholders). The discussion does not
purport to be a comprehensive description of all the tax
considerations that may be relevant to a decision to invest in
or hold our ADSs. The discussion is based on the tax laws of
Germany as in effect on the date of this prospectus, which may
be subject to change at short notice and, within certain limits,
possibly also with retroactive effect. You are advised to
consult your tax advisors in relation to the tax consequences of
the acquisition, holding and disposition or transfer of ADSs and
in relation to the procedure which needs to be observed in the
event of a possible reduction or refund of German withholding
taxes. Only these advisors are in a position to duly consider
your specific tax situation.
Taxation
of the Company
On August 17, 2007, the Business Tax Reform Act of 2008 was
enacted in Germany, introducing several changes to the taxation
of German business activities, including a reduction of the
combined corporate and trade tax rate from approximately 39% to
30%. Most of the changes come into effect for our 2008 financial
year. Statements below regarding periods after 2007 take into
account the anticipated changes to be made by the Business Tax
Reform Act.
In principle, German corporations are subject to corporate
income tax at a rate of 25% (after 2007: 15%). This tax rate
applies irrespective of whether profits are distributed or
retained. Solidarity surcharge of 5.5% is levied on the assessed
corporate income tax liability, so that the combined effective
tax burden of corporate income tax and solidarity surcharge is
26.375% (after 2007: 15.825%). Certain foreign source income is
exempt from corporate income tax. Generally, any dividends
received by us and capital gains realized by us on the sale of
shares in other corporations will also be exempt from corporate
income tax. However, 5% of such dividends and capital gains are
considered nondeductible business expenses.
In addition, German corporations are subject to a profit-based
trade tax, the exact amount of which depends on the municipality
in which the corporation conducts its business. With effect as
of January 1, 2008, trade tax is no longer a deductible
item in calculating the corporations tax base for
corporate income and trade tax purposes.
According to a minimum taxation regime applicable as of 2004,
not more than 1 million plus 60% of the amount
exceeding 1 million of the income of one fiscal year
may be offset against tax losses carried forward.
Taxation
of Dividends
Tax must be withheld at a rate of 20% (after 2008: 25%) plus
solidarity surcharge of 5.5% (in total 21.1%; after 2008:
26.375%) on dividends paid (if any).
Pursuant to most German tax treaties, including the income tax
treaty between Germany and the United States (the
Treaty) the German withholding tax may not exceed
15% of the dividends received by Non-German Shareholders who are
eligible for treaty benefits. The difference between the
withholding tax including solidarity surcharge that was levied
and the maximum rate of withholding tax permitted by an
applicable tax treaty is refunded to the shareholder by the
German Federal Tax Office (Bundeszentralamt für
Steuern, An der Küppe 1, D-53225 Bonn, Germany) upon
application. Forms for a refund application are available from
the German Federal Tax Office or the German embassies and
consulates in the various countries. A further reduction applies
pursuant to most tax treaties if the shareholder is a
corporation which holds a stake of 25% or more, and in some
cases (including under the Treaty) of 10% or more, of the
registered share capital (or according to some tax treaties of
the votes) of a company. If the shareholder is a parent company
resident in the European Union as defined in Directive
No. 90/435/EEC of the Council of July 23, 1990 (the
so-called Parent-Subsidiary Directive), upon application and
subject to further requirements, no tax may have to be withheld
at all.
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Withholding
Tax Refund for U.S. Shareholders
U.S. shareholders who are eligible for treaty benefits
under the Treaty (as discussed below in United
States Taxation) are entitled to claim a refund of the
portion of the otherwise applicable 20% (after 2008: 25%) German
withholding tax and 5.5% solidarity surcharge on dividends that
exceeds the applicable Treaty rate (generally 15%).
For ADSs kept in custody with the Depository Trust Company
in New York or one of its participating banks, the German tax
authorities have introduced a collective procedure for the
refund of German dividend withholding tax and solidarity
surcharge thereon. Under this procedure, the Depository
Trust Company may submit claims for refunds payable to
U.S. shareholders under the Treaty collectively to the
German tax authorities on behalf of these
U.S. shareholders. The German Federal Tax Office will pay
the refund amounts on a preliminary basis to the Depository
Trust Company, which will redistribute these amounts to the
U.S. shareholders according to the regulations governing
the procedure. The Federal Tax Office may review whether the
refund was made in accordance with the law within four years
after making the payment to the Depository Trust Company.
Details of this collective procedure are available from the
Depository Trust Company. This procedure is currently
permitted by German tax authorities but that permission may be
revoked, or the procedure may be amended, at any time in the
future.
Individual claims for refunds may be made on a special German
form, which must be filed with the German Federal Tax Office
(Bundeszentralamt für Steuern, An der Küppe 1,
D-53225 Bonn, Germany) within four years from the end of the
calendar year in which the dividend is received. Copies of the
required forms may be obtained from the German tax authorities
at the same address or from the Embassy of the Federal Republic
of Germany, 4645 Reservoir Road, NW, Washington D.C.
20007-1998.
As part of the individual refund claim, a U.S. shareholder
must submit to the German tax authorities the original
withholding certificate (or a certified copy thereof) issued by
the paying agent documenting the tax withheld and an official
certification of United States tax residency on IRS
Form 6166. IRS Form 6166 generally may be obtained by
filing a properly completed IRS Form 8802 with the Internal
Revenue Service, Philadelphia Service Center,
U.S. Residency Certification Request,
P.O. Box 16347, Philadelphia, PA
19114-0447.
Requests for certification must include the
U.S. shareholders name, Social Security Number or
Employer Identification Number, the number of the form on which
the tax return was filed and the tax period for which the
certification is requested. The Internal Revenue Service will
send the certification on IRS Form 6166 to the
U.S. shareholder who then must submit the certification
with the claim for refund.
Taxation
of Capital Gains
Generally, capital gains from the disposition of ADSs realized
by a Non-German shareholder other than a corporation are only
subject to German tax if such shareholder at any time during the
five years preceding the disposition, directly or indirectly,
held an interest of 1% or more in a companys issued share
capital. If the shareholder has acquired the ADSs without
consideration, the previous owners holding period and size
of shareholding will also be taken into account.
If the shareholder is an individual, one half (after 2008: 60%)
of the capital gain will generally be taxable. If the
shareholder is a corporation, effectively 5% of the capital gain
will generally be taxable. However, most German tax treaties,
including the Treaty, provide that Non-German Shareholders who
are beneficiaries under the respective treaty are generally not
subject to German tax even under the circumstances described in
the preceding paragraph. See the discussion regarding
shareholders that generally are eligible for benefits under the
Treaty in United States Taxation, below.
Special rules may apply to certain companies of the finance or
insurance sector (including pension funds) that are not
protected from German tax under a tax treaty.
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Inheritance
and Gift Tax
Under German domestic law, the transfer of ADSs will be subject
to German inheritance or gift tax on a transfer by reason of
death or as a gift if:
(a) the donor or transferor or the heir, donee or other
beneficiary is resident in Germany at the time of the transfer,
or, if a German citizen, was not continuously outside of Germany
and without German residence for more than five years; or
(b) at the time of the transfer, the ADSs are held by the
decedent or donor as assets of a business for which a permanent
establishment is maintained or a permanent representative is
appointed in Germany; or
(c) the decedent or donor has held, alone or together with
related persons, directly or indirectly, 10% or more of a
companys registered share capital at the time of the
transfer.
The few presently existing German estate tax treaties (e.g., the
Estate Tax Treaty with the United States) usually provide that
German inheritance or gift tax may only be imposed in cases
(a) and (b) above.
Other
Taxes
There are no transfer, stamp or similar taxes which would apply
to the sale or transfer of the ADSs in Germany. Net worth tax is
no longer levied in Germany.
United
States Taxation
This section is a summary, under current law, of the material
U.S. federal income tax considerations relevant to an
investment by a U.S. shareholder in the ADSs. This summary
applies only to holders that are eligible for benefits as
U.S. residents under the Treaty in respect of their
investment in the ADSs (U.S. shareholders). In
general, a shareholder will be eligible for such benefits if the
shareholder:
(i) is:
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an individual U.S. citizen or resident;
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a U.S. corporation; or
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a partnership, estate, or trust to the extent the
shareholders income is subject to taxation in the United
States as the income of a resident, either in the
shareholders hands or in the hands of the
shareholders partners or beneficiaries;
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(ii) is not also a resident of Germany for German tax
purposes;
(iii) is the beneficial owner of the ADSs (and the
dividends paid with respect thereto);
(iv) holds the ADSs as a capital asset for tax purposes;
(v) does not hold the ADSs in connection with the conduct
of business through a permanent establishment, or the
performance of personal services through a fixed base, in
Germany; and
(vi) is not subject to an anti-treaty shopping provision in
the Treaty that applies in limited circumstances.
This summary does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to any
particular investor, and does not address the tax treatment of
investors who are subject to special rules, such as financial
institutions and persons whose functional currency is not the
U.S. dollar. It is based upon the assumption that
prospective shareholders are familiar with any special tax rules
to which they may be subject. Prospective purchasers should
consult their own tax advisers concerning the U.S. federal,
state, local and other national tax consequences of purchasing,
owning and disposing of the ADSs in light of their particular
circumstances.
In general, for U.S. federal income tax purposes and for
purposes of the Treaty, holders of ADSs will be treated as the
owners of our shares represented by those ADSs.
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Taxation
of Dividends
U.S. shareholders must include the gross amount of cash
dividends paid in respect of the ADSs, without reduction for
German withholding tax, in ordinary income on the date that they
are treated as having received them, translating dividends paid
in euro into U.S. dollars using an exchange rate in effect
on that date.
Subject to certain exceptions for short-term and hedged
positions, the U.S. dollar amount of dividends received by
a non-corporate U.S. shareholder with respect to the ADSs
before January 1, 2011 will be subject to taxation at a
maximum rate of 15% if the dividends are qualified
dividends. Dividends received with respect to the ADSs
will be qualified dividends if (i)(a) the company is
eligible for the benefits of a comprehensive income tax treaty
with the United States that the IRS has approved for the
purposes of the qualified dividend rules or (b) the ADSs of
the company are readily tradable on an established securities
market in the United States, and (ii) the company was not,
in the year prior to the year in which the dividend was paid,
and is not, in the year in which the dividend is paid, a passive
foreign investment company (PFIC). ADSs traded on
the New York Stock Exchange will be treated as readily tradeable
on an established securities market in the United States. The
Treaty has been approved for the purposes of the qualified
dividend rules. Based on the companys audited financial
statements and relevant market and shareholder data, the company
believes that it was not treated as a PFIC for U.S. federal
income tax purposes with respect to its taxable year ended
September 30, 2006. In addition, based on its audited
financial statements and its current expectations regarding the
value and nature of its assets, the sources and nature of its
income, and relevant market and shareholder data, the company
does not anticipate becoming a PFIC for its taxable year ending
September 30, 2007 or in the foreseeable future.
German tax withheld from dividends will be treated, up to the
15% rate provided under the Treaty, as a foreign income tax
that, subject to generally applicable limitations under
U.S. tax law, is eligible for credit against the
U.S. federal income tax liability of U.S. shareholders
or, if they have elected to deduct such taxes, may be deducted
in computing taxable income. As discussed in the preceding
section regarding German Taxation, German withholding tax will
generally be imposed at a rate of 20% (after 2008: 25%) plus
solidarity surcharge of 5.5% (in total 21.1%; after 2008:
26.375%). However, U.S. taxpayers who qualify for benefits
under the Treaty as discussed above may request a refund of
German tax withheld in excess of the 15% rate provided in the
treaty. A new protocol to the Treaty was signed in Berlin on
June 1, 2006 but it has not yet been ratified. Among other
items, the protocol provides for new limitation of benefit
provisions. Fluctuations in the dollar-euro exchange rate
between the date that U.S. shareholders receive a dividend
and the date that they receive a related refund of German
withholding tax may give rise to foreign currency gain or loss,
which generally is treated as ordinary income or loss for
U.S. tax purposes.
Taxation
of Sales or Other Taxable Dispositions
Sales or other taxable dispositions by U.S. shareholders of
ADSs generally will give rise to capital gain or loss equal to
the difference between the U.S. dollar value of the amount
realized on the disposition and the U.S. shareholders
U.S. dollar basis in the ADSs. Any such capital gain or
loss will be long-term capital gain or loss, subject to taxation
at reduced rates for non-corporate taxpayers, if the ADSs were
held for more than one year. The deductibility of capital losses
is subject to limitations.
Information
Reporting and Backup Withholding
Dividends paid in respect of ADSs, and payments of the proceeds
of a sale of ADSs, paid within the United States or through
certain
U.S.-related
financial intermediaries are subject to information reporting
and may be subject to backup withholding unless the holder
(i) is a corporation or other exempt recipient or
(ii) provides a taxpayer identification number and
certifies that no loss of exemption from backup withholding has
occurred. Holders that are not U.S. persons generally are
not subject to information reporting or backup withholding.
However, such a holder may be required to provide a
certification to establish its
non-U.S. status
in connection with payments received within the United States or
through certain
U.S.-related
financial intermediaries (generally an IRS
Form W-8BEN).
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against a holders
U.S. federal income tax liability. A holder may obtain a
refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund
with the IRS and furnishing any required information.
S-166
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus
supplement among us, Infineon and the underwriters named below,
Infineon and J.P. Morgan agreed to sell to the underwriters, for
whom Citigroup Global Markets Inc., Credit Suisse Securities
(USA) LLC and J.P. Morgan Securities Inc. are acting as
representatives, the following numbers of our ADSs:
|
|
|
|
|
|
|
Number of
|
Underwriters
|
|
ADSs
|
|
Citigroup Global Markets Inc.
|
|
|
7,613,360
|
|
Credit Suisse Securities (USA) LLC
|
|
|
7,613,360
|
|
J.P. Morgan Securities Inc.
|
|
|
7,613,359
|
|
ABN AMRO Rothschild LLC
|
|
|
1,903,340
|
|
Deutsche Bank Securities Inc.
|
|
|
1,903,340
|
|
HVB Capital Markets, Inc.
|
|
|
1,903,339
|
|
|
|
|
|
|
Total
|
|
|
28,550,098
|
|
The underwriting agreement provides that the underwriters are
obligated to purchase all of the ADSs from Infineon in this
offering if any are purchased, other than those ADSs covered by
the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or this offering may be terminated.
The underwriters will offer ADSs in a public offering in the
United States and to institutional investors elsewhere. Each
underwriter may offer and sell ADSs anywhere in the world where
it is legally permitted to do so. There are no minimum or
maximum limits on how many ADSs may be offered or sold in any
particular country or region. Some of the underwriters are
expected to make offers and sales both inside and outside the
United States through their respective selling agents.
Any offers or sales in the United States will be conducted by
broker-dealers registered with the SEC.
All of the shares offered in this offering will be delivered in
the form of ADSs.
Infineon has granted to the underwriters a
30-day
option to purchase up to 3,750,000 additional ADSs from
Infineon at the public offering price listed on the cover page
of this prospectus supplement, less the underwriting discounts
and commissions. The option may be exercised only to cover any
overallotments of ADSs.
The Loaned ADSs offered by this prospectus supplement are ADSs
that Infineon has agreed to loan to J.P. Morgan, pursuant
to the ADS Lending Agreement. J.P. Morgan is offering for
sale pursuant to this prospectus supplement the entire
3,550,098 ADSs it is entitled to borrow under the ADSs
Lending Agreement. We have been advised by J.P. Morgan that
its affiliate intends to use the proceeds from the sale of these
ADSs to facilitate the establishment by the exchangeable note
investors of hedged positions in the exchangeable notes through
the entry into privately negotiated derivative transactions with
those investors. J.P. Morgan will pay a fee of 0.10% per
year, calculated based on the market price of our ADSs, to
Infineon under the ADS Lending Agreement. J.P. Morgan is
one of the underwriters of the simultaneous offering by Infineon
Technologies Investment B.V. of notes exchangeable into our
ADSs. See ADS Lending Agreement; Simultaneous Offering of
Exchangeable Notes.
We will not receive any proceeds from any part of this offering.
The total underwriting discounts and commissions paid to the
underwriters will be 1.77% of the total offering price of the
ADSs. The following table summarizes the compensation and
estimated expenses to be paid in connection with this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per ADS
|
|
|
Total
|
|
|
|
Without
|
|
|
With full
|
|
|
Without
|
|
|
With full
|
|
|
|
exercise of
|
|
|
exercise of
|
|
|
exercise of
|
|
|
exercise of
|
|
|
|
over allotment
|
|
|
over-allotment
|
|
|
over allotment
|
|
|
over-allotment
|
|
|
|
option
|
|
|
option
|
|
|
option
|
|
|
option
|
|
|
Expenses payable by Infineon
|
|
$
|
0.073
|
|
|
$
|
0.064
|
|
|
$
|
2,075,500
|
|
|
$
|
2,075,500
|
|
Underwriting discounts and
commissions paid by Infineon
|
|
$
|
0.193
|
|
|
$
|
0.193
|
|
|
$
|
4,825,000
|
|
|
$
|
5,548,750
|
|
S-167
We estimate our out-of-pocket expenses for this offering to be
approximately $75,500 in registration fees, $600,000 in printing
fees, $300,000 in legal fees, $300,000 in accounting fees, up to
$500,000 reimbursement of expenses of the underwriters and
$300,000 in marketing and miscellaneous expenses. All of these
expenses will be paid by the Selling Shareholder.
The underwriters propose initially to offer ADSs at the initial
public offering price set forth on the cover page of this
prospectus supplement. Any ADSs sold by the underwriters to
securities dealers may be sold at a discount of up to $0.193 per
ADS from the public offering price. Any such securities dealers
may resell any ADSs purchased from the underwriters to other
brokers or dealers at a discount of up to $0.116 per ADS from
the public offering price. If all of the ADSs are not sold at
the offering price, the representatives may change the offering
price and the other selling terms.
See Shares Eligible for Future Sale for a discussion
of certain transfer restrictions.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act of 1934 (the
Exchange Act).
|
|
|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
|
|
Over-allotment involves sales by the underwriters of our ADSs in
excess of the number of our ADSs the underwriters are obligated
to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of our ADSs
over-allotted by the underwriters is not greater than the number
of our ADSs that they may purchase in the over-allotment option.
In a naked short position, the number of our ADSs involved is
greater than the number of our ADSs in the over-allotment
option. The underwriters may close out any covered short
position by either exercising their over-allotment option
and/or
purchasing in the open market.
|
|
|
|
Syndicate covering transactions involve purchases of our ADSs in
the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the
source of our ADSs to close out the short position, the
underwriters will consider, among other things, the price of our
ADSs available for purchase in the open market as compared to
the price at which they may purchase our ADSs through the
over-allotment option. If the underwriters sell more of our ADSs
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
our ADSs in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
there could be downward pressure on the price of our ADSs in the
open market after pricing that could adversely affect investors
who purchase in this offering.
|
|
|
|
Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when our ADSs originally sold
by the syndicate member are purchased in a stabilizing or
syndicate covering transaction to cover syndicate short
positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our ADSs or preventing or retarding a
decline in the market price of our ADSs. As a result, the price
of our ADSs may be higher than the price that might otherwise
exist in the open market. If these activities are commenced,
they are required to be conducted in accordance with applicable
laws and regulations, and they may be discontinued at any time.
These transactions may be effected on the New York Stock
Exchange, in the over-the-counter market or otherwise and, if
commenced, may be discontinued at any time.
In connection with this offering, the underwriters may
over-allot ADSs or effect transactions with a view to supporting
the market price of the ADSs at a level higher than that which
might otherwise prevail. However, there is no assurance that the
underwriters will undertake stabilization action. Such
stabilizing, if commenced, may be discontinued at any time and,
if begun, must be brought to an end after a limited period. Any
stabilization action will be undertaken in accordance with
applicable laws and regulations.
The underwriters do not expect sales to discretionary accounts
to exceed 5% of the total number of ADSs offered.
S-168
We and our shareholders, Infineon and Infineon Investment, have
agreed that, for a period of 60 days from the date of this
prospectus supplement, we and they will not, without the prior
written consent of each of Citigroup Global Markets Inc., Credit
Suisse Securities (USA) LLC and J.P. Morgan Securities,
Inc., dispose of or hedge any of our shares or ADSs or
securities which are convertible or exchangeable into these
securities. Citigroup Global Markets Inc., Credit Suisse
Securities (USA) LLC and J.P. Morgan Securities, Inc. in
their sole discretion may release any of the securities subject
to these
lock-up
agreements at any time without notice. The release of any
lock-up is
considered on a
case-by-case
basis. Factors in deciding whether to release shares or ADSs may
include the length of time before the
lock-up
expires, the number of shares or ADSs involved, the reason for
the requested release, market conditions, the trading price of
our ADSs and historical trading volumes of our ADSs. The
lock-up does
not apply to our issuance of shares or options pursuant to the
plans described in Management Employee Stock
Option and Employee Share Purchase Programs, the ADSs or
shares Infineon Investment will deliver on exchanges of the
exchangeable notes referred to under ADS Lending
Agreement; Simultaneous Offering of Exchangeable Notes,
securities we issue as consideration in connection with any
strategic acquisition, investment or alliance we or any of our
affiliates may enter into or any securities we issue in the
course of an increase in our capital against contributions of
assets (other than current assets), as long as any transferee in
these transactions agrees to be bound by this
lock-up. The
lock-up also
does not apply to transfers of securities within Infineons
group of companies or transactions between Infineon Technologies
AG and Infineon Investment and our company in relation to the
funding of options granted to directors or employees of our
company or any of our affiliates, as long as any transferee in
these transactions agrees to be bound by this
lock-up.
A copy of this prospectus supplement and the accompanying
prospectus in electronic format will be made available on
websites maintained by one or more of the underwriters if one or
more of the underwriters participating in this offering may
distribute the prospectus electronically. The underwriters may
agree to allocate a number of ADSs to underwriters and
securities dealers for sale to their online brokerage account
holders. Internet distributions will be allocated by the joint
lead managers to underwriters that may make Internet
distributions on the same basis as other allocations.
From time to time, the underwriters or their affiliates have
provided, and continue to provide, commercial banking, financial
advisory and investment banking services to us, our affiliates
and our employees and to Infineon, for which they receive
customary fees, commissions and expenses. The underwriters or
their affiliates are lenders to Infineon under existing
committed and uncommitted credit facilities and act as lead
arrangers in the 250 million committed credit
facility that we entered into in August 2006. Moreover each of
the underwriters or their affiliates have and are providing
other types of commercial banking services, such as working
capital financing, the issuance of standby letters of credit,
guarantees and treasury management services such as cash
management, foreign exchange operations and derivative
transactions. An affiliate of J.P. Morgan Securities Inc. has,
in the past provided institutional trust and depositary services
in connection with certain offerings of securities by Infineon
or its affiliates.
The validity of the shares and the ADSs and certain other legal
matters with respect to German, U.S. federal and New York
law will be passed upon by Cleary Gottlieb Steen &
Hamilton LLP, German and U.S. counsel to Infineon and to
us. Certain legal matters with respect to German,
U.S. federal and New York law in connection with this
offering will be passed upon for the underwriters by
Shearman & Sterling LLP, German and U.S. counsel
for the underwriters.
S-169
|
|
|
ADSs |
|
American Depositary Shares. ADSs are securities issued by a
depositary that represent ownership interests in underlying
ordinary shares held by the depositarys custodian. ADSs
may be evidenced by American Depositary Receipts (ADRs). Each
Qimonda AG ADS represents one ordinary share. |
|
Advanced Memory Buffer (AMB) |
|
A logic chip that enables high speed communication between the
memory controller and a fully buffered DIMM in a server system. |
|
back-end |
|
The packaging, assembly and testing stages of the semiconductor
manufacturing process, which take place after electronic
circuits are imprinted on silicon wafers in the front-end
process. |
|
bit |
|
A unit of information; a computational quantity (binary pulse)
that can take one of two values, such as true and false or 0 and
1; also the smallest unit of storage sufficient to hold one bit. |
|
byte |
|
A unit of measurement equal to eight bits. |
|
Computer Aided Design (CAD) |
|
A designation of software tools used in the design of integrated
circuits. |
|
capacitor |
|
An electronic device that stores electrical charges. Capacitors
are used to store information in a DRAM chip. |
|
cell |
|
A primary unit that normally repeats many times in an integrated
circuit. Cells represent individual functional design units or
circuits that may be reused as blocks in designs. For example, a
memory cell represents a storage unit in a memory array. |
|
chip |
|
Popular term describing a section of a wafer that contains a
discrete component or an integrated circuit. Also called a
die. |
|
circuit |
|
A combination of electrical or electronic components,
interconnected to perform one or more functions. |
|
clean room |
|
An area within a fab in which the wafer fabrication takes place.
The classification of a clean room relates to the maximum number
of particles of contaminants per cubic foot within that room.
For example, a class 100 clean room contains fewer than 100
particles of contaminants per cubic foot. |
|
DDR SDRAM |
|
Double Data Rate SDRAM. A form of DRAM chip that activates
output on both the rising and falling edge of the system clock
rather than on just the rising edge, potentially doubling output. |
|
DDR2 SDRAM |
|
Double Data Rate 2 SDRAM is an enhanced form of DDR SDRAM that
offers higher data transfer rates compared to its predecessor. |
|
DDR3 SDRAM |
|
Double Data Rate 3 SDRAM. Successor to DDR2 SDRAM currently in
advanced stages of development. |
|
Die |
|
A chip. |
|
Dual Inline Memory Module (DIMM) |
|
A type of printed circuit board composed of DRAM chips mounted
on a circuit board in a particular configuration. |
S-170
|
|
|
Dynamic Random Access Memory (DRAM) |
|
The most common type of random access memory. Each bit of
information is stored as an amount of electrical charge in a
storage cell consisting of a capacitor and a transistor. The
capacitor discharges gradually due to leakage and the memory
cell loses the information stored. To preserve the information,
the memory has to be refreshed periodically and is therefore
referred to as dynamic. DRAM is the most widespread
memory technology because of its high memory density and
relatively low price. |
|
fab |
|
A semiconductor fabrication facility, in which the front-end
manufacturing process takes place. |
|
feature size |
|
A measurement (generally in micron or nm) of the width of the
smallest patterned feature or circuit on a semiconductor chip. |
|
flash memory |
|
A type of non-volatile memory that can be erased and
reprogrammed. |
|
front-end |
|
The wafer processing stage of the semiconductor manufacturing
process, in which electronic circuits are imprinted onto raw
silicon wafers. This is followed by the packaging, assembly and
testing stages, which comprise the back-end process. |
|
foundry |
|
A semiconductor manufacturer that makes chips for third parties. |
|
gigabit (Gb) |
|
Approximately one billion bits (1,073,741,824 bits). Generally
used to indicate the storage capacity (or density) of memory
chips. |
|
gigabyte (GB) |
|
Approximately one billion bytes (1,073,741,824 bytes). Generally
used to indicate the storage capacity (or density) of memory
modules. |
|
Integrated Circuit (IC) |
|
An electronic circuit in which all elements of the circuit are
integrated on a single semiconductor device. |
|
ISO |
|
International Standards Organization. The international
organization responsible for developing and maintaining
worldwide standards for manufacturing, environmental protection,
computers, data communications and many other fields. |
|
library |
|
The collection of representations required by various design
tools. The representations, such as symbol, simulation model,
layout abstract, and transistor schematic, are used by different
tools in the design system to create or analyze some portion of
an IC or otherwise aid in the design process. Creating a design
library requires inserting the fabrication technologies in the
design system in a form that allows designers to create circuits
in the most efficient manner. |
|
logic |
|
One of the three major classes of integrated circuits (along
with processors and memory). Logic ICs are used for data
manipulation and control functions. |
|
mask |
|
A transparent glass or quartz plate covered with an array of
patterns used in the IC manufacturing process to create
circuitry patterns on a wafer. Each pattern consists of opaque
and transparent areas that define the size and shape of all
circuit and device elements. The mask is used to expose selected
areas, and defines the areas to be processed. Masks may use
emulsion, chrome, iron oxide, silicon or other material to
produce the opaque areas. |
S-171
|
|
|
megabit (Mb) |
|
Approximately one million bits (1,048,576 bits). Generally used
to indicate the storage capacity (or density) of memory chips. |
|
megabyte (MB) |
|
Approximately one billion bytes (1,048,576 bytes). Generally
used to indicate the storage capacity (or density) of memory
modules. |
|
memory semiconductors |
|
Semiconductors that store data in digital form. |
|
NAND flash |
|
A type of flash memory commonly used for mass storage
applications such as digital audio players and digital cameras. |
|
nanometer (nm) |
|
A metric unit of linear measure that equals one billionth of a
meter (or 1/1,000th of a micron). This unit of measurement is
commonly used to indicate the width of the smallest patterned
feature or circuit on a semiconductor chip (the so-called
feature size). |
|
non-volatile memory |
|
A type of semiconductor memory that retains data even when
electrical power is shut off. |
|
NOR flash |
|
A type of flash memory commonly used for the storage of code
data, such as the software instructions in a mobile phone. |
|
NROM Flash |
|
Nitrided Read Only Memory. A flash technology that can store two
bits per cell. Charges are locally separated on both ends of the
memory transistor cell. This compares with other non-volatile
technologies like floating gate technology, which store one or
two bits by different charge amounts spread over the whole
transistor cell. |
|
OEM |
|
Original Equipment Manufacturer. A company that acquires a
product or component and reuses or incorporates it into a new
product with its own brand name. |
|
package |
|
The protective container of an electronic component or die, with
external terminals to provide electrical access to the
components inside. |
|
photolithography |
|
A step in the front-end process of semiconductor manufacturing
in which a form of ultraviolet light is used to draw a pattern
of an IC on a silicon wafer. The sophistication of this process
and the related equipment determines the achievable feature
sizes on memory chips, and therefore is a key determinant in the
ability of manufacturers continuously to improve the capacity
(or density) of memory ICs. |
|
process technology |
|
The procedures used in the front-end process to convert raw
silicon wafers into finished wafers containing hundreds or
thousands of chips. |
|
Random Access Memory (RAM) |
|
A type of digital memory that functions as the main workspace of
a computer. The order of access to bits at different locations
does not affect the speed of access (and is therefore
random). This is in contrast to, for example, a
magnetic or optical disk or magnetic tape, which are used for
long-term storage of data on a computer, but which are too slow
to be used for primary workspace. |
|
photoresist |
|
A photoactive chemical that is used in the photolithography
process, in which the design of an integrated circuit is drawn
on a silicon wafer. |
|
semiconductor |
|
Generic name for devices, such as transistors and integrated
circuits, that control the flow of electrical signals. More
generally, a material, typically crystalline, that can be
altered to allow electrical current to |
S-172
|
|
|
|
|
flow or not flow in a pattern. The most common semiconductor
material for use in integrated circuits is silicon. |
|
server |
|
A computer that provides a service for other computers connected
to it via a network. The most common example is a file server,
which has a local disk and services requests from remote clients
to read and write files on that disk. |
|
silicon |
|
A type of semiconducting material used to make a wafer. Silicon
is widely used in the semiconductor industry as a base material. |
|
Static Random Access Memory (SRAM) |
|
A type of volatile memory product that is used in electronic
systems to store data and program instructions. Unlike the more
common DRAM, it does not need to be electronically refreshed
(and is therefore static). |
|
Synchronous DRAM (SDRAM) |
|
A generic name for various kinds of DRAM that are synchronized
with the clock speed for which the microprocessor is optimized.
This tends to increase the number of instructions that the
processor can perform in a given time. |
|
transistor |
|
An individual circuit that can amplify or switch electric
current. This is the building block of all integrated circuits. |
|
volatile memory |
|
A type of semiconductor memory that loses stored information if
the power source is removed. |
|
wafer |
|
A disk made of a semiconducting material such as silicon,
currently usually either 200mm or 300mm in diameter, used to
form the substrate of a chip. A finished wafer may contain
several thousand chips. |
|
yield |
|
The percentage of usable dies produced on a silicon wafer in the
front-end process. |
|
USB |
|
Universal Serial Bus. A protocol for transferring data to and
from digital devices. |
|
USB drive |
|
A portable data storage device based on flash memory that uses
USB interface protocol. |
S-173
QIMONDA
AG AND SUBSIDIARIES
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Qimonda AG and
Subsidiaries
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-60
|
|
|
|
|
F-61
|
|
|
|
|
F-62
|
|
|
|
|
F-63
|
|
|
|
|
F-64
|
|
|
|
|
F-65
|
|
|
|
|
|
|
Inotera Memories,
Inc.
|
|
|
|
|
|
|
|
F-89
|
|
|
|
|
F-90
|
|
|
|
|
F-92
|
|
|
|
|
F-93
|
|
|
|
|
F-94
|
|
|
|
|
F-95
|
|
|
|
|
F-125
|
|
|
|
|
F-126
|
|
|
|
|
F-128
|
|
|
|
|
F-129
|
|
|
|
|
F-130
|
|
|
|
|
F-131
|
|
F-1
Report
of Independent Registered Public Accounting Firm
The Supervisory Board
Qimonda AG:
We have audited the accompanying combined and consolidated
balance sheets of Qimonda AG and subsidiaries (the Company) as
of September 30, 2005 and 2006, and the related combined
and consolidated statements of operations,
business/shareholders equity, and cash flows for each of
the years in the three-year period ended September 30,
2006. These combined and consolidated financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these combined and
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined and consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Qimonda AG and subsidiaries
as of September 30, 2005 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2006, in conformity
with U.S. generally accepted accounting principles.
Munich, Germany
November 13, 2006
/s/ KPMG
Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft
F-2
Qimonda
AG and Subsidiaries
Combined and Consolidated Statements of Operations
for the years ended September 30, 2004, 2005 and 2006
(in millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
5
|
|
|
|
2,912
|
|
|
|
2,821
|
|
|
|
3,798
|
|
|
|
4,818
|
|
Related parties
|
|
|
27
|
|
|
|
96
|
|
|
|
4
|
|
|
|
17
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
|
|
|
|
3,008
|
|
|
|
2,825
|
|
|
|
3,815
|
|
|
|
4,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
2,063
|
|
|
|
2,164
|
|
|
|
3,048
|
|
|
|
3,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
945
|
|
|
|
661
|
|
|
|
767
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
347
|
|
|
|
390
|
|
|
|
433
|
|
|
|
549
|
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
232
|
|
|
|
206
|
|
|
|
215
|
|
|
|
273
|
|
Restructuring charges
|
|
|
8
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Other operating expenses, net
|
|
|
7
|
|
|
|
194
|
|
|
|
13
|
|
|
|
60
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
170
|
|
|
|
51
|
|
|
|
59
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
(30
|
)
|
|
|
(7
|
)
|
|
|
(25
|
)
|
|
|
(32
|
)
|
Equity in (losses) earnings of
associated companies
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
45
|
|
|
|
80
|
|
|
|
102
|
|
Gain on associated company share
issuance
|
|
|
16
|
|
|
|
2
|
|
|
|
|
|
|
|
72
|
|
|
|
92
|
|
Other non-operating (expense)
income, net
|
|
|
|
|
|
|
(11
|
)
|
|
|
13
|
|
|
|
8
|
|
|
|
10
|
|
Minority interests
|
|
|
|
|
|
|
17
|
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
132
|
|
|
|
104
|
|
|
|
188
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
9
|
|
|
|
(211
|
)
|
|
|
(86
|
)
|
|
|
(114
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings
per share
|
|
|
10
|
|
|
|
(0.26
|
)
|
|
|
0.06
|
|
|
|
0.24
|
|
|
|
0.30
|
|
See accompanying notes to the combined and consolidated
financial statements.
F-3
Qimonda
AG and Subsidiaries
Combined and Consolidated Balance Sheets
September 30,
2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
632
|
|
|
|
932
|
|
|
|
1,182
|
|
Marketable securities
|
|
|
11
|
|
|
|
|
|
|
|
138
|
|
|
|
175
|
|
Trade accounts receivable, net
|
|
|
12
|
|
|
|
439
|
|
|
|
803
|
|
|
|
1,019
|
|
Inventories
|
|
|
13
|
|
|
|
484
|
|
|
|
622
|
|
|
|
789
|
|
Deferred income taxes
|
|
|
9
|
|
|
|
49
|
|
|
|
47
|
|
|
|
60
|
|
Other current assets
|
|
|
14
|
|
|
|
198
|
|
|
|
265
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
1,802
|
|
|
|
2,807
|
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
15
|
|
|
|
2,216
|
|
|
|
2,080
|
|
|
|
2,639
|
|
Long-term investments
|
|
|
16
|
|
|
|
544
|
|
|
|
636
|
|
|
|
807
|
|
Deferred income taxes
|
|
|
9
|
|
|
|
125
|
|
|
|
160
|
|
|
|
203
|
|
Other assets
|
|
|
17
|
|
|
|
174
|
|
|
|
178
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
4,861
|
|
|
|
5,861
|
|
|
|
7,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Business/Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
Infineon
|
|
|
21
|
|
|
|
524
|
|
|
|
344
|
|
|
|
435
|
|
Trade accounts payable
|
|
|
18
|
|
|
|
519
|
|
|
|
712
|
|
|
|
904
|
|
Accrued liabilities
|
|
|
19
|
|
|
|
122
|
|
|
|
160
|
|
|
|
203
|
|
Deferred income taxes
|
|
|
9
|
|
|
|
|
|
|
|
18
|
|
|
|
23
|
|
Other current liabilities
|
|
|
20
|
|
|
|
200
|
|
|
|
245
|
|
|
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
1,365
|
|
|
|
1,479
|
|
|
|
1,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
21
|
|
|
|
108
|
|
|
|
151
|
|
|
|
192
|
|
Deferred income taxes
|
|
|
9
|
|
|
|
9
|
|
|
|
36
|
|
|
|
46
|
|
Other liabilities
|
|
|
22
|
|
|
|
412
|
|
|
|
324
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
1,894
|
|
|
|
1,990
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business/Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments by and advances from
Infineon
|
|
|
2
|
|
|
|
3,034
|
|
|
|
|
|
|
|
|
|
Ordinary share capital
|
|
|
23
|
|
|
|
|
|
|
|
684
|
|
|
|
868
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
3,097
|
|
|
|
3,929
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
224
|
|
|
|
284
|
|
Accumulated other comprehensive
loss
|
|
|
25
|
|
|
|
(67
|
)
|
|
|
(134
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Business/Shareholders
Equity
|
|
|
|
|
|
|
2,967
|
|
|
|
3,871
|
|
|
|
4,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Business/Shareholders Equity
|
|
|
|
|
|
|
4,861
|
|
|
|
5,861
|
|
|
|
7,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the combined and consolidated
financial statements.
F-4
Qimonda
AG and Subsidiaries
Combined and Consolidated Statements of
Business/Shareholders Equity
for the years ended September 30, 2004, 2005 and 2006
(in millions except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Investments by
|
|
|
currency
|
|
|
minimum
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Issued Ordinary shares
|
|
|
Paid-In
|
|
|
Retained
|
|
|
and advances
|
|
|
translation
|
|
|
pension
|
|
|
gain/(loss)
|
|
|
|
|
|
|
Notes
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
earnings
|
|
|
from Infineon
|
|
|
adjustment
|
|
|
liability
|
|
|
on securities
|
|
|
Total
|
|
|
|
|
|
|
(millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
(millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
Balance as of October 1, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
8
|
|
|
|
2,736
|
|
Net investments by and advances
from Infineon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
Other comprehensive loss
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,890
|
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of DD200 facility to
Infineon
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374
|
)
|
Net investments by and advances
from Infineon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Other comprehensive income (loss)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,034
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
2,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of development center to
Infineon
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Net investments by and advances
from Infineon prior to May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
Net loss prior to May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
Contribution to capital and
issuance of shares on initial formation as of May 1, 2006
|
|
|
1
|
|
|
|
300
|
|
|
|
600
|
|
|
|
2,772
|
|
|
|
|
|
|
|
(3,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of net pension liability
from Infineon
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
Issuance of shares upon initial
public offering, net of offering costs and tax benefit thereon
|
|
|
1
|
|
|
|
42
|
|
|
|
84
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
Stock-based compensation
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Net income after May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
Other comprehensive loss
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2006
|
|
|
|
|
|
|
342
|
|
|
|
684
|
|
|
|
3,097
|
|
|
|
224
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
3,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the combined and consolidated
financial statements.
F-5
Qimonda
AG and Subsidiaries
Combined and Consolidated Statements of Cash Flows
for the
years ended September 30, 2004, 2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net (loss) income
|
|
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
|
|
94
|
|
Adjustments to reconcile net (loss)
income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
15/17
|
|
|
752
|
|
|
|
528
|
|
|
|
703
|
|
|
|
892
|
|
Provision for doubtful accounts
|
|
12
|
|
|
1
|
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
Gain on sale of marketable
securities
|
|
11
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sales of long-term
assets
|
|
15
|
|
|
3
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Equity in losses (earnings) of
associated companies
|
|
16
|
|
|
16
|
|
|
|
(45
|
)
|
|
|
(80
|
)
|
|
|
(101
|
)
|
Gain on associate company share
issuance
|
|
16
|
|
|
(2
|
)
|
|
|
|
|
|
|
(72
|
)
|
|
|
(92
|
)
|
Stock-based compensation
|
|
24
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
10
|
|
Minority interests
|
|
|
|
|
(17
|
)
|
|
|
(2
|
)
|
|
|
6
|
|
|
|
8
|
|
Impairment charges
|
|
16
|
|
|
7
|
|
|
|
6
|
|
|
|
9
|
|
|
|
11
|
|
Deferred income taxes
|
|
9
|
|
|
36
|
|
|
|
52
|
|
|
|
23
|
|
|
|
29
|
|
Due to changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
12
|
|
|
(135
|
)
|
|
|
45
|
|
|
|
(378
|
)
|
|
|
(480
|
)
|
Inventories
|
|
13
|
|
|
73
|
|
|
|
(172
|
)
|
|
|
(147
|
)
|
|
|
(186
|
)
|
Other current assets
|
|
14
|
|
|
19
|
|
|
|
7
|
|
|
|
(75
|
)
|
|
|
(95
|
)
|
Trade accounts payable
|
|
18
|
|
|
106
|
|
|
|
47
|
|
|
|
162
|
|
|
|
206
|
|
Accrued liabilities
|
|
19
|
|
|
66
|
|
|
|
(58
|
)
|
|
|
68
|
|
|
|
86
|
|
Other current liabilities
|
|
20
|
|
|
68
|
|
|
|
(35
|
)
|
|
|
63
|
|
|
|
80
|
|
Other assets and liabilities
|
|
|
|
|
(218
|
)
|
|
|
88
|
|
|
|
(69
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
|
|
693
|
|
|
|
483
|
|
|
|
297
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
(222
|
)
|
Proceeds from sales of marketable
securities available for sale
|
|
|
|
|
17
|
|
|
|
1
|
|
|
|
37
|
|
|
|
46
|
|
Purchases of business interests
|
|
16
|
|
|
(350
|
)
|
|
|
(83
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Proceeds from disposal of business
interests and dividends
|
|
16
|
|
|
|
|
|
|
15
|
|
|
|
29
|
|
|
|
37
|
|
Purchases of intangible assets
|
|
17
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(42
|
)
|
|
|
(53
|
)
|
Purchases of property, plant and
equipment
|
|
15
|
|
|
(770
|
)
|
|
|
(926
|
)
|
|
|
(686
|
)
|
|
|
(871
|
)
|
Proceeds from sales of long-term
assets
|
|
15
|
|
|
60
|
|
|
|
26
|
|
|
|
68
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
|
|
(1,048
|
)
|
|
|
(971
|
)
|
|
|
(772
|
)
|
|
|
(981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in short-term
debt due Infineon
|
|
21
|
|
|
|
|
|
|
481
|
|
|
|
(163
|
)
|
|
|
(207
|
)
|
Increase in short-term debt due
third parties
|
|
21
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term debt due
third parties
|
|
21
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Decrease (increase) in financial
payables due related parties
|
|
27
|
|
|
57
|
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Decrease in financial receivables
from associated and related parties
|
|
27
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
21
|
|
|
170
|
|
|
|
80
|
|
|
|
44
|
|
|
|
56
|
|
Principal repayments of long-term
debt
|
|
21
|
|
|
(133
|
)
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
1
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
527
|
|
Dividend payments to minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Proceeds from issuance of shares to
minority interest
|
|
|
|
|
52
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Investments by and advances from
Infineon
|
|
26
|
|
|
165
|
|
|
|
500
|
|
|
|
484
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
|
|
388
|
|
|
|
538
|
|
|
|
773
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate
changes on cash and cash equivalents
|
|
|
|
|
|
|
|
|
5
|
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
|
|
33
|
|
|
|
55
|
|
|
|
300
|
|
|
|
380
|
|
Cash and cash equivalents at
beginning of year
|
|
|
|
|
544
|
|
|
|
577
|
|
|
|
632
|
|
|
|
802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
|
|
|
577
|
|
|
|
632
|
|
|
|
932
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the combined and consolidated
financial statements.
F-6
QIMONDA
AG AND SUBSIDIARIES
Notes to the Combined and Consolidated Financial
Statements
(euro in millions, except where otherwise stated)
|
|
1.
|
Description
of Business, Formation and Basis of Presentation
|
Description
of Business
Qimonda AG and its subsidiaries (collectively, the
Company or Qimonda) is one of the
worlds 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.
Formation
On November 17, 2005, Infineon announced its intention to
separate its memory products business from the remainder of its
activities and place its memory products business in a
stand-alone legal structure, with the preferred goal of
conducting a public offering of the shares of the new company
(the Offering). 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. The Company intends to
use the offering proceeds of 415, net of offering costs of
19 and tax benefit thereon of 9, to finance
investments in its manufacturing facilities and for research and
development. In addition, Infineon sold 6.3 million shares
upon exercise of the underwriters over-allotment option.
As a result, Infineons ownership interest As a result,
Infineons ownership interest in the Company decreased to
85.9%.
The Companys operations in Japan and Korea were
transferred to separate legal entities and held in trust for
Qimondas benefit by Infineon until the legal transfer to
Qimonda takes place. The Companys Korea operations were
transferred in October 2006, and the transfer of the Japan
operations is expected during the three months ending
March 31, 2007. The Companys investment in Inotera
Memories Inc. (Inotera) is held in trust by Infineon
subject to the expiration of the
lock-up
provisions under Taiwan securities law (see note 16 and
note 33). The Companys investment in Advanced Mask
Technology Center GmbH & Co. (AMTC) and
Maskhouse Building Administration GmbH & Co. KG
(BAC) is 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.
Basis
of Presentation
The accompanying 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 combined and consolidated financial statements
are presented on a combined basis for period prior to the
Formation and on a consolidated basis for all periods thereafter.
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.
F-7
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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.
Qimonda AG is incorporated in Germany. Pursuant to
paragraph 291 of the German Commercial Code
(Handelsgesetzbuch or HGB) the
Company is exempted from preparing consolidated financial
statements in accordance with either the HGB accounting
principles and regulations (German GAAP) or
international financial reporting standards (IFRS),
since its ultimate parent company, Infineon, prepares and issues
consolidated financial statements according to U.S. GAAP in
compliance with the transitional regulation of the German
Bilanzrechtsreformgesetz Article 58, paragraph 3
EGHGB. Accordingly, the Company presents the U.S. GAAP
combined and consolidated financial statements contained herein.
All amounts herein are shown in millions of euro (or
) except where otherwise stated. The
accompanying balance sheet as of September 30, 2006, and
the statements of operations and cash flows for the year then
ended are also presented in U.S. dollars ($),
solely for the convenience of the reader, at the rate of 1
= $1.2687 the Federal Reserve noon buying rate on
September 29, 2006. The U.S. dollar convenience
translation amounts have not been audited.
Certain amounts in prior year consolidated financial statements
and notes have been reclassified to conform to the current year
presentation. Results of operations have not been affected by
these reclassifications.
Statements
of Operations
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. These expenditures, with the
exception of certain corporate items, are mainly allocated from
each of a number of what Infineon refers to as
clusters, which are groups of functional departments
for which Infineon accounts on a cost center basis.
The costs allocated from the clusters include charges for
facilities, functions and services provided by shared Infineon
facilities for the Memory Products business, expenses for
certain functions and services performed by centralized Infineon
departments, a portion of Infineons general corporate
expenses and certain research and development expenses. The
allocations from each cluster were made based on allocation
methods, or allocation keys, which vary depending on the nature
of the expenditures being allocated. The allocation keys are
consistent with those Infineon used to allocate expenses among
its segments, although historically Infineon did not allocate
the expenses of some central activities and instead accounted
for these as corporate costs.
The following assumptions and allocation methods are used for
significant allocated expenses included in the combined
statements of operations:
The Infineon Central R&D cluster costs include
research and development activities related to semiconductor
electronic technologies, circuits, and related systems. The
allocation is based on total sales.
The Infineon Logistic cluster costs include all
logistics expenses related to distribution centers including
handling, traffic and customs, packaging and freight. It also
includes expenses for corporate logistics in Europe, Asia and
North America. The allocation to the Memory Products business is
based partly on unit volume and partly on sales.
The Infineon Sales cluster covers all central
selling expenses related to the activities of pricing office,
account management, distribution management, receivables
management, export control and commissions.
F-8
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The allocation to the Memory Products business is based,
depending on the relevant function, on the dedicated headcount
of the business and also on sales.
The Infineon IT-Services cluster costs include all
expenses incurred relating to the design, implementation and
operation of IT systems and related administration. The
allocation is based, depending on the relevant function, on
either the total direct cost, the total research and development
cost or the total cost of sales of the Memory Products business.
The Infineon Finance and Treasury cluster costs
include all financial income and expense, as well as foreign
exchange gains and losses, related to treasury market activities
(foreign exchange management, money market transactions and
interest rate management). The allocation is based on the total
direct costs.
The Infineon Central cluster costs include strategic
and general central functions within the Infineon headquarters
or its regional organizations. The allocation is based on the
total direct costs.
The combined statements of operations include depreciation
expense for all property, plant and equipment owned and operated
by the Memory Products business.
Allocations from Infineon during the years ended
September 30, 2004, 2005 and the seven months ended
April 30, 2006, are reflected in the combined statements of
operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
2004
|
|
|
2005
|
|
|
April 30, 2006
|
|
|
Cost of goods sold
|
|
|
180
|
|
|
|
168
|
|
|
|
111
|
|
Research and development expenses
|
|
|
43
|
|
|
|
27
|
|
|
|
17
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
160
|
|
|
|
109
|
|
|
|
75
|
|
Other operating expenses, net
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387
|
|
|
|
305
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since 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 the respective agreements (see note 27).
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
Companys future effective tax rate after the Formation may
differ from those indicated in the accompanying combined and
consolidated financial statements prior to the Formation.
Balance
Sheets
The assets and liabilities attributable to the Memory Products
business were contributed to the Company, in general, at their
historical costs. In certain jurisdictions where tax regulations
do not permit the tax-free transfer of assets or liabilities to
the Company, they were revalued for tax, but not accounting
purposes. Unless otherwise noted, all assets and liabilities
specifically identifiable as pertaining to the Memory Products
business are included in the combined and consolidated financial
statements. Where legal entities were wholly allocable to the
Memory Products business, the shares of these entities were
transferred to the Memory Products business. In some cases,
including at the Infineon parent company level, the
memory-related assets and liabilities were identified and carved
out by means of asset and liability transfer transactions.
F-9
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
For carve-out transfers, the assets and liabilities directly
identifiable as pertaining to the Memory Products business
include inventories, long-term investments, fixed assets and
accounts receivable. The following assumptions and allocations
were used for those assets and liabilities that were not
specifically identifiable to the Memory Products business:
Trade
Accounts Payable
Trade accounts payable include identifiable payables from
specific Memory Products business vendors and service
suppliers as well as an allocation of payables from
Infineon-specified vendors.
Other
Current and Accrued Liabilities
Other current and accrued liabilities include direct payroll
obligations and payroll obligations, which were allocated based
on the Memory Products business and an allocation of the
Infineon employees in corporate functions that in part supported
the Memory Products business.
Pension
Liabilities
Pension expenses and related liabilities were measured based on
actuarial computations and are determined, with respect to all
of the employees that participate in Infineons defined
benefit pension plans, based on the number of employees of the
Memory Products business and an allocation of the Infineon
employees in corporate functions that in part supported the
Memory Products business.
Investments
by and Advances from Infineon
Because a direct ownership relationship did not exist among the
various entities comprising the Memory Products business prior
to the Formation, Infineons investments in and advances to
the Memory Products business represent Infineons interest
in the recorded net assets of the Memory Products business, and
are shown as business equity in lieu of shareholders
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 Formation are included in Investments and advances from
Infineon in the accompanying combined and consolidated
financial statements. All intercompany transactions, including
purchases of inventory, charges and cost allocations for
facilities, functions and services performed by Infineon for the
Memory Products business are reflected in this amount.
Capital
Structure
The Memory Products business historically relied on Infineon to
provide the financing of its capital requirements, as Infineon
uses a centralized approach to cash management and the financing
of its operations. The historical capital structure of Qimonda
was considered to be based on the following:
instruments that were directly identified with the
Memory Products business;
cash and intercompany financial receivables reduce
total short and long-term debt, so that the Company has no net
debt;
a proportional share of total assets constitutes
total cash, cash equivalents, marketable securities and
intercompany financial receivables;
a proportional share of aggregate total debt and
total business equity constitutes total short and long-term debt.
F-10
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The allocation of Infineons cash and debt in conjunction
with the historical capital structure of the Memory Products
business in the combined and consolidated financial statements
is reflected through the following:
through the Formation, contribution of 582 in
cash through business equity;
as of September 30, 2005 and the Formation, the
reduction of inter-company financial receivables of 227
and 66, respectively, by inter-company debt.
At the Formation, net investments by and advances from Infineon
in the amount of 3,372 were contributed to the Company as
equity, which is reflected as 600 ordinary share capital
and 2,772 as additional paid in capital in the
accompanying combined and consolidated statement of
business/shareholders equity.
The capital structure attributed to the Memory Products business
in connection with the preparation of the combined financial
statements prior to Formation, based as it is on the business
equity concept and without independent financing by the Company,
may not be indicative of the capital structure that the Memory
Products business would have required had it been an independent
company during the financial periods presented.
The Companys operations have been financed largely through
contributions from Infineon and, to a lesser extent, third-party
borrowings. The Companys interest expense prior to
formation includes interest charges on certain intercompany
financial liabilities to the Infineon group companies and
interest expense on its external debt based on the
aforementioned capital structure. Interest income includes
allocations based on the proportional share of cash and cash
equivalents. The Companys capital structure after the
Formation may differ from the capital structure presented in the
accompanying combined and consolidated financial statements
prior to the Formation as a result of the issuance of additional
ordinary shares by Qimonda AG as part of the Offering.
Accordingly, interest expense prior to the Formation reflected
in the accompanying combined and consolidated financial
statements may not necessarily be indicative of the interest
expense that Qimonda AG would have incurred as a stand-alone
entity or will incur after the Formation.
Estimates
The preparation of the accompanying 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 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
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 combined and consolidated financial
statements.
F-11
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
2.
|
Summary
of Significant Accounting Policies
|
The following is a summary of significant accounting policies
followed in the preparation of the accompanying combined and
consolidated financial statements.
Basis
of Consolidation
The accompanying combined and consolidated financial statements
include the accounts of the Company and its significant
subsidiaries on a combined and consolidated basis. Investments
in companies in which the Company has an ownership interest of
20% or more and are not controlled by the Company
(Associated Companies) are accounted for using the
equity method of accounting (see note 16). The equity in
earnings of Associated Companies with financial year ends that
differ by not more than three months from the Companys
financial year are recorded on a three month lag. Other equity
investments (Related Companies), in which the
Company has an ownership interest of less than 20%, are recorded
at cost. The effects of all significant intercompany
transactions are eliminated. In addition, the Company evaluates
its relationships with other entities to identify whether they
are variable interest entities as defined by Financial
Accounting Standards Board (FASB) Interpretation
No. 46 (R) Consolidation of Variable Interest
Entities (FIN 46R) and to assess
whether it is the primary beneficiary of such entities. If the
determination is made that the Company is the primary
beneficiary, then that entity is included in the combined and
consolidated financial statements in accordance with
FIN 46R.
The Company group consists of the following numbers of entities
in addition to the parent company, Qimonda AG:
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|
Consolidated
|
|
|
Associated
|
|
|
|
|
|
|
Subsidiaries
|
|
|
Companies
|
|
|
Total
|
|
|
September 30, 2005
|
|
|
14
|
|
|
|
6
|
|
|
|
20
|
|
Additions in connection with
Formation
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
Disposals
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
23
|
|
|
|
5
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting
and Foreign Currency
The Companys reporting currency is the euro, and therefore
the accompanying combined and consolidated financial statements
are presented in euro.
The assets and liabilities of foreign subsidiaries with
functional currencies other than the euro are translated using
period-end exchange rates, while the revenues and expenses of
such subsidiaries are translated using average exchange rates
during the period. Differences arising from the translation of
assets and liabilities in comparison with the translation of the
previous periods are included in other comprehensive income
(loss) and reported as a separate component of
business/shareholders equity.
