SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

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

April 30, 2008

QIMONDA AG

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

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

Form 20-F  þ          Form 40-F  o

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

Yes  o          No  þ

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

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

 

 

Explanatory Note

     This Report on Form 6-K contains the quarterly report for the second financial quarter ended March 31, 2008 of Qimonda AG dated April 30, 2008 and is hereby incorporated by reference into our Registration Statement on Form F-3, Registration No. 333-145983.

QIMONDA AG AND SUBSIDIARIES

 

QUARTERLY REPORT
FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2008

 

 

INDEX

 

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Three And Six Months Ended March 31, 2008 Compared To Three And Six Months Ended March 31, 2007

 

Results of Operations

 

Net Sales

 

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

 

 

Our net sales in the six months ended March 31, 2008 decreased by €1,232 million, or 57%, from €2,157 million in the six months ended March 31, 2007 to €925 million in the six months ended March 31, 2008. This decrease was primarily due to:

 

 

Offsetting this decrease in part was

 

 

Price decreases.  A steep price decline of DRAM prices was seen in the three months ended December 31, 2007. Despite the continued oversupply market situation, the price remained stable at a low level in the three months ended March 31, 2008. This was caused by higher DRAM demand across different applications especially from the PC industry, which has absorbed a significant portion of the oversupply in the industry (albeit at low prices). DRAM bit production growth in the industry persisted due to productivity increases as manufacturers employed increasingly efficient technologies.

 

Since January 2007, we have experienced a sharp decline of market prices (for DDR2 memories in particular) with prices falling during 2007 by more than 80%.

 

Overall the average selling prices of our DRAM products were 69% lower in the six months ended March 31, 2008 as compared to the six months ended March 31, 2007.

 

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

 

In the six months ended March 31, 2008, 45% of our total bit shipments was for use in non-PC applications compared to 54% for the six months ended March 31, 2007. The decrease in our non-PC share was mainly due to weaker than usual seasonal demand in the consumer and infrastructure markets in the three months ended March 31, 2008 and, as a result of our technology conversion, stronger shipments in the PC market to meet demand growth.

 

Exchange rate effects.  The U.S. dollar weakened against the euro in the first six months of the 2008 financial year, with the average exchange rate for the period 14% lower than it was for the corresponding period of our 2007 financial year. This unfavorable U.S. dollar to euro exchange rate negatively affected our revenues during the six months ended March 31, 2008. We have calculated the effects of this translation risk as follows: we would have achieved €125 million more in net sales in the six months ended March 31, 2008, had the average exchange rates we used to translate our U.S. dollar denominated sales into euros been the same in the six months ended March 31, 2008 as they were in the six months ended March 31, 2007. For the three months ended March 31, 2008 compared to the three months ended March 31, 2007 the respective negative impact on sales amounted to €60 million.

Increase in bit shipments.  Our bit shipments increased by 60% during the six months ended March 31, 2008 compared to the six months ended March 31, 2007 due to increasing manufacturing output. Demand for our products was especially high in the PC market, as PC manufacturers increased the amount of DRAM included in each system (or “bits per box”) in the current low price environment. As of March 31, 2008, 76% of our capacities were converted to the 80nm and below technology nodes, compared to less than 11% for the six months ended March 31, 2007.

 

Net Sales by Region

 

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

 

 

The relative increase in the share of sales in Asia/Pacific and decrease in North America and Rest of Europe during the six months ended March 31, 2008 was mainly caused by Original Equipment Manufacturer (“OEM”) customers’ shifting their production to Asia, as well as the shifting of volume from customers in North America to customers in Asia.

 

For practical purposes, the Rest of Europe region also includes other countries and territories in the rest of the world outside of the main geographic regions listed above, with aggregate sales representing no more than 1% of total sales in any period. In addition, prior period amounts have been reclassified to conform to the current period presentation.

 

Cost of Goods Sold and Gross Margin

 

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

 

 

Cost of goods sold decreased by €29 million, or 2%, from €1,608 million in the six months ended March 31, 2007 to € 1,579 million in the six months ended March 31, 2008. As a percentage of net sales, cost of goods sold increased from 75% to 171% over the same period. The absolute decrease in our cost of goods sold was due primarily to:

 

 

Offsetting this decrease in part were:

 

 

Improved productivity.  Similar to our 2007 financial year, we achieved productivity improvements through converting our capacities to 80nm and 75nm process technologies and increasing the percentage of our chips produced on 300mm wafers. As previously announced, to improve our productivity we are actively phasing out the purchase of 200mm wafers from Infineon Dresden and are reducing our 200mm production capacity in Richmond. Measured in wafer starts, 83% of our total production (including capacity

sourced from our strategic and foundry partners) was on 300mm wafers in the six months ended March 31, 2008 as compared to 72% of our production in the six months ended March 31, 2007. We believe that productivity improvements, together with a larger sales volume over which our fixed costs are spread, permitted us to achieve a lower percentage increase in costs as compared to the percentage increase in bit shipments. As of March 31, 2008, 76% of our capacities were converted to the 80nm and below technology nodes, compared to less than 11% for the six months ended March 31, 2007. Other DRAM suppliers have been converting their capacities to smaller feature sizes very aggressively during the past few quarters and thus we have implemented measures to accelerate our conversion.

