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

August 1, 2008

QIMONDA AG

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

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

Form 20-F  þ          Form 40-F  o

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

Yes  o          No  þ

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

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

 

 

Explanatory Note

     This Report on Form 6-K contains the quarterly report for the third financial quarter ended June 30, 2008 of Qimonda AG dated August 1, 2008 and is hereby incorporated by reference into our Registration Statement on Form F-3, Registration No. 333-145983.

QIMONDA AG AND SUBSIDIARIES

 

QUARTERLY REPORT
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2008

 

 

INDEX

 

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Three And Nine Months Ended June 30, 2008 Compared To Three And Nine Months Ended June 30, 2007

 

Results of Operations

 

Net Sales

 

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

 

 

Our net sales in the nine months ended June 30, 2008 decreased by €1,588 million, or 55%, from €2,897 million in the nine months ended June 30, 2007 to €1,309 million in the nine months ended June 30, 2008. This decrease was primarily due to:

 

 

These decreasing effects was offset in part by:

 

 

Average price decline.  In the 2007 calendar year, we have experienced a sharp decline of market prices (for 512Mb DDR2 memories in particular) with prices falling by more than 80%. Despite the continued oversupply market situation, the price remained stable at a low level in the three months ended June 30, 2008 compared to 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.

 

Overall the average selling prices of our DRAM products were 63% lower in the nine months ended June 30, 2008 as compared to the nine months ended June 30, 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 experienced in calendar year 2007. 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.

 

Decrease in non-PC bit shipments.  In the nine months ended June 30, 2008, 49% of our total bit shipments were for use in non-PC applications compared to 52% for the nine months ended June 30, 2007. The decrease in our non-PC share was mainly due to increased shipments in the PC market in the first two quarters to meet the strong PC market demand growth.

 

Exchange rate effects.  The U.S. dollar weakened against the euro in the first nine months of the 2008 financial year, with the average exchange rate for the period being 15% lower than for the corresponding period of our 2007 financial year. This unfavorable U.S. dollar to euro exchange rate negatively affected our revenues during the nine months ended June 30, 2008. We have calculated the effects of this translation risk as follows: we would have achieved €190 million more in net sales in the nine months ended June 30, 2008, had the average exchange rates we used to translate our U.S. dollar denominated sales into euro been the same in the nine months ended June 30, 2008 as they were in the nine months ended June 30, 2007. For the three months ended June 30, 2008 compared to the three months ended June 30, 2007 the negative impact on sales amounted to €64 million.

 

Increase in bit shipments.  Our bit shipments increased by 41% during the nine months ended June 30, 2008 compared to the nine months ended June 30, 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 June 30, 2008, 89% of our capacities were converted to the 80nm and below technology nodes, compared to less than 22% as of June 30, 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 during the nine months ended June 30, 2008 was mainly caused by Original Equipment Manufacturer (“OEM”) customers relocating their production to Asia.

 

For practical purpose, 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 1% of total sales in any period.

 

Cost of Goods Sold and Gross Margin

 

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

 

 

Cost of goods sold decreased by €421 million, or 16%, from €2,572 million in the nine months ended June 30, 2007 to €2,151 million in the nine months ended June 30, 2008. As a percentage of net sales, cost of goods sold increased from 89% to 164% over the same period. The absolute decrease in our cost of goods sold was due primarily to:

 

 

These decreasing effects were offset in part by:

 

 

Improvements in 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. We had converted almost 90% of our capacities to 80nm and 75nm at June 30, 2008. 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, 85% of our total production (including capacity sourced from our strategic and foundry partners) was on 300mm wafers in the nine months ended June 30, 2008 as compared to 73% of our production in the nine months ended June 30, 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 June 30, 2008, 89% of our capacities were converted to the 80nm and below technology nodes, compared to less than 22% as of June 30, 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.

 

Reduced 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. During the three months ended June 30, 2008, we completely phased out external capacities related to SMIC and Infineon Dresden. Our purchases from joint ventures and foundries amounted to €566 million in the nine months ended June 30, 2008 as compared to €974 million in the nine months ended June 30, 2007. Even though our purchases from these entities declined in absolute amounts as a result of the significant decline in DRAM prices, we increased the percentage of total bit shipments purchased from these partners increased to 65% in the nine months ended June 30, 2008 as compared to 58% during the nine months ended June 30, 2007.