F-12
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The exchange rates of the primary currencies used in the
preparation of the accompanying combined and consolidated
financial statements are as follows:
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|
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|
|
|
|
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|
|
|
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|
|
Exchange Rate September 30,
|
|
|
Annual Average Exchange Rate
|
|
Currency
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
euro
|
|
|
euro
|
|
|
euro
|
|
|
euro
|
|
|
U.S. dollar
|
|
|
1$
|
|
|
|
=
|
|
|
|
0.8290
|
|
|
|
0.7899
|
|
|
|
0.7869
|
|
|
|
0.8117
|
|
|
|
|
|
|
|
|
=
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Taiwan dollar
|
|
|
100NTD
|
|
|
|
=
|
|
|
|
2.4957
|
|
|
|
2.3866
|
|
|
|
2.4583
|
|
|
|
2.4823
|
|
|
|
|
|
|
|
|
=
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chinese Yuan Renminbi
|
|
|
100CNY
|
|
|
|
=
|
|
|
|
10.2432
|
|
|
|
9.9934
|
|
|
|
9.5601
|
|
|
|
10.1172
|
|
Revenue
Recognition
Sales
Revenue from products sold to customers is recognized, pursuant
to U.S. Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB)
104, Revenue Recognition, when persuasive
evidence of an arrangement exists, the price is fixed or
determinable, shipment is made and collectibility is reasonably
assured. The Company records reductions to revenue for estimated
product returns and allowances for discounts, volume rebates and
price protection, based on actual historical experience, at the
time the related revenue is recognized. In general, returns are
permitted only for quality related reasons within the applicable
warranty period, which is typically 12 months. Distributors
can, in certain cases, apply for stock rotation or scrap
allowances and price protection. Allowances for stock rotation
returns are accrued based on expected stock rotation as per the
contractual agreement. Distributor scrap allowances are accrued
based on the contractual agreement and, upon authorization of
the claim, reimbursed up to a certain maximum of the average
inventory value. Price protection programs allow distributors to
apply for a price protection credit on unsold inventory in the
event the Company reduces the standard list price of the
products included in such inventory. In some cases, rebate
programs are offered to specific distributors whereby the
distributor may apply for a rebate upon achievement of a defined
sales volume. Distributors are also partially compensated for
commonly defined cooperative advertising on a
case-by-case
basis.
License
Income
License income is recognized when earned and realizable (see
note 5). Lump sum payments are generally non-refundable and
are deferred where applicable and recognized over the period in
which the Company is obliged to provide additional service.
Pursuant to Emerging Issues Task Force (EITF) Issue
00-21,
Revenue Arrangements with Multiple
Deliverables, revenues from contracts with multiple
elements entered into after July 1, 2003 are recognized as
each element is earned based on the relative fair value of each
element and when there are no undelivered elements that are
essential to the functionality of the delivered elements and
when the amount is not contingent upon delivery of the
undelivered elements. Royalties are recognized as earned.
Grants
Grants for capital expenditures include both tax-free government
grants (Investitionszulage) and taxable grants for
investments in property, plant and equipment
(Investitionszuschüsse). Grants receivable are
established when a legal right for the grant exists and the
criteria for receiving the grant have been met. Tax-free
government grants are deferred (see note 22) and
recognized over the remaining useful life of the related asset.
Taxable grants are deducted from the acquisition costs of the
related asset (see note 6) and thereby reduce
depreciation expense in future periods. Other taxable grants
reduce the related expense (see notes 6, 20 and 22).
F-13
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Product-related
Expenses
Shipping and handling costs associated with product sales are
included in cost of sales. Expenditures for advertising, sales
promotion and other sales-related activities are expensed as
incurred. Provisions for estimated costs related to product
warranties are generally made at the time the related sale is
recorded, based on estimated failure rates and claim history.
Research and development costs are expensed as incurred.
Income
Taxes
Income taxes, as presented in the accompanying combined and
consolidated financial statements, are determined on a separate
return basis, although in numerous tax jurisdictions, including
Germany, the Company was included in the consolidated tax
returns of Infineon prior to the Formation. Where the Memory
Products business was only a part of an Infineon entity, the tax
provision has been prepared on an as-if separate company basis
except that, pursuant to the terms of the contribution agreement
between the Company and Infineon, any net operating losses
generated by the Memory Products business and carried forward
are treated as a reduction of business equity, as such losses
have been retained by Infineon. Infineon evaluates its tax
position and related tax strategies for its entire group as a
whole, which may differ from the tax strategies the Company
would have followed as a stand-alone company.
Income taxes are accounted for under the asset and liability
method pursuant to FASB Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting
for Income Taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. Investment tax credits are
accounted for under the flow-through method.
Stock-based
Compensation
Prior to the adoption of SFAS No. 123 (revised 2004),
the Company accounted for stock-based compensation using the
intrinsic value method pursuant to Accounting Principles Board
(APB) Opinion 25, Accounting for Stock
Issued to Employees, recognized compensation cost over
the pro rata vesting period, and applied the disclosure-only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation as amended by
SFAS No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure, an Amendment
of FASB Statement No. 123.
Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method. Under this application, the
Company records stock-based compensation expense for all awards
granted on or after the date of adoption and for the portion of
previously granted awards that remained unvested at the date of
adoption. Stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as
expense over the period during which the employee is required to
provide service in exchange for the award. Prior period amounts
have not been restated and do not reflect the recognition of
stock-based compensation. (see note 24).
Issuance
of shares by Subsidiaries or Associated Companies
Gains or losses arising from the issuances of shares by
subsidiaries or Associated Companies, due to changes in the
Companys proportionate share of the value of the
issuers equity, are recognized in earnings pursuant to
SAB Topic 5:H, Accounting for Sales of Stock by a
Subsidiary (see note 16).
F-14
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Cash
and Cash Equivalents
Cash and cash equivalents represent cash, deposits and liquid
short-term investments with original maturities of three months
or less. Cash equivalents as of September 30, 2005 and 2006
were 625 and 895 respectively, and consisted mainly
of bank term deposits and fixed income securities with original
maturities of three months or less.
Marketable
Securities
The Companys marketable securities are classified as
available-for-sale
and are stated at fair value as determined by the most recently
traded price of each security at the balance sheet date.
Unrealized gains and losses are included in accumulated other
comprehensive income, net of applicable income taxes. Realized
gains or losses and declines in value, if any, judged to be
other-than-temporary
on
available-for-sale
securities, are reported in other non-operating income or
expense. For the purpose of determining realized gains and
losses, the cost of securities sold is based on specific
identification.
Inventories
Inventories are valued at the lower of cost or market, cost
being generally determined on the basis of an average method.
Cost consists of purchased component costs and manufacturing
costs, which comprise direct material and labor costs and
applicable indirect costs.
Property,
Plant and Equipment
Property, plant and equipment is valued at cost less accumulated
depreciation. Spare parts, maintenance and repairs are expensed
as incurred. Depreciation expense is recognized using the
straight-line method. Construction in progress includes advance
payments for construction of fixed assets. Land and construction
in progress are not depreciated. The cost of construction of
certain long-term assets includes capitalized interest, which is
amortized over the estimated useful life of the related asset.
During the years ended September 30, 2005 and 2006
capitalized interest was 7 and 0, respectively. The
estimated useful lives of assets are as follows:
|
|
|
|
|
|
|
Years
|
|
|
Buildings
|
|
|
10-25
|
|
Technical equipment and machinery
|
|
|
3-10
|
|
Other plant and office equipment
|
|
|
1-10
|
|
Leases
The Company is a lessee of property, plant and equipment. All
leases where the Company is lessee that meet certain specified
criteria intended to represent situations where the substantive
risks and rewards of ownership have been transferred to the
lessee are accounted for as capital leases pursuant to
SFAS No. 13, Accounting for Leases,
and related interpretations. All other leases are accounted for
as operating leases.
Intangible
Assets
The Company accounts for business combinations using the
purchase method of accounting pursuant to
SFAS No. 141, Business
Combinations. Intangible assets acquired in a purchase
method business combination are recognized and reported apart
from goodwill, pursuant to the criteria specified by
SFAS No. 141.
Intangible assets consist primarily of purchased intangible
assets, such as licenses and purchased technology, which are
recorded at acquisition cost, and goodwill resulting from
business acquisitions, representing the excess of purchase price
over fair value of net assets acquired. Intangible assets other
than goodwill are amortized on a straight-line basis over the
estimated useful lives of the assets ranging from 3 to
10 years. Pursuant to SFAS No. 142
F-15
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Goodwill and Other Intangible Assets,
goodwill is not amortized, but instead tested for impairment at
least annually in accordance with the provisions of
SFAS No. 142. The Company tests goodwill annually for
impairment in the fourth quarter of the financial year, whereby
if the carrying amount of a reporting unit with goodwill exceeds
its fair value, the amount of impairment is determined by the
excess of recorded goodwill over the fair value of goodwill. The
determination of fair value of the reporting units and related
goodwill requires considerable judgment by management.
Impairment
of Long-lived Assets
The Company reviews long-lived assets, including property, plant
and equipment and intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Estimated fair
value is generally based on either appraised value or measured
by discounted estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future
cash flows.
Long-term
Investments
The Company assesses declines in the value of investments
accounted for under the equity and cost methods to determine
whether such decline is
other-than-temporary,
thereby rendering the investment impaired. This assessment is
made by considering available evidence including changes in
general market conditions, specific industry and individual
company data, the length of time and the extent to which the
market value has been less than cost, the financial condition
and near-term prospects of the individual company, and the
Companys intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery
in market value.
Financial
Instruments
The Company operates internationally, giving rise to exposure to
changes in foreign currency exchange rates. The Company uses
financial instruments, including derivatives such as foreign
currency forward and option contracts, to reduce this exposure
based on the net exposure to the respective currency. The
Company applies SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as
amended by SFAS No. 137, SFAS No. 138 and
SFAS No. 149, which provides guidance on accounting
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. Derivative financial instruments are recorded at
their fair value and included in other current assets or other
current liabilities. Generally the Company does not designate
its derivative instruments as hedge transactions. Changes in
fair value of undesignated derivatives that relate to operations
are recorded as part of cost of sales, while undesignated
derivatives relating to financing activities are recorded in
other non-operating expense, net. The fair value of derivatives
and other financial instruments is discussed in note 29.
Pension
Plans
The measurement of pension-benefit liabilities is based on
actuarial computations using the
projected-unit-credit
method in accordance with SFAS No. 87,
Employers Accounting for Pensions. The
assumptions used to calculate pension liabilities and costs are
shown in Note 28. Changes in the amount of the projected
benefit obligation or plan assets resulting from experience
different from that assumed and from changes in assumptions can
result in gains or losses not yet recognized in the
Companys consolidated financial statements. Amortization
of an unrecognized net gain or loss is included as a component
of the Companys net periodic benefit plan cost for a year
if, as of the beginning of the year, that unrecognized net gain
or loss exceeds 10% of the greater of the projected
F-16
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
benefit obligation or the fair value of that plans assets.
In that case, the amount of amortization recognized by the
Company is the resulting excess divided by the average remaining
service period of the active employees expected to receive
benefits under the plan. The Company also records a liability
for amounts payable under the provisions of its various defined
contribution plans.
Recent
Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB
No. 43, Chapter 4, which clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage),
requiring that such costs be recognized as current period
charges and requiring the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The Company adopted
SFAS No. 151 with effect from October 1, 2005,
which did not have a significant impact on its consolidated
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets an
Amendment of APB Opinion No. 29, which eliminates
the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The
Company adopted SFAS No. 153 for nonmonetary asset
exchanges occurring on or after July 1, 2005. The adoption
SFAS No. 153 did not have a significant impact on the
Companys combined and consolidated financial position or
results of operations.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations, which clarifies that an entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value can be
reasonably estimated even though uncertainty exists about the
timing and (or) method of settlement. The Company is required to
adopt Interpretation No. 47 prior to the end of its 2006
financial year. The Company adopted Interpretation No. 47
during the 2006 financial year, which did not have a significant
impact on its consolidated financial positions or results of
operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces 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 is required to adopt SFAS No. 154 for
accounting changes and error corrections that occur after
September 30, 2006. The Companys results of
operations and financial condition will only be impacted
following the adoption of SFAS No. 154 if it
implements changes in accounting principle that are addressed by
the standard or corrects accounting errors in future periods.
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 derecognition, 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
F-17
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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. 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(R), 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 plan 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. The Company does not expect the
change in the annual measurement date to September 30 to
have a significant impact on its results of operations or
financial position. 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.
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 and results of operations.
During December 2004, Saifun Semiconductors Ltd.
(Saifun) and the Company modified their existing
flash cooperation agreement. As a consequence, the Company
consummated the acquisition of Saifuns remaining 30% share
in the Infineon Technologies Flash joint venture in January 2005
and was granted a license for the use of Saifun
NROM®
technologies, in exchange for $95 million (subsequently
reduced to $48 million) to be paid in quarterly
installments over 10 years and additional purchase
consideration primarily in the form of net liabilities assumed
aggregating to 7 (see note 17). The assets acquired
and liabilities assumed were recorded in the accompanying
combined and consolidated balance sheet based upon their
estimated fair values as of the date of the acquisition (see
note 21). The excess of the purchase price over the
estimated fair values of the underlying assets
F-18
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
acquired and liabilities assumed amounted to 7 and was
allocated to goodwill. The Company has sole ownership and
responsibility for the business and started to account for its
entire financial results in the three months ended
March 31, 2005. In light of the weak market conditions for
commodity NAND Flash memories in the three months ended
September 30, 2006, Qimonda decided to ramp down its Flash
production and stop the current development of NAND-compatible
flash memory products based on Saifuns proprietary
NROM®
technology. Qimonda and Saifun amended the above license
agreement to terminate the payment of quarterly installments as
of December 31, 2006. As a result of the above, Qimonda
reduced payables, goodwill and other intangible assets, and
recognized an impairment charge of 9 (see
note 7) related to the license (7) and fixed
assets (2) that were not considered to be recoverable as
of September 30, 2006.
The Company had no acquisitions during the year ended
September 30, 2006. The following table summarizes the net
assets acquired as a result of the Companys acquisition
during the year ended September 30, 2005:
|
|
|
|
|
|
|
2005
|
|
|
Acquisition Date
|
|
|
January 2005
|
|
Cash
|
|
|
1
|
|
Other current assets
|
|
|
16
|
|
Property, plant and equipment
|
|
|
4
|
|
Intangible assets core
technology
|
|
|
58
|
|
Goodwill
|
|
|
7
|
|
Other non-current assets
|
|
|
3
|
|
|
|
|
|
|
Total assets acquired
|
|
|
89
|
|
|
|
|
|
|
Current liabilities
|
|
|
(45
|
)
|
Non-current liabilities (including
debt)
|
|
|
(2
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(47
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
42
|
|
|
|
|
|
|
Cash paid (Purchase consideration)
|
|
|
|
|
The above acquisition has been accounted for by the purchase
method of accounting and, accordingly, the combined and
consolidated statements of operations include the results of the
acquired company from its acquisition date. For each significant
acquisition the Company engages an independent third party to
assist in the valuation of net assets acquired. Pro forma
financial information relating to this acquisition is not
material either individually or in the aggregate to the results
of operations and financial position of the Company and has been
omitted.
Effective October 1, 2004 Infineon transferred the 200mm
front-end manufacturing facility located in Dresden, Germany
(DD200) from the Memory Products business to the
Logic business of Infineon, since the facility would be used to
manufacture logic products in the future. Accordingly, the
Infineon Logic business took over the management responsibility
for this operation from the transfer date.
Through September 30, 2004 the DD200 balance sheet and
income statement is included in the Companys historical
combined financial statements because the business was owned and
operated as part of the Memory Products business. Since the
transfer was between entities under common control, the transfer
was effected at historical book value as a non-cash reduction of
business equity (note 26).
F-19
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Until the facility is fully converted to logic production, the
Company is charged for the capacity utilized to manufacture the
products it purchases from Infineon. In April 2006, the Company
entered into a product purchase agreement with Infineon through
the end of the 2007 financial year related to the DD200 facility
based on Infineons cost plus a margin. Qimonda is
currently in negotiations with Infineon regarding the
Companys use or acquisition, after September 30,
2007, of capacity at Infineons 200mm manufacturing
facility in Dresden. Infineon and the Company have agreed in
principle that they will share equally any potential
restructuring costs arising in connection with one module.
Restructuring cost will depend on the extent of our capacity
usage after September 30, 2007.
The following table summarizes the results of the transferred
DD200 facility for the year ended September 30, 2004:
|
|
|
|
|
|
|
2004
|
|
|
Sales
|
|
|
|
|
Third parties
|
|
|
1
|
|
Related parties
|
|
|
83
|
|
|
|
|
|
|
Net sales
|
|
|
84
|
|
|
|
|
|
|
Loss before tax
|
|
|
(5
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5
|
)
|
|
|
|
|
|
Effective October 1, 2005 Infineon transferred the
development facility Infineon Technologies MP Development Center
France S.A.S, France located in Corbeil Essonnes, France
(IFMDF) from the Memory Products business to the
Logic business of Infineon, due to the revised scope of its
future development activities. Accordingly, the Infineon Logic
business took over the management responsibility for this
operation from the transfer date. Through September 30,
2005 the IFMDF balance sheet and income statement is included in
the Companys historical combined financial statements
because the business was owned and operated as part of the
Memory Products business. The results of the transferred
facilitys operations during the year ended
September 30, 2005 are not material. The net book value of
10 was reflected as a non-cash reduction to
business/shareholders equity as of October 1, 2005.
(note 26).
During the years ended September 30, 2004, 2005 and 2006,
the Company recognized revenues related to license and
technology transfer fees of 61, 160 and 7,
respectively, which are included in net sales in the
accompanying statements of operations. Included in these amounts
are previously deferred license fees of 48, 33 and
2, which were recognized as revenue pursuant to
SAB 104, for the years ended September 30, 2004, 2005
and 2006, respectively, since the Company had fulfilled all of
its obligations and all such amounts were realized.
On November 10, 2004, the Company and ProMOS Technologies
Inc. (ProMOS) reached an agreement regarding
ProMOS license of the Companys previously
transferred technologies, pursuant to which ProMOS may continue
to produce and sell products using those technologies and to
develop its own processes and products. The Company has no
continuing future involvement with the licensing of these
products to ProMOS. As full consideration, ProMOS agreed to pay
the Company $156 million in four installments through
April 30, 2006, against which the Companys accrued
payable for DRAM products from ProMOS of $36 million was
offset. The parties agreed to withdraw their respective claims,
including arbitration. The present value of the settlement
amounted to 118 and was recognized as license income
during the first quarter of the 2005 financial year.
F-20
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
In connection with its joint technology development with Nanya
Technology Corporation (Nanya), in 2003, the Company
granted Nanya a license to use its 110nm technology in
Nanyas existing operations. In September 29, 2005,
the Company and Nanya signed an agreement to expand their
development cooperation with respect to the joint development of
advanced 58nm production technologies for 300mm wafers (see
note 16). License income related to the technology is
recognized over the estimated life of the technology.
In connection with the extension of a capacity reservation
agreement with Winbond Electronics Corp., Hsinchu, Taiwan
(Winbond) in August 2004, the Company granted
Winbond a license to use its 110nm technology in Winbonds
production process for the manufacturing of products for the
Company. On August 29, 2006, the Company signed agreements
with Winbond to expand their existing cooperation and capacity
reservation. Under the terms of the agreements, the Company will
transfer its 80nm DRAM trench technology to Winbonds
300mm-wafer facility. In return, Winbond will manufacture DRAMs
for computing applications using this technology exclusively for
the Company. The license income was deferred and is being
recognized over the life of the capacity reservation agreements.
The Company has received economic development funding from
various governmental entities, including grants for the
construction of manufacturing facilities, as well as grants to
subsidize research and development activities and employee
training. Grants and subsidies included in the accompanying
combined and consolidated financial statements during the years
ended September 30, 2004, 2005 and 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Included in the combined and
consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
25
|
|
|
|
16
|
|
|
|
17
|
|
Cost of sales
|
|
|
86
|
|
|
|
94
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
110
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction grants deducted from
the cost of fixed assets (note 26)
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
Deferred government grants at
September 30 (notes 20 and 22)
|
|
|
|
|
|
|
208
|
|
|
|
179
|
|
Grants receivable at
September 30 (note 14 and 17)
|
|
|
|
|
|
|
78
|
|
|
|
118
|
|
|
|
7.
|
Other
Operating Expense, net
|
Other operating expense, net for the years ended
September 30, 2004, 2005 and 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Litigation settlement charges
(note 31)
|
|
|
194
|
|
|
|
20
|
|
|
|
54
|
|
Impairment charges (note 3)
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Other, net
|
|
|
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
13
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement charges refer to the settlement of an
antitrust investigation by the U.S. Department of Justice
and related settlements with customers (see note 19), as
well as, during the year ended September 30, 2006, the
settlement of the Tessera litigation (see note 17).
In 2004, Infineon announced restructuring measures aimed at
reducing costs. As part of the restructuring, the Memory
Products business terminated 31 employees, primarily as a result
of relocating the Companys Maskhouse
F-21
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
operations from Munich to Dresden. This plan was completed in
the 2005 financial year although lease termination costs related
to the U.S. operations remained accrued at
September 30, 2005 and were settled during the year ended
September 30, 2006.
During the years ended September 30, 2004, 2005 and 2006,
charges of 2, 1 and 0, respectively, were
recognized as a result of these restructuring initiatives. As of
September 30, 2005 and 2006, restructuring liabilities were
2 and 0, respectively (see note 20).
Income before income taxes and minority interests is
attributable to the following geographic locations for the years
ended September 30, 2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Germany
|
|
|
76
|
|
|
|
41
|
|
|
|
22
|
|
Foreign
|
|
|
39
|
|
|
|
61
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
115
|
|
|
|
102
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) for the years ended
September 30, 2004, 2005 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
42
|
|
|
|
27
|
|
|
|
63
|
|
Foreign
|
|
|
35
|
|
|
|
6
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
33
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
171
|
|
|
|
46
|
|
|
|
21
|
|
Foreign
|
|
|
(37
|
)
|
|
|
7
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
53
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
211
|
|
|
|
86
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys statutory tax rate in Germany is 25%.
Additionally, a solidarity surcharge of 5.5% and trade tax of
13% is levied, for a combined statutory tax rate of 39%.
F-22
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
A reconciliation of income taxes for the years ended
September 30, 2004, 2005 and 2006, determined using the
German corporate tax rate plus trade taxes, net of federal
benefit, for a combined statutory rate of 39% for 2004, 2005 and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Expected expense for income taxes
|
|
|
44
|
|
|
|
40
|
|
|
|
75
|
|
Decrease (increase) in available
tax credits
|
|
|
(5
|
)
|
|
|
11
|
|
|
|
2
|
|
Non-taxable investment (income)
loss
|
|
|
6
|
|
|
|
(21
|
)
|
|
|
(50
|
)
|
Foreign tax rate differential
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(38
|
)
|
Non deductible expenses and other
provisions
|
|
|
51
|
|
|
|
3
|
|
|
|
5
|
|
Increase in valuation allowance
|
|
|
27
|
|
|
|
14
|
|
|
|
11
|
|
Losses not available to Qimonda
due to Formation
|
|
|
98
|
|
|
|
43
|
|
|
|
114
|
|
Other
|
|
|
3
|
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual expense for income taxes
|
|
|
211
|
|
|
|
86
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current tax expense resulting from the Formation was 6
for the year ended September 30, 2006. The deferred tax
expense for the year ended September 30, 2006 resulting
from the Formation was 13 due to reduced deferred tax
benefits available to the Company and 101 due to net
operating losses which are to be utilized by Infineon.
The Company has set up operations in a jurisdiction which grants
a tax holiday from the 2005 financial year onwards, which has a
remaining term of three years. Compared to ordinary taxation in
the country of residence this results in tax savings of 0
and 16 for the years ending September 30, 2005 and
2006, respectively, which are reflected in the foreign tax rate
differential.
F-23
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Deferred income tax assets and liabilities as of
September 30, 2005 and 2006 relate to the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
23
|
|
|
|
79
|
|
Property, plant and equipment
|
|
|
45
|
|
|
|
71
|
|
Other
|
|
|
16
|
|
|
|
7
|
|
Trade accounts receivable
|
|
|
10
|
|
|
|
16
|
|
Accrued liabilities
|
|
|
16
|
|
|
|
31
|
|
Liabilities
|
|
|
14
|
|
|
|
15
|
|
Deferred income
|
|
|
69
|
|
|
|
65
|
|
Net operating loss and tax credit
carry-forwards
|
|
|
87
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
280
|
|
|
|
316
|
|
Valuation allowance
|
|
|
(59
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
221
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(27
|
)
|
|
|
(44
|
)
|
Investments
|
|
|
|
|
|
|
(3
|
)
|
Inventories
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Trade accounts receivable
|
|
|
(6
|
)
|
|
|
(12
|
)
|
Accrued liabilities
|
|
|
(12
|
)
|
|
|
(15
|
)
|
Liabilities
|
|
|
(3
|
)
|
|
|
(14
|
)
|
Other items
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(56
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
165
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets and liabilities are presented in
the accompanying combined and consolidated balance sheets as of
September 30, 2005 and 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current
|
|
|
49
|
|
|
|
47
|
|
Non-current
|
|
|
125
|
|
|
|
160
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
(18
|
)
|
Non-current
|
|
|
(9
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
165
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Information regarding net tax loss carry-forwards that will be
retained by Infineon and not transferred to the Company at
Formation has not been provided as the Company does not believe
that such information is meaningful. Pursuant to the terms of
the contribution agreement between the Company and Infineon,
substantially all net operating losses generated and not
utilized by the Company have been transferred to and retained by
Infineon. As such, net deferred tax assets, reflecting valuation
allowances calculated on a separate return basis by the Company
F-24
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
for losses it could not utilize, of 59, 6 and
0 for the years ended September 30, 2004, 2005 and
2006, respectively, have been accounted for as equity
transactions with Infineon.
As of September 30, 2005 and 2006, the Company had
tax-effected credit carry-forwards of 28 and 32,
respectively, that will be retained by the Company. Such tax
credit-carry-forwards are generally limited to be used by the
particular entity that generated the loss or credit and do not
expire under current law. The benefit for tax credits is
accounted for on the flow-through method when the individual
entity is entitled to the claim.
Pursuant to SFAS No. 109, the Company has assessed its
deferred tax asset and the need for a valuation allowance. Such
an assessment considers whether it is more likely than not that
some portion or all of the deferred tax assets may not be
realized. The assessment requires considerable judgment on the
part of management, with respect to, among other factors,
benefits that could be realized from available tax strategies
and future taxable income, as well as other positive and
negative factors. The ultimate realization of deferred tax
assets is dependent upon the Companys ability to generate
the appropriate character of future taxable income sufficient to
utilize loss carry-forwards or tax credits before their
expiration. The assessment was based on the benefits that could
be realized from available tax strategies, forecasted future
taxable income and the reversal of temporary differences in
future periods. As a result of this assessment, the Company has
increased its deferred tax asset valuation allowance in those
tax jurisdictions as of September 30, 2005 and 2006 to
reduce the deferred tax asset to an amount that is more likely
than not expected to be realized in future.
Included in the valuation allowance for the years ended
September 30, 2005 and 2006 is an amount of 9 and
0, respectively, which will be utilized against goodwill
and other intangible assets in the event of a future recovery of
fully provided tax assets from acquisitions.
The changes in valuation allowance for deferred tax assets
during the years ended September 30, 2005 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Balance, beginning of the year
|
|
|
45
|
|
|
|
59
|
|
Applicable to continuing operations
|
|
|
14
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the year
|
|
|
59
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
The Company did not provide for income taxes or foreign
withholding taxes on cumulative earnings of foreign subsidiaries
as of September 30, 2005 and 2006, because these earnings
are intended to be indefinitely reinvested in those operations.
It is not practicable to estimate the amount of unrecognized
deferred tax liabilities for these undistributed foreign
earnings.
The income tax (benefit) expense for the years ended
September 30, 2004, 2005 and 2006 was allocated to
continuing operations and accumulated other comprehensive
income. The aggregate amounts allocated to equity, for
unrealized gains (losses) on securities and minimum pension
liabilities, were 0, 1 and 1 for the years
ended September 30, 2004, 2005 and 2006, respectively.
|
|
10.
|
Earnings
(Loss) Per Share
|
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 300,000,000 owned by Infineon (see
note 23). 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
300,000,000 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).
F-25
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The Company did not have any potentially dilutive instruments
outstanding for the years ended September 30, 2004, 2005
and 2006 (see note 24).
The computation of basic and diluted EPS for the years ended
September 30, 2004, 2005 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to
ordinary shareholders
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
300,000,000
|
|
|
|
300,000,000
|
|
|
|
305,983,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share (in
euro):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
(0.26
|
)
|
|
|
0.06
|
|
|
|
0.24
|
|
|
|
11.
|
Marketable
Securities
|
Marketable securities at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
Cost
|
|
|
Value
|
|
|
Gain
|
|
|
Loss
|
|
|
Cost
|
|
|
Value
|
|
|
Gain
|
|
|
Loss
|
|
|
Foreign government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
Equity securities
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Term deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
138
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
142
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reflected as follows Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
138
|
|
|
|
|
|
|
|
(1
|
)
|
Non-current assets (note 17)
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
142
|
|
|
|
142
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses as of September 30, 2006 related to
securities held for less than 12 months.
Realized gains (losses), net are reflected as other
non-operating income (expense), net and were as follows for the
years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Realized gains
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Realized losses
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains, net
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
12.
|
Trade
Accounts Receivable, net
|
Trade accounts receivable at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Third party trade
|
|
|
445
|
|
|
|
764
|
|
Infineon group trade
(note 27)
|
|
|
8
|
|
|
|
61
|
|
Associated and Related
Companies trade (note 27)
|
|
|
4
|
|
|
|
|
|
Siemens group trade
(note 27)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, gross
|
|
|
458
|
|
|
|
825
|
|
Allowance for doubtful accounts
|
|
|
(19
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
439
|
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for doubtful accounts for the years
ended September 30, 2005 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Allowance for doubtful accounts,
beginning of year
|
|
|
15
|
|
|
|
19
|
|
Provision for bad debt, net of
recoveries
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts,
end of year
|
|
|
19
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Inventories at September 30, 2005 and 2006 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Raw materials and supplies
|
|
|
31
|
|
|
|
54
|
|
Work-in-process
|
|
|
261
|
|
|
|
432
|
|
Finished goods
|
|
|
192
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
484
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
Other current assets at September 30, 2005 and 2006 consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Grants receivable
|
|
|
78
|
|
|
|
105
|
|
VAT and other tax receivables
|
|
|
34
|
|
|
|
97
|
|
Third party financial
and other receivables
|
|
|
35
|
|
|
|
24
|
|
License fees receivable
|
|
|
19
|
|
|
|
14
|
|
Prepaid expenses
|
|
|
10
|
|
|
|
14
|
|
Financial instruments
(note 29)
|
|
|
7
|
|
|
|
6
|
|
Employee receivables (note 27)
|
|
|
3
|
|
|
|
2
|
|
Associated and Related
Companies financial and other receivables
(note 27)
|
|
|
1
|
|
|
|
|
|
Other
|
|
|
11
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
|
198
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
F-27
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
15.
|
Property,
Plant and Equipment, net
|
A summary of activity for property, plant and equipment for the
year ended September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
|
|
|
Other Plant
|
|
|
|
|
|
|
|
|
|
Land and
|
|
|
Equipment
|
|
|
and Office
|
|
|
Construction
|
|
|
|
|
|
|
Buildings
|
|
|
and Machinery
|
|
|
Equipment
|
|
|
in Progress
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
820
|
|
|
|
3,389
|
|
|
|
766
|
|
|
|
91
|
|
|
|
5,066
|
|
Additions
|
|
|
1
|
|
|
|
217
|
|
|
|
32
|
|
|
|
352
|
|
|
|
602
|
|
Impairment charges (note 7)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Disposals
|
|
|
|
|
|
|
(53
|
)
|
|
|
(32
|
)
|
|
|
(2
|
)
|
|
|
(87
|
)
|
Reclassifications
|
|
|
7
|
|
|
|
338
|
|
|
|
9
|
|
|
|
(354
|
)
|
|
|
|
|
Transfers from (to) Infineon, net
|
|
|
1
|
|
|
|
(11
|
)
|
|
|
52
|
|
|
|
(3
|
)
|
|
|
39
|
|
Foreign currency effects
|
|
|
(24
|
)
|
|
|
(83
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
805
|
|
|
|
3,795
|
|
|
|
821
|
|
|
|
82
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
(209
|
)
|
|
|
(2,003
|
)
|
|
|
(638
|
)
|
|
|
|
|
|
|
(2,850
|
)
|
Depreciation
|
|
|
(70
|
)
|
|
|
(540
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
(691
|
)
|
Disposals
|
|
|
|
|
|
|
53
|
|
|
|
30
|
|
|
|
|
|
|
|
83
|
|
Reclassifications
|
|
|
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Transfers to (from) Infineon, net
|
|
|
|
|
|
|
11
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(24
|
)
|
Foreign currency effects
|
|
|
5
|
|
|
|
50
|
|
|
|
4
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
(274
|
)
|
|
|
(2,430
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
(3,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
611
|
|
|
|
1,386
|
|
|
|
128
|
|
|
|
91
|
|
|
|
2,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
531
|
|
|
|
1,365
|
|
|
|
102
|
|
|
|
82
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
16.
|
Long-term
Investments
|
A summary of activity for long-term investments for the year
ended September 30, 2005 and 2006, respectively is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in
|
|
|
Investment in
|
|
|
|
|
|
|
Associated
|
|
|
Related
|
|
|
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Total
|
|
|
Balance at October 1, 2004
|
|
|
381
|
|
|
|
16
|
|
|
|
397
|
|
Additions
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
Disposals
|
|
|
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Dividend payments
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Capitalized interest amortization
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Impairments
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
Equity in earnings
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
Reclassification
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Foreign currency effects
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
543
|
|
|
|
1
|
|
|
|
544
|
|
Additions
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Dividends received
|
|
|
(29
|
)
|
|
|
|
|
|
|
(29
|
)
|
Capitalized interest amortization
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Equity in earnings of associated
companies
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
Gain on associated company share
issuance
|
|
|
72
|
|
|
|
|
|
|
|
72
|
|
Reclassification
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
Foreign currency effects
|
|
|
(42
|
)
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
635
|
|
|
|
1
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Related Companies principally relate to
investment activities aimed at strengthening the Companys
future intellectual property potential.
The following Associated Companies as of September 30, 2006
are accounted for using the equity method of accounting due to
the lack of unilateral control (see note 2):
|
|
|
|
|
|
|
Direct and
|
|
|
|
Indirect
|
|
Name of the Associated Company
|
|
Ownership
|
|
|
Hwa-Keng Investment Inc., Taipei,
Taiwan (Hwa-Keng)
|
|
|
50.0
|
%
|
Inotera Memories Inc., Taoyuan,
Taiwan (Inotera)
|
|
|
36.0
|
%
|
Advanced Mask Technology Center
GmbH & Co. KG, Dresden, Germany (AMTC)
|
|
|
33.3
|
%
|
Maskhouse Building Administration
GmbH & Co. KG, Dresden, Germany (BAC)
|
|
|
33.3
|
%
|
Ramtron International Corp.,
Colorado, USA (Ramtron)
|
|
|
18.0
|
%
|
On November 13, 2002, the Company entered into agreements
with Nanya relating to a strategic cooperation in the
development of DRAM products and the foundation of a joint
venture called Inotera Memories Inc., a 300mm manufacturing
facility in Taiwan to employ production technology developed
under the Companies joint development agreements with
Nanya. Pursuant to the agreements, the Company and Nanya
developed advanced 90nm and 75nm technology. On
September 29, 2005, the Company and Nanya signed an
agreement to expand their development cooperation with respect
to the joint development of advanced 58nm production
technologies for
F-29
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
300mm wafers. The cooperation is expected to help each partner
expand its position in the DRAM market while sharing development
costs two-thirds by the Company and one-third by Nanya. The 2002
and 2005 cooperative agreements will remain in force until the
product and process technologies developed pursuant to the
agreements have achieved required qualifications.
During the year ended September 30, 2004 Inotera completed
the construction and started mass production in its first
manufacturing module. The final stage of the capacity was
completed during the year ended September 30, 2006. In May
2005 the groundbreaking for the second manufacturing module took
place. The capacity expansion for the second manufacturing
module is expected to take place through the 2007 calendar year.
The second module is financed by Inotera. The joint venture
partners are obliged to each purchase one-half of Inoteras
production based, in part, on market prices.
The November 2002 agreement, as amended, entitles Nanya to
receive from the Company or its then-existing foundry partners
60% of that amount of its foundry capacity that is in excess of
the foundry capacity the Company receives as of December 2006.
Nanya may also receive 50% of the Companys foundry
capacity for which it contracts after March 1, 2006 with
new foundry partners. The Companys obligation to provide
foundry capacity is capped at one third of its total 90nm
foundry capacity. In combination, the 2002 and 2005 agreements
also entitle Nanya to receive from the Company or its foundry
partners one third of its 75nm foundry capacity and one third of
its 58nm foundry capacity. As of September 30, 2006 the
Company has not contracted for foundry capacity that would
require it to cede capacity to Nanya under these agreements. The
Company does not expect that any foundry capacity that it may be
required to provide to Nanya will have a material adverse effect
on its business, financial condition or results of operations.
In connection with the Formation, Infineon and Qimonda entered
into a trust agreement under which Infineon holds the Inotera
shares in trust for the Company until the shares can be
transferred. This trust agreement provides for Infineon to
transfer the shares to the Company as and when the transfer
restrictions expire or the Company receives the exemption from
the lock-up
(see note 33).
If Infineon were to reduce its shareholding in the Company to a
minority level before the earlier of the fifth anniversary of
its Formation from Infineon and the achievement of early mass
production using 58nm process technology at its manufacturing
site in Dresden, the joint venture agreement with Nanya, as
amended, could require Qimonda to transfer these Inotera shares
to Infineon. The Company agreed with Infineon that, in this
event, it would retransfer the Inotera shares back to the trust.
The trust agreement provides for Infineon to again hold the
Inotera shares in trust for Qimonda until they could be
retransferred back to the Company.
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
Companys ownership interest was diluted to 41.4% while its
proportional share of Inoteras equity increased by
approximately 30, which gain the Company recognized as
part of non-operating income during the year ended
September 30, 2006.
On May 10, 2006, Inotera successfully completed a public
offering on the Luxembourg Stock Exchange of 40 million
global depositary shares (representing 400,000,000 common
shares) which are traded on the Euro MTF market and represent
14.8% of its outstanding share capital before the offering, for
an issuance price of NT$33 per ordinary share. As a result,
the Companys ownership interest was diluted to 36.0% while
its proportional share of Inoteras equity increased by
42, which gain the Company reflected as part of
non-operating income during the year ended September 30,
2006.
F-30
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
On May 16, 2002, Infineon entered into the AMTC and BAC
joint venture with its partners Advanced Micro Devices, Inc.,
USA (AMD), and Toppan Photomasks, Inc., USA
(formerly DuPont Photomasks Inc.) (Toppan), with the
purpose of developing and manufacturing advanced photomasks.
The Company also maintains equity investments in BAC, a German
company that owns the premises used by AMTC and Toppan
Photomasks Germany. The purpose of BAC is acquisition,
administration, and letting of real estate and corresponding
facilities for the production of photo masks.
The limited partnership agreement relating to AMTC and BAC
requires prior written consent from the other partners before
Infineon can assign its partnership interest. In the case of a
transfer to an affiliate, such as Qimonda, the consent may not
be unreasonably withheld, but the interest must be transferred
back to Infineon should Infineon cease to be the majority
shareholder. Infineon is currently in the process of negotiating
with AMD and Toppan with the goal of reaching an agreement that
would allow the Company to retain the interest even if Infineon
ceases to be the majority shareholder.
Hwa-Keng, a Taiwanese company was formed for the purpose of
facilitating the distribution of Inotera shares to
Inoteras employees. As a result of the Inotera IPO,
Hwa-Kengs business purpose has been fulfilled and
therefore is in the process of being dissolved. The dissolution
is not expected to have any financial impact for the Company.
Ramtron develops specialty semiconductor memory products, and is
based in Colorado Springs, Colorado. Since the acquisition in
2001 the investment in Ramtron has been accounted for under the
equity method of accounting. The Company has two representatives
on the board of directors of Ramtron and the ability to exercise
significant influence over operating and financial policies of
Ramtron (see note 33).
The Company recognized impairment charges related to certain
investments for which the carrying value exceeded the fair value
on an
other-than-temporary
basis, of 7, 6 and 0 for the years ended
September 30, 2004, 2005 and 2006, respectively, which are
reflected as other non-operating expense.
Goodwill of 0 and 2 is included in the amount of
long-term investments at September 30, 2005 and 2006,
respectively.
For the Associated Companies as of September 30, 2006, the
aggregate summarized financial information for the years ended
September 30, 2004, 2005 and 2006, respectively, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Sales
|
|
|
54
|
|
|
|
475
|
|
|
|
909
|
|
Gross (loss) profit
|
|
|
(6
|
)
|
|
|
154
|
|
|
|
320
|
|
Net (loss) income
|
|
|
(45
|
)
|
|
|
90
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Current assets
|
|
|
227
|
|
|
|
525
|
|
|
|
1,123
|
|
Non-current assets
|
|
|
1,012
|
|
|
|
1,923
|
|
|
|
1,823
|
|
Current liabilities
|
|
|
(205
|
)
|
|
|
(329
|
)
|
|
|
(518
|
)
|
Non-current liabilities
|
|
|
(328
|
)
|
|
|
(898
|
)
|
|
|
(645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
706
|
|
|
|
1,221
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Other non-current assets at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Intangible assets, net
|
|
|
157
|
|
|
|
143
|
|
Employee deferred compensation
asset (note 27)
|
|
|
10
|
|
|
|
5
|
|
Prepaid expenses
|
|
|
4
|
|
|
|
1
|
|
Marketable securities
(note 11)
|
|
|
1
|
|
|
|
4
|
|
Grants receivable
|
|
|
|
|
|
|
13
|
|
License fees receivable
|
|
|
|
|
|
|
11
|
|
Other
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
174
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
A summary of activity for intangible assets for the years ended
September 30, 2005 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
Total
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
93
|
|
|
|
12
|
|
|
|
105
|
|
Additions
|
|
|
|
|
|
|
41
|
|
|
|
41
|
|
Disposals
|
|
|
|
|
|
|
(34
|
)
|
|
|
(34
|
)
|
Acquisitions (note 3)
|
|
|
7
|
|
|
|
58
|
|
|
|
65
|
|
Foreign currency effects
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
101
|
|
|
|
77
|
|
|
|
178
|
|
Additions
|
|
|
|
|
|
|
45
|
|
|
|
45
|
|
Impairment charges (note 7)
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Disposals and reductions
|
|
|
(11
|
)
|
|
|
(26
|
)
|
|
|
(37
|
)
|
Foreign currency effects
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
84
|
|
|
|
89
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2004
|
|
|
(13
|
)
|
|
|
(6
|
)
|
|
|
(19
|
)
|
Amortization
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Disposals
|
|
|
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(21
|
)
|
Amortization
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
Disposals and reductions
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
Foreign currency effects
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
(12
|
)
|
|
|
(18
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net as of
September 30, 2005
|
|
|
88
|
|
|
|
69
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net as of
September 30, 2006
|
|
|
72
|
|
|
|
71
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The estimated aggregate amortization expense relating to other
intangible assets for each of the five succeeding financial
years is as follows: 2007 15; 2008 12; 2009 9;
2010 9; 2011 9.
In connection with the acquisition of Saifuns remaining
30% share in Infineon Technologies Flash during January 2005,
the Company was granted a license for the use of Saifun
NROM®
technologies (see note 3). During the three months ended
March 31, 2005 the Company recorded the license of 58
and a corresponding liability in the amount of 58,
representing the estimated fair value of the license and minimum
future license payments, respectively. The Company retained the
option to terminate the entire license, or parts thereof, at any
time without penalty. During the three months ended
June 30, 2005, the Company exercised its termination option
and cancelled the portion of the license encompassing
NROM®
Code Flash products. As a result of the partial termination, the
license asset and related liability were reduced to 28 as
of September 30, 2005. Effective September 30, 2006,
the Company and Saifun amended its license agreement (see
note 3). As a result of the amendment, the Company reduced
payables, goodwill and other intangible assets, and recognized
an impairment charge of 9 (see note 7) related
to the license (7) and fixed assets (2) that were
not considered to be recoverable as of September 30, 2006.
On March 18, 2005, the Company and Rambus reached an
agreement settling all claims between them and licensing the
Rambus patent portfolio for use in current and future Company
products. Rambus granted to the Company a worldwide license to
existing and future Rambus patents and patent applications for
use in the Companys memory products. In exchange for this
worldwide license, the Company agreed to pay $50 million in
quarterly installments of $6 million between
November 15, 2005 and November 15, 2007. As of
March 31, 2005 the Company recorded a license and
corresponding liability in the amount of 37, representing
the estimated present value of the minimum future license
payments. After November 15, 2007, and only if Rambus
enters into additional specified licensing agreements with
certain other DRAM manufacturers, the Company would make
additional quarterly payments which may accumulate up to a
maximum of an additional $100 million. Because Rambus
ability to conclude the agreements is not within the
Companys control, the Company is not able to estimate
whether additional payment obligations may arise. The agreement
also provides the Company an option for acquiring certain other
licenses. All licenses provide for the Company to be treated as
a most-favored customer of Rambus. The Company
simultaneously granted to Rambus a fully-paid perpetual license
for memory interfaces. In addition to the licenses, the two
companies agreed to the immediate dismissal of all pending
litigation and released each other from all existing legal
claims. The license of 37 is being amortized over the
expected useful life of the related technologies of ten years.
In June 2006, the Company and Infineon reached an agreement with
MOSAID Technologies Inc. (MOSAID) settling all
claims between them and licensing the MOSAID patent portfolio
for use in current and future Company products. MOSAID granted
to Infineon a six year license to use any MOSAID patents in the
manufacturing and sale of semiconductor products, as well as a
lives of the patents license to certain MOSAID
patent families. In exchange for these licenses, the Company
agreed to make license payments commencing on July 1, 2006
over a six-year term. The license of 32 is being amortized
over the expected useful life of the related technologies of six
years.
On August 1, 2006, Infineon and the Company entered into
settlement agreements with Tessera Inc. in respect of all of
Tesseras patent infringement and antitrust claim and all
counterclaims and other claims Infineon and the Company raised
against Tessera. As part of the settlement, Infineon and the
Company entered into license agreements with Tessera, effective
July 1, 2006, that provide the Infineon and the Company
world-wide, nonexclusive, non-transferable and non-sublicensable
license to use a portfolio of Tessera patents relating to
packaging for integrated circuits in Infineons and the
Companys production. The license agreements have a
six-year term and can be extended. Under the license agreement,
the Company agreed to pay Tessera an initial upfront fee and
additional royalty payments over a six year period based on the
volume of components it sells that are subject to the license.
The Company recognized the litigation settlement portion of
31 as other operating expense
F-33
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
(see note 7) during the year ended September 30,
2006. The remaining license portion is amortized over the term
of the agreement and the royalty payments are recognized as the
related sales are made.
|
|
18.
|
Trade
Accounts Payable
|
Trade accounts payable at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Third party trade
|
|
|
422
|
|
|
|
565
|
|
Infineon group trade
(note 27)
|
|
|
31
|
|
|
|
71
|
|
Associated and Related
Companies trade (note 27)
|
|
|
64
|
|
|
|
76
|
|
Siemens group trade
(note 27)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
519
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities at September 30, 2005 and 2006 consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Personnel costs
|
|
|
69
|
|
|
|
95
|
|
Settlement for antitrust related
matters (note 31)
|
|
|
31
|
|
|
|
53
|
|
Warranties and licenses
|
|
|
3
|
|
|
|
2
|
|
Other
|
|
|
19
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
122
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
On September 15, 2004 the Company entered into a plea
agreement with the United States Department of Justice in
connection with its antitrust investigation (see
note 31) and agreed to pay a fine aggregating
$160 million over a five-year period. The amount due within
one year as of the balance sheet date is included in accrued and
other current liabilities (see note 20), and the remaining
long-term portion is reflected as other non-current liabilities
(see note 22). As a result of this agreement and other
anti-trust related investigations and customer settlements (see
note 31), the Company charged other operating expenses with
an aggregate of 194, 20 and 23 during the
years ended September 30, 2004, 2005 and 2006, respectively
(see note 7).
F-34
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
20.
|
Other
Current Liabilities
|
Other current liabilities at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred government grants
(note 6)
|
|
|
70
|
|
|
|
74
|
|
VAT and other taxes payable
|
|
|
33
|
|
|
|
72
|
|
Payroll obligations to employees
|
|
|
31
|
|
|
|
31
|
|
Settlement for anti-trust related
matters payable to Infineon (notes 19 and 31)
|
|
|
31
|
|
|
|
24
|
|
Other deferred income
|
|
|
13
|
|
|
|
20
|
|
Licenses payable
|
|
|
9
|
|
|
|
13
|
|
Infineon group
financial and other (note 27)
|
|
|
6
|
|
|
|
9
|
|
Financial instruments
(note 29)
|
|
|
4
|
|
|
|
2
|
|
Restructuring (note 8)
|
|
|
2
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
200
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
Debt at September 30, 2005 and 2006 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Loans from Infineon, weighted
average interest rate 6.23%
|
|
|
524
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Unsecured term loan payable to
bank, rate 3.75%, due 2013
|
|
|
80
|
|
|
|
124
|
|
Notes payable to governmental
entity, rate 4.55%, due 2027
|
|
|
28
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
108
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Short-term loans consist of U.S. dollar denominated
borrowings from Infineon, with maturities in July and August
2007 as of September 30, 2006, under the terms of a Master
Loan Agreement with Infineon. In this agreement, the Company
agreed not to draw further amounts and to repay all outstanding
amounts, including any mutually agreed extensions not later than
two years after the date of the IPO. An amount of 107 was
repaid during the three months ended September 30, 2006.
A 124 non-recourse project financing facility for the
expansion of the Porto, Portugal manufacturing facility was
fully drawn as of September 30, 2006.
As of September 30, 2006 a 27 million note
payable to a government entity in connection with the Richmond,
Virginia plant had been fully drawn.
F-35
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Aggregate amounts of debt maturing subsequent to
September 30, 2006 are as follows:
|
|
|
|
|
Year Ending September 30,
|
|
Amount
|
|
|
2007
|
|
|
344
|
|
2008
|
|
|
21
|
|
2009
|
|
|
21
|
|
2010
|
|
|
21
|
|
2011
|
|
|
21
|
|
Thereafter
|
|
|
67
|
|
|
|
|
|
|
Total debt
|
|
|
495
|
|
|
|
|
|
|
In August 2006, the Company entered into a multicurrency
revolving loan facility in an aggregate principal amount of
250 million. The facility matures three years from
the date of the Companys initial public offering, and may
be extended for one additional year at the option of the lenders
at the end of the facilitys first year of operation. The
Company entered into this facility primarily as a source of
backup liquidity. Loans made under the facility, which may be
used for working capital requirements
and/or
general corporate purposes, may have various maturities, ranging
from one to twelve months, or longer as agreed by the parties.
The facility contains several covenants, agreements and
financial ratios customary for such transactions including
negative pledge, limitation on indebtedness, restriction on
asset dispositions; limitations on mergers and reorganizations,
required maintenance of minimum liquidity levels and financial
ratios; and limitation on dividend payments. The Company was in
compliance with these covenants as of September 30, 2006.
Funds drawn under the facility shall not be used to repay
indebtedness to Infineon and the agreement contains restrictions
on the Companys ability to repay indebtedness to Infineon
other than from capital market issuances, unless the
Companys liquidity exceeds certain levels. The facility is
subject to a provision permitting lenders to terminate their
advances if a person or group of persons, acting in concert,
other than Infineon, gains either 35 percent of the
Companys voting power or other indices of control or share
ownership exceeding 35 percent of the Companys issued
share capital. As of September 30, 2006, no amounts were
outstanding under this facility.
The Company can also draw, for short term purposes, on the
working capital lines it maintains in several locations in an
aggregate amount of 177 million; there were no
amounts outstanding under these facilities as of
September 30, 2006.
Other non-current liabilities at September 30, 2005 and
2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred government grants
(note 6)
|
|
|
138
|
|
|
|
105
|
|
Minority interest
|
|
|
81
|
|
|
|
79
|
|
Settlement for antitrust related
matters payable to Infineon (notes 19 and 31)
|
|
|
88
|
|
|
|
64
|
|
Pension liabilities (note 28)
|
|
|
29
|
|
|
|
26
|
|
Licenses payable
|
|
|
48
|
|
|
|
37
|
|
Deferred income
|
|
|
22
|
|
|
|
9
|
|
Other
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
412
|
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
F-36
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
On July 28, 2003, the Company entered into a joint venture
agreement with China-Singapore Suzhou Industrial Park Venture
Company (CSVC) for the construction of a back-end
manufacturing facility in the Peoples Republic of China.
The capital invested by CSVC earns an annual return and has a
liquidation preference. All accumulated earnings and dividend
rights accrue to the benefit of the Company. Accordingly, the
Company has consolidated 100% of the results of operations of
the joint venture from inception, although the capital invested
and annual return of the minority investor is reflected as
minority interest.
|
|
23.
|
Ordinary
Share Capital
|
On April 25, 2006 the initial 50,000 registered shares of
euro 1.00 notional value were combined to 25,000 registered
shares of 2.00 notional value.
Pursuant to the contribution agreement, in exchange for the
Infineon contributions as part of the Formation, the Company
issued 132,288,975 ordinary registered shares to Infineon, which
increased the Companys share capital from 0.05 to
264.6 on April 25, 2006 (Capital Increase I), and
167,686,025 ordinary registered shares to Infineon Technologies
Holding B.V., which increased the Companys share capital
from 264.6 to 600 (Capital Increase II).
On July 27, 2006, the Companys shareholders resolved
to increase the share capital to 684 against cash
contributions through the issuance of 42,000,000 ordinary
registered shares, that exclude subscription rights of existing
shareholders, and became effective on August 8, 2006
(Capital Increase III).
As of September 30, 2006 the Company had a total of
342,000,000 no-par value ordinary registered shares
(Namensaktien) shares of 2.00 notional value per share
outstanding.
Authorized
and Conditional Share Capital
Under the German Stock Corporation Act (Aktiengesetz), a
stock corporations shareholder can authorize the
management board to issue shares in a specified aggregate
nominal amount up to 50% of the issued share capital at the time
the resolution is passed. The shareholders authorization
may extend for a period of no more than five years.
On July 14, 2006, the Companys shareholders resolved
to amend the Companys Articles of Association to authorize
the Management Board to increase the share capital with the
Supervisory Boards consent. The Management Board may use
this authorization until July 13, 2011 to increase the
share capital by up to 30 through the issuance, in one or
more tranches, of new ordinary registered shares with no par
value, that exclude subscription rights of existing
shareholders, in exchange for cash contributions for the purpose
of issuing shares to the Companys and the
subsidiaries employees.
In addition on July 27, 2006, the Companys
shareholders resolved to amend the Companys Articles of
Association to authorize the Management Board to increase the
share capital with the Supervisory Boards consent against
contributions in cash or in kind. The Management Board may use
these authorizations until July 26, 2011 to issue new
shares in one or more tranches for any legal purpose in an
aggregate amount of up to 239.4 million in which case
existing shareholders have pre-emptive rights, which may be
excluded in specified circumstances.
During the Companys extraordinary shareholders
meeting on July 14, 2006, its shareholders passed the
following resolutions with regard to conditional capital:
First, the Companys share capital is
conditionally increased by up to 12 million through
the issuance of up to 6 million ordinary registered shares
with no par value in connection with the employee stock option
and share purchase plans described in note 24.
Second, the Companys share capital is
conditionally increased by up to 240.1 through the
issuance of up to 120.05 ordinary registered shares with no par
value. This conditional capital may only be used in connection
with an issuance of a convertible bond, which the shareholders
authorized by resolution of July 14, 2006.
F-37
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Dividends
Under the German Stock Corporation Act (Aktiengesetz),
the amount of dividends available for distribution to
shareholders is based on the level of earnings
(Bilanzgewinn) of the parent company, Qimonda AG, as
determined in accordance with the HGB. All dividends must be
approved by shareholders. No earnings are available for
distribution as a dividend for the 2006 financial year, since
Qimonda AG on a stand-alone basis, as the parent company,
incurred a cumulative loss (Bilanzverlust) as of
September 30, 2006.
|
|
24.
|
Stock-based
Compensation
|
Infineon
Stock Option Plans
In periods prior to the Formation, certain of the Companys
employees were granted Infineon stock options as Infineon
employees pursuant to Infineons stock option plans. The
aggregate number of such options outstanding were
11.6 million and 11.4 million (of which
5.6 million and 6.6 million were exercisable) as of
September 30, 2005 and 2006, respectively. If such options
are exercised, the employees are to be given Infineon shares in
exchange for payment of the exercise price to Infineon.
Accordingly, such options do not represent potential dilutive
instruments to the Company.
Qimonda
Employee Stock Option Plan
During an extraordinary shareholders meeting held on
July 14, 2006, the shareholders authorized the Supervisory
Board to grant to the members of the Management Board, and the
Management Board to grant to certain key executives in the
group, through September 30, 2009, a total of 6,000,000
non-transferable option rights to receive ordinary shares issued
by the Company. The shareholders meeting resolved on the
following key features of such stock option plan:
The option rights may be allocated as follows: the first group,
consisting of the members of the Management Board, may receive a
total of up to 1,200,000 option rights. The second group,
consisting of the members of the executive boards of the
subsidiaries in Germany and abroad, may receive a total of up to
1,000,000 option rights. The third group, consisting of further
key executives who will be nominated based on their performance
to receive up to a specific number of options based on their job
classification, may receive a total of up to 3,800,000 option
rights. The Company expects that, in total, about 6% of the work
force will be eligible to participate in the plan. During any
fiscal year, not more than 40% of the total option rights
allocable to the respective group may be issued to the members
of such group. No option rights may be issued to executives of
any of the group companies that are listed on a stock exchange
and their subsidiaries, if and for as long as such companies
maintain their own stock option plans.
Option rights may be granted within 45 days upon the
publication of the results for the preceding fiscal year or
within 45 days upon publication of the results for the
first or second quarter of a fiscal year, but, in each case, no
later than two weeks prior to the end of the respective quarter.
The option rights may be exercised within six years after their
grant, but not before the expiration of a vesting period that
will be at least three years. The exercise of each option right
is subject to the condition that the exchange price of the ADSs
on the New York Stock Exchange will, during the exercise period
of the respective option right, exceed the index
Philadelphia Semiconductor Sector (SOX) on at least
three consecutive days. In order to determine whether such
excess has taken place, the SOX and the strike price of the
respective option right will be set at 100 at the day on which
the option right is granted.
For as long as the Companys shares are not listed on any
organized market with the European Union or the European
Economic Area, the strike price will be the average of the
opening prices of the ADSs on the New York Stock Exchange on the
five trading days prior to the day of the grant (or a fraction
thereof, if an ADS does not
F-38
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
represent exactly one of the ordinary shares). Otherwise, the
strike price will be the average of the opening prices of the
shares on the respective organized market on the five trading
days prior to the day of the grant.