 

Decreased purchase prices from joint ventures and foundries.  Cost of goods sold includes the cost of inventory purchased from our joint ventures, such as Inotera, and other associated and related companies as well as our foundry partners Winbond, SMIC and Infineon Dresden. For the six months ended March 31, 2008, cost of sales includes losses related to purchase commitments for 200mm wafer manufacturing at Infineon Dresden in the amount of €20 million. Our purchase from joint ventures and foundries amounted to €402 million in the six months ended March 31, 2008 as compared to €707 million in the six months ended March 31, 2007. While, as a result of the significant decline in DRAM prices, our purchases from these entities declined in absolute amounts, we increased the percentage of total bit shipments purchased from these partners to 67% in the six months ended March 31, 2008 as compared to 61% during the six months ended March 31, 2007.

 

Exchange rate effects.  The decline in the exchange rate of other currencies against the euro in the six months ended March 31, 2008, as compared to the equivalent period one year earlier, decreased the euro value of our costs that are denominated in other currencies, mainly the U.S. dollar, by approximately €141 million. This means that we would have incurred approximately €141 million more in costs of goods sold in our six months ended March 31, 2008, had the average exchange rates we used to translate our non-euro expenses into euro been the same in the six months ended March 31, 2008 as they were in the six months ended March 31, 2007. However, considered together with the decrease in our net sales due to negative foreign exchange effects in the amount of €125 million, foreign currency movements overall only had a net positive effect of €16 million on our gross margin during the six months ended March 31, 2008. For the three months ended March 31, 2008 the positive exchange rate impact on our costs of goods sold was €77 million compared to the respective quarter in financial year 2007. Considering the negative exchange rate impact of €60 million on net sales in the three months ended March 31, 2008 there would have been a net positive effect of €17 million on gross margin if the U.S. dollar to euro exchange rate would have remained constant since March 31, 2007.

 

Higher bit shipments.  The 60% increase in bit shipments in the six months ended March 31, 2008 compared to the six months ended March 31, 2007 was primarily enabled by the further ramp-up of production volumes at our Richmond 300mm facility and higher purchase volumes from foundries and joint ventures. In response to the low price levels, PC manufacturers started to increase the quantities of DRAMs that were installed per system, which absorbed a significant portion of the oversupply in the industry.

 

Inventory revaluation and reserves.  We value our inventory on a quarterly basis at the lower of cost or market value. If the market price declines below the full production cost of a particular product group, then all inventories of that product group are written down to the market price. Due to the significant price decline (especially during the first three months of the current financial year), we recorded write-downs on inventory in an amount of €109 million for the six months ended March 31, 2008 in accordance with our policy. In the comparable period of our 2007 financial year, as a result of more stable selling prices, we recorded write-downs on inventory in an amount of €24 million. Due to the volatility of the DRAM market, write-downs of this nature may occur in future periods of sharp price decline.

 

Our gross margin decreased to a negative 71% during the six months ended March 31, 2008, from a positive 25% in the six months ended March 31, 2007. This was primarily due to lower average selling prices and related inventory write-downs due to lower selling prices which could not be compensated by lower production costs per unit resulting from increased manufacturing productivity and lower purchase prices from foundry partners. In the second quarter of our 2008 financial year our gross margin improved to negative 58% as compared to a negative 81% in the first quarter of our 2008 financial year. This improvement resulted mainly from the combined effect of inventory write-downs in the first quarter which did not re-occur in the second quarter, continuing productivity improvements and reduced foundry purchases which offset the effect of lower sales.

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

 

Research and Development (R&D) Expenses

 

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

 

 

In the six months ended March 31, 2008, research and development expenses increased by 13% to €219 million from €193 million in the six months ended March 31, 2007. This was principally due to our efforts to strengthen our development of capabilities with respect to the next generation of memory technologies to further diversify our portfolio of memory products as well as with respect to non-volatile memory technologies. In the six months ended March 31, 2007, our research and development expenses were low due to the substantial completion of technology development for 80nm and 75nm during September and October 2006, respectively.