 

Positive impacts from exchange rate effects.  The decline in the exchange rate of other currencies against the euro in the nine months ended June 30, 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 €219 million. This means that we would have incurred approximately €219 million more in costs of goods sold in our nine months ended June 30, 2008, had the average exchange rates we used to translate our non-euro expenses into euro been the same in the nine months ended June 30, 2008 as they were in the nine months ended June 30, 2007. However, considered together with the decrease in our net sales due to negative foreign exchange effects in the amount of €190 million, foreign currency movements overall only had a net positive effect of €29 million on our gross margin during the nine months ended June 30, 2008. For the three months ended June 30, 2008 the positive exchange rate impact on our costs of goods sold was €78 million compared to the respective quarter in financial year 2007. Considering the negative exchange rate impact of €64 million on net sales in the three months ended June 30, 2008 there would have been a net positive effect of €14 million on gross margin if the U.S. dollar to euro exchange rate would have remained on the same level since June 30, 2007.

 

Lower inventory write-downs.  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 €72 million for the nine months ended June 30, 2008 in accordance with our policy. In the comparable period of our 2007 financial year we recorded write-downs on inventory in an amount of €91 million. The lower level of write-downs in the nine months ended June 30, 2008 as compared to the nine months ended June 30, 2007 is due to a reduction in our manufacturing costs and a recovery in sales prices experienced in the three months ended June 30, 2008. Due to the volatility of the DRAM market, write-downs of this nature may occur in future periods of sharp price decline.

 

Increase in bit shipments.  The 41% increase in bit shipments in the nine months ended June 30, 2008 compared to the nine months ended June 30, 2007 was primarily enabled by continued production growth at our Richmond 300mm facility and higher purchase volumes from foundries and joint ventures. In response to the low price levels, PC manufacturers continued to increase the quantities of DRAMs that were installed per system, which absorbed a significant portion of the oversupply in the industry.

 

Our gross margin fell to a negative 64% during the nine months ended June 30, 2008, from a positive 11% in the nine months ended June 30, 2007. This was primarily due to immensely lower average 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 third quarter of our 2008 financial year our gross margin improved to negative 49% as compared to a negative 58% in the second quarter of our 2008 financial year. This improvement resulted mainly from continuing productivity improvements, reduced foundry purchases which offset in part the effect of lower sales and a €37 million positive effect from reduced inventory write-downs due to increasing price levels for standard DRAMs during the third quarter of our 2008 financial year.

 

While average selling prices, especially for standard DRAM products, generally decline over time, they can exhibit significant volatility from period to period. Our gross margin suffers in periods, such as the first nine months of our 2008 financial year, in which prices have declined 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 nine months ended June 30, 2008, research and development expenses increased by 12% to €326 million from €291 million in the nine months ended June 30, 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 nine months ended June 30, 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.”

 

In the third quarter, Qimonda and Elpida signed final contracts for a strategic technology partnership for the joint development of memory chips. They plan to jointly develop technology platforms and design rules drawing on both their technologies. Specifically, the companies target to introduce a jointly developed innovative 4F² cell concept in the 40nm generation already in 2010 and to subsequently scale it to the 30nm generation. The companies have established a broad cross licensing of intellectual property. Additionally, they are in the process of finalizing discussions on further joint activities in the areas of product and technology development as well as joint manufacturing.

 

Selling, General and Administrative (SG&A) Expenses

 

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

 

 

During the nine months ended June 30, 2008, selling, general and administrative expenses decreased by 1% 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 four measures: The relocation of the backend production in Malaysia from Malacca to Senai (Johor) near Singapore, the phase-out of the 200mm wafer supply from Infineon’s manufacturing facility in Dresden, the combination of our research centers in North America and a comprehensive cost reduction program.

 

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 and nine months ended June 30, 2008 we accrued €0 million and €4 million for severance payments for 631 employees, respectively.

 

Furthermore, as part of our focus to improve profitability and 300mm manufacturing, we terminated our wafer purchase contract with Infineon. Our purchases of wafers from Infineon Dresden had been 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 incurred €1 million and €11 million during the three and nine months ended June 30, 2008, respectively, for the reimbursement obligation to Infineon. 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 €33 million for the three and nine months ended June 30, 2008, respectively. Infineon and we are presently discussing additional reimbursements to Infineon from us in respect of idle costs at Infineon Dresden, which have not been incurred or accrued as of June 30, 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, was closed by the end of June 2008. We accrued restructuring costs of €0 million and €4 million during the three and nine months ended June 30, 2008, respectively, relating to lease termination costs and expected severance payments for 108 employees.