The holders of option rights will benefit from certain
anti-dilution protection provisions, particularly in the case of
certain capital measures performed by the Company.
Upon exercise of an option right, the holder will generally
receive new ordinary shares to be issued by the company. The
Management Board (with approval by the Supervisory Board) will,
however, instead be allowed to deliver existing shares or pay a
cash compensation to be calculated on the basis of the
difference between the strike price and the exchange price of
the ADSs or shares on the exercise date.
The Management Board and, to the extent options to be granted to
the Management Board are concerned, the Supervisory Board are
entitled to determine further details of the option plan,
including, in particular, the inclusion of the new shares
granted upon exercise of the option rights into the ADS program.
As of September 30, 2006 no options have been granted under
this plan. No options were granted as part of the Companys
IPO. The Supervisory Board has allocated 400,000 options for
grant to the Management Board in the 2007 financial year.
Fair
value disclosures of Infineon Stock Option Plans
Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method, and accounts for stock option
grants to its employees under the Infineon stock option plans
according to the fair value method of SFAS No. 123
(revised 2004) from that date.
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model. Prior to the
adoption of SFAS No. 123 (revised 2004), the Company
relied on historical volatility measures when estimating the
fair value of stock options granted to employees. Following the
implementation of SFAS No. 123 (revised 2004),
Infineon uses a combination of implied volatilities from traded
options on Infineons stock and historical volatility when
estimating the fair value of stock options granted to employees,
as it believes that this methodology better reflects the
expected future volatility of its stock. The expected life of
options granted is estimated based on historical experience.
Beginning on the date of adoption of SFAS No. 123
(revised 2004), forfeitures are estimated based on historical
experience; prior to the date of adoption, forfeitures were
recorded as they occurred. The risk-free rate is based on
treasury note yields at the time of grant for the estimated life
of the option. Infineon has not made any dividend payments in
2006 nor does it have plans to pay dividends in the foreseeable
future. After the Formation through September 30, 2006
neither Infineon nor the Company granted stock options to
Qimonda employees.
The following weighted-average assumptions were used in the
Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
3.68
|
%
|
|
|
3.03
|
%
|
|
|
3.08
|
%
|
Expected volatility
|
|
|
59
|
%
|
|
|
58
|
%
|
|
|
43
|
%
|
Expected life in years
|
|
|
4.50
|
|
|
|
4.50
|
|
|
|
5.07
|
|
Weighted-average fair value per
option at grant date in euro
|
|
|
5.89
|
|
|
|
4.06
|
|
|
|
3.19
|
|
Stock-Based
Compensation Expense
Total stock-based compensation cost during the year ended
September 30, 2006 was 8, entirely related to
Infineon stock options, and is reflected as a non-cash equity
contribution by Infineon in the statement of
business/shareholders equity. Cost of goods sold,
SG&A (selling, general and administrative expenses), and
research and development expenses included stock-based
compensation of 3, 3 and 2, respectively, for
the year ended
F-39
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
September 30, 2006. The amount of stock-based compensation
cost which was capitalized and remained in inventory as of
September 2006 was immaterial. Stock-based compensation expense
does not reflect any income tax benefits, since stock options
are granted in tax jurisdictions where the expense is not
deductible for tax purposes. As of September 30, 2006,
there was a total of 6.8 in unrecognized compensation cost
related to unvested stock options which is expected to be
recognized over a period of 3.5 years.
Prior to the 2006 financial year, the Company applied the
provisions of APB No. 25, as permitted under
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment
of SFAS No. 123.
If the Company had accounted for stock-based compensation
according to the fair value method of SFAS No. 123,
and thereby recognized compensation expense based on the above
fair values over the respective option vesting periods, net
income would have been reduced to the pro forma amounts
indicated below, pursuant to the provision of
SFAS No. 148:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(79
|
)
|
|
|
18
|
|
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of related tax
effects
|
|
|
(14
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
(93
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(0.26
|
)
|
|
|
0.06
|
|
Pro forma
|
|
|
(0.31
|
)
|
|
|
0.03
|
|
As noted above, options on Infineon stock do not represent
potential dilutive instruments for Qimonda AG and accordingly,
they have no impact on diluted earnings (loss) per share (see
note 10).
|
|
25.
|
Other
Comprehensive Loss
|
The changes in the components of other comprehensive income
(loss) for the years ended September 30, 2004, 2005 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Unrealized (losses) gains on
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
losses (gains) included in net income (loss)
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional minimum pension
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
Foreign currency translation
adjustment
|
|
|
(35
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
43
|
|
|
|
1
|
|
|
|
44
|
|
|
|
(68
|
)
|
|
|
1
|
|
|
|
(67
|
)
|
Accumulated other comprehensive
income (loss) beginning of year
|
|
|
(68
|
)
|
|
|
|
|
|
|
(68
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
(111
|
)
|
|
|
(68
|
)
|
|
|
1
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss) end of year
|
|
|
(111
|
)
|
|
|
|
|
|
|
(111
|
)
|
|
|
(68
|
)
|
|
|
1
|
|
|
|
(67
|
)
|
|
|
(136
|
)
|
|
|
2
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
26.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
37
|
|
|
|
22
|
|
|
|
5
|
|
Income taxes
|
|
|
46
|
|
|
|
36
|
|
|
|
52
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction grants deducted from
the cost of fixed assets (note 6)
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Infineon
|
|
|
|
|
|
|
(374
|
)
|
|
|
(19
|
)
|
Deferred tax assets retained by
Infineon
|
|
|
(59
|
)
|
|
|
(6
|
)
|
|
|
|
|
The historical net book value of DD200 of 374 transferred
from the Company to the Logic business of Infineon is reflected
as a non-cash equity transaction as of the October 1, 2004
transfer date (see note 4).
Effective October 1, 2005 Infineon transferred the IFMDF
development facility from the Memory Products business to the
Logic business of Infineon. The net book value of 10 was
reflected as a non-cash reduction to business equity as of
October 1, 2005 (note 4).
Pension plan assets transferred to the Qimonda Pension Trust in
connection with the Formation were based on the actual
employees pension benefits and the related pro rata share
of pension assets in the Infineon Pension Trust. The difference
to the previously allocated plan assets of 9 is reflected
as a non-cash equity transaction in the statement of
shareholders equity for the year ended September 30,
2006 (see note 28).
Deferred tax assets related to tax loss carry-forwards, net of
valuation allowance, or tax credits that will be retained by
Infineon and not transferred to the Company at the Formation of
59, 6 and 0 as of September 30, 2004,
2005 and 2006 are reflected as non-cash decreases to
business/shareholders equity in the accompanying combined
and consolidated financial statements.
The Company has transactions in the normal course of business
with Infineon group companies, Siemens group companies and with
Related and Associated Companies (together, Related
Parties). The Company purchases certain of 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.
Contributions by Infineon in connection with the Formation and
allocations by Infineon prior to that date are explained in
note 1.
On April 3, 2006, Siemens disposed of its remaining
shareholding in Infineon. Transactions between Qimonda and
Siemens subsequent to this date are no longer reflected as
Related Party transactions.
F-41
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Related Party receivables at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Infineon group trade
(note 12)
|
|
|
8
|
|
|
|
61
|
|
Associated and Related
Companies trade (note 12)
|
|
|
4
|
|
|
|
|
|
Siemens group trade
(note 12)
|
|
|
1
|
|
|
|
|
|
Associated and Related
Companies financial and other (note 14)
|
|
|
1
|
|
|
|
|
|
Employee receivables (note 14)
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Related Party receivables
|
|
|
17
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Receivables from Infineon mainly represent amounts due to the
Companys operations in Japan which is expected to be
transferred from Infineon during the three months ending
March 31, 2007.
Related Party payables at September 30, 2005 and 2006
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Infineon group trade
(note 18)
|
|
|
31
|
|
|
|
71
|
|
Associated and Related
Companies trade (note 18)
|
|
|
64
|
|
|
|
76
|
|
Siemens group trade
(note 18)
|
|
|
2
|
|
|
|
|
|
Infineon group
financial and other (note 20)
|
|
|
6
|
|
|
|
9
|
|
Associated and Related
Companies financial and other (note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Related Party payables
|
|
|
103
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Related Party receivables and payables have been segregated
first between amounts owed by or to Infineon group companies,
Siemens 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.
Related Party debt at September 30, 2005 and 2006 consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Loans from Infineon (note 21)
|
|
|
524
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
Total Related Party debt
|
|
|
524
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
F-42
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Transactions with Related Parties during the years ended
September 30, 2004, 2005 and 2006, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Sales to Related Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Siemens group companies
|
|
|
9
|
|
|
|
3
|
|
|
|
17
|
|
Infineon group companies
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Associated and Related Companies
|
|
|
4
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
4
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases from Related Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Siemens group companies
|
|
|
22
|
|
|
|
13
|
|
|
|
4
|
|
Infineon group companies
|
|
|
|
|
|
|
265
|
|
|
|
403
|
|
Associated and Related Companies
|
|
|
23
|
|
|
|
247
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
525
|
|
|
|
845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Infineon during the year ended September 30, 2004
are related to the DD200 facility which was transferred to
Infineon effective October 1, 2004 (see note 4).
Purchases from Infineon during the years ended
September 30, 2005 and 2006 are principally related to
products purchased from the DD200 facility and are based on
Infineons cost plus a margin. Purchases from Siemens group
companies primarily include purchases of fixed assets and rent
payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Interest income from (expense to)
Infineon group companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from Infineon
group companies
|
|
|
21
|
|
|
|
40
|
|
|
|
15
|
|
Interest expense to Infineon group
companies
|
|
|
(21
|
)
|
|
|
(34
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 five months ended September 30, 2006 are
reflected in the consolidated statements of operations as
follows:
|
|
|
|
|
|
|
Five Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Cost of goods sold
|
|
|
95
|
|
Research and development expenses
|
|
|
10
|
|
Selling, general and
administrative expenses
|
|
|
14
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
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 percent. 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 percent.
F-43
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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 partys
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, 2006 and thereafter as mutually agreed from
year to year.
Dresden
200mm Fab
In April 2006, Infineon and Qimonda entered into an agreement
for the production of wafers in the Dresden 200mm fab. Pursuant
to the agreement, Infineon has agreed to manufacture certain
specified semiconductor memory products at the Dresden 200mm
fab, using the Companys manufacturing technologies and
masks, and to sell them to the Company at prices specified in
the agreement. The Company is required under this agreement to
pay for idle costs resulting from its purchasing fewer wafers
from Infineon than agreed upon, if Infineon cannot otherwise
utilize the capacity. The Company is obliged to indemnify
Infineon against any third party claims based on or related to
any products manufactured for the Company under this agreement.
In addition, the Company has to indemnify Infineon against any
intellectual property infringement claims related to the
products covered by the agreement. The agreement terminates on
September 30, 2007 unless extended by a written mutual
agreement between Infineon and the Company.
Qimonda is currently in negotiations with Infineon regarding the
Companys use or acquisition, after September 30,
2007, of capacity at Infineons 200mm manufacturing
facility in Dresden. In addition, the contribution agreement
provides for indemnification of Infineon with respect to certain
existing and future legal claims and potential restructuring
costs incurred in connection with the rampdown of production in
one module of the 200 mm facility. Restructuring costs may
include severance payments, costs relating to lower levels of
production in that module and higher production costs in another
module.
The Companys employees participate in the pension plans of
Infineon. Infineon has defined benefit pension plans in Germany
(Domestic Plans) and in other countries
(Foreign Plans). The pension costs and liabilities
included in the accompanying combined and consolidated financial
statements and presented below represent the portion of the
Infineon pension costs and liabilities that relate to the
Companys employees participating in the respective
Infineon pension plans.
Infineons pension plans are partially funded by pension
plan assets contributed by Infineon. Since Infineons
pension plan assets fund the total pension liability as a whole
and not individual pension claims, a pro-rata portion of the
Infineon pension assets in relation to the Infineon projected
benefit obligation were allocated as plan assets for purposes of
the accompanying combined and consolidated financial statements.
The Companys employees continue to participate in the
Infineon plans until such time as separate Qimonda pension plans
are established.
Infineons plan benefits are principally based upon years
of service. Certain pension plans are based on salary earned in
the last year or last five years of employment, while others are
fixed plans depending on ranking (both salary level and
position). The measurement date for the Companys pension
plans is June 30.
F-44
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Information with respect to Infineons pension plans, which
relate to the Companys employees for the years ended
September 30, 2004, 2005 and 2006 is presented for German
(Domestic) plans and non-German
(Foreign) plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Accumulated benefit obligations
end of year
|
|
|
(31
|
)
|
|
|
(3
|
)
|
|
|
(49
|
)
|
|
|
(4
|
)
|
|
|
(41
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations
beginning of year
|
|
|
(31
|
)
|
|
|
(7
|
)
|
|
|
(39
|
)
|
|
|
(5
|
)
|
|
|
(59
|
)
|
|
|
(6
|
)
|
Service cost
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
Interest cost
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Actuarial (losses) gains
|
|
|
(1
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
Disposal of plan
|
|
|
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan transfer
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
17
|
|
|
|
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations end
of year
|
|
|
(39
|
)
|
|
|
(5
|
)
|
|
|
(59
|
)
|
|
|
(6
|
)
|
|
|
(53
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
|
16
|
|
|
|
4
|
|
|
|
22
|
|
|
|
3
|
|
|
|
31
|
|
|
|
3
|
|
Contributions and transfers
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
2
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Plan transfer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of year
|
|
|
22
|
|
|
|
3
|
|
|
|
31
|
|
|
|
3
|
|
|
|
25
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(17
|
)
|
|
|
(2
|
)
|
|
|
(28
|
)
|
|
|
(3
|
)
|
|
|
(28
|
)
|
|
|
(1
|
)
|
Unrecognized actuarial loss
|
|
|
2
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability recognized
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(24
|
)
|
|
|
(3
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006 the Company converted the existing
defined benefit plan in the US into a defined contribution plan,
which resulted in a curtailment gain of 1.
The above net liability is recognized as follows in the
accompanying combined and consolidated balance sheets as of
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Accrued pension liabilities
(note 22)
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability recognized
|
|
|
(15
|
)
|
|
|
(2
|
)
|
|
|
(24
|
)
|
|
|
(3
|
)
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Information for pension plans with projected benefit obligations
and accumulated benefit obligations in excess of plan assets are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Projected benefit obligation
|
|
|
39
|
|
|
|
6
|
|
|
|
59
|
|
|
|
6
|
|
|
|
53
|
|
|
|
3
|
|
Fair value of plan assets
|
|
|
22
|
|
|
|
3
|
|
|
|
31
|
|
|
|
3
|
|
|
|
25
|
|
|
|
2
|
|
Accumulated benefit obligations
|
|
|
31
|
|
|
|
3
|
|
|
|
49
|
|
|
|
4
|
|
|
|
41
|
|
|
|
3
|
|
Fair value of plan assets
|
|
|
22
|
|
|
|
3
|
|
|
|
31
|
|
|
|
3
|
|
|
|
25
|
|
|
|
2
|
|
The weighted-average assumptions used in calculating the
actuarial values for the pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Discount rate
|
|
|
5.8
|
%
|
|
|
5.6
|
%
|
|
|
4.5
|
%
|
|
|
4.9
|
%
|
|
|
4.8
|
%
|
|
|
5.9
|
%
|
Rate of compensation increase
|
|
|
3.0
|
%
|
|
|
4.5
|
%
|
|
|
2.5
|
%
|
|
|
3.6
|
%
|
|
|
2.5
|
%
|
|
|
3.6
|
%
|
Projected future pension increases
|
|
|
1.3
|
%
|
|
|
2.2
|
%
|
|
|
1.3
|
%
|
|
|
1.7
|
%
|
|
|
1.8
|
%
|
|
|
2.3
|
%
|
Expected return on plan assets
|
|
|
6.8
|
%
|
|
|
7.0
|
%
|
|
|
7.3
|
%
|
|
|
6.4
|
%
|
|
|
6.5
|
%
|
|
|
6.6
|
%
|
Discount rates are established based on prevailing market rates
for high-quality fixed-income instruments that, if the pension
benefit obligation were settled at the measurement date, would
provide the necessary future cash flows to pay the benefit
obligation when due. The Company believes short-term changes in
interest rates should not affect the measurement of the
Companys long-term obligation.
Investment
strategies
The investment approach of Infineons pension plans
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program.
Infineons pension plans assets are invested with
several investment managers. The plans employ a mix of active
and passive investment management programs. Considering the
duration of the underlying liabilities, a portfolio of
investments of plan assets in equity securities, debt securities
and other assets is targeted to maximize the long-term return on
assets for a given level of risk. Investment risk is monitored
on an ongoing basis through periodic portfolio reviews, meetings
with investment managers and annual liability measurements.
Investment policies and strategies are periodically reviewed to
ensure the objectives of the plans are met considering any
changes in benefit plan design, market conditions or other
material items.
Expected
long-term rate of return on plan assets
Establishing the expected rate of return on pension assets
requires judgment. Infineons approach in determining the
long-term rate of return for plan assets is based upon
historical financial market relationships that have existed over
time, the types of investment classes in which pension plan
assets are invested, long-term investment strategies, as well as
the expected compounded return Infineon can reasonably expect
the portfolio to earn over appropriate time periods.
Infineon reviews the expected long-term rate of return annually
and revises it as appropriate. Also, Infineon periodically
commissions detailed asset/liability studies to be performed by
third-party professional investment advisors and actuaries.
F-46
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Plan
asset allocation
For periods prior to Formation a portion of the Infineon pension
plan assets have been allocated to the Company based on the
proportion of the Companys projected benefit obligation to
the total Infineon projected benefit obligation.
As of September 30, 2005 and 2006 the percentage of plan
assets invested and the targeted allocation in major asset
categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Targeted Allocation
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Equity securities
|
|
|
44
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
61
|
%
|
|
|
45
|
%
|
|
|
60
|
%
|
Debt securities
|
|
|
51
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
39
|
%
|
|
|
52
|
%
|
|
|
40
|
%
|
Cash
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
|
|
Other
|
|
|
5
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2000, Infineon established the Infineon Technologies Pension
Trust e.V. (the Infineon Pension Trust) for the
purpose of funding future pension benefit payments for employees
in Germany in order to reduce its exposure to certain risks
associated with defined benefit plans. Infineon contributed
155 of cash and marketable debt and equity securities,
which qualify as plan assets under SFAS No. 87
Employers Accounting for Pensions, to
the Pension Trust for use in funding these pension benefit
obligations, thereby reducing accrued pension liabilities. In
the accompanying combined and consolidated financial statements
for periods prior to the Formation, these plan assets have been
allocated to the Memory Products business on a pro rata basis
according to the projected benefit obligation in each respective
year.
In September 2006 the Company established the Qimonda Pension
Trust. The Infineon Pension Trust transferred 26 in cash
to the Qimonda Pension Trust, representing the pro rata portion
of the Infineon Plan Assets related to the actual Qimonda
employees at the Formation. The Qimonda Pension Trust is to
invest these funds according to the targeted investment
allocation. The difference between the actually transferred
assets and the previously allocated plan assets of 9 is
reflected as a non-cash equity transaction in the statement of
business/shareholders equity for the year ended
September 30, 2006 (see note 26).
The Companys asset allocation targets for its pension plan
assets are based on its assessment of business and financial
conditions, demographic and actuarial data, funding
characteristics, related risk factors, market sensitivity
analysis and other relevant factors. The overall allocation is
expected to help protect the plans funded status while
generating sufficiently stable real returns (i.e. net of
inflation) to meet current and future benefit payment needs. Due
to active portfolio management, the asset allocation may differ
from the target allocation up to certain limits for different
classes. As a matter of policy, the Companys pension plans
do not invest in the Companys and Infineons shares.
F-47
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The components of net periodic pension cost for the years ended
September 30, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Service cost
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
Interest cost
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Expected return on plan assets
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Curtailment gain recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The prior service costs relating to the pension plans are
amortized in equal amounts over the expected years of future
service of each active employee who is expected to receive
benefits from the pension plans.
Unrecognized gains or losses are included in the net pension
cost for the years if, as of the beginning of the year, the
unrecognized net gains or losses exceed 10% of the greater of
the projected benefit obligation or the market value of the plan
assets. The amortization is the excess divided by the average
remaining service period of active employees expected to receive
benefits under the plan.
Actuarial losses amounted to 1, 4 and 0 for
the years ended September 30, 2004, 2005, and 2006
respectively.
The future benefit payments, which reflect future service, as
appropriate, that are expected to be paid from the
Companys pension plan for the next five financial years
and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Foreign
|
|
Years Ending September 30,
|
|
Plans
|
|
|
Plans
|
|
|
2007
|
|
|
|
|
|
|
|
|
2008
|
|
|
1
|
|
|
|
|
|
2009
|
|
|
1
|
|
|
|
|
|
2010
|
|
|
1
|
|
|
|
|
|
2011
|
|
|
1
|
|
|
|
|
|
2012-2016
|
|
|
7
|
|
|
|
1
|
|
The Company has a deferred savings plan for its employees in
Germany, whereby a portion of the employees salary is
invested for a lump sum benefit payment including interest upon
retirement. The liability for such future payments of 2
and 2 as of September 30, 2005 and 2006,
respectively, is actuarially determined and accounted for on the
same basis as the Companys other pension plans.
The Company provides post-retirement health care benefits to
eligible employees in the United States. The Company recognized
net periodic benefit cost of less than 1 for each of the
years ended September 30, 2004, 2005 and 2006. The net
liability recognized in the accompanying balance sheet was
1 and 1 as of September 30, 2005 and 2006,
respectively.
|
|
29.
|
Financial
Instruments
|
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 Companys foreign currency denominated
net future cash flows. The Company does not enter into
derivatives for trading or speculative purposes.
F-48
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Prior to the Formation the financial instruments of the Company
refer to those financial instruments that were specifically
identified with the Memory Products business. Derivatives that
Infineon entered into for group or corporate purposes were not
allocated to the Memory Products business for purposes of the
accompanying combined financial statements for periods prior to
the Formation, because there was no reasonable allocation basis.
The euro equivalent notional amounts in millions and fair values
of the Companys derivative instruments as of
September 30, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Forward contracts sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
42
|
|
|
|
2
|
|
|
|
168
|
|
|
|
(1
|
)
|
Japanese yen
|
|
|
34
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
Forward contracts purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
122
|
|
|
|
1
|
|
|
|
17
|
|
|
|
|
|
Japanese yen
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
Singapore Dollar
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Malaysian Ringgit
|
|
|
11
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Other currencies
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, net
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and losses on derivative financial instruments included in
determining net income (loss), with those related to operations
included primarily in cost of goods sold, and those related to
financial activities included in other non-operating income
(expense), were as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Losses from foreign currency
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) from foreign
currency transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
9
|
|
|
|
|
|
|
|
(1
|
)
|
Other non-operating (expense)
income
|
|
|
(7
|
)
|
|
|
18
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
18
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (losses) gains from foreign
currency derivatives and transactions
|
|
|
(5
|
)
|
|
|
17
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values of financial instruments are determined using quoted
market prices or discounted cash flows. The fair values of the
Companys cash and cash equivalents, receivables,
related-party receivables and payables and other financial
instruments approximated their carrying values due to their
short-term nature. Marketable securities are recorded at fair
value (see note 11).
Financial instruments that expose the Company to credit risk
consist primarily of trade receivables, cash equivalents,
marketable securities and financial derivatives. Concentrations
of credit risks with respect to trade receivables are limited by
the large number of geographically diverse customers that make
up the Companys customer base. The Company controls of
credit risk through credit approvals, credit limits and
monitoring
F-49
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
procedures, as well as comprehensive credit evaluations for all
customers. The credit risk with respect to cash equivalents,
marketable securities and financial derivatives is limited by
transactions with a number of large international financial
institutions, with pre-established limits. The Company does not
believe that there is significant risk of non-performance by
these counterparties because the Company monitors their credit
risk and limits the financial exposure and the amounts of
agreements entered into with any one financial institution.
In order to remain competitive, the Company must continue to
make substantial investments in process technology and research
and development. Portions of these investments might not be
recoverable if these research and development efforts fail to
gain market acceptance or if markets significantly deteriorate.
Due to the high-technology nature of the Companys
operations, intellectual property is an integral part of the
Companys business. The Company has intellectual property
which it has self-developed, purchased or licensed from third
parties. The Company is exposed to infringements by others on
such intellectual property rights. Conversely, the Company is
exposed to assertions by others of infringement by the Company
of their intellectual property rights.
The Company, through its use of third-party foundry and joint
venture arrangements, uses a significant portion of
manufacturing capacity that is outside of its direct control. As
a result, the Company is reliant upon such other parties for the
timely and uninterrupted supply of products and is exposed, to a
certain extent, to fluctuations in product procurement cost.
As a subsidiary of Infineon, the Company benefits under a number
of patent cross-licenses, technology licenses and purchasing
agreements. The benefits of such agreements would be lost if
Infineons ownership were to fall below 50%. The Company is
in the process of negotiating certain replacement contracts with
third parties related to such patents. There is no assurance
that the Company will be able to successfully negotiate such
replacement contracts at all or on similar terms. If the Company
is unable to do so, it could have a material adverse impact on
its business and results of operations.
As part of the Formation, certain agreements, including
licensing, purchasing and shareholding, and investments of
Infineon relating to the Companys business may not be
transferable to the Company or restrictions may exist that
prolong the ownership transfer which may adversely affect our
business or operating results. For example, Infineon must obtain
the prior written consent of the other investors in AMTC and BAC
before its ownership interest can be transferred to the Company.
The Company has established policies and procedures which serve
as business conduct guidelines for its employees. Should these
guidelines not be adhered to, the Company could be exposed to
risks relating to wrongful actions by its employees.
After the Formation, the Company is not legally bound to
collective bargaining agreements of the employer association to
which Infineon belongs. The terms and conditions of those
agreements remain valid for those employees who were employed by
the Company as of the Formation, until new agreements are
negotiated.
However, as part of an agreement with the workers council,
the Company agreed to apply the same conditions to its employees
as those to which Infineon is bound through wage agreements
entered until July 30, 2008. Approximately 700 of the
Companys employees are covered by these regulations.
The Company intends to negotiate a new agreement with the
workers council. There is no assurance that the Company
will be able to successfully negotiate such replacement
contracts at all or on similar terms. If the Company is unable
to do so, work stoppages are possible which could have a
material adverse impact on its business and results of
operations.
During the year ended September 30, 2004 the Company had
one customer with 21% who accounted for more than 10% of net
sales. During the year ended September 30, 2005 the Company
had that customer with 19% and one
F-50
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
other customer with 14% which individually accounted for more
than 10% of the Companys net sales. During the year ended
September 30, 2006 the Company had that customer with 18%
and one other customer with 16% which individually accounted for
more than 10% of the Companys net sales.
31. Commitments
and Contingencies
Contribution
from Infineon
These contingencies described below were assigned to the Company
pursuant to the contribution agreement entered into between
Infineon and the Company in connection with the Formation.
Under the contribution agreement, the Company is required to
indemnify Infineon, in whole or in part as specified below, for
any claim (including any related expenses) arising in connection
with the liabilities, contracts, offers, uncompleted
transactions, continuing obligations, risks, encumbrances and
other liabilities Infineon incurs in connection with the matters
described below.
The contribution agreement is based on the principle that all
potential liabilities and risks in connection with legal matters
existing as of the Formation date are generally to be borne by
the business unit which caused the risk or liability or where
the risk or liability arose. Except to the limited extent
described below for the securities class action litigation and
the settled Tessera litigation (for which the Company has
different arrangements), the Company has agreed to indemnify
Infineon for all liabilities arising in connection with all
legal matters specifically described below, including court
costs and legal fees. Infineon will not settle or otherwise
agree to any of these liabilities without the Companys
prior consent. Liabilities and risks relating to the securities
class action litigation, including court costs, will be equally
shared by Infineon and the Company, but only with respect to the
amount by which the total amount payable exceeds the amount of
the corresponding accrual that Infineon transferred to the
Company at the formation. Infineon has agreed not to settle this
lawsuit without the Companys prior consent. Any expenses
incurred in connection with the assertion of claims against the
provider of directors and officers (D &
O) insurance covering Infineons two current or former
officers named as defendants in the suit will also be equally
shared. The D & O insurance provider has so far
refused coverage. The Company has agreed to indemnify Infineon
for 80% of the court costs and legal fees relating to the
recently settled litigation with Tessera (see note 17).
The Company has further agreed to pay 60% of the total license
fees payable by Infineon and the Company to which Infineon and
the Company may agree in connection with two cases in which
negotiations relating to licensing and cross-licensing were
ongoing at the time of the Formation, one of which is still
ongoing.
In accordance with the general principle that all potential
risks or liabilities are to be borne by the entity which caused
the risk or liability or where the risk or liability arose, the
indemnification provisions of the contribution agreement include
the following specific allocation keys with respect to claims or
lawsuits arising after the Formation:
|
|
|
|
|
liabilities arising in connection with intellectual property
infringement claims relating to memory products were fully
allocated to the Company.
|
|
|
|
liabilities arising in connection with actual or alleged
antitrust violations with respect to DRAM products were fully
allocated to the Company.
|
Litigation
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its ongoing investigation
of alleged antitrust violations in the DRAM industry. Pursuant
to this plea agreement, Infineon agreed to plead guilty to a
single count related to the pricing of DRAM between July 1,
1999 and June 15, 2002, and to pay a fine of
$160 million. The fine plus accrued interest is to be paid
in equal annual installments through 2009. On October 25,
2004, the plea agreement was accepted by the
F-51
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
U.S. District Court for the Northern District of
California. Therefore, the matter has been fully resolved as
between Infineon and the DOJ, subject to Infineons
obligation to cooperate with the DOJ in its ongoing
investigation of other participants in the DRAM industry. The
charges by the DOJ related to DRAM-product sales to six Original
Equipment Manufacturer (OEM) customers that
manufacture computers and servers. Infineon has entered into
settlement agreements with five of these OEM customers and is
considering the possibility of a settlement with the remaining
OEM customer, which purchased only a very small volume of DRAM
from Infineon.
Subsequent to the commencement of the DOJ investigation, a
number of purported class action lawsuits were filed against
Infineon, its principal U.S. subsidiary and other DRAM
suppliers.
Sixteen cases were filed between June 21, 2002 and
September 19, 2002 in the following U.S. federal
district courts: one in the Southern District of New York, five
in the District of Idaho, and ten in the Northern District of
California. Each of the federal district court cases purports to
be on behalf of a class of individuals and entities who
purchased DRAM directly from various DRAM suppliers in the
United States of America during a specified time period, which
was originally alleged to have commenced on or after
October 1, 2001 (Direct U.S. Purchaser
Class). The complaints allege price-fixing in violation of
the Sherman Act and seek treble damages in unspecified amounts,
costs, attorneys fees, and an injunction against the
allegedly unlawful conduct.
In September 2002, the Judicial Panel on Multi-District
Litigation ordered that the foregoing federal cases be
transferred to the U.S. District Court for the Northern
District of California for coordinated or consolidated pre-trial
proceedings as part of a Multi-District Litigation
(MDL). In October 2003 and June 2005, the plaintiffs
filed amended complaints, which together allege that the
unlawful conduct commenced on approximately April 1, 1999
and continued through at least June 30, 2002.
In September 2005, Infineon and its principal
U.S. subsidiary entered into a definitive settlement
agreement with counsel to the Direct U.S. Purchaser Class
(subject to approval by the U.S. District Court for the
Northern District of California and to an opportunity for
individual class members to opt out of the settlement) and has
secured individual settlements with eight direct customers in
addition to those OEMs identified by the DOJ. The court has
scheduled the trial in the Direct U.S. Purchaser Class
cases to begin on April 23, 2007. Under the terms of the
settlement agreement Infineon agreed to pay approximately
$21 million. The Company recorded a corresponding charge to
other operating expense during the year ended September 30,
2005. In addition to this settlement payment, Infineon agreed to
pay an additional amount if it is proven that sales of DRAM
products to the settlement class after opt-outs during the
settlement period exceeded $208.1 million. The Company
would also be responsible for this payment. The additional
amount payable is calculated by multiplying the amount by which
these sales exceed $208.1 million by 10.53%. The Company
does not currently expect to pay any additional amount to the
class. The settlement was provisionally approved on May 10,
2006, and the final hearing for approval of the settlement is
scheduled for November 1, 2006 (see note 33). The
hearing on plaintiffs motion for class certification of
the Direct U.S. Purchaser Class took place on May 17,
2006. On June 5, 2006, the Court issued an order certifying
a direct purchaser class. As of September 30, 2006, the
deadline for any objections to the settlements and for any
individual class members to elect to opt-out of the class and
settlements was October 3, 2006.
On April 28, 2006, Unisys Corporation filed a complaint
against Infineon and its principal U.S. subsidiary, among
other DRAM suppliers, alleging state and federal claims for
price fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. Unisys subsequently filed a consolidated
complaint with another plaintiff Sun Microsystems, Inc., naming
Infineon and its U.S. subsidiary as defendants only as to
the claims by Unisys, and not the claims by Sun, with which
Infineon reached a settlement agreement in the financial year
2004/2005.
On May 5, 2006, Honeywell International, Inc. filed a
complaint against Infineon and its U.S. subsidiary, among
other DRAM suppliers, alleging a claim for price fixing under
federal law, and seeking recovery as a direct purchaser of DRAM.
Infineon and its principal U.S. subsidiary have agreed to
accept service of the Honeywell complaint. Infineons
principal U.S. subsidiary was served with the Unisys
complaint on September 8, 2006. Infineon agreed to waive
service in exchange for an extended response date of
December 5, 2006 for both Infineon entities. Both of
F-52
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
these complaints were filed in the Northern District of
California, and have been related to the MDL described above.
Both Unisys and Honey well opted out of the Direct
U.S. Purchaser Class and settlement, so their claims are
not barred by Infineons settlement with the Direct
U.S. Purchaser Class.
Sixty-four additional cases were filed between August 2,
2002 and October 12, 2005 in numerous federal and state
courts throughout the United States of America. Each of these
state and federal cases (except a case filed in the
U.S. District Court for the Eastern District of
Pennsylvania in May 2005 on behalf of foreign purchasers)
purports to be on behalf of a class of individuals and entities
who indirectly purchased DRAM in the United States of America
during specified time periods commencing in or after 1999. The
Eastern District of Pennsylvania case purporting to be on behalf
of a class of foreign individuals and entities who directly
purchased DRAM outside of the United States of America from July
1999 through at least June 2002, was dismissed with prejudice
and without leave to amend on March 1, 2006. Plaintiffs in
that case have filed a notice of appeal. On July 31, 2006,
Plaintiffs filed their opening brief on appeal, and defendants
filed their joint opening brief on September 20. No hearing
date has yet been scheduled for the appeal. Infineon intends to
defend itself vigorously if the court of appeals remands this
lawsuit, The complaints variously allege violations of the
Sherman Act, Californias Cartwright Act, various other
state laws, unfair competition law and unjust enrichment and
seek treble damages in generally unspecified amounts,
restitution, costs, attorneys fees and an injunction
against the allegedly unlawful conduct. The California state
cases were ordered transferred for coordinated and consolidated
pre-trial proceedings to the San Francisco County Superior
Court.
Subsequently, twenty-three of the state (outside California) and
federal court cases and the U.S. District Court for the
Eastern District of Pennsylvania case were ordered transferred
to the U.S. District Court for the Northern District of
California for coordinated and consolidated pre-trial
proceedings as part of the MDL described above. After this
transfer, the plaintiffs dismissed two of the transferred cases.
Two additional transferred cases were subsequently remanded back
to their relevant state courts. Nineteen of the twenty-three
transferred cases are currently pending in the MDL. Further, the
plaintiffs in the indirect purchaser cases originated outside
California which have not been transferred to the MDL have
agreed to stay proceedings in those cases pending resolution of
the MDL-proceedings. The defendants have filed two motions for
judgment on the pleadings directed at several of the claims;
these motions are pending. After these have been decided the
indirect purchaser plaintiffs in the case that is part of the
MDL proceedings will have the opportunity to file any motion for
class certification. Infineon is defending against all of these
actions vigorously.
On July 13, 2006, the New York state attorney general filed
an action in the U.S. District Court for the Southern
District of New York against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of New York governmental entities and New York consumers
who purchased products containing DRAM beginning in 1998. The
plaintiffs allege violations of state and federal antitrust laws
arising out of the same allegations of DRAM price-fixing and
artificial price inflation practices discussed above, and seek
recovery of actual and treble damages in unspecified amounts,
penalties, costs (including attorneys fees) and injunctive
and other equitable relief. On July 14, 2006, the attorneys
general of California, Alaska, Arizona, Arkansas, Colorado,
Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Louisiana,
Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah,
Vermont, Virginia, Washington, West Virginia and Wisconsin filed
a lawsuit in the U.S. District Court for the Northern
District of California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities, consumers and businesses in
each of those states who purchased products containing DRAM
beginning in 1998. On September 8, 2006, the complaint was
amended to add claims by the attorneys general of Kentucky,
Maine, New Hampshire, North Carolina, the Northern Mariana
Islands and Rhode Island. This action is based on state and
federal law claims relating to the same alleged anticompetitive
practices in the sale of DRAM and plaintiffs seek recovery of
actual and treble damages in unspecified amounts, penalties,
costs (including attorneys fees) and injunctive and other
relief. Infineon and its U.S. subsidiary agreed to accept
service of both of these complaints, and, as of
September 30, 2006, their responses
F-53
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
were due on October 10, 2006. Infineon and its principal
U.S. subsidiary intend to vigorously defend both of these
actions.
In April 2003, Infineon received a request for information from
the European Commission (the Commission) to enable
the Commission to assess the compatibility with the
Commissions rules on competition of certain practices of
which the Commission has become aware in the European market for
DRAM products. Infineon has reassessed the matter after its plea
agreement with the DOJ and made an accrual during the 2004
financial year for a probable minimum fine that may be imposed
as a result of the Commissions investigation. Any fine
actually imposed by the Commission may be significantly higher
than the reserve established, although Infineon cannot more
accurately estimate the amount of such actual fine. Infineon is
fully cooperating with the Commission in its investigation.
In May 2004, the Canadian Competition Bureau advised
Infineons principal U.S. subsidiary that it and its
affiliated companies are among the targets of a formal inquiry
into alleged violations of the Canadian Competition Act. No
compulsory process (such as subpoenas) has been commenced.
Infineon is cooperating with the Competition Bureau in its
inquiry.
Between December 2004 and February 2005, two putative class
proceedings were filed in the Canadian province of Quebec and
one was filed in each of Ontario and British Columbia against
Infineon, its principal U.S. subsidiary and other DRAM
manufacturers on behalf of all direct and indirect purchasers
resident in Canada who purchased DRAM or products containing
DRAM between July 1999 and June 2002, seeking damages,
investigation and administration costs, as well as interest and
legal costs. Plaintiffs primarily allege conspiracy to unduly
restrain competition and to illegally fix the price of DRAM. In
the British Columbia action, the certification motion has been
scheduled for May 2007. In one Quebec class action, preliminary
motions are to be scheduled early in 2007; the other Quebec
action has been stayed pending developments in the one that is
going forward. Infineon intends to defend itself vigorously
against these proceedings.
Between September 30, 2004 and November 4, 2004, seven
securities class action complaints were filed against Infineon
and three of its current or former officers (of which one
officer was subsequently dropped as a defendant) in the
U.S. District Courts for the Northern District of
California and the Southern District of New York. The plaintiffs
voluntarily dismissed the New York cases, and on June 30,
2005 filed a consolidated amended complaint in California on
behalf of a putative class of purchasers of Infineons
publicly-traded securities, who purchased them during the period
from March 13, 2000 to July 19, 2004, effectively
combining all lawsuits. The consolidated amended complaint added
Infineons principal U.S. subsidiary and four
then-current or former employees of Infineon and its affiliate
as defendants. It alleges violations of the U.S. securities
laws and asserts that the defendants made materially false and
misleading public statements about Infineons historical
and projected financial results and competitive position because
they did not disclose Infineons alleged participation in
DRAM price-fixing activities and that, by fixing the price of
DRAM, defendants manipulated the price of Infineons
securities, thereby injuring its shareholders. The plaintiffs
seek unspecified compensatory damages, interest, costs and
attorneys fees. Infineon, its subsidiary and the current
and former Infineon officers filed motions to dismiss the
consolidated amended complaint. On May 22, 2006 the court
partially denied and partially granted the motions to dismiss.
On June 21, 2006, the court agreed to permit the Company to
move for reconsideration of the May 22, 2006 order. On
September 11, 2006, the court granted Infineons
motion for partial reconsideration and dismissed Infineon, its
principal U.S. subsidiary and its current and former
officers from the complaint. Infineon believes these claims are
without merit and is vigorously defending itself in this action.
Because this action is in its early stages, Infineon is unable
to provide an estimate of the likelihood of an unfavorable
outcome to Infineon or of the amount or range of potential loss
arising from the action. If the outcome of this action is
unfavorable or if Infineon incurs substantial legal fees in
defending this action, it may have a material adverse effect on
the Companys financial condition and results of
operations. Infineons directors and officers
insurance carrier has denied coverage in the class action and
Infineon filed suit against the carrier in December 2005 (see
note 33).
F-54
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Liabilities related to legal proceedings are recorded when it is
probable that a liability has been incurred and the associated
amount can be reasonably estimated. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
September 30, 2006, the Company had accrued liabilities in
the amount of 141 related to the DOJ and European
anti-trust investigations and the direct and indirect purchaser
litigation and settlements described above, as well as for legal
expenses relating to the other matters described above. As
additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on the Companys results of
operations and financial position.
An adverse final resolution of the antitrust investigations or
related civil claims or the securities class action lawsuits
described above could result in substantial financial liability
to, and other adverse effects upon the Company, which would have
a material adverse effect on its business, results of operations
and financial condition. Irrespective of the validity or the
successful assertion of the above referenced claims, the Company
could incur significant costs with respect to defending against
or settling such claims, which could have a material adverse
effect on its results of operations and financial position.
The Company is subject to various other lawsuits, legal actions,
claims and proceedings related to products, patents and other
matters incidental to its businesses. The Company has accrued a
liability for the estimated costs of adjudication of various
asserted and unasserted claims existing as of the balance sheet
date. Based upon information presently known to management, the
Company does not believe that the ultimate resolution of such
other pending matters will have a material adverse effect on the
Companys financial position, although the final resolution
of such matters could have a material adverse effect on the
Companys results of operations or cash flows in the year
of settlement.
Contractual
Commitments
The following table summarizes the Companys commitments
with respect to external parties as of September 30,
2006(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due to Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-2 Years
|
|
|
2-3 Years
|
|
|
3-4 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Contractual commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
payments(3)
|
|
|
107
|
|
|
|
27
|
|
|
|
26
|
|
|
|
24
|
|
|
|
9
|
|
|
|
8
|
|
|
|
13
|
|
Unconditional purchase commitments
|
|
|
954
|
|
|
|
738
|
|
|
|
50
|
|
|
|
38
|
|
|
|
38
|
|
|
|
40
|
|
|
|
50
|
|
Other long-term commitments
|
|
|
132
|
|
|
|
66
|
|
|
|
66
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
|
|
1,193
|
|
|
|
831
|
|
|
|
142
|
|
|
|
62
|
|
|
|
47
|
|
|
|
48
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain payments of obligations or expirations of commitments
that are based on the achievement of milestones or other events
that are not date-certain are included for purposes of this
table based on estimates of the reasonably likely timing of
payments or expirations in the particular case. Actual outcomes
could differ from those estimates. |
|
(2) |
|
Product purchase commitments associated with continuing capacity
reservation agreements are not included in this table, since the
purchase prices are based, in part, on future market prices, and
are accordingly not accurately quantifiable at
September 30, 2006. Purchases under these arrangements
aggregated approximately 1,185 for the year ended
September 30, 2006. |
F-55
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
|
(3) |
|
Operating lease payments include amounts allocated from Infineon
for lease payments. Premises currently occupied by the Company
that are leased by Infineon are expected to be the subject of a
sublease agreement between Infineon and the Company at Formation. |
In December 2002, the Company and Semiconductor Manufacturing
International Corporation (SMIC) entered into a
technology transfer and capacity reservation agreement. In
exchange for the technology transfer, SMIC will reserve
specified capacity over a five-year period, with product
purchases based on a market price formula. In 2004 the parties
amended their agreement to include next generation technology.
The Company has capacity reservation agreements with certain
Associated Companies and external foundry suppliers for the
manufacturing and testing of semiconductor products. These
agreements generally are greater than one year in duration and
are renewable. Under the terms of these agreements, the Company
has agreed to purchase a portion of their production output
based, in part, on market prices. The Company has a product
purchase agreement with Infineon through the end of the 2007
financial year related to the DD200 facility on the basis of
Infineons cost plus a margin.
Purchases under these agreements are recorded as incurred in the
normal course of business. The Company assesses its anticipated
purchase requirements on a regular basis to meet customer demand
for its products. An assessment of losses under these agreements
is made on a regular basis in the event that either budgeted
purchase quantities fall below the specified quantities or
market prices for these products fall below the specified prices.
Other
Contingencies
The following table summarizes the Companys contingencies
with respect to external parties, other than those related to
litigation, as of September 30,
2006(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expirations by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-2 Years
|
|
|
2-3 Years
|
|
|
3-4 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Maximum potential future payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees(2)
|
|
|
71
|
|
|
|
|
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
9
|
|
|
|
53
|
|
Contingent government
grants(3)
|
|
|
452
|
|
|
|
113
|
|
|
|
111
|
|
|
|
18
|
|
|
|
43
|
|
|
|
22
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contingencies
|
|
|
523
|
|
|
|
113
|
|
|
|
113
|
|
|
|
25
|
|
|
|
43
|
|
|
|
31
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain expirations of contingencies that are based on the
achievement of milestones or other events that are not
date-certain are included for purposes of this table based on
estimates of the reasonably likely timing of expirations in the
particular case. Actual outcomes could differ from those
estimates. |
|
(2) |
|
Guarantees are mainly issued by the parent company for the
payment of import duties, rentals of buildings, contingent
obligations related to government grants received. Such
guarantees which relate to Qimonda AG were transferred to the
Company as part of the Formation. |
|
(3) |
|
Contingent government grants refer to amounts previously
received, related to the construction and financing of certain
production facilities, which are not otherwise guaranteed and
could be refundable if the total project requirements are not
met. |
Infineon subsidiaries that were transferred to the Company as
part of the Formation have received government grants and
subsidies related to the construction and financing of certain
of its production facilities. These amounts are recognized upon
the attainment of specified criteria. Certain of these grants
have been received contingent upon the Company maintaining
compliance with certain project-related requirements for a
specified period after receipt. The Company is committed to
maintaining these requirements. Nevertheless, should such
requirements not be met, as of September 30, 2006, a
maximum of 452 of these subsidies could be refundable.
F-56
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The Company, through certain of its sales and other agreements
may, in the normal course of business, be obligated to indemnify
its counterparties under certain conditions for warranties,
patent infringement or other matters. The maximum amount of
potential future payments under these types of agreements is not
predictable with any degree of certainty, since the potential
obligation is contingent on conditions that may or may not occur
in future, and depends on specific facts and circumstances
related to each agreement. Historically, payments made by the
Company under these types of agreements have not had a material
adverse effect on the Companys business, results of
operations or financial condition.
The Company has guarantees outstanding to external parties of
71 as of September 30, 2006, that expire through
2013. Guarantees are mainly issued by Infineon for the payment
of import duties, rentals of buildings, contingent obligations
related to government grants received and the consolidated debt
of subsidiaries. Such guarantees which relate to Qimonda AG were
transferred to the Company as part of the Formation. The Company
also agreed to indemnify Infineon against any losses it may
suffer under several guarantee and financing arrangements that
relate to its business but that cannot be transferred to it for
legal, technical or practical reasons.
A tabular reconciliation of the changes in the aggregate product
warranty liability for the year ended September 30, 2006 is
as follows:
|
|
|
|
|
|
|
2006
|
|
|
Balance as of October 1, 2005
|
|
|
1
|
|
Accrued during the year, net
|
|
|
3
|
|
Settled during the year
|
|
|
(3
|
)
|
|
|
|
|
|
Balance as of September 30,
2006
|
|
|
1
|
|
|
|
|
|
|
32. Operating
Segment and Geographic Information
The Company has reported its operating segment and geographic
information in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related
Information. The accounting policies applied for
segment reporting are substantially the same as described in the
summary of significant accounting policies (see note 2).
The Companys Management Board, consisting of its Chief
Executive Officer, Chief Operating Officer and Chief Financial
Officer, has been collectively identified as the Chief Operating
Decision Maker (CODM). The CODM makes decisions
about resources to be allocated to the business and assesses the
Companys performance on a functional and project basis.
Only combined operating results of the Company are regularly
presented to the CODM to make such decisions. Furthermore, the
CODM does not evaluate performance or review asset information
by product line on a regular basis, except that the CODM is
provided information regarding certain inventories on a product
basis. Accordingly, the Company has one operating segment,
Memory Products, which is also its reportable segment,
consistent with the manner in which financial information is
internally reported and used by the CODM for purposes of
evaluating business performance and allocating resources.
The Memory Products segment derives revenue principally from the
sale of integrated circuits that have the capacity to store
digital information (memory) which the Company manufactures
using its patented technology.
Prior to the Formation, the Company operated as a segment of
Infineon. Following the Formation, the Company continues to be
reported as an operating segment of Infineon, although its
operations are contained in a stand-alone legal entity. Segment
information is shown for all periods presented, including
periods prior to the Formation, consistent with the current
organization structure.
F-57
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The following is a summary of net sales and of property, plant
and equipment by geographic area for the years ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
398
|
|
|
|
232
|
|
|
|
316
|
|
Other Europe
|
|
|
342
|
|
|
|
332
|
|
|
|
428
|
|
North America
|
|
|
1,135
|
|
|
|
1,067
|
|
|
|
1,591
|
|
Asia/Pacific
|
|
|
1,001
|
|
|
|
1,091
|
|
|
|
1,174
|
|
Japan
|
|
|
131
|
|
|
|
102
|
|
|
|
252
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,008
|
|
|
|
2,825
|
|
|
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Germany
|
|
|
804
|
|
|
|
654
|
|
Other Europe
|
|
|
175
|
|
|
|
144
|
|
North America
|
|
|
1,082
|
|
|
|
1,100
|
|
Asia/Pacific
|
|
|
155
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,216
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers are based on the
customers billing location.
The Company defines EBIT as earnings (loss) before interest and
taxes. The Companys management uses EBIT, among other
measures, to establish budgets and operational goals, to manage
the combined and consolidated Companys business and to
evaluate and report performance as part of the Infineon Group.
Because many operating decisions, such as allocations of
resources to individual projects, are made on a basis for which
the effects of financing the overall business and of taxation
are of marginal relevance, management finds a metric that
excludes the effects of interest on financing and tax expense
useful. In addition, in measuring operating performance,
particularly for the purpose of making internal decisions, such
as those relating to personnel matters, it is useful for
management to consider a measure that excludes items over which
the individuals being evaluated have minimal control, such as
enterprise-level taxation and financing. The Company reports
EBIT information because it believes that it provides investors
with meaningful information about the operating performance of
the Company in a manner similar to that which management uses to
assess and direct the business. EBIT is not a substitute for net
income, however, because the exclusion of interest and tax
expense is not appropriate when reviewing the overall
profitability of the Company.
EBIT is determined as follows from the combined and consolidated
statements of operations, without adjustment to the
U.S. GAAP amounts presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net (loss) income
|
|
|
(79
|
)
|
|
|
18
|
|
|
|
74
|
|
Adjust:
|
|
Income tax expense
|
|
|
211
|
|
|
|
86
|
|
|
|
114
|
|
|
|
Interest expense, net
|
|
|
30
|
|
|
|
7
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
162
|
|
|
|
111
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-58
QIMONDA
AG AND SUBSIDIARIES
Notes to
the Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The above EBIT results differ from the Memory Products segment
results previously reported by Infineon, primarily due to
allocations of Infineon corporate expenses (reported by Infineon
as part of its Corporate and Reconciliation segment), since they
arise from corporate directed decisions not within the direct
control of segment management, which have been reallocated to
the Company for purposes of preparing the accompanying combined
and consolidated financial statements on a stand-alone basis.
33. Subsequent
Events
On October 10, 2006 Infineon joined the other defendants in
fling motions to dismiss several of the claims alleged in the
two actions filed by the state attorneys general. On
October 23, 2006 the New York case was made part of the MDL
proceedings.
On October 11, 2006 the plaintiffs in the securities class
action filed an amended complaint within the period set by the
court.
On October 3, 2006 a number of individuals and entities
gave notice that they were opting out of the Direct
U.S. Purchaser Class and settlements. However, apart from
Unisys Corporation and Honeywell International, Inc., none of
the other opt-outs has filed suit against Infineon. On
November 1, 2006 the District Court for the Northern
District of California approved the settlement with the Direct
U.S. Purchaser Class.
During October 2006, the Taiwanese authorities granted an
exemption to Infineon to transfer the Inotera shares, which is
expected to be finalized during the three months ending
December 31, 2006.
On November 13, 2006 the Company sold its investment in
Ramtron through a private placement. As a result of the sale,
the company expects to record a gain of 3 during the three
months ending December 31, 2006.
On November 13, 2006, Infineons lawsuit against the
insurance carrier of its directors and officers
insurance, which has denied coverage in the securities class
action, was dismissed. Infineon intends to file an appeal
against this dismissal.
F-59
Qimonda
AG and Subsidiaries
Condensed Combined and Consolidated Statements of Operations
(Unaudited)
For the three months ended June 30, 2006 and 2007
(in millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Notes
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
|
|
|
|
972
|
|
|
|
740
|
|
|
|
1,000
|
|
Related parties
|
|
|
13
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
17
|
|
|
|
977
|
|
|
|
740
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
(762
|
)
|
|
|
(964
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
|
|
|
|
215
|
|
|
|
(224
|
)
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
(110
|
)
|
|
|
(98
|
)
|
|
|
(132
|
)
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
(48
|
)
|
|
|
(48
|
)
|
|
|
(65
|
)
|
Other operating income, net
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
58
|
|
|
|
(366
|
)
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
13
|
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
1
|
|
Equity in earnings of associated
companies
|
|
|
|
|
|
|
11
|
|
|
|
38
|
|
|
|
51
|
|
Gain on associated company share
issuance
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Other non-operating income, net
|
|
|
|
|
|
|
3
|
|
|
|
6
|
|
|
|
8
|
|
Minority interests
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
94
|
|
|
|
(322
|
)
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
3
|
|
|
|
(40
|
)
|
|
|
104
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
54
|
|
|
|
(218
|
)
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss)
per share
|
|
|
4
|
|
|
|
0.18
|
|
|
|
(0.64
|
)
|
|
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed combined and
consolidated financial statements.
F-60
Qimonda
AG and Subsidiaries
Condensed Combined and Consolidated Statements of Operations
(Unaudited)
For the nine months ended June 30, 2006 and 2007
(in millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Notes
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
|
|
|
|
2,561
|
|
|
|
2,897
|
|
|
|
3,917
|
|
Related parties
|
|
|
13
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
17
|
|
|
|
2,583
|
|
|
|
2,897
|
|
|
|
3,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
(2,158
|
)
|
|
|
(2,572
|
)
|
|
|
(3,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
425
|
|
|
|
325
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
|
|
|
(325
|
)
|
|
|
(291
|
)
|
|
|
(393
|
)
|
Selling, general and
administrative expenses
|
|
|
|
|
|
|
(161
|
)
|
|
|
(140
|
)
|
|
|
(189
|
)
|
Other operating (expenses) income,
net
|
|
|
|
|
|
|
(13
|
)
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
(74
|
)
|
|
|
(99
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
13
|
|
|
|
(22
|
)
|
|
|
4
|
|
|
|
5
|
|
Equity in earnings of associated
companies
|
|
|
|
|
|
|
38
|
|
|
|
103
|
|
|
|
139
|
|
Gain on associated company share
issuance
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Other non-operating income, net
|
|
|
|
|
|
|
9
|
|
|
|
12
|
|
|
|
16
|
|
Minority interests
|
|
|
|
|
|
|
(5
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
(24
|
)
|
|
|
16
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
3
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
(82
|
)
|
|
|
16
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings
per share
|
|
|
4
|
|
|
|
(0.27
|
)
|
|
|
0.05
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed combined and
consolidated financial statements.
F-61
Qimonda
AG and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
As of
September 30, 2006 and June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
Notes
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
( millions)
|
|
|
( millions)
|
|
|
($ millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
932
|
|
|
|
629
|
|
|
|
850
|
|
Marketable securities
|
|
|
|
|
|
|
138
|
|
|
|
263
|
|
|
|
356
|
|
Trade accounts receivable, net
|
|
|
5
|
|
|
|
803
|
|
|
|
364
|
|
|
|
492
|
|
Inventories
|
|
|
6
|
|
|
|
622
|
|
|
|
600
|
|
|
|
811
|
|
Deferred income taxes
|
|
|
3
|
|
|
|
47
|
|
|
|
27
|
|
|
|
37
|
|
Other current assets
|
|
|
|
|
|
|
265
|
|
|
|
302
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
2,807
|
|
|
|
2,185
|
|
|
|
2,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
2,080
|
|
|
|
2,129
|
|
|
|
2,878
|
|
Long-term investments
|
|
|
7
|
|
|
|
636
|
|
|
|
681
|
|
|
|
921
|
|
Deferred income taxes
|
|
|
3
|
|
|
|
160
|
|
|
|
200
|
|
|
|
270
|
|
Other assets
|
|
|
|
|
|
|
178
|
|
|
|
169
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
5,861
|
|
|
|
5,364
|
|
|
|
7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current
maturities
|
|
|
9, 13
|
|
|
|
344
|
|
|
|
21
|
|
|
|
28
|
|
Trade accounts payable
|
|
|
8
|
|
|
|
712
|
|
|
|
679
|
|
|
|
918
|
|
Accrued liabilities
|
|
|
|
|
|
|
160
|
|
|
|
146
|
|
|
|
197
|
|
Deferred income taxes
|
|
|
3
|
|
|
|
18
|
|
|
|
18
|
|
|
|
24
|
|
Other current liabilities
|
|
|
|
|
|
|
245
|
|
|
|
242
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
1,479
|
|
|
|
1,106
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
9
|
|
|
|
151
|
|
|
|
128
|
|
|
|
173
|
|
Deferred income taxes
|
|
|
3
|
|
|
|
36
|
|
|
|
34
|
|
|
|
46
|
|
Other liabilities
|
|
|
|
|
|
|
324
|
|
|
|
288
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
1,990
|
|
|
|
1,556
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share capital
|
|
|
|
|
|
|
684
|
|
|
|
684
|
|
|
|
925
|
|
Additional paid-in capital
|
|
|
|
|
|
|
3,097
|
|
|
|
3,113
|
|
|
|
4,209
|
|
Retained earnings
|
|
|
|
|
|
|
224
|
|
|
|
240
|
|
|
|
324
|
|
Accumulated other comprehensive
loss
|
|
|
11
|
|
|
|
(134
|
)
|
|
|
(229
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
|
|
|
3,871
|
|
|
|
3,808
|
|
|
|
5,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
|
|
|
|
|
5,861
|
|
|
|
5,364
|
|
|
|
7,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed combined and
consolidated financial statements.