 

In February 2008 we announced the development of our new innovative Buried Wordline DRAM technology, which is aimed at reducing the cell size of our DRAM products towards 4F² over the next several years, consistent with our views on the progression of the industry, while at the same time meeting customer requirements regarding high performance and low power consumption. This new architecture combines a variety of innovations at the cell and wiring levels, and we are currently expending additional R&D efforts to introduce it in initial product designs. We plan to introduce this technology initially in 65nm technologies and to begin production of a 1 Gbit DDR2 in the second half of the 2008 calendar year. Because the degree of innovation, testing and other development work that is involved with the progression to this new architecture exceeds that required for the reductions in the feature sizes that we have implemented in recent technology generations, we may be unable to meet our goals or to keep pace with the rate of development in the industry in a timely manner or at all, or do so at competitive costs. In addition, the increased R&D work in which we are currently engaged and expect to continue with in the coming financial periods will add to demands for capital. See “Liquidity — Capital Requirements.”

 

Selling, General and Administrative (SG&A) Expenses

 

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

 

 

During the six months ended March 31, 2008, selling, general and administrative expenses decreased by 2% as compared to the same period in the prior year. The increase as a percentage of sales was mainly attributable to the decrease in sales compared to the prior year.

Restructuring Expenses

 

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

 

 

Our restructuring expenses comprise three measures: The relocation of the backend production in Malaysia from Malacca to Senai (Johor) near Singapore, the phase-out of 200mm manufacturing at Infineon’s manufacturing facility in Dresden and the combination of our research centers in North America.

 

In March 2007 we announced our intention to relocate our backend production in Malaysia from our existing facility in Malacca to a new backend production facility in Senai (Johor) near Singapore by December 2008. Following the move, the existing site in Malacca is to be completely closed and the remaining employees are to be laid off. During the three months ended March 31, 2008 we accrued €4 million for severance payments for 631 employees.

 

Furthermore, as part of our focus to improve profitability and 300mm manufacturing, we terminated our wafer purchase contract with Infineon. Our purchase of wafers from Infineon Dresden will be completely phased out by the end of May 2008. Under the terms of the contract with Infineon, we had agreed to indemnify Infineon for 50% of the restructuring costs, that Infineon will incur in connection with the termination of this contract. As a result of the termination, we accrued restructuring liabilities of €12 million and €10 million as of December 31, 2007 and March 31, 2008, respectively. In addition, cost of goods sold includes losses related to purchase commitments for 200mm wafer contract manufacturing at Infineon Dresden in the amount of €3 million and €20 million for the three and six months ended March 31, 2008, respectively. Infineon and we are presently discussing additional reimbursements to Infineon from us in respect of idle costs at Infineon Dresden in the amount of approximately €20 million, which have not been incurred or accrued as of March 31, 2008.

 

Due to continued efforts to improve costs and efficiencies, we decided to consolidate our U.S. research and development facilities into a single development center located in Raleigh, North Carolina. As a result, our development center in Burlington, Vermont, is to be closed by the end of June 2008. We accrued restructuring costs of €0 million and €4 million during the three and six months ended March 31, 2008, respectively, relating to lease termination costs and expected severance payments for approximately 100 employees.

 

Goodwill Impairment

 

 

Due to the decline in our share price and the general weakness in pricing for DRAM products we tested the goodwill on our balance sheet for impairment at March 31, 2008 in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. As a result of our fair value analysis as of March 31, 2008, we determined that the carrying value of the goodwill exceeded the implied fair value of zero. Accordingly, during the three months ended March 31, 2008 we charged €61 million to the income statement to write off the existing goodwill in full. We also assessed our long-lived assets for impairment as of March 31, 2008 in accordance with SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets”, and determined that our long-lived assets are recoverable.

Other Operating Income, Net

 

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

 

 

Other operating income, net contains various items related to our operations, and may fluctuate from period to period due to the more or less infrequent nature of these items, which include subsidies, grants, insurance proceeds and accruals for legal matters. No material items of this nature were incurred in the six months ended March 31, 2007 as well as in the six months ended March 31, 2008.

 

Equity in Earnings (loss) of Associated Companies

 

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

 

 

The equity in earnings (loss) of associated companies with financial year-ends that differ by not more than three months from the Company’s financial year-end is recorded with a three-month delay. This applies in particular to our joint venture Inotera Memories, which has a December 31 financial year-end. Market price fluctuations during the three months ended March 31, 2008 would, to the extent these impact Inotera’s results, affect our equity in Inotera’s earnings (loss) during the three months ending June 30, 2008.