 

On April 21, 2008 management 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 recurring costs. This includes a reduction in nonvolatile 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 the 2009 financial year and to have accrued for any restructuring charges relating to this program by the end of the 2008 financial year. During the three and nine months ended June 30, 2008, we incurred restructuring expenses in an amount of €19 million for each period. For the fourth quarter, we expect to record about €10 million in additional restructuring charges related to these cost reduction initiatives.

 

Goodwill and Long-lived Assets Impairment

 

Due to the decline in our share price and the general weakness in pricing for DRAM products we tested the goodwill recorded 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.

 

Due to our operating loss and cash outflow, we are required in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” to analyze whether the carrying values of our long-lived assets are recoverable or reduce those values through impairment charges if they are not. We assessed our long-lived assets for impairment as of June 30, 2008, and determined that our long-lived assets are recoverable. As a result of the protracted downturn in the DRAM industry and the recent sharp decline in our share price, our independent auditors have requested an independent valuation in order to finally conclude on our assessment of recoverability. We intend to conclude this valuation by September 30, 2008.

 

If the result of the valuation is a conclusion that the value of our long-lived assets is lower than their carrying values, we will be required to write down their carrying values. A write-down of this nature could be material. In addition, a write-down may affect our compliance with financial covenants requiring us to maintain prescribed levels of debt to equity. This would require us to seek to renegotiate these covenants, refinance the affected financing obligations or risk breach of these covenants and repayment of the related financing obligations of €40 million as of June 30, 2008.

 

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 nine months ended June 30, 2007 as well as in the nine months ended June 30, 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 June 30, 2008 would, to the extent these impact Inotera’s results, affect our equity in Inotera’s earnings (loss) during the three months ending September 30, 2008.

 

In both periods, Inotera contributed most of our equity in earnings (loss) from associated companies, which decreased to a loss in the three months ended June 30, 2008, primarily due to lower selling prices in the three months ended March 31, 2008. 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 nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 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 (Expense), 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 nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 2008. Despite the consolidated pretax loss, we generated taxable income in some tax jurisdictions which resulted in the negative effective tax rate during the nine months ended June 30, 2008.

 

Pursuant to SFAS No. 109 “Accounting for Income Taxes”, we have assessed our deferred tax asset and the need for a valuation allowance. The assessment was based on the benefits that could be realized from available tax strategies, forecasted future taxable income to the extent applicable, and the reversal of temporary differences in future periods. As a result of this assessment, we increased our deferred tax asset valuation allowance as of June 30, 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 €0 million and €10 million were recorded for the three and nine months ended June 30, 2008, respectively.

 

Net Income (Loss)

 

We had a net loss of €1,481 million in the nine months ended June 30, 2008 compared to a net income of €16 million in the nine months ended June 30, 2007. In the three months ended June 30, 2008 our net loss amounted to €401 million, compared to a net loss of €482 million in the three months ended March 31, 2008.

Financial Condition

 

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

 

 

As of June 30, 2008, our current assets decreased significantly as compared to September 30, 2007 mainly due to lower inventories, lower cash and cash equivalents, lower trade accounts receivables, lower marketable securities and lower other current assets. Inventories decreased as a result of lower gross inventories and higher inventory write-downs due to market price decline in the nine months ended June 30, 2008 compared to September 30, 2007. Trade accounts receivables decreased in the nine months ended June 30, 2008 primarily due to lower sales. As of June 30, 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 and Long-lived Assets Impairment”.

 

As of June 30, 2008, current liabilities increased slightly compared to September 30, 2007 principally due to higher short-term debt and higher other current liabilities, offset by lower trade accounts payable. Trade accounts payable mainly decreased as a result of lower capital expenditures in the three months ended June 30, 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 June 30, 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 June 30, 2008, our shareholders’ equity decreased to €1,925 million, primarily due to our net loss of €1,481 million incurred during the nine months ended June 30, 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 €769 million in the nine months ended June 30, 2007 to an outflow of €423 million in the nine months ended June 30, 2008. This was mainly caused by our net loss of €1,481 million in the nine months ended June 30, 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. Operating cash flow was also negatively impacted by the higher decrease in our trade accounts payable balance during the nine months ended June 30, 2008, with the value of our trade payables following selling prices down. These negative impacts on our operating cash flow were partly offset by working capital improvements resulting from the decrease in our inventories and trade accounts receivable due to falling prices and our working capital management efforts.