F-62
Qimonda
AG and Subsidiaries
Condensed Combined and Consolidated Statements of
Business/Shareholders Equity (Unaudited)
For the nine months ended June 30, 2006 and 2007
(euro in millions, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by and
|
|
|
Foreign
|
|
|
Additional
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
advances
|
|
|
currency
|
|
|
minimum
|
|
|
gain/(loss)
|
|
|
|
|
|
|
|
|
|
Issued Ordinary shares
|
|
|
paid-in
|
|
|
Retained
|
|
|
from
|
|
|
translation
|
|
|
pension
|
|
|
on
|
|
|
|
|
|
|
Notes
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
earnings
|
|
|
Infineon
|
|
|
adjustment
|
|
|
liability
|
|
|
securities
|
|
|
Total
|
|
|
|
|
|
|
(millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
( millions)
|
|
|
Balance as of October 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,034
|
|
|
|
(66
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
2,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of development center to
Infineon
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Net investments by and advances
from Infineon prior to May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493
|
|
Net loss prior to May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
Contribution to capital and
issuance of shares on initial Formation as of May 1, 2006
|
|
|
|
|
|
|
300
|
|
|
|
600
|
|
|
|
2,772
|
|
|
|
|
|
|
|
(3,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Net income since May 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
Other comprehensive (loss) income
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29
|
)
|
|
|
(6
|
)
|
|
|
2
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006
|
|
|
|
|
|
|
300
|
|
|
|
600
|
|
|
|
2,773
|
|
|
|
68
|
|
|
|
|
|
|
|
(95
|
)
|
|
|
(7
|
)
|
|
|
2
|
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2006
|
|
|
|
|
|
|
342
|
|
|
|
684
|
|
|
|
3,097
|
|
|
|
224
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
3,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution by Infineon
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
Stock-based compensation
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Other comprehensive loss
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2007
|
|
|
|
|
|
|
342
|
|
|
|
684
|
|
|
|
3,113
|
|
|
|
240
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
|
3.808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed combined and
consolidated financial statements.
F-63
Qimonda
AG and Subsidiaries
Condensed Combined and Consolidated Statements of Cash Flows
(Unaudited)
For the
nine months ended June 30, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
|
Notes
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
|
( millions)
|
|
( millions)
|
|
($ millions)
|
|
Net (loss) income
|
|
|
|
|
|
|
(82
|
)
|
|
|
16
|
|
|
|
22
|
|
Adjustments to reconcile net (loss)
income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
524
|
|
|
|
496
|
|
|
|
671
|
|
Allowance for doubtful accounts
|
|
|
5
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Gain on sales of business interests
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Gain (Loss) on sales of long-term
assets
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Equity in earnings of associated
companies
|
|
|
|
|
|
|
(38
|
)
|
|
|
(103
|
)
|
|
|
(139
|
)
|
Gains on associated company share
issuance
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
10
|
|
|
|
6
|
|
|
|
4
|
|
|
|
5
|
|
Minority interests
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
7
|
|
Deferred income taxes
|
|
|
3
|
|
|
|
23
|
|
|
|
(9
|
)
|
|
|
(12
|
)
|
Due to changes in operating assets
and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
5
|
|
|
|
(170
|
)
|
|
|
421
|
|
|
|
569
|
|
Inventories
|
|
|
6
|
|
|
|
(196
|
)
|
|
|
12
|
|
|
|
16
|
|
Other current assets
|
|
|
|
|
|
|
(27
|
)
|
|
|
1
|
|
|
|
1
|
|
Trade accounts payable
|
|
|
8
|
|
|
|
88
|
|
|
|
(27
|
)
|
|
|
(37
|
)
|
Accrued liabilities
|
|
|
|
|
|
|
45
|
|
|
|
(10
|
)
|
|
|
(14
|
)
|
Other current liabilities
|
|
|
|
|
|
|
24
|
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Other assets and liabilities
|
|
|
|
|
|
|
(116
|
)
|
|
|
(24
|
)
|
|
|
(32
|
)
|
Net cash provided by operating
activities
|
|
|
|
|
|
|
61
|
|
|
|
769
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities
available for sale
|
|
|
|
|
|
|
(168
|
)
|
|
|
(147
|
)
|
|
|
(199
|
)
|
Proceeds from marketable securities
available for sale
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
22
|
|
Purchases of business interests
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Proceeds from disposal of business
interests and dividends
|
|
|
7
|
|
|
|
|
|
|
|
27
|
|
|
|
37
|
|
Purchases of intangible assets
|
|
|
|
|
|
|
(6
|
)
|
|
|
(24
|
)
|
|
|
(32
|
)
|
Purchases of property, plant and
equipment
|
|
|
|
|
|
|
(571
|
)
|
|
|
(601
|
)
|
|
|
(813
|
)
|
Proceeds from sales of long-term
assets
|
|
|
|
|
|
|
23
|
|
|
|
5
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
|
|
|
|
(725
|
)
|
|
|
(724
|
)
|
|
|
(978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in short-term debt due
Infineon
|
|
|
9
|
|
|
|
(54
|
)
|
|
|
(344
|
)
|
|
|
(465
|
)
|
Increase (decrease) in financial
payables due related parties
|
|
|
13
|
|
|
|
(12
|
)
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Decrease in financial receivables
from related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
|
9
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Dividend payments to minority
shareholders
|
|
|
|
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(8
|
)
|
Investments by and advances from
Infineon
|
|
|
1
|
|
|
|
493
|
|
|
|
12
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
|
|
|
|
466
|
|
|
|
(343
|
)
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate
changes on cash and cash equivalents
|
|
|
|
|
|
|
4
|
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Net decrease in cash and cash
equivalents
|
|
|
|
|
|
|
(194
|
)
|
|
|
(303
|
)
|
|
|
(410
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
|
|
|
|
632
|
|
|
|
932
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
|
|
|
|
|
438
|
|
|
|
629
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed combined and
consolidated financial statements.
F-64
Qimonda
AG and Subsidiaries
Notes to the Unaudited Condensed Combined and Consolidated
Financial Statements
(euro in
millions, except where otherwise stated)
|
|
1.
|
Description
of Business, Formation and Basis of Presentation
|
Qimonda AG and its subsidiaries (collectively, the
Company or Qimonda) is one of the
worlds 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,
Infineons ownership interest in the Company decreased to
85.9%.
At the Formation the Companys operations in Japan and
Korea were initially held in trust for Qimondas benefit by
Infineon until the legal transfer to Qimonda takes place. The
Companys 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 Companys investment in
Inotera Memories Inc. (Inotera), previously held in
trust by Infineon, was transferred to Qimonda in March 2007 (see
note 7). The Companys 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).
F-65
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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.
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:
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
Nine months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2006
|
|
|
Cost of goods sold
|
|
|
7
|
|
|
|
111
|
|
Research and development expenses
|
|
|
2
|
|
|
|
17
|
|
Selling, general and
administrative expenses
|
|
|
9
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
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
Companys 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.
|
|
|
Investments
by and Advances from Infineon
|
Because a direct ownership relationship did not exist among the
various entities comprising the Memory Products business prior
to the Formation, Infineons investments in and advances to
the Memory Products business represent Infineons interest
in the recorded net assets of the Memory Products business, and
are shown as business equity in lieu of shareholders
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
F-66
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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 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.
|
|
2.
|
Recent
Accounting Pronouncements
|
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 Companys 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
F-67
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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. 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
F-68
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Germany
|
|
|
45
|
|
|
|
(190
|
)
|
|
|
(159
|
)
|
|
|
(86
|
)
|
Foreign
|
|
|
51
|
|
|
|
(131
|
)
|
|
|
140
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
96
|
|
|
|
(321
|
)
|
|
|
(19
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) for the three and nine months ended
June 30, 2006 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
(20
|
)
|
|
|
27
|
|
|
|
(19
|
)
|
|
|
(9
|
)
|
Foreign
|
|
|
(2
|
)
|
|
|
50
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
77
|
|
|
|
(35
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
(14
|
)
|
|
|
1
|
|
|
|
(15
|
)
|
|
|
( 7
|
)
|
Foreign
|
|
|
(4
|
)
|
|
|
26
|
|
|
|
(8
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
27
|
|
|
|
(23
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit
|
|
|
(40
|
)
|
|
|
104
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three and nine months ended June 30, 2007, the
Companys 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
Companys 2008 financial year. Upon enactment, which could
be during the three months
F-69
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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.
|
|
4.
|
Earnings
(Loss) Per Share
|
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).
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to
ordinary shareholders
|
|
|
54
|
|
|
|
(218
|
)
|
|
|
(82
|
)
|
|
|
16
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding basic
|
|
|
300.0
|
|
|
|
342.0
|
|
|
|
300.0
|
|
|
|
342.0
|
|
Effect of dilutive instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding diluted
|
|
|
300.0
|
|
|
|
342.0
|
|
|
|
300.0
|
|
|
|
342.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share (in
euro):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
0.18
|
|
|
|
(0.64
|
)
|
|
|
(0.27
|
)
|
|
|
0.05
|
|
F-70
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
5.
|
Trade
Accounts Receivable, net
|
Trade accounts receivable at September 30, 2006 and
June 30, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Third party trade
|
|
|
764
|
|
|
|
359
|
|
Infineon group trade
(note 13)
|
|
|
61
|
|
|
|
11
|
|
Trade accounts receivable, gross
|
|
|
825
|
|
|
|
370
|
|
Allowance for doubtful accounts
|
|
|
(22
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
803
|
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
Inventories at September 30, 2006 and June 30, 2007
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Raw materials and supplies
|
|
|
54
|
|
|
|
60
|
|
Work-in-process
|
|
|
432
|
|
|
|
336
|
|
Finished goods
|
|
|
136
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
622
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
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 shares are to be transferred to
Qimonda.
If Infineon were to reduce its shareholding in the Company to a
minority level before the earlier of the fifth anniversary of
the Formation and the achievement of early mass production using
58nm process technology at its manufacturing site in Dresden,
the joint venture agreement with Nanya, as amended, could
require Qimonda to transfer these Inotera shares to Infineon.
The Company agreed with Infineon that, in this event, it would
retransfer the Inotera shares back to the trust. The trust
agreement provides for Infineon to again hold the Inotera shares
in trust for Qimonda until they could be retransferred back to
the Company.
Hwa-Keng, a Taiwanese company, was formed for the purpose of
facilitating the distribution of Inotera shares to
Inoteras employees. As a result of the Inotera IPO,
Hwa-Kengs business purpose has been fulfilled and
therefore it has been dissolved. The dissolution did not have a
significant financial impact on the Company.
The limited partnership agreement relating to AMTC and BAC
requires prior written consent from the other partners, AMD and
Toppan, before Infineon can assign its partnership interest. In
the case of a transfer to an affiliate, such as Qimonda, the
consent may not be unreasonably withheld, but the interest must
be transferred back to Infineon should Infineon cease to be the
majority shareholder. Infineon is currently in the process of
negotiating with AMD and Toppan with the goal of reaching an
agreement that would allow the Company to retain the interest
even if Infineon ceases to be the majority shareholder.
F-71
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
On November 13, 2006 the Company sold its investment in
Ramtron through a private placement. As a result of the sale,
the Company recorded a gain of 2 as part of other
non-operating income during the three months ended
December 31, 2006.
|
|
8.
|
Trade
Accounts Payable
|
Trade accounts payable at September 30, 2006 and
June 30, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Third party trade
|
|
|
565
|
|
|
|
549
|
|
Infineon group trade
(note 13)
|
|
|
71
|
|
|
|
54
|
|
Associated and Related
Companies trade (note 13)
|
|
|
76
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
712
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
Debt at September 30, 2006 and June 30, 2007 consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
as of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Short-term debt and current
maturities:
|
|
|
|
|
|
|
|
|
Loans from Infineon
|
|
|
344
|
|
|
|
|
|
Current maturities of long-term
debt, weighted average interest rate 4.36%
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt and current
maturities
|
|
|
344
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Unsecured term bank loan, rate
weighted average interest 4.36%, due 2013
|
|
|
124
|
|
|
|
103
|
|
Notes payable to governmental
entity, weighted average interest rate 5.15%, due 2027
|
|
|
27
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
151
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
The Company fully repaid its short-term loan from Infineon of
344 during the nine months ended June 30, 2007, of
which 48 during the three months ended June 30, 2007.
The Company has a multicurrency revolving loan facility in an
aggregate principal amount of 250. As of June 30,
2007, no amounts were outstanding under this facility and the
Company was in compliance with the facilitys covenants.
The Company can also draw, for short term purposes, on the
working capital lines it maintains in several locations in an
aggregate amount of 166. There were no amounts outstanding
under these facilities as of June 30, 2007.
|
|
10.
|
Stock-based
Compensation
|
Infineon
Stock Option Plans
In periods prior to the Formation, certain of the Companys
employees were granted Infineon stock options as Infineon
employees pursuant to Infineons stock option plans. The
aggregate number of such options outstanding
F-72
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
were 11.7 million and 10.0 million (of which
6.5 million and 6.8 million were exercisable) as of
June 30, 2006 and June 30, 2007, respectively. If such
options are exercised, the employees are to be given Infineon
shares in exchange for payment of the exercise price to
Infineon. Accordingly, such options do not represent potential
dilutive instruments to the Company.
Fair
value disclosures of Infineon Stock Option Plans
Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method, and accounts for stock option
grants to its employees under the Infineon stock option plans
according to the fair value method of SFAS No. 123
(revised 2004) from that date.
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model. Prior to the
adoption of SFAS No. 123 (revised 2004), the Company
relied on historical volatility measures when estimating the
fair value of stock options granted to employees. Following the
implementation of SFAS No. 123 (revised 2004),
Infineon uses a combination of implied volatilities from traded
options on Infineons stock and historical volatility when
estimating the fair value of stock options granted to employees,
as it believes that this methodology better reflects the
expected future volatility of its stock. The expected life of
options granted is estimated based on historical experience.
Beginning on the date of adoption of SFAS No. 123
(revised 2004), forfeitures are estimated based on historical
experience; prior to the date of adoption, forfeitures were
recorded as they occurred. The risk-free rate is based on
treasury note yields at the time of grant for the estimated life
of the option. Infineon has not granted stock options to Qimonda
employees after March 1, 2006.
The following weighted-average assumptions were used in the
Black-Scholes option-pricing model for options granted during
the period indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
Expected volatility
|
|
|
|
|
|
|
|
|
|
|
43
|
%
|
|
|
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
Expected life in years
|
|
|
|
|
|
|
|
|
|
|
5.07
|
|
|
|
|
|
Weighted-average fair value per
option at grant date in euro
|
|
|
|
|
|
|
|
|
|
|
3.19
|
|
|
|
|
|
Qimonda
Stock Option Plan
On November 24, 2006, the Company granted
1,899,200 Qimonda stock options to employees and the
management board of the Company. In addition, the supervisory
board received 30,000 stock appreciation rights with the
same conditions as Qimonda stock options, except that they can
only be settled in cash if exercised, which results in their
classification as a liability. The option rights may be
exercised within six years after their grant, but not before the
expiration of a vesting period that will be at least three years
from the grant date. The exercise of each option is subject to
the condition that the performance of the Companys ADSs on
the New York Stock Exchange exceeds that of the Philadelphia
Semiconductor Sector (SOX) Index on at least three consecutive
days.
F-73
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Fair
value disclosures of Qimonda Stock Option Plan
A summary of the status of the Qimonda Stock Option Plan (SOP)
as of June 30, 2007, and changes during the nine months
then ended is presented below (options in millions, exercise
price in U.S. dollars, fair value in euro):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
Weighted-
|
|
average
|
|
average
|
|
|
Number of
|
|
average
|
|
remaining life
|
|
grant date
|
|
|
options
|
|
exercise price
|
|
(in years)
|
|
fair value
|
|
Outstanding at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1.9
|
|
|
$
|
15.97
|
|
|
|
6.00
|
|
|
|
3.23
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1.9
|
|
|
$
|
15.97
|
|
|
|
5.41
|
|
|
|
3.23
|
|
Vested during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to ultimately vest at end
of period
|
|
|
1.9
|
|
|
$
|
15.97
|
|
|
|
5.41
|
|
|
|
3.23
|
|
Exercisable at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the grant
date using a specific Monte Carlo simulation based
option-pricing model. This model accounts for vesting conditions
relating to the SOX Index and its impact on fair value.
Following the implementation of SFAS No. 123(R), the
Company uses a combination of implied and historical
volatilities from traded options on the Companys peer
group when estimating the fair value of stock options granted to
employees, as it believes that this methodology better reflects
the expected future volatility of its stock. The peer group is a
group of publicly listed companies deemed to reflect
fundamentals of the Companys stock. Forfeitures are
estimated based on historical experience. The expected life and
expected vesting period of options granted are estimated based
on the simulation. The risk-free rate is based on treasury note
yields at the time of grant for the estimated life of the option.
The following assumptions were used in the Monte Carlo
simulation to determine the fair value of options granted during
the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.62
|
%
|
Expected volatility, underlying ADS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
%
|
Expected volatility, SOX Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
%
|
Forfeiture rate, per year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
Expected life in years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.62
|
|
Weighted-average fair value per
option at grant date in euro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.23
|
|
F-74
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Stock-Based
Compensation Expense
Stock-based compensation expenses for the Infineon and the
Qimonda SOP were allocated as follows for the three and nine
months ended June 30, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Compensation expense recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Selling, general and
administrative expenses
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
Research and development expense
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
|
1
|
|
|
|
1
|
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infineon Stock Options:
|
|
|
1
|
|
|
|
|
|
|
|
6
|
|
|
|
3
|
|
Qimonda Stock Options:
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
The amount of stock-based compensation cost which was
capitalized and remained in inventories during the period ended
June 30, 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 nine months ended June 30, 2007, since no
exercises of stock options occurred during the period. As of
June 30, 2007, for Infineon 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 2.75 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 2.41 years.
As noted above, options on Infineon stock do not represent
potential dilutive instruments for Qimonda AG and accordingly,
they have no impact on diluted earnings (loss) per share (see
note 4). The Qimonda stock options did not cause a dilutive
effect in the period ended June 30, 2007 (see note 4).
|
|
11.
|
Other
Comprehensive Loss
|
The changes in the components of other comprehensive (loss)
income for the three and nine months ended June 30, 2006
and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Three months ended
|
|
|
June 30, 2006
|
|
June 30, 2007
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pretax
|
|
Effect
|
|
|
Net
|
|
Pretax
|
|
Effect
|
|
|
Net
|
|
Accumulated other comprehensive
(loss) income beginning of period
|
|
|
(75
|
)
|
|
|
1
|
|
|
|
(74
|
)
|
|
|
(208
|
)
|
|
|
2
|
|
|
|
(206
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(22
|
)
|
|
|
|
|
|
|
(22
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
(21
|
)
|
Additional minimum pension
liability
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized income (loss) on
securities
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
(loss) income end of period
|
|
|
(102
|
)
|
|
|
2
|
|
|
|
(100
|
)
|
|
|
(231
|
)
|
|
|
2
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-75
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
June 30, 2006
|
|
|
June 30, 2007
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Pretax
|
|
|
Effect
|
|
|
Net
|
|
|
Accumulated other comprehensive
(loss) income beginning of period
|
|
|
(68
|
)
|
|
|
1
|
|
|
|
(67
|
)
|
|
|
(136
|
)
|
|
|
2
|
|
|
|
(134
|
)
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
(29
|
)
|
|
|
|
|
|
|
(29
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
(90
|
)
|
Additional minimum pension
liability
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) income on
securities
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
(loss) income end of period
|
|
|
(102
|
)
|
|
|
2
|
|
|
|
(100
|
)
|
|
|
(231
|
)
|
|
|
2
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest to Infineon
|
|
|
7
|
|
|
|
|
|
|
|
25
|
|
|
|
12
|
|
Interest to third parties
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Income taxes
|
|
|
6
|
|
|
|
16
|
|
|
|
27
|
|
|
|
63
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to Infineon
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Effective October 1, 2005 Infineon transferred the
development center in France from the Memory Products business
to the Logic business of Infineon. The net book value of
10 was reflected as a non-cash reduction to business
equity as of October 1, 2005.
The Company has transactions in the normal course of business
with Infineon group companies, Siemens group companies and with
Related and Associated Companies (together, Related
Parties). The Company purchases certain of 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. Contributions by Infineon in connection
with the Formation and allocations by Infineon prior to that
date are explained in note 1. On April 3, 2006,
Siemens disposed of its remaining shareholding in Infineon.
Transactions between Qimonda and Siemens subsequent to this date
are no longer reflected as Related Party transactions.
F-76
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Related Party receivables at September 30, 2006 and
June 30, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Infineon group trade
(note 5)
|
|
|
61
|
|
|
|
11
|
|
Associated and Related
Companies trade (note 5)
|
|
|
|
|
|
|
|
|
Associated and Related
Companies financial and other
|
|
|
|
|
|
|
1
|
|
Employee receivables
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total Related Party receivables
|
|
|
63
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Related Party payables at September 30, 2006 and
June 30, 2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Infineon group trade
(note 8)
|
|
|
71
|
|
|
|
54
|
|
Associated and Related
Companies trade (note 8)
|
|
|
76
|
|
|
|
76
|
|
Infineon group
financial and other
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Related Party payables
|
|
|
156
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
Related Party debt at September 30, 2006 and June 30,
2007 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
Loans from Infineon (note 9)
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Related Party debt
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-77
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
Transactions with Related Parties during the three and nine
months ended June 30, 2006 and 2007, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Sales to Related Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siemens group companies
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infineon group companies
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated and Related Companies
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases from Related Parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siemens group companies
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Infineon group companies
|
|
|
431
|
|
|
|
78
|
|
|
|
567
|
|
|
|
239
|
|
Associated and Related Companies
|
|
|
92
|
|
|
|
118
|
|
|
|
290
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
|
|
196
|
|
|
|
861
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from (expense to)
Infineon group companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from Infineon
group companies
|
|
|
1
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
Interest expense to Infineon group
companies
|
|
|
(7
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
(8
|
)
|
Purchases from Infineon during the three and nine months ended
June 30, 2006 and 2007 principally relate to products
purchased from the 200mm front-end manufacturing facility
located in Dresden, Germany (the Dresden 200mm Fab)
and are based on Infineons cost plus a margin.
Also included in purchases from Infineon are purchased services
under several service agreements entered into with Infineon in
conjunction with the Formation. 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 subsequent to the Formation during the two months
ended June 30, 2006 and during the three and nine months
ended June 30, 2007, respectively, are reflected in the
accompanying statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Cost of goods sold
|
|
|
9
|
|
|
|
3
|
|
|
|
9
|
|
|
|
11
|
|
Research and development expenses
|
|
|
2
|
|
|
|
7
|
|
|
|
2
|
|
|
|
22
|
|
Selling, general and
administrative expenses
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
14
|
|
|
|
15
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%.
F-78
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
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 partys
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 October 1, 2006 to
September 30, 2007 and thereafter as mutually agreed from
year to year.
Dresden
200mm Fab
In April 2006, Infineon and Qimonda entered into an agreement
for the production of wafers in the Dresden 200mm Fab. Pursuant
to the agreement, Infineon has agreed to manufacture certain
specified semiconductor memory products at the Dresden 200mm
Fab, using the Companys manufacturing technologies and
masks, and to sell them to the Company at fixed prices specified
in the agreement. The Company is required under this agreement
to pay for idle costs resulting from its purchasing fewer wafers
from Infineon than agreed upon, if Infineon cannot otherwise
utilize the capacity. The Company is obliged to indemnify
Infineon against any third party claims based on or related to
any products manufactured for the Company under this agreement.
In addition, the Company is required to indemnify Infineon
against any intellectual property infringement claims related to
the products covered by the agreement. On January 26, 2007
Qimonda and Infineon extended their agreement for the production
of wafers in the Dresden 200mm Fab through September 30,
2009.
In addition, in the contribution agreement Infineon and Qimonda
agreed to share equally any potential restructuring costs
incurred in connection with the ramp down of production in the
Dresden 200mm Fab. Restructuring costs may include severance
payments and costs relating to lower levels of production in the
Dresden 200mm Fab. Although no restructuring plan has been
established or is currently anticipated, these costs could be
material and adversely affect the Companys financial
condition and results of operations.
In February 2007, the Company established a uniform Qimonda
Pension Plan for Germany (Domestic plans) with
effect from October 1, 2006. The plan qualifies as a
defined benefit plan and, accordingly, the change from the
previous defined benefit plans is treated as a plan amendment
pursuant to SFAS No. 87. The Company believes that the
impact of this pension plan amendment on projected benefit
obligations and net periodic pension costs is immaterial. The
Company is in the process of measuring the pension obligations
on its regular measurement date June 30, 2007 and will
report the related effects, if any, in the three months ending
September 30, 2007.
In foreign countries the Companys employees participate in
the pension plans of Infineon until they are transferred to the
Companys pension plans (collectively, Foreign
plans). The pension costs and liabilities included in the
accompanying combined and consolidated financial statements and
presented below include the portion of the Infineon pension
costs and liabilities that relate to the Companys
employees participating in the respective Infineon pension plans.
F-79
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The components of net periodic pension cost for the three and
nine months ended June 30, 2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Foreign
|
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Plans
|
|
|
Service cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
Interest cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Expected return
on plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qimonda contributed 0 and 1, respectively, to fund
its pension plans during the three and nine months ended
June 30, 2007. During the three and nine months ended
June 30, 2006, the Company did not contribute funds to its
pension plans for periods prior to the Formation.
|
|
15.
|
Financial
Instruments
|
The Company periodically enters into financial instrument
contracts, including foreign currency forward contracts and
foreign currency options. The objective of these transactions is
to reduce the impact of exchange rate fluctuations on the
Companys foreign currency denominated net future cash
flows. The Company does not enter into financial instrument
contracts for trading or speculative purposes.
Prior to the Formation, the financial instruments of the Company
refer to those financial instruments that were specifically
identified with the Memory Products business. Derivative
contracts that Infineon entered into for group or corporate
purposes were not allocated to the Memory Products business for
purposes of the accompanying combined financial statements for
periods prior to the Formation, because there was no reasonable
allocation basis.
F-80
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
The euro equivalent notional amounts in millions and fair values
of the Companys outstanding foreign exchange derivative
and other financial instruments as of September 30, 2006
and June 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
|
|
As of June 30, 2007
|
|
|
|
Notional
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
amount
|
|
|
Fair value
|
|
|
amount
|
|
|
Fair value
|
|
|
Forward contracts sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
168
|
|
|
|
(1
|
)
|
|
|
507
|
|
|
|
4
|
|
Japanese yen
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese yen
|
|
|
22
|
|
|
|
|
|
|
|
83
|
|
|
|
(3
|
)
|
Singapore dollar
|
|
|
3
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
Malaysian ringgit
|
|
|
5
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Other currencies
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Currency options sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Call
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Put
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency options purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Call
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar Put
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
94
|
|
|
|
5
|
|
|
|
107
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, net
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and losses on derivative financial instruments included in
determining net income (loss), with those related to operations
included primarily in cost of goods sold, and those related to
financial activities included in other non-operating income
(expense), for the three and nine months ended June 30,
2006 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Net gains (losses) from foreign
currency derivatives and transactions
|
|
|
(11
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
16.
|
Commitments
and Contingencies
|
Contribution
from Infineon
These contingencies described below were assigned to the Company
pursuant to the contribution agreement entered into between
Infineon and the Company in connection with the Formation.
Under the contribution agreement, the Company is required to
indemnify Infineon, in whole or in part as specified below, for
any claim (including any related expenses) arising in connection
with the liabilities, contracts, offers, uncompleted
transactions, continuing obligations, risks, encumbrances and
other liabilities Infineon incurs in connection with the matters
described below.
The contribution agreement is based on the principle that all
potential liabilities and risks in connection with legal matters
existing as of the Formation date are generally to be borne by
the business unit which caused the risk or liability or where
the risk or liability arose. Except to the limited extent
described below for the securities class
F-81
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
action litigation and the settled Tessera litigation (for which
the Company has different arrangements), the Company has agreed
to indemnify Infineon for all liabilities arising in connection
with all legal matters specifically described below, including
court costs and legal fees. Infineon will not settle or
otherwise agree to any of these liabilities without the
Companys prior consent. Liabilities and risks relating to
the securities class action litigation, including court costs,
will be equally shared by Infineon and the Company, but only
with respect to the amount by which the total amount payable
exceeds the amount of the corresponding accrual that Infineon
transferred to the Company at the formation. Infineon has agreed
not to settle this lawsuit without the Companys prior
consent. Any expenses incurred in connection with the assertion
of claims against the provider of directors and
officers (D & O) insurance covering
Infineons two current or former officers named as
defendants in the suit will also be equally shared. The
D & O insurance provider has so far refused coverage.
The Company has agreed to indemnify Infineon for 80% of the
court costs and legal fees relating to the recently settled
litigation with Tessera.
The Company has further agreed to pay 60% of the total license
fees payable by Infineon and the Company to which Infineon and
the Company may agree in connection with two cases in which
negotiations relating to licensing and cross-licensing were
ongoing at the time of the Formation, one of which is still
ongoing.
In accordance with the general principle that all potential
risks or liabilities are to be borne by the entity which caused
the risk or liability or where the risk or liability arose, the
indemnification provisions of the contribution agreement include
the following specific allocation keys with respect to claims or
lawsuits arising after the Formation:
|
|
|
|
|
liabilities arising in connection with intellectual property
infringement claims relating to memory products were fully
allocated to the Company.
|
|
|
|
liabilities arising in connection with actual or alleged
antitrust violations with respect to DRAM products were fully
allocated to the Company.
|
Litigation
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its investigation of
alleged antitrust violations in the DRAM industry. Pursuant to
this plea agreement, Infineon agreed to plead guilty to a single
count of conspiring with other unspecified DRAM manufacturers to
fix the prices of DRAM products between July 1, 1999 and
June 15, 2002, and to pay a fine of $160 million. The
fine plus accrued interest is being paid in equal annual
installments through 2009. Infineon has a continuing obligation
to cooperate with the DOJ in its ongoing investigation of other
participants in the DRAM industry. The price fixing charges
related to DRAM-product sales to six Original Equipment
Manufacturer (OEM) customers that manufacture
computers and servers. Infineon has entered into settlement
agreements with five of these OEM customers and is considering
the possibility of a settlement with the remaining OEM customer,
which purchased only a very small volume of DRAM products from
Infineon.
Subsequent to the commencement of the DOJ investigation, a
number of putative class action lawsuits were filed against
Infineon, its principal U.S. subsidiary and other DRAM suppliers.
Sixteen cases were filed between June 21, 2002 and
September 19, 2002 in the following U.S. federal district
courts: one in the Southern District of New York, five in the
District of Idaho, and ten in the Northern District of
California. Each of the federal district court cases purports to
be on behalf of a class of individuals and entities who
purchased DRAM directly from various DRAM suppliers in the
United States during a specified time period (the Direct
U.S. Purchaser Class). The complaints allege price-fixing
in violation of the Sherman Act and seek treble damages in
unspecified amounts, costs, attorneys fees, and an
injunction against the allegedly unlawful conduct.
In September 2002, the Judicial Panel on Multi-District
Litigation ordered that the foregoing federal cases be
transferred to the U.S. District Court for the Northern District
of California for coordinated or consolidated pre-trial
F-82
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
proceedings as part of a Multi-District Litigation
(MDL). On June 5, 2006, the Court issued an
order certifying a direct purchaser class.
In September 2005, Infineon and its principal U.S. subsidiary
entered into a definitive settlement agreement with counsel to
the Direct U.S. Purchaser Class (subject to approval by the U.S.
District Court for the Northern District of California and to an
opportunity for individual class members to opt out of the
settlement). The settlement agreement was approved by the court
on November 1, 2006 and the court entered final judgment
and dismissed the class action claims with prejudice on
November 2, 2006. Under the terms of the settlement
agreement Infineon agreed to pay approximately $21 million.
In addition to this settlement payment, Infineon agreed to pay
an additional amount if it is proven that sales of DRAM products
to the settlement class after opt-outs during the settlement
period exceeded $208.1 million. The Company would also be
responsible for this payment. The additional amount payable
would be calculated by multiplying the amount by which these
sales exceed $208.1 million by 10.53%. The Company does not
currently expect to pay any additional amount to the class. The
Company has secured individual settlements with eight direct
customers in addition to those OEMs identified by the DOJ.
On April 28, 2006, Unisys Corporation filed a complaint
against Infineon and its principal U.S. subsidiary, among other
DRAM suppliers, alleging state and federal claims for price
fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International,
Inc. filed a complaint against Infineon and its principal U.S.
subsidiary, among other DRAM suppliers, alleging a claim for
price fixing under federal law, and seeking recovery as a direct
purchaser of DRAM. Both Unisys and Honeywell opted out of the
direct purchaser class and settlement, and therefore their
claims are not barred by the Companys settlement with the
Direct U.S. Purchaser Class. Both of these complaints were filed
in the Northern District of California, and have been related to
the MDL described above. On April 5, 2007 the court
dismissed the initial complaint with leave to amend for failing
to give proper notice of its claims. Unisys filed a First
Amended Complaint on May 4, 2007. Infineon, its principal
U.S. subsidiary, and the other defendants again filed a motion
to dismiss certain portions of the Unisys First Amended
Complaint on June 4, 2007. After Honeywell had filed a
stipulation of dismissal without prejudice of its lawsuit
against Infineon, the court entered the dismissal order on
April 26, 2007. Between February 28, 2007 and
March 8, 2007 four more opt-out cases were filed by All
American Semiconductor, Inc., Edge Electronics, Inc., Jaco
Electronics, Inc. and DRAM Claims Liquidation Trust, by its
Trustee, Wells Fargo Bank, N.A. The All American Semiconductor
complaint alleges claims for price-fixing under the Sherman Act.
The Edge Electronics, Jaco Electronics and DRAM Claims
Liquidation Trust complaints allege state and federal claims for
price-fixing. As with Unisys and Honeywell, the claims of these
plaintiffs are not barred by Infineons settlement with the
Direct U.S. Purchaser Class, since they opted out of the Direct
U.S. Purchaser Class and settlement before or on October 3,
2006. All four of these cases were filed in the Northern
District of California and have been related to the MDL
described above. Based upon the Courts order dismissing
portions of the initial Unisys complaint above, the plaintiffs
in all four of these opt-out cases decided to file amended
complaints on May 4, 2007. On June 4, 2007, Infineon
and its principal U.S. subsidiary answered the amended
complaints filed by All American Semiconductor, Inc., Edge
Electronics, Inc., and Jaco Electronics, Inc. Also on
June 4, 2007, Infineon and its principal U.S. subsidiary,
along with its co-defendants filed a joint motion to dismiss
certain portions of the DRAM Claims Liquidation Trust amended
complaint.
Sixty-four additional cases were filed between August 2,
2002 and October 12, 2005 in numerous federal and state
courts throughout the United States of America. Each of these
state and federal cases (except a case filed in the U.S.
District Court for the Eastern District of Pennsylvania on
May 5, 2005 on behalf of foreign purchasers) purports to be
on behalf of a class of individuals and entities who indirectly
purchased DRAM in the United States during specified time
periods commencing in or after 1999 (the Indirect U.S.
Purchaser Class). The Eastern District of Pennsylvania
case purporting to be on behalf of a class of foreign
individuals and entities who directly purchased DRAM outside of
the United States of America from July 1999 through at least
June 2002, was dismissed with prejudice and without leave to
amend on March 1, 2006. On July 31, 2006, plaintiffs
filed their opening brief on appeal, and defendants filed their
joint opening brief on September 20, 2006. No hearing date
has
F-83
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
yet been scheduled for the appeal. The complaints variously
allege violations of the Sherman Act, Californias
Cartwright Act, various other state laws, unfair competition law
and unjust enrichment and seek treble damages in generally
unspecified amounts, restitution, costs, attorneys fees
and an injunction against the allegedly unlawful conduct.
Subsequently, twenty-three of the state (outside California) and
federal court cases and the U.S. District Court for the Eastern
District of Pennsylvania case were ordered transferred to the
U.S. District Court for the Northern District of California for
coordinated and consolidated pre-trial proceedings as part of
the MDL described above. After this transfer, the plaintiffs
dismissed two of the transferred cases. Two additional
transferred cases were subsequently remanded back to their
relevant state courts. Nineteen of the twenty-three transferred
cases are currently pending in the MDL - litigation. The
California state cases were ordered transferred for coordinated
and consolidated pre-trial proceedings to the San Francisco
County Superior Court. The plaintiffs in the indirect purchaser
cases originated outside California which have not been
transferred to the MDL agreed to stay proceedings in those cases
in favor of proceedings on the indirect purchaser cases pending
as part of the MDL pretrial-proceedings. The defendants have
filed two motions for judgment on the pleadings directed at
several of the claims. The court entered an order on
June 1, 2007 granting in part and denying in part the
defendants motions. The order dismissed a large percentage
of the indirect purchaser plaintiffs claims, and granted
leave to amend with regard to claims under three specific state
statutes. The court ruled that the indirect purchaser plaintiffs
must file a motion for leave to amend the complaint with regard
to any of the other dismissed claims. On June 29, 2007, the
indirect plaintiffs filed both a First Amended Complaint, and a
motion for leave to file a Second Amended Complaint that
attempts to resurrect some of the claims that were dismissed.
The defendants response to the First Amended Complaint is
due on July 30, 2007.
On July 13, 2006, the New York state attorney general filed
an action in the U.S. District Court for the Southern District
of New York against Infineon, its principal U.S subsidiary and
several other DRAM manufacturers on behalf of New York
governmental entities and New York consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs
allege violations of state and federal antitrust laws arising
out of the same allegations of DRAM price-fixing and artificial
price inflation practices discussed above, and seek recovery of
actual and treble damages in unspecified amounts, penalties,
costs (including attorneys fees) and injunctive and other
equitable relief. On October 23, 2006, the New York case
was made part of the MDL proceedings. On July 14, 2006, the
attorneys general of California, Alaska, Arizona, Arkansas,
Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa,
Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Nebraska, Nevada, New Mexico, North Dakota, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Utah, Vermont, Virginia, Washington, West Virginia and
Wisconsin filed a lawsuit in the U.S. District Court for the
Northern District of California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on behalf
of governmental entities, consumers and businesses in each of
those states who purchased products containing DRAM beginning in
1998. On September 8, 2006, the complaint was amended to
add claims by the attorneys general of Kentucky, Maine, New
Hampshire, North Carolina, the Northern Mariana Islands and
Rhode Island. This action is based on state and federal law
claims relating to the same alleged anticompetitive practices in
the sale of DRAM and plaintiffs seek recovery of actual and
treble damages in unspecified amounts, penalties, costs
(including attorneys fees) and injunctive and other
relief. On October 10, 2006 Infineon joined the other
defendants in filing motions to dismiss several of the claims
alleged in these two actions. A hearing on these motions to
dismiss was held on February 7, 2007. The court has not yet
ruled on these motions.
In April 2003, Infineon received a request for information from
the European Commission (the Commission) to enable
the Commission to assess the compatibility with the
Commissions rules on competition of certain practices of
which the Commission has become aware in the European market for
DRAM products. Infineon has reassessed the matter after its plea
agreement with the DOJ and made an accrual during the 2004
financial year for an amount representing the probable minimum
fine that may be imposed as a result of the Commissions
investigation. Any fine actually imposed by the Commission may
be significantly higher than the reserve
F-84
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
established, although Infineon cannot more accurately estimate
the amount of such actual fine. Infineon is fully cooperating
with the Commission in its investigation.
In May 2004, the Canadian Competition Bureau advised
Infineons principal U.S. subsidiary that it, its
affiliated companies and present and past directors, officers
and employees are among the targets of a formal inquiry into an
alleged conspiracy to prevent or lessen competition unduly in
the production, manufacture, sale or supply of DRAM, contrary to
the Canadian Competition Act. No formal steps (such as
subpoenas) have been taken by the Competition Bureau to date.
Infineon is cooperating with the Competition Bureau in its
inquiry.
Between December 2004 and February 2005, two putative class
proceedings were filed in the Canadian province of Quebec and
one was filed in each of Ontario and British Columbia against
Infineon, its principal U.S. subsidiary and other DRAM
manufacturers on behalf of all direct and indirect purchasers
resident in Canada who purchased DRAM or products containing
DRAM between July 1999 and June 2002, seeking damages,
investigation and administration costs, as well as interest and
legal costs. Plaintiffs primarily allege conspiracy to unduly
restrain competition and to illegally fix the price of DRAM. In
the British Columbia action, a hearing on the certification
motion has been scheduled for August 2007. In one Quebec class
action, a tentative date for the motion for authorization
(certification) has been set for May 2008 (with some possibility
of a March 2008 date if the court calendar opens); the other
Quebec action has been stayed pending developments in the one
that is going forward.
Between September 30, 2004 and November 4, 2004, seven
securities class action complaints were filed against Infineon
and three of its current or former officers (of which one
officer was subsequently dropped as a defendant and one of which
is currently the chairman of the Companys Supervisory
Board) in the U.S. District Courts for the Northern District of
California and the Southern District of New York. The plaintiffs
voluntarily dismissed the New York cases, and on June 30,
2005 filed a consolidated amended complaint in California on
behalf of a putative class of purchasers of Infineons
publicly-traded securities, who purchased them during the period
from March 13, 2000 to July 19, 2004, effectively
combining all lawsuits. The consolidated amended complaint added
Infineons principal U.S. subsidiary and four then-current
or former employees of Infineon and its affiliate as defendants.
It alleges violations of the U.S. securities laws and asserts
that the defendants made materially false and misleading public
statements about Infineons historical and projected
financial results and competitive position because they did not
disclose Infineons alleged participation in DRAM
price-fixing activities and that, by fixing the price of DRAM,
defendants manipulated the price of Infineons securities,
thereby injuring its shareholders. The plaintiffs seek
unspecified compensatory damages, interest, costs and
attorneys fees. In September 2006, the court dismissed the
complaint with leave to amend and in October 2006 the plaintiffs
filed a second amended complaint. In March 2007, pursuant to a
stipulation agreed with the defendants, the plaintiffs withdrew
the second amended complaint and were granted a motion for leave
to file a third amended complaint. In the contribution agreement
the Company entered into with Infineon, the Company agreed to
share any future liabilities arising out of this lawsuit equally
with Infineon, including the cost of defending the suit.
On April 10, 2007, Lin Packaging Technologies, Ltd. (Lin)
filed a lawsuit against Infineon Technologies AG, Infineon
Technologies North America Corp. and an additional DRAM
manufacturer in the U.S. District Court for the Eastern District
of Texas, alleging that certain DRAM products were infringing
two Lin patents. In May 2007, Lin amended its complaint to
include Qimonda AG, Qimonda North America Corp. and Qimonda
Richmond LLC. Under the contribution agreement with Infineon,
the Company is required to indemnify Infineon for claims
(including any related expenses) arising in connection with the
aforementioned suit.
Infineon believes these claims are without merit. The Company is
currently unable to provide an estimate of the likelihood of an
unfavorable outcome to Infineon or of the amount or range of
potential loss arising from these actions. If the outcome of
these actions is unfavorable or if Infineon incurs substantial
legal fees in defending these actions regardless of outcome, it
may have a material adverse effect on the Companys
financial condition and results of operations. Infineons
directors and officers insurance carriers have
denied coverage in the securities class actions and Infineon
filed suits against the carriers in December 2005 and August
2006. Infineons claims
F-85
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
against the D&O insurance carriers were dismissed in
November 2006 and May 2007. Infineon filed an appeal against one
of these decisions.
Liabilities related to legal proceedings are recorded when it is
probable that a liability has been incurred and the associated
amount can be reasonably estimated. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
June 30, 2007, the Company had accrued liabilities in the
amount of 114 related to potential liabilities and risks
with respect to the DOJ and European antitrust investigations
and the direct and indirect purchaser litigation and settlements
described above, as well as for legal expenses relating to the
securities class actions and the Canadian antitrust
investigation and litigation described above. As additional
information becomes available, the potential liability related
to these matters will be reassessed and the estimates revised,
if necessary. These accrued liabilities would be subject to
change in the future based on new developments in each matter,
or changes in circumstances, which could have a material adverse
effect on the Companys results of operations and financial
condition.
An adverse final resolution of the investigations or lawsuits
described above could result in significant financial liability
to, and other adverse effects upon Infineon, and most likely the
Company, which would have a material adverse effect on the
Companys business, results of operations, financial
condition and cash flows. In each of these matters, the Company
is continuously evaluating the merits of its respective claims
and defending itself vigorously or seeking to arrive at
alternative resolutions in the best interests of the Company, as
its deems appropriate. Irrespective of the validity or the
successful assertion of the above referenced claims, the Company
could incur significant costs with respect to defending against
or settling such claims, which could have a material adverse
effect on its results of operations, financial position and cash
flows.
The Company is subject to various other lawsuits, legal actions,
claims and proceedings related to products, patents and other
matters incidental to its businesses. The Company has accrued a
liability for the estimated costs of adjudication of various
asserted and unasserted claims existing as of the balance sheet
date. Based upon information presently known to management, the
Company does not believe that the ultimate resolution of such
other pending matters will have a material adverse effect on the
Companys financial position, although the final resolution
of such matters could have a material adverse effect on the
Companys results of operations or cash flows at that time.
Other
Contingencies
Infineon subsidiaries that were transferred to the Company as
part of the Formation have received government grants and
subsidies related to the construction and financing of certain
of its production facilities. These amounts are recognized upon
the attainment of specified criteria. Certain of these grants
have been received contingent upon the Company maintaining
compliance with certain project-related requirements for a
specified period after receipt. The Company is committed to
maintaining these requirements. Nevertheless, should such
requirements not be met, as of June 30, 2007, a maximum of
443 of these subsidies could be refundable.
The Company has guarantees outstanding to external parties of
128 as of June 30, 2007. Guarantees are mainly issued
for the payment of import duties, rentals of buildings,
contingent obligations related to government grants received and
the consolidated debt of subsidiaries. Such guarantees which
relate to Qimonda AG were transferred to the Company as part of
the Formation. The Company also agreed to indemnify Infineon
against any losses it may suffer under several guarantee and
financing arrangements that relate to its business but that
could not be transferred to it for legal, technical or practical
reasons.
Contractual
Commitments
On April 25, 2007, the Company and SanDisk Corporation
entered into an agreement to jointly develop and manufacture
multichip packages (MCPs) utilizing SanDisks
NAND flash and controllers and the Companys
F-86
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
low power mobile DRAM. The collaboration targets the need for
high capacity, integrated memory solutions for data-intensive
mobile applications. This agreement will be executed through a
jointly owned company based in Portugal, subject to the
fulfillment of certain closing conditions, in particular
regulatory approval.
In June 2007 the Company entered into an agreement with
Winbond Electronics Corp., Hsinchu, Taiwan
(Winbond). Under the terms of this agreement,
Qimonda will transfer its 75nm and 58nm DRAM technology to
Winbonds 300mm facility in Taichung, Taiwan. In return,
Winbond will manufacture DRAMs for computing applications in
these technologies exclusively for Qimonda. The transfer of the
58nm-technology from Qimonda will enable Winbond also to develop
and sell respective proprietary specialty memories for which
Qimonda will receive license fees and royalties. This new
agreement is the extension of the two companies existing
cooperation which encompasses the transfer and licensing of the
Qimonda 110nm, 90nm and 80nm DRAM technologies for
Winbonds production sites.
|
|
17.
|
Operating
Segment and Geographic Information
|
The Company has one operating segment, Memory Products, which is
also its reportable segment, consistent with the manner in which
financial information is internally reported and used by the
Chief Operating Decision Maker for purposes of evaluating
business performance and allocating resources.
The following is a summary of net sales by geographic area based
on the customers billing location for the three and nine
months ended June 30, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(in millions, except percentages)
|
|
|
(in millions, except percentages)
|
|
|
Germany
|
|
|
74
|
|
|
|
8
|
%
|
|
|
52
|
|
|
|
7
|
%
|
|
|
223
|
|
|
|
9
|
%
|
|
|
212
|
|
|
|
7
|
%
|
Rest of Europe
|
|
|
142
|
|
|
|
14
|
%
|
|
|
65
|
|
|
|
9
|
%
|
|
|
331
|
|
|
|
13
|
%
|
|
|
331
|
|
|
|
11
|
%
|
North America
|
|
|
406
|
|
|
|
42
|
%
|
|
|
244
|
|
|
|
33
|
%
|
|
|
1,078
|
|
|
|
42
|
%
|
|
|
1,093
|
|
|
|
38
|
%
|
Asia/Pacific
|
|
|
312
|
|
|
|
32
|
%
|
|
|
229
|
|
|
|
31
|
%
|
|
|
837
|
|
|
|
32
|
%
|
|
|
898
|
|
|
|
31
|
%
|
Japan
|
|
|
43
|
|
|
|
4
|
%
|
|
|
150
|
|
|
|
20
|
%
|
|
|
114
|
|
|
|
4
|
%
|
|
|
363
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
977
|
|
|
|
100
|
%
|
|
|
740
|
|
|
|
100
|
%
|
|
|
2,583
|
|
|
|
100
|
%
|
|
|
2,897
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
During the three months ended June 30, 2007, the Company
recategorized revenues from Europe to North America consistent
with the revision of a customers billing location
according to information reviewed by the Companys chief
operating decision maker (CODM). Prior period amounts have been
reclassified to conform to the current period presentation.
The Company defines EBIT as earnings (loss) before interest and
taxes. The Companys management uses EBIT, among other
measures, to establish budgets and operational goals, to manage
the combined and consolidated Companys business and to
evaluate and report performance as part of the Infineon Group.
Because many operating decisions, such as allocations of
resources to individual projects, are made on a basis for which
the effects of financing the overall business and of taxation
are of marginal relevance, management finds a metric that
excludes the effects of interest on financing and tax expense
useful. In addition, in measuring operating performance,
particularly for the purpose of making internal decisions, such
as those relating to personnel matters, it is useful for
management to consider a measure that excludes items over which
the individuals being evaluated have minimal control, such as
enterprise-level taxation and financing. The Company reports
EBIT information because it believes that it provides investors
with meaningful information about the operating performance of
the Company in a
F-87
Qimonda
AG and Subsidiaries
Notes to
the Unaudited Condensed Combined and Consolidated Financial
Statements (Continued)
(euro in
millions, except where otherwise stated)
manner similar to that which management uses to assess and
direct the business. EBIT is not a substitute for net income,
however, because the exclusion of interest and tax expense is
not appropriate when reviewing the overall profitability of the
Company.
EBIT is determined as follows from the combined and consolidated
statements of operations, without adjustment to the U.S. GAAP
amounts presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
months
|
|
|
|
|
|
|
ended
|
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Net (loss) income
|
|
|
54
|
|
|
|
(218
|
)
|
|
|
(82
|
)
|
|
|
16
|
|
Adjust: Interest expense (income),
net
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
(4
|
)
|
Adjust: Income tax expense (income)
|
|
|
40
|
|
|
|
(104
|
)
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
100
|
|
|
|
(323
|
)
|
|
|
(2
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above EBIT results prior to the Formation differ from the
Memory Products segment results previously reported by Infineon,
primarily due to allocations of Infineon corporate expenses
(reported by Infineon as part of its Corporate and
Reconciliation segment), since they arise from corporate
directed decisions not within the direct control of segment
management, which have been reallocated to the Company for
purposes of preparing the accompanying combined and consolidated
financial statements on a stand-alone basis.
18. Subsequent
Events
On July 10, 2007, the motion for class certification in the
Indirect U.S. Purchaser Class was filed by the plaintiffs.
On July 17, 2007, the plaintiffs of the securities class
actions filed a third amended complaint.
On July 18, 2007, in connection with the transfer of
ownership of Qimonda Japan K.K. from Infineon, the capital
increase of Qimonda AG was registered with the Commercial
Register. The new registered share capital of Qimonda AG amounts
to 684,000,002.00 and the Authorized Capital 2006/II is
reduced to 239,399,998.00.
On August 17, 2007, the court in the MDL indirect purchaser
litigation entered an order granting the motion to file a Second
Amended Complaint, repleading part of the previously dismissed
claims.
On August 17, 2007, the Business Tax Reform Act of 2008 was
enacted in Germany (see note 3). The Company is evaluating
the impact of the tax law change and expects to record a charge
during the three months ending September 30, 2007, subject
to the final analysis of deferred taxes as of that date,
reflecting the reduction in value of its deferred tax assets in
Germany.
Between June 25 and August 15, 2007, the state attorneys
general of Ohio, New Hampshire and Texas filed motions to
dismiss their complaints without prejudice.
On August 31, 2007, the defendants motion to dismiss
the claims brought by the state attorneys general was granted in
part. The courts order dismissed the claims on behalf of
consumers, businesses and governmental entities in a number of
states, and dismissed certain other claims with leave to amend
by October 1, 2007.
F-88
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Inotera Memories Inc.
We have audited the accompanying balance sheets of Inotera
Memories Inc. (the Company) as of December 31,
2005 and 2006, and the related statements of income, changes in
stockholders equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Inotera Memories Inc. as of December 31, 2005 and 2006,
and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles
generally accepted in the Republic of China.
As stated in Note 3 to the financial statements, effective
January 1, 2006, the Company adopted the Republic of China
Statement of Financial Accounting Standard (SFAS) No. 34
Financial Instruments: Recognition and Measurement,
SFAS No. 36 Financial Instruments: Disclosure
and Presentation and newly amended SFAS No. 1
Conceptual Framework for Financial Accounting and
Preparation of Financial Statements.
As described in Note 23 (c) to the financial
statements, on January 6, 2006, the Company was granted
government approval of its Deferred Stock Purchase Plan and
implemented it on the same day. Under this Plan, the shares were
purchased by the employees on February 9, 2006.
Accounting principles generally accepted in the Republic of
China vary in certain significant respects from accounting
principles generally accepted in the United States of America.
Information relating to the nature and effect of such
differences is presented in Note 25 to the financial
statements.
/s/ KPMG Certified Public Accountant
Taipei, Taiwan (the Republic of China)
March 1, 2007
KPMG Certified Public Accountants,
the Taiwan member firm of the
KPMG network of independent member
firms affiliated with KPMG
international, a Swiss cooperative
F-89
INOTERA
MEMORIES, INC.
Balance Sheets
December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(notes 4 and 17)
|
|
$
|
9,822,568
|
|
|
|
21,704,854
|
|
|
|
665,895
|
|
Current portion of lease
receivables (note 7)
|
|
|
6,690
|
|
|
|
4,912
|
|
|
|
151
|
|
Accounts receivable-related parties
(notes 17 and 18)
|
|
|
5,050,277
|
|
|
|
8,332,816
|
|
|
|
255,647
|
|
Other receivables (note 7)
|
|
|
54,110
|
|
|
|
95,125
|
|
|
|
2,918
|
|
Inventories, net (note 6)
|
|
|
3,485,585
|
|
|
|
3,927,461
|
|
|
|
120,493
|
|
Prepayments and other current assets
|
|
|
616,693
|
|
|
|
671,298
|
|
|
|
20,595
|
|
Deferred income tax assets-current,
net (note 14)
|
|
|
36,405
|
|
|
|
79,690
|
|
|
|
2,445
|
|
Financial assets reported at fair
value through profit or loss (notes 5 and 17)
|
|
|
1,268,011
|
|
|
|
1,654,219
|
|
|
|
50,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,340,339
|
|
|
|
36,470,375
|
|
|
|
1,118,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
(notes 7, 8, 9, 12, 18 and 19):
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,801,467
|
|
|
|
2,801,467
|
|
|
|
85,948
|
|
Buildings
|
|
|
2,424,571
|
|
|
|
2,523,511
|
|
|
|
77,420
|
|
Machinery and equipment
|
|
|
59,669,447
|
|
|
|
68,124,934
|
|
|
|
2,090,042
|
|
Vehicles
|
|
|
2,913
|
|
|
|
4,915
|
|
|
|
151
|
|
Leased assets
|
|
|
135,996
|
|
|
|
135,996
|
|
|
|
4,172
|
|
Miscellaneous equipment
|
|
|
6,465,676
|
|
|
|
6,942,453
|
|
|
|
212,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,500,070
|
|
|
|
80,533,276
|
|
|
|
2,470,724
|
|
Less: accumulated depreciation
|
|
|
(10,130,631
|
)
|
|
|
(21,743,083
|
)
|
|
|
(667,068
|
)
|
Construction in progress
|
|
|
4,770,603
|
|
|
|
41,597,511
|
|
|
|
1,276,193
|
|
Prepayment on land purchase
|
|
|
22,772
|
|
|
|
22,772
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and
equipment
|
|
|
66,162,814
|
|
|
|
100,410,476
|
|
|
|
3,080,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refundable deposits (note 17)
|
|
|
28,544
|
|
|
|
79,219
|
|
|
|
2,430
|
|
Deferred charges
|
|
|
134,846
|
|
|
|
118,630
|
|
|
|
3,640
|
|
Lease receivables-long-term
(note 7)
|
|
|
338,788
|
|
|
|
333,876
|
|
|
|
10,243
|
|
Deferred income tax
assets-non-current, net (note 14)
|
|
|
352,758
|
|
|
|
270,624
|
|
|
|
8,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
854,936
|
|
|
|
802,349
|
|
|
|
24,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
87,358,089
|
|
|
|
137,683,200
|
|
|
|
4,224,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-90
INOTERA
MEMORIES, INC.