 

In both periods, Inotera contributed most of our equity in earnings (loss) from associated companies, which decreased in the three months ended March 31, 2008, primarily due to lower selling prices in the three months ended December 31, 2007. Our equity in Inotera’s earnings (loss) is, however, sensitive not only to fluctuations in the price of DRAM and production volumes, but also to changes in the portion of our inventory which we purchased from Inotera and that remains unsold. This is because we eliminate Inotera’s profit from the inventory we have not yet sold.

 

Loss on Associated Company Share Issuance

 

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

 

 

On August 20, 2007 Inotera issued 40 million common shares, representing 1.2% of its outstanding share capital, as bonuses to its employees. This diluted our ownership interest to 35.6%, which amounted to a loss of €7 million in the six months ended March 31, 2008.

Other Non-Operating Income, Net

 

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

 

 

Other non-operating income, net consists of various items from period to period not directly related to our principal operations, including gains and losses on sales of marketable securities. In the six months ended March 31, 2008, other non-operating income related primarily to an increase in the valuation of derivatives and gains and losses on sales of marketable securities, whereas in the six months ended March 31, 2007, other non-operating income related principally to foreign currency transaction gains as well as a gain in the amount of €2 million on the sale of our investment in Ramtron.

 

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

 

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

 

 

Interest Income, Net

 

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

 

 

Interest expense mainly relates to interest on our sale and lease back transactions and convertible notes, which is offset by interest income we earn on cash and cash equivalents and marketable securities.

 

Income Taxes

 

Income tax expense for the three and six months ended March 31, 2007 and 2008 is as follows:

 

 

On August 17, 2007, the Business Tax Reform Act of 2008 was enacted in Germany. This bill introduces several changes to the taxation of German business activities, including a reduction of the

combined corporate and trade tax rate in Germany from approximately 39% to 30%. Most of the changes apply to the Company effective October 1, 2007 and affect the Company’s current tax rate from that date.

 

In the three and six months ended March 31, 2007 and 2008, our effective tax rate was lower than the combined German statutory tax rate of 39% and 30%, respectively. This resulted primarily from income in jurisdictions with lower than average corporate tax rates, the utilization of tax credits, and the recording of additional valuation allowances against current period deferred tax benefits arising in connection with the operating losses in the three and six months ended March 31, 2008. Despite the consolidated pretax loss, we generated taxable income in some tax jurisdictions which resulted in the negative effective tax rate during the three and six months ended March 31, 2008.

 

Pursuant to SFAS No. 109 “Accounting for Income Taxes”, we have assessed our deferred tax assets and the need for a valuation allowance. The assessment was based on the benefits that could be realized from available tax strategies, forecasted future taxable income to the extent applicable, and the reversal of temporary differences in future periods. As a result of this assessment, we increased the deferred tax asset valuation allowance as of March 31, 2008 to reduce the deferred tax asset to an amount that is more likely than not expected to be realized in future. Changes in valuation allowance attributable to prior year tax credits in the amounts of €6 million and €10 million were recorded for the three and six months ended March 31, 2008, respectively.

 

Net Income (Loss)

 

We had a net loss of €1,080 million in the six months ended March 31, 2008 compared to net income of €234 million in the six months ended March 31, 2007. In the three months ended March 31, 2008 our net loss amounted to €482 million, compared to a net loss of €598 million in the three months ended December 31, 2007.

 

Financial Condition

 

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

 

 

As of March 31, 2008, our current assets decreased significantly as compared to September 30, 2007 mainly due to lower inventories, lower trade accounts receivables, lower other current assets and lower cash and cash equivalents. Inventories decreased as a result of lower gross inventories and higher inventory write-downs due to market price decline in the six months ended March 31, 2008 compared to September 30, 2007. Trade accounts receivables decreased in the six months ended March 31, 2008 primarily due to lower sales. As of March 31, 2008, non-current assets decreased compared to September 30, 2007 principally due to lower property, plant and equipment, lower long term investments and lower intangible assets. Property, plant and equipment decreased primarily because our capital expenditures were lower than our depreciation expenses. The decrease of intangible assets is attributable to the write-off of goodwill in the amount of €61 million as described above under “Results of operations — Goodwill Impairment”.

 

As of March 31, 2008, current liabilities decreased slightly compared to September 30, 2007 principally due to lower trade accounts payable and lower short-term provisions, offset by higher short-term debt and higher other current liabilities. Trade accounts payable mainly decreased as a result of lower capital expenditures in the three months ended March 31, 2008 compared to the three months

ended September 30, 2007. Short-term debt increased compared to September 30, 2007 mainly due to higher short-term portions of long-term debt and our sale and leaseback transactions. As of March 31, 2008, non-current liabilities increased compared to September 30, 2007 principally due to increased long-term debt as a result of our sale and leaseback transactions and the issuance of our convertible bond.