 

Cash used in investing activities decreased substantially from an outflow of €724 million in the nine months ended June 30, 2007 to an outflow of €41 million in the nine months ended June 30, 2008. This was principally due to lower capital expenditures (a reduction of €283 million), lower investment in marketable securities (a reduction of €256 million) and the execution of our sale and lease back transactions (a contribution of €154 million in the nine months ended June 30, 2008).

 

Cash provided by financing activities during the nine months ended June 30, 2008 refers mainly to the issuance of our convertible bond, from which we raised €168 million, a prepayment agreement with a customer to secure supply, and a drawing of €40 million under a long-term loan agreement. During the nine months ended June 30, 2007, cash used in financing activities refers principally to the repayment of €344 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 to which we are a party including the prepayment agreements we have entered into with some customers contain covenants customary for such transactions and that relate to our financial performance. We were in compliance with all such covenants at June 30, 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 nine months ended June 30, 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 months ended June 30, 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 nine months ended June 30, 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 €370 million to €420 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 June 30, 2008 in the amount of €630 million, which we refer to as our gross cash position, compared to

€1,011 million as of September 30, 2007. As of June 30, 2008 we had short-term debt obligations of €193 million payable within one year. Our total short and long-term debt amounted to €631 million as of June 30, 2008, which represents 33% of our shareholders’ equity as of that 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 are exploring 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 July 8, 2008, we decided to close down our design centers at our Italian subsidiary’s sites in Padua and Milan by the end of 2008. We estimate that the restructuring expenses in connection with these closures amount to about €5 million and will be incurred in the quarter ended September 30, 2008. The expenses relate to the termination of employees and the cancellation of rental contracts.

 

On July 14, 2008, Qimonda North America reached a tentative agreement with Technology Park to settle all claims and disputes related to the complaint regarding the lease in Vermont and plans to finalize a written agreement shortly.

 

On July 17, 2008 the remaining shares of Inotera held by Infineon were transferred to us. This completed the legal transfer of all Inotera shares from Infineon to us.

 

On July 17, 2008 the plaintiffs in the Quebec antitrust action, whose motion for authorization (certification) was dismissed by the Quebec Superior Court in June 2008, filed an appeal against this court decision.

 

Outlook for the Fourth Quarter of our 2008 Financial Year and the 2009 Financial Year

 

For the fourth quarter of financial year 2008, we expect our bit production to increase by over 20% compared to the third quarter, due to conversion to 75nm and improved yields. We continue to target an increase in our bit production for financial year 2008 of 20% to 30%.

 

For financial year 2008, 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. In general, we expect a slow down of supply growth in the market, as expected by independent market researchers, eventually leading to a more balanced supply and demand situation.

 

For the full financial year 2008, we expect to record a share of bit-shipments for use in non-PC applications of slightly below 50% compared to the original target of more than 50%, due to the strong growth in productivity and bit-production for standard products in the fourth quarter.

 

We have further reduced our financial year 2008 capital expenditures spending plan to a range of between €370 million and €420 million. We expect our depreciation and amortization charges, without taking into account the write off of goodwill taken in the second quarter, to be between €600 million and €650 million for financial year 2008, compared to our previous expectations of between €650 million and €750 million. This is due to the lower level of capital spending.

 

For our 2009 financial year, we are currently targeting R&D expenses of between €360 million and €390 million and SG&A expenses of between €160 million and €180 million.

 

Based primarily on the further productivity improvements we expect to achieve at our in-house and external foundry capacities, and taking into account the reductions we have made in our external foundry capacities, we are currently targeting bit-production growth of between 30 and 40% compared to financial year 2008. For our 2009 financial year, we target a share of bit-shipments for use in non-PC applications of more than 50%.

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

For the three months ended June 30, 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 nine months ended June 30, 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 June 30, 2008

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

QIMONDA AG AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

For the nine months ended June 30, 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 nine months ended June 30, 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)

 

 

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 (notes 16 and 19).

 

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 nine months ended June 30, 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).

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company’s financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company continues to execute its strategy and business plan which are aimed at supporting continued growth and improving profitability. As part of this plan, the Company has implemented a cost reduction program (note 3) and is accelerating its technology conversion to further increase productivity in manufacturing. In addition the Company has recently raised additional funds, e.g. through sale and leaseback transactions (note 12), and seeks to utilize suitable financing opportunities.

 

All amounts herein are shown in millions of euro (or “€”) except where otherwise stated. The accompanying balance sheet as of June 30, 2008 and the statements of operations and cash flows

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

for the periods then ended are also presented in U.S. dollars (“$”), solely for the convenience of the reader, at the rate of €1 = $1.5748, the Federal Reserve noon buying rate on June 30, 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.