Balance Sheets (Continued)
December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Liabilities and
Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loans (notes 10 and
17)
|
|
$
|
2,323,300
|
|
|
|
|
|
|
|
|
|
Accounts payable (note 17)
|
|
|
4,010,066
|
|
|
|
21,110,779
|
|
|
|
647,669
|
|
Accounts payable-related parties
(notes 17 and 18)
|
|
|
55,212
|
|
|
|
405,917
|
|
|
|
12,453
|
|
Income tax payable
|
|
|
124,302
|
|
|
|
133,571
|
|
|
|
4,098
|
|
Accrued expenses (note 13)
|
|
|
855,816
|
|
|
|
941,477
|
|
|
|
28,884
|
|
Other payables-related parties
(notes 9 and 18)
|
|
|
86,253
|
|
|
|
65,539
|
|
|
|
2,011
|
|
Current portion of long-term loans
(notes 12 and 17)
|
|
|
6,431,636
|
|
|
|
10,299,107
|
|
|
|
315,972
|
|
Other current liabilities
|
|
|
14,014
|
|
|
|
14,888
|
|
|
|
458
|
|
Current portion of lease payables
(note 9)
|
|
|
3,390
|
|
|
|
3,544
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
13,903,989
|
|
|
|
32,974,822
|
|
|
|
1,011,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds payable (notes 11 and 17)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
184,077
|
|
Long-term loans (notes 12 and
17)
|
|
|
26,034,564
|
|
|
|
19,392,164
|
|
|
|
594,943
|
|
Lease payables-long-term
(note 9)
|
|
|
130,967
|
|
|
|
127,422
|
|
|
|
3,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
26,165,531
|
|
|
|
25,519,586
|
|
|
|
782,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liabilities
(note 13)
|
|
|
50,594
|
|
|
|
46,746
|
|
|
|
1,434
|
|
Guarantee deposits
|
|
|
1,691
|
|
|
|
4,506
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
liabilities
|
|
|
52,285
|
|
|
|
51,252
|
|
|
|
1,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
40,121,805
|
|
|
|
58,545,660
|
|
|
|
1,796,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
25,109,540
|
|
|
|
31,109,540
|
|
|
|
954,427
|
|
Capital surplus
|
|
|
15,548,660
|
|
|
|
29,317,836
|
|
|
|
899,458
|
|
Legal reserve
|
|
|
91,689
|
|
|
|
684,665
|
|
|
|
21,005
|
|
Special reserve
|
|
|
542,605
|
|
|
|
542,605
|
|
|
|
16,647
|
|
Unappropriated earnings
|
|
|
5,943,790
|
|
|
|
17,482,894
|
|
|
|
536,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
|
|
|
47,236,284
|
|
|
|
79,137,540
|
|
|
|
2,427,904
|
|
Commitments and contingencies
(note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
87,358,089
|
|
|
|
137,683,200
|
|
|
|
4,224,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-91
INOTERA
MEMORIES, INC.
Statements of Income
For the years ended December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for
earnings per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue
|
|
$
|
23,044,929
|
|
|
|
40,866,245
|
|
|
|
1,253,758
|
|
Sales returns
|
|
|
(3,133
|
)
|
|
|
(7,049
|
)
|
|
|
(216
|
)
|
Sales allowances
|
|
|
(9,593
|
)
|
|
|
(77,486
|
)
|
|
|
(2,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues
(note 18)
|
|
|
23,032,203
|
|
|
|
40,781,710
|
|
|
|
1,251,165
|
|
Cost of goods sold
(notes 18 and 23)
|
|
|
(16,350,746
|
)
|
|
|
(24,316,647
|
)
|
|
|
(746,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,681,457
|
|
|
|
16,465,063
|
|
|
|
505,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative and general expenses
(notes 9, 18 and 23)
|
|
|
(283,853
|
)
|
|
|
(321,675
|
)
|
|
|
(9,869
|
)
|
Research and development expenses
(note 23)
|
|
|
(658,134
|
)
|
|
|
(254,923
|
)
|
|
|
(7,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
(941,987
|
)
|
|
|
(576,598
|
)
|
|
|
(17,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,739,470
|
|
|
|
15,888,465
|
|
|
|
487,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income and
gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (notes 5 and 7)
|
|
|
309,821
|
|
|
|
981,826
|
|
|
|
30,122
|
|
Gain on disposal of short-term
investments
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain, net
|
|
|
676,797
|
|
|
|
796,785
|
|
|
|
24,445
|
|
Valuation gain on financial
instruments, net (note 5)
|
|
|
|
|
|
|
450,596
|
|
|
|
13,824
|
|
Others (note 7)
|
|
|
306,754
|
|
|
|
114,515
|
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income and
gains
|
|
|
1,297,904
|
|
|
|
2,343,722
|
|
|
|
71,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses and
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (excluding
capitalized interest of $395,501 and $121,388 in 2005 and 2006,
respectively) (notes 5 and 9)
|
|
|
(760,618
|
)
|
|
|
(1,655,085
|
)
|
|
|
(50,777
|
)
|
Loss on obsolescence of inventories
(note 6)
|
|
|
|
|
|
|
(18,849
|
)
|
|
|
(578
|
)
|
Impairment loss on idle assets
(note 8)
|
|
|
|
|
|
|
(32,107
|
)
|
|
|
(985
|
)
|
Others (note 18)
|
|
|
(9,637
|
)
|
|
|
(33,823
|
)
|
|
|
(1,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses and
losses
|
|
|
(770,255
|
)
|
|
|
(1,739,864
|
)
|
|
|
(53,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
tax
|
|
|
6,267,119
|
|
|
|
16,492,323
|
|
|
|
505,977
|
|
Income tax expense
(note 14)
|
|
|
(337,361
|
)
|
|
|
(386,499
|
)
|
|
|
(11,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principle
|
|
|
5,929,758
|
|
|
|
16,105,824
|
|
|
|
494,119
|
|
Cumulative effect of change in
accounting principle (net of income tax benefit of $79,305)
(note 3)
|
|
|
|
|
|
|
(237,915
|
)
|
|
|
(7,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,929,758
|
|
|
|
15,867,909
|
|
|
|
486,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
(note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
Before tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
2.50
|
|
|
|
5.64
|
|
|
|
0.17
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.11
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.50
|
|
|
|
5.53
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
2.36
|
|
|
|
5.51
|
|
|
|
0.17
|
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.08
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.36
|
|
|
|
5.43
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-92
INOTERA
MEMORIES, INC.
Statements of Changes in Stockholders Equity
For the years ended December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Capital
|
|
|
Legal
|
|
|
Special
|
|
|
Unappropriated
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
surplus
|
|
|
reserve
|
|
|
reserve
|
|
|
earnings
|
|
|
Total
|
|
|
Balance as of January 1,
2005
|
|
|
NTD
|
|
|
|
24,976,600
|
|
|
|
15,548,660
|
|
|
|
1,559
|
|
|
|
|
|
|
|
915,333
|
|
|
|
41,442,152
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,130
|
|
|
|
|
|
|
|
(90,130
|
)
|
|
|
|
|
Appropriation for special reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542,605
|
|
|
|
(542,605
|
)
|
|
|
|
|
Remuneration to directors and
supervisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,686
|
)
|
|
|
(2,686
|
)
|
Bonus to employees
|
|
|
|
|
|
|
8,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,114
|
)
|
|
|
(8,057
|
)
|
Cash and stock dividends to
stockholders
|
|
|
|
|
|
|
124,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249,766
|
)
|
|
|
(124,883
|
)
|
Net income for the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,929,758
|
|
|
|
5,929,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
NTD
|
|
|
|
25,109,540
|
|
|
|
15,548,660
|
|
|
|
91,689
|
|
|
|
542,605
|
|
|
|
5,943,790
|
|
|
|
47,236,284
|
|
Increase in capital
|
|
|
|
|
|
|
6,000,000
|
|
|
|
13,769,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,769,176
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
592,976
|
|
|
|
|
|
|
|
(592,976
|
)
|
|
|
|
|
Remuneration to directors and
supervisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,736
|
)
|
|
|
(3,736
|
)
|
Bonus to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(298,866
|
)
|
|
|
(298,866
|
)
|
Cash dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,433,227
|
)
|
|
|
(3,433,227
|
)
|
Net income for the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,867,909
|
|
|
|
15,867,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
|
NTD
|
|
|
|
31,109,540
|
|
|
|
29,317,836
|
|
|
|
684,665
|
|
|
|
542,605
|
|
|
|
17,482,894
|
|
|
|
79,137,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1,
2006 (Unaudited)
|
|
|
USD
|
|
|
|
770,350
|
|
|
|
477,026
|
|
|
|
2,813
|
|
|
|
16,647
|
|
|
|
182,353
|
|
|
|
1,449,189
|
|
Increase in capital
|
|
|
|
|
|
|
184,077
|
|
|
|
422,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,509
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,192
|
|
|
|
|
|
|
|
(18,192
|
)
|
|
|
|
|
Remuneration to directors and
supervisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
(115
|
)
|
Bonus to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,169
|
)
|
|
|
(9,169
|
)
|
Cash dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105,330
|
)
|
|
|
(105,330
|
)
|
Net income for the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486,820
|
|
|
|
486,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006 (Unaudited)
|
|
|
USD
|
|
|
|
954,427
|
|
|
|
899,458
|
|
|
|
21,005
|
|
|
|
16,647
|
|
|
|
536,367
|
|
|
|
2,427,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-93
INOTERA
MEMORIES, INC.
Statements of Cash Flows
For the years ended December 31, 2005 and 2006
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,929,758
|
|
|
|
15,867,909
|
|
|
|
486,820
|
|
Depreciation
|
|
|
8,099,551
|
|
|
|
11,633,379
|
|
|
|
356,907
|
|
Amortization of deferred charges
|
|
|
6,995
|
|
|
|
8,454
|
|
|
|
259
|
|
Amortization of deferred
charges bank loan syndication fees
|
|
|
29,170
|
|
|
|
29,012
|
|
|
|
890
|
|
Losses on obsolescence of
inventories
|
|
|
|
|
|
|
18,849
|
|
|
|
578
|
|
Losses on disposal of property,
plant and equipment
|
|
|
|
|
|
|
1,590
|
|
|
|
49
|
|
Impairment loss on idle assets
|
|
|
|
|
|
|
32,107
|
|
|
|
985
|
|
Unrealized foreign currency
exchange gain, net
|
|
|
(280,665
|
)
|
|
|
(260,716
|
)
|
|
|
(7,999
|
)
|
Gain on disposal of short-term
investments
|
|
|
(4,532
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred forward
exchange premium
|
|
|
(287,851
|
)
|
|
|
|
|
|
|
|
|
Realized interest income from
capital lease
|
|
|
(10,133
|
)
|
|
|
(20,066
|
)
|
|
|
(616
|
)
|
Realized interest expense from
capital lease
|
|
|
1,513
|
|
|
|
5,920
|
|
|
|
182
|
|
Cumulative effect of change in
accounting principle for financial assets
|
|
|
|
|
|
|
237,915
|
|
|
|
7,299
|
|
Valuation gain on financial
instruments, net
|
|
|
|
|
|
|
(450,596
|
)
|
|
|
(13,824
|
)
|
Increase in accounts
receivable related parties
|
|
|
(2,554,838
|
)
|
|
|
(3,310,868
|
)
|
|
|
(101,576
|
)
|
Net cash paid on purchase of
financial assets reported at fair value through profit or loss
|
|
|
|
|
|
|
(252,832
|
)
|
|
|
(7,757
|
)
|
Decrease (increase) in other
receivables
|
|
|
106,119
|
|
|
|
(44,427
|
)
|
|
|
(1,363
|
)
|
Increase in inventories
|
|
|
(1,358,055
|
)
|
|
|
(460,725
|
)
|
|
|
(14,135
|
)
|
Cash received from lease receivable
|
|
|
10,291
|
|
|
|
26,756
|
|
|
|
821
|
|
Decrease (increase) in prepayments
and other current assets
|
|
|
395,049
|
|
|
|
(53,855
|
)
|
|
|
(1,652
|
)
|
Increase (decrease) in accounts
payable
|
|
|
804,060
|
|
|
|
(266,255
|
)
|
|
|
(8,169
|
)
|
(Decrease) increase in accounts
payable related parties
|
|
|
(71,320
|
)
|
|
|
350,705
|
|
|
|
10,759
|
|
Increase in income tax payable
|
|
|
124,357
|
|
|
|
9,269
|
|
|
|
284
|
|
Increase in accrued expenses
|
|
|
407,478
|
|
|
|
85,494
|
|
|
|
2,623
|
|
Decrease in other
payables related parties
|
|
|
(198,268
|
)
|
|
|
(20,714
|
)
|
|
|
(635
|
)
|
Cash paid on lease payables
|
|
|
(3,152
|
)
|
|
|
(9,311
|
)
|
|
|
(286
|
)
|
Increase in other current
liabilities
|
|
|
5,255
|
|
|
|
874
|
|
|
|
27
|
|
Increase (decrease) in accrued
pension liabilities
|
|
|
19,839
|
|
|
|
(3,848
|
)
|
|
|
(118
|
)
|
Decrease in deferred income tax
assets, net
|
|
|
185,198
|
|
|
|
118,154
|
|
|
|
3,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
11,355,819
|
|
|
|
23,272,174
|
|
|
|
713,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in short-term investments
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property,
plant and equipment
|
|
|
|
|
|
|
600
|
|
|
|
18
|
|
Purchases of property, plant and
equipment
|
|
|
(28,313,919
|
)
|
|
|
(28,446,514
|
)
|
|
|
(872,726
|
)
|
Increase in deferred charges
|
|
|
(52,728
|
)
|
|
|
(22,000
|
)
|
|
|
(675
|
)
|
Decrease (increase) in refundable
deposits
|
|
|
18,117
|
|
|
|
(50,675
|
)
|
|
|
(1,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(28,343,998
|
)
|
|
|
(28,518,589
|
)
|
|
|
(874,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in short-term loans
|
|
|
(158,200
|
)
|
|
|
(2,323,300
|
)
|
|
|
(71,278
|
)
|
Proceeds from long-term loans
|
|
|
17,285,096
|
|
|
|
3,850,000
|
|
|
|
118,116
|
|
Repayment of long-term loans
|
|
|
|
|
|
|
(6,403,123
|
)
|
|
|
(196,445
|
)
|
Increase in bonds payable
|
|
|
|
|
|
|
6,000,000
|
|
|
|
184,077
|
|
Increase in capital
|
|
|
|
|
|
|
19,769,176
|
|
|
|
606,509
|
|
Increase in guarantee deposits
|
|
|
1,114
|
|
|
|
2,815
|
|
|
|
86
|
|
Cash dividend to stockholders
|
|
|
(124,611
|
)
|
|
|
(3,433,498
|
)
|
|
|
(105,338
|
)
|
Bonus to employees
|
|
|
(8,057
|
)
|
|
|
(298,866
|
)
|
|
|
(9,169
|
)
|
Remuneration to directors and
supervisors
|
|
|
(2,686
|
)
|
|
|
(3,736
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
16,992,656
|
|
|
|
17,159,468
|
|
|
|
526,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
exchange translation
|
|
|
(162,098
|
)
|
|
|
(30,767
|
)
|
|
|
(30,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(157,621
|
)
|
|
|
11,882,286
|
|
|
|
364,543
|
|
Cash and cash equivalents at
beginning of year
|
|
|
9,980,189
|
|
|
|
9,822,568
|
|
|
|
301,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
9,822,568
|
|
|
|
21,704,854
|
|
|
|
665,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
27,860
|
|
|
|
259,071
|
|
|
|
7,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid (excluding
capitalized interest)
|
|
$
|
972,201
|
|
|
|
1,749,036
|
|
|
|
53,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities affecting
both cash and non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accquisition of property, plant,
and equipment
|
|
$
|
22,928,454
|
|
|
|
45,915,339
|
|
|
|
1,408,662
|
|
Decrease (increase) in payables to
equipment suppliers
|
|
|
5,385,465
|
|
|
|
(17,468,825
|
)
|
|
|
(535,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
28,313,919
|
|
|
|
28,446,514
|
|
|
|
872,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term loans
|
|
$
|
6,431,636
|
|
|
|
10,299,107
|
|
|
|
315,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-94
INOTERA
MEMORIES, INC.
Notes to Financial Statements
December 31, 2005 and 2006
(All amounts are expressed in thousands of New Taiwan
Dollars,
except for per share information or unless otherwise
specified)
(1) Organization
and Principal Activities
Inotera Memories, Inc. (the Company) was legally
established with the approval by Ministry of Economic Affairs on
January 23, 2003. The Companys main operating
activities are to manufacture and to sell semiconductor
products. On January 12, 2006, the Company was granted
approval of its application to list its shares on the Taiwan
Stock Exchange (TSE). The Companys shares were initially
listed on the TSE on March 17, 2006. On May 16, 2006,
the Company listed its shares in the form of global depositary
shares (GDSs) on the Luxembourg Stock Exchange (LSE).
As of December 31, 2005 and 2006, the Company had 1,824 and
2,898 employees, respectively.
(2) Summary
of Significant Accounting Policies
The accompanying financial statements are prepared in conformity
with accounting principles generally accepted in the Republic of
China (ROC). The financial statements are not intended to
present the financial position of the Company and the related
results of operations and cash flow in accordance with
accounting principles and practices generally accepted in
countries and jurisdictions other than the ROC.
The significant accounting policies followed by the Company are
as follows:
(a) Convenience translation into U.S. dollars
The financial statements are stated in New Taiwan Dollars.
Translation of the 2006 New Taiwan Dollar amounts into U.S.
dollar amounts is included solely for the convenience of the
readers, using the Bank of Taiwan exchange rate on
December 29, 2006, of NT$32.595 to US$1 uniformly for all
the financial statements accounts. The convenience
translations should not be construed as representations that the
New Taiwan Dollar amounts have been, could have been, or could
in the future be, converted into U.S. dollars at this rate or
any other rate of exchange.
(b) Foreign currency transactions and translation
The Companys reporting currency is New Taiwan Dollar.
Foreign currency transactions during the period are translated
at the exchange rates on the transaction dates. Foreign
currency-denominated assets and liabilities are translated into
New Taiwan Dollars at the exchange rate prevailing on the
balance sheet date, and the resulting translation gains or
losses are recognized as non-operating income or expenses.
Effective January 1, 2005, the Company adopted the amended
Republic of China Statement of Financial Accounting Standards
No. 14 (SFAS No. 14) The Effects of
Changes in Foreign Exchange Rates. Under the amended
SFAS No. 14, the exchange difference from the
translation using the exchange rate on balance sheet date of
foreign currency monetary and non-monetary assets and
liabilities reported at fair value through profit or loss is
recognized in earnings.
(c) Basis for classifying assets and liabilities as current
or non-current
Cash and other assets that the Company will convert to cash or
use within in a relatively short period of time one
year or one operating cycle, whichever is longer are
classified as current assets, otherwise, are classified as
non-current assets. Debts due within one year or one operating
cycle, whichever is longer, are classified as current
liabilities; otherwise, are classified as long-term liabilities.
(d) Asset impairment
Commencing from January 1, 2005, the Company adopted the
ROC SFAS No. 35 Impairment of Assets. In
accordance with SFAS No. 35, the Company assesses at
each balance sheet date whether there is
F-95
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
any indication that an asset (individual asset or
cash-generating unit) may have been impaired. If any such
indication exists, the Company estimates the recoverable amount
of the asset. The Company recognizes impairment loss for an
asset whose carrying value is higher than the recoverable amount.
The Company reverses an impairment loss recognized in prior
periods for assets if there is any indication that the
impairment loss recognized no longer exists or has decreased.
The carrying value after the reversal should not exceed the
recoverable amount or the depreciated or amortized balance of
the assets assuming no impairment loss was recognized in prior
periods.
(e) Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash in
banks, time deposits, negotiable time deposits, and other cash
equivalents. Other cash equivalents represent highly liquid debt
instruments with a maturity period of less than three months,
such as commercial paper, government bonds held under repurchase
agreement, and other highly liquid investments which do not have
a significant level of market or credit risk from potential
interest rate changes.
(f) Financial instruments
Effective January 1, 2006, the Company adopted the ROC
SFAS No. 34 Financial Instruments: Recognition
and Measurement. In accordance with the
SFAS No. 34, the Company classifies its financial
assets as financial assets/liabilities reported at fair value
through profit or loss.
The Company adopted trade-date-accounting for financial
instrument transactions. The financial instruments are initially
recognized at fair value plus transaction costs.
After the initial recognition, the financial instruments that
the Company held or issued are classified as financial assets
reported at fair value through profit or loss, including those
held for trading. Financial assets held for trading are those
that the Company is holding mainly for the purpose of short-term
profit-taking. Financial derivatives, except for those that meet
the criteria for hedge accounting, are accounted for as
financial assets reported at fair value through profit or loss.
Before January 1, 2006, some of the investments held by the
Company were classified, according to the Companys
intention for holding them, as short-term investments, including
open-end mutual funds. These short-term investments were
evaluated at the lower of cost or market value. Market value of
open-end mutual funds was determined based on the net asset
value of the mutual funds at the balance sheet date. The
aggregate cost of these short-term investments was determined by
the weighted-average method. Devaluation losses resulting from a
decline in market value were recognized in the income statement.
Before January 1, 2006, interest rate swaps and foreign
currency forward contracts were accounted for as follows:
|
|
|
|
(i)
|
Foreign exchange forward contracts
|
Foreign exchange forward contracts, which were entered into for
the purpose of hedging the risks of exchange rate fluctuation on
foreign currency receivables and payables, were translated into
New Taiwan Dollars using spot rates on the balance sheet date.
The resulting translation difference was recorded as an exchange
gain or loss in the accompanying statements of income. The
difference between the forward rate and spot rate at the
contract date was amortized over the contract period.
Because there is no physical transfer of principal, only memo
entries of notional principals were made for interest rate
swaps. For trading swaps, the differences between the present
and market values of interest receivables or payables arising
thereon were reported as unrealized
F-96
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
gains or losses on derivative instruments. For non-trading
swaps, interest was accrued based on contract terms, with
interest revenue and expense recognized in the same period that
the hedged items affect earnings.
(g) Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined by using the monthly weighted-average method.
Market value represents replacement cost or net realizable
value. The market value of raw materials and supplies are
determined on the basis of replacement cost. The market value of
finished goods and work in-process are determined on the basis
of net realizable value.
(h) Property, plant and equipment / Depreciation
Property, plant and equipment are stated at cost less
accumulated depreciation. Interest costs related to the
construction of property, plant and equipment are capitalized
and included in the cost of the related asset. Maintenance and
repairs are expensed when incurred; major addition, improvement
and replacement expenditures are capitalized.
Depreciation of property, plant and equipment is provided over
their estimated useful lives by using the straight-line method.
Assets still in service after reaching the end of their
estimated useful lives are depreciated based on the residual
value over their re-estimated useful lives. The useful lives of
the assets are as follows:
(i) Buildings: 8 to 50 years.
(ii) Vehicles: 5 years.
(iii) Machinery and equipment: 3 to 5 years.
(iv) Leased assets: 23.7 years.
(v) Miscellaneous equipment: 5 to 15 years.
Gains or losses on disposal of property, plant and equipment are
recorded as non-operating income or expenses.
(i) Leases
A lease is deemed to be a capital lease if it conforms to any
one of the following classification criteria:
|
|
|
|
(i)
|
the lease transfers ownership of the leased assets to the lessee
by the end of the lease term;
|
(ii) the lease contains a bargain purchase option;
|
|
|
|
(iii)
|
the lease term is equal to 75% of or more of the total estimated
economic life of the leased assets; this criterion should not be
applied to leases in which the leased asset has been used for
more than 75% of its estimated economic life before the lease
begins;
|
|
|
(iv)
|
the present value of the rental plus the bargain purchase price
or the guaranteed residual value is at least 90% of the fair
market value of the leased assets at the inception date of the
lease.
|
For the lessor, a capital lease must also conform to any one of
the four classification criteria specified above and both of the
following two further criteria:
(i) collectibility of the lease payments is reasonably
predictable; and
|
|
|
|
(ii)
|
no important uncertainties surround the amount of unreimbursable
costs yet to be incurred by the lessor under the lease.
|
Under a capital lease, the Company, as the lessee, capitalizes
the leased assets based on (a) the present value of all
future installment rental payments (minus executory cost born by
lessor) plus bargain purchase
F-97
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
price or lessees guaranteed residual value or (b) the
fair market value of leased assets at the lease inception date,
whichever is lower. The depreciation period is restricted to the
lease term, rather than the estimated useful life of the assets,
unless the lease provides for transfer of title or includes a
bargain purchase option.
Under a capital lease, the Company, as the lessor, records all
installments plus bargain purchase price or guaranteed residual
value as the lease receivables. The implicit interest rate is
used to calculate the present value of lease receivables as the
cost of leased assets transferred. The difference between the
total amount of lease receivables and the cost of leased assets
transferred is recognized as unrealized interest income and is
then recognized as realized interest income using the interest
method over the lease term.
(j) Employee retirement plan
The Company has established an employee noncontributory defined
benefit retirement plan (the Plan) covering
full-time employees in the Republic of China. In accordance with
the Plan, employees are eligible for retirement or are required
to retire after meeting certain age or service requirements.
Payments of retirement benefits are based on years of service
and the average salary for the last six months before the
employees retirement. Each employee gets
2 months salary for each service year for the first
15 years, and 1 months salary for each service
year thereafter. A lump-sum retirement benefit is paid through
the retirement fund.
Starting from July 1, 2005, the enforcement of the newly
enacted Labor Pension Act (the New Act) stipulates
those employees covered by the defined contribution plan as
follows:
|
|
|
|
(i)
|
employees who were covered by the Plan and opt to be subject to
the pension mechanism under the New Act;
|
|
|
(ii)
|
employees who are employed after the enforcement date of the New
Act.
|
In accordance with the New Act, the rate of contribution by an
employer to an individual labor pension fund account per month
shall not be less than 6% of the workers monthly wages.
The Plan has not been modified to conform to the New Act. For
those provisions of the New Act not currently included in the
Plan, the Company follows the New Act.
The Company adopts the SFAS No. 18, Accounting
for Pensions, for its defined benefit retirement plan.
SFAS No. 18 requires an actuarial calculation of the
Companys pension obligation at the end of each year. Based
on the actuarial calculation, the Company recognizes a minimum
pension liability and net periodic pension costs.
(k) Deferred charges
|
|
|
|
(i)
|
Bank charges related to syndicated loans are deferred and
amortized over the terms of the loans.
|
|
|
(ii)
|
Power line installation costs and royalty paid to the Industrial
Technology Research Institute are deferred and amortized over
the estimated useful lives or the agreement terms.
|
|
|
(iii)
|
Underwriter handling charges on bonds payable are deferred and
amortized over the term of the bond.
|
(l) Revenue recognition
Revenue is generally recognized when it is realized or
realizable and earned when all of the following criteria are met:
|
|
|
|
(i)
|
persuasive evidence of an arrangement exists,
|
|
|
(ii)
|
shipment has occurred or services have been rendered,
|
|
|
(iii)
|
the sellers price to the buyer is fixed or determinable,
and
|
F-98
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(iv) collectibility is reasonably assured.
Rental income is recognized when services are provided.
(m) Income tax
The Company has adopted the SFAS No. 22 Income
Taxes. Income taxes are accounted for using the asset and
liability method. Deferred income tax is determined based on
differences between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect during
the years in which the differences are expected to reverse. The
income tax effects of taxable temporary differences are
recognized as deferred income tax liabilities. The income tax
effects resulting from deductible temporary differences, net
operating loss carryforwards, and income tax credits are
recognized as deferred income tax assets. The realization of the
deferred income tax assets is evaluated, and if it is considered
more likely than not that the asset will not be realized, a
valuation allowance is recognized accordingly.
The classification of deferred income tax assets and liabilities
as current or non-current is based on the classification of the
related asset or liability. If the deferred income tax asset or
liability is not directly related to a specific asset or
liability, then the classification is based on the expected
realization date of the asset or liability.
A tax imputation system was adopted in accordance with the
amended ROC Income Tax Law. Under this system, the Company may
retain the earnings (on tax basis) incurred after
December 31, 1997 but will be subject to 10% surtax. This
surtax is computed according to the ROC Income Tax Law, and is
charged to current income tax expense in the year when the
shareholders resolved during their meeting not to distribute the
earnings. The ROC Income Tax Law was further amended in 2006,
under which, the 10% surtax is calculated based on the after tax
earnings (on accounting basis).
(n) Earnings (loss) per common share
Earnings (loss) per share are calculated based on the
weighted-average number of outstanding shares. The number of
outstanding shares is retroactively adjusted for common stock
issued through the distribution of stock dividends out of
unappropriated earnings and capital surplus.
(3) Reasons
for and Cumulative Effect of Accounting Principle
Change
|
|
|
|
(a)
|
As the Company adopted the SFAS No. 34 Financial
Instruments: Recognition and Measurement,
SFAS No. 36 Financial Instruments: Disclosure
and Presentation, and newly amended SFAS No. 1
Conceptual Framework for Financial Accounting and
Preparation of Financial Statements effective
January 1, 2006, the net income and earnings per share
(after tax) for the year ended December 31, 2006, were
affected as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in net
|
|
|
Decrease in
|
|
Nature of the change in accounting principle
|
|
income
|
|
|
earnings per share
|
|
|
Accounting for financial
instruments
|
|
$
|
27,600
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
The financial instruments are recorded in accordance with the
SFAS No. 34 and No. 36. The effects of the adoption of
these new accounting principles were discussed further in
note 5 to the financial statements.
|
|
|
|
(b)
|
The Company adopted SFAS No. 34 Financial
Instruments: Recognition and Measurement effective
January 1, 2006. Accordingly, the Company measured and
reclassified the financial assets based on fair value at the
beginning of 2006. As of January 1, 2006, the cumulative
effect of the change in accounting principle amounted to
NT$237,915 (net of tax).
|
F-99
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(4) Cash
and Cash Equivalents
Cash and cash equivalents as of December 31, 2005 and 2006,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Cash on hand petty cash
|
|
$
|
160
|
|
|
|
230
|
|
Cash in bank checking
account
|
|
|
5,346
|
|
|
|
19,386
|
|
Cash in bank demand
deposit account
|
|
|
5,143
|
|
|
|
287
|
|
Cash in bank foreign
currency account
|
|
|
546,761
|
|
|
|
1,523,104
|
|
Time deposit new
Taiwan dollars
|
|
|
9,265,158
|
|
|
|
500,000
|
|
Time deposit foreign
currency
|
|
|
|
|
|
|
3,944,973
|
|
Cash equivalents
commercial paper
|
|
|
|
|
|
|
360,385
|
|
Cash equivalents
government and corporate bonds under agreement to repurchase
|
|
|
|
|
|
|
15,356,489
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,822,568
|
|
|
|
21,704,854
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents were not pledged or mortgaged to
secure bank loans.
(5) Financial
Assets Reported at Fair Value through Profit or Loss
Financial assets reported at fair value with changes in fair
value recorded through profit or loss as of December 31,
2005 and 2006, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Financial assets reported at fair
value through profit of loss
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
|
|
|
|
52,255
|
|
Foreign exchange forward contracts
|
|
|
1,268,011
|
|
|
|
941,480
|
|
Mutual bond fund
|
|
|
|
|
|
|
660,484
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,268,011
|
|
|
|
1,654,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The Company entered into seventeen foreign exchange forward
contracts with Standard Chartered Bank and three other banks to
hedge the risk of foreign currency exchange rate fluctuations
for foreign long-term loans. The foreign exchange forward
contracts with notional amounts aggregating to US$130,000
thousand matured in 2006. The maturity of these forward
contracts resulted in net cash settlement and gain on disposal
of financial assets of NT$403,822 and NT$217,335, respectively.
As of December 31, 2005 and 2006, the notional amounts of
the remaining foreign exchange forward contracts aggregated to
US$650,000 thousand and US$520,000 thousand, respectively, with
net fair value of NT$912,154 and NT$941,480, respectively. As of
December 31, 2006, the
mark-to-market
revaluation of foreign exchange forward contracts resulted in
unrealized gain on financial assets of NT$215,813. If the
Company had continued adopting the accounting treatment for
forward contracts under the old SFAS No. 14, which was
effective prior to January 1, 2006, amortization of
deferred forward exchange premium and unrealized foreign
currency exchange gain would have amounted to NT$267,216, and
net income would have decreased by NT$38,552 (after tax) for the
year ended December 31, 2006.
|
|
|
|
|
(b)
|
The Company entered into four interest rate swap agreements
(IRS) with Taipei Fubon Bank and two other banks to hedge the
risk from fluctuations of interest rates for foreign long-term
loans, which were obtained by the Company in 2004. As of
December 31, 2005 and 2006, the notional amounts of the
outstanding interest rate swap agreements amounted to US$130,000
thousand and US$92,857 thousand, respectively. The net interest
arising from these interest hedging activities resulted in net
interest expense of NT$12,822
|
F-100
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
in 2005 and interest income of NT$24,488 in 2006. The net
interest receivable as of December 31, 2005 and 2006,
amounted to NT$1,348 and NT$13,118, respectively. As of
December 31, 2005 and 2006, the net fair value of IRS
amounted to NT$38,637 and NT$52,255, respectively. Also, the
mark-to-market
revaluation of IRS resulted in unrealized gain on financial
assets of NT$13,618. If the Company had continued adopting the
old accounting treatment for IRS which was effective prior to
January 1, 2006, there would have been no gain or loss
based on
mark-to-market
revaluation of IRS, and net income would have increased by
NT$10,214 (after tax) for the year ended December 31, 2006.
|
|
|
|
|
(c)
|
In 2006, the Company purchased 197,396.36 units of a mutual bond
fund for NT$659,500. As of December 31, 2006, the fair
value of the mutual bond fund amounted to NT$660,484. The
mark-to-market
revaluation of the mutual bond fund resulted in unrealized gain
on financial assets of NT$984. If the Company had continued
adopting the old accounting treatment for mutual bond fund which
was effective prior to January 1, 2006, the mutual bond
fund would have amounted to NT$659,500, and net income would
have increased by NT$738 (after tax) for the year ended
December 31, 2006.
|
|
|
|
|
(d)
|
In December 2006, the maturities of cross currency swaps
resulted in realized gain on financial assets of NT$2,846.
|
|
|
|
|
(e)
|
In accordance with SFAS No. 34, the net foreign
exchange forward receivable amounting to NT$1,268,011 was
reclassified to financial assets reported at fair value through
profit or loss as of December 31, 2005.
|
(6) Inventories,
net
As of December 31, 2005 and 2006, inventories consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Raw materials
|
|
$
|
557,814
|
|
|
|
736,290
|
|
Supplies
|
|
|
577,199
|
|
|
|
579,913
|
|
Work in process
|
|
|
2,341,178
|
|
|
|
2,624,819
|
|
Finished goods
|
|
|
9,394
|
|
|
|
5,288
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,485,585
|
|
|
|
3,946,310
|
|
Less: allowance for inventory
losses
|
|
|
|
|
|
|
(18,849
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,485,585
|
|
|
|
3,927,461
|
|
|
|
|
|
|
|
|
|
|
Inventories were not pledged or mortgaged to secure bank loans.
(7) Lease
Receivables
|
|
|
|
(a)
|
The Company signed a long-term lease agreement with Nanya
Technology Corp. (NTC) to lease out a portion of the building
and land (including supplemental equipment) located at No. 667,
Fuhsing 3rd Road, Hwa-Ya Technology Park, Kueishan Valley,
Taoyuan County. The lease took effect on July 1, 2005, and
remains effective until December 31, 2034 (including the
period when the lease is automatically extended), a total of
354 months. The lease agreement for the building is treated
as a capital lease because the present value of the periodic
rental payments since the inception date is at least 90% of the
market value of the leased assets. The land is treated as an
operating lease. The monthly rents for the lease of building and
land were NT$2,058 and NT$310, respectively.
|
|
|
|
|
(b)
|
The initial total amount of lease receivables for the capital
lease of the building was NT$728,587; the implicit interest rate
was 5.88%. The cost of leased assets transferred was NT$345,637
(including the net book value of the building and miscellaneous
equipment of NT$277,372 and NT$68,265, respectively).
|
F-101
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
The difference between the total amount of lease receivables and
the cost of leased assets transferred amounted to NT$382,950,
which was recognized as unrealized interest income and is
amortized over the lease period. For the years ended
December 31, 2005 and 2006, NT$10,133 and NT$20,066,
respectively, was recognized as interest income (classified
under non-operating income and gains interest
income).
|
The details of lease receivables of December 31, 2005 and
2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
|
Current
|
|
|
Non-current
|
|
|
Current
|
|
|
Non-current
|
|
|
Gross lease receivables
|
|
$
|
26,756
|
|
|
|
691,540
|
|
|
|
24,698
|
|
|
|
666,842
|
|
Less: Unrealized interest income
|
|
|
(20,066
|
)
|
|
|
(352,752
|
)
|
|
|
(19,786
|
)
|
|
|
(332,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease receivables
|
|
$
|
6,690
|
|
|
|
338,788
|
|
|
|
4,912
|
|
|
|
333,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
For the years ended December 31, 2005 and 2006, the rent
revenues (classified under non-operating income and
gains others) from the operating lease of land were
NT$1,859 and NT$3,719, respectively.
|
|
|
|
|
(d)
|
As of December 31, 2005 and 2006, the uncollected rent
revenues (classified under other receivables) were NT$310 and
NT$310, respectively.
|
|
|
|
|
(e)
|
Future gross lease receivables for leases classified as capital
lease or operating lease as of December 31, 2006, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006.12.31
|
|
Duration
|
|
Capital lease
|
|
|
Operating lease
|
|
|
2007.1.1-2007.12.31
|
|
$
|
24,698
|
|
|
|
3,719
|
|
2008.1.1-2008.12.31
|
|
|
24,698
|
|
|
|
3,719
|
|
2009.1.1-2009.12.31
|
|
|
24,698
|
|
|
|
3,719
|
|
2010.1.1-2010.12.31
|
|
|
24,698
|
|
|
|
3,719
|
|
2011.1.1-2034.12.31
|
|
|
592,748
|
|
|
|
89,244
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
691,540
|
|
|
|
104,120
|
|
|
|
|
|
|
|
|
|
|
(8) Property,
Plant and Equipment
|
|
|
|
(a)
|
In March 2005, the Company purchased two parcels of land
numbered 350 and 351 located in Hwa-Ya, Kueishan, Taoyuan
County, for NT$28,465 from the Land Readjustment Committee in
Kueishan, Taoyuan County. As of December 31, 2006, the
Company had prepaid NT$22,772 of the total purchase price, which
was recorded as a prepayment on land purchase.
|
|
|
|
|
(b)
|
The property, plant and equipment are pledged to secure bank
loans as of December 31, 2005 and 2006, as described in
note 12.
|
|
|
|
|
(c)
|
For the years ended December 31, 2005, and 2006, the
Company assessed the related assets for any impairment. Fixed
assets not used in operation were transferred to idle assets
based on book value, and NT$0 and NT$32,107, respectively, was
recognized as impairment loss on idle asset.
|
(9) Leased
Assets and Lease Payables
|
|
|
|
(a)
|
The Company signed a long-term lease agreement with NTC to lease
a portion of the building and land located on the land numbered
348, 348-2
and 348-4,
Hwa-Ya Section, Kueishan Valley, Taoyuan County. The lease took
effect on July 1, 2005, and remains effective until
February 28, 2029 (including the period when the agreement
can be automatically extended), a total of 284 months. The
lease agreement for the building is treated as a capital lease
because (a) the present value of the periodic rental
payments made
|
F-102
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
since the inception date is at least 90% of the market value of
the leased assets and (b) the lease term is equal to 75% or
more of the total estimated economic life of the leased assets.
The land is treated as an operating lease. The monthly rents for
the leased building and land were NT$775 and NT$357,
respectively. Total interest expenses of NT$1,513 and NT$5,920
were recognized for the years ended December 31, 2005 and
2006, respectively.
|
|
|
|
|
(b)
|
The total present value of lease payables for the capital lease
of the building was NT$135,996; the implicit interest rate was
4.46%. The fair value of the leased assets at the beginning of
the lease period was NT$135,996.
|
|
|
|
|
(c)
|
As of December 31, 2005 and 2006, the details of these
lease payables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Lease payables
|
|
$
|
134,357
|
|
|
|
130,966
|
|
Less: Current portion of lease
payables
|
|
|
(3,390
|
)
|
|
|
(3,544
|
)
|
|
|
|
|
|
|
|
|
|
Lease payables
long-term
|
|
$
|
130,967
|
|
|
|
127,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
For the years ended December 31, 2005 and 2006, the lease
expenses for the operating lease of the land (classified under
administrative and general expenses) were NT$2,141 and NT$4,282,
respectively, which were fully paid.
|
|
|
|
|
(e)
|
As of December 31, 2005 and 2006, the unpaid rent expenses
(classified under other payables related parties)
were NT$0 and NT$357, respectively.
|
|
|
|
|
(f)
|
Future lease payments (excluding interest component) classified
as capital lease or operating lease as of December 31,
2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006.12.31
|
|
Duration
|
|
Capital lease
|
|
|
Operating lease
|
|
|
2007.1.1-2007.12.31
|
|
$
|
3,544
|
|
|
|
4,282
|
|
2008.1.1-2008.12.31
|
|
|
3,706
|
|
|
|
4,282
|
|
2009.1.1-2009.12.31
|
|
|
3,874
|
|
|
|
4,282
|
|
2010.1.1-2010.12.31
|
|
|
4,050
|
|
|
|
4,282
|
|
2011.1.1-2029.12.31
|
|
|
115,792
|
|
|
|
77,786
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,966
|
|
|
|
94,914
|
|
|
|
|
|
|
|
|
|
|
(10) Short-term
Loans
Short-term loans as of December 31, 2005 and 2006 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
|
|
|
Unsecured borrowings
|
|
$
|
2,323,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The short-term loans bear interest at annual rate of 1.39% as of
December 31, 2005. As of December 31, 2005 and 2006,
the unused credit facility for short-term loans amounted to
NT$5,666,700 and NT$10,115,936, respectively.
(11) Bonds
Payable
On November 22, 2006, the board of directors approved the
issuance of domestic unsecured corporate bond to raise long-term
funds for the repayment of loans. The issuance of this bond was
approved by the Securities and
F-103
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
Futures Bureau (SFB). On December 19, 2006, the Company
issued the unsecured bond amounting to NT$6,000,000 at coupon
rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon Rate and
|
|
|
Principal
|
|
Par Value
|
|
Duration
|
|
Interest Payment
|
|
Repayment Term
|
|
NT$6,000,000
|
|
NT$1,000
|
|
2006.12.19 - 2011.12.19
|
|
Interest payable
annually at 2.2%
|
|
Repayable in 3 annual installments
December 2009, 2010 and 2011: 33%, 33%, and 34% of principal,
respectively.
|
Future principal repayments for the Companys unsecured
corporate bond as of December 31, 2006, were as follows:
|
|
|
|
|
Year
|
|
Amount
|
|
|
2009
|
|
$
|
1,980,000
|
|
2010
|
|
|
1,980,000
|
|
2011
|
|
|
2,040,000
|
|
|
|
|
|
|
Total
|
|
$
|
6,000,000
|
|
|
|
|
|
|
(12) Long-term
Loans
Long-term loans as of December 31, 2005 and 2006, consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
|
|
|
Bank
|
|
Repayment period
|
|
Nature
|
|
Interest rate
|
|
2005.12.31
|
|
|
Taiwan Cooperative Bank (the
managing bank)
|
|
(1) February 2, 2006-
February 2, 2009
|
|
Machinery loan
|
|
4.6214%-4.7688%
|
|
$
|
8,541,000
|
|
Mega International Commercial
Bank(the managing bank)
|
|
(2) November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
4.6512%-5.3488%
|
|
|
22,075,200
|
|
Mega International Commercial Bank
(the managing bank)
|
|
(2) November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
2.3362%-2.4260%
|
|
|
1,850,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,466,200
|
|
Less: Current portion of
|
|
|
|
|
|
|
|
|
|
|
long-term loans
|
|
|
|
|
|
|
|
|
(6,431,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,034,564
|
|
|
|
|
|
|
|
|
|
|
|
|
F-104
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
2006.12.31
|
|
|
|
|
|
Bank
|
|
Repayment period
|
|
Nature
|
|
Interest rate
|
|
2006.12.31
|
|
|
Taiwan Cooperative Bank (the
managing bank)
|
|
(1) February 2, 2006-
February 2, 2009
|
|
Machinery loan
|
|
4.6214%-6.3352%
|
|
$
|
6,030,260
|
|
Mega International Commercial Bank
(the managing bank)
|
|
(2) November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
5.3488%-6.2090%
|
|
|
18,775,296
|
|
Mega International Commercial Bank
(the managing bank)
|
|
(2) November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
2.4260%-2.6184%
|
|
|
4,885,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,691,271
|
|
Less: Current portion of
|
|
|
|
|
|
|
|
|
|
|
long-term loans
|
|
|
|
|
|
|
|
|
(10,299,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,392,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company signed a syndicated loan agreement with Taiwan
Cooperative Bank, the managing bank of this syndicated loan, and
15 other banks on January 16, 2004. The Company had
utilized US$260,000 thousand from this loan facility for the
period from February 2 to August 2, 2004. The details of
this loan are as follows:
|
|
|
|
|
(a)
|
Credit line: US$260,000 thousand.
|
|
|
|
|
(b)
|
Interest rate: USD
3-month or
6-month
London Inter-bank Offered Rate (LIBOR) plus margin.
|
|
|
|
|
(d)
|
Repayment: The principal is payable in 7 semi-annual
installments starting from 24 months after the first
drawing date.
|
|
|
|
|
(e)
|
The long-term loan is secured by machinery. As of
December 31, 2005 and 2006, the net book value of the
pledged assets amounted to NT$9,625,951 and NT$7,657,438,
respectively.
|
|
|
|
|
(f)
|
The Company has issued a promissory note for the syndicated loan.
|
|
|
|
|
(g)
|
As of December 31, 2006, the Company repaid US$75,000
thousand of this syndicated loan.
|
|
|
|
|
(2)
|
The Company signed a syndicated loan agreement with Mega
International Commercial Bank (formerly I.C.B.C.) the managing
bank of the syndicated loan, and 23 other banks on
October 14, 2004 (as of December 31, 2006, the actual
number of banks had increased to 31). The Company applied for
drawings of US$672,000 thousand and NT$5,700,000 for the period
November 15, 2004, to December 31, 2006.
|
The details of this loan are as follows:
|
|
|
|
(a)
|
Credit line: US$672,000 thousand and NT$5,700,000.
|
|
|
|
|
(b)
|
Interest rate for Tranche A: USD
3-month or
6-month
London Inter-bank Offered Rate (LIBOR) plus margin.
|
|
|
|
|
(c)
|
Interest rate for Tranche B: The
90-day or
180-day
commercial paper rate in the primary market which appears on
Moneyline Telerate, plus margin.
|
|
|
|
|
(e)
|
Repayment: The principal is payable in 7 semi-annual
installments starting from 24 months after the first
drawing date.
|
F-105
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(f)
|
This long-term debt is secured by buildings and machinery. As of
December 31, 2005 and 2006, the net book value of the
pledged assets amounted to NT$17,949,184 and NT$24,272,894,
respectively.
|
|
|
|
|
(g)
|
The Company has issued a promissory note for this syndicated
loan.
|
|
|
(h)
|
As of December 31, 2006, the Company repaid US$96,000
thousand and NT$814,285 of this syndicated loan.
|
The two long-term loan agreements contain undertakings and
restrictive covenants requiring the Company to maintain certain
financial ratios. In addition, the long-term loan agreements
require that (i) no material adverse change shall be made
to the off-take sales arrangements signed by the Company, Nanya
Technology Corporation (NTC), and Infineon AG (IFX),
(ii) that Nan Ya Plastics Corporation (NPC) shall remain
the largest shareholder of and retain management control over
NTC, and (iii) that NTC and IFX continue to be the
Companys largest shareholders and retain control over the
Company. As of December 31, 2006, the Company was in
compliance with these undertakings and covenants.
(13) Accrued
Pension Liabilities
|
|
|
|
(a)
|
The pension information for the years ended December 31,
2005 and 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Balance of the retirement fund
|
|
$
|
29,192
|
|
|
|
44,428
|
|
Periodic pension costs
|
|
|
|
|
|
|
|
|
Defined benefit plan cost
|
|
|
35,317
|
|
|
|
11,372
|
|
Defined contribution plan cost
|
|
|
23,482
|
|
|
|
61,083
|
|
Accrued pension
liabilities-defined benefit plan
|
|
|
50,594
|
|
|
|
46,746
|
|
Accrued expenses-defined
contribution plan
|
|
|
12,265
|
|
|
|
20,099
|
|
|
|
|
|
(b)
|
The following table sets forth the details of the reconciliation
of funded status to accrued pension liability on
December 31, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Benefit obligation:
|
|
|
|
|
|
|
|
|
Vested benefit obligation
|
|
$
|
(4,227
|
)
|
|
|
(3,504
|
)
|
Non-vested benefit obligation
|
|
|
(54,372
|
)
|
|
|
(61,546
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
|
(58,599
|
)
|
|
|
(65,050
|
)
|
Projected compensation increase
|
|
|
(65,607
|
)
|
|
|
(70,459
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
(124,206
|
)
|
|
|
(135,509
|
)
|
Fair value of plan assets
|
|
|
31,115
|
|
|
|
46,963
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(93,091
|
)
|
|
|
(88,546
|
)
|
Unamortized pension gain or losses
|
|
|
42,497
|
|
|
|
41,800
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$
|
(50,594
|
)
|
|
|
(46,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
As of December 31, 2005 and 2006, the actuarial present
value of the vested benefits for the Companys employees in
accordance with the retirement benefit plan was approximately
NT$4,609 and NT$4,112, respectively.
|
F-106
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(d)
|
Major assumptions used to determine the pension plan funded
status for the years ended December 31, 2005, and 2006,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Discount rate
|
|
|
3.00%
|
|
|
|
2.75%
|
|
Rate of increase in compensation
|
|
|
3.00%
|
|
|
|
3.00%
|
|
Expected long-term rate of return
on plan assets
|
|
|
3.00%
|
|
|
|
2.75%
|
|
(14) Income
Tax
|
|
|
|
(a)
|
The Companys earnings are subject to income tax at a
statutory rate of 25%. For the years ended December 31,
2005, and 2006, the components of income tax expense were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Income tax expense
current
|
|
$
|
152,162
|
|
|
|
268,345
|
|
Income tax expense
deferred
|
|
|
185,199
|
|
|
|
118,154
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
337,361
|
|
|
|
386,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The details of deferred income tax expenses for the years ended
December 31, 2005, and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Investment tax credit
|
|
$
|
(2,917,497
|
)
|
|
|
(963,916
|
)
|
Difference in depreciation expense
for tax purposes and financial accounting purposes
|
|
|
1,261
|
|
|
|
1,260
|
|
Allowance for inventory devaluation
|
|
|
|
|
|
|
(4,712
|
)
|
Provision for pension expense in
excess of tax limit
|
|
|
(4,634
|
)
|
|
|
962
|
|
Realized accrued operating expenses
|
|
|
2,138
|
|
|
|
14,308
|
|
Impairment loss on idle asset
|
|
|
|
|
|
|
(8,027
|
)
|
Utilized loss carryforwards
|
|
|
47,414
|
|
|
|
|
|
Allowance for valuation of
deferred tax assets
|
|
|
3,123,694
|
|
|
|
1,220,105
|
|
Decrease in unrealized foreign
exchange gain
|
|
|
(67,177
|
)
|
|
|
(152,808
|
)
|
Increase in valuation gain on
financial instruments, net
|
|
|
|
|
|
|
10,982
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
$
|
185,199
|
|
|
|
118,154
|
|
|
|
|
|
|
|
|
|
|
F-107
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(c)
|
The income tax calculated on pretax financial income at a
statutory income tax rate of 25% was reconciled with the actual
income tax as reported in the accompanying financial statements
for the years ended December 31, 2005, and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Income tax calculated based on
financial pretax income
|
|
$
|
1,566,770
|
|
|
|
4,123,070
|
|
Tax effect of tax-free income from
income tax holiday
|
|
|
(1,269,720
|
)
|
|
|
(3,967,622
|
)
|
Increase in income tax credit for
purchasing machinery and equipment
|
|
|
(3,353,697
|
)
|
|
|
(694,779
|
)
|
Differences between estimated and
actual income tax expense filing
|
|
|
263,056
|
|
|
|
(453,270
|
)
|
Tax-exempt securities
|
|
|
(985
|
)
|
|
|
(5,147
|
)
|
Increase in valuation allowance
for deferred income tax assets
|
|
|
3,123,694
|
|
|
|
1,220,105
|
|
10% surtax on undistributed
earnings
|
|
|
7,862
|
|
|
|
160,095
|
|
Income tax levied separately
|
|
|
381
|
|
|
|
4,034
|
|
Permanent differences
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
337,361
|
|
|
|
386,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Deferred income tax assets and tax liabilities as of
December 31, 2005 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
66,267
|
|
|
|
116,396
|
|
Deferred income tax liabilities
|
|
|
(29,862
|
)
|
|
|
(36,706
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred income tax
liablilities current, net
|
|
$
|
36,405
|
|
|
|
79,690
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
7,194,031
|
|
|
|
8,086,962
|
|
Valuation allowance for deferred
income tax assets
|
|
|
(6,596,233
|
)
|
|
|
(7,816,338
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax
assets non-current, net
|
|
|
597,798
|
|
|
|
270,624
|
|
Deferred income tax liabilities
|
|
|
(245,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax
assets, net
|
|
$
|
352,758
|
|
|
|
270,624
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
$
|
7,260,298
|
|
|
|
8,203,358
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
liabilities
|
|
$
|
274,902
|
|
|
|
36,706
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowance for
deferred income tax assets
|
|
$
|
6,596,233
|
|
|
|
7,816,338
|
|
|
|
|
|
|
|
|
|
|
F-108
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(e)
|
As of December 31, 2005 and 2006, the components of
deferred income tax assets or liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
|
|
|
|
Effects on
|
|
|
|
|
|
Effects on
|
|
|
|
Amount
|
|
|
income tax
|
|
|
Amount
|
|
|
income tax
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused investment tax credit
|
|
$
|
7,023,377
|
|
|
|
7,023,377
|
|
|
|
7,987,293
|
|
|
|
7,987,293
|
|
Difference in depreciation expense
for tax purposes and financial accounting purposes
|
|
|
8,030
|
|
|
|
2,007
|
|
|
|
2,986
|
|
|
|
747
|
|
Allowance for inventory devaluation
|
|
|
|
|
|
|
|
|
|
|
18,849
|
|
|
|
4,712
|
|
Provision for pension expense in
excess of tax limit
|
|
|
50,594
|
|
|
|
12,649
|
|
|
|
46,746
|
|
|
|
11,687
|
|
Unrealized foreign exchange loss
|
|
|
818,944
|
|
|
|
204,736
|
|
|
|
433,465
|
|
|
|
108,366
|
|
Cumulative effect of change in
accounting principle on financial assets
|
|
|
|
|
|
|
|
|
|
|
317,220
|
|
|
|
79,305
|
|
Allowance for impairment loss on
idle
|
|
|
|
|
|
|
|
|
|
|
32,107
|
|
|
|
8,027
|
|
Unrealized operating expenses
|
|
|
70,114
|
|
|
|
17,529
|
|
|
|
12,886
|
|
|
|
3,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, gross
|
|
|
|
|
|
$
|
7,260,298
|
|
|
|
|
|
|
|
8,203,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain
|
|
$
|
1,099,609
|
|
|
|
274,902
|
|
|
|
102,899
|
|
|
|
25,724
|
|
Unrealized valuation gain on
financial instruments
|
|
|
|
|
|
|
|
|
|
|
43,928
|
|
|
|
10,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities,
gross
|
|
|
|
|
|
$
|
274,902
|
|
|
|
|
|
|
|
36,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
Under the ROC Statute for Upgrading Industries, the
Companys unused investment tax credits as of
December 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel training and
|
|
|
|
|
|
|
|
|
|
Purchasing machinery
|
|
|
research and development
|
|
|
|
|
|
|
|
Year
|
|
and equipment
|
|
|
expenditures
|
|
|
Expiry Year
|
|
|
|
|
|
2003
|
|
$
|
565,230
|
|
|
|
14,539
|
|
|
|
2007
|
|
|
|
|
|
2004
|
|
|
3,049,861
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
2005
|
|
|
3,852,048
|
|
|
|
35,058
|
|
|
|
2009
|
|
|
|
|
|
2006
|
|
|
470,557
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,937,696
|
|
|
|
49,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROC Income Tax Law provides an investment tax credit to
companies that purchase certain types of equipment and
machinery. Such tax credit can be used to reduce by up to 50% of
income tax liability arising from the Companys products
produced using such machinery for four years starting from the
year of equipment purchase, and can be used to reduce by up to
100% such income tax liability in the fifth year.
|
|
|
|
(g)
|
The Companys income tax returns have been examined by the
ROC tax authority through 2004.
|
|
|
(h)
|
Undistributed earnings, imputation credit account (ICA) and
creditable ratio
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Undistributed earnings after 1997
|
|
$
|
5,943,790
|
|
|
|
17,482,894
|
|
|
|
|
|
|
|
|
|
|
Imputation credit account
|
|
$
|
27,822
|
|
|
|
146,489
|
|
|
|
|
|
|
|
|
|
|
F-109
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(Actual)
|
|
|
(Projected)
|
|
|
Creditable ratio
|
|
|
3.24
|
%
|
|
|
2.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
The stockholders approved a resolution during their meetings on
June 29, 2005, and October 18, 2004, to allow the
Company to avail of the Income Tax Holiday for investment
projects under Article 9 of the Statute for Upgrading
Industries. The Company has availed of the five-year Income Tax
Holiday commencing from January 1, 2005, June 1, 2005,
and January 1, 2006, respectively, for the taxable income
that is derived only from the sale of products produced from its
Fab-1-Phases 1, 2, and 3 investment project. As of
December 31, 2006, the exemption from profit-seeking
enterprise income tax (Income Tax Holiday) under
Article 9 of the Statute for Upgrading Industries for the
aforesaid investment projects had the following duration.
|
|
|
|
|
|
Duration of Income Tax Holiday
|
|
Inotera Fab-1
Phase 1
|
|
January 2005 December
2009
|
Inotera Fab-1
Phase 2
|
|
June 2005 May 2010
|
Inotera Fab-1
Phase 3
|
|
January 2006 December
2010
|
(15) Stockholders
Equity
During their meeting on June 29, 2005, the stockholders
approved a resolution allowing the Company to further increase
its capital by NT$132,940 by declaring stock dividends out of
its 2004 earnings. This capital increase was approved by the
Securities and Futures Bureau (SFB) on July 12, 2005. On
July 18, 2005, the board of directors approved a resolution
to set August 9, 2005, as the effective date for
distributing this stock dividend by issuing new shares.