 

As of March 31, 2008, our shareholders’ equity decreased to €2,323 million, primarily due to our net loss of €1,080 million incurred during the six months ended March 31, 2008, as well as foreign currency translation losses affecting equity in the amount of €100 million.

 

Liquidity

 

Cash Flows

 

 

Our operating cash flow decreased significantly from an inflow of €724 million in the six months ended March 31, 2007 to an outflow of €268 million in the six months ended March 31, 2008. This was mainly caused by our net loss of €1,080 million in the six months ended March 31, 2008, which in turn was largely a result of lower net sales due to the strong decline in our average selling prices as compared to the previous year. This negative impact in our operating cash flow was partly offset by working capital improvements resulting from the decrease in our inventories and trade accounts receivable. Operating cash flow was also negatively impacted by a higher decrease in trade accounts payable during the six months ended March 31, 2008 compared to the decrease during the six months ended March 31, 2007.

 

Cash used in investing activities decreased substantially from an outflow of €486 million in the six months ended March 31, 2007 to an outflow of €122 million in the six months ended March 31, 2008. This was principally due to lower capital expenditures (a reduction of €96 million) lower investment in marketable securities (a reduction of €150 million) and the execution of our sale and lease back transactions (a contribution of €129 million in the six months ended March 31, 2008).

 

Cash provided in financing activities during the six months ended March 31, 2008 refers mainly to the issuance of our convertible bond, from which we raised €168 million, and a drawing of €40 million under a long-term loan agreement. During the six months ended March 31, 2007, cash used in financing refers principally to the repayment of €296 million of short-term debt to Infineon.

 

The €40 million drawn under the long-term loan agreement must be repaid by July 31, 2009. This loan agreement and other contracts which we are a party to contain covenants customary for such transactions and that relate to our financial performance. We were in compliance with such covenants at March 31, 2008.

 

Free Cash Flow

 

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

 

Our free cash flow in the six months ended March 31, 2008, was negative primarily due to our currently non-profitable operations and capital expenditures that were higher than our proceeds from sales of marketable securities and sale and leaseback transactions.

 

Our free cash flow was positive in the three and six months ended March 31, 2007 mainly due to our profitable operations during that timeframe and capital expenditures that were lower than cash provided from operating activities.

 

Capital Expenditures

 

Our capital expenditures for the six months ended March 31, 2008, consisted primarily of equipment for the technology conversion at our 300mm facility in Richmond, Virginia and for our 300mm R&D facility in Dresden.

 

We target capital expenditures for the 2008 financial year in a range of €400 million to €500 million. Furthermore, as part of our conversion to Buried Wordline technology we anticipate investing an additional €100 million over the course of our 2009 and 2010 financial years.

 

Capital Requirements

 

We had aggregate cash, cash equivalents and available-for-sale marketable securities as of March 31, 2008 in the amount of €768 million, which we refer to as our gross cash position, compared to €1,011 million as of September 30, 2007. As of March 31, 2008 we had short-term debt obligations of €123 million payable within one year. Our total short and long-term debt amounted to €552 million as of March 31, 2008, which represents 24% of our shareholders’ equity as of the same date. We therefore believe that our capital structure provides us with flexibility to obtain financing suitable to our business, such as the sale and lease back transactions we have recently executed despite difficult global financial market conditions.

 

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

 

Recent Developments

 

On April 21, 2008 we announced a comprehensive cost reduction program designed to adjust our cost structure and lower our breakeven point. We target €180 million in annualized cost reductions compared to the current cost structure. These cost reductions are based on a combination of reducing workforce in the range of 10% on a worldwide basis and cutting our recurring costs. This includes a reduction in non-volatile memory development to basic research activities and the termination of the related agreement with Macronix. We expect to realize these savings in full starting in our 2009 financial year and to accrue any restructuring charges relating to this program by the end of our 2008 financial year.

 

On April 21, 2008 we announced that we have signed a technology license and foundry agreement with Winbond whereby Winbond will license our Buried Wordline technology for 65 nm manufacturing.

 

On April 24, 2008 we and Elpida Memory, Inc., Japan, (“Elpida”) announced that we have signed a Memorandum of Understanding for a strategic technology partnership for the joint development of memory chips (DRAMs). In the planned cooperation, we will provide our know-how with the innovative Buried Wordline technology and Elpida its advanced stack capacitor technology. The strategic technology cooperation will leverage the strength of both companies to accelerate their roadmap to DRAM products featuring cell sizes of 4F². The companies expect to conclude their negotiations and finalize definitive agreements in due course.