 

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.

 

 

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.

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles”. The Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of this Statement to have a material impact on its financial statements.

 

In May 2008, the FASB issued SFAS No. 163 “Accounting for Financial Guarantee Insurance Contracts”. This Statement applies to financial guarantee insurance (and reinsurance) contracts issued by enterprises that are included within the scope of paragraph 6 of Statement 60 and that are not accounted for as derivative instruments. The recognition and measurement provisions of this Statement shall be applied on a contract-by-contract basis. The Statement shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not have such financial guarantee insurance (and reinsurance) contracts and, therefore, does not expect the adoption of this Statement to have a material impact on its financial statements.

 

3.  Restructuring

 

General

 

During the nine months ended June 30, 2008 Qimonda announced various restructuring measures aimed at reducing costs and focusing efforts on faster conversions to more cost efficient technologies. The Company’s restructuring expenses comprise four measures: the relocation of the backend production in Malaysia from Malacca to Senai (Johor) near Singapore, the phase-out of 200mm wafer supply by Infineon Dresden, the combination of research activities in North America and the implementation of permanent cost reductions compared to the current cost structure. As of June 30, 2008 the Company has accrued liabilities of €34 related to these measures.

 

 

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 and nine months ended June 30, 2008 the Company accrued €0 and €4, respectively, 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

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

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 have been completely phased out by the end of May 2008. As a result of the termination, the Company had accrued liabilities of €10 as of June 30, 2008 for the reimbursement obligation to Infineon. During the three and nine months ended June 30, 2008 the Company incurred costs of €1 and €11, respectively. In addition, cost of goods sold includes losses related to purchase commitments for 200mm wafer contract manufacturing at Infineon Dresden of €3 and €33 for the three and nine months ended June 30, 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, which have not been incurred or accrued as of June 30, 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, was closed by the end of June 2008. The Company accrued restructuring costs of €0 and €4 during the three and nine months ended June 30, 2008, respectively, relating to lease termination costs and expected severance payments for 108 employees.

 

Cost reduction program

 

On April 21, 2008 the Company announced a comprehensive cost reduction program designed to adjust its cost structure and lower its breakeven point. The Company targets €180 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 its recurring costs. This includes a reduction in non-volatile memory development to basic research activities and the termination of the related agreement with Macronix. The Company expects to realize these savings in full starting in its 2009 financial year and to accrue any restructuring charges relating to this program by the end of its 2008 financial year. For the three and nine months ended June 30, 2008, the Company incurred restructuring expenses in the amount of €19 in each period.

 

 

Income tax benefit (expense) for the three and nine months ended June 30, 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 nine months ended June 30, 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

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

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 nine months ended June 30, 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 nine months ended June 30, 2008.

 

Pursuant to SFAS No. 109 “Accounting for Income Taxes”, the Company has assessed its 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, the Company increased its deferred tax asset valuation allowance as of June 30, 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 €0 and €10 were recorded for the three and nine months ended June 30, 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 nine months ended June 30, 2008, respectively. If recognized, the unrecognized tax benefits resulting from the adoption of FIN 48 and its increase in the three and nine months ended June 30, 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.

 

During the three and nine months ended June 30, 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.

 

 

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 nine months ended June 30, 2007 and 2008, respectively.

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

On November 24, 2006, the Company granted 1.9 million stock options pursuant to the Qimonda Stock Option Plan (note 13). None of these options were dilutive to EPS for the three and nine months ended June 30, 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 13 and 18). 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 nine months ended June 30, 2008.

 

The computation of basic and diluted EPS for the three and nine months ended June 30, 2007 and 2008 is as follows:

 

 

 

Marketable securities at September 30, 2007 and June 30, 2008 consist of the following available-for-sale marketable securities:

 

 

As of June 30, 2007 and 2008 available-for-sale marketable securities in an unrealized loss position consisted of:

 

 

Because the decline in market value is mainly attributable to changes in interest rates, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may

 

QIMONDA AG AND SUBSIDIARIES
Notes to the Unaudited Condensed Consolidated Financial Statements
(euro in millions, except where otherwise stated)

 

be until maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2008.

 

Realized losses on sold marketable securities were €0 and €3 for the three months ended June 30, 2007 and 2008, respectively, and €0 and €4 for the nine months ended June 30, 2007 and 2008, respectively.

 

The following table presents contractual maturities of debt securities as of June 30, 2008:

 

 

Actual maturities may differ due to call or prepayment rights.

 

 

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