On February 6, 2006, the board of directors approved the
Initial Public Offering of the Companys shares through the
issuance of 200 million Company shares for cash at initial
price offering of NT$33 per share on the Taiwan Stock Exchange
(TSE). The Company approved a resolution to set March 14,
2006, as the effective date for issuing new shares. This capital
increase was approved by the SFB on April 11, 2006. The
excess of the initial price offering over the par value of the
shares issued of NT$23 per share was recorded as capital
surplus paid-in capital in excess of par value.
Effective May 16, 2006, the Company sold for cash
40 million GDSs, representing 400 million common
shares of the Company, at a price of US$10.53 per share and
subsequently listed its GDSs on the LSE. Total issuance of GDSs
amounted to US$421,200 thousand, and each GDS offers the holder
the right to receive 10 shares of the Company. The offering
was approved by the SFB on May 1, 2006. On May 16,
2006, the Company issued 400 million of its shares, and net
proceeds were US$416,114 thousand, or NT$13,169,176 (after
deducting commissions and offering expenses payable by the
Company). The net proceeds exceeded the par value by
NT$9,169,176, which was recorded as capital surplus
paid-in capital in excess of par value.
As of December 31, 2005 and 2006, the Companys total
authorized capital amounted to NT$40,000,000, and total issued
common stock amounted to NT$25,109,540 and NT$31,109,540,
respectively, with $10 par value per share.
As of December 31, 2005 and 2006, the capital surplus
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
Paid-in capital in excess of par
value
|
|
$
|
15,548,660
|
|
|
|
29,317,836
|
|
|
|
|
|
|
|
|
|
|
F-110
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
According to the ROC Company Law, realized capital surplus can
be transferred to common stock after deducting the accumulated
deficit, if any. Realized capital surplus includes the
additional paid-in capital from issuance of common stock in
excess of the common stocks par value, donation from
others, and additional paid-in capital-treasury stock.
|
|
|
|
(c)
|
Earnings appropriation and distribution
|
The Companys annual net profit, after providing for income
tax and covering the losses of previous years, shall be first
set aside for legal reserve at the rate of 10% thereof until the
accumulated balance of legal reserve equals the total issued
capital. The remaining net profit, if any, after providing for
any special reserves or reserving certain undistributed earnings
for business purposes shall be distributed as follows:
|
|
|
|
(i)
|
0.1% 1% as remuneration to directors and supervisors.
|
|
|
(ii)
|
1% 8% as bonus to employees.
|
|
|
|
|
(iii)
|
The remainder as dividends to stockholders, distributed in the
form of cash dividends and/or stock dividends.
|
As it belongs to a highly capital-intensive industry with strong
growth potential, the Company adopts a dividend distribution
policy which is in line with its capital budget and long-term
financial plans. This policy requires, among other things, that
the distribution of cash dividends shall be at least fifty
percent (50%) of the Companys total dividend distribution
for the year.
Based on the resolutions approved by the stockholders during
their meeting on June 29, 2005, and June 7, 2006, the
Companys stockholders proposed to distribute the
Companys 2004 and 2005 earnings as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings distribution
|
|
|
Distribution per share
|
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
Legal reserve
|
|
$
|
90,130
|
|
|
|
592,976
|
|
|
|
|
|
|
|
|
|
Special reserve
|
|
|
542,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remuneration to directors and
supervisors
|
|
|
2,686
|
|
|
|
3,736
|
|
|
|
|
|
|
|
|
|
Bonus to employees cash
|
|
|
8,057
|
|
|
|
298,866
|
|
|
|
|
|
|
|
|
|
Bonus to employees
stock
|
|
|
8,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to
stockholders cash
|
|
|
124,883
|
|
|
|
3,433,227
|
|
|
|
0.05
|
|
|
|
1.1036
|
|
Dividends to
stockholders stock
|
|
|
124,883
|
|
|
|
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
901,301
|
|
|
|
4,328,805
|
|
|
|
0.10
|
|
|
|
1.1036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the remuneration to directors and supervisors and the
employees bonus were recorded as compensation expenses,
the retroactive earnings per share in 2004 would decrease from
NTD$0.51 to NTD$0.5 and the earnings per share in 2005 would
decrease from NTD$2.36 to NTD$2.24.
The appropriation of the Companys 2006 net income for the
employees bonus and remuneration to directors and
supervisors is subject to a resolution to be passed and approved
by the Companys directors and stockholders during their
meetings normally held within six months after the year-end
closing. Following the approval of this resolution, related
information can be obtained from the public information website.
F-111
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(16) Earnings
Per Share
For the years ended December 31, 2005, and 2006, the
weighted-average number of outstanding common shares and the
common stock equivalents for calculating the basic EPS consisted
of the following (expressed in thousands of New Taiwan Dollars
and shares, except for earnings per share expressed in New
Taiwan Dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Amount
|
|
|
Total weighted
|
|
|
Earnings per share
|
|
|
|
Income before
|
|
|
Income after
|
|
|
average shares
|
|
|
Before
|
|
|
After
|
|
|
|
income tax
|
|
|
income tax
|
|
|
outstanding
|
|
|
income tax
|
|
|
income tax
|
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,267,119
|
|
|
|
5,929,758
|
|
|
|
2,510,954
|
|
|
|
2.50
|
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Amount
|
|
Total weighted
|
|
Earnings per share
|
|
|
Income before
|
|
Income after
|
|
average shares
|
|
Before
|
|
After
|
|
|
income tax
|
|
income tax
|
|
outstanding
|
|
income tax
|
|
income tax
|
|
Basic earnings per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
16,492,323
|
|
|
|
16,105,824
|
|
|
|
2,923,557
|
|
|
|
5.64
|
|
|
|
5.51
|
|
Cumulative effect of change in
accounting principle
|
|
|
(317,220
|
)
|
|
|
(237,915
|
)
|
|
|
2,923,557
|
|
|
|
(0.11
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,175,103
|
|
|
|
15,867,909
|
|
|
|
|
|
|
|
5.53
|
|
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17)
|
Financial
Instrument Information
|
(a) Fair value of financial instruments
As of December 31, 2005 and 2006, the fair value of the
Companys financial assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
Financial instruments
|
|
Book value
|
|
|
Fair value
|
|
|
Book value
|
|
|
Fair value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,822,568
|
|
|
|
9,822,568
|
|
|
|
21,704,854
|
|
|
|
21,704,854
|
|
Accounts receivable
related parties
|
|
|
5,050,277
|
|
|
|
5,050,277
|
|
|
|
8,332,816
|
|
|
|
8,332,816
|
|
Interest rate swap
|
|
|
|
|
|
|
38,637
|
|
|
|
52,255
|
|
|
|
52,255
|
|
Foreign exchange forward contracts
|
|
|
1,268,011
|
|
|
|
912,154
|
|
|
|
941,480
|
|
|
|
941,480
|
|
Mutual bond fund
|
|
|
|
|
|
|
|
|
|
|
660,484
|
|
|
|
660,484
|
|
Refund deposits
|
|
|
28,544
|
|
|
|
28,544
|
|
|
|
79,219
|
|
|
|
79,219
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loans (including
current portion of long-term loans)
|
|
|
8,754,936
|
|
|
|
8,754,936
|
|
|
|
10,299,107
|
|
|
|
10,299,107
|
|
Accounts payable (including
accounts payable related parties)
|
|
|
4,065,278
|
|
|
|
4,065,278
|
|
|
|
21,516,696
|
|
|
|
21,516,696
|
|
Bond payable
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
5,988,672
|
|
Long-term loans
|
|
|
26,034,564
|
|
|
|
26,034,564
|
|
|
|
19,392,164
|
|
|
|
19,392,164
|
|
F-112
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(b) The methods and assumptions used to estimate the fair
value of each class of financial instruments were as follows:
|
|
|
|
(i)
|
The book value of short-term financial instruments is believed
to be not materially different from the fair value because the
maturity dates of short-term financial instruments are within
one year from the balance sheet date. Therefore, their book
value is adopted as a reasonable basis for determining their
fair value. This principle is applied in estimating the fair
value of short-term financial instruments including cash and
cash equivalents, account receivables, account payables, and
short-term loans.
|
|
|
(ii)
|
The fair value of financial instruments traded in active markets
is based on quoted market prices. If the financial instruments
are not in an active market, then the fair value is determined
by certain valuation techniques, using assumptions under
existing market conditions.
|
|
|
(iii)
|
The discounted present value of anticipated cash flows is
adopted as the fair value of long-term debt. The discounting
rates used in calculating the present value are similar to those
of the Companys existing long-term loans.
|
|
|
(iv)
|
Fair value of bond payable was determined by using broker quote.
This quote is tested for reasonableness by discounting estimated
future cash flows based on the terms and maturity of each
contract and using market interest rates for a similar
instrument at the measurement date.
|
|
|
(v)
|
Refundable deposits are refunded in cash based on its contracted
amount. Therefore, its book value is equivalent to its fair
value.
|
|
|
|
|
(c)
|
As of December 31, 2006, the fair values of the financial
instruments, were based on market values in an active market or
determined by using broker quotes/carrying values, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006.12.31
|
|
|
|
|
|
|
Value determined
|
|
|
|
|
|
|
by using
|
|
|
|
Market value in
|
|
|
broker quote/
|
|
Financial instruments
|
|
active market
|
|
|
carrying value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,704,854
|
|
|
|
|
|
Accounts receivables
related parties
|
|
|
|
|
|
|
8,332,816
|
|
Interest rate swaps
|
|
|
|
|
|
|
52,255
|
|
Foreign exchange forward contracts
|
|
|
|
|
|
|
941,480
|
|
Mutual bond fund
|
|
|
|
|
|
|
660,484
|
|
Refund deposits
|
|
|
|
|
|
|
79,219
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term loans
|
|
|
|
|
|
|
10,299,107
|
|
Accounts payable (including
accounts payable related parties)
|
|
|
|
|
|
|
21,516,696
|
|
Bond payable
|
|
|
|
|
|
|
5,988,672
|
|
Long-term loans
|
|
|
|
|
|
|
19,392,164
|
|
F-113
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(d) Financial risk information
(i) Market risk
All derivative financial instruments are intended as hedges for
fluctuations in foreign exchange rates and interest rates. Gains
or losses from these hedging instruments are likely to be offset
by gains or losses from the hedged items. Thus, market price
risks are believed to be low.
The Company has sufficient operating capital to meet the cash
requirements for the derivative financial instrument
transactions. In addition, additional cash inflow is expected to
meet the cash outflow. Therefore, the cash flow risk is low.
(ii) Credit risk
The Company signed a Product Purchase and Capacity
Reservation Agreement with NTC and IFX (which transferred
all its rights to Qimonda), as described in note 18(b)
(vi). Under this agreement, these entities are each entitled to
a contracted percentage of the Companys production
capacity. Under the agreement, the sales of the Company were
derived 100% from NTC, IFX and Qimonda. The sales are an
indication that the Company has concentration of credit risk.
Because these customers are all reputable listed companies, the
accounts receivable from NTC and Qimonda are collectible.
Management believes its exposure related to the potential
payment default by NTC and Qimonda is low, as described in
note 18(b).
Credit risks of financial instrument transactions represent the
positive net settlement amount of those contracts with positive
fair values at the balance sheet date. The positive net
settlement amount represents the loss to the Company if the
counter-parties breached the contracts. The banks, which are the
counter-parties to the foregoing derivative financial
instruments, are reputable financial institutions. Management
believes its exposure related to the potential default by those
counter-parties is low.
(iii) Cash flow and interest rate risk
Interest rate risk arises from short-term and long-term loans.
Loans issued at variable rates expose the Company to cash flow
interest rate risk. If the market interest rate increases by 1%,
the cash outflow of the Company would increase by NT$296,913.
The Company manages its cash flow interest rate risk by using
floating-to-fixed
interest-rate swaps. Such interest rate swaps have the economic
effect of converting loans from floating rates to fixed rates.
(18) Related-party
Transactions
(a) Names of and relationship with related parties
|
|
|
Name
|
|
Relationship with the Company
|
|
Nan Ya Plastics Corp. (NPC)
|
|
Common chairman
|
Nanya Technology Corp. (NTC)
|
|
Stockholder
|
Infineon Technologies AG (IFX)
|
|
Stockholder
|
Qimonda Technologies Suzhou Co.,
Ltd (formerly Infineon Technologies Suzhou Co., Ltd)
|
|
Subsidiary of Qimonda AG
|
Qimonda Richmond, LLC (formerly
Infineon Technologies, Richmond)
|
|
Subsidiary of Qimonda AG
|
Qimonda AG
|
|
Subsidiary of IFX
|
F-114
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(b) Significant related-party transactions
(i) Sales revenue and accounts receivable
Significant sales to related parties for the years ended
December 31, 2005 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of net
|
|
|
|
|
|
% of net
|
|
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
sales
|
|
|
NTC
|
|
$
|
11,502,292
|
|
|
|
49.94
|
|
|
|
20,477,214
|
|
|
|
50.21
|
|
IFX
|
|
|
9,180,137
|
|
|
|
39.86
|
|
|
|
3,994,116
|
|
|
|
9.79
|
|
Qimonda Technologies Suzhou Co.,
Ltd
|
|
|
2,347,571
|
|
|
|
10.19
|
|
|
|
2,695,017
|
|
|
|
6.61
|
|
Qimonda Richmond, LLC
|
|
|
2,203
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Qimonda AG
|
|
|
|
|
|
|
|
|
|
|
13,615,363
|
|
|
|
33.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,032,203
|
|
|
|
100.00
|
|
|
|
40,781,710
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances of accounts receivable resulting from the above
transactions as of December 31, 2005 and 2006, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
|
|
|
|
% of accounts
|
|
|
|
|
|
% of accounts
|
|
|
|
|
|
|
receivable
|
|
|
|
|
|
receivable
|
|
|
|
Amount
|
|
|
related parties
|
|
|
Amount
|
|
|
related parties
|
|
|
NTC
|
|
$
|
2,362,640
|
|
|
|
46.78
|
|
|
|
4,325,897
|
|
|
|
51.91
|
|
IFX
|
|
|
1,898,230
|
|
|
|
37.59
|
|
|
|
|
|
|
|
|
|
Qimonda Technologies Suzhou Co.,
Ltd
|
|
|
789,407
|
|
|
|
15.63
|
|
|
|
|
|
|
|
|
|
Qimonda AG
|
|
|
|
|
|
|
|
|
|
|
4,006,919
|
|
|
|
48.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,050,277
|
|
|
|
100.00
|
|
|
|
8,332,816
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The normal credit term with the related parties above is
60 days from delivery date.
(ii) Purchases and accounts payable
Significant purchases from related parties for the years ended
December 31, 2005 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of net
|
|
|
|
|
|
% of net
|
|
|
|
Amount
|
|
|
purchases
|
|
|
Amount
|
|
|
purchases
|
|
|
NPC
|
|
$
|
49,827
|
|
|
|
0.17
|
|
|
|
680,957
|
|
|
|
15.85
|
|
NTC
|
|
|
|
|
|
|
|
|
|
|
70,039
|
|
|
|
1.63
|
|
IFX
|
|
|
464,481
|
|
|
|
1.56
|
|
|
|
217,230
|
|
|
|
5.06
|
|
Qimonda AG
|
|
|
|
|
|
|
|
|
|
|
252,285
|
|
|
|
5.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
514,308
|
|
|
|
1.73
|
|
|
|
1,220,511
|
|
|
|
28.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-115
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The balances of accounts payable resulting from the above
transactions as of December 31, 2005 and 2006, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
|
|
|
|
% of total
|
|
|
|
|
|
% of total
|
|
|
|
|
|
|
accounts
|
|
|
|
|
|
accounts
|
|
|
|
Amount
|
|
|
payable
|
|
|
Amount
|
|
|
payable
|
|
|
NPC
|
|
$
|
32,420
|
|
|
|
0.80
|
|
|
|
346,304
|
|
|
|
1.61
|
|
IFX
|
|
|
22,792
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
Qimonda AG
|
|
|
|
|
|
|
|
|
|
|
59,613
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,212
|
|
|
|
1.36
|
|
|
|
405,917
|
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company pays NPC and NTC on the 15th of the month following
the month of purchase, and pays IFX and Qimonda AG within
30 days of the invoice date. Purchases from NPC included
miscellaneous equipment. Purchase prices and payment terms of
purchases from related parties are not materially different from
those of non-related general suppliers.
(iii) Acquisition and disposition of property, plant and
equipment
In May 2005, the Company purchased for NT$1,575,000 from NTC six
parcels of land numbered 347 and five other numbers, which are
located in Hwa-Ya, Kueishan, Taoyuan County. As of
December 31, 2005, the Company fully paid the purchase
price.
In June 2005, the Company purchased for NT$73,827 electronic
equipment from NTC, which was accounted for as machinery and
equipment. As of December 31, 2005, the Company fully paid
the purchase price.
In July 2006, the Company sold for NT$600 to NTC machinery with
a book value of NT$2,142. Loss on disposal of this asset
amounted to NT$1,542, which was accounted for as non-operating
expenses and losses others. As of December 31,
2006, the Company received full payment from NTC.
(iv) Training expense
NTC transferred some of its employees to the Company to enable
the Company to have a sufficient number of high quality and
loyal staff. Consequently, the Company is required to reimburse
NTC for the loss of their experienced employees in an amount
equal to 6 months salary of those employees. The
Company booked this expenditure as training expenses (classified
under administrative and general expenses) of NT$5,180 for the
year ended December 31, 2005. As of December 31, 2005,
the Company fully paid these training expenses.
(v) Lease contracts
Commencing from July 1, 2005, the Company signed lease
contracts with NTC. Refer to notes 7 and 9 for details.
(vi) Other significant transactions
IFX provides some IT and inspection services and other services
to the Company. As of December 31, 2005 and 2006, the
unpaid liability from these transactions amounted to NT$61,757
and NT$0, respectively, which was accounted for as other
payables related parties.
Qimonda AG provides IT and handling services to the Company. As
of December 31, 2006, the unpaid liability from these
transactions amounted to NT$36,511, which was accounted for as
other payables related parties.
F-116
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
NTC supplies some of the Companys utilities, steam,
purification for waste water and employee dormitories. As of
December 31, 2005 and 2006, the unpaid liability from this
transaction amounted to NT$20,059 and NT$24,932, respectively,
which was accounted for as other payables related
parties.
NPC rents out dormitory space and water and power utility
facilities to the Company. As of December 31, 2005 and
2006, the unpaid rental and utilities amounted to NT$4,437 and
NT$4,096, respectively, which was accounted for as other
payables related parties.
(vii) Contracts with related parties
The Company signed a Product Purchase and Capacity
Reservation Agreement with NTC and IFX. Under this
agreement, these entities are each entitled to a contracted
percentage of the Companys production capacity. The
Company is committed to sell its production to these entities at
a transfer price calculated in accordance with the formula
stated in the agreement. This agreement took effect on
July 15, 2003, and will continue in effect until terminated
by either party with cause or when the Joint Venture Agreement
and/or the License and Technical Cooperation Agreement between
NTC and IFX are terminated.
The Company signed a Know-How Transfer Agreement
with NTC and IFX. Under this agreement, these entities allowed
the Company to utilize their know-how in the semiconductor
manufacturing process. This contract took effect on
July 15, 2003, and it will continue in effect until either
of the following conditions has been fulfilled: 1) both
corporations decide to terminate their Joint Venture Agreement
or 2) three years after the completion of know-how transfer.
IFX has completed the carve-out of its memory product business
group effective on May 1, 2006. Accordingly, IFXs
memory products business, including substantially all of the
related assets and liabilities and personnel were transferred to
a wholly owned subsidiary named Qimonda AG. Also, IFX assigned
the rights and obligations under the Product Purchase and
Capacity Reservation Agreement and Know-How Transfer
Agreement to Qimonda AG effective on May 1, 2006.
The Company signed a service contract with NTC. Under
this contract, NTC provides transaction support in the following
areas: human resources, finance, engineering and construction,
raw material, inventory, etc. The service fee is charged based
on the actual type of service rendered. The contract took effect
on July 15, 2003, and will continue in effect until
terminated mutually by both parties.
(19) Pledged
Properties
Refer to note 12 for information on the Companys
assets pledged to secure loans.
(20) Commitments
and Contingencies
As of December 31, 2005 and 2006, in addition to those
described in the financial statements and accompanying notes,
the balance of outstanding letters of credit were as follows:
|
|
|
|
|
|
|
|
|
Currency
|
|
2005.12.31
|
|
|
2006.12.31
|
|
|
USD
|
|
$
|
13,197
|
|
|
|
65,308
|
|
JPY
|
|
¥
|
342,070
|
|
|
|
2,099,273
|
|
EUR
|
|
|
674
|
|
|
|
50,907
|
|
F-117
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(21) Significant
Disaster Loss: None.
(22) Subsequent
Events:
The Company issued a second domestic unsecured bonds on
January 5, 2007. The issuance was approved by the SFB, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coupon Rate and
|
|
|
Principal
|
|
Par Value
|
|
Duration
|
|
Interest Payment
|
|
Repayment Term
|
|
NT$4,000,000
|
|
NT$1,000
|
|
2007.1.5 - 2012.1.5
|
|
Interest payable annually at 2.23%
|
|
Payable on maturity date
|
(23) Others
|
|
|
|
(a)
|
The Companys personnel, depreciation, and amortization
expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005
|
|
|
|
Cost of goods sold
|
|
|
Operating expenses
|
|
|
Total
|
|
|
Personnel expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
1,048,967
|
|
|
|
192,903
|
|
|
|
1,241,870
|
|
Labor and health insurance
|
|
|
63,796
|
|
|
|
8,084
|
|
|
|
71,880
|
|
Pension expenses
|
|
|
48,974
|
|
|
|
9,825
|
|
|
|
58,799
|
|
Other personnel expenses
|
|
|
29,724
|
|
|
|
3,628
|
|
|
|
33,352
|
|
Depreciation expenses
|
|
|
8,049,957
|
|
|
|
49,594
|
|
|
|
8,099,551
|
|
Amortization expenses
|
|
|
6,995
|
|
|
|
|
|
|
|
6,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006
|
|
|
|
Cost of goods sold
|
|
|
Operating expenses
|
|
|
Total
|
|
|
Personnel expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
|
1,369,465
|
|
|
|
205,154
|
|
|
|
1,574,619
|
|
Labor and health insurance
|
|
|
90,656
|
|
|
|
8,267
|
|
|
|
98,923
|
|
Pension expenses
|
|
|
61,163
|
|
|
|
11,292
|
|
|
|
72,455
|
|
Other personnel expenses
|
|
|
41,019
|
|
|
|
4,037
|
|
|
|
45,056
|
|
Depreciation expenses
|
|
|
11,571,260
|
|
|
|
62,119
|
|
|
|
11,633,379
|
|
Amortization expenses
|
|
|
8,454
|
|
|
|
|
|
|
|
8,454
|
|
|
|
|
|
(b)
|
As discussed in note 18(b)(vii) to the financial
statements, the Company signed a service contract with NTC,
under which, the General Administrative Office of the Formosa
Group is entrusted to provide certain administrative services.
For the years ended December 31, 2005 and 2006, the service
expenses paid to the General Administrative Office of the
Formosa Group amounted to NT$25,631 and NT$28,278, respectively.
|
The Board of Directors of the Company approved a resolution to
adopt a Deferred Stock Purchase Plan (the Plan).
Under this Plan, the employees of the Company are allowed to
purchase the Companys shares which are being held by
Hwa-Keng Investment Corp., a corporate stockholder of the
Company, following the approval thereof by the board of
directors and stockholders of Hwa-Keng Investment Corp.
The Plan requires that its actual implementation shall be made
within 4 weeks after the approval of the Companys
stock listing by the SFB. The purchase price is the higher of
NT$15 per share or the net book value per share of the Company
at the time of the Plans execution plus 10% premium
thereof. There were
F-118
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
73,124 thousand Company shares being held by Hwa-Keng Investment
Corp., which were made available for purchase by the employees.
On January 6, 2006, the Company received the approval from
the SFB, and implemented the Plan on the same day. On
February 9, 2006, Hwa-Keng Investment Corp. sold 64,032,908
Company shares at NT$20.07 per share to the employees of the
Company, following the Companys implementation of the Plan.
Under the International Financial Reporting Standards (IFRS),
the share-based payment is normally accounted for as current
expenses. If the IFRS is adopted to account for the share-based
payment under this Plan, the Company should recognize
compensation cost of approximately NT$826,025 in current results
of operations. However, the Company did not adopt this
accounting treatment under IFRS because there are no specific
accounting principles or declaratory statutes announced by the
Accounting Research and Development Foundation (the ARDF) in the
Republic of China. The ARDF is now in the process of
promulgating the accounting treatment on share-based payment
under this type of Plan and has indicated that there is a common
view that simply requires disclosing the details of the Plan in
the financial statements when the Plan is consummated before the
declaratory statutes is announced by the ARDF, without
recognizing an expense currently. For this reason, the Company
simply disclosed the details of the Plan to conform with the
requirement for disclosure.
Certain accounts in the 2005 financial statements, have been
reclassified to conform with the financial statements
presentation adopted in 2006, for purposes of comparison. These
reclassifications have not materially affected the financial
statements.
|
|
|
|
(a)
|
Industrial information
|
The Companys main operating activities are to manufacture
and to sell semiconductor product, which belong to a single
industrial segment.
|
|
|
|
(b)
|
Geographic information
|
The Company has no foreign operation segment; thus, no
geographic information is provided.
|
|
|
|
(c)
|
Export sales information
|
Export sales to geographic areas in 2005 and 2006 were
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
net
|
|
|
|
|
|
net
|
|
Destination Area
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
sales
|
|
|
Europe
|
|
$
|
9,180,137
|
|
|
|
39.86
|
|
|
|
17,609,479
|
|
|
|
43.18
|
|
Asia
|
|
|
2,347,571
|
|
|
|
10.19
|
|
|
|
2,695,017
|
|
|
|
6.61
|
|
North America
|
|
|
2,203
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,529,911
|
|
|
|
50.06
|
|
|
|
20,304,496
|
|
|
|
49.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-119
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The major clients of the Company for the years 2005 and 2006
were summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
net
|
|
|
|
|
|
net
|
|
Client
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
sales
|
|
|
NTC
|
|
$
|
11,502,292
|
|
|
|
49.94
|
|
|
|
20,477,214
|
|
|
|
50.21
|
|
Qimonda AG
|
|
|
|
|
|
|
|
|
|
|
13,615,363
|
|
|
|
33.39
|
|
IFX
|
|
|
9,180,137
|
|
|
|
39.86
|
|
|
|
3,994,116
|
|
|
|
9.79
|
|
Qimonda Technologies Suzhou Co.,
Ltd
|
|
|
2,347,571
|
|
|
|
10.19
|
|
|
|
2,695,017
|
|
|
|
6.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,030,000
|
|
|
|
99.99
|
|
|
|
40,781,710
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25)
|
Summary
of Significant Differences between Accounting Principles
Followed by the Company and Generally Accepted Accounting
Principles in the United States of America
|
a. Derivative financial instrument transactions
Before January 1, 2006, under ROC GAAP, there are no
specific rules related to accounting for derivative financial
instruments, nor criteria for hedge accounting. Therefore,
companies have flexibility in choosing when to recognize
derivative financial instruments and when to follow hedge
accounting versus fair value accounting for such instruments. In
practice, derivative contracts including foreign currency
forward contracts and interest rate swaps are accounted for as
follows:
(i) Foreign exchange forward contracts
Foreign exchange forward contracts, which were entered into for
the purpose of hedging the risks of exchange rate fluctuation on
foreign currency receivables and payables, were translated into
New Taiwan Dollars using spot rates on the balance sheet date.
The resulting translation difference was recorded as an exchange
gain or loss in the accompanying statements of income. The
difference between the forward rate and spot rate at the
contract date was amortized over the contract period.
(ii) Interest rate swaps
Because there is no physical transfer of principal, only memo
entries of notional principals were made for interest rate
swaps. For trading swaps, the differences between the present
and market values of interest receivables or payables arising
thereon were reported as unrealized gains or losses on
derivative instruments. For non-trading swaps, interest was
accrued based on contract terms, with interest revenue and
expense recognized in the same period that the hedged items
affect earnings.
Effective January 1, 2006, however, the accounting for
derivative financial instrument transactions is principally
equivalent to U.S. GAAP.
U.S. GAAP contains comprehensive guidance as to when hedge
accounting is appropriate. As a consequence, certain derivative
contracts such as foreign currency forward contracts and
interest rate swaps included in the Companys balance sheet
would be recorded at the derivatives contracts market rate
as of the reporting date, resulting in a decrease in other
receivables as reported under the ROC GAAP balance sheet.
F-120
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
b. Bonuses to employees, directors and supervisors
Under the ROC regulations and the Companys Articles of
Incorporation, a portion of distributable earnings should be set
aside as bonuses to employees, directors and supervisors.
Bonuses to directors and supervisors are always paid in cash.
However, bonuses to employees may be granted in cash or shares
or both. All of these appropriations, including share bonuses
which are valued at par value of NT$10, are charged against
retained earnings, after such appropriations are formally
approved by the shareholders in the following year.
Under U.S. GAAP, bonuses and remuneration are generally expensed
as services are rendered. Also under U.S. GAAP, bonuses which
are paid in the form of Company shares are recorded within
equity at fair market value, with a corresponding charge to
earnings for the difference between the fair value of the shares
at the date of grant and the price paid by the employee, if any.
c. Undistributed earnings surtax
Companies in the ROC are subject to a 10% surtax on
undistributed profits earned after December 31, 1997. If
the undistributed earnings are distributed in the following
year, the 10% surtax is not due. Under ROC GAAP, income tax
expense is recorded in the statement of operations in the
following year if the earnings are not distributed to the
shareholders.
Under U.S. GAAP, the 10% surtax leviable on the undistributed
earnings is recorded in the statement of income in the year when
the profits were earned. The income tax expense, including the
tax effects of temporary differences, in such year is measured
by using the rate that includes this 10% surtax.
As of December 31, 2005 and 2006, the Company has
established a valuation allowance for principally all of its
deferred tax assets as a result of forecasts for future taxable
income and the five-year Income Tax Holiday related to taxable
income that is derived from the sale of products produced from
Phases 1, 2, and 3 of Fab 1.
d. Capital contribution
Under ROC GAAP, the expatriate employees payroll cost paid by a
foreign joint venture partner/shareholder is not recorded nor
treated as the shareholders capital contribution in the
Company.
Under U.S. GAAP, the expatriate employees payroll cost paid by a
foreign joint venture partner would be recorded as expense and
treated as capital contribution in the Company.
e. Lease
Under ROC GAAP, the estimated fair value of a partially leased
building used in evaluating the lease classification described
under Note 2 (h) to the financial statements can be
based on the proportionate fair value of the entire building.
Under U.S. GAAP, the fair value of a partially leased building
used in determining the lease classification must be based on
the specific fair value of the leased asset. In the event that
the fair value of the partially leased building can not be
determined, the lease of a partial building should be treated as
an operating lease. As a result, the leased asset described in
Note 7 to the financial statements, which was treated as a
capital lease under ROC GAAP would be treated as an operating
lease under U.S. GAAP.
f. Related party
Under ROC GAAP, the transaction with the Formosa Group as
described in Note 23(b) is not treated as a related party
transaction.
Under U.S. GAAP, the transaction would be considered a related
party transaction.
F-121
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
g. Earnings per share
Under ROC GAAP, earnings per share are calculated based on the
weighted average number of outstanding shares. The weighted
average number of outstanding shares is retroactively adjusted
for common stock issued arising from the distribution of stock
dividends through unappropriated earnings and capital surplus.
Under U.S. GAAP, when a simple capital structure exists, basic
earnings per share are calculated using the weighted average
number of common shares outstanding. The weighted average number
of outstanding shares is not retroactively adjusted for stock
dividends.
h. Stock purchase plan
Under ROC GAAP, no compensation cost is recognized for the
deferred stock purchase plan because there are no specific
accounting principles or declaratory statutes announced by the
Accounting Research and Development Foundation (the ARDF) in the
Republic of China.
Under U.S. GAAP, compensation cost is recognized for the
deferred stock purchase plan based on the difference between the
fair value of the shares at the date of grant and the price paid
by the employee.
i. Pension
In accordance with ROC GAAP, the Companys unrecognized
actuarial gains and losses are not recognized as pension
liabilities until the accumulated unrecognized amounts exceed
certain thresholds.
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 158 Employers
Accounting for Defined Benefit Pension and Other Post-retirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS 158 requires an employer to recognize
the overfunded or underfunded status of a defined benefit
post-retirement plan as an asset or liability in the balance
sheet and to recognize changes in that funded status in other
comprehensive income in the year in which the changes occur.
Retrospective application of SFAS 158 is not permitted. The
Company has adopted SFAS 158 for purposes of its US GAAP
reconciliation with effect as of December 31, 2006.
j. Statement cash flows
Under ROC GAAP, bonus to employees and remuneration to directors
and supervisors are considered financing activities.
Under US GAAP, bonus to employees and remuneration to directors
and supervisors are considered operating activities.
F-122
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The following reconciles net income and stockholders
entity under ROC GAAP as reported in the audited financial
statements to the net income and stockholders equity
amounts determined under U.S. GAAP, giving effect to adjustments
for the differences listed above.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Net income
|
|
|
|
|
|
|
|
|
Net income based on ROC GAAP
|
|
$
|
5,929,758
|
|
|
|
15,867,909
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
a. Foreign currency forward
contracts marked to market
|
|
|
(355,857
|
)
|
|
|
|
|
a. Interest rate
swaps marked to market
|
|
|
75,943
|
|
|
|
|
|
a. Cumulative effect of
change in accounting principle
|
|
|
|
|
|
|
317,220
|
|
b. Bonuses to employees
|
|
|
(298,866
|
)
|
|
|
(799,742
|
)
|
b. Remuneration to directors
and supervisors
|
|
|
(3,736
|
)
|
|
|
(9,997
|
)
|
c. 10% surtax on
undistributed earnings
|
|
|
(565,812
|
)
|
|
|
(1,428,112
|
)
|
c. Tax benefit
|
|
|
588,522
|
|
|
|
858,623
|
|
d. Expatriate employees
payroll cost paid by IFX
|
|
|
(168,697
|
)
|
|
|
(166,766
|
)
|
e. Operating lease
|
|
|
(4,742
|
)
|
|
|
(8,930
|
)
|
h. DSPP
|
|
|
|
|
|
|
(826,025
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in net income
|
|
|
(733,245
|
)
|
|
|
(2,063,729
|
)
|
|
|
|
|
|
|
|
|
|
Net income based on U.S. GAAP
|
|
$
|
5,196,513
|
|
|
|
13,804,180
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
2.08
|
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
|
|
|
Stockholders equity based on
ROC GAAP
|
|
$
|
47,236,284
|
|
|
|
79,137,540
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
a. Foreign currency forward
contracts marked to market
|
|
|
(355,857
|
)
|
|
|
|
|
a. Interest rate
swaps marked to market
|
|
|
38,637
|
|
|
|
|
|
b. Bonuses to employees
|
|
|
(298,866
|
)
|
|
|
(799,742
|
)
|
b. Remuneration to directors
and supervisors
|
|
|
(3,736
|
)
|
|
|
(9,997
|
)
|
c. 10% surtax on
undistributed earnings
|
|
|
(565,812
|
)
|
|
|
(1,428,112
|
)
|
c. Tax benefit
|
|
|
639,247
|
|
|
|
932,058
|
|
d. Expatriate employees
payroll cost paid by IFX
|
|
|
(324,773
|
)
|
|
|
(491,539
|
)
|
d. Contributed capital (net
of tax of $105,552 and $159,951 in 2005 and 2006, respectively)
arising from employees payroll paid by IFX
|
|
|
219,221
|
|
|
|
331,788
|
|
e. Operating lease
|
|
|
(4,742
|
)
|
|
|
(13,672
|
)
|
i. Other comprehensive
income pension
|
|
|
|
|
|
|
(41,800
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in stockholders
equity
|
|
|
(656,681
|
)
|
|
|
(1,521,016
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders equity based on
U.S. GAAP
|
|
$
|
46,579,603
|
|
|
|
77,616,524
|
|
|
|
|
|
|
|
|
|
|
Changes in stockholders
equity based on U.S. GAAP
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
41,377,184
|
|
|
|
46,579,603
|
|
Issuance of common stock
|
|
|
|
|
|
|
19,769,176
|
|
Cash dividend to stockholders
|
|
|
(124,883
|
)
|
|
|
(3,433,227
|
)
|
Bonus shares issued at a premium
to the employees
|
|
|
16,919
|
|
|
|
|
|
Contributed capital (net of tax of
$54,827 and $54,199 in 2005 and 2006, respectively ) arising
from employees
|
|
|
113,870
|
|
|
|
112,567
|
|
DSPP
|
|
|
|
|
|
|
826,025
|
|
Other comprehensive
income pension
|
|
|
|
|
|
|
(41,800
|
)
|
Net income for the year
|
|
|
5,196,513
|
|
|
|
13,804,180
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
46,579,603
|
|
|
|
77,616,524
|
|
|
|
|
|
|
|
|
|
|
F-123
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
A reconciliation of the significant balance sheet accounts to
the amounts determined under U.S. GAAP as of December 31,
2005 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
20,340,339
|
|
|
|
36,470,375
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
a. Financial assets-Interest
rate swaps
|
|
|
38,637
|
|
|
|
|
|
a. Financial assets-Foreign
currency forward contracts
|
|
|
(355,857
|
)
|
|
|
|
|
e. Current portion of lease
receivables
|
|
|
(6,690
|
)
|
|
|
(4,912
|
)
|
c. Deferred tax
assets current, net
|
|
|
11,277
|
|
|
|
28,351
|
|
e. Other current assets
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
20,029,763
|
|
|
|
36,493,814
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
66,162,814
|
|
|
|
100,410,476
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
e. Building and structure
|
|
|
281,538
|
|
|
|
281,538
|
|
e. Other equipment
|
|
|
75,555
|
|
|
|
75,555
|
|
e. Accumulated depreciation
|
|
|
(18,414
|
)
|
|
|
(31,977
|
)
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
66,501,493
|
|
|
|
100,735,592
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
854,936
|
|
|
|
802,349
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
c. Deferred tax
assets non-current, net
|
|
|
239,512
|
|
|
|
29,900
|
|
e. Lease
receivables long term
|
|
|
(338,788
|
)
|
|
|
(333,876
|
)
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
755,660
|
|
|
|
498,373
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
13,903,989
|
|
|
|
32,974,822
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
b. Employees bonus
|
|
|
298,866
|
|
|
|
799,742
|
|
b. Remuneration to directors
and supervisors
|
|
|
3,736
|
|
|
|
9,997
|
|
c. 10% surtax on
undistributed earnings
|
|
|
282,906
|
|
|
|
714,056
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
14,489,497
|
|
|
|
34,498,617
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
52,285
|
|
|
|
51,252
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
i. Accrued pension liabilities
|
|
|
|
|
|
|
41,800
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
52,285
|
|
|
|
93,052
|
|
|
|
|
|
|
|
|
|
|
F-124
INOTERA
MEMORIES, INC.
Balance
Sheets
December 31, 2004 and 2005
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(note 5)
|
|
$
|
9,980,189
|
|
|
|
9,822,568
|
|
|
|
299,469
|
|
Accounts receivable related parties
(note 17)
|
|
|
2,589,503
|
|
|
|
5,050,277
|
|
|
|
153,972
|
|
Other receivables (note 7 and
16)
|
|
|
160,283
|
|
|
|
1,322,121
|
|
|
|
40,309
|
|
Inventories, net (note 6)
|
|
|
2,127,530
|
|
|
|
3,485,585
|
|
|
|
106,268
|
|
Current portion of lease
receivables (note 7)
|
|
|
|
|
|
|
6,690
|
|
|
|
204
|
|
Prepayments and other current assets
|
|
|
1,011,742
|
|
|
|
616,693
|
|
|
|
18,802
|
|
Deferred income tax
assets current, net (note 13)
|
|
|
12,163
|
|
|
|
36,405
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
15,881,410
|
|
|
|
20,340,339
|
|
|
|
620,134
|
|
Property, plant and
equipment
(notes 7, 8, 9, 11 and 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,225,459
|
|
|
|
2,801,467
|
|
|
|
85,411
|
|
Buildings and structures
|
|
|
2,374,783
|
|
|
|
2,424,571
|
|
|
|
73,920
|
|
Machinery and equipment
|
|
|
26,546,487
|
|
|
|
59,669,447
|
|
|
|
1,819,190
|
|
Vehicles
|
|
|
2,913
|
|
|
|
2,913
|
|
|
|
89
|
|
Leased assets
|
|
|
|
|
|
|
135,996
|
|
|
|
4,146
|
|
Miscellaneous equipment
|
|
|
5,087,028
|
|
|
|
6,465,676
|
|
|
|
197,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,236,670
|
|
|
|
71,500,070
|
|
|
|
2,179,880
|
|
Less: accumulated depreciation
|
|
|
(2,042,536
|
)
|
|
|
(10,130,631
|
)
|
|
|
(308,861
|
)
|
Construction in progress
|
|
|
18,349,418
|
|
|
|
4,770,603
|
|
|
|
145,445
|
|
Prepayment on land purchase
|
|
|
|
|
|
|
22,772
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and
equipment
|
|
|
51,543,552
|
|
|
|
66,162,814
|
|
|
|
2,017,158
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refundable deposits
|
|
|
46,661
|
|
|
|
28,544
|
|
|
|
870
|
|
Deferred charges
|
|
|
118,283
|
|
|
|
134,846
|
|
|
|
4,111
|
|
Lease receivables long-term
(note 7)
|
|
|
|
|
|
|
338,788
|
|
|
|
10,329
|
|
Deferred income tax
assets non-current, net (note 13)
|
|
|
562,198
|
|
|
|
352,758
|
|
|
|
10,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
727,142
|
|
|
|
854,936
|
|
|
|
26,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
68,152,104
|
|
|
|
87,358,089
|
|
|
|
2,663,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-126
INOTERA
MEMORIES, INC.
Balance Sheets (Continued)
December 31, 2004 and 2005
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Liabilities and
Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loans (note 10)
|
|
$
|
2,481,500
|
|
|
|
2,323,300
|
|
|
|
70,832
|
|
Accounts payable
|
|
|
8,640,125
|
|
|
|
4,010,066
|
|
|
|
122,258
|
|
Accounts payable
related parties (note 17)
|
|
|
131,039
|
|
|
|
55,212
|
|
|
|
1,683
|
|
Income tax payable
|
|
|
|
|
|
|
124,302
|
|
|
|
3,790
|
|
Accrued expenses (notes 12 and
16)
|
|
|
450,856
|
|
|
|
855,816
|
|
|
|
26,092
|
|
Other payables related
parties (note 17)
|
|
|
284,521
|
|
|
|
86,253
|
|
|
|
2,630
|
|
Current portion of long-term loans
(note 11)
|
|
|
|
|
|
|
6,431,636
|
|
|
|
196,086
|
|
Current portion of lease payables
(note 9)
|
|
|
|
|
|
|
3,390
|
|
|
|
103
|
|
Other current liabilities
|
|
|
8,759
|
|
|
|
14,014
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
11,996,800
|
|
|
|
13,903,989
|
|
|
|
423,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term loans (note 11)
|
|
|
14,681,820
|
|
|
|
26,034,564
|
|
|
|
793,737
|
|
Lease payables
long-term (note 9)
|
|
|
|
|
|
|
130,967
|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term
liabilities
|
|
|
14,681,820
|
|
|
|
26,165,531
|
|
|
|
797,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liabilities
(note 12)
|
|
|
30,755
|
|
|
|
50,594
|
|
|
|
1,543
|
|
Guarantee deposits
|
|
|
577
|
|
|
|
1,691
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
liabilities
|
|
|
31,332
|
|
|
|
52,285
|
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
26,709,952
|
|
|
|
40,121,805
|
|
|
|
1,223,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(note 14):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
24,976,600
|
|
|
|
25,109,540
|
|
|
|
765,535
|
|
Capital surplus
|
|
|
15,548,660
|
|
|
|
15,548,660
|
|
|
|
474,045
|
|
Legal reserve
|
|
|
1,559
|
|
|
|
91,689
|
|
|
|
2,795
|
|
Special reserve
|
|
|
|
|
|
|
542,605
|
|
|
|
16,543
|
|
Retained earnings
|
|
|
915,333
|
|
|
|
5,943,790
|
|
|
|
181,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders
equity
|
|
|
41,442,152
|
|
|
|
47,236,284
|
|
|
|
1,440,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
(note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
68,152,104
|
|
|
|
87,358,089
|
|
|
|
2,663,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-127
INOTERA
MEMORIES, INC.
Statements of Income
For the years ended December 31, 2004 and 2005
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars except for earnings per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Operating revenues
(note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue
|
|
$
|
5,961,954
|
|
|
|
23,044,929
|
|
|
|
702,589
|
|
Sales returns
|
|
|
(161
|
)
|
|
|
(3,133
|
)
|
|
|
(96
|
)
|
Sales allowances
|
|
|
(963
|
)
|
|
|
(9,593
|
)
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
revenues
|
|
|
5,960,830
|
|
|
|
23,032,203
|
|
|
|
702,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
(notes 17 and 22)
|
|
|
(3,912,658
|
)
|
|
|
(16,350,746
|
)
|
|
|
(498,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,048,172
|
|
|
|
6,681,457
|
|
|
|
203,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(notes 17 and
22):
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative and general expenses
|
|
|
(1,395,577
|
)
|
|
|
(283,853
|
)
|
|
|
(8,654
|
)
|
Research and development expenses
|
|
|
(322,185
|
)
|
|
|
(658,134
|
)
|
|
|
(20,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
(1,717,762
|
)
|
|
|
(941,987
|
)
|
|
|
(28,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
330,410
|
|
|
|
5,739,470
|
|
|
|
174,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (note 7)
|
|
|
24,110
|
|
|
|
309,821
|
|
|
|
9,446
|
|
Gain on disposal of investments
|
|
|
85,648
|
|
|
|
4,532
|
|
|
|
138
|
|
Foreign exchange gain, net
|
|
|
551,248
|
|
|
|
676,797
|
|
|
|
20,634
|
|
Others (note 16)
|
|
|
12,966
|
|
|
|
306,754
|
|
|
|
9,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income and
gains
|
|
|
673,972
|
|
|
|
1,297,904
|
|
|
|
39,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses (excluding
capitalized interest of NT$151,686 and NT$395,501 for 2004 and
2005, respectively) (note 16)
|
|
|
(91,322
|
)
|
|
|
(760,618
|
)
|
|
|
(23,190
|
)
|
Others (note 16)
|
|
|
(11,713
|
)
|
|
|
(9,637
|
)
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
and losses
|
|
|
(103,035
|
)
|
|
|
(770,255
|
)
|
|
|
(23,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
tax
|
|
|
901,347
|
|
|
|
6,267,119
|
|
|
|
191,070
|
|
Income tax expense
(note 13)
|
|
|
(46
|
)
|
|
|
(337,361
|
)
|
|
|
(10,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
901,301
|
|
|
|
5,929,758
|
|
|
|
180,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
(note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
Before tax
|
|
$
|
0.51
|
|
|
|
2.50
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After tax
|
|
$
|
0.51
|
|
|
|
2.36
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-128
INOTERA
MEMORIES, INC.
Statements of Changes in Stockholders Equity
For the years ended December 31, 2004 and 2005
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during the
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Capital
|
|
|
Legal
|
|
|
Special
|
|
|
development
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
stock
|
|
|
surplus
|
|
|
reserve
|
|
|
reserve
|
|
|
stage
|
|
|
earnings
|
|
|
Total
|
|
|
Balance as of January 1,
2004
|
|
|
NTD
|
|
|
|
8,591,700
|
|
|
|
3,333,350
|
|
|
|
|
|
|
|
|
|
|
|
15,591
|
|
|
|
|
|
|
|
11,940,641
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,559
|
|
|
|
|
|
|
|
(1,559
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
16,384,900
|
|
|
|
12,215,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,600,210
|
|
Cumulative net loss from January 1
to May 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,597
|
)
|
|
|
|
|
|
|
(237,597
|
)
|
Accumulated loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,565
|
|
|
|
(223,565
|
)
|
|
|
|
|
Net income from June 1, 2004 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,138,898
|
|
|
|
1,138,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
NTD
|
|
|
|
24,976,600
|
|
|
|
15,548,660
|
|
|
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
915,333
|
|
|
|
41,442,152
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,130
|
|
|
|
|
|
|
|
|
|
|
|
(90,130
|
)
|
|
|
|
|
Appropriation for special reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542,605
|
|
|
|
|
|
|
|
(542,605
|
)
|
|
|
|
|
Remuneration for directors and
supervisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,686
|
)
|
|
|
(2,686
|
)
|
Bonus for employees
|
|
|
|
|
|
|
8,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,114
|
)
|
|
|
(8,057
|
)
|
Bonus for stockholders
|
|
|
|
|
|
|
124,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249,766
|
)
|
|
|
(124,883
|
)
|
Net income for the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,929,758
|
|
|
|
5,929,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
NTD
|
|
|
|
25,109,540
|
|
|
|
15,548,660
|
|
|
|
91,689
|
|
|
|
542,605
|
|
|
|
|
|
|
|
5,943,790
|
|
|
|
47,236,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
USD
|
|
|
|
761,482
|
|
|
|
474,045
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
27,906
|
|
|
|
1,263,481
|
|
Appropriation and distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriation for legal reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
(2,747
|
)
|
|
|
|
|
Appropriation for special reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,543
|
|
|
|
|
|
|
|
(16,543
|
)
|
|
|
|
|
Remuneration for directors and
supervisors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82
|
)
|
|
|
(82
|
)
|
Bonus for employees
|
|
|
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(491
|
)
|
|
|
(245
|
)
|
Bonus for stockholders
|
|
|
|
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,615
|
)
|
|
|
(3,808
|
)
|
Net income for the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,785
|
|
|
|
180,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
USD
|
|
|
|
765,535
|
|
|
|
474,045
|
|
|
|
2,795
|
|
|
|
16,543
|
|
|
|
|
|
|
|
181,213
|
|
|
|
1,440,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-129
INOTERA
MEMORIES, INC.
Statements of Cash Flows
For the years ended December 31, 2004 and 2005
(Expressed in thousands of New Taiwan Dollars and
U.S. Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
901,301
|
|
|
|
5,929,758
|
|
|
|
180,785
|
|
Depreciation
|
|
|
2,041,633
|
|
|
|
8,099,551
|
|
|
|
246,938
|
|
Amortization of deferred charges
|
|
|
12,269
|
|
|
|
36,165
|
|
|
|
1,103
|
|
Unrealized foreign currency
exchange gain, net
|
|
|
(549,374
|
)
|
|
|
(280,665
|
)
|
|
|
(8,557
|
)
|
Realized interest revenue from
capital lease
|
|
|
|
|
|
|
(10,133
|
)
|
|
|
(309
|
)
|
Gain on disposal of short-term
investments
|
|
|
(85,648
|
)
|
|
|
(4,532
|
)
|
|
|
(138
|
)
|
Amortization of deferred forward
exchange premium
|
|
|
|
|
|
|
(287,851
|
)
|
|
|
(8,776
|
)
|
Increase in accounts
receivable related parties
|
|
|
(2,634,669
|
)
|
|
|
(2,554,838
|
)
|
|
|
(77,891
|
)
|
Decrease (increase) in other
receivables
|
|
|
(40,841
|
)
|
|
|
106,119
|
|
|
|
3,235
|
|
Increase in inventories
|
|
|
(2,095,342
|
)
|
|
|
(1,358,055
|
)
|
|
|
(41,404
|
)
|
Decrease in lease receivables
|
|
|
|
|
|
|
10,291
|
|
|
|
314
|
|
Decrease (increase) in prepayments
and other current assets
|
|
|
(940,582
|
)
|
|
|
395,049
|
|
|
|
12,044
|
|
(Decrease) increase in accounts
payable
|
|
|
492,165
|
|
|
|
(4,581,405
|
)
|
|
|
(139,677
|
)
|
Decrease in accounts
payable related parties
|
|
|
(160,139
|
)
|
|
|
(71,320
|
)
|
|
|
(2,174
|
)
|
Increase in tax payables
|
|
|
|
|
|
|
124,357
|
|
|
|
3,791
|
|
Increase in accrued expenses
|
|
|
350,970
|
|
|
|
407,478
|
|
|
|
12,423
|
|
(Decrease) increase in other
payables related parties
|
|
|
254,113
|
|
|
|
(198,268
|
)
|
|
|
(6,045
|
)
|
Decrease in lease payables
|
|
|
|
|
|
|
(1,639
|
)
|
|
|
(50
|
)
|
Increase in other current
liabilities
|
|
|
6,182
|
|
|
|
5,255
|
|
|
|
160
|
|
Increase in accrued pension
liability
|
|
|
15,038
|
|
|
|
19,839
|
|
|
|
605
|
|
Decrease in deferred income tax
assets, net
|
|
|
9
|
|
|
|
185,198
|
|
|
|
5,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(2,432,915
|
)
|
|
|
5,970,354
|
|
|
|
182,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in short-term investments
|
|
|
4,822,138
|
|
|
|
4,532
|
|
|
|
138
|
|
Purchases of property, plant and
equipment
|
|
|
(37,915,757
|
)
|
|
|
(22,928,454
|
)
|
|
|
(699,038
|
)
|
Increase in deferred charges
|
|
|
(123,218
|
)
|
|
|
(52,728
|
)
|
|
|
(1,608
|
)
|
Decrease (increase) in refundable
deposits
|
|
|
(13,574
|
)
|
|
|
18,117
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(33,230,411
|
)
|
|
|
(22,958,533
|
)
|
|
|
(699,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in short-term
loans
|
|
|
1,728,852
|
|
|
|
(158,200
|
)
|
|
|
(4,823
|
)
|
Increase in long-term loans
|
|
|
15,270,954
|
|
|
|
17,285,096
|
|
|
|
526,985
|
|
Increase in capital
|
|
|
28,600,210
|
|
|
|
|
|
|
|
|
|
Decrease in advance receipts for
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in guarantee deposits
|
|
|
448
|
|
|
|
1,114
|
|
|
|
34
|
|
Cash dividends
|
|
|
|
|
|
|
(124,611
|
)
|
|
|
(3,799
|
)
|
Bonus for employees
|
|
|
|
|
|
|
(8,057
|
)
|
|
|
(246
|
)
|
Remuneration of directors and
supervisors
|
|
|
|
|
|
|
(2,686
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
45,600,464
|
|
|
|
16,992,656
|
|
|
|
518,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
exchange translation
|
|
|
(38,322
|
)
|
|
|
(162,098
|
)
|
|
|
(4,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
9,898,816
|
|
|
|
(157,621
|
)
|
|
|
(4,806
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
81,373
|
|
|
|
9,980,189
|
|
|
|
304,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
9,980,189
|
|
|
|
9,822,568
|
|
|
|
299,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
2,351
|
|
|
|
27,860
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid (excluding
capitalized interest)
|
|
$
|
122,644
|
|
|
|
972,201
|
|
|
|
29,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of current portion
of long-term loans from long-term loans
|
|
$
|
|
|
|
|
6,431,636
|
|
|
|
196,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease payables and leased assets
resulting from lease agreement
|
|
$
|
|
|
|
|
135,996
|
|
|
|
4,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and leased assets
transferred resulting from lease agreement
|
|
$
|
|
|
|
|
345,637
|
|
|
|
10,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-130
INOTERA
MEMORIES, INC.
Notes to Financial Statements
December 31, 2004 and 2005
(All amounts expressed in thousands of New Taiwan Dollars
and U.S. Dollars except per share information or unless
otherwise specified)
(1) Organization
and Principal Activities
Inotera Memories, Inc. (the Company) commenced as a
development stage enterprise on December 17, 2002, and was
legally established on January 23, 2003, however, it did
not commence commercial operating activities until June 1,
2004.
The Companys main operating activities are to produce and
to sell semiconductor products. In the development stage, the
Companys activities included financial planning, raising
funds, employee hiring, and plant construction.
As of December 31, 2004 and 2005, the Company had 1,408 and
1,824 employees, respectively.
(2) Summary
of Significant Accounting Policies
The accompanying financial statements are prepared in accordance
with accounting principles generally accepted in the Republic of
China (ROC). The financial statements are not intended to
present the financial position of the Company and the related
results of operations and cash flow in accordance with
accounting principles and practices generally accepted in
countries and jurisdictions other than the ROC. The significant
accounting policies followed by the Company are as follows:
(a) Foreign currency transactions and translation
The Companys reporting currency is the New Taiwan Dollar.
Foreign currency transactions during the year are translated at
the exchange rates on the transaction dates. Foreign
currency-denominated assets and liabilities are translated into
New Taiwan Dollar at the exchange rate prevailing on the balance
sheet date, and the resulting realized and unrealized gains or
losses are recognized as non-operating income or expenses.
(b) Convenience translation into U.S. dollars
The financial statements are stated in New Taiwan Dollars.
Translation of the 2005 New Taiwan Dollar amounts into
U.S. dollar amounts is included solely for the convenience
of the readers, using the Federal Reserve exchange rate on
December 30, 2005, of NT$32.8 to US$1 uniformly for all the
financial statements accounts. The convenience
translations should not be construed as representations that the
New Taiwan Dollar amounts have been, could have been, or could
in the future be, converted into U.S. dollars at this rate
or any other rate of exchange.
(c) Cash equivalents
Cash and cash equivalents consist of cash on hand, cash in
banks, time deposits, negotiable time deposits and other cash
equivalents. Other cash equivalents represent highly liquid debt
instruments with a maturity period of less than three months,
such as commercial paper, repurchased government bond and other
highly liquid investments which do not have a significant level
of market or credit risk from potential interest rate changes.
(d) Short-term investments
Short-term investments consist mainly of bond funds, which are
stated at the lower of aggregate cost or market value. Aggregate
cost is determined by the weighted-average method. Market value
is the listed net value of the fund at the balance sheet date.
Losses resulting from a decline in market value are recognized
in the income statement of the current period.
F-131
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(e) Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined by using the monthly weighted-average method.
Market value represents replacement cost or net realizable value.
(f) Property, plant and equipment/Depreciation
Property, plant and equipment are stated at cost. The cost less
accumulated depreciation is the net book value. Interest from
borrowings obtained to finance the construction of property,
plant and equipment is capitalized. Maintenance and repairs are
expensed when incurred; major addition, improvement and
replacement expenditures are capitalized.
Depreciation of property, plant and equipment is provided over
their estimated useful lives by using the straight-line method.
Assets still in service after reaching the end of their
estimated useful lives are depreciated based on the residual
value over their re-estimated useful lives. The useful lives of
the assets are as follows:
|
|
|
|
(i)
|
Buildings and structures: 8-50 years.
|
|
|
(ii)
|
Vehicles: 5 years.
|
|
|
(iii)
|
Machinery and equipment: 3-5 years.
|
|
|
(iv)
|
Leased assets: 23.7 years.
|
|
|
(v)
|
Miscellaneous equipment: 5-15 years.
|
Gains or losses on disposal of property, plant and equipment are
recorded as non-operating income or expenses.
(g) Leases
A lease is deemed to be a capital lease if it conforms to any
one of the following classification criteria:
|
|
|
|
(i)
|
the lease transfers ownership of the leased assets to the lessee
by the end of the lease term;
|
|
|
(ii)
|
the lease contains a bargain purchase option;
|
|
|
(iii)
|
the lease term is equal to 75% or more of the total estimated
economic life of the leased assets; this criterion should not be
applied to leases in which the leased asset has been used for
more than 75% of its estimated economic life before the lease
begins;
|
|
|
(iv)
|
The present value of the rental plus the bargain purchase price
or the guaranteed residual value is at least 90% of the fair
market value of the leased assets at the inception date of the
lease.
|
For the lessor, a capital lease must also conform to any one of
the four classification criteria specified above and both of the
following two further criteria:
|
|
|
|
(i)
|
collectibility of the lease payments is reasonably predictable;
and
|
|
|
(ii)
|
no important uncertainties surround the amount of unreimbursable
costs yet to be incurred by the lessor under the lease.
|
Under a capital lease, the Company, as the lessee, capitalizes
the leased assets based on (a) the present value of all
future installment rental payments (minus executory costs born
by lessor) plus the bargain purchase price or lessees
guaranteed residual value or (b) the fair market value of
leased assets at the lease inception date, whichever is lower.
The depreciation period is restricted to the lease term, rather
than the estimated useful life of the assets, unless the lease
provides for transfer of title or includes a bargain purchase
option.
F-132
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
Under a capital lease, the Company, as the lessor, records all
installments plus the bargain purchase price or guaranteed
residual value as the lease receivables. The implicit interest
rate is used to calculate the present value of lease receivables
as the cost of leased assets transferred. The difference between
the total amount of lease receivables and the cost of leased
assets transferred is recognized as unrealized interest income
and is then recognized as realized interest income using the
interest method over the lease term.
(h) Deferred charges
|
|
|
|
(i)
|
Any charges and consulting fees related to the syndicated loans
are deferred and amortized over the loan terms.
|
|
|
(ii)
|
Power line compensation and the royalty paid to the Industrial
Technology Research Institute are deferred and amortized over
the estimated useful lives or the agreement terms.
|
(i) Employee retirement plan
The Company has established an employee noncontributory defined
benefit retirement plan (the Plan) covering
full-time employees in the Republic of China. In accordance with
the Plan, employees are eligible for retirement or are required
to retire after meeting certain age or service requirements.
Payments of retirement benefits are based on years of service
and the average salary for the last six months before the
employees retirement. Each employee gets
2 months salary for each service year for the first
15 years, and 1 months salary for each service
year thereafter. A lump-sum retirement benefit is paid through
the retirement fund.
Starting from July 1, 2005, the enforcement date of the
newly enacted Labor Pension Act (the New Act), those
employees who adopt the defined contribution plan are stipulated
as follows:
|
|
|
|
(i)
|
employees who originally adopted the Plan and opt to be subject
to the pension mechanism under the New Act;
|
|
|
(ii)
|
employees who commenced working after the enforcement date of
the New Act.
|
In accordance with the New Act, the rate of contribution by an
employer to an individual labor pension fund account per month
shall not be less than 6% of the workers monthly wages.
The Company has adopted Republic of China Statement of Financial
Accounting Standards (SFAS) No. 18, Accounting for
Pensions for the noncontributory defined benefit
retirement plan. SFAS No. 18 requires an actuarial
calculation of the Companys pension obligation as of each
fiscal year-end. Based on the actuarial calculation, the Company
recognizes a minimum pension liability and net periodic pension
costs covering the service lives of the retirement plan
participants.
(j) Revenue recognition
Revenue is generally recognized when products are delivered to
customers and the significant risks and rewards of ownership are
transferred. Repair income is recognized when the services are
provided.
Revenue is generally recognized when it is realized or
realizable and earned when all of the following criteria are met:
|
|
|
|
(i)
|
persuasive evidence of an arrangement exists,
|
|
|
(ii)
|
delivery has occurred or services have been rendered,
|
|
|
|
|
(iii)
|
the sellers price to the buyer is fixed or
determinable, and
|
|
|
|
|
(iv)
|
collectibility is reasonably assured.
|
F-133
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(k) Income tax
Income taxes are accounted for using the asset and liability
method. Deferred income tax is determined based on differences
between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect during the years
in which the differences are expected to reverse. The income tax
effects of taxable temporary differences are recognized as
deferred income tax liabilities. The income tax effects
resulting from deductible temporary differences, net operating
loss carryforwards, and income tax credits are recognized as
deferred income tax assets. The realization of the deferred
income tax assets is evaluated, and if it is considered more
likely than not that the asset will not be realized, a valuation
allowance is recognized accordingly.
The classification of deferred income tax assets and liabilities
as current or noncurrent is based on the classification of the
related asset or liability. If the deferred income tax asset or
liability is not directly related to a specific asset or
liability, then the classification is based on the expected
realization date of the asset or liability.
A tax imputation system was adopted in accordance with the
amended ROC Income Tax Law. Under this system, the Company may
retain the earnings incurred after December 31, 1997, by
paying 10% surtax on such undistributed earnings, calculated on
tax basis, and the surtax is accounted for as income tax expense
on the date when the stockholders resolve not to
distribute the earnings.
(l) Earnings (loss) per common share
Earnings (loss) per share are computed by dividing the net
income (loss) made available for distribution to common
stockholders by the weighted-average number of shares
outstanding which is retroactively adjusted to include stock
dividends issued during the period.
(m) Derivative financial instruments
(i) Foreign exchange forward contracts
Foreign exchange forward contracts which are entered into for
the purpose of hedging the risks of exchange rate fluctuation on
foreign currency receivables and payables are translated into
New Taiwan Dollars using spot rates on the balance sheet date.
The resulting translation difference is recorded as an exchange
gain or loss in the accompanying statements of income. The
difference between the forward rate and spot rate at the
contract date is amortized over the contract period.
(ii) Interest rate swap contracts
Because there is no physical transfer of principal, only memo
entries of notional principals are made for interest rate swaps.
For trading swaps, the differences between the present and
market values of interest receivables or payables arising
thereon are reported as unrealized gains or losses on derivative
instruments. For non-trading swaps, interest is accrued based on
contract terms with interest revenue and expense recognized in
the same period that the hedged items affect earnings.
(iii) Cross currency swaps (CCSs)
Memo entries of notional principals are made on the contract
date for cross-currency swaps. Forward accounts receivables are
offset against payables on the balance sheet date, with the
difference reflected either as an asset or a liability. For
trading swaps, gains or losses on the differences between the
present and market value of principal and interests in New
Taiwan Dollars, are recognized as unrealized gains or losses.
For non-trading swaps, interest is accrued based on contract
terms and principal repayment period, with interest revenue and
expense recognized in the same period that the hedged items
affect earnings.
F-134
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(n) Asset impairment
Effective January 1, 2005, the Company adopted Republic of
China Statement of Financial Accounting Standards No. 35
(ROC SFAS 35) Accounting for Asset
Impairment. According to SFAS No. 35, the
Company assesses at each balance sheet date whether there is any
indication that an asset (individual asset or cash-generating
unit) may have been impaired. If any such indication exists, the
Company estimates the recoverable amount of the asset. The
Company recognizes impairment loss for an asset whose carrying
value is higher than the recoverable amount.
The Company reverses an impairment loss recognized in prior
periods for assets if there is any indication that the
impairment loss recognized no longer exists or has decreased.
The carrying value after the reversal should not exceed the
recoverable amount or the depreciated or amortized balance of
the assets assuming no impairment loss was recognized in prior
periods.
(o) Basis for classifying assets and liabilities as current
or non-current
Current assets are cash and other assets that a business will
convert to cash or use up in a relatively short period of
time one year or one operating cycle, whichever is
longer. Current liabilities are debts due within one year or one
operating cycle, whichever is longer.
(3) Reasons
for and Cumulative Effect of Accounting Principle
Changes
The Company adopted Republic of China Statement of Financial
Accounting Standards No. 35 Accounting for Asset
Impairment in 2005. After performing an evaluation of
impairment of its assets (individual asset or cash-generating
unit), the Company determined that no impairment loss would be
recognized as of December 31, 2005.
(4) Revenues
and expenses during development stage
|
|
|
|
|
|
|
|
|
|
|
2004.1.1-2004.5.30
|
|
|
2002.12.17-2003.12.31
|
|
|
|
NTD
|
|
|
NTD
|
|
|
Operating revenue
|
|
$
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative expenses
|
|
|
(1,452,163
|
)
|
|
|
(566,506
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,452,163
|
)
|
|
|
(566,506
|
)
|
|
|
|
|
|
|
|
|
|
Non-operating income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,171
|
|
|
|
4,417
|
|
Gain on disposal of investment
|
|
|
15,825
|
|
|
|
20,737
|
|
Exchange gain, net
|
|
|
231,209
|
|
|
|
5,259
|
|
Other income
|
|
|
3,633
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,838
|
|
|
|
31,186
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(40,420
|
)
|
|
|
(23,336
|
)
|
Other expenses
|
|
|
(788
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,208
|
)
|
|
|
(23,366
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(1,241,533
|
)
|
|
|
(558,686
|
)
|
Income tax benefit
|
|
|
1,003,936
|
|
|
|
574,277
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(237,597
|
)
|
|
|
15,591
|
|
|
|
|
|
|
|
|
|
|
F-135
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(5) Cash
and cash equivalents
Cash and deposits as of December 31, 2004 and 2005,
consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Cash on hand and petty cash
|
|
$
|
130
|
|
|
|
160
|
|
|
|
5
|
|
Cash in bank checking
account
|
|
|
4,159
|
|
|
|
5,346
|
|
|
|
163
|
|
Cash in bank demand
deposit account
|
|
|
7,616,966
|
|
|
|
5,143
|
|
|
|
157
|
|
Cash in bank foreign
currency account
|
|
|
600,106
|
|
|
|
546,761
|
|
|
|
16,670
|
|
Time deposit
|
|
|
1,758,828
|
|
|
|
9,265,158
|
|
|
|
282,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,980,189
|
|
|
|
9,822,568
|
|
|
|
299,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits were not pledged or mortgaged to secure bank loans.
As of December 31, 2004 and 2005, inventories consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Raw material
|
|
$
|
541,186
|
|
|
|
557,814
|
|
|
|
17,007
|
|
Supplies
|
|
|
379,428
|
|
|
|
468,803
|
|
|
|
14,293
|
|
Work in process
|
|
|
1,188,247
|
|
|
|
2,341,178
|
|
|
|
71,377
|
|
Finished goods
|
|
|
130
|
|
|
|
9,394
|
|
|
|
286
|
|
Inventory in transit
|
|
|
18,539
|
|
|
|
108,396
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,127,530
|
|
|
|
3,485,585
|
|
|
|
106,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The insurance coverage for inventories amounted to NT$2,412,642
and NT$3,245,671 as of December 31, 2004 and 2005,
respectively.
|
|
|
|
|
(b)
|
Inventories were not pledged or mortgaged to secure bank loans.
|
|
|
|
|
(a)
|
The Company signed a long-term lease agreement with Nanya
Technology Corp. (NTC) to lease out a portion of a building and
land (including supplemental equipment) located at No. 667,
Fuhsing 3rd Road, Hwa-Ya Technology Park, Kueishan Valley,
Taoyuan County. The lease took effect on July 1, 2005, and
remains effective until December 31, 2034 (including the
period when the lease is automatically extended), a total of
354 months. The lease agreement for the building is treated
as a capital lease because the present value of the periodic
rental payments since the inception date is at least 90% of the
market value of the leased assets. The land is treated as an
operating lease. The monthly rents for the leased building and
land were NT$2,058 and NT$310, respectively.
|
|
|
|
|
(b)
|
The initial total amount of lease receivables for the capital
lease of the building was NT$728,587; the implicit interest rate
was 5.88%. The cost of leased assets transferred was NT$345,637
(including the net book value of the building and miscellaneous
equipment of NT$277,372 and NT$68,265, respectively). The
difference between the total amount of lease receivables and the
cost of leased assets transferred was NT$382,950 and was
recognized as unrealized interest income which is amortized over
the lease period.
|
F-136
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
For the year ended December 31, 2005, NT$10,133 was
recognized as realized interest income. The details of lease
receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Current
|
|
|
Non-current
|
|
|
|
NTD
|
|
|
USD
|
|
|
NTD
|
|
|
USD
|
|
|
Gross lease receivables
|
|
$
|
26,756
|
|
|
|
816
|
|
|
|
691,540
|
|
|
|
21,084
|
|
Less: Unrealized interest revenue
|
|
|
(20,066
|
)
|
|
|
(612
|
)
|
|
|
(352,752
|
)
|
|
|
(10,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease receivables
|
|
$
|
6,690
|
|
|
|
204
|
|
|
|
338,788
|
|
|
|
10,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
For the year ended December 31, 2005, the rent revenue from
the operating lease for land was NT$1,859, of which NT$310 was
not received and was recorded as other receivables.
|
|
|
|
|
(d)
|
Future gross lease receivables classified as capital lease or
operating lease as of December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
|
|
|
Operating lease
|
|
Duration
|
|
NTD
|
|
|
USD
|
|
|
NTD
|
|
|
USD
|
|
|
2006.1.1-2006.12.31
|
|
$
|
24,698
|
|
|
|
753
|
|
|
|
3,719
|
|
|
|
113
|
|
2007.1.1-2007.12.31
|
|
|
24,698
|
|
|
|
753
|
|
|
|
3,719
|
|
|
|
113
|
|
2008.1.1-2008.12.31
|
|
|
24,698
|
|
|
|
753
|
|
|
|
3,719
|
|
|
|
113
|
|
2009.1.1-2009.12.31
|
|
|
24,698
|
|
|
|
753
|
|
|
|
3,719
|
|
|
|
113
|
|
2010.1.1-2034.12.31
|
|
|
617,447
|
|
|
|
18,825
|
|
|
|
92,964
|
|
|
|
2,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
716,239
|
|
|
|
21,837
|
|
|
|
107,840
|
|
|
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
Property,
Plant and Equipment/Depreciation
|
As of December 31, 2004 and 2005, accumulated depreciation
of property, plant and equipment consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Buildings and structures
|
|
$
|
24,756
|
|
|
|
99,863
|
|
|
|
3,045
|
|
Machinery and equipment
|
|
|
1,845,574
|
|
|
|
9,219,024
|
|
|
|
281,067
|
|
Vehicles
|
|
|
239
|
|
|
|
725
|
|
|
|
22
|
|
Leased assets
|
|
|
|
|
|
|
2,873
|
|
|
|
88
|
|
Miscellaneous equipment
|
|
|
171,967
|
|
|
|
808,146
|
|
|
|
24,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,042,536
|
|
|
|
10,130,631
|
|
|
|
308,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
All construction in progress is insured, and the insurance
coverage thereon amounted to NT$60,354,152 and NT$35,778,787 as
of December 31, 2004 and 2005, respectively.
|
|
|
|
|
(b)
|
As of December 31, 2004 and 2005, the insurance coverage on
the buildings and equipment against fire loss amounted to
NT$33,186,671 and NT$67,533,079, respectively.
|
|
|
|
|
(c)
|
In March 2005, the Company purchased two parcels of land
numbered 350 and 351 located in Hwa-Ya, Kueishan, Taoyuan
County, for NT$28,465 from the Land Readjustment Committee in
Kueishan, Taoyuan County. As of December 31, 2005, the
Company had paid NT$22,772, which was recorded as a prepayment
on land purchase.
|
F-137
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(d)
|
As of December 31, 2005, the insurance coverage for losses
on business interruption amounted to NT$13,658,519.
|
|
|
|
|
(e)
|
The property, plant and equipment pledged to secure bank loans
as of December 31, 2004 and 2005, were described in
note 11.
|
|
|
(9)
|
Leased
Assets and Lease Payables
|
|
|
|
|
(a)
|
The Company signed a long-term lease agreement with NTC to lease
a portion of the building and land located on the land numbered
348, 348-2
and 348-4,
Hwa-Ya Section, Kueishan Valley, Taoyuan County. The lease took
effect on July 1, 2005, and remains effective until
February 28, 2029 (including the period when the agreement
can be automatically extended), a total of 284 months. The
lease agreement for the building is treated as a capital lease
because (a) the present value of the periodic rental
payments made since the inception date is at least 90% of the
market value of the leased assets and (b) the lease term is
equal to 75% of or more of the total estimated economic life of
the leased assets. The land is treated as an operating lease.
The monthly rents for the leased building and land were NT$775
and NT$357, respectively.
|
|
|
|
|
(b)
|
The total amount of lease payables for the capital lease of the
building was NT$135,996; the implicit interest rate was 4.46%.
The fair value of the leased assets was NT$135,996. The details
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005.12.31
|
|
|
|
NTD
|
|
|
USD
|
|
|
Lease payables
|
|
$
|
134,357
|
|
|
|
4,096
|
|
Less: Current portion of lease
payables
|
|
|
(3,390
|
)
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,967
|
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
For the year ended December 31, 2005, the lease expense for
the operating lease for land was NT$2,141, which was fully paid.
|
|
|
|
|
(d)
|
Future lease payments (excluding interest component) classified
as capital lease or operating lease as of December 31,
2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
|
|
|
Operating lease
|
|
Duration
|
|
NTD
|
|
|
USD
|
|
|
NTD
|
|
|
USD
|
|
|
2006.1.1-2006.12.31
|
|
$
|
3,390
|
|
|
|
103
|
|
|
|
4,282
|
|
|
|
131
|
|
2007.1.1-2007.12.31
|
|
|
3,544
|
|
|
|
108
|
|
|
|
4,282
|
|
|
|
131
|
|
2008.1.1-2008.12.31
|
|
|
3,706
|
|
|
|
113
|
|
|
|
4,282
|
|
|
|
131
|
|
2009.1.1-2009.12.31
|
|
|
3,874
|
|
|
|
118
|
|
|
|
4,282
|
|
|
|
131
|
|
2010.1.1-2029.02.28
|
|
|
119,843
|
|
|
|
3,654
|
|
|
|
82,068
|
|
|
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
134,357
|
|
|
|
4,096
|
|
|
|
99,196
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term loans as of December 31, 2004 and 2005,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Unsecured borrowings
|
|
$
|
2,481,500
|
|
|
|
2,323,300
|
|
|
|
70,832
|
|
The short-term loans bore interest at annual rates of
1.050%-1.157% in 2004 and 1.390% in 2005.
F-138
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The unused credit facility for short-term loans amounted to
NT$5,666,700 as of December 31, 2005.
Long-term loans as of December 31, 2004 and 2005, consisted
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
Bank
|
|
Repayment period
|
|
Nature
|
|
Interest rate
|
|
NTD
|
|
|
Taiwan Cooperative Bank (the
managing bank)
|
|
February 2, 2006-
February 2, 2009
|
|
Machinery loan
|
|
1.1725%-2.5793%
|
|
$
|
8,298,420
|
|
I.C.B.C. (the managing bank)
|
|
November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
3.1607%-3.4567%
|
|
|
6,383,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,681,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
Bank
|
|
Repayment period
|
|
Nature
|
|
Interest rate
|
|
NTD
|
|
|
USD
|
|
|
Taiwan Cooperative Bank (the
managing bank)
|
|
February 2, 2006-
February 2, 2009
|
|
Machinery loan
|
|
4.6214%-4.7688%
|
|
$
|
8,541,000
|
|
|
|
260,396
|
|
I.C.B.C. (the managing bank)
|
|
November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
5.3488%
|
|
|
22,075,200
|
|
|
|
673,025
|
|
I.C.B.C. (the managing bank)
|
|
November 15, 2006-
November 15, 2009
|
|
Machinery loan
|
|
2.4260%
|
|
|
1,850,000
|
|
|
|
56,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,466,200
|
|
|
|
989,823
|
|
Less: Current portion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term loans
|
|
|
|
|
|
|
|
|
(6,431,636
|
)
|
|
|
(196,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,034,564
|
|
|
|
793,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company signed a syndicated loan agreement with Taiwan
Cooperative Bank, the managing bank of this syndicated loan, and
15 other banks on January 16, 2004. The Company had
utilized US$260,000 from this loan facility for the period from
February 2 to August 2, 2004. The details of the loan are
as follows:
|
|
|
|
(a)
|
Credit line: US$260,000.
|
|
|
|
|
(b)
|
Interest rate:
USD 3-month
or 6-month
London Inter-bank Offered Rate (LIBOR) plus margin.
|
|
|
|
|
(d)
|
Repayment: The principal is payable in 7 semi-annual
installments starting from 24 months after the first
drawing date.
|
|
|
|
|
(e)
|
The long-term loan is secured by machinery. As of
December 31, 2004 and 2005, the net book value of the
pledged assets amounted to NT$11,654,503 and NT$9,625,951,
respectively.
|
|
|
|
|
(f)
|
This long-term borrowing was guaranteed by Nan Ya Plastics
Corporation.
|
|
|
|
|
(g)
|
The Company has issued a promissory note for the syndicated loan.
|
F-139
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The Company signed a syndicated loan agreement with I.C.B.C., as
the managing bank of the syndicated loan, and 23 other banks on
October 14, 2004 (as of December 31, 2005, the actual
number of banks had increased to 28). The Company applied for
drawings of US$672,000 and NT$1,850,000 for the period
November 15, 2004, to December 31, 2005. The details
of the loan are as follows:
|
|
|
|
(a)
|
Credit line: US$672,000 and NT$5,700,000.
|
|
|
|
|
(b)
|
Interest rate for Tranche A:
USD 3-month
or 6-month
London Inter-bank Offered Rate (LIBOR) plus margin.
|
|
|
|
|
(c)
|
Interest rate for Tranche B: The
180-day
commercial paper rate in the primary market which appears on
Moneyline Telerate, plus margin.
|
|
|
|
|
(e)
|
Repayment: The principal is payable in 7 semi-annual
installments starting from 24 months after the first
drawing date.
|
|
|
|
|
(f)
|
This long-term debt is secured by buildings and machinery. As of
December 31, 2005, the net book value of the pledged assets
amounted to NT$17,949,184.
|
|
|
|
|
(g)
|
This long-term borrowing was guaranteed by Nan Ya Plastics
Corporation.
|
|
|
(h)
|
The Company has issued a promissory note for this syndicated
loan.
|
|
|
(12)
|
Accrued
Pension Liability
|
The pension information for the years ended December 31,
2004 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Balance of the retirement fund
|
|
$
|
12,637
|
|
|
|
29,193
|
|
|
|
890
|
|
The net pension costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit retirement plan
|
|
|
30,094
|
|
|
|
35,317
|
|
|
|
1,077
|
|
Defined contribution plan
|
|
|
|
|
|
|
23,482
|
|
|
|
716
|
|
Accrued pension expenses
|
|
|
|
|
|
|
12,265
|
|
|
|
374
|
|
Accrued pension liabilities
|
|
|
30,755
|
|
|
|
50,594
|
|
|
|
1,543
|
|
|
|
|
|
(a)
|
The Company adopted Republic of China Statement of Financial
Accounting Standards No. 18, Accounting for
Pensions for those employees covered by the
non-contributory defined benefit retirement plan. The Company
recognizes a minimum pension liability based on the actuarial
report, which uses the balance sheet date as the measurement
date.
|
F-140
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(b)
|
The following table sets forth the details of the reconciliation
of funded status to accrued pension liability on
December 31, 2004 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested benefit obligation
|
|
$
|
(1,589
|
)
|
|
|
(4,227
|
)
|
|
|
(129
|
)
|
Non-vested benefit obligation
|
|
|
(33,262
|
)
|
|
|
(54,372
|
)
|
|
|
(1,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
|
(34,851
|
)
|
|
|
(58,599
|
)
|
|
|
(1,787
|
)
|
Projected compensation increase
|
|
|
(38,746
|
)
|
|
|
(65,607
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
(73,597
|
)
|
|
|
(124,206
|
)
|
|
|
(3,787
|
)
|
Fair value of plan assets
|
|
|
15,132
|
|
|
|
31,115
|
|
|
|
949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(58,465
|
)
|
|
|
(93,091
|
)
|
|
|
(2,838
|
)
|
Unamortized pension gain or losses
|
|
|
27,710
|
|
|
|
42,497
|
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$
|
(30,755
|
)
|
|
|
(50,594
|
)
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
As of December 31, 2004 and 2005, the actuarial present
value of the vested benefits for the Companys employees in
accordance with the retirement benefit plan was approximately
NT$1,835 and NT$4,609, respectively. Major assumptions used to
determine the pension plan funded status as of December 31,
2004 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Discount rate
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Rate of increase in compensation
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Expected long-term rate of return
on plan assets
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
(a)
|
The Companys earnings are subject to income tax at a
statutory rate of 25%. For the years ended December 31,
2004 and 2005, the components of income tax expense were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Income tax expense
current
|
|
$
|
46
|
|
|
|
152,162
|
|
|
|
4,639
|
|
Income tax expense
deferred
|
|
|
|
|
|
|
185,199
|
|
|
|
5,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
46
|
|
|
|
337,361
|
|
|
|
10,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-141
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(b)
|
The differences between expected income tax expense calculated
at a statutory income tax rate of 25% and the actual income tax
as reported in the accompanying financial statements for the
years ended December 31, 2004 and 2005, were summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Income tax calculated based on
financial pretax income
|
|
$
|
225,327
|
|
|
|
1,566,770
|
|
|
|
47,767
|
|
Tax effect of tax-free income from
income tax holiday
|
|
|
|
|
|
|
(1,269,719
|
)
|
|
|
(38,711
|
)
|
Increase in income tax credit for
purchasing machinery and equipment
|
|
|
(3,480,741
|
)
|
|
|
(3,353,698
|
)
|
|
|
(102,248
|
)
|
Differences between estimated and
actual income tax expense filing
|
|
|
(85
|
)
|
|
|
263,056
|
|
|
|
8,020
|
|
Tax-exempt securities
|
|
|
(21,412
|
)
|
|
|
(985
|
)
|
|
|
(30
|
)
|
Increase in valuation allowance
for deferred income tax assets
|
|
|
3,276,911
|
|
|
|
3,123,694
|
|
|
|
95,235
|
|
10% surtax on undistributed
earnings
|
|
|
|
|
|
|
7,862
|
|
|
|
240
|
|
Income tax expense imposed
separately
|
|
|
46
|
|
|
|
381
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
46
|
|
|
|
337,361
|
|
|
|
10,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Deferred income tax assets and tax liabilities as of
December 31, 2004 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
23,744
|
|
|
|
66,267
|
|
|
|
2,020
|
|
Deferred income tax liabilities
|
|
|
(11,581
|
)
|
|
|
(29,862
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax
assets, net
|
|
$
|
12,163
|
|
|
|
36,405
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
4,182,020
|
|
|
|
7,194,031
|
|
|
|
219,331
|
|
Valuation allowance for deferred
income tax assets
|
|
|
(3,472,538
|
)
|
|
|
(6,596,233
|
)
|
|
|
(201,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, net
|
|
|
709,482
|
|
|
|
597,798
|
|
|
|
18,226
|
|
Deferred income tax liabilities
|
|
|
(147,284
|
)
|
|
|
(245,040
|
)
|
|
|
(7,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax
assets, net
|
|
$
|
562,198
|
|
|
|
352,758
|
|
|
|
10,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets,
gross...
|
|
$
|
4,205,764
|
|
|
|
7,260,298
|
|
|
|
221,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax
liabilities, gross
|
|
$
|
158,865
|
|
|
|
274,902
|
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowance for
deferred income tax assets
|
|
$
|
3,472,538
|
|
|
|
6,596,233
|
|
|
|
201,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-142
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
(d)
|
As of December 31, 2004 and 2005, the components of
deferred income tax assets or liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
Effects
|
|
|
|
|
|
Effects
|
|
|
|
|
|
Effects
|
|
|
|
|
|
|
on
|
|
|
|
|
|
on
|
|
|
|
|
|
on
|
|
|
|
|
|
|
income
|
|
|
|
|
|
income
|
|
|
|
|
|
income
|
|
|
|
Amount
|
|
|
tax
|
|
|
Amount
|
|
|
tax
|
|
|
Amount
|
|
|
tax
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment tax credit
|
|
$
|
4,105,880
|
|
|
|
4,105,880
|
|
|
|
7,023,377
|
|
|
|
7,023,377
|
|
|
|
214,127
|
|
|
|
214,127
|
|
Difference in depreciation expense
for tax purposes and financial accounting purposes
|
|
|
13,075
|
|
|
|
3,269
|
|
|
|
8,030
|
|
|
|
2,008
|
|
|
|
245
|
|
|
|
61
|
|
Pension expense in excess of tax
limit
|
|
|
32,056
|
|
|
|
8,014
|
|
|
|
50,594
|
|
|
|
12,648
|
|
|
|
1,543
|
|
|
|
386
|
|
Loss carryforwards
|
|
|
189,657
|
|
|
|
47,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange loss
|
|
|
86,083
|
|
|
|
21,521
|
|
|
|
818,944
|
|
|
|
204,736
|
|
|
|
24,968
|
|
|
|
6,242
|
|
Unrealized operating expense
|
|
|
78,665
|
|
|
|
19,666
|
|
|
|
70,114
|
|
|
|
17,529
|
|
|
|
2,138
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets, gross
|
|
|
|
|
|
|
4,205,764
|
|
|
|
|
|
|
|
7,260,298
|
|
|
|
|
|
|
|
221,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gain
|
|
$
|
635,458
|
|
|
|
158,864
|
|
|
|
1,099,609
|
|
|
|
274,902
|
|
|
|
33,525
|
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
Under the ROC Statute for Upgrading Industries, the
Companys unused investment tax credits as of
December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining deductible
|
|
Year
|
|
Amount
|
|
|
Amount
|
|
|
Expiry Year
|
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
Investment tax credit for
purchasing machinery and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
$
|
427,988
|
|
|
|
13,048
|
|
|
|
2007
|
|
2004
|
|
|
3,241,691
|
|
|
|
98,832
|
|
|
|
2008
|
|
2005
|
|
|
3,353,698
|
|
|
|
102,247
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,023,377
|
|
|
|
214,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROC Income Tax Law provides investment tax credit to companies
that purchase certain type of equipment and machinery. Such tax
credit can be used to reduce up to 50% of income tax liability
arising from the Companys products produced using such
machinery for four years starting from the year of equipment
purchase, and can be used to reduce up to 100% of such income
tax liability in the fifth year.
(f) The Companys income tax returns have not been
examined or assessed yet by the ROC tax authority.
(g) Imputation credit account (ICA) and creditable ratio
|
|
|
|
(h)
|
As of December 31, 2004 and 2005, the balance of the
Companys ICA amounted to NT$196 and NT$27,822,
respectively. The Companys creditable ratio related to
2005 was 0.06%. There were no undistributed earnings belonging
to the years before 1997.
|
|
|
|
|
(i)
|
The stockholders approved a resolution during their meetings on
June 29, 2005, and October 18, 2004, to allow the
Company to avail itself of the Income Tax Holiday for investment
projects under Article 9 of the Statute for Upgrading
Industries. The Company has availed itself of the five-year
Income Tax Holiday
|
F-143
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
|
|
|
commencing from January 1, 2005 and June 1, 2005,
respectively, for the taxable income that is derived only from
the sale of products produced from its Fab 1-Phases 1 and 2
investment project. This income tax holiday reduced the
Companys effective income tax rate to as low as 5% in
2005. As of December 31, 2005, the exemption from
profit-seeking enterprise income tax (Income Tax
Holiday) under Article 9 of the Statute for Upgrading
Industries for the aforesaid investment projects had the
following duration.
|
|
|
|
|
|
Duration of Income Tax Holiday
|
|
Inotera Fab-1
Phase 1
|
|
January 2005-December 2009
|
Inotera Fab-1
Phase 2
|
|
June 2005-May 2009
|
|
|
(14)
|
Stockholders
Equity
|
(a) Capital stock
During their meetings on February 6, April 20,
July 28, and November 10, 2004, the board of directors
approved resolutions allowing the Company to increase its
capital by issuing 666,670 thousand, 294,120 thousand, 315,790
thousand, and 361,910 thousand shares of common stock, NT$15,
NT$17, NT$19, and NT$21 per share, respectively. The
capital increase dates were February 17, May 20,
August 3, and December 30, 2004, respectively, and
were approved by and registered with the authorities.
During their meeting on June 29, 2005, the stockholders
approved a resolution allowing the Company to further increase
its capital by NT$132,940 by declearing stock dividends out of
its 2004 earnings. This capital increase was approved by the
Securities and Futures Bureau (SFB) on July 12, 2005. On
July 18, 2005, the board of directors resolved to set
August 9, 2005 as the effective date for paying this stock
dividend by issuing new shares. Following the issuance of these
new shares, the total amount of the Companys outstanding
common stock was NT$25,109,540.
As of December 31, 2004 and 2005, the Companys total
authorized capital amounted to NT$30,000,000 and NT$40,000,000,
respectively, and total issued common stock amounted to
NT$24,976,600 and NT$25,109,540, respectively, with $10 par
value per share.
(b) Capital surplus
As of December 31, 2004 and 2005, the capital surplus
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Paid-in capital in excess of par
value
|
|
$
|
15,548,660
|
|
|
|
15,548,660
|
|
|
|
474,045
|
|
According to the ROC Company Law, realized capital surplus can
be transferred to common stock after deducting the accumulated
deficit, if any. Realized capital surplus includes the
additional paid-in capital from issuance of common stock in
excess of the common stocks par value, donation from
others, and additional paid-in capital treasury
stock.
(c) Earnings appropriation and distribution
The Companys annual net profit, after providing for income
tax and covering the losses of previous years, shall be first
set aside for legal reserve at the rate of 10% thereof until the
accumulated balance of legal reserve equals the total issued
capital. The remaining net profit, if any, after providing for
any special reserves or reserving certain undistributed earnings
for business purposes shall be distributed as follows:
|
|
|
|
(i)
|
0.1%-1% as bonuses for directors and supervisors
|
|
|
(ii)
|
1%-8% as employee bonuses
|
|
|
(iii)
|
The remainder as dividends and bonuses for stockholders,
distributed in the form of cash dividends
and/or stock
dividends.
|
F-144
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
Because it belongs to a highly capital-intensive industry with
strong growth potential, the Company adopts a dividend
distribution policy which is in line with its capital budget and
long-term financial plans. This policy requires, among other
things that the distribution of cash dividends shall be at least
fifty percent (50%) of the Companys total dividends for
the year.
Based on the resolutions approved by the stockholders during
their meeting on June 29, 2005, the Company distributed its
2004 earnings as follows:
|
|
|
|
(i)
|
Legal reserve (10% of net income): NT$90,130
|
|
|
(ii)
|
Voluntary reserve: NT$542,605
|
|
|
(iii)
|
Remuneration of directors and supervisors: NT$2,686
|
|
|
(iv)
|
Employees bonus cash: NT$8,057
|
|
|
(v)
|
Employees bonus stock: NT$8,057
|
|
|
(vi)
|
Stockholders dividend stock (0.05 NT dollar
per share): NT$124,883
|
|
|
(vii)
|
Stockholders dividend cash (0.05 NT dollar per
share): NT$124,883
|
If the remuneration of directors and supervisors and the
employees bonus were distributed by cash and recorded as
compensation expenses, the retroactive earning per share in 2004
would decrease from NTD$0.51 to NTD$0.50. The distributed shares
of the employees stock bonus in 2004 were 0.03% of the
outstanding shares.
The appropriation of the Companys 2005 net income for
the employees bonus and remuneration of directors and
supervisors is subject to a resolution to be passed and approved
by the Companys directors and stockholders during their
meetings normally held within six months after the year-end
closing. Following the approval of this resolution, related
information can be obtained from the public information website.
For the years ended December 31, 2004 and 2005, the
weighted-average number of outstanding common shares and the
common stock equivalents for calculating the basic EPS consisted
of the following (expressed in thousands of New Taiwan Dollars
and shares, except for earnings per share expressed in New
Taiwan Dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
Amount
|
|
|
|
Earnings per share
|
|
|
Income before
|
|
Income after
|
|
Total shares
|
|
Before
|
|
After
|
|
|
income tax
|
|
income tax
|
|
outstanding
|
|
income tax
|
|
income tax
|
|
Basic earnings per
share retroactively adjusted
|
|
$
|
901,347
|
|
|
|
901,301
|
|
|
|
1,767,217
|
|
|
|
0.51
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NTD
|
|
|
2005
|
|
|
Amount
|
|
|
|
Earnings per share
|
|
|
Income before
|
|
Income after
|
|
Total shares
|
|
Before
|
|
After
|
|
|
income tax
|
|
income tax
|
|
outstanding
|
|
income tax
|
|
income tax
|
|
Basic earnings per
share retroactively adjusted
|
|
$
|
6,267,119
|
|
|
|
5,929,758
|
|
|
|
2,510,954
|
|
|
|
2.50
|
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD
|
|
|
Basic earnings per
share retroactively adjusted
|
|
$
|
191,070
|
|
|
|
180,785
|
|
|
|
2,510,954
|
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-145
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
|
|
(16)
|
Financial
Instrument Information
|
(a) Derivative financial instruments
|
|
|
|
(i)
|
In July 2004, the Company entered into two Euro forward exchange
contracts to hedge the risk of Euro payments with Chinatrust
Commercial Bank and Taishin International Bank, respectively.
The foreign exchange loss thereon amounted to NT$1,387, which
was recorded under other losses on the income statement. These
contracts had the same notional amount of EUR4,000 thousand and
were settled in advance on August 9, 2004.
|
|
|
|
|
(ii)
|
The Company entered into four interest rate swap agreements with
Taipei Fubon Bank and three other banks to hedge the risk from
fluctuations of interest rates for foreign long-term loans which
were obtained by the Company in 2004. As of December 31,
2005 and 2004, the notional amounts of the outstanding interest
rate swap agreements amounted to US$130,000 and US$130,000,
respectively. Interest expenses incurred from these interest
hedging activities amounted to NT$12,822 and NT$36,580,
respectively. The net interest receivable and a payable as of
December 31, 2005 and 2004, amounted to interest receivable
of NT$1,348 and interest payable of NT$20,554, respectively.
|
|
|
|
|
(iii)
|
The Company entered into seventeen forward foreign exchange
contracts with Standard Chartered Bank and three other banks to
hedge the risk of foreign currency exchange rate fluctuations
for foreign long-term loans. The deferred exchange gain for the
year ended December 31, 2005, amounted to NT$1,313,265, of
which NT$287,851 was amortized as non-operating income. The
remaining unamortized balance was NT$1,025,414 as of
December 31, 2005. As of December 31, 2005, the
balance of forward foreign exchange contracts amounted to
US$650,000, the details of which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
NTD
|
|
|
USD
|
|
|
Forward contract receivables
|
|
$
|
21,352,500
|
|
|
|
650,991
|
|
Payables for forward purchases
|
|
|
(19,059,075
|
)
|
|
|
(581,069
|
)
|
Deferred exchange gains
|
|
|
(1,025,414
|
)
|
|
|
(31,263
|
)
|
|
|
|
|
|
|
|
|
|
Forward contract receivable, net
|
|
$
|
1,268,011
|
|
|
|
38,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iv)
|
The Company entered into five foreign currency swap agreements
with Citibank to hedge the foreign currency exchange risk for
Euro payments. There was no unsettled balance as of
December 31, 2005. For the year ended December 31,
2005, the exchange loss incurred amounted to NT$3,004 and
recorded as other losses.
|
|
|
|
|
(v)
|
The Companys hedging strategy is to cover the biggest part
of the risk. Because the foreign forward exchange rate is fixed,
the cash flow risk is low. Credit risk is the risk that a
counter-party will default on its obligation. The banks with
which the Company entered into derivative transactions are all
well-known financial institutions. Therefore, the Company does
not expect the banks to default. As a result, the Company
estimates credit risk to be reasonably low.
|
F-146
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(b) Fair value of financial instruments
In accordance with ROC SFAS No. 27, Disclosure
of Financial Instruments, the fair value of the
Companys derivative and non-derivative financial
instruments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
Financial Instruments
|
|
value
|
|
|
value
|
|
|
value
|
|
|
value
|
|
|
value
|
|
|
value
|
|
|
Forward foreign exchange contracts
|
|
$
|
|
|
|
|
|
|
|
|
1,268
|
|
|
|
912
|
|
|
|
39
|
|
|
|
28
|
|
Interest rate swap agreements
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37
|
)
|
|
|
1,268
|
|
|
|
951
|
|
|
|
39
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The methods and assumptions used to estimate the fair value of
each class of financial instruments were as follows:
|
|
|
|
(i)
|
The book value is believed to be not materially different from
their fair value because the maturity dates of short-term
financial instruments are within one year from the balance sheet
date. Therefore, their book value is adopted as a reasonable
basis for determining their fair value. This principle is
applied in estimating the fair value of short-term financial
instruments including cash and cash equivalents, account
receivables, account payables, accrued expenses and short-term
loans.
|
|
|
|
|
(ii)
|
Refundable deposits and guarantee deposits are collected or
refunded in cash based on their amount. Therefore, their book
value is equivalent to their fair value.
|
|
|
|
|
(iii)
|
The discounted present value of anticipated cash flows is
adopted as the fair value of long-term debt and corporate bonds
payable. The discounting rates used in calculating the present
value are similar to those of the Companys existing
long-term loans.
|
|
|
|
|
(iv)
|
The fair values of derivative financial instruments are the
estimated amounts expected to be received or to be paid by the
Company assuming that it terminates the contracts on the balance
sheet date. The majority of the Companys derivative
financial instruments have quotations available from financial
institutions which are used in the calculation of the fair value.
|
|
|
|
|
(v)
|
The fair value of letters of credit or endorsements/guarantees
is based on the contract price.
|
|
|
|
|
(c)
|
As of December 31, 2004 and 2005, the fair values of
non-derivative financial instruments were estimated to be equal
to their book values as of the same date.
|
(17) Related-party
Transactions
(a) Names of and relationship with related parties
|
|
|
Name
|
|
Relationship with the Company
|
|
Nan Ya Plastics Corp. (NPC)
|
|
The president of Nan Ya Plastics
Corp. is the chairman of the Company.
|
Nanya Technology Corp. (NTC)
|
|
Major shareholder
|
Infineon Technologies AG (IFX)
|
|
Major shareholder
|
Infineon Technologies Suzhou Co.,
Ltd. (IFSZ)
|
|
Subsidiary of IFX
|
Infineon Technologies, Richmond
(IFR)
|
|
Subsidiary of IFX
|
F-147
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(b) Significant related-party transactions
(i) Sales revenue, and accounts receivable
Significant sales to related parties for the years ended
December 31, 2004 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
% of net
|
|
|
NTD
|
|
|
USD
|
|
|
% of net
|
|
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
Amount
|
|
|
sales
|
|
|
NTC
|
|
$
|
2,985,699
|
|
|
|
50.09
|
|
|
|
11,502,292
|
|
|
|
350,680
|
|
|
|
49.94
|
|
IFX
|
|
|
2,975,131
|
|
|
|
49.91
|
|
|
|
9,180,137
|
|
|
|
279,882
|
|
|
|
39.86
|
|
IFSZ
|
|
|
|
|
|
|
|
|
|
|
2,347,571
|
|
|
|
71,572
|
|
|
|
10.19
|
|
IFR
|
|
|
|
|
|
|
|
|
|
|
2,203
|
|
|
|
67
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,960,830
|
|
|
|
100.00
|
|
|
|
23,032,203
|
|
|
|
702,201
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances of accounts receivable resulting from the above
transactions as of December 31, 2004 and 2005, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
|
|
|
NTD
|
|
|
USD
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
NTC
|
|
$
|
1,354,917
|
|
|
|
52.32
|
|
|
|
2,362,640
|
|
|
|
72,032
|
|
|
|
46.78
|
|
IFX
|
|
|
1,234,586
|
|
|
|
47.68
|
|
|
|
1,898,230
|
|
|
|
57,873
|
|
|
|
37.59
|
|
IFSZ
|
|
|
|
|
|
|
|
|
|
|
789,407
|
|
|
|
24,067
|
|
|
|
15.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,589,503
|
|
|
|
100.00
|
|
|
|
5,050,277
|
|
|
|
153,972
|
|
|
|
100.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The normal credit term with related parties above is
60 days from delivery date.
(ii) Purchases and accounts payable
Significant purchases from related parties for the years ended
December 31, 2004 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
% of net
|
|
|
NTD
|
|
|
USD
|
|
|
% of net
|
|
|
|
Amount
|
|
|
purchases
|
|
|
Amount
|
|
|
Amount
|
|
|
purchases
|
|
|
NPC
|
|
$
|
165,793
|
|
|
|
3.63
|
|
|
|
49,827
|
|
|
|
1,519
|
|
|
|
0.51
|
|
IFX
|
|
|
562,897
|
|
|
|
12.31
|
|
|
|
464,481
|
|
|
|
14,161
|
|
|
|
4.71
|
|
NTC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
728,690
|
|
|
|
15.94
|
|
|
|
514,308
|
|
|
|
15,680
|
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-148
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The balances of accounts payable resulting from the above
transactions as of December 31, 2004 and 2005, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
% of total
|
|
|
|
|
|
|
|
|
% of total
|
|
|
|
|
|
|
accounts
|
|
|
|
|
|
|
|
|
accounts
|
|
|
|
NTD
|
|
|
and notes
|
|
|
NTD
|
|
|
USD
|
|
|
and notes
|
|
|
|
Amount
|
|
|
payable
|
|
|
Amount
|
|
|
Amount
|
|
|
payable
|
|
|
NPC
|
|
$
|
88,654
|
|
|
|
0.98
|
|
|
|
32,420
|
|
|
|
988
|
|
|
|
0.80
|
|
IFX
|
|
|
42,385
|
|
|
|
0.47
|
|
|
|
22,792
|
|
|
|
695
|
|
|
|
0.56
|
|
NTC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,039
|
|
|
|
1.45
|
|
|
|
55,212
|
|
|
|
1,683
|
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company pays NPC on the 15th of the month following the
month of purchase, and pays IFX within 30 days of the
invoice date. Purchasing prices and payment terms of purchases
from related parties are not materially different from those of
non-related general suppliers.
(iii) Due to related parties
The details of financial borrowing from related parties for the
year ended December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Maximum daily
|
|
|
Balance on
|
|
|
|
|
|
|
|
|
|
balance
|
|
|
December 31
|
|
|
|
|
|
|
|
Related party
|
|
NTD
|
|
|
NTD
|
|
|
Interest rate
|
|
|
Interest expense
|
|
|
NTC
|
|
$
|
315,500
|
|
|
|
|
|
|
|
2.281-2.849
|
%
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No financial borrowing was obtained from related parties for the
year ended December 31, 2005.
As of December 31 2004, the Company had interest payable of
NT$9 to NTC which was accounted as other payables
related parties.
(iv) Acquisition of property, plant and equipment
In May 2005, the Company purchased from NTC six parcels of land
numbered 347 and five other numbers which are located in Hwa-Ya,
Kueishan, Taoyuan County for NT$1,575,000. As of
December 31, 2005, the Company had fully paid the purchase
price.
In June 2005, the Company purchased electronic equipment from
NTC for NT$73,827. As of December 31, 2005, the Company had
fully paid the purchase price.
F-149
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(v) Training expense
NTC and IFX both transferred a number of their employees to the
Company to enable the Company to maintain a sufficient number of
high-quality and loyal staff. Consequently, the Company is
required to reimburse NTC and IFX for the loss of their
experienced employees an amount equal to 6 months
salary of those employees. The Company accrued and booked this
expenditure as training expenses for the years ended
December 31, 2004 and 2005 under administrative expenses,
as follows:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Training expense
|
|
|
|
|
Related party
|
|
payable
|
|
|
Training expense
|
|
|
IFX
|
|
$
|
|
|
|
|
3,718
|
|
NTC
|
|
|
|
|
|
|
6,960
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
10,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Training expense
|
|
|
|
|
Related party
|
|
payable
|
|
|
Training expense
|
|
|
NTC-NTD
|
|
$
|
|
|
|
|
5,180
|
|
|
|
|
|
|
|
|
|
|
NTC-USD
|
|
$
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
(vi) Lease contracts
Commencing from July 1, 2005, the Company had signed lease
contracts with NTC, as described in notes 7 and 9.
(vii) Other significant transactions
IFX provides some construction, technical and inspection
services, etc., to the Company. As of December 31, 2004 and
2005, the unpaid liability from this transaction amounted to
NT$245,892 and NT$61,757, respectively, which was accounted for
as other payables related parties.
NTC supplies some of the Companys utilities, steam,
purification for waste water, etc. As of December 31, 2004
and 2005, the unpaid liability from this transaction amounted to
NT$38,629 and NT$20,059, respectively, which was accounted for
as other payables related parties.
NPC rents out dormitory space to the Company. As of
December 31, 2005, the unpaid liability from this
transaction amounted to NT$4,437, which was accounted for as
other payables related parties.
(viii) Contracts with related parties
The Company signed a Product Purchase and Capacity
Reservation Agreement with NTC and IFX. Under this
agreement, these entities are each entitled to a contracted
percentage of the Companys production capacity. The
Company is committed to sell its production to these entities at
a transfer price calculated in accordance with the formula
stated in the agreement. This agreement took effect on
July 15, 2003, and will continue in effect until the
termination by either party with cause or when Joint Venture
Agreement
and/or the
License and Technical Cooperation Agreement between NTC and IFX
are terminated.
The Company signed a Know-How Transfer Agreement
with NTC and IFX. Under this agreement, these entities allowed
the Company to utilize their know-how in the semiconductor
manufacturing process. This contract took effect on
July 15, 2003, and it will continue in effect until either
of the following conditions has been fulfilled: 1) both
corporations decide to terminate their Joint Venture Agreement
or 2) three years after the completion of know-how transfer.
F-150
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
The Company signed a service contract with NTC. Under this
contract, NTC provides transaction support in the following
areas: human resources, finance, engineering and construction,
raw material and inventory, etc. The service fee is charged
based on the actual type of service rendered. The contract took
effect on July 15, 2003, and will continue in effect until
terminated mutually by both parties.
Please see note 11 for information on the Companys
assets pledged to secure loans.
|
|
(19)
|
Commitments
and Contingencies
|
As of December 31, 2005, in addition to those described in
the financial statements and accompanying notes, the Company had
outstanding letters of credit of approximately USD13,197,
JPY342,070 thousand and EUR674,000.
(20) Significant
Disaster Loss: None.
|
|
|
|
(a)
|
The Board of Directors of the Company resolved to adopt a
Deferred Stock Purchase Plan (the Plan). Under this
Plan, the employees of the Company are allowed to purchase the
Companys shares which are being held by Hwa-Keng
Investment Corp., a corporate stockholder of the Company,
following the approval thereof by the board of directors and
stockholders of Hwa-Keng Investment Corp. Also, the Plan
requires that its actual implementation shall be made within
4 weeks after the approval of the Companys stock
listing by the SFB. The purchase price is the higher of
NT$15 per share or the net book value per share of the
Company at the time of the Plans execution plus 10%
premium thereof. There were 71,124 thousand Company shares which
were made available for purchase by the employees. On
January 6, 2006, the Company received the approval from the
SFB, and implemented the Plan on the same day. As of
February 9, 2006, Hwa-Keng Investment Corp. sold 64,032,908
Company shares at NT$20.07 per share to the employees of
the Company, following the Companys implementation of the
Plan.
|
|
|
|
|
(b) i.
|
On January 12, 2006, the Company was granted approval of
its application to list its shares on the Taiwan Stock Exchange
(TSE). The Companys shares were initially listed on the
TSE on March 17, 2006.
|
|
|
|
|
ii.
|
On February 6, 2006 and in accordance with the resolution
approved by the Shareholders on September 27, 2005, the
Board of Directors approved the Initial Public Offering of the
Company shares through the issuance of 200 million Company
shares for cash at proposed price of NT$33 per share on the
TSE. The offering occurred on March 17, 2006.
|
|
|
iii.
|
On March 9, 2006 and in accordance with the resolution
approved by the Shareholders on September 27, 2005, the
Board of Directors approved the offering of Global Depositary
Shares (GDS) through the issuance of 335 million to
400 million Company shares for cash. The offering is still
pending.
|
F-151
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(a) The Companys personnel, depreciation, and
amortization expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Cost of goods
|
|
|
Operating
|
|
|
|
|
|
|
sold
|
|
|
expenses
|
|
|
Total
|
|
|
|
|
|
|
NTD
|
|
|
|
|
|
Personnel expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
470,957
|
|
|
|
447,971
|
|
|
|
918,928
|
|
Labor and health insurance
|
|
|
28,996
|
|
|
|
22,486
|
|
|
|
51,482
|
|
Pension expenses
|
|
|
14,535
|
|
|
|
15,559
|
|
|
|
30,094
|
|
Other personnel expenses
|
|
|
14,076
|
|
|
|
11,108
|
|
|
|
25,184
|
|
Depreciation expenses
|
|
|
2,008,139
|
|
|
|
33,495
|
|
|
|
2,041,634
|
|
Amortization expenses
|
|
|
12,269
|
|
|
|
|
|
|
|
12,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Cost of goods
|
|
|
Operating
|
|
|
|
|
|
|
sold
|
|
|
expenses
|
|
|
Total
|
|
|
|
|
|
|
NTD
|
|
|
|
|
|
Personnel expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
1,048,968
|
|
|
|
192,903
|
|
|
|
1,241,871
|
|
Labor and health insurance
|
|
|
63,796
|
|
|
|
8,084
|
|
|
|
71,880
|
|
Pension expenses
|
|
|
48,974
|
|
|
|
9,825
|
|
|
|
58,799
|
|
Other personnel expenses
|
|
|
29,724
|
|
|
|
3,628
|
|
|
|
33,352
|
|
Depreciation expenses
|
|
|
8,049,956
|
|
|
|
49,595
|
|
|
|
8,099,551
|
|
Amortization expenses
|
|
|
36,165
|
|
|
|
|
|
|
|
36,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Cost of goods
|
|
|
Operating
|
|
|
|
|
|
|
sold
|
|
|
expenses
|
|
|
Total
|
|
|
|
|
|
|
USD
|
|
|
|
|
|
Personnel expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
31,981
|
|
|
|
5,881
|
|
|
|
37,862
|
|
Labor and health insurance
|
|
|
1,945
|
|
|
|
246
|
|
|
|
2,191
|
|
Pension expenses
|
|
|
1,493
|
|
|
|
300
|
|
|
|
1,793
|
|
Other personnel expenses
|
|
|
906
|
|
|
|
111
|
|
|
|
1,017
|
|
Depreciation expenses
|
|
|
245,425
|
|
|
|
1,512
|
|
|
|
246,937
|
|
Amortization expenses
|
|
|
1,103
|
|
|
|
|
|
|
|
1,103
|
|
(b) As discussed in note 17(b)(viii) to the financial
statements, the Company signed a service contract with NTC,
under which the General Administrative Office of the Formosa
Group is entrusted to provide certain administrative services.
For the years ended December 31, 2004 and 2005, the service
expenses paid to the General Administrative Office of the
Formosa Group amounted to NT$16,507 and NT$25,631, respectively.
(a) Industrial information
The Companys main operating activities are to produce and
to sell semiconductor products, which belong to a single
industrial segment.
F-152
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
(b) Geographic information
No geographic information was disclosed because the Company has
no foreign operating segments.
(c) Export sales information
Export sales to geographic areas in 2004 and 2005 were
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
NTD
|
|
|
net
|
|
|
NTD
|
|
|
USD
|
|
|
net
|
|
Destination area
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
Amount
|
|
|
sales
|
|
|
Europe
|
|
$
|
2,975,131
|
|
|
|
49.91
|
|
|
|
9,180,137
|
|
|
|
279,882
|
|
|
|
39.86
|
|
Asia
|
|
|
|
|
|
|
|
|
|
|
2,347,571
|
|
|
|
71,572
|
|
|
|
10.19
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
2,203
|
|
|
|
67
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,975,131
|
|
|
|
49.91
|
|
|
|
11,529,911
|
|
|
|
351,521
|
|
|
|
50.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Major clients
The major clients of the Company for the years 2004 and 2005
were summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
NTD
|
|
|
net
|
|
|
NTD
|
|
|
USD
|
|
|
net
|
|
|
|
Amount
|
|
|
sales
|
|
|
Amount
|
|
|
Amount
|
|
|
sales
|
|
|
NTC
|
|
$
|
2,985,699
|
|
|
|
50.09
|
|
|
|
11,502,292
|
|
|
|
350,680
|
|
|
|
49.94
|
|
IFX
|
|
|
2,975,131
|
|
|
|
49.91
|
|
|
|
9,180,137
|
|
|
|
279,882
|
|
|
|
39.86
|
|
IFSZ
|
|
|
|
|
|
|
|
|
|
|
2,347,571
|
|
|
|
71,572
|
|
|
|
10.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,960,830
|
|
|
|
100.00
|
|
|
|
23,030,000
|
|
|
|
702,134
|
|
|
|
99.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24)
|
Summary
of Significant Difference Between Accounting Principles Followed
by the Company and Generally Accepted Accounting Principles in
the United States of America
|
The Companys financial statements have been prepared in
accordance with ROC GAAP. ROC GAAP varies in certain significant
respects from accounting principles generally accepted in the
United States of America (U.S. GAAP). A brief
description of certain significant differences between ROC GAAP
and U.S. GAAP are set out below.
Certain differences which would have a significant effect on the
Companys results of operations and stockholders
equity are as follows:
a. Derivative Financial Instrument Transactions
Under ROC GAAP, there are no specific rules related to
accounting for derivative financial instruments, nor criteria
for hedge accounting. Therefore, companies have flexibility in
choosing when to recognize derivative financial instruments and
when to follow hedge accounting versus fair value accounting for
such instruments.
U.S. GAAP contains detailed rules as to when hedge
accounting is appropriate. As a consequence, certain derivative
contracts such as foreign currency forward contracts and
interest rate swaps included in the Companys balance sheet
would be recorded at the derivatives contracts market rate
as of the reporting date, resulting in a decrease in other
receivables as reported under the ROC GAAP balance sheet.
F-153
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
b. Bonuses to Employees, Directors and Supervisors
Under the ROC regulations and the Companys Articles of
Incorporation, a portion of distributable earnings should be set
aside as bonuses to employees, directors and supervisors.
Bonuses to directors and supervisors are always paid in cash.
However, bonuses to employees may be granted in cash or shares
or both. All of these appropriations, including share bonuses
which are valued at par value of NT$10, are charged against
retained earnings, after such appropriations are formally
approved by the shareholders in the following year.
Under U.S. GAAP, bonuses and remuneration are generally
expensed as services are rendered. Also under U.S. GAAP,
bonuses which are paid in the form of Company shares are
recorded within equity at fair market value, with a
corresponding charge to earnings for the difference between the
fair value of the shares at the date of grant and the price paid
by the employee, if any.
c. Surtax
Companies in the ROC are subject to a 10% surtax on
undistributed tax basis profits earned after December 31,
1997. If the undistributed tax earnings are distributed in the
following year, the 10% surtax is not due. Under ROC GAAP,
income tax expense is recorded in the statement of operations in
the following year if the earnings are not distributed to the
shareholders.
Under U.S. GAAP, a 10% surtax leviable on the undistributed
tax earnings is recorded in the statement of income in the year
when the profits were earned. The income tax expense, including
the tax effects of temporary differences, in such year is
measured by using the rate that includes this 10% surtax.
d. Capital contribution
Under ROC GAAP, the expatriate employees payroll cost paid by a
foreign joint venture partner/shareholder is not recorded nor
treated as the shareholders capital contribution in the
Company.
Under U.S. GAAP, the expatriate employees payroll cost paid
by a foreign joint venture partner would be recorded as expense
and treated as capital contribution in the Company.
e. Lease
Under ROC GAAP, the estimated fair value of a partial leased
building used in evaluating the lease classification described
under note 2 (g) to the financial statements can be
based on the proportionate fair value of the entire building.
Under U.S. GAAP, the fair value of a partial lease building
used in determining the lease classification must be based on
the specific fair value of the leased asset. In the event that
the fair value of the partial leased building can not be
determined, the lease of a partial building should be treated as
an operating lease. As a result, the leased asset described in
note 7 to the financial statements, which was treated as a
capital lease under ROC, would be treated as an operating lease
under U.S. GAAP.
f. Related party
Under ROC GAAP, the transaction with the Formosa Group as
described in note 22(b) is not treated as a related party
transaction.
Under U.S. GAAP, the transaction would be considered a
related party transaction.
g. Earnings per share
Under ROC GAAP, earnings per share in calculated based on the
weighted average number of outstanding shares. The number of
outstanding shares is retroactively adjusted for stock dividends
and new common stock issued through unappropriated earnings and
capital surplus.
F-154
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
Under U.S. GAAP, when a simple capital structure exists,
basic earnings per share is calculated using the weighted
average number of common shares outstanding. The number of
outstanding shares is not retroactively adjusted for stock
dividends.
The following reconciles net income and shareholders entity
under ROC GAAP as reported in the audited financial statements
to the net income and shareholders equity amounts
determined under U.S. GAAP, giving effect to adjustments
for the difference listed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Net income
|
|
$
|
901,301
|
|
|
$
|
5,929,758
|
|
|
|
180,785
|
|
Net income based on ROC GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Foreign currency forward
contracts-mark-to-market
|
|
|
|
|
|
|
(355,857
|
)
|
|
|
(10,849
|
)
|
a. Interest rate
swaps-mark-to-market
|
|
|
(53,763
|
)
|
|
|
75,943
|
|
|
|
2,315
|
|
b. Bonuses to employees
|
|
|
(24,976
|
)
|
|
|
(298,866
|
)
|
|
|
(9,112
|
)
|
b. Remuneration to directors
and supervisors
|
|
|
(2,686
|
)
|
|
|
(3,736
|
)
|
|
|
(114
|
)
|
c. 10% surtax on
undistributed tax earnings
|
|
|
|
|
|
|
(565,812
|
)
|
|
|
(17,250
|
)
|
c. Tax expense
|
|
|
50,725
|
|
|
|
588,522
|
|
|
|
17,943
|
|
d. Expatriate employees
payroll cost paid by IFX
|
|
|
(156,076
|
)
|
|
|
(168,697
|
)
|
|
|
(5,143
|
)
|
e. Operating lease
|
|
|
|
|
|
|
(4,742
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net income
|
|
|
(186,776
|
)
|
|
|
(733,245
|
)
|
|
|
(22,355
|
)
|
Net income based on U.S. GAAP
|
|
$
|
714,525
|
|
|
$
|
5,196,513
|
|
|
|
158,430
|
|
Earnings per share
|
|
$
|
0.41
|
|
|
$
|
2.08
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity based on
ROC GAAP
|
|
$
|
41,442,152
|
|
|
$
|
47,236,284
|
|
|
|
1,440,131
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Foreign currency forward
contracts
mark-to-market
|
|
|
|
|
|
|
(355,857
|
)
|
|
|
(10,849
|
)
|
a. Interest rate
swaps
mark-to-market
|
|
|
(37,306
|
)
|
|
|
38,637
|
|
|
|
1,178
|
|
b. Bonuses to employees
|
|
|
(24,976
|
)
|
|
|
(298,866
|
)
|
|
|
(9,112
|
)
|
b. Remuneration to directors
and supervisors
|
|
|
(2,686
|
)
|
|
|
(3,736
|
)
|
|
|
(114
|
)
|
c. 10% surtax on
undistributed tax earnings
|
|
|
|
|
|
|
(565,812
|
)
|
|
|
(17,250
|
)
|
c. Tax expense
|
|
|
50,725
|
|
|
|
639,247
|
|
|
|
19,489
|
|
d. Expatriate employees
payroll cost paid by IFX
|
|
|
(156,076
|
)
|
|
|
(324,773
|
)
|
|
|
(9,902
|
)
|
d. Contributed capital (net
of tax) arising from employees payroll paid by IFX
|
|
|
105,351
|
|
|
|
219,221
|
|
|
|
6,684
|
|
e. Operating lease
|
|
|
|
|
|
|
(4,742
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in shareholders
equity
|
|
|
(64,968
|
)
|
|
|
(656,681
|
)
|
|
|
(20,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity based on
U.S. GAAP
|
|
$
|
41,377,184
|
|
|
$
|
46,579,603
|
|
|
|
1,420,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in shareholders
equity based on U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
11,957,098
|
|
|
$
|
41,377,184
|
|
|
|
1,261,500
|
|
Issuance of common stock
|
|
|
28,600,210
|
|
|
|
|
|
|
|
|
|
Bonus to stockholders
|
|
|
|
|
|
|
(124,883
|
)
|
|
|
(3,807
|
)
|
Bonus share issued at a premium to
the employees
|
|
|
|
|
|
|
16,919
|
|
|
|
516
|
|
Contributed capital (net of tax)
arising from employees payroll paid by IFX
|
|
|
105,351
|
|
|
|
113,870
|
|
|
|
3,471
|
|
Net income for the twelve months
|
|
|
714,525
|
|
|
|
5,196,513
|
|
|
|
158,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
41,377,184
|
|
|
$
|
46,579,603
|
|
|
|
1,420,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-155
INOTERA
MEMORIES, INC.
Notes to
Financial Statements (Continued)
A reconciliation of the significant balance sheet accounts to
the approximate amounts determined under U.S. GAAP as of
December 31, 2004 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
|
NTD
|
|
|
NTD
|
|
|
USD
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
15,881,410
|
|
|
$
|
20,340,339
|
|
|
|
620,132
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets-Interest rate
swaps
|
|
|
|
|
|
|
38,637
|
|
|
|
1,178
|
|
Financial assets-Foreign currency
forward contracts
|
|
|
|
|
|
|
(355,857
|
)
|
|
|
(10,849
|
)
|
Current portion of lease
receivables
|
|
|
|
|
|
|
(6,690
|
)
|
|
|
(204
|
)
|
Deferred tax assets
current, net
|
|
|
|
|
|
|
11,277
|
|
|
|
344
|
|
Other current assets
|
|
|
|
|
|
|
2,057
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
15,881,410
|
|
|
$
|
20,029,763
|
|
|
|
610,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
51,543,552
|
|
|
$
|
66,162,814
|
|
|
|
2,017,158
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Building and structure
|
|
|
|
|
|
|
281,538
|
|
|
|
8,583
|
|
Other equipment
|
|
|
|
|
|
|
75,555
|
|
|
|
2,304
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(18,414
|
)
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
51,543,552
|
|
|
$
|
66,501,493
|
|
|
|
2,027,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
727,142
|
|
|
$
|
854,936
|
|
|
|
26,065
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
non-current, net
|
|
|
|
|
|
|
239,512
|
|
|
|
7,302
|
|
Lease Receivables long
term
|
|
|
|
|
|
|
(338,788
|
)
|
|
|
(10,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
727,142
|
|
|
$
|
755,660
|
|
|
|
23,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
11,996,800
|
|
|
$
|
13,903,989
|
|
|
|
423,902
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees bonus
|
|
|
24,976
|
|
|
|
298,866
|
|
|
|
9,112
|
|
Remuneration to directors and
supervisors
|
|
|
2,686
|
|
|
|
3,736
|
|
|
|
114
|
|
10% surtax on undistributed
earnings
|
|
|
|
|
|
|
282,906
|
|
|
|
8,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
12,024,462
|
|
|
$
|
14,489,497
|
|
|
|
441,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
31,332
|
|
|
$
|
52,285
|
|
|
|
1,594
|
|
U.S. GAAP adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial liabilities-IRS
|
|
|
37,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
68,638
|
|
|
$
|
52,285
|
|
|
|
1,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-156
Qimonda
AG
American
Depositary Shares, representing Ordinary Shares,
including any Ordinary Shares issued upon conversion of Debt
Securities
Debt Securities
Guarantees of Debt Securities
Qimonda
Finance LLC
Debt
Securities Guaranteed by Qimonda AG
This prospectus relates to the offer and sale from time to time
of securities by Qimonda AG, a German stock corporation, and
debt securities of Qimonda Finance LLC, a Delaware limited
liability company, that are guaranteed by Qimonda AG.
In addition, Infineon Technologies AG and Infineon Technologies
Investment B.V., an indirect subsidiary of Infineon Technologies
AG incorporated in The Netherlands, which we refer to as the
selling shareholders, may offer American Depositary Shares, or
ADSs, of Qimonda AG from time to time. This may include share
lending arrangements. The ADSs may be evidenced by American
Depositary Receipts, or ADRs. Each ADS will represent one
ordinary share. We will not receive any proceeds from the sale
of our ADSs by the selling shareholders.
When securities are offered using this prospectus, we will
provide you with a prospectus supplement describing the specific
terms of the specific issue of securities, including the
offering price of the securities. You should carefully read this
prospectus and the prospectus supplement relating to the
specific issue of securities, together with the documents we
incorporate by reference, before you decide to invest in any of
these securities.
Our ADSs are listed on the New York Stock Exchange under the
symbol QI.
Investing in our securities involves risks. See
Risk Factors on page 2 of this prospectus and
Risk Factors included in our most recent annual
report on
Form 20-F,
which is incorporated by reference in this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
We may, and any selling shareholder may, offer the securities
independently or together in any combination for sale directly
to purchasers or through underwriters, dealers or agents to be
designated at a future date. See Plan of
Distribution. If any underwriters, dealers or agents are
involved in the sale of any of the securities, their names, and
any applicable purchase price, fee, commission or discount
arrangements between or among them, will be set forth, or will
be calculable from the information set forth, in the applicable
prospectus supplement.
Prospectus dated September 11, 2007.
You should rely on the information contained in this document
or to which we have referred you. We have not authorized anyone
to provide you with information that is different. This document
may only be used where sale of these securities is legally
permitted. The information in this document may only be accurate
on the date of this document.
TABLE OF
CONTENTS
|
|
|
|
|
PROSPECTUS SUMMARY
|
|
|
1
|
|
RISK FACTORS
|
|
|
2
|
|
CAPITALIZATION
|
|
|
3
|
|
SHARE PRICE
|
|
|
4
|
|
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND MARKET DATA
|
|
|
5
|
|
USE OF PROCEEDS
|
|
|
5
|
|
EXPENSES OF THE ISSUE
|
|
|
5
|
|
RECENT DEVELOPMENTS
|
|
|
6
|
|
DESCRIPTION OF ORDINARY SHARES
|
|
|
6
|
|
DESCRIPTION OF AMERICAN DEPOSITARY
SHARES WE OR THE SELLING SHAREHOLDERS MAY OFFER
|
|
|
6
|
|
GENERAL DESCRIPTION OF DEBT
SECURITIES AND GUARANTEES WE MAY OFFER
|
|
|
7
|
|
PLAN OF DISTRIBUTION
|
|
|
13
|
|
ENFORCING CIVIL LIABILITIES
|
|
|
16
|
|
LEGAL MATTERS
|
|
|
16
|
|
EXPERTS
|
|
|
16
|
|
ADDITIONAL INFORMATION
|
|
|
16
|
|
INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE
|
|
|
17
|
|
In this prospectus, references to:
|
|
|
|
|
our company refer to Qimonda AG;
|
|
|
|
we, us, Qimonda AG or
Qimonda refer to Qimonda AG and, unless the context
otherwise requires, to our subsidiaries and our predecessor, the
former Memory Products segment of Infineon;
|
|
|
|
Infineon refer to Infineon Technologies AG, a German
stock corporation and, unless the context otherwise requires, to
its subsidiaries;
|
|
|
|
the Infineon Group refer to Infineon and
Infineons subsidiaries, including Qimonda prior to the
carve-out but excluding Qimonda after the carve-out described
herein;
|
|
|
|
the selling shareholders refer to Infineon
Technologies AG and Infineon Technologies Investment
B.V.; and
|
|
|
|
securities include any security that we or any
selling shareholder might sell under this prospectus or any
prospectus supplement.
|
i
This summary highlights some important information about our
business and this offering. Because it is a summary, it does not
contain all the information you should consider before investing
in our securities. Before making your investment decision, you
should carefully read:
|
|
|
|
|
this entire prospectus, which explains the general terms of the
securities we may offer;
|
|
|
|
the accompanying prospectus supplement, which (i) explains
the specific terms of the particular offering and
(ii) updates and changes information in this prospectus;
|
|
|
|
the documents referred to below in Incorporation of
Certain Information by Reference; and
|
|
|
|
the documents referred to below in Additional
Information.
|
Qimonda
AG
We design semiconductor memory technologies and develop,
manufacture, market and sell a large variety of semiconductor
memory products on a chip, component and module level. We began
operations within the Semiconductor Group of Siemens AG, whose
roots in semiconductor R&D and manufacturing date back to
1952, and operated as the Memory Products segment of Infineon
Technologies AG since its carve-out from Siemens AG in 1999. We
were registered in the commercial register of the local court of
Munich on May 25, 2004 as Invot AG, a German stock
corporation and wholly-owned subsidiary of Infineon Technologies
AG, under number HRB 152545. We changed our name to Qimonda
AG on April 6, 2006. Our principal executive offices are
located at Gustav-Heinemann-Ring 212, 81739 Munich, Germany, and
our telephone number is +49-89-60088-0. Our website is
http://www.qimonda.com.
This website address is included in this prospectus as an
inactive textual reference only. The information and other
content appearing on our website are not part of this
prospectus. Our agent for service of process in the United
States is Qimonda North America Corp., Corporation
Trust Center, 1209 Orange Street, Wilmington, County of New
Castle, Delaware 19801.
Qimonda
Finance LLC
Qimonda Finance LLC was formed by us on July 13, 2006
pursuant to the filing of a certificate of formation with the
Secretary of State of the State of Delaware. Qimonda Finance LLC
is our wholly-owned subsidiary formed for the purpose of raising
funds for us.
Qimonda Finance LLCs principal executive office and postal
address is 3000 CentreGreen Way, Cary, North Carolina, 27513
U.S.A., and its telephone number is +1
919-677-2700.
Qimonda Finance LLCs registered agent in the United States
is Qimonda North America Corp., Attn: General Counsel,
Corporation Trust Center, 1209 Orange Street, Wilmington,
County of New Castle, Delaware 19801.
Ratio of
earnings to fixed charges
The following table shows the ratios of earnings to fixed
charges for Qimonda AG for the fiscal years ended
September 30, 2006, 2005, 2004 and 2003 and for the
nine-month period ended June 30, 2007.
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Nine Months
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Ended June 30,
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Year Ended September 30,
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2007
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2006
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2005
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2004
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2003
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2002
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Ratio of earnings to fixed charges
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5.68
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5.98
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9.06
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2.97
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1.20
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*
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* |
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A ratio for 2002 is not available without undue effort to
properly prepare, compile and verify all of the financial
information needed to calculate the ratio. For more information,
see Selected Combined and Consolidated Financial
Data in our annual report on
Form 20-F
for the year ended September 30, 2006. |
1
Before you invest in our securities, you should carefully
consider the risks involved. Accordingly, you should carefully
consider:
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the information contained in or incorporated by reference into
this prospectus,
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the information contained in or incorporated by reference into
any prospectus supplement relating to specific offerings of
securities,
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the risks described in our Annual Report on
Form 20-F
for our most recent fiscal year and in any Current Report on
Form 6-K,
which we have filed since our most recent Annual Report on
Form 20-F
and which is incorporated by reference into this
prospectus, and
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other risks and other information that may be contained in, or
incorporated by reference from other filings we make with the
SEC, including in any prospectus supplement relating to specific
offerings of securities.
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The discussion of risks related to our business contained in or
incorporated by reference into this prospectus or into any
prospectus supplement are those significant risks, then known
and specific to us, that we believe are relevant to an
investment in our securities. If any of these risks materialize,
our business, financial condition or results of operations could
suffer, the price of our securities could decline and you could
lose part or all of your investment.
2
The following table sets forth our actual consolidated
capitalization as of June 30, 2007. You should read this
table in conjunction with Selected Combined and
Consolidated Financial Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our unaudited condensed combined and
consolidated financial statements and related notes included in
the documents incorporated by reference.
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As of June 30, 2007
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(in millions)
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Current maturities of long-term
debt(1)
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21
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Long-term
debt(1)
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128
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Shareholders equity:
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Ordinary share capital
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684
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Additional paid-in capital
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3,113
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Retained earnings
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240
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Accumulated other comprehensive
loss
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(229
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Total shareholders equity
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3,808
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Total capitalization
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3,936
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(1) |
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As of June 30, 2007, we had a 124 million
project-related term loan for our production facility in
Portugal, of which 21 is classified as current maturity,
as it is payable in March 2008, and a 25 million note
payable to a government entity in connection with our Richmond
plant. Both loans are unsecured. The term loan is unguaranteed. |
3
ADSs representing our companys shares have traded on the
New York Stock Exchange since August 9, 2006. The table
below sets forth, for the periods indicated, the high and low
closing sales prices for the ADSs on the New York Stock Exchange:
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Price per ADS in
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U.S. dollars
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High
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Low
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August 2006 (beginning August 9)
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$
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16.28
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$
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13.54
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September 2006
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$
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17.91
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$
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15.90
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October 2006
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$
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17.05
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$
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13.95
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November 2006
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$
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18.85
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$
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14.11
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December 2006
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$
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18.65
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$
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17.00
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January 2007
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$
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17.45
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$
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15.17
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February 2007
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$
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15.60
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$
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14.45
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March 2007
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$
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14.93
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$
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13.81
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April 2007
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$
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15.68
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$
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14.09
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May 2007
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$
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15.16
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$
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14.14
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June 2007
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$
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17.00
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$
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14.94
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July 2007
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$
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17.04
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$
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14.80
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August 2007
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$
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14.81
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$
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12.20
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September 2007 (through
September 10, 2007)
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$
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13.42
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$
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12.65
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On September 10, 2007, the closing sales price per ADS on
the New York Stock Exchange was $12.87.
4
SPECIAL
NOTE REGARDING
FORWARD-LOOKING STATEMENTS AND MARKET DATA
This prospectus, any accompanying prospectus supplement and the
information incorporated by reference in either document contain
forward-looking statements. These forward-looking statements
include statements regarding our financial position; our
expectations concerning future operations, margins,
profitability, liquidity and capital resources; our business
strategy and other plans and objectives for future operations;
and all other statements that are not historical facts. In some
cases, you can identify forward-looking statements by
terminology such as may, will,
should, expects, intends,
plans, anticipates,
believes, thinks, estimates,
seeks, predicts, potential,
and similar expressions. Although we believe that these
statements are based on reasonable assumptions, they are subject
to numerous factors, risks and uncertainties that could cause
actual outcomes and results to be materially different from
those projected. These factors, risks and uncertainties include
those listed under Risk Factors in our Annual Report
for the year ended September 30, 2006, as amended, and
elsewhere in this prospectus. Those factors, among others, could
cause our actual results and performance to differ materially
from the results and performance projected in, or implied by,
the forward-looking statements. As you read and consider this
prospectus, you should carefully understand that the
forward-looking statements are not guarantees of performance or
results.
These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting
on our behalf. New risks and uncertainties arise from time to
time, and we cannot predict those events or how they may affect
us. Except for any ongoing obligations to disclose material
information as required by the U.S. federal securities
laws, we do not have any intention or obligation to update
forward-looking statements after we distribute this prospectus.
In addition, this prospectus contains information concerning the
semiconductor memory products market generally and the DRAM
market in particular, that is forward-looking in nature and is
based on a variety of assumptions regarding the ways in which
the semiconductor market and the DRAM market in particular will
develop. These assumptions have been derived from independent
market research and industry reports referred to in this
prospectus. Some data are also based on our good faith
estimates, derived from our review of internal surveys and the
independent sources listed above.
If any of the assumptions regarding the market are incorrect,
actual market results may differ from those predicted. Although
we do not know what impact any such differences may have on our
business, our future results of operations and financial
condition and the market price of our securities may be
materially adversely affected.
Unless we state otherwise in a prospectus supplement, the net
proceeds from the sale of securities offered through this
prospectus will be used for general corporate purposes. Net
proceeds received by Qimonda Finance LLC from the sale of
securities offered through this prospectus will be on-lent to
our group companies for their general corporate purposes.
We will not receive any proceeds from the sale of ADSs by the
selling shareholders.
The following is a statement of expenses in connection with this
registration statement. All amounts shown are estimates.
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Amount to be paid
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Legal Fees and Expenses
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$
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75,000
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Accounting Fees and Expenses
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50,000
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Total
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125,000
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5
Manufacturing
Alliances
SMIC
In December 2002, we entered into a Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2007, with Semiconductor Manufacturing International
Corporation (SMIC), a Chinese foundry. As amended, this
agreement provides us access to additional DRAM manufacturing
capacity. Under the terms of this agreement, SMIC agreed to
manufacture, and we have agreed to purchase, up to 20,000 wafers
per month at SMICs 200mm production facility in Shanghai
at least until 2007 and up to 15,000 wafers per month at
SMICs 300mm production facility in Beijing at least until
2010. The agreement remains in effect until December 31,
2010 and may be extended. We have the unilateral right to
terminate this agreement in the event that one of our
semiconductor competitors acquires 50% of SMICs voting
shares. In addition, either party may terminate the agreement
upon material breach by the other party of any obligation under
this or the ancillary know-how transfer agreement or upon
bankruptcy or insolvency of the other party.
Under the terms of the agreements, Infineon was free to assign
the agreement to us and has done so in connection with the
carve-out.
Winbond
In May 2002, we entered into a Product Purchase and Capacity
Reservation Agreement with Winbond, a Taiwanese foundry. This
agreement provides us access to additional DRAM production
capacity. Under the terms of this agreement, Winbond agreed to
manufacture, and we agreed to purchase, up to 19,000 wafer
starts per month from Winbonds 200mm production facility
in Hsinchu, Taiwan until 2007. We are currently phasing down our
purchases of 200mm wafers from Winbond.
In August 2004, we entered into an extended Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2006, with Winbond. This agreement gives us access to
additional DRAM production capacity of up to 18,000 wafers per
month in Winbonds 300mm facility in Taiwan until 2009. We
have exceeded this level from time to time. Under the terms of
this agreement we agreed to provide our 80nm DRAM trench
technology to Winbonds 300mm-wafer facility and Winbond
agreed to manufacture DRAMs for computing applications using
this technology exclusively for us. Under the terms of these
agreements, Infineon was free to assign these agreements to us
and has done so in connection with the carve-out. Each agreement
remains in effect until the last shipment of, and payment for,
products manufactured under the agreement unless it is earlier
terminated for breach.
On June 27, 2007, we signed agreements with Winbond to
expand our existing cooperation with Winbond and our reservation
of capacity at Winbonds facility for up to 24,000 300mm
wafer starts per month. Under the terms of the agreements, we
will provide our 75nm and 58nm DRAM trench technology to
Winbonds 300mm-wafer facility. In return, Winbond will
manufacture DRAMs for computing applications using this
technology exclusively for us.
DESCRIPTION
OF ORDINARY SHARES
For a description of our ordinary shares, see Articles of
Association in our annual report on
Form 20-F
for the year ended September 30, 2006, as amended. See
Incorporation of Certain Information by Reference.
DESCRIPTION
OF AMERICAN DEPOSITARY SHARES WE OR THE SELLING
SHAREHOLDERS MAY OFFER
For a description of our American Depositary Shares, see
Description of American Depositary Shares in our
final prospectus filed pursuant to Rule 424(b)(1) of the
Securities Act on August 10, 2006 with respect to the
Registration Statement on
Form F-1
(File
No. 333-135913).
See Incorporation of Certain Information by
Reference.
6
GENERAL
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES WE MAY
OFFER
The following description of the terms of the debt securities
and guarantees we may offer sets forth certain general terms and
provisions of any debt securities and guarantees to which any
prospectus supplement may relate. Particular terms of debt
securities and guarantees offered by any prospectus supplement
and the extent, if any, to which these general terms and
provisions shall apply to any debt securities so offered will be
described in the prospectus supplement relating to the
applicable debt securities. The applicable prospectus supplement
may also state that any of the terms set forth in this
description are inapplicable to such debt securities. This
description does not purport to be complete.
General
As required by U.S. federal law for debt securities of
companies that are publicly offered, each series of debt
securities will be governed by a document called an indenture.
The material terms of any indenture governing a series of debt
securities will be described in the applicable prospectus
supplement. The indentures will be qualified under the
Trust Indenture Act and filed as exhibits to our
registration statement. See Where You Can Find More
Information for information on how to obtain a copy.
In addition to Qimonda AG and, if applicable, Qimonda Finance
LLC, a trustee will also be a party to each indenture. The
trustee has two main roles:
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First, it can enforce your rights against us if we default.
There are some limitations on the extent to which the trustee
acts on your behalf, which will be described in the applicable
prospectus supplement.
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Second, the trustee performs administrative duties for us, such
as sending you interest payments, transferring your debt
securities to a new buyer if you sell and sending you notices.
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We will describe in any applicable prospectus supplement the
terms relating to a series of debt securities, including:
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the title,
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any limit on the amount that may be issued,
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whether or not we will issue the series of debt securities in
global form,
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whether or not the series of debt securities will be convertible
or exchangeable for our common stock or other securities as
described below,
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the material terms of the indenture and who the trustee will be,
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the maturity date,
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the annual interest rate, which may be fixed or floating, or the
method for determining the rate and the date interest will begin
to accrue, the dates interest will be payable and the regular
record dates for interest payment dates or the method for
determining such dates,
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whether or not the debt securities will be secured or unsecured,
and the terms of any secured debt securities,
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the terms of the subordination of any series of subordinated
debt securities,
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the place where payments will be payable,
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our right, if any, to defer payment of interest and the maximum
length of any such deferral period,
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the date, if any, after which, and the price at which, we may,
at our option, redeem the series of notes pursuant to any
optional redemption provisions,
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the date, if any, on which, and the price at which we are
obligated, pursuant to any mandatory sinking fund provisions or
otherwise, to redeem, or at the holders option to
purchase, the series of notes,
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whether the indenture will restrict our ability to pay
dividends, or will require us to maintain any asset ratios or
reserves,
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whether we will be restricted from incurring any additional
indebtedness,
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a discussion on any material or special United States federal
income tax considerations applicable to the debt securities,
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if other than U.S. dollars, the currency in which the debt
securities of the series will be denominated or in which the
principal of or any premium or interest on the debt securities
of the series will be payable;
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the denominations in which we will issue the series of debt
securities, if other than denominations of $1,000 and any
integral multiple thereof, and
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any other specific terms, preferences, rights or limitations of,
or restrictions on, the debt securities.
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Fixed
rate debt securities
Fixed rate debt securities typically bear interest at a fixed
rate. However, fixed rate debt securities include zero coupon
notes, which bear no interest and are instead issued at a price
lower than the principal amount. Any interest will be paid on
fixed rate debt securities on dates specified in the applicable
prospectus supplement.
Floating
rate debt securities
Floating rate debt securities provide an interest rate
determined, and adjusted periodically, by reference to any of
the following interest rate bases or formulae: Commercial Paper
Rate, LIBOR, EURIBOR, Prime Rate, Treasury Rate, CD Rate, CMT
Rate, CMS Rate, Federal Funds Rate or any other rate specified
in any applicable prospectus supplement. Interest will be paid
on floating rate debt securities on dates determined at the time
of issuance and as specified in any applicable prospectus
supplement.
Conversion
or Exchange of Debt Securities
If any debt securities are issued that may be converted or
exchanged into our common stock or other securities, the
applicable prospectus supplement will also describe the terms on
which the debt securities may be converted or exchanged. These
terms will include whether the conversion or exchange is
mandatory, is at our option or is at the option of the holder.
The applicable prospectus supplement will also describe how the
number of shares of common stock or other securities or property
to be received will be calculated.
Mandatory
conversion or exchange
At maturity, if any, or another time described in the applicable
prospectus supplement, the holder of a mandatorily convertible
or exchangeable debt security must exchange the security for the
underlying security or securities at a specified rate of
conversion or exchange. Therefore, depending upon the value of
the underlying securities at maturity, if any, or such other
time, the holder of a mandatorily convertible or exchangeable
debt security may receive less than the principal amount of the
debt security. If so indicated in the applicable prospectus
supplement, the specified rate at which a mandatorily
convertible or exchangeable debt security may be converted or
exchanged may vary depending on the value of the underlying
securities so that, upon conversion or exchange, the holder
participates in a percentage, which may be less than, equal to,
or greater than 100% of, the change in value of the underlying
securities. Mandatorily convertible or exchangeable debt
securities may include securities where we have the right, but
not the obligation, to require holders of the debt securities to
exchange their debt securities for the underlying securities.
Optional
conversion or exchange
The holder of an optionally convertible or exchangeable debt
security may, during a period, or at a specific time or times,
convert or exchange the debt security for the underlying
securities at a specified rate of conversion or exchange as set
forth in the applicable prospectus supplement. If specified in
the applicable prospectus supplement, we will have the option to
redeem the optionally convertible or exchangeable note prior to
maturity, if any. If the holder of an optionally convertible or
exchangeable debt security does not elect to exchange the
security prior to
8
maturity, if any, or any applicable redemption date, the holder
will receive the principal amount of the security plus any
accrued interest at maturity, if any, or upon redemption.
Payments
upon conversion or exchange
The applicable prospectus supplement will specify whether upon
conversion or exchange, at maturity, if any, or otherwise, the
holder of a convertible or exchangeable security may receive, at
the specified exchange rate, either the underlying securities or
the cash value of the underlying securities or a combination of
both. The convertible or exchangeable debt securities may or may
not provide for protection against fluctuations in the exchange
rate between the currency in which that security is denominated
and the currency or currencies in which the market prices of the
underlying security or securities are quoted.
Other
terms
Convertible or exchangeable debt securities may have other
terms, which will be specified in the applicable pricing
supplement or product supplement.
Guarantees
Qimonda AG will be the guarantor of debt securities issued by
Qimonda Finance LLC. Qimonda AG will fully, unconditionally and
irrevocably guarantee the payment of the principal of, premium,
if any, and interest on the debt securities issued by Qimonda
Finance LLC, including any additional amounts which may be
payable by Qimonda Finance LLC in respect of its debt
securities, as described in the applicable prospectus
supplement. Qimonda AG will guarantee the payment of such
amounts when such amounts become due and payable, whether at the
stated maturity of the debt securities, by declaration or
acceleration, call for redemption or otherwise.
In the distribution of the assets of any subsidiary of Qimonda
AG upon the subsidiarys liquidation or reorganization, any
creditor of the subsidiary will have a right to participate in
the distribution before the creditors of Qimonda AG, including
holders of debt securities issued by Qimonda Finance LLC. The
guarantees will be unsecured obligations of Qimonda AG.
Additional information about the guarantees, if any, will be
described in the applicable prospectus supplement.
Consolidation,
Merger or Sale
The indentures do not contain any covenant that restricts our
ability to merge or consolidate, or sell, convey, transfer or
otherwise dispose of all or substantially all of our assets.
However, any successor to or acquirer of such assets must assume
all of our obligations under the indentures or the debt
securities, as appropriate.
Events of
Default under the Indenture
The following are events of default under the indentures with
respect to any series of debt securities that we may issue:
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if we fail to pay interest when due and our failure continues
for 90 days and the time for payment has not been extended
or deferred;
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if we fail to pay the principal, or premium, if any, when due
and the time for payment has not been extended or delayed;
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if we fail to observe or perform any other covenant contained in
the notes or the indentures, other than a covenant specifically
relating to another series of notes, and our failure continues
for 90 days after we receive notice from the trustee or
holders of at least 25% in aggregate principal amount of the
outstanding notes of the applicable series; and
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if specified events of bankruptcy, insolvency or reorganization
occur to us.
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If an event of default with respect to debt securities of any
series occurs and is continuing, the trustee or the holders of
at least 25% in aggregate principal amount of the outstanding
debt securities of that series, by notice to us
9
in writing, and to the trustee if notice is given by such
holders, may declare the unpaid principal of, premium, if any,
on and accrued interest, if any, on the debt securities due and
payable immediately.
The holders of a majority in principal amount of the outstanding
debt securities of an affected series may waive any default or
event of default with respect to the series and its
consequences, except defaults or events of default regarding
payment of principal, premium, if any, or interest, unless we
have cured the default or event of default in accordance with
the indentures. Any waiver shall cure the default or event of
default.
Subject to the terms of the indentures, if an event of default
under the indenture shall occur and be continuing, the trustee
will be under no obligation to exercise any of its rights or
powers under the indentures at the request or direction of any
of the holders of the applicable series of debt securities,
unless such holders have offered the trustee reasonable
indemnity. The holders of a majority in principal amount of the
outstanding debt securities of any series will have the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any trust
or power conferred on the trustee, with respect to the debt
securities of that series, provided that:
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the direction so given by the holder is not in conflict with any
law or the applicable indenture; and
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subject to its duties under the Trust Indenture Act, the
trustee need not take any action that might involve it in
personal liability or might be unduly prejudicial to the holders
not involved in the proceeding.
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A holder of the debt securities of any series will only have the
right to institute a proceeding under the applicable indenture
or to appoint a receiver or trustee, or to seek other remedies,
if:
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the holder has given written notice to the trustee of a
continuing event of default with respect to that series;
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the holders of at least 25% in aggregate principal amount of the
outstanding debt security of that series have made written
request, and such holders have offered reasonable indemnity to
the trustee to institute the proceeding as trustee; and
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the trustee does not institute the proceeding, and does not
receive from the holders of a majority in aggregate principal
amount of the outstanding debt securities of that series other
conflicting directions within 60 days after the notice,
request and offer.
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These limitations do not apply to a suit instituted by a holder
of debt securities if we default in the payment of the
principal, premium, if any, or interest on, the debt securities.
We will periodically file statements with the trustee regarding
our compliance with specified covenants in the indenture.
Modification
of Indenture; Waiver
We and the trustee may change an indenture without the consent
of any holders with respect to specific matters, including:
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to fix any ambiguity, defect or inconsistency in the
indenture; and
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to change anything that does not materially adversely affect the
interests of any holder of debt securities of any series.
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In addition, under the indenture, the rights of holders of a
series of debt securities may be changed by us and the trustee
with the written consent of the holders of at least a majority
in aggregate principal amount of the outstanding debt securities
of each series that is affected. However, we and the trustee may
only make the following changes with the consent of each holder
of any outstanding debt securities affected:
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extending the fixed maturity of the series of the debt
securities;
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reducing the principal amount, reducing the rate of interest, or
reducing any premium payable upon the redemption of any debt
securities; or
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reducing the minimum percentage of debt securities, the holders
of which are required to consent to any amendment.
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Discharge
The indenture provides that we may elect to be discharged from
our obligations with respect to one or more series of debt
securities, except for obligations to:
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register the transfer or exchange of debt securities of the
series;
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replace stolen, lost or mutilated debt securities of the series;
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maintain paying agencies;
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hold monies for payment in trust;
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compensate and indemnify the trustee; and
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appoint any successor trustee.
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In order to exercise our rights to be discharged, we must
deposit with the trustee money or government obligations
sufficient to pay all the principal of, any premium, if any, and
interest on, the debt securities of the series on the dates
payments are due.
Form,
Exchange and Transfer
We will issue the debt securities of each series only in fully
registered form without coupons and, unless we otherwise specify
in the applicable prospectus supplement, in denominations of
$1,000 and any integral multiple thereof. The indentures provide
that we may issue debt securities of a series in temporary or
permanent global form and as book-entry securities that will be
deposited with, or on behalf of, The Depository
Trust Company or another depository named by us and
identified in a prospectus supplement with respect to that
series.
At the option of the holder, subject to the terms of the
applicable indentures and the limitations applicable to global
securities described in the applicable prospectus supplement,
the holder of the debt securities of any series can exchange the
securities for other securities of the same series, in any
authorized denomination and of like tenor and aggregate
principal amount.
Subject to the terms of the applicable indenture and the
limitations applicable to global securities set forth in the
applicable prospectus supplement, holders of the debt securities
may present the notes for exchange or for registration of
transfer, duly endorsed or with the form of transfer endorsed
thereon duly executed if so required by us or the security
registrar, at the office of the security registrar or at the
office of any transfer agent designated by us for this purpose.
Unless otherwise provided in the debt securities that the holder
presents for transfer or exchange, we will not require any
payment for any registration of transfer or exchange, but we may
require payment of any taxes or other governmental charges.
We will name in the applicable prospectus supplement the
security registrar, and any transfer agent in addition to the
security registrar, that we initially designate for any debt
securities. We may at any time designate additional transfer
agents or rescind the designation of any transfer agent or
approve a change in the office through which any transfer agent
acts, except that we will be required to maintain a transfer
agent in each place of payment for the notes of each series.
If we elect to redeem the debt securities of any series, we will
not be required to:
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issue, register the transfer of, or exchange any debt securities
of that series during a period beginning at the opening of
business 15 days before the day of mailing of a notice of
redemption of any debt securities that may be selected for
redemption and ending at the close of business on the day of the
mailing; or
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register the transfer of or exchange any debt securities so
selected for redemption, in whole or in part, except the
unredeemed portion of any debt securities we are redeeming in
part.
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Information
concerning the trustee
The trustee, other than during the occurrence and continuance of
an event of default under an indenture, undertakes to perform
only those duties as are specifically set forth in the
applicable indenture. Upon an event of default under an
indenture, the trustee must use the same degree of care as a
prudent person would exercise or use in the conduct of his or
her own affairs. Subject to this provision, the trustee is under
no obligation to exercise any of the powers given it by the
relevant indenture at the request of any holder of debt
securities unless it is offered reasonable security and
indemnity against the costs, expenses and liabilities that it
might incur.
Payment
and Paying Agents
Unless we otherwise indicate in the applicable prospectus
supplement, we will make payment of the interest on any debt
securities on any interest payment date to the person in whose
name the securities, or one or more predecessor securities, are
registered at the close of business on the regular record date
for the interest payment.
We will pay principal of and any premium and interest on the
debt securities of a particular series at the office of the
paying agents designated by us, except that unless we otherwise
indicate in the applicable prospectus supplement, we will make
interest payments by check which we will mail to the holder.
Unless we otherwise indicate in a prospectus supplement, we will
designate the corporate trust office of the trustee in New York
City as our sole paying agent for payments with respect to debt
securities of each series. We will name in the applicable
prospectus supplement any other paying agents that we initially
designate for the debt securities of a particular series. We
will maintain a paying agent in each place of payment for the
debt securities of a particular series.
All money we pay to a paying agent or the trustee for the
payment of the principal of or any premium or interest on any
debt securities which remains unclaimed at the end of two years
after such principal, premium or interest has become due and
payable will be repaid to us, and the holder of the security
thereafter may look only to us for payment thereof.
Governing
Law
The indentures and the debt securities will be governed by and
construed in accordance with the laws of the State of New York,
except to the extent that the Trust Indenture Act is
applicable.
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We are registering the shares of common stock covered by this
prospectus to permit us to offer and sell ADSs representing new
shares we may issue as well as to permit the selling
shareholders to conduct public secondary offerings of ADSs from
time to time after the date of this prospectus. A selling
shareholder may offer the shares of common stock for cash or
other consideration, including in an exchange for other
securities issued by a selling shareholder.
All of the shares offered in this offering will be delivered in
the form of ADSs.
We may, and any selling shareholder may, sell all or a portion
of the securities from time to time:
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directly; or
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through underwriters, dealers or agents, who may receive
compensation in the form of underwriting discounts or
commissions or agents commissions from the selling
shareholder or from the purchasers of the securities for whom
they may act as agent.
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Underwriters, dealers and agents may be entitled under
agreements with us to indemnification by us against some civil
liabilities, including liabilities under the Securities Act. In
addition, underwriters, dealers and agents may be customers of,
engage in transactions with, or perform services for, us in the
ordinary course of business.
Underwriters
If we, or any selling shareholder, use underwriters for the sale
of securities, they will acquire the securities for their own
account. The underwriters may resell the securities from time to
time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying
prices determined at the time of sale. Unless we otherwise state
in the applicable prospectus supplement, various conditions will
apply to the underwriters obligation to purchase the
securities, and the underwriters will be obligated to purchase
all of the securities contemplated in an offering if they
purchase any of such securities. Any initial public offering
price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
Dealers
If we, or any selling shareholder, use dealers in connection
with the sale of securities, unless we otherwise indicate in the
applicable prospectus supplement, we, or any selling
shareholder, will sell the securities to the dealers as
principals. The dealers may then resell the securities to the
public at varying prices that the dealers may determine at the
time of resale.
Agents
We or any selling shareholder may designate agents who agree to
use their reasonable efforts to solicit purchases of the
securities during the term of their appointment to sell
securities on a continuing basis.
Direct
Sales
We or any selling shareholder may also sell securities directly
without using underwriters, dealers or agents.
Loans of
Securities
In addition, we or a selling shareholder may loan or pledge
securities to a financial institution or other third party that
in turn may sell the securities using this prospectus and an
applicable prospectus supplement. Such financial institution or
third party may transfer its short position in our securities to
investors.
Selling
Restrictions
In any EEA Member State that has implemented Directive
2003/71/EC (together with any applicable implementing measures
in any Member State, the Prospectus Directive), this
communication is only addressed to and is only directed at
qualified investors in that Member State within the meaning of
the Prospectus Directive.
This prospectus has been prepared on the basis that all offers
of the securities will be made pursuant to an exemption under
the Prospectus Directive, as implemented in member states of the
European Economic Area (EEA), from the requirement
to produce a prospectus for offers of the securities.
Accordingly any person making or intending to make any offer
within the EEA of the securities which are the subject of the
placement contemplated
13
in this prospectus should only do so in circumstances in which
no obligation arises for us or any of the underwriters to
produce a prospectus for such offer. Neither we nor any of the
underwriters have authorized, nor do we or they authorize, the
making of any offer of the securities through any financial
intermediary, other than offers made by the underwriters which
constitute the final placement of the securities contemplated in
this prospectus.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), an offer to the public of
any securities which are the subject of the offering
contemplated by this prospectus (the Securities) may
not be made in that Relevant Member State, except that an offer
to the public in that Relevant Member State of any Securities
may be made at any time under the following exemptions under the
Prospectus Directive, if they have been implemented in that
Relevant Member State:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more
than 43,000,000 and (3) an annual net turnover
of more than 50,000,000, as shown in its last annual
or consolidated accounts;
(c) by the underwriters to fewer than 100 natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive); or
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive,
provided that no such offer of Securities shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any Securities in
any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and any Securities to be offered so as to enable an
investor to decide to purchase any Securities, as the same may
be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
This communication is only being distributed to and is only
directed at (i) persons who are outside the
United Kingdom or (ii) investment professionals
falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 (the
Order) or (iii) high net worth companies, and
other persons to whom it may lawfully be communicated, falling
within Article 49(2)(a) to (d) of the Order (all such
persons together being referred to as relevant
persons). The Securities are only available to, and any
invitation, offer or agreement to subscribe, purchase or
otherwise acquire such Securities will be engaged in only with,
relevant persons. Any person who is not a relevant person should
not act or rely on this document or any of its contents.
This prospectus is not being distributed pursuant to a public
offer in France within the meaning of
Article L. 411-1
of the French Monetary and Financial Code (Code
monétaire et financier), and as a result this
prospectus has not been and will not be submitted to the
Autorité des Marchés Financiers for approval in
France. The Securities offered have not been offered or sold,
and will not be offered or sold, directly or indirectly, to the
public in France, and this prospectus and any other offering
related material has not been distributed and will not be
distributed to the public in France. Any offers, sales and
distributions have only been and will only be made in France to
qualified investors (investisseurs qualifiés), to a
restricted group of investors (cercle restreint
dinvestisseurs) or to people providing portfolio
management services for third party accounts (personnes
fournissant le service dinvestissement de gestion de
portefeuille pour compte de tiers). In each case,
acting for their own account, all as defined in, and in
accordance with, Articles L.
411-1, L.
411-2, D.
411-1 and D.
411-2 of the
French Monetary and Financial Code. This prospectus is not to be
further distributed or reproduced (in whole or in part) in
France by the recipients hereof and this prospectus will be
distributed on the understanding that any recipients will only
participate in the issue or sale of the Securities for their own
account and undertake not to transfer, directly or indirectly,
the shares to the public in France, other than in compliance
with all applicable laws and regulations and in particular with
Articles L.
411-1 and L.
411-2 of the
French Monetary and Financial Code.
The Securities offered by this prospectus have not been and will
not be offered to the public within the meaning of the German
Sales Prospectus Act (Verkaufsprospektgesetz) or the
German Investment Act (Investmentgesetz). Neither our
shares nor the Securities have been or will be listed on a
German exchange. No sales prospectus
14
pursuant to the German Sales Prospectus Act has been or will be
published or circulated in Germany or filed with the German
Federal Financial Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht) or any other
governmental or regulatory authority in Germany. This prospectus
does not constitute an offer to the public in Germany and it
does not serve for public distribution of the Securities or
shares in Germany. Neither this prospectus, nor any other
document issued in connection with this offering, may be issued
or distributed to any person in Germany except under
circumstances which do not constitute an offer to the public
within the meaning of the German Sales Prospectus Act or the
German Investment Act.
This offering has not been registered with the Commissione
Nationale per la Società e la Borsa (CONSOB) pursuant
to Italian securities legislation. The securities offered by
this prospectus may not be offered or sold, nor may the
prospectus or any other offering materials be distributed in the
Republic of Italy unless such offer, sale or distribution is:
(a) made by an investment firm, bank or financial
intermediary permitted to conduct such activities in the
Republic of Italy in accordance with Legislative Decree
No. 385 of September 1, 1993 (Decree No. 385),
Legislative Decree No. 58 of February 24, 1998, CONSOB
Regulation No. 11971 of May 14, 1999 and any
other applicable laws and regulations;
(b) made (i) to professional investors (operatori
qualificati) as defined in Article 31, second paragraph
of CONSOB Regulation No. 11422 of July 1, 1998,
as amended, or Regulation No, 11522, (ii) in
circumstances where an exemption from the rules governing
solicitations to the public at large applies pursuant to
Article 100 of Legislative Decree No. 58 of
February 24, 1998 and Article 33, first paragraph, of
CONSOB Regulation No. 11971 of May 14, 1999, as
amended or (iii) to persons located in the Republic of
Italy who submit an unsolicited request to purchase the
securities; and (c) in compliance with all relevant Italian
securities and tax laws and regulations.
The underwriters will not offer or sell any of our Securities
directly or indirectly in Japan or to, or for the benefit of any
Japanese person or to others, for re-offering or re-sale
directly or indirectly in Japan or to any Japanese person,
except in each case pursuant to an exemption from the
registration requirements of, and otherwise in compliance with,
the Securities and Exchange Law of Japan and any other
applicable laws and regulations of Japan. For purposes of this
paragraph, Japanese person means any person resident
in Japan, including any corporation or other entity organized
under the laws of Japan.
The underwriters and each of their affiliates have not
(i) offered or sold, and will not offer or sell, in Hong
Kong, by means of any document, our Securities other than
(a) to professional investors as defined in the
Securities and Futures Ordinance (Cap.571) of Hong Kong and any
rules made under that Ordinance or (b) in other
circumstances which do not result in the document being a
prospectus as defined in the Companies Ordinance
(Cap.32) of Hong Kong or which do not constitute an offer to the
public within the meaning of that Ordinance or (ii) issued
or had in its possession for the purposes of issue, and will not
issue or have in its possession for the purposes of issue,
whether in Hong Kong or elsewhere any advertisement, invitation
or document relating to our Securities which is directed at, or
the contents of which are likely to be accessed or read by, the
public in Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to our
Securities which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors as defined in the Securities and Futures
Ordinance and any rules made under that Ordinance. The contents
of this document have not been reviewed by any regulatory
authority in Hong Kong. You are advised to exercise caution in
relation to the offer. If you are in any doubt about any of the
contents of this document, you should obtain independent
professional advice.
This prospectus or any other offering material relating to our
Securities has not been and will not be registered as a
prospectus with the Monetary Authority of Singapore, and the
Securities will be offered in Singapore pursuant to exemptions
under Section 274 and Section 275 of the Securities
and Futures Act, Chapter 289 of Singapore (the
Securities and Futures Act). Accordingly our
Securities may not be offered or sold, or be the subject of an
invitation for subscription or purchase, nor may this prospectus
or any other offering material relating to our Securities be
circulated or distributed, whether directly or indirectly, to
the public or any member of the public in Singapore other than
(a) to an institutional investor or other person specified
in Section 274 of the Securities and Futures Act,
(b) to a sophisticated investor, and in accordance with the
conditions specified in Section 275 of the
15
Securities and Futures Act or (c) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the Securities and Futures Act.
ENFORCING
CIVIL LIABILITIES
Qimonda AG is a German stock corporation. The executive offices
and a substantial portion of the assets of Qimonda AG are
located outside the United States. In addition, the members of
the Supervisory and Management Boards of Qimonda AG and the
experts named herein may be residents of Germany and other
jurisdictions other than the United States. As a result, it may
be difficult for investors to effect service within the United
States upon Qimonda AG, members of their Supervisory or
Management Boards or experts or to enforce outside the
United States judgments obtained against such persons in
United States courts, or to enforce in United States courts
judgments obtained against such persons in courts in
jurisdictions outside the United States, in any action,
including actions predicated upon the civil liability provisions
of the U.S. securities laws. In addition, it may be
difficult for investors to enforce, in original actions brought
in courts in jurisdictions located outside the
United States, liabilities predicated upon the
U.S. securities laws.
The validity of the securities and certain other legal matters
with respect to German, U.S. federal and New York law will
be passed upon by Cleary Gottlieb Steen & Hamilton
LLP, German and U.S. counsel to the selling shareholders,
Qimonda AG and Qimonda Finance LLC.
Certain other legal matters with respect to Delaware law will be
passed upon by Richards, Layton, & Finger, P.A., special
Delaware counsel to Qimonda Finance LLC.
The combined and consolidated financial statements of Qimonda AG
and subsidiaries as of September 30, 2005 and 2006, and for
each of the years in the three-year period ended
September 30, 2006, have been incorporated by reference
herein in reliance upon the report of KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft, independent registered
public accounting firm, Ganghoferstrasse 29, 80339 Munich,
Germany, incorporated by reference herein, and upon the
authority of that firm as experts in accounting and auditing. To
the extent that KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audits
and reports on financial statements of Qimonda AG issued at
future dates, and consents to the use of its report thereon,
such financial statements also will be incorporated by reference
in the registration statement in reliance upon its report and
said authority.
The financial statements of Inotera Memories, Inc. as of and for
the years ended December 31, 2004, 2005 and 2006 have been
incorporated by reference herein in reliance upon the reports of
KPMG Certified Public Accountants, independent registered public
accounting firm, 6F, Sec. 3 Misheng E. Road, Songshon District,
Taipei City 105, Taiwan, R.O.C., incorporated by reference
herein, and upon the authority of that firm as experts in
accounting and auditing. To the extent that KPMG Certified
Public Accountants audits and reports on financial statements of
Inotera Memories, Inc. issued at future dates, and consents to
the use of its report thereon, such financial statements also
will be incorporated by reference in the registration statement
in reliance upon its report and said authority.
We have filed with the Securities and Exchange Commission a
registration statement on
Form F-3
under the Securities Act. This prospectus does not contain all
of the information set forth in the registration statement, and
some parts have been omitted in accordance with the rules and
regulations of the SEC. For further information about us and the
securities, please refer to the registration statement, which
you may access at the SECs website, www.sec.gov, or
inspect in person, without charge, at the SECs Public
Reference Room as described below.
We are subject to the informational requirements of the
Securities Exchange Act of 1934 and file reports and other
information with the Commission. Such reports and other
information can be inspected and copied at the public reference
facilities of the SEC located at the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the
SECs Public Reference Room by calling the SEC
16
in the United States at
1-800-SEC-0330.
The SEC also maintains a web site at
http://www.sec.gov
that contains reports and other information regarding
registrants that file electronically with the SEC.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers or persons controlling the registrant pursuant to the
foregoing provisions, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference the
information we file with the SEC in other documents, which means:
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incorporated documents are considered part of this prospectus;
we can disclose important information to you by referring you to
those documents; and
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information in this prospectus automatically updates and
supersedes information in earlier documents that are
incorporated by reference in this prospectus, and information
that we file with the SEC after the date of this prospectus
automatically updates and supersedes this prospectus.
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We incorporate by reference our Annual Report on
Form 20-F
for the year ended September 30, 2006, which was filed with
the SEC on November 21, 2006 and our Annual Report on
Form 20-F/A
for the year ended September 30, 2006, which was filed with
the SEC on March 30, 2007. We incorporate by reference our
report on
Form 6-K
dated July 27, 2007. We also incorporate by reference the
section Description of American Depositary Shares in
our prospectus filed pursuant to Rule 424(b)(1) of the
Securities Act on August 10, 2006 with respect to the
Registration Statement on
Form F-1
(File
No. 333-135913).
We also incorporate by reference each of the following documents
that we will file with the SEC after the date of this prospectus
from now until we terminate the offering of the debt securities:
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Annual Reports filed on
Form 20-F; and
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any future reports filed on
Form 6-K
that indicate that they are incorporated by reference in this
prospectus.
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Upon request, we will provide to each person, including any
beneficial owner, to whom a prospectus is delivered, a copy of
any or all of the information that has been incorporated by
reference in the prospectus but not delivered with the
prospectus.
You may obtain a copy of any of the documents referred to above
at no cost by contacting us at the following address or
telephone number:
Qimonda AG
Gustav-Heinemann-Ring 212
81739 Munich, Germany
+(49)(89)
60088-0
Qimonda
Finance LLC
Qimonda Finance LLC is our wholly-owned, consolidated
subsidiary. Qimonda Finance LLC does not, and will not, file
separate reports with the SEC.
17
28,550,098 American Depositary
Shares
Representing 28,550,098 Ordinary
Shares
Qimonda AG
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Citi |
Credit
Suisse |
JP
Morgan |
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ABN
AMRO Rothschild LLC |
Deutsche
Bank Securities |
HVB
Capital Markets, Inc. |