Outlook for the Third Quarter and 2008 Financial Year

 

For the third quarter of our financial years, we are expecting our bit production to decrease by a high single digit percentage compared to the second quarter, mainly due the reduction of capacity corridors with our foundry partners.

 

We are currently targeting an increase in our bit production for the full 2008 financial year, of between 20% and 30%, taking into account a reduction of 300mm capacities at our foundry partners. This compares to our prior estimate of 30% to 40%. In general, due to the reductions of capital expenditures and the retirements of 200mm facilities in the semi-conductor industry as announced by several DRAM companies, including ourselves, we expect a slow-down of supply growth in the market, in line with the expectations of market researchers, which should eventually lead to a more balanced supply and demand situation.

 

We are further reducing our target for selling, general and administrative expenses for our 2008 financial year to a range of €180 million to €200 million compared to our original target at the beginning of the financial year of between €210 million and €230 million.

 

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

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

For the three months ended March 31, 2007 and 2008
(in millions, except for share data)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

For the six months ended March 31, 2007 and 2008

(in millions, except for share data)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

As of September 30, 2007 and March 31, 2008

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

For the six months ended March 31, 2007 and 2008

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

QIMONDA AG AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended March 31, 2007 and 2008

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

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

 

Formation

 

Effective May 1, 2006, substantially all the memory products-related assets and liabilities, operations and activities of Infineon (the “Memory Products business”) were contributed to the Company (the “Formation”). In conjunction with the Formation the Company entered into a contribution agreement and various other service agreements with Infineon (note 15 and 18).

 

At the Formation certain of the Company’s operations and investments that could not be directly transferred were initially held in trust for Qimonda’s benefit by Infineon until the legal transfer to Qimonda could take place. Pursuant to agreements entered into on December 14, 2007 Infineon’s investments in Advanced Mask Technology Center GmbH & Co. (“AMTC”) and Maskhouse Building Administration GmbH & Co. KG (“BAC”) were transferred to Qimonda subject to registration in the commercial register. On January 11, 2008 the legal transfer from Infineon of the Company’s interest in AMTC became effective with the entry in the commercial register. Similarly, on January 21, 2008 the legal transfer from Infineon of the Company’s interest in BAC became effective with the entry in the commercial register. The accompanying financial statements include the results of operations of these activities for all periods presented.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements as of and for the three and six months ended March 31, 2007 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The accompanying financial statements are condensed, because certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In addition, the condensed consolidated balance sheet as of September 30, 2007 was derived from audited financial statements and condensed for comparative purposes, but does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows of the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full financial year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited combined and consolidated financial statements for the year ended September 30, 2007. The accounting policies applied in preparing the accompanying condensed financial statements are consistent with those for the year ended September 30, 2007 (note 2).

 

All amounts herein are shown in millions of euro (or “€”) except where otherwise stated. The accompanying balance sheet as of March 31, 2008 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 = $1.5805, the Federal Reserve noon buying rate on March 31, 2008.

 

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

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

Estimates

 

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

 

2.  Recent Accounting Pronouncements

 

Adopted in the financial year beginning October 1, 2007

 

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

 

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

 

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

 

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

 

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”. The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect the adoption of this Statement to have a material impact on its financial statements.

 

3.  Restructuring

 

During the three months ended December 31, 2007 Qimonda announced various restructuring measures aimed at reducing costs by focusing efforts on faster conversions to more cost efficient technologies. The Company’s restructuring expenses comprise three measures: The relocation of the backend production in Malaysia from Malacca to Senai (Johor) near Singapore, the phase-out of 200mm manufacturing at Infineon Dresden and the combination of research activities in North America. As of March 31, 2008, the Company has recorded accruals of €18 related to these measures. The Company

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

currently expects additional costs of €4 related to these measures which are to be expensed as they are incurred during the year ending September 30, 2008.

 

 

Relocation of backend production in Malaysia

 

In March 2007, the Company had announced its intention to relocate its backend production in Malaysia from its existing facility in Malacca to a new backend production facility in Senai (Johor) near Singapore by December 2008. Following the move, the existing site in Malacca is to be completely closed and the remaining employees are to be laid off. During the three months ended March 31, 2008 the Company accrued €4 for severance payments for 631 employees.

 

Phase-out of 200mm Manufacturing at Infineon Dresden

 

In April 2006, Infineon and Qimonda entered into a product purchase agreement for the production of 200mm wafers by Infineon Technologies Dresden GmbH & Co. OHG (“Infineon Dresden”) through September 30, 2007. In January 2007, the agreement was extended through September 30, 2009. Pursuant to the agreement, Infineon agreed to manufacture wafers at Infineon Dresden, using the Company’s manufacturing technologies and masks, and to sell them to the Company at prices specified in the agreement. The Company agreed to pay for idle costs resulting from its purchasing fewer wafers from Infineon Dresden than agreed upon, if Infineon cannot otherwise utilize the capacity. Infineon and the Company agreed to share equally any potential restructuring costs arising in connection with one Infineon Dresden module.

 

As part of its focus on improved profitability and 300mm manufacturing, on November 30, 2007, the Company terminated the aforementioned product purchase agreement with Infineon. The Company’s purchases of wafers from Infineon Dresden will be completely phased out by the end of May 2008. As a result of the termination, the Company accrued restructuring liabilities of €12 and €10 as of December 31, 2007 and March 31, 2008, respectively, for amounts to be reimbursed to Infineon for costs related to one Infineon Dresden module. In addition, cost of goods sold includes losses related to purchase commitments for 200mm wafer contract manufacturing at Infineon Dresden of €3 and €20 for the three and six months ended March 31, 2008, respectively. Additionally, Infineon and the Company are presently discussing additional reimbursement for Infineon from the Company in respect of idle costs at Infineon Dresden of approximately €20, which have not been incurred or accrued as of March 31, 2008.

 

Combination of research activities in North America

 

Due to continued efforts to improve cost and efficiency, in December 2007, the Company announced plans to consolidate its U.S. research and development facilities into a single development center located in Raleigh, North Carolina. As a result, the Company’s development center in Burlington, Vermont, is to be closed by the end of June 2008. The Company accrued restructuring costs of €0 and €4 during the three and six months ended March 31, 2008, respectively, relating to lease termination costs and expected severance payments for approximately 100 employees.

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

4.  Income Taxes

 

Income tax expense for the three and six months ended March 31, 2007 and 2008 is as follows:

 

 

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

 

In the three and six months ended March 31, 2007 and 2008, the Company’s effective tax rate was lower than the combined German statutory tax rate of 39% and 30%, respectively. This resulted primarily from income in jurisdictions with lower than average corporate tax rates, the utilization of tax credits, and the recording of additional valuation allowances against current period deferred tax benefits arising in connection with the operating losses in the three and six months ended March 31, 2008. Despite the consolidated pretax loss, the Company generated taxable income in some tax jurisdictions which resulted in the negative effective tax rate during the three and six months ended March 31, 2008.

 

Pursuant to SFAS No. 109, “Accounting for Income Taxes”, the Company has assessed its deferred tax asset and the need for a valuation allowance. The assessment was based on the benefits that could be realized from available tax strategies, forecasted future taxable income to the extent applicable, and the reversal of temporary differences in future periods. As a result of this assessment, the Company increased its deferred tax asset valuation allowance as of March 31, 2008 to reduce the deferred tax asset to an amount that is more likely than not expected to be realized in future. Changes in valuation allowance attributable to prior year tax credits in the amounts of €6 and €10 were recorded for the three and six months ended March 31, 2008, respectively.

 

Application of FIN 48

 

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

 

The adoption of FIN 48 as of October 1, 2007 did not affect the Company’s liability for unrecognized tax benefits. The total amount of gross unrecognized tax benefits as of the date of adoption was €37. The unrecognized tax benefits were increased during the three and six months ended March 31, 2008, respectively. If recognized, the unrecognized tax benefits resulting from the adoption of FIN 48 and its increase in the three and six months ended March 31, 2008, would favorably affect the Company’s effective tax rate. Interest and penalties related to income tax liabilities are classified as interest expense. The Company had no significant accrued interest and penalties recorded as of the date of adoption.

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

During the three and six months ended March 31, 2008 the total amount of unrecognized tax benefits was as follows:

 

 

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

 

5.  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 three and six months ended March 31, 2007 and 2008, respectively.

 

On November 24, 2006, the Company granted 1.9 million stock options pursuant to the Qimonda Stock Option Plan (note 11). None of these options were dilutive to EPS for the three and six months ended March 31, 2007 and 2008. The Company accounts for the potentially dilutive effects of its stock options according to the provisions of SFAS No. 123(R) “Share Based Payment”.

 

On February 13, 2008, the Company issued convertible notes, due in 2013, with a conversion option for up to 30 million ADSs plus an overallotment option that was exercised by the underwriting banks representing a conversion option for 4.2 million additional ADSs (notes 11 and 17). If the conversion option were to be exercised, the number of outstanding shares would increase. None of these options were dilutive to EPS for the three and six months ended March 31, 2008.

 

The computation of basic and diluted EPS for the three and six months ended March 31, 2007 and 2008 is as follows:

 

 

6.  Trade Accounts Receivable, net

 

Trade accounts receivable at September 30, 2007 and March 31, 2008 consists of the following:

 

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

7.  Inventories

 

Inventories at September 30, 2007 and March 31, 2008 consist of the following:

 

 

8.  Long-term Investments

 

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

 

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

 

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

 

9.  Intangible Assets, net

 

Pursuant to SFAS No. 142 “Goodwill and Other Intangible Assets” the Company tested goodwill for impairment at March 31, 2008 due to the decline in the Company’s share price and general weakness in pricing for DRAM products. Goodwill is tested for impairment using a two-step process. In the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the implied fair value of the reporting unit’s goodwill. Determining the implied fair value of goodwill requires the valuation of the reporting unit’s tangible and intangible assets and liabilities in a manner similar to the allocation of purchase price in a business combination and requires considerable judgment. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference.

 

As a result of the Company’s fair value analysis as of March 31, 2008, the carrying value of goodwill was determined to exceed its implied fair value in full. Accordingly, as of March 31, 2008 the Company recognized a goodwill impairment charge in the amount of €61.

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

As of September 30, 2007 and March 31, 2008, the Company had goodwill as follows:

 

 

The Company also assessed its long-lived assets for impairment pursuant to SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” as of March 31, 2008 and determined that the Company’s long-lived assets are recoverable.

 

10.  Trade Accounts Payable

 

Trade accounts payable at September 30, 2007 and March 31, 2008 consists of the following:

 

 

11.  Debt

 

Debt at September 30, 2007 and March 31, 2008 consists of the following:

 

 

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

 

The Company can also draw, for short term purposes, on the working capital lines it maintains in several locations with an aggregate amount of €248 as of March 31, 2008.

 

On January 29, 2008, Qimonda AG held its annual general meeting of shareholders. The shareholders resolved to replace the previous authorization of July 14, 2006 relating to the issuance of securities

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

with a new authorization to the Management Board, effective until January 28, 2013, to issue various types of securities having an aggregate face value of up to the equivalent of €2,063. Following this authorization, on February 13, 2008, Qimonda AG’s 100%-owned finance subsidiary Qimonda Finance LLC issued $218 million convertible notes due 2013 at par which are fully and unconditionally guaranteed by Qimonda AG in an underwritten registered offering in the U.S.A. On March 11, 2008, in connection with the exercise of the underwriters’ overallotment option, an additional $30 million convertible notes were issued on the same terms. The notes are convertible, at the option of the holders of the notes, into an aggregate 34.2 million ordinary shares of the Company, at an initial conversion price of $7.2549 per share through maturity. The notes accrue interest at 6.75% per year. The notes are unsecured and rank pari passu with all present and future unsecured unsubordinated obligations of the issuer. The note holders have a negative pledge relating to future capital market indebtedness, as defined. The note holders have an early redemption option in the event of a fundamental change, as defined. The Company may redeem the convertible notes after three years at their principal amount plus interest accrued thereon, if the Company’s share price exceeds 150% of the conversion price on 20 trading days during a period of 30 consecutive trading days. The convertible notes have been admitted for open trading on the Frankfurt Stock Exchange. Concurrently with this transaction, Infineon loaned Credit Suisse International up to 21 million Qimonda ADSs ancillary to the placement of the convertible notes.

 

Furthermore at issuance, the Company deferred issuance costs of €5 which will be amortized as part of interest expense over the term of the convertible notes. At March 31, 2008 unamortized debt issuance costs amounted to €5.

 

At issuance, the equity conversion option embedded in the convertible notes was bifurcated pursuant to SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and a corresponding amount is amortized as debt premium to interest expense over the term of the convertible notes (notes 5 and 17).

 

For the period ended March 31, 2008, the Company recognized interest expense of €2 related to both the nominal interest and amortized debt premium of the convertible notes.

 

Aggregated amounts of debt, including capital lease obligations, maturing subsequent to March 31, 2008 are as follows:

 

 

QIMONDA AG AND SUBSIDIARIES

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

 

12.  Stock-based Compensation

 

A summary of the status of the Qimonda stock option plan 2006 as of March 31, 2008, and changes during the six months then ended is presented as follows:

 

 

Stock-Based Compensation Expense

 

Stock-based compensation expense for the Infineon and Qimonda stock option plans was allocated as follows for the three and six months ended March 31, 2007 and 2008: