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(Exact name of Registrant as
specified in its charter)
Gustav-Heinemann-Ring 212
81739 Munich, Germany
+(49)(89) 60088-0
(Address of principal executive
offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act.
Title of Each Class:
Name of Each Exchange on Which Registered:
American Depositary Shares representing Qimonda AG
New York Stock Exchange
ordinary shares of no par value
Qimonda AG ordinary shares of no par value
New York Stock Exchange*
*
Not for trading, but only in
connection with the registration of American Depositary Shares.
Securities registered or to be
registered pursuant to Section 12(g) of the Act.
None
(Title of class)
Securities for which there is a
reporting obligation pursuant to Section 15(d) of the
Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close
of the period covered by the annual report.
As of September 30, 2007, 342,000,001 ordinary shares, of
no par value, of Qimonda AG were outstanding.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes o No þ
Note — Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o Not
applicable o.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
þ Large
accelerated
filer o Accelerated
filer o Non-accelerated
filer
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17 o Item 18 þ
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a court.
Our combined and consolidated financial statements are prepared
in accordance with U.S. GAAP and expressed in euro, the
single currency of the participating member states in the Third
Stage of the European Economic and Monetary Union (EMU) of the
Treaty Establishing the European Community, as amended from time
to time. In this annual report, references to “euro”
or ‘‘€” are to euro and references to
“U.S. $” or “$” are to
U.S. dollars. In this annual report, for convenience only,
we have translated the euro amounts reflected in our combined
and consolidated financial statements as of and for the
financial year ended September 30, 2007, into
U.S. dollars at the rate of €1.00 = $1.4219, the noon
buying rate of the Federal Reserve Bank of New York for euro on
September 28, 2007, the last currency trading day in
September 2007. You should not assume that, on these or on any
other dates, one could have converted these amounts of euros
into dollars at these or any other exchange rates.
Our financial year ends on September 30 of each year. References
to any financial year refer to the year ended September 30 of
the calendar year specified.
This annual report contains market data that have been prepared
or reported by DRAMeXchange, Gartner Inc. (Gartner),
International Data Corporation (IDC), iSuppli Corporation
(iSuppli) and World Semiconductor Trade Statistics (WSTS).
The trademarks
Qimondatm,
TwinFlash®,
AENEON®
and
RLDRAM®
have been assigned to us by Infineon in connection with our
carve-out. Pursuant to a co-development agreement between
Infineon and Micron Technology, Inc., Micron has trademark
rights to
CellularRAM®
used on or in connection with products sold inside the United
States, whereas Infineon has those rights with respect to
products sold outside the United States. All other trademarks,
trade names or service marks appearing in this annual report are
the property of their respective owners.
Figures presented in tabular format may not add up to 100% due
to rounding.
Special terms used in the semiconductor industry are defined in
the glossary.
Forward-looking
statements and market data
This annual report, including particularly the sections entitled
“Risk Factors”, “Selected Combined and
Consolidated Financial Data”, “Operating and Financial
Review”, “The Semiconductor Memory Industry”,
“Our Business”, “Management”,“Related
Party Transactions and Relationships” and “Additional
Information” contains forward-looking statements. These
forward-looking statements include statements regarding our
financial position; our expectations concerning future
operations, margins, profitability, liquidity and capital
resources; our business strategy and other plans and objectives
for future operations; and all other statements that are not
historical facts. In some cases, you can identify
forward-looking statements by terminology such as
“may”, “will”, “should”,
“expects”, “intends”, “plans”,
“anticipates”, “believes”,
“thinks”, “estimates”, “seeks”,
“predicts”, “potential”, and similar
expressions. Although we believe that these statements are based
on reasonable assumptions, they are subject to numerous factors,
risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These
factors, risks and uncertainties include those listed under
“Risk Factors” and elsewhere in this annual report.
Those factors, among others, could cause our actual results and
performance to differ materially from the results and
performance projected in, or implied by, the forward-looking
statements. As you read and consider this annual report, you
should carefully understand that the forward-looking statements
are not guarantees of performance or results.
These factors expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting
on our behalf. New risks and uncertainties arise from time to
time, and we cannot predict those events or how they may affect
us. Except for any ongoing obligations to disclose material
information as required by the federal securities laws, we do
not have any intention or obligation to update forward-looking
statements after we distribute this annual report.
In addition, this annual report contains information concerning
the semiconductor memory products market generally and the DRAM
market in particular, that is forward-looking in nature and is
based on a variety of assumptions regarding the ways in which
the semiconductor market and the DRAM market in particular will
develop. These assumptions have been derived from independent
market research and industry reports referred to in
this annual report. Some data are also based on our good faith
estimates, derived from our review of internal surveys and the
independent sources listed above.
If any of the assumptions regarding the market are incorrect,
actual market results may differ from those predicted. Although
we do not know what impact any such differences may have on our
business, our future results of operations and financial
condition and the market price of our ADSs may be materially
adversely affected.
Company
Information
We were registered in the commercial register of the local court
of Munich on May 25, 2004 as Invot AG, a German stock
corporation and wholly-owned subsidiary of Infineon Technologies
AG, under number HRB 152545. We changed our name to Qimonda AG
on April 6, 2006. Our principal executive offices are
located at Gustav-Heinemann-Ring 212, 81739 Munich, Germany, and
our telephone number is +49-89-60088-0. Our website is
http://www.qimonda.com.
This website address is included in this annual report as an
inactive textual reference only. The information and other
content appearing on our website are not part of this annual
report. Our agent for service of process in the United States is
Qimonda North America Corp., Corporation Trust Center, 1209
Orange Street, Wilmington, County of New Castle, Delaware19801.
Use
of Non-U.S.
GAAP Financial Measures
This document contains
non-U.S. GAAP
financial measures.
Non-U.S. GAAP
financial measures are measures of our historical or future
performance, financial position or cash flows that contain
adjustments that exclude or include amounts that are included or
excluded, as the case may be, from the most directly comparable
measure calculated and presented in accordance with
U.S. GAAP in our combined and consolidated financial
statements. Earnings before interest and taxes
(“EBIT”) is an example of a
non-U.S. GAAP
financial measure. For descriptions of these
non-U.S. GAAP
financial measures and the adjustment made to the most directly
comparable U.S. GAAP financial measures to obtain them,
please refer to “Operating and Financial Review”.
Investing in our ADSs involves a high degree of risk. You
should carefully consider the risk factors set forth below and
all other information contained in this annual report, including
our combined and consolidated financial statements and the
related notes, before making an investment decision regarding
our securities. The risks described below are those significant
risk factors, currently known and specific to us that we believe
are relevant to an investment in our securities. If any of these
risks materialize, our business, financial condition or results
of operations could suffer, the price of our ADSs could decline
and you could lose part or all of your investment. Additional
risks not currently known to us or that we now deem immaterial
may also harm us and adversely affect your investment in our
ADSs.
Risks
related to the semiconductor memory industry
The
DRAM industry is subject to cyclical fluctuations, including
recurring periods of oversupply, which result in large swings in
our operating results, including large losses.
The market for DRAM products is highly cyclical, with frequently
mismatched demand and supply cycles. Because the majority of
DRAM products shipped, especially those for the PC market, is of
a commodity nature, DRAM prices are driven primarily by changes
in worldwide DRAM supply, which in turn is driven by
manufacturing capacity and, in part, by fluctuations in demand
for the end products that use memory semiconductors. A typical
DRAM market cycle is characterized by an initial period of high
demand for DRAM products, resulting in rising DRAM prices.
Higher prices and suppliers’ perception of increasing
demand lead many suppliers and manufacturers to decide to
construct, equip or contract new facilities to increase
capacity. We and our competitors are currently bringing new
capacity on-stream, in our case through the
ramp-up at
our DRAM manufacturing facility in Richmond, Virginia. Several
of our competitors and we have announced the construction of new
capacity, in our case a new DRAM manufacturing facility in
Singapore, which we expect will commence production in 2009.
However, the lead times for new or improved facilities to become
operational average one to two years. By the time these
facilities come on-stream, demand growth may have slowed or even
reversed. When many suppliers’ additional manufacturing
capacity comes on-stream, which may occur almost simultaneously,
industry-wide supply often rises to exceed demand and DRAM
prices fall, sometimes precipitously. This in turn can cause
DRAM manufacturers to incur losses. As a result of this
cyclicality, our results of operations have historically been
volatile from year to year and we expect them to remain so. The
cyclicality of the DRAM market is evidenced through the
development of market prices for the higher volume standardized
memory products. The average “spot” market price for
512Mb DDR2 DRAM as reported by DRAMeXchange fell from $6.36 on
December 29, 2006, to $1.45 on September 28, 2007, a
drop of 77.2%. We believe that part of this price decline,
especially towards the end of March 2007, was driven by seasonal
demand weakness, the effects of an earlier
build-up of
inventories at original equipment manufacturers (OEMs) ahead of
the introduction of the Windows Vista computer operating system
and capacity conversions from NAND to DRAM by some competitors
following severe price erosion in the NAND flash area. During
the three months ended June 30, 2007, the price decline
continued and was amplified by strong DRAM output growth across
the industry, driven, we believe, mostly by capacity increases
and technology conversions to more efficient technologies.
Although prices for DRAM products improved slightly in July 2007
compared to June 2007, in August 2007, prices resumed the
decline that has characterized the calendar year to date. These
price declines may have significant negative impact on operating
results of DRAM suppliers, including ours.
The
reluctance of DRAM manufacturers to run their facilities at less
than full capacity can cause oversupply-driven downturns to last
for prolonged periods, keeping DRAM prices low.
Because the fixed costs of building, equipping and operating
DRAM manufacturing facilities, or fabs, are very high and
constitute a high proportion of the costs of producing each DRAM
chip, DRAM manufacturers normally operate their factories at
full capacity, 24 hours per day and seven days per week,
even when prices are low or falling. A manufacturer would
typically continue production of DRAM products at full capacity
at a DRAM facility as long as the average selling price of the
DRAM chips the facility produces remains above that
facility’s variable cost of producing chips and provided
that the facility cannot be cost-effectively converted to
manufacture a more profitable product. For this reason, there is
typically little capacity or supply shrinkage in response to a
market downturn. Oversupply has in a number of periods
contributed to substantial declines in average selling prices.
It did
so in the nine months ended September 30, 2007, and is
likely to do so again in the future. DRAM prices only begin to
recover when demand growth strengthens sufficiently to match
supply. While lower prices may lead to acceleration in demand if
PC manufacturers, in particular, increase the amount of DRAM
“bits per box”, or the amount of memory included in
each device, the absorption of the oversupply may require a
substantial increase in demand. As a result, oversupply-driven
downturns can last for prolonged periods. It is likely that the
DRAM industry will continue to suffer from cyclical downturns in
the future and that we will be adversely affected by these
downturns. Such downturns can have material adverse effects on
our business, financial condition and results of operations for
extended periods.
We
expect the average selling prices of the semiconductor memory
products we sell to continue to decline irrespective of cyclical
fluctuations in the industry, and if prices decrease faster than
we are able to reduce our costs, our margins will be adversely
affected.
The average selling prices of semiconductor memory products,
including DRAMs, have declined in general for many years and we
expect that they will, irrespective of industry-wide
fluctuations, continue to decline as a result of, among other
factors, technological advancements and cost reductions.
Although we may from time to time be able to take advantage of
higher selling prices typically associated with new products and
technologies, the prices of new products also generally decline
over time, and in certain cases very rapidly, in the face of
market competition. Accordingly, we need to reduce our
per-megabit manufacturing costs even as we seek to maintain our
technological position. Despite our significant investments in
research and development and in modern manufacturing facilities,
the product and process technologies that we develop may fail to
keep pace with the industry’s continuous drive towards more
powerful, smaller devices with lower per-megabit costs. If our
development fails to keep pace, our competitors may be able to
offer their products on a more profitable basis. If the average
per-megabit selling price for DRAMs and other memory chips that
we produce decreases faster than we are able to reduce our
per-megabit manufacturing costs, our gross margins would
decrease and our business, financial condition and results of
operations may be materially and adversely affected.
To
reduce our costs, we need to make investments to implement
improvements and developments in our process technologies
quickly. If we are unable to do so, we may not be able to reduce
per-megabit manufacturing costs quickly enough to keep pace with
declines in average selling prices for DRAMs and other memory
products.
Implementing a significant new process technology, such as the
migration to a new process technology node (for example, from
90nm to 75nm), requires very significant long-term investments
and often many years of development effort. In addition, each
successive improvement in process technology generally involves
an increase in complexity that may increase the required level
of investment and demand more development effort. In 2003, we
experienced difficulties in our transition from the 140nm to the
110nm technology node because, at the same time, we moved our
development work from East Fishkill, New York to Dresden,
Germany and began to convert to 193nm lithography, both of which
introduced complexities to the technology node transition.
Product yields tend to be at relatively lower levels when new
process technologies are being implemented. If we experience
delays in implementing these technologies, we may not be able to
reduce our per-megabit manufacturing costs quickly enough to
avoid falling margins or keep our prices competitive. Our
business, results of operations and financial condition could be
hurt if we experience substantial delays in developing new
process technologies or if we do not implement production
technology transitions efficiently.
Demand
weakness in any of the end markets that use our products,
especially the personal computer industry, could have a material
adverse effect on our results of operations.
We sell our products for use in a variety of applications such
as PCs, servers, game consoles and mobile and consumer devices.
Our revenue growth depends not only on continued growth in the
number of these products sold into our customers’ end
markets, but also on the amount of DRAM “bits per
box”. We are likely to suffer slower growth or a decline in
demand for our products if our customers’ end markets do
not continue to grow or if the “bits per box” do not
continue to increase or if either decline. If this occurs during
a period already characterized by DRAM oversupply, our business
can suffer especially severe downturns. This occurred most
recently in 2001, when
worldwide DRAM sales dropped from $29 billion in 2000, to
$11 billion in 2001, according to WSTS. According to
Gartner, 256Mb equivalent DRAM was priced at $36 in the third
quarter of 2000, but by the fourth quarter of 2001, this price
had fallen below $4. These declines had a material adverse
effect on our financial condition and results of operations and
those of our competitors in 2001 and 2002. Any sustained decline
in our customers’ markets for our products that may occur
in the future could have a material adverse effect on our
business, financial condition and results of operations.
A
mismatch between the specific DRAM chips we or the DRAM industry
generally are producing and the platforms for which equipment
manufacturers require DRAMs can lead to declining prices for the
DRAMs we produce and consequently to material inventory
write-downs.
Which DRAMs are required by the market at any particular time
depends on the platforms the manufacturers of PCs and other
electronic devices are using in their products at that time. In
general, DRAMs are designed, manufactured and assembled into
modules for use on a specified platform, or logic chipset and
its associated interfaces. If DRAM manufacturers are producing
DRAMs for which there is not enough demand because the supply of
the related platforms is low, the supply of these DRAMs may
exceed the demand for them, causing prices for the affected DRAM
products to fall. For example, the DDR2 generation of DRAMs is
designed to work together with a DDR2 logic chipset to operate a
PC. In the first quarter of our 2006 financial year, we and many
of our competitors were producing large volumes of DDR2 DRAMs,
but the PC manufacturers sourced far fewer DDR2 logic chipsets
than would permit the manufacture of enough PCs to absorb all of
the DDR2 DRAMs being produced. The result was a dramatic
oversupply and price decline in DDR2 DRAMs industry-wide. A
portion of the DDR2 DRAMs that we produced remained unsold and
in our inventory until supply of appropriate logic chipsets
created sufficient demand for these accumulated DDR2 DRAMs.
Given the significant risk of demand and supply mismatches
characteristic of our industry, we may find it necessary to
write down the carrying value of inventories in the future
depending on market conditions. For some of our products, the
significant price decline in our 2007 financial year resulted in
the write-down of inventory of those products to market value in
an amount of €85 million in accordance with our
policy. Due to the volatility of the DRAM market, write-downs of
this nature may continue to occur in periods of sharp price
decline. Any such write-downs could have a material adverse
effect on our business, financial condition and results of
operations.
We may
not respond quickly enough to the rapid technological change in
our industry.
The semiconductor memory industry is characterized by rapid
technological change, both in the design of memory chips and in
the manufacturing processes used to produce them. The following
technological developments are continuously driving the
improvements in the performance standards of most DRAM products:
•
increasing the amount of data storage capacity per DRAM chip, or
density (DRAM manufacturers have generally doubled the density
of DRAM chips approximately every 24 months);
•
increasing data transfer rates, or bandwidth, between the DRAM
and the central processing unit, or CPU, of the host device,
such as a PC;
•
decreasing operating voltage and power consumption of the
DRAM; and
•
reducing and tailoring the form factor of DRAM chips and
components with a given density,
In 2000, the industry-standard DRAM chip had a density of 64
megabits. By 2006, the density of the standard DRAM chip had
increased to 512 megabits with the 1 gigabit generation in
ramp-up
phase and higher densities in development. In the same period,
the interface generation has evolved from SDRAM past DDR to
DDR2, with DDR3 in the development phase. At the same time,
operating voltage has declined from 3.3 volts for SDRAM to
1.5 volts for DDR3. DRAM manufacturers have continuously
reduced the feature size of their technologies to enable them to
manufacture higher density memory offering higher speeds and
requiring lower operating voltages.
In addition, from time to time industry participants are able to
reduce the overall size of the storage cells on DRAM chips,
which could be a factor in reducing manufacturing costs by
increasing the number of chips that can be
manufactured on a wafer, and is becoming increasingly important
for certain applications that require very small and
specifically tailored form factors.
For us to maintain or increase the competitiveness of our
products, we must continually develop or acquire the
technologies that allow us to increase memory capacity while
shrinking the size of our chips and to do so faster than our
competition. Our commitment to the development of new products
and process technologies, including making the substantial
investments that are required for these developments, must be
made well in advance of the introduction of those products and
technologies into the market. As part of this commitment, we
must continually be reviewing the technologies, architectures
and processes we use to make sure that they have the
technological properties and robustness to permit volume
manufacturing at competitive costs. Technology and industry
standards or customer demands may change during the development
process, rendering our products outdated or uncompetitive. Our
failure to keep pace with the technological advancements, to
anticipate changes that might render our technologies,
architectures and processes uncompetitive or to respond quickly
to market changes may materially and adversely affect our
business, financial condition and results of operations.
The
semiconductor memory industry is characterized by intense
competition, which could reduce our sales or put continued
pressure on our prices.
The semiconductor memory industry is highly competitive and has
been characterized by rapid technological change, short product
lifecycles, high capital expenditures, intense pricing pressure
from major customers, periods of oversupply and continuous
advancements in process technologies and manufacturing
facilities. We compete globally with other major DRAM suppliers,
including Samsung Electronics, Hynix Semiconductor, Elpida
Memory, Micron Technology and Nanya Technology Corporation
(Nanya), which is our joint venture partner in Inotera Memories,
Inc. Some of our competitors have substantially greater capital,
human and other resources and manufacturing capacities, more
efficient cost structures, higher brand recognition, larger
customer bases and more diversified product lines than we have.
See “Our Business — Competition”.
Competitors with greater resources and more diversified
operations may have long-term advantages, including the ability
to better withstand future downturns in the DRAM market and to
finance research and development activities. In addition, unfair
price competition, government support or trade barriers by or
for the benefit of our competitors can adversely affect our
competitive position.
To compete successfully in the DRAM market, we must:
•
design and develop new products and introduce them in a timely
manner;
•
develop and successfully implement improved manufacturing
process technologies to reduce our per-megabit costs; and
•
broaden our DRAM customer base, to reduce our dependence on a
small number of customers and position us to increase our market
share.
Other factors affecting our ability to compete successfully are
largely beyond our control. These include:
•
the extent to which and the pace at which customers incorporate
our memory products into their devices;
•
whether electronics manufacturers design their products to use
DRAM configurations or new types of memory products that we do
not offer;
•
the number and nature of our competitors; and
•
general economic conditions.
Increased competitive pressure generally or the relative
weakening of our competitive position caused by these factors,
or other developments we have not anticipated, could materially
and adversely affect our business, financial condition and
results of operations.
Our
results of operations are subject to the effects of seasonal
sales patterns that apply to the demand for the products our
customers sell and these seasonal sales patterns may interact
with existing DRAM supply and demand dynamics in a way that
further harms our results.
Retail demand for our customers’ products fluctuates
throughout the year and typically varies from region to region.
For example, as our product mix shifts towards applications used
in consumer electronics, we are increasingly exposed to the
seasonal sales patterns around the Christmas season. In
addition, demand in the retail sector of the PC market is often
stronger during the last three months of the calendar year as a
result of the Christmas holiday season. Many of the factors that
create and affect seasonal trends are beyond our control.
Further, if DRAM prices are relatively low, our customers may
react to reduced demand for their products by increasing
“bits per box” to offer the end-user a higher
performing product in an attempt to spur demand, such as when a
PC or notebook manufacturer offers to upgrade the amount of
memory included in a product at no additional cost. However, if
DRAM prices are relatively high at that time, our customers may
not increase the “bits per box” but instead use
another method to spur demand for their products. Alternatively,
if DRAM prices are high during a period in which retail demand
is relatively high, our customers may seek to limit the growth
of the “bits per box”, which may in turn slow or
reduce demand for DRAM and cause DRAM prices to fall. Measures
like these can easily obscure the seasonal factors. These uneven
sales patterns, especially when combined with the existing
dynamics of DRAM demand and supply cyclicality, make prediction
of net sales for each financial period difficult and increase
the risk of unanticipated variations in our results and
financial condition on a quarterly basis.
Risks
related to our operations
Some
of our agreements with strategic partners, such as our Inotera
Memories, Inc. joint venture with Nanya, have restrictions on
transfers of the shares of the ventures they create that could
cause our ownership or equity interest in these ventures to
revert to Infineon, if Infineon ceases to be our majority
owner.
Our joint venture with Nanya, Inotera Memories, Inc.
manufactures DRAM products on the basis of technology jointly
developed by Nanya and us pursuant to a separate joint
development agreement. Infineon has transferred its shares in
Inotera to us, other than a portion representing 0.24% of the
total Inotera shares, which Infineon holds in trust for us due
to Taiwanese legal restrictions.
If Infineon were to reduce its shareholding in Qimonda to a
minority level before the fifth anniversary of our carve-out
from Infineon and the early mass production using 58nm process
technology at our manufacturing site in Dresden has not been
achieved by that time, the joint venture agreement with Nanya,
as amended, could require us to retransfer these Inotera shares
to Infineon. We have agreed with Infineon that, in the event
Nanya requests a retransfer, we would transfer the Inotera
shares to Infineon in compliance with a trust agreement pursuant
to which Infineon has agreed it would hold the Inotera shares in
trust for us until they could be transferred back to us. If
Infineon acquires our shares in Inotera to hold in trust for us,
we would have to exercise our shareholder rights, including
board membership and voting rights, only through Infineon, which
would be required under the trust agreement to act according to
our instructions. This process is a more cumbersome and less
efficient method of exercising these rights than if we held the
shares directly. We do not believe that these administrative
complexities would have a material adverse effect on our
business, financial condition and results of operations.
Although the trust agreement was drafted in a manner designed
under German law to ensure that Qimonda could force the transfer
to it of the Inotera shares if Infineon were to become the
subject of insolvency proceedings, there is, in the absence of
any clear statutory provision or directly applicable judicial
interpretation on the issue, a risk that the shares would remain
subject to the insolvency proceeding in such a case. Were this
to occur, we would lose a portion or all of our investment in
Inotera.
In addition, our limited partnership agreement with Advanced
Micro Devices (AMD) and Toppan Photomasks Inc. relating to the
Advanced Mask Technology Center (AMTC) and the Maskhouse
Building Administration Company (BAC) in Dresden requires prior
written consent from the other partners before Infineon can
assign its partnership interest. In the case of a transfer to an
affiliate, the consent may not be unreasonably withheld. Under
the current agreement, the interest must be transferred back to
Infineon should Infineon cease to be our majority shareholder.
This could lead to similar administrative complexities as
described above in the case of Inotera.
Infineon and we are currently finalizing negotiations with AMD
and Toppan concerning an agreement that would include the
consent to the assignment to us and address Infineon’s
intention to reduce its stake in us below 50%. Under this
agreement, a “change of control” that could lead to
termination of the agreements with AMD and Toppan would only be
deemed to occur if a direct competitor of AMD or Toppan becomes
the beneficial owner of 30% or more of our equity interests or
obtains the power to appoint the majority of the members of our
Supervisory Board.
We
have suffered substantial losses in the recent past. Even during
profitable years, we have suffered losses in individual
quarters. Losses in the future and the unpredictability of our
results may cause our share price to fall.
We have suffered substantial losses in prior periods, when the
price of our products has dropped at a rate for which we could
not compensate through volume increases or reduced costs. For
example, in our 2001 and 2002 financial years, we incurred net
operating losses of €962 million and
€626 million. In addition, we have incurred quarterly
losses in net income and EBIT terms for individual quarters
within financial years in which we were profitable, including in
our 2006 financial year, in which we experienced significant
losses in the first quarter. In our 2007 financial year we
experienced significant losses in the third and fourth quarters.
We may also incur losses in future periods. If we sustain losses
like these, it would materially and adversely affect our
business, financial condition and results of operations. In
addition, our share price is likely to fall if we incur losses
in the future or if we report quarterly or annual results that
do not meet the expectations of industry analysts or are weaker
than those reported by our competitors.
The average selling prices of our principal DRAM products may
fluctuate significantly from quarter to quarter or even from
month to month. This may cause us to experience significant
fluctuations in our revenues. However, we have high fixed costs
of operations, resulting in large part from the
capital-intensive nature of our business. As a result, our
reported financial results can and often do fluctuate
significantly from period to period.
A high proportion of our revenues are derived from sales of
standard DRAM products for PC and workstation applications,
which accounted for 51% of our revenues in our 2005 financial
year, 47% of our revenues in our 2006 financial year and 39% in
our 2007 financial year. While we are, as part of our strategy
to reduce over-reliance on standard DRAMs, seeking to better
balance our product portfolio by offering a wider range of
application-specific DRAMs and to diversify our customer base by
focusing on customer-specific DRAMs, these products remain to a
greater or lesser extent exposed to the dynamics exemplified by
the standard DRAM market. Finally, after our carve-out, we are
no longer able to offer customers a range of logic products in
addition to memory products. Due to these factors, in the event
of a downturn in the DRAM market, our ability to offer
alternative products is very limited.
Some of our competitors have diversified production among DRAMs,
flash memory, image sensors and logic ICs, while at present we
remain generally focused on DRAMs. These competitors may be able
to offset the negative effects of DRAM downturns by selling
non-DRAM products, including flash memory. They may, when they
then perceive better pricing conditions in the DRAM market, be
able to quickly convert production to DRAM products,
significantly increasing their DRAM capacities in response to
positive environments and significantly decreasing their DRAM
capacities in response to negative environments. Conversely, if
the pricing for non-DRAM products such as flash memory
deteriorates, they can convert production back to DRAM products.
Because our production is narrowly focused on DRAMs, we are less
able to adjust our capacities in response to cyclical
developments. This lower ability to adjust capacity could
adversely affect our business, financial condition and results
of operations.
In addition, the potential ability of these competitors to
offset the negative effects of DRAM downturns by shifting their
sales to non-DRAM products may permit them to use the proceeds
from those sales to invest in their DRAM business. This may
cause us to be at a competitive disadvantage with regard to
technological advancements taking place in the DRAM industry and
reduce our relative ability to keep pace with these competitors.
This could adversely affect our business, financial condition
and results of operations.
The ability of some of our competitors to shift their production
among memory products may leave us relatively more exposed to
downturns in the DRAM industry and less able to finance
technological advancement.
Our
results may suffer if we are not able to adequately forecast
demand for our products.
It is not industry practice to enter into firm, long-term
purchase commitments with respect to standard DRAMs. We
primarily use internal forecasts to determine the number and mix
of products that we manufacture. Although we also consult with
major customers, who typically provide us with short-term
rolling forecasts of their product requirements on a monthly
basis, customers may cancel orders or reduce quantities for a
number of reasons or discontinue their relationship with us at
any time. Customers frequently place orders requesting product
delivery almost immediately after the order is made, which makes
forecasting customer demand even more difficult. Other customers
also purchase chips on consignment, withdrawing from our stock
of products kept on our premises. They may reduce their
anticipated withdrawals from these stocks on very short notice.
Based on past experience, if we over-estimate demand for a
particular product, we may need to significantly reduce the
price for that product in order to sell our excess inventory. In
addition, due to the high fixed costs of operating manufacturing
facilities, it is not industry practice to reduce production in
response to or anticipation of demand slumps, which may lead to
excess inventory and cause us to incur additional inventory
carrying costs or write-downs. If we are unable to predict
accurately the appropriate amount of products needed to meet
customer requirements, or if our customers were to unexpectedly
cancel or reduce a large number of orders simultaneously, we
could fail to match our production with our customers’
demand. This could materially and adversely affect our business,
financial condition and results of operations.
In addition, because our markets are volatile and subject to
rapid technological and price changes, our forecasts may be
incorrect, and we may make too many or too few of certain
products. For example, in the first quarter of our 2006
financial year, we produced an excess of DDR2 DRAMs because the
corresponding DDR2 logic chipsets, which are produced by logic
semiconductor manufacturers, were not available in quantities
sufficient for PC manufacturers to absorb the supply of DDR2
DRAMs in the market. A portion of the DDR2 DRAMs that we
produced remained unsold and in our inventory until supply of
appropriate logic chipsets created sufficient demand for our
accumulated DDR2 DRAMs.
If we
are unable to respond to customer demand for diversified DRAM
products or are unable to do so in a cost efficient manner, we
may fail to gain, or even lose, market share.
The DRAM product needs of manufacturers of servers, networking
and storage equipment and graphics, mobile and consumer devices
are becoming increasingly diverse in terms of product
specifications. This diversification requires us to devote
significant resources to product design and development in
cooperation with our customers. If we are unable to invest
sufficient resources to meet our customers’ specialized
needs, if we do so in an inefficient or untimely manner, or if
our working relationships with our customers otherwise
deteriorate, we may lose business opportunities or market share
as a result. We also may encounter difficulties penetrating
markets where our relationship with manufacturers is less
developed. In addition, our competitors may be able to implement
similar strategies more effectively than we can.
We may
be unable to recoup our investments if we bring new production
facilities on-stream in times of overcapacity.
It is difficult to predict future supply and demand in the
market for DRAM and other memory products. Because it takes one
to two years to plan, finance, construct and equip a new
facility, we must make a decision to build a new facility, or to
re-equip an existing facility, with no reliable forecast of what
the supply and demand ratio is likely to be when the facility is
scheduled to come on-stream. The capital expenditures required
to construct and equip a semiconductor facility with competitive
economies of scale are typically between $2 to $3 billion.
In the 2005 financial year, commercial DRAM production began at
the 300mm facilities of our fab in Richmond, Virginia. In the
same year, our foundry partner SMIC ramped up its new 300mm
facility, in Beijing, China with our DRAM technology. In the
2006 financial year, our foundry partner Winbond ramped up a new
300mm fab in Taichung, Taiwan with our DRAM technology. In
addition, Inotera Memories, Inc. our joint venture with Nanya,
increased its capacity at its 300mm fab in Taoyuan, Taiwan in
the 2006 financial year, and has started manufacturing in its
second 300mm manufacturing module in December 2006. We are also
continuing the
ramp-up at
our 300mm manufacturing facility in Richmond, Virginia.
We recently announced plans to build a new 300mm manufacturing
facility in Singapore with production expected to start there in
2009. A number of our competitors have also opened, or announced
their intentions to open, new 300mm production facilities. If
several new 300mm DRAM manufacturing plants come on-stream at
the same time, there is a risk that the resulting supply growth
might exceed demand at that point in time. This could result in
strongly reduced prices for our DRAM products at a time when we
have just made very substantial investments in new production.
If this happens, it may take longer for us to recoup our
investments, or we may not be able to do so at all. This could
materially and adversely affect our business, financial
condition and results of operations.
If prices are significantly declining during the time when we
are ramping up production at new facilities, we may take
measures to limit our cash outflows. These measures could
include cancelling or delaying the delivery of manufacturing
equipment at those facilities. As a consequence, these
facilities might not ramp up to their expected capacity in the
short term. This could prevent them from achieving the economies
of scale they were designed to achieve, such that the costs of
manufacture at these facilities might exceed the revenues from
the sales of the products produced there. This could force us to
decide to suspend manufacturing at these facilities. This would
also prevent us from recouping our investments as planned or at
all, which could have a material and adverse effect on our
business, financial condition and results of operations.
We may
lose sales or customers or incur losses if we are unable to
successfully modify existing production facilities or bring new
production facilities on-stream in times of high
demand.
We may experience difficulty in ramping up production at new or
existing facilities in a timely manner, such as our 300mm fab in
Richmond, Virginia. Similarly, our joint ventures with Nanya and
CSVC, as well as SMIC and Winbond, foundry manufacturers who
provide some of our manufacturing capacity may experience
similar difficulties in ramping up production at their
production facilities. We may also experience delays in
converting to the next step in the technology improvements that
enable us to reduce the feature sizes on chips. This could be
due to a variety of factors, including an inability to hire and
train new personnel in a timely fashion, the unavailability of
equipment, difficulties or delays in implementing new
fabrication processes and an inability to achieve required yield
levels.
In the future, we may face delays in the construction, equipping
or ramp-up
of new facilities or the conversion of existing facilities to
new process technologies. Our failure to ramp up our production
on a timely basis may result in loss of sales or customers and a
loss of market share, which in turn could reduce our ability to
exploit economies of scale, negatively affecting our cost
position and our ability to finance investments in the future.
This failure could also prevent us from recouping our
investments in a timely manner or at all. Any of these effects
could materially and adversely affect our business, financial
condition and results of operations.
The
loss of one or more of our significant customers may adversely
affect our business.
Historically, we have relied on a limited number of customers,
primarily among the largest PC manufacturers, for a substantial
portion of our total sales. In our 2007 financial year, our five
largest customers accounted for approximately 48% of our total
sales. HP, our largest customer accounted for approximately 17%
of our sales and Dell, our second largest customer accounted for
approximately 12% of our sales in that period. These major
customers generally purchase products on short-term purchase
orders, can easily cancel these orders and have no long-term
obligations to purchase products from us. Although we are
seeking to broaden our customer base, there are a limited number
of major manufacturers that purchase standard DRAM products in
large quantities, and most of them are existing customers of
ours. Our major customers generally seek to maintain multiple
sources of supply, and it may be difficult for us to
meaningfully increase our current sales volumes of existing
products to them. The loss of one of our major customers, or any
substantial reduction in sales to any of these customers, could
have a material adverse effect on our business, financial
condition and results of operations.
Sanctions
in the United States and other countries against us and other
DRAM producers for anticompetitive practices in the DRAM
industry and related civil litigation may have a direct or
indirect material adverse effect on our
operations.
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with the DOJ’s investigation of alleged
antitrust violations in the DRAM industry. Pursuant to this plea
agreement, Infineon agreed to plead guilty to a single count of
conspiring with other unspecified DRAM manufacturers to fix the
prices of DRAM products between July 1, 1999 and
June 15, 2002, and pay a fine of $160 million. The
plea agreement requires Infineon to pay the fine (plus accrued
interest) in equal annual installments through 2009. Subsequent
to the commencement of the DOJ investigation, a number of
putative class action lawsuits were filed against Infineon, its
principal U.S. subsidiary and other DRAM suppliers in
various state and federal courts in the United States alleging
violations of the Sherman Act, California’s Cartwright Act,
other state laws and unfair competition law as well as unjust
enrichment in connection with the sale and pricing of memory
products. Each of the cases purports to be on behalf of a class
of individuals and entities who purchased DRAMs directly or
indirectly from Infineon in periods commencing in or after 1999.
Infineon reached a settlement agreement in the class action
cases filed by direct U.S. purchasers that were transferred
to the U.S. District Court for the Northern District of
California for coordinated proceedings. Under the terms of the
settlement agreement Infineon agreed to pay approximately
$21 million. We recorded a corresponding charge to other
operating expense in our financial year ended September 30,2005. In addition to this settlement payment, Infineon agreed to
pay an additional amount if it is proven that sales of DRAM
products to the settlement class after opt-outs during the
settlement period exceeded $208.1 million. We would also be
responsible for this payment. The additional amount payable is
calculated by multiplying the amount by which these sales exceed
$208.1 million by 10.53%. We do not currently expect to pay
any additional amount to the class. In November 2006, the
District Court for the Northern District of California approved
the settlement with the direct U.S. purchasers, entered
final judgment and dismissed the class action claims with
prejudice. Between March 2006 and March 2007, six separate
lawsuits were filed by six direct and indirect purchasers of
DRAM against Infineon and various other DRAM suppliers seeking
unspecified damages and other relief based on the same
allegations. One of those lawsuits was voluntarily dismissed on
April 26, 2007, pursuant to a settlement. In October 2006,
these six plaintiffs along with a number of other individuals
and entities gave notice that they are opting out of the direct
U.S. purchaser class and settlement. As a consequence their
claims were not released by that settlement. As of the date
hereof, 62 indirect U.S. purchaser class action cases are
still pending in federal and state courts. A putative class
action brought on behalf of
non-U.S. direct
purchasers of DRAM was dismissed with prejudice by the court. In
July 2006, plaintiffs filed their opening brief on appeal in
that case and defendants filed their joint opening brief in
September 2006. No hearing date has yet been scheduled for the
appeal. Furthermore, in July and September 2006, the state
attorneys general of New York, California and 39 other states
and territories filed two separate actions in federal court in
New York and California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities and consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs’
claims involve the same allegations of DRAM price-fixing and
artificial price inflation practices discussed above. The
plaintiffs are seeking to recover actual and treble damages in
unspecified amounts, penalties, costs and other relief. In
August 2007, the court granted the defendants’ motion to
dismiss in part, dismissing the claims on behalf of consumers,
businesses and governmental agencies in a number of states and
dismissing certain other claims with leave to amend. The
plaintiffs in both actions filed amended complaints in October
2007.
Between December 2004 and February 2005, two putative class
proceedings were also filed in the Canadian province of Quebec
and one was filed in each of Ontario and British Columbia
against Infineon, its principal U.S. subsidiary and other
DRAM manufacturers on behalf of all direct and indirect
purchasers resident in Canada who purchased DRAM or products
containing DRAM between July 1999 and June 2002. Plaintiffs
primarily allege conspiracy to unduly restrain competition and
to illegally fix the price of DRAM. In the British Columbia
action, the certification motion has been scheduled for August
2007 and will resume in November 2007. In one Quebec class
action, a tentative date for the motion for authorization
(certification) has been set for May 2008 (with the possibility
of a March 2008 date if the court calendar opens); the other
Quebec action has been stayed pending developments in the one
that is going forward.
Infineon received a request for information regarding DRAM
industry practices from the European Commission in April 2003
and a notice of formal inquiry into alleged DRAM industry
competition law violations from the Canadian Competition Bureau
in May 2004. Infineon is fully cooperating with the
Commission’s investigation and the Competition
Bureau’s inquiry.
In the contribution agreement we entered into with Infineon, we
agreed to indemnify Infineon for all of the potential
liabilities and risks in connection with the civil and criminal
antitrust proceedings, including the costs of defending these
proceedings. As of June 30, 2007, we have accrued
liabilities in the amount of €101 million related to
potential liabilities and risks with respect to the DOJ and
European antitrust investigations and the direct and indirect
purchaser litigation and settlements described above, as well as
for legal expenses relating to the securities class actions and
the Canadian antitrust investigation and litigation described in
“Our Business — Legal Matters”. As
additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on our financial condition and results
of operations.
An adverse final resolution of the investigations or the civil
claims described above could cause us to bear significant
financial liability and other adverse effects. Irrespective of
the validity or the successful assertion of the above claims,
Infineon could incur significant costs in connection with the
defense or settlement of these claims, for which we are required
to indemnify Infineon under the contribution agreement. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. See “Our
Business — Legal Matters” for more information on
these matters.
An
unfavorable outcome in the pending securities litigation against
Infineon or the incurrence of significant costs in the defense
of this litigation may have a direct or indirect material
adverse effect on our operations.
A consolidated putative class action lawsuit is pending against
Infineon and its U.S. subsidiary, and three of
Infineon’s current and former officers, one of which is
currently the chairman of our Supervisory Board, in
U.S. federal court on behalf of a putative class of
purchasers of Infineon’s shares who purchased them during
the period from March 2000 to July 2004. The plaintiffs allege
violations of the U.S. securities laws arising out of an
alleged failure to disclose Infineon’s alleged
participation in DRAM price fixing activities and seek
unspecified damages. In September 2006, the court dismissed the
complaint with leave to amend and in October 2006, the
plaintiffs filed a second amended complaint. In March 2007, the
plaintiffs withdrew the second amended complaint and were
granted a motion for leave to file a third amended complaint.
The plaintiffs filed a third amended complaint in July 2007 and
Infineon filed a further brief in support of its motion to
dismiss in October 2007. The court has scheduled a hearing on
the motion in November 2007. In the contribution agreement we
entered into with Infineon, we agreed to share any future
liabilities arising out of this lawsuit equally with Infineon,
including the cost of defending the suit.
We are currently unable to provide an estimate of the likelihood
of an unfavorable outcome to us or of the amount or range of
potential loss arising from the action. An adverse final
resolution of the class action litigation could cause us to bear
significant financial liability and other adverse effects.
Irrespective of the validity or the successful assertion of the
securities claims, Infineon could incur significant costs in
connection with the defense of these claims, and we are required
to indemnify Infineon for one-half of these, as stated above. An
adverse final resolution or the incurrence of significant costs
could have a material adverse effect on our business, financial
condition and results of operations. Infineon’s
directors’ and officers’ insurance carriers have
denied coverage in the securities class action and Infineon
filed suit against the carriers in December 2005 and August
2006. Infineon’s claims against one D&O insurance
carrier were finally dismissed in May 2007. The claims against
the other insurance carrier were dismissed in November 2006;
Infineon filed an appeal against this decision. See “Our
Business — Legal Matters” for more information on
this matter.
We may
not be able to protect our proprietary intellectual property or
obtain rights to intellectual property of third parties needed
to operate our business.
Our success depends on our ability to obtain and maintain
patents, licenses and other intellectual property rights
covering our products and our design and manufacturing
processes. The process of seeking patent protection can be long
and expensive. Patents may not be granted on currently pending
or future applications or may not be of sufficient scope or
strength to provide us with meaningful protection or commercial
advantage. In addition, effective copyright and trade secret
protection may be unavailable or limited in some countries, and
our trade secrets may be vulnerable to disclosure or
misappropriation by employees, strategic partners and other
persons. See “ — Risks related to our carve-out
as a stand-alone company and our continuing relationship with
Infineon — We may lose rights to intellectual property
arrangements if Infineon’s ownership in our company drops
below certain levels.”
Infineon transferred to us substantially all of the patents
attributable to the Memory Products segment of Infineon in
connection with the carve-out of our company, while Infineon
retained ownership of all other Infineon patents. Qimonda’s
patent portfolio at the end of September 2007 included
approximately 20,000 patents and patent applications
(representing approximately 6,000 patent families) compared to
more than 23,000 patents and patent applications remaining with
Infineon at the time of the carve-out. Each of we and Infineon
has granted the other a perpetual, royalty free license to use
these patents in each of our respective businesses. However, our
rights to use these patents are subject to the limitations and
restrictions described in “Our Business —
Intellectual Property”.
We also may require rights to use patented technology owned by
third parties, including other semiconductor manufacturers, and
have entered into licenses and cross-license agreements to
obtain such rights (ourselves or through Infineon). We
anticipate that we will continue to enter into more of these
agreements in the future. If we are unable to enter into or
renew our technology licensing agreements on acceptable terms,
or not at all, we may lose the legal right to use some of the
processes we require to produce our products, which may prevent
us from manufacturing and selling some of our products,
including our key products. In addition, we could be at a
disadvantage if our competitors obtain licenses for protected
technologies on more favorable terms than we do, or if we are
unable to acquire on favorable terms any licenses we require for
patented technologies which we may determine we need to obtain
from third parties in order to maintain our competitive
situation.
In addition, our rights to use some third party patents are
currently based on cross-license agreements between Infineon and
those third parties. Some of these cross-license agreements will
terminate with respect to us if we cease to be a controlled
subsidiary of Infineon. Although our own patent portfolio may
provide us with leverage in negotiating cross-license agreements
with third parties, these agreements may be less favorable to us
than the existing Infineon agreements. If we are unable to
protect our intellectual property, or retain or obtain the
intellectual property we need from third parties to operate our
business, our business, financial condition and results of
operations could be materially and adversely affected.
We may
be accused of infringing the intellectual property rights of
others.
Our industry is characterized by a complex series of license and
cross license agreements covering technology used in our
products and manufacturing processes and those of our
competitors. Accordingly, other companies have developed and
will continue to develop technologies that are protected by
patents and other intellectual property rights and that we may
require to manufacture our products. These technologies may
become unavailable to us or be offered to us only on unfavorable
terms and conditions. In other cases, other companies may claim
technology as theirs and seek to force us to stop using it, even
if we believe that we have developed or otherwise have rights to
exploit the technology in question. In either case, litigation,
which could require substantial financial and management
resources, is often necessary to defend against claims of
infringement of intellectual property rights brought against us
by others. In some cases, we might be able to avoid or settle
litigation on favorable terms because we in turn possess patents
that we could assert against a plaintiff or potential plaintiff.
In other cases, the plaintiffs are engaged principally in the
development and licensing of technology, and do not require
access to other parties’ patent portfolios, such as ours.
For example, in August 2006, we entered into a six year license
agreement with Tessera under which Tessera granted us a
worldwide, non exclusive, non transferable and non sublicensable
license to use a portfolio of Tessera patents. We paid Tessera a
one time fee of $40 million and are required to pay
additional royalties based on volume of components we sell that
are subject to the license.
At any given time, Infineon and we are engaged in negotiations
with a number of third parties regarding assertions that
technologies we are using infringe those parties’ rights.
Infineon and we are currently in negotiations in a small number
of matters of this nature. In part as a result of the complex
series of license and cross-license agreements and the
uncertainty, time and expense of litigation, it is sometimes in
our interests to settle with these claimants in a way that
avoids litigation. These settlements may involve the payment of
license fees, royalties or other consideration over lengthy
periods in amounts that could be material for us. In the
contribution agreement we entered into with Infineon, we agreed
to indemnify Infineon for all of the potential liabilities and
risks in connection with any such settlement or litigation
relating to our business, and to bear 60% of the combined
license fee payments that Infineon and we must or may have to
pay in the future related to two of these negotiations, one of
which is still ongoing.
If any intellectual property infringement claims that may be
asserted against us in the future are successful, we may be
forced to refrain from selling DRAM products in certain markets,
seek to develop non-infringing technology, which may not be
feasible, license the underlying technology upon economically
unfavorable terms and conditions,
and/or pay
damages for prior use of the technology at issue. In addition,
our insurance excludes liability arising out of claims that we
have infringed the patent or other intellectual property rights
of third parties. Any of these results may have a material and
adverse effect on our business, financial condition and results
of operations.
We may
face difficulties in implementing next generations of our
proprietary DRAM trench cell architecture.
We manufacture our products using our “trench” DRAM
architecture. In 2006, approximately 24% of DRAM chips produced
worldwide were manufactured using trench cell architecture, of
which we produced approximately two-thirds, according to
Gartner. The remaining 76% were produced using different kinds
of an alternative architecture known as “stack”
architecture. Although we believe that the physical
characteristics of trench cell technology can be exploited
during the 90nm node, which currently accounts for more than
half of our production, and during the next several technology
nodes, including the 58nm node that is currently in development,
to yield advantages over the various stack architectures, this
technology may not continue to perform as well as, or better
than, stack technology when migrating to smaller chip feature
sizes. As part of our commitment to the development of new
products and process technologies, we must continually be
reviewing the technologies, architectures and processes we use
to make sure that they provide the technological properties,
regarding performance, power consumption and form factor as well
as the robustness to permit volume manufacturing at competitive
costs. If we were required to transition from trench to other
technology platforms, the transition could require a substantial
period of time and a substantial investment of capital, and may
require us to acquire rights to additional technology.
To manufacture our trench cells, we need etching equipment that
is specially modified to etch the deep trench capacitors. We
cannot be certain that equipment manufacturers will continue to
develop and supply such equipment on favorable terms, if at all.
We may
face difficulties in shifting to new memory technologies that
are not based on silicon
In the longer term, we face the potential risk of a fundamental
shift from the silicon-based technology on which the memory
industry has long been based. Although we do not believe that
any technology to rival silicon-based memory is likely to prove
feasible in at least the near- to medium-term, and although we
devote resources to basic research in order to keep abreast of a
wide range of potential new memory technologies, the fundamental
technology of the semiconductor memory business may not continue
to be broadly based on current technology. We may be unable to
respond quickly enough to any fundamental technological shift in
the industry. Our failure to implement successfully subsequent
technology generations or respond to technology developments may
materially and adversely affect our business, financial
condition and results of operations.
We may
misallocate our research and development resources or have
insufficient resources to conduct the necessary level of
research and development to remain competitive.
We may also devote research and development resources to
technologies or products that turn out to be unsuccessful.
Commitments to developing any new product must be made well in
advance of sales, and customer demands and technology may change
while we are in development, rendering our products outdated or
uncompetitive before their introduction. We must therefore
anticipate both future demand and the technology features that
will be required to supply such demand. If we incur losses as a
result of a market downturn or otherwise, we may not be able to
devote sufficient resources to the research and development
needed to remain competitive. Our failure to properly allocate
research and development resources could materially and
adversely affect our business, financial condition and results
of operations.
We
have a limited number of suppliers of manufacturing equipment
and raw materials, and our business would be harmed if they were
to interrupt supply or increase prices.
Our manufacturing operations depend upon obtaining deliveries of
the equipment used in our manufacturing facilities and adequate
supplies of raw materials, including silicon wafers, masks,
chemicals and resists, at reasonable prices and on a timely
basis.
Although there are multiple sources for most types of equipment
that we use, the equipment is sophisticated and complex and it
is difficult for us to rapidly substitute one supplier for
another or one piece of equipment for another. We currently have
only one significant sole-source equipment supplier, Advantest,
which supplies some of our testing equipment. If we were to
experience supply or quality problems with Advantest, it could
take a long time for us to locate a secondary source of supply
for that equipment.
The expansion of fabrication facilities by us, our joint venture
counterparts, our foundry partners and other semiconductor
companies may put additional pressure on the supply of
equipment. Shortages of equipment could result in an increase in
prices and longer delivery times. The lead time for delivery of
some equipment may be as long as six to twelve months. If we are
unable to obtain equipment in a timely manner, we may be unable
to ramp up production according to our plan or fulfill our
customer orders, which could negatively impact our business,
financial condition and results of operations.
We generally have more than one source available for raw
materials, but materials meeting our standards are in some cases
available only from a limited number of vendors. The principal
suppliers for our silicon wafers are Siltronic, SEH, MEMC and
SUMCO. Our revenues and earnings could decline if we were unable
to obtain adequate supplies of high-quality raw materials in a
timely manner (for instance, due to interruption of supply or
increased industry demand) or if there were significant
increases in the costs of raw materials that we could not pass
on to our customers. In addition, the raw materials we need for
our business could become scarcer or more expensive as worldwide
demand for semiconductors and other products also produced with
the same raw materials increases. If we are unable to obtain
sufficient raw materials in a timely manner, we may experience
interruptions in production, which could in turn, leave us
unable to fulfill our customer orders, which could negatively
impact our business, financial condition and results of
operations.
The
success of our business may be dependent on our ability to
maintain our third-party foundry relationships.
In 2002, Infineon entered into agreements with each of SMIC, a
Chinese foundry, and Winbond, a Taiwanese foundry, for the
production of some of our memory products in their fabs. We
sourced 22% of our DRAM capacity from these unaffiliated foundry
partners in the 2006 financial year compared to 25% in the 2007
financial year and plan to reduce those levels somewhat in the
coming months as we increase the proportion of our capacity
sourced from Inotera. In addition, we sourced about 7% of our
capacity from Infineon’s 200mm fab in Dresden. We intend to
source at least 50% of our production capacity from our own
facilities to enable us to continue to develop our manufacturing
process technologies. There are relatively few foundries that
could manufacture our products, and we might not be able to
secure an agreement with an alternative foundry on acceptable
terms, particularly in a period of industry-wide under-capacity.
In the event that manufacturing capacity is reduced or
eliminated at one or more foundry facilities, or if we are
unsuccessful in negotiating additional capacity with our
existing foundry partners or
in obtaining new foundry partners, we could have difficulties
fulfilling our customer’s needs, and our sales could
decline.
Our reliance on third-party manufacturing relationships also
subjects us to the following risks:
•
the potential inability of our manufacturing partners to develop
manufacturing methods appropriate for our products;
•
inability of our partners to construct and equip manufacturing
facilities or to ramp up production in a timely manner;
•
unwillingness or inability of partners to devote adequate
capacity to the manufacture of our products;
•
potential product quality issues, where we do not have
sufficient control to resolve them quickly or at all;
•
our partners’ inability to acquire manufacturing machinery
and equipment required to manufacture our products due to
controls on the export or import of technology into the country
where the partner is located or limited supply of the necessary
equipment; and
•
reduced control over delivery schedules and product costs.
If any of these events, or others we have not foreseen, were to
occur, we could experience an interruption in our supply chain
or an increase in costs, which could delay or decrease our sales
or otherwise adversely affect our business, financial condition
and results of operations.
While building new capacity of our own would require
significantly higher capital expenditures than purchasing
products from foundries, purchasing products from foundries may
result in lower profit margins than we could obtain by
manufacturing the products on our own because we base the price
we pay for wafers from our foundry partners on a margin sharing
principle. Therefore, in times of high DRAM prices, the prices
we pay for wafers produced by our foundry partners are likely to
be higher than the cost of manufacturing using our own
capacities, resulting in lower profit margins.
If our
strategic alliance partners or joint ventures fail to meet their
business or technological goals we may lose the value of our
investments in them, and we may fail to keep pace with the rapid
developments in our industry.
As part of our strategy, we have entered into a number of
long-term strategic alliances with leading industry
participants, both to manufacture memory products and to develop
new manufacturing process technologies and products. For
example, we have entered into development agreements with Nanya
to develop the 75nm and 58nm process technology nodes and have
formed a joint venture with Nanya called Inotera Memories, Inc.
to manufacture DRAM. We participate in a joint venture with
Advanced Micro Devices and Toppan Photomasks to develop and
manufacture lithographic masks. We also established a joint
venture with China Singapore Suzhou Industrial Park Venture Co.
in Suzhou, China pursuant to which we constructed a facility for
assembly and testing of our memory products. We expect that our
investments in our Chinese joint venture until the end of our
2008 financial year, pursuant to our current contractual
obligations will be $86.5 million.
These strategic relationships and joint ventures are subject to
various risks that could cause us to lose the value of these
investments and damage our business. Some of those risks are:
•
our alliance partners could encounter financial difficulties;
•
our interests could diverge from those of our alliance partners
in the future;
•
we may not be able to agree with a joint venture or alliance
partner on the amount or timing of further investments in our
joint projects;
•
the management of one of our joint ventures may not be able to
control costs;
•
a joint venture may experience ramp up or manufacturing problems;
•
a joint venture may experience delays or difficulties in
reaching its research and development targets;
political instability may occur in the countries where our joint
ventures
and/or
alliance partners are located; and
•
economic instability, including currency devaluations or
exchange rate fluctuations, may occur in the countries where our
joint ventures
and/or
alliance partners are located.
For example, the failure of Inotera Memories, Inc. to
successfully reach and continue production at anticipated output
levels could leave us with inadequate capacity to meet
customers’ needs and our growth targets. If any of our
strategic alliances do not accomplish our intended goals, we may
fail to keep pace with the rapid technological developments in
our industry, our revenues could be reduced and our business,
financial condition and results of operations could be
materially and adversely affected.
We may
be unable to fund our research and development efforts and
capital expenditures if we do not have adequate access to
capital.
We require significant amounts of capital to build, expand,
modernize and maintain our sophisticated manufacturing
facilities and to fund our research and development efforts. For
example, we invested €686 million in property, plant
and equipment in our 2006 financial year and a further
€879 million in our 2007 financial year, largely for
capacity expansion of our 300mm facility in Richmond, Virginia
and for equipment upgrades at our 300mm facility in Dresden,
Germany. Due to the lead times between ordering and delivery of
equipment, a substantial amount of capital expenditures
typically is committed well in advance. As of September 30,2007, approximately €237 million of capital
expenditures have been included in unconditional purchase
commitments, mostly for investments to be made in our front-end
and back-end manufacturing facilities. While we have reduced our
planned capital expenditures for the 2008 financial year,
through increased focus on our partnership model, we still
expect to spend between €650 million and
€750 million during the year.
Because of the cyclical nature of DRAM demand, the need to
invest in manufacturing facilities may arise at a time when our
cash flow from operations is low. We used net cash in our
investing activities of €972 million in our 2005
financial year, €801 million in our 2006 financial
year and €847 million in the 2007 financial year. Our
research and development expenses were €390 million in
our 2005 financial year, €433 million in our 2006
financial year and €401 million in our 2007 financial
year. We intend to continue to invest heavily in our
manufacturing facilities, including in the new manufacturing
facility we plan to construct in Singapore, and research and
development, while continuing the policy of cooperation with
other semiconductor companies to share these costs with us where
appropriate.
As of September 30, 2007, our external financial debt
included €148 million resulting from a dedicated
financing for our manufacturing facility in Portugal and a note
payable to a government entity related to our production
facility in Richmond, Virginia. We plan to service these
financings from cash generated from our operations beginning in
2008 and to refinance them upon their maturities in 2013 and
2027. In August 2006, we entered into a committed multicurrency
revolving loan facility in an aggregate principal amount of
€250 million, which we then voluntarily terminated on
September 28, 2007. We decided to terminate this facility,
under which we had made no drawdowns, because its restrictions
on asset dispositions were inconsistent with the sale and
leaseback transactions we had decided to enter into covering
some of our manufacturing equipment in our Richmond facility.
For more details on this termination and on the sale and
leaseback transactions, see “MD&A —
Liqidity and Capital Requirements”.
In the future, we may not be able to raise the amount of capital
required for our business or the repayment of our existing
financial obligations on acceptable terms due to a cyclical or
other downturn in the semiconductor memory industry, general
market and economic conditions, inadequate cash flow from
operations, unsuccessful asset management or other factors.
Because of the high risk profile of DRAM manufacturers (due
largely to the volatility of the DRAM market cycle) and our lack
of an independent credit history, we may be unable to secure
debt financing on acceptable terms. In general, our access to
capital on favorable terms may also be more limited now that we
are a stand-alone entity than it was when we operated as a
segment of the Infineon Group. In particular, we no longer have
access to Infineon’s pool of capital. Our business,
financial condition and results of operations may be materially
and adversely affected if we are not able to fund necessary
capital expenditures and research and development expenses.
If our
manufacturing processes are delayed or disrupted, our business,
financial condition and results of operations could be
materially adversely affected.
We manufacture our products using processes that are highly
complex and require advanced and costly equipment that must
continuously be maintained and modified to improve yields and
performance when implementing new technology generations.
We may face interruptions due to human error in the operation of
the machines, power outages, earthquakes and other natural
disasters or other incidences that have an impact on the
productive availability of machines, material or manpower.
Difficulties encountered in the manufacturing process can reduce
production yields or interrupt production and may make it
difficult for us to deliver products on time or in a
cost-effective, competitive manner.
In addition, semiconductors must be produced in a tightly
controlled, clean environment. Even small impurities in the
manufacturing materials, difficulties in the wafer fabrication
process, defects in the masks used to print circuits on a wafer,
the use of defective raw materials, defective vendor-provided
lead frames or component parts, or other factors can cause a
substantial percentage of wafers to be rejected or numerous
chips on each wafer to be non-functional. We may experience
problems in achieving an acceptable yield rate in the production
of chips. Reduced yields will reduce our sales revenues, which
could have a material adverse effect on our business, financial
condition and results of operations.
Our
business can be hurt by changes in exchange rates.
Our business, financial condition and results of operations have
been and may in the future be adversely affected by changes in
exchange rates, particularly between the euro and the
U.S. dollar. We are exposed both to the risk that currency
changes will reduce our revenues or margins on the products we
sell and the risk arising in connection with the translation
into euro of the results of subsidiaries using non-euro
currencies. In addition, we could lose money on the currency
transactions, such as currency hedging contracts that we use to
help us manage our exchange rate risk.
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as costs
relating to our design, manufacturing, selling and marketing,
general and administrative, and research and development
activities are denominated in other currencies, principally the
U.S. dollar.
Memory products are generally priced worldwide in
U.S. dollars, even if invoices are denominated in another
currency, while 50% of our expenses in our 2007 financial year,
were denominated in euro and other currencies. In addition, the
balance sheet impact of currency translation adjustments has
been material in some periods and varies widely, and we expect
these characteristics to continue. Net foreign currency
derivative and transaction gains totaled €17 million
in our 2005 financial year, while net foreign currency
derivative and transaction losses were €2 million in
our 2006 financial year. Net foreign currency derivative and
transaction losses were €14 million in our financial
year 2007. We attempt to mitigate the effects of foreign
currency fluctuations on our business by entering into foreign
currency hedging contracts. These contracts can subject us to
risks of losses if the values of the hedged currencies move in
the opposite direction from what we expected when we entered
into the contracts.
Since its introduction in 1999, the euro has fluctuated in value
against the U.S. dollar, ranging from a high of €1.00
= $1.4691 on November 8, 2007 to a low of €1.00 =
$0.8270 on October 25, 2000. The relative weakness of the
euro against the dollar positively affected our revenues and
results of operations in the 2001 and 2002 financial years.
Since the beginning of 2003, the dollar has weakened sharply
against the euro, which has had a substantial negative effect on
our revenues and profitability, as reported in euro. The
exchange rate varied in our 2006 financial year between
€1.00 = $1.1667 on November 14, 2005, and €1.00 =
$1.2953 on June 5, 2006. On September 29, 2006, the
last currency trading day in September 2006, the noon buying
rate of the Federal Reserve Bank of New York for euro was
€1.00 = $1.2687. The dollar continued to weaken during our
2007 financial year. On September 28, 2007, the last
currency trading day in September 2007, the noon buying rate of
the Federal Reserve Bank of New York for euro was €1=
$1.4219. Any further weakening of the dollar against the euro
would negatively affect our reported results of operations.
Our
business could suffer as a result of negative economic
developments, political instability, unfavorable legal
environments or negative currency developments in the different
parts of the world in which we operate, especially in the United
States, Taiwan and the developing markets of China and
Malaysia.
We operate in many locations around the world, with
manufacturing, assembly and testing, and research and
development facilities in eight countries on three continents,
including in Taiwan and the developing markets of China and
Malaysia. Manufacturing, assembly and testing sometimes take
place in different countries and even on different continents.
In the 2007 financial year 45% of our revenues were invoiced in
the Asia-Pacific region (including Japan), 37% were invoiced in
North America, 18% were invoiced in the Rest of Europe
(including Germany and in other regions), as described in
“Our Business — Customers, Sales and
Marketing”). In many cases, our products were shipped to
different countries than those from which our invoices were
paid. Our business is subject to risks involved in international
business, including:
•
negative economic developments in foreign economies, in
particular the United States, China, Malaysia and Taiwan, where
we have or share substantial manufacturing facilities;
•
political instability, including the threat of war, terrorist
attacks, epidemic or civil unrest, in particular in Taiwan,
which experiences recurring tensions with China;
•
uncertainties as to the effectiveness of intellectual property
protection, especially in China;
•
devaluations of local currencies, especially in Asia;
•
changes in laws and policies affecting trade and investment,
including exchange controls and expropriation, particularly in
China; and
•
varying laws and varying practices of the regulatory, tax,
judicial and administrative bodies in the jurisdictions where we
operate, especially in developing Asian countries.
Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
Reductions
in the amount of government subsidies we receive or demands for
repayment could increase our reported expenses.
As is the case with many other semiconductor companies, our
reported expenses have been reduced in recent years by various
subsidies received from governmental entities. In particular, we
have received, and expect to continue to receive, subsidies for
investment projects as well as for research and development
projects, including our 300mm manufacturing facility in Dresden,
Germany, and our fab in Porto, Portugal. We recognized
governmental subsidies as a reduction of research and
development and of cost of goods sold in aggregate amounts of
€112 million in the 2006 financial year and
€100 million in the 2007 financial year. In addition,
we had received grants of €179 million and
€146 million as of September 30, 2006 and 2007,
respectively, which are deferred and will be recognized in
earnings over the useful life of the related assets in future
periods.
The availability of government subsidies is largely outside our
control. We may not continue to benefit from such support,
sufficient alternative funding may not be available on a timely
basis if necessary and any alternative funding would probably be
provided to us on terms less favorable to us than those we
currently receive. As a general rule, we believe that government
subsidies are becoming less available in each of the countries
in which we have received funding in the past, and the
competition for government funding is intensifying.
The application for and implementation of such subsidies often
involves compliance with extensive regulatory requirements,
including, in the case of subsidies to be granted within the
European Union, notification to the European Commission of the
contemplated grant prior to disbursement. In particular,
establishment of compliance with project related ceilings on
aggregate subsidies defined under European Union law often
involves highly complex economic evaluations. Many of the legal
and other criteria for receiving subsidies are more stringent
than they were in the past. If we fail to meet applicable formal
or other requirements, we may not be able to receive the
relevant subsidies or may be obliged to repay them, which could
have a material and adverse effect on our business, financial
condition and results of operations.
In addition, the terms of certain of the subsidies we have
received impose conditions that may limit our flexibility to
utilize the subsidized facility as we deem appropriate, to
divert equipment to other facilities, to reduce employment at
the site, or to use related intellectual property outside the
European Union. This could impair our ability to operate our
business in the manner we believe is most cost effective.
An
inability to attract and retain skilled technical personnel
could adversely impact our business.
Competition for qualified employees among companies that rely
heavily on engineering and technology is intense, and the loss
of qualified employees or an inability to attract, retain and
motivate additional highly skilled employees required for the
operation and expansion of our business could hinder our ability
to conduct research activities successfully and to develop
marketable products. The availability of highly skilled workers,
while generally constrained worldwide, is particularly
constrained in places such as Singapore, China, Germany and
Japan where the need for qualified employees in our industry is
strong. Since our carve-out, we have been competing, and will
continue to compete, directly with other semiconductor companies
for qualified personnel in certain geographic markets, which may
make our recruitment and retention efforts even more difficult.
Environmental
laws and regulations may expose us to liability and increase our
costs.
As with other companies engaged in similar activities, we face
inherent risks of environmental liability in our current and
historical manufacturing activities. The manufacturing of
semiconductors involves the use of metals, solvents and other
chemical substances that, if handled improperly, can cause
damage to the environment or to the people working with them.
Recently, there has been increased media scrutiny and reporting
regarding a potential link between working in semiconductor
manufacturing clean room environments and certain illnesses,
primarily different types of cancers. Regulatory agencies and
associations have begun to study the issue to see if any actual
correlation exists. While we have monitored our employees using
bio-monitoring programs since 1990, we cannot be certain that in
the future no link between working in a clean room environment
and certain illnesses will be established.
Our operations are subject to many environmental laws and
regulations wherever we operate that govern, among other things,
air emissions, wastewater discharges, the use and handling of
hazardous substances, waste disposal and the investigation and
remediation of soil and ground water contamination. A recent
directive in the European Union known as Waste Electrical and
Electronic Equipment Directive, or WEEE, imposes
“take-back” obligations on manufacturers for the
financing of the collection, recovery and disposal of electrical
and electronic equipment. The implementation of the WEEE
directive has not been completed in most EU Countries and
therefore the potential costs are not foreseeable. We have begun
supplying WEEE-compliant products in the German market. The
related cost impact is minor in Germany, but could be higher in
other countries depending on their implementations of the
directive.
The Registration, Evaluation and Authorization of Chemicals used
in the European Union, or REACH Regulation, is a regulatory
framework that concerns the registration, evaluation and
authorization of certain chemicals. This regulatory framework
came into effect in December 2006. While it has not been fully
determined which chemicals will fall under these regulations, we
believe the regulation is targeted towards chemical companies
and industries in which significant volumes of chemicals are
used. As we use very few chemicals whose volume exceeds 100 tons
per year, we are classified as a “downstream user category
II” under this legislation. Furthermore, this legislation
contains a proposal to exempt companies who meet certain
standards from the authorization process. Due to these
uncertainties, we believe it is premature to estimate the
potential costs this regulation could impose on us.
In 2006 a European directive on the Restriction of the use of
Hazardous Substances, or RoHS, restricting the usage of
lead-based and other chemicals and compounds in products went
into effect and we were successful in limiting the cost impact
of this new legislation upon our business. A similar set of
rules has recently been implemented in the People’s
Republic of China. These rules impose labeling requirements on
all electronic information products, as defined in those rules
that are sold in the Chinese retail market. In addition, a
self-declaration containing details on the affected chemicals
and compounds must be created and communicated within
the supply chain. The future implementation obligations of this
new law may impose additional costs upon our business or may
have an effect on our ability to timely meet customer demand for
our products in China.
Costs associated with future additional environmental
compliance, with remediation obligations or the costs of
litigation if claims were made with respect to damages resulting
from our operations or the former operations of Infineon or
Siemens at a site that we currently own or operate could have a
material and adverse effect on our business, financial condition
and results of operations. For a further description of
environmental issues that we face, see “Our
Business — Environmental Protection, Safety and
Health.” For more information on our ongoing relationship
with Infineon, see “Related Party Transactions and
Relationships — with Infineon” and note 27
“Related Parties” to the combined and consolidated
financial statements, and for more information on our ongoing
relationship with Siemens see “Related Party Transactions
and Relationships — with Siemens” and
note 27 “Related Parties” to the combined and
consolidated financial statements appearing elsewhere in this
annual report.
Products
that do not meet customer specifications or that contain, or are
perceived to contain, defects or errors or that are otherwise
incompatible with their intended end use could impose
significant costs on us.
The design and production processes for memory products are
highly complex. It is possible that we may produce products that
do not meet customer specifications, contain or are perceived to
contain defects or errors, or are otherwise incompatible with
their intended uses. We may incur substantial costs in remedying
such defects or errors, which could include material inventory
write-downs. Moreover, if actual or perceived problems with
nonconforming, defective or incompatible products occur after we
have shipped the products, we might not only bear liability for
providing replacements or otherwise compensating customers for
damages incurred but could also suffer from long-term damage to
our relationship with important customers or to our reputation
in the industry generally. This could have a material adverse
effect on our business, financial condition and results of
operations.
We may
be unable to make desirable acquisitions or to integrate
successfully any businesses we acquire.
Our future success may depend in part on the acquisition of
businesses or technologies intended to complement, enhance or
expand our current business or products or that might otherwise
offer us growth opportunities. Our ability to complete such
transactions may be hindered by a number of factors, including
potential difficulties in obtaining financing or in issuing our
own securities as payment in acquisitions. In particular, as
long as Infineon is our majority shareholder, it will have
substantial control over our ability to incur certain debt or to
issue equity, and may seek to limit any dilution of its interest
in our company. In addition, we may wish to avoid any securities
issuances that would dilute Infineon’s interest in our
company below the levels that would trigger adverse consequences
under any intellectual property licenses or other third-party
agreements from which we benefit as a majority-owned subsidiary
of Infineon.
Any acquisition that we do make would pose risks related to the
integration of the new business or technology with our business.
We cannot be certain that we will be able to achieve the
benefits we expect from a particular acquisition or investment.
Acquisitions may also strain our managerial and operational
resources, as the challenge of managing new operations may
divert our staff from monitoring and improving operations in our
existing operations. Our business, financial condition and
results of operations may be materially and adversely affected
if we fail to coordinate our resources effectively to manage
both our existing operations and any businesses we acquire.
We are
subject to the risk of loss due to explosion and fire because
some of the materials we use in our manufacturing processes are
highly combustible.
We use highly combustible materials such as silane and hydrogen
in our manufacturing processes and are therefore subject to the
risk of loss arising from explosion and fire which cannot be
completely eliminated. Although we maintain comprehensive fire
and casualty insurances, including insurance for loss of
property and loss of profit resulting from business
interruption, our insurance coverage may not be sufficient to
cover all of our potential losses. If any of our fabs were to be
damaged or cease operations as a result of an explosion and
fire, it could reduce our manufacturing capacity and may cause
us to lose important customers.
Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon
We
have limited experience operating as an independent
company.
Our company was formed as a wholly-owned subsidiary of Infineon
in May 2004 as Invot AG. Substantially all of the assets and
liabilities of the Memory Products segment of Infineon were
contributed to our company on May 1, 2006. This excluded
the Memory Products operations in Korea and Japan, which have
since been transferred to us. Legal transfer of Infineon’s
investment in AMTC and BAC is subject to approval by the other
shareholders in the venture. Although we operated as a separate
segment within the Infineon Group, we had no experience in
conducting our operations on a stand-alone basis until May 2006.
We may encounter operational, administrative and strategic
difficulties as we adjust to operating as a stand-alone company,
which may cause us to react more slowly than our competitors to
market conditions, may divert our management’s attention
from running our business or may otherwise harm our operations.
While we were, as a business within Infineon, indirectly subject
to requirements to maintain an effective internal control
environment, and Infineon, as a U.S. listed company, is
currently in the process of ensuring that its own internal
control procedures comply with the regulatory requirements, our
management has been evaluating and continues to evaluate the
applicability of those procedures to Qimonda in light of our new
status as an independent company, and has been implementing
necessary changes to those procedures to account for that
status. We cannot guarantee that we will be able to do so in a
timely and effective manner.
Our
ability to operate our business effectively may suffer if we do
not, quickly and cost-effectively, establish our own financial,
administrative and other support functions in order to operate
as a stand-alone company, and we cannot assure you that the
transitional services Infineon has agreed to provide us will be
sufficient for our needs.
Historically, we have relied on financial, administrative and
other resources of Infineon to operate our business. In
conjunction with our carve-out, we will need to create our own
financial, administrative and other support systems or contract
with third parties to replace Infineon’s systems, as well
as establish our own independent internal controls referred to
above. We have entered into agreements with Infineon under which
Infineon provides certain transitional services to us, including
services related to information technology systems and financial
and accounting services. See “Related Party Transactions
and Relationships — with Infineon” for a
description of these services. These services may not be
sufficient to meet our needs, and, after these agreements with
Infineon expire, we may not be able to replace these services at
all or obtain these services at prices and on terms as favorable
as we currently have. Any failure or significant downtime in our
own financial or administrative systems or in Infineon’s
financial or administrative systems during the transitional
period could impact our results and prevent us from paying our
suppliers and employees, executing foreign currency transactions
or performing other administrative services on a timely basis
and could materially harm our business, financial condition and
results of operations.
Our
pre-carve-out financial information may not be representative of
our results as an independent company.
The combined financial information included in this annual
report for periods prior to the legal carve-out of our company
has been prepared on a carve-out basis. We have made numerous
estimates, assumptions and allocations in our financial
information because Infineon did not account for us, and we did
not operate, as a single stand-alone business for any period
prior to May 1, 2006. The historical financial information
included in this annual report for these periods does not
reflect many significant changes that have occurred since we
have begun to operate as a separate company. The primary
categories of assumptions we have made relate to our allocation
of expenses that could not be specifically identified as
belonging to the Memory Products business.
Use of these assumptions and estimates means that the combined
financial statements for periods prior to our carve-out
presented in this annual report are likely not to be
representative of what our financial condition, results of
operations and cash flows would have been had we been a
separate, stand-alone entity during the periods presented.
Furthermore, the combined financial statements cannot be used to
forecast or predict our future financial condition, results of
operations or cash flows.
We may
lose rights to intellectual property arrangements if
Infineon’s ownership in our company drops below certain
levels.
As a majority-owned subsidiary of Infineon, we are the
beneficiary of some of Infineon’s intellectual property
arrangements, including cross-licensing arrangements with other
semiconductor companies and licenses from third parties of
technology incorporated in our products and used to operate our
business. We will no longer be a beneficiary under some of these
agreements if Infineon’s direct or indirect equity
ownership in our company no longer exceeds 50%. Infineon has
publicly announced that it aims to reduce its stake in Qimonda
to significantly below 50% by the time of Infineon’s Annual
Shareholder Meeting in 2009, at the latest.
With Infineon’s support, we are engaged in negotiating
assignments of existing agreements as well as our own agreements
and arrangements with some third parties for intellectual
property and technology that is important to our business and
that was previously obtained through our relationship with
Infineon. We may be unable to enter into these agreements
successfully. If we do not successfully conclude such agreements
and Infineon’s direct or indirect equity ownership of our
company no longer exceeds 50%, we may be exposed to infringement
claims or lose access to important intellectual property and
technology. We may not then be able to obtain or renegotiate
licensing arrangements or supply agreements on favorable terms
or at all. our patent portfolio at the end of September 2007
included approximately 20,000 patents and patent applications
(representing approximately 6,000 patent families) compared to
more than 23,000 patents and patent applications remaining with
Infineon at the time of the carve-out. This smaller patent
portfolio may make it more difficult for us to negotiate
third-party patent cross licenses on terms that are as favorable
to us as those previously negotiated by Infineon, especially
since partners under existing cross-license agreements with
Infineon will generally be able to continue to use patents
transferred to us as part of the carve-out under these
agreements even after Infineon’s ownership in us no longer
exceeds 50%. If as a result we were to infringe intellectual
property rights of others or otherwise lose access to
intellectual property or technology important in the conduct of
our business, it could have a material and adverse effect on our
business, financial condition and results of operations. We
could, for example, be forced to agree to make substantially
higher royalty payments to continue using that intellectual
property or technology or, if we are unable to agree on
licensing terms on our own, could have to cease manufacturing
products that use that intellectual property or technology. For
a detailed description of the intellectual property rights
contributed to us and retained by Infineon and the circumstances
under which our access to the rights retained by Infineon may be
affected if we cease to be a controlled subsidiary of Infineon,
see “Our Business — Intellectual Property.”
We may
not be successful in establishing a brand
identity.
We are still in the early stages of establishing our own brand
identity. Prior to our carve-out, all memory products sold by
the Infineon Group were sold under either the Infineon or
AENEON®
brand names. The Infineon and
AENEON®
brand names are well known by memory customers, suppliers and
potential employees. We will need to expend significant time,
effort and resources to continue to establish the Qimonda brand
name in the marketplace. This effort may not be successful. If
we are unsuccessful in establishing our brand identity, our
business, financial condition or results of operations may be
materially adversely affected. We have applied for protection of
our Qimonda brand as a trademark, domain and company name, but
may not be successful in actually gaining much protection in
some jurisdictions.
We may
face additional costs under our agreements with Infineon
relating to Infineon’s 200mm fab in Dresden.
During our 2004 financial year, we transferred ownership of the
entire 200mm fab in Dresden to Infineon’s Communications
segment. We continue to own the newer 300mm fab and the research
and development center in Dresden.
In April 2006, we entered into an agreement with Infineon for
the production of wafers in the Dresden 200mm fab. Pursuant to
the agreement, as amended in January 2007, Infineon has agreed
to manufacture specified semiconductor memory products at the
Dresden 200mm fab, using our manufacturing technologies and
masks, and to sell them to us at prices specified in the
agreement. These prices are based on the cost of manufacture. We
are required under this agreement to pay for idle costs
resulting from our purchasing fewer wafers from Infineon than
agreed upon, if Infineon cannot otherwise utilize the capacity.
We are also obligated to indemnify Infineon against any third
party claims based on or related to any products manufactured
for us under this agreement and against any intellectual
property infringement claims related to the products covered by
the agreement. In addition, we agreed to share equally with
Infineon any potential restructuring costs that might be
incurred in connection with the ramp-down of production in the
Dresden 200mm fab if neither company can use that capacity.
Restructuring costs may include severance payments. Although no
restructuring plan has been established, these costs could be
material and adversely affect our financial condition and
results of operations. The capacity arrangements terminate on
September 30, 2009, unless we terminate them earlier.
We may
experience increased costs resulting from a decrease in the
purchasing power we have historically had as a segment of
Infineon.
We have historically been able to take advantage of
Infineon’s size and purchasing power in procuring goods,
technology and services, including insurance, employee benefit
support and audit services. Following our carve-out from
Infineon, we are a smaller and less diversified company than
Infineon. Although we anticipate that, while we are a
majority-owned subsidiary of Infineon, we will be able to
continue to take advantage of many of these benefits, we cannot
guarantee that this will continue to be the case. As a separate,
stand-alone company, we may be unable to obtain goods,
technology and services at prices and on terms as favorable as
those available to us prior to the carve-out, which could have a
material adverse effect on our business, financial condition and
results of operations.
Our
agreements with Infineon relating to our carve-out may be less
favorable to us than similar agreements negotiated between
unaffiliated third parties.
We entered into our contribution and related agreements with
Infineon while we were a wholly owned subsidiary of Infineon,
and they may be less favorable to us than would be the case if
they were negotiated with unaffiliated third parties. Pursuant
to our contribution agreement with Infineon, we agreed to
indemnify Infineon for, among other things, liabilities arising
from litigation and other contingencies related to our business
such as guarantee commitments, and assumed these liabilities as
part of our carve-out from Infineon. The allocation of assets
and liabilities between Infineon and our company may not reflect
the allocation that would have been reached by two unaffiliated
parties.
Infineon
will initially control the outcome of shareholder actions in our
company, and may thereby limit our ability to obtain additional
financing or make acquisitions.
Infineon currently holds, directly or indirectly, a 77.5% equity
interest in our company. This includes shares equal to 1% of the
equity interests in our company that Infineon loaned to an
affiliate of J.P. Morgan Securities Inc. in connection with
Infineon’s placement of bonds exchangeable into shares of
our company. Infineon has advised us that J.P. Morgan has
already returned some of these shares. The remainder must be
returned no later than August 31, 2010 upon the termination
of the loan. Infineon has publicly announced that it aims to
reduce its stake in our company to significantly below 50% by
the time of Infineon’s Annual Shareholder Meeting in 2009,
at the latest. Its equity shareholding gives it the power to
control actions that require shareholder approval, including the
election of the four shareholder representatives on our
Supervisory Board, which appoints our Management Board.
Even if Infineon ceases to own or control more than 50% of our
shares, for so long as it continues to have a substantial equity
interest in our company it may, as a practical matter, be in a
position to control many or all actions that require shareholder
approval. Under German law, for so long as Infineon holds more
than 25% of our shares, it will be in a position to block
shareholder action on any capital increase or decrease, merger,
consolidation, spin-off, sale or other transfer of all or
substantially all of our assets, a change in the corporate form
or business purpose of our company or the dissolution of our
company.
Significant corporate actions, including the incurrence of
material indebtedness or the issuance of a material amount of
equity securities, may require the consent of our shareholders.
Infineon might oppose any action that would dilute its equity
interest in our company, and may be unable or unwilling to
participate in a future financing of our company. Infineon, as
our majority shareholder, could block any such action and
thereby materially harm our business or prospects.
We may
have conflicts of interest with Infineon and, because of
Infineon’s controlling ownership interest in our company,
may not be able to resolve such conflicts on favorable terms for
us.
Conflicts of interest may arise between Infineon and us in a
number of areas relating to our past and ongoing relationships.
Potential conflicts of interest that we have identified include
the following:
•
Indemnification arrangements in connection with our carve-out
from Infineon. We have agreed to indemnify
Infineon with respect to lawsuits and other matters as part of
our carve-out from Infineon. These indemnification arrangements
could result in us having interests that are adverse to those of
Infineon, for example different interests with respect to
settlement arrangements in a litigation matter. In addition,
under these arrangements, we agreed to reimburse Infineon for
liabilities incurred (including legal defense costs) in
connection with certain litigation, while Infineon will be the
party prosecuting or defending the litigation.
•
Employee recruiting and retention. Because we
operate in many of the same geographical areas, we expect to
compete with Infineon in the hiring and retention of employees,
in particular with respect to highly-skilled technical
employees. We have no agreement with Infineon that would
restrict either Infineon or us from hiring any of the
other’s employees.
•
Members of our Supervisory Board and Management Board may
have conflicts of interest. Certain members of
our Supervisory Board and Management Board own shares in
Infineon or options to purchase Infineon shares. In addition,
Peter Fischl, a member of our Supervisory Board, is the Chief
Financial Officer of Infineon and a member of its Management
Board. These relationships could create, or appear to create,
conflicts of interest when these persons are faced with
decisions with potentially different implications for Infineon
and us, even though these persons owe a duty of loyalty to take
into account only our interests.
•
Sale of shares in our company. Infineon may
decide to sell all or a portion of the shares that it holds in
us to a third party, including to one of our competitors,
thereby giving that third party substantial influence over our
business and our affairs. Such a sale could be contrary to the
interests of certain of our stakeholders, including our
employees or our public shareholders.
•
Allocation of business opportunities. Business
opportunities may arise that both we and Infineon find
attractive, and which would complement our respective
businesses. Infineon may decide to take the opportunities
itself, which would prevent us from taking advantage of the
opportunity ourselves.
Although our company is an independent entity, we expect to
operate for as long as Infineon is our majority shareholder as a
part of the Infineon Group. Infineon may from time to time make
strategic decisions that it believes are in the best interests
of its business as a whole, including our company. These
decisions may be different from the decisions that we would have
made on our own. Infineon’s decisions with respect to us or
our business may be resolved in ways that favor Infineon and
therefore Infineon’s own shareholders, which may not
coincide with the interests of our company’s other
shareholders. We may not be able to resolve any potential
conflicts and, even if we do so, the resolution may be less
favorable to us than if we were dealing with an unaffiliated
party. Even if both parties seek to transact business on terms
intended to approximate those that could have been achieved
among unaffiliated parties, this may not succeed in practice.
Third
parties may seek to hold us responsible for liabilities of
Infineon that we did not assume in the contribution
agreement.
Pursuant to the contribution agreement we entered into with
Infineon, Infineon agreed to retain all of its liabilities that
we do not expressly assume under that agreement. Liabilities we
expressly assumed include those arising out of legal matters
that relate to the business that was transferred to us at the
time of our carve-out. See “Our Business — Legal
Matters” for a description of the relevant indemnification
provisions.
Third parties may seek to hold us responsible for
Infineon’s retained liabilities. Under the contribution
agreement, Infineon agreed to indemnify us for claims and losses
relating to these retained liabilities. However, if those
liabilities are significant and we are ultimately held liable
for them, we might not be able to recover the full amount of our
losses from Infineon.
We may
experience difficulty in separating our assets and resources
from Infineon.
We may face difficulty in completing the final steps in the
separation of our assets and resources from Infineon’s
assets and resources. In particular, we may experience
additional costs and delay in finalizing the transfers to us of
our interest in AMTC and BAC. Our business, financial condition
and results of operations could be harmed if we incur unexpected
costs in completing the separation.
Risks
related to the securities markets and ownership of our shares or
ADSs
Sales
of substantial numbers of shares or ADSs in the public market
could adversely affect the market price of our
securities.
Infineon holds, directly or indirectly, a 77.5% equity interest
in our company. Infineon does not anticipate owning a majority
of our shares over the long term and has publicly announced that
it intends to reduce its stake in our company to significantly
below 50% by the time of Infineon’s Annual Shareholders
Meeting in 2009, at the latest. In connection with an offering
of our shares in September 2007, Infineon agreed not to sell or
transfer any of the remaining shares they hold until
November 19, 2007. The underwriters may, however, waive
this restriction in their discretion. However, sales of
substantial numbers of the shares of our company by Infineon,
either in the public market or in private transactions, or the
perception that such sales may occur, could adversely affect the
market price of the shares and ADSs and could adversely affect
our ability to raise capital through subsequent offerings of
equity or equity-related securities.
The
price of our ADSs may be subject to wide
fluctuations.
The trading price of our ADSs may fluctuate widely and may fall
below the price at which ADSs were sold in our IPO or below our
net asset value. Among the factors that could affect the price
of our ADSs are the risk factors described in this section and
other factors, including:
•
the volatility of DRAM prices and therefore of our revenues;
•
changes in market valuations of technology companies in general
and memory product companies in particular;
•
variations in our operating results;
•
changes in demand for, and supply of, our products;
•
technological changes that hurt our competitive position;
•
unfavorable developments in litigation or governmental
investigations in which we are involved;
•
strategic moves by us or our competitors, such as acquisitions
or restructurings;
•
failure of our quarterly operating results to meet market
expectations;
•
changes in expectations as to our future financial performance,
including financial estimates by securities analysts;
•
review of the long-term values of our assets, which could lead
to impairment charges that could reduce our earnings;
•
dispositions or anticipated dispositions by Infineon of shares
in our company; and
•
general market conditions.
Stock markets have experienced extreme volatility in recent
years that has often been unrelated to the operating performance
of a particular company. These broad market fluctuations may
adversely affect the trading price of our securities.
Exchange
rate fluctuations may reduce the amount of U.S. dollars you
receive in respect of dividends or other distributions in
respect of your ADSs.
Exchange rate fluctuations will affect the amount of
U.S. dollars our shareholders receive upon the payment of
cash dividends or other distributions paid in euro, if any.
Therefore, such fluctuations could also adversely affect the
value of our ADSs, and, in turn, adversely affect the
U.S. dollar proceeds holders receive from the sale of our
ADSs.
You
may not be able to participate in rights offerings and may
experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. Under the deposit
agreement for the ADSs, the depositary will not offer those
rights to ADS holders unless both the rights and the underlying
securities to be distributed to ADS holders are either
registered under the Securities Act or exempt from registration
under the Securities Act with respect to all holders of ADSs. We
are under no obligation to file a registration statement with
respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared
effective. In addition, we may not be able to take advantage of
any exemptions from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in
our rights offerings and may experience dilution in their
holdings as a result.
If the depositary is unable to sell the rights that are not
exercised or not distributed or if the sale is not lawful or
reasonably practicable, it will allow the rights to lapse, in
which case you will receive no value for these rights.
You
may not be able to exercise your right to vote the ordinary
shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the
ordinary shares represented by our ADSs only in accordance with
the provisions of the deposit agreement. The deposit agreement
provides that, upon receipt of notice of any meeting of holders
of our common shares, the depositary will, as soon as
practicable thereafter, fix a record date for the determination
of ADS holders who shall be entitled to give instructions for
the exercise of voting rights. Upon timely receipt of notice
from us, the depositary shall distribute to the holders as of
the record date (i) the notice of the meeting or
solicitation of consent or proxy sent by us, (ii) a
statement that such holder will be entitled to give the
depositary instructions and a statement that such holder may be
deemed, if we have appointed a proxy bank as set forth in the
deposit agreement, to have instructed the depositary to give a
proxy to the proxy bank to vote the ordinary shares underlying
the ADSs in accordance with the recommendations of the proxy
bank and (iii) a statement as to the manner in which
instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the
ordinary shares underlying your ADSs but only if we ask the
depositary to ask for your instructions. Otherwise, you will not
be able to exercise your right to vote, unless you withdraw our
ordinary shares underlying the ADSs you hold. However, you may
not know about the meeting far enough in advance to withdraw
those ordinary shares. If we ask for your instructions, the
depositary, upon timely notice from us, will notify you of the
upcoming vote and arrange to deliver our voting materials to
you. We cannot guarantee you that you will receive the voting
materials in time to ensure that you can instruct the depositary
to vote your ordinary shares. In addition, the depositary and
its agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise
your right to vote, and there may be nothing you can do if the
ordinary shares underlying your ADSs are not voted as you
requested.
Under the deposit agreement for the ADS, we may choose to
appoint a proxy bank. In this event, the depositary will receive
a proxy which will be given to the proxy bank to vote our
ordinary shares underlying your ADSs at shareholders’
meetings if you do not vote in a timely fashion and in the
manner specified by the depositary.
The effect of this proxy is that you cannot prevent our ordinary
shares underlying your ADSs from being voted, and it may make it
more difficult for shareholders to influence the management of
our company, which could adversely affect your interests.
Holders of our ordinary shares are not subject to this proxy.
You
may not receive distributions on our ordinary shares represented
by our ADSs or any value for them if it is illegal or
impractical to make them available to holders of
ADSs.
The depositary of our ADSs has agreed to pay to you the cash
dividends or other distributions it or the custodian receives on
our ordinary shares or other deposited securities after
deducting its fees and expenses. You will receive these
distributions in proportion to the number of our ordinary shares
your ADSs represent. However, the depositary is not responsible
if it decides that it is unlawful or impractical to make a
distribution available to any holders of ADSs. We have no
obligation to take any other action to permit the distribution
of our ADSs, ordinary shares, rights or anything else to holders
of our ADSs. This means that you may not receive the
distributions we make on our ordinary shares or any value from
them if it is illegal or impractical for us to make them
available to you. These restrictions may have a material adverse
effect on the value of your ADSs.
You
may be subject to limitations on transfer of your
ADSs.
Your ADSs, which may be evidenced by ADRs, are transferable on
the books of the depositary. However, the depositary may close
its books at any time or from time to time when it deems
expedient in connection with the performance of its duties. The
depositary may refuse to deliver, transfer or register transfers
of your ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary
think it is advisable to do so because of any requirement of law
or government or governmental body, or under any provision of
the deposit agreement, or for any other reason.
The
rights of shareholders in German companies differ in material
respects from the rights of shareholders of corporations
incorporated in the United States.
Our company is incorporated in Germany, and the rights of our
shareholders are governed by German law, which differs in many
respects from the laws governing corporations incorporated in
the United States. For example, individual shareholders in
German companies do not have standing to initiate a shareholder
derivative action, either in Germany or elsewhere, including the
United States unless they meet thresholds set forth under German
corporate law. Therefore, our public shareholders may have more
difficulty protecting their interests in the face of actions by
our management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a jurisdiction in
the United States.
It may
be difficult for you to bring any action or enforce any judgment
obtained in the United States against our company or members of
our Supervisory Board or Management Board, which may limit the
remedies otherwise available to our shareholders.
Our company is incorporated in Germany and the majority of our
assets are located outside the United States. In addition, most
of the members of our Supervisory Board, Management Board and
other senior management, named in this annual report, are
nationals and residents of Germany. Most or all of the assets of
these individuals are located outside the United States. As a
result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the United
States if you believe your rights have been infringed under the
securities laws or otherwise. In addition, a German court may
prevent you from enforcing a judgment of a United States court
against us or these individuals based on the securities law of
the United States or any state thereof. A German court may not
allow you to bring an action in Germany against us or these
individuals based on the securities laws of the United States or
any state thereof.
We
have no present intention to pay dividends on our ordinary
shares in the foreseeable future and, consequently, your only
opportunity to achieve a return on your investment during that
time is if the price of our ADSs appreciates.
We have no present intention to pay dividends on our ordinary
shares in the foreseeable future. No earnings were available for
distribution as a dividend for our 2007 financial year, since
Qimonda AG, on a stand alone basis, as parent company, incurred
a cumulative loss (Bilanzverlust) as of
September 30, 2007. Any determination by our Supervisory
and Management Boards to pay dividends will depend on many
factors, including our financial condition, results of
operations, legal requirements and other factors. Accordingly,
if the price of our ADSs falls in
the foreseeable future, you will lose money on your investment,
without the likelihood that this loss will be offset in part or
at all by cash dividends.
The
effect of Infineon’s loan of our ADSs to J.P. Morgan,
any exercise of the exchange rights under the exchangeable notes
Infineon Technologies Investment B.V. has offered or any sales
of our ADSs in short sale transactions by the investors in the
exchangeable notes may have a negative effect on the market
price of our ADSs. In addition, purchases of ADSs in connection
with the termination of Infineon’s loan of shares in our
company to J.P. Morgan may result in a temporary increase
in the market price of our ADSs during the loan unwind
period.
In September 2007, Infineon Technologies Investment B.V.
offered, in sales it has advised us were exempt from
registration under the U.S. Securities Act of 1933, as
amended, pursuant to Regulation S thereunder, notes
exchangeable into shares it currently holds in our company. We
have been advised by J.P. Morgan Securities Inc. that, in
connection with that offering, its affiliate has facilitated and
expects to continue to facilitate the establishment by the
investors in the exchangeable note of hedged positions in the
exchangeable notes through the entry into privately negotiated
derivative transactions with those investors. Infineon also
loaned approximately 3.5 million shares to an affiliate of
J.P. Morgan Securities, Inc. in connection with these
anticipated transactions. The increase in the number of our ADSs
outstanding upon exchanges of the exchangeable notes could have
a negative effect on the market price of our ADSs. The market
price of our ADSs also could be negatively affected by other
short sales of our ADSs by or on behalf of the investors in the
exchangeable notes to hedge their investments in the
exchangeable notes. In addition, purchases of ADSs in connection
with the termination of the loan may result in a temporary
increase in the market price of our ADSs during the loan unwind
period.
The following table presents summary historical combined and
consolidated financial data for the periods indicated. We
derived the summary combined and consolidated financial data as
of and for the years ended September 30, 2004, 2005, 2006
and 2007 from our combined and consolidated financial statements
for those years. These combined and consolidated financial
statements have been audited by our independent registered
public accounting firm, KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, whom we
refer to as KPMG. The combined and consolidated financial
statements as of September 30, 2006 and 2007 and for each
of the years in the three year period ended September 30,2007, are included elsewhere in this annual report. We derived
the summary combined financial data as of and for the year ended
September 30, 2003, from our unaudited combined financial
statements for that year. In the opinion of our management,
these unaudited condensed combined and consolidated financial
statements include all adjustments necessary to present fairly
the financial information for the periods they represent.
We have been a segment of Infineon for all of the periods
indicated. Infineon did not allocate most non-operating
financial statement line items among its segments during the
periods prior to our carve-out from Infineon. This financial
data was prepared in accordance with U.S. GAAP and on a
basis consistent with the financial data for the later periods
we have presented. Infineon contributed our business to our
company on May 1, 2006. We refer to this contribution as
our carve-out. Our combined financial information for all
periods before the date of our carve-out from Infineon may not
be representative of what our results would have been had we
been a stand-alone company during any of those periods. In
addition, historical results are not necessarily indicative of
the results that you may expect for any future period.
In particular, the combined financial statements do not reflect
estimates of one-time and ongoing incremental costs required for
us to operate as a separate company. Infineon allocated to our
company costs it incurred relating to research and development,
logistics, purchasing, selling, information technology, employee
benefits, general corporate functions and other costs. General
corporate functions include accounting, treasury, tax, legal,
executive oversight, human resources and other services. These
and other allocated costs totaled €387 million for our
2004 financial year, €305 million for our 2005
financial year and €203 million before the carve-out
for our 2006 financial year. Following our carve-out from
Infineon, we are responsible for substantially all of these
items, subject to Infineon’s continued provision of some of
these services pursuant to service agreements. These agreements
are described in “Related Party Transactions and
Relationships — with Infineon”. As a result,
costs are no longer allocated after the carve-out, but rather
charged on the basis of these agreements. Had we been incurring
these costs directly during these periods before the carve-out,
they may have been materially different than the allocated
amounts in the combined financial statements.
Selected Combined and Consolidated Statement of Operations
data:
Net sales
€
2,544
€
3,008
€
2,825
€
3,815
€
3,608
$
5,130
Cost of goods sold
2,090
2,063
2,164
3,048
3,390
4,820
Gross (loss) profit
454
945
661
767
218
310
Research and development expenses
298
347
390
433
401
570
Selling, general and administrative expenses
209
232
206
215
199
283
Restructuring charges
3
2
1
—
—
—
Other operating expenses (income), net
16
194
13
60
(18
)
(26
)
Operating (loss) income
(72
)
170
51
59
(364
)
(517
)
Interest (expense) income, net
(35
)
(30
)
(7
)
(25
)
7
10
Equity in earnings (losses) of Associated companies
22
(16
)
45
80
117
166
Gain (loss) on associated company share issuance
(2
)
2
—
72
—
—
Other non-operating income (expense), net
56
(11
)
13
8
7
10
Minority interests
11
17
2
(6
)
(6
)
(9
)
Income (loss) before income taxes
(20
)
132
104
188
(239
)
(340
)
Income tax (expense) benefit
(55
)
(211
)
(86
)
(114
)
(10
)
(14
)
Net (loss) income
€
(75
)
€
(79
)
€
18
€
74
€
(249
)
$
(354
)
Net (loss) income per share and ADS
(unaudited)(2):
Basic and diluted
€
(0.25
)
€
(0.26
)
€
0.06
€
0.24
€
(0.73
)
$
(1.03
)
Number of shares used in earnings per share
computation(2):
Basic (in thousands)
300,000
300,000
300,000
305,984
342,000
342,000
Diluted (in thousands)
300,000
300,000
300,000
305,984
342,000
342,000
Summary Combined and Consolidated Balance Sheet data:
Cash and cash equivalents
€
544
€
577
€
632
€
932
€
746
$
1,061
Marketable securities
23
2
—
138
265
377
Working capital,
net(3)
787
78
437
1,328
1,013
1,440
Total assets
4,634
4,750
4,861
5,861
5,381
7,651
Short-term debt, including current portion of long-term debt
51
551
524
344
77
109
Long-term debt, excluding current portion
516
27
108
151
227
323
Business/shareholders’ equity
2,736
2,779
2,967
3,871
3,517
5,001
Summary Combined and Consolidated Cash Flow data:
Net cash provided by operating Activities
€
300
€
693
€
484
€
326
€
980
$
1,395
Net cash used in investing Activities
(242
)
(1,048
)
972
(801
)
(847
)
(1,205
)
Depreciation and amortization
815
752
528
703
666
946
(1)
Translated into U.S. dollars solely
for convenience of the reader at the rate of €1.00 =
$1.4219, the noon buying rate of the Federal Reserve Bank of New
York for euro on September 28, 2007, the last currency
trading day in September 2007.
(2)
Before the carve-out, the Memory
Products business was wholly owned by Infineon, and there were
no earnings (loss) per share for our company. Following the
carve-out, earnings (loss) per share reflects the contributed
capital structure and the additions due to the IPO for all
periods presented. For presentation purposes, we used the number
of shares outstanding at the carve-out date for the presentation
of earnings (loss) per share for periods prior to our carve-out.
(3)
Calculated by subtracting current
liabilities from current assets.
This discussion and analysis of our financial condition and
results of operations is based on, and should be read in
conjunction with, our audited combined and consolidated
financial statements as of and for the years ended
September 30, 2005, 2006, 2007 and the other financial
information included elsewhere in this annual report. We have
prepared our combined and consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
This discussion and analysis of our financial condition and
results of operations contains forward-looking statements.
Statements that are not statements of historical fact, including
expressions of our beliefs and expectations, are forward-looking
in nature and are based on current plans, estimates and
projections. Forward-looking statements are applicable only as
of the date they are made, and we undertake no obligation to
update any of them in light of new information or future events.
Forward-looking statements involve inherent risks and
uncertainties. We caution you that a number of important factors
could cause actual results or outcomes to differ materially from
those expressed in any forward-looking statement. These factors
include those identified under the headings “Risk
Factors” and “Special Note Regarding Forward-Looking
Statements and Market Data”.
Executive
Summary
We are one of the world’s leading suppliers of
semiconductor memory products. We came into being as Qimonda
effective May 1, 2006 when Infineon contributed
substantially all of the assets, liabilities, operations and
activities, as well as the employees, of its former Memory
Products segment to us. On August 9, 2006 we completed our
IPO on the New York Stock Exchange under the symbol QI.
Infineon’s shareholding in our company was 77.5% as of
September 30, 2007, and Infineon has announced that it
wants to reduce its stake in Qimonda to significantly less than
50 percent by the time of its 2009 annual
shareholders’ meeting.
We prepared our combined and consolidated financial statements
on the basis of a number of assumptions and estimates. We
believe these assumptions and estimates to be reasonable. In
addition, there are a number of critical accounting policies
which we believe are essential to understanding our financial
statements. However, our financial statements may not be
indicative of our future performance. Several additional
factors, particularly the volatility of DRAM prices, strongly
affect our capital intensive business. We aim to increase
profitability by maintaining our product portfolio diversity in
applications outside the standard PC market, by reducing our
costs per bit and through strategic cooperations.
The single most important factor affecting our results of
operations in our 2007 financial year was the high rate of
decline of prices for the DRAM products we sell. While our
business model is premised on managing the continuous price
decline that characterizes our industry, the price declines in
2007 exceeded our ability to compensate through improvements in
technology and efficiency. After falling precipitously during
our second and third financial quarters — the average
“spot” market price for 512Mb DRAM as reported by
DRAMeXchange fell by nearly three-quarters in the first five
months of calendar year 2007 — prices stabilized and
increased briefly in July 2007 before resuming their decline
through our financial year end. The effects of these price
declines pushed us into a loss in the 2007 financial year after
a profitable 2006 financial year. However, in both financial
years, we believe we benefited strongly from the major elements
of our strategy, and that our implementation of that strategy
has helped us to reduce the impact of the very rough recent
market conditions and has enabled us to achieve strong results
when market conditions were less severe.
Our strategic responses to market conditions in both years has
been generally to increase our volumes of memory sold, to
maintain our efforts to push our product mix towards the
relatively higher priced infrastructure, graphics, consumer and
mobile DRAM products and to enhance our productivity. In
particular, the volume of memory we sold, based on bits of data
storage (which we refer to as our bit shipments) grew by 79% in
our 2006 financial year and 44% in our 2007 financial year. We
grew the share of our bit shipments for non-PC applications from
less than 50% on average in the 2006 financial year to more than
50% in the 2007 financial year, which, we believe, caused the
overall decline in our average selling prices to be smaller than
it would have been had our product mix remained unchanged from
its level of several years ago. In our production, we increased
the share of our capacities based on 300mm wafers to
approximately 75% in our 2007 financial year and enhanced our
productivity in other ways, primarily through conversion of
capacities to the 90nm process node in the 2006 financial year
and to the 80nm and 75nm process nodes in the 2007 financial
year.
Despite the continuous price pressure, we were able to retain
positive operating income in both our 2005 and 2006 financial
years and in the first six months of our 2007 financial year.
However, due to the significant price decline for DRAM products
described above, we incurred operating losses in the second half
our 2007 financial year and for the full financial year. In our
2007 financial year, we incurred a net loss of
€249 million, compared to net income of
€74 million in our 2006 financial year.
We generated significant amounts of cash from operations in each
of our 2006 and 2007 financial years. We invested this cash,
together with proceeds from our IPO, in our manufacturing
facilities and on R&D, as we continued our migration to
300mm wafers and for the technical conversion to the 80nm and
smaller technology nodes. We also repaid the remainder of our
outstanding debt to Infineon during 2007 and entered into our
first sale and leaseback transaction, both in furtherance of our
strategy of developing a strong and independent capital
structure.
Overview
Business
Overview
We are one of the world’s leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. For the full calendar year 2006, we were the
world’s third largest supplier of DRAM by revenue and bit
shipments, with a market share of approximately 16%, according
to Gartner. For the first nine months of the 2007 calendar year,
we remained the third largest supplier of DRAM by revenue and
were the fourth largest supplier of DRAM by bit shipments with
market shares of approximately 13% according to iSuppli’s
preliminary report in November 2007. Although our market share
fluctuates, in each of the past five calendar years, we captured
between 12% and 16% of the worldwide DRAM market based on
revenues, according to Gartner, and remained among the four
largest DRAM suppliers worldwide based on revenues.
Our principal products are DRAM components and modules for use
in a wide variety of electronic products. In our 2007 financial
year 39% of our net sales were of standard DRAMs for use in PC,
notebook and workstation applications and 60% were of DRAM
products for more advanced infrastructure applications and
graphics, mobile and consumer DRAMs. Flash memory, other
products and licensing revenue accounted for the remaining 1%.
For the financial year ended September 30, 2007, our net
sales were €3.608 million, our earnings before
interest and taxes (abbreviated as “EBIT”) was a loss
of €246 million and our net loss was
€249 million. For the financial year ended
September 30, 2006, our net sales were
€3,815 million, our EBIT was €213 million
and our net income was €74 million.
Our
Carve-Out from Infineon
Effective May 1, 2006, Infineon contributed substantially
all of the assets, liabilities, operations and activities, as
well as the employees, of its former Memory Products segment to
us. We refer to this event as the “carve-out”. This
temporarily excluded the Memory Products operations in Korea and
Japan, which have since been transferred to us. While
Infineon’s investment in the Advanced Mask Technology
Center (AMTC) and the Maskhouse Building Administration Company
(BAC) in Dresden has been contributed to us, the legal transfer
of this investment is not yet effective because Infineon’s
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest. While pursuant to the
AMTC and BAC limited partnership agreements, such consent may
not be unreasonably withheld, we, Infineon and Infineon’s
co-venturers are finalizing negotiations on agreement that
provides such consent and also addresses Infineon’s
intention to reduce its stake in us to below 50%. Infineon is
obligated under the contribution agreement to hold the AMTC and
BAC interest for our economic benefit. For as long as Infineon
holds our interest in AMTC and BAC, we must exercise our
shareholder rights through Infineon, which is a more cumbersome
and less efficient method of exercising these rights than if we
held the interest directly. A similar arrangement was in place
for our joint venture with Nanya, Inotera Memories, Inc., where
Infineon held our shares in trust until March 2007. Infineon
transferred nearly all of these shares to us on March 13,2007. Only a
portion of shares representing less than 1% of the total Inotera
share capital remains in the trust. We do not expect these
administrative complexities to have a material adverse effect on
our business, financial condition and results of operations. We
refer to the former segment’s assets, liabilities,
operations and activities as the “Memory Products
business”.
In connection with our carve-out, some agreements (including
licensing, purchase and shareholding agreements) and investments
of Infineon relating to our business could not be transferred to
us. In other cases, as outlined above, the transfer of such
agreements and investments were delayed due to legal
restrictions. In the future, some of our interests could revert
to Infineon or be terminated. Any such reversion or termination
could materially adversely affect our financial condition and
results of operations. See “Risk Factors — Risks
related to our operations — Some of our agreements
with strategic partners, such as our Inotera Memories, Inc.
joint venture with Nanya, have restrictions on transfers of the
shares of the ventures they create that could cause our
ownership or equity interest in these ventures to revert to
Infineon, if Infineon ceases to be our majority owner”.
On August 9, 2006 we completed our initial public offering,
or IPO, on the New York Stock Exchange through the issuance of
42 million ordinary shares, which commenced trading as
American Depositary Shares (ADSs) under the symbol QI. We used
the offering proceeds of €415 million, net of offering
costs and tax benefits thereon, to finance investments in our
manufacturing facilities and for research and development. In
our 2007 financial year we invested these proceeds primarily in
our 300mm front-end manufacturing sites in Richmond, Virginia
and Dresden, Germany for capacity expansion and new equipment
for the technical conversion to the 80nm and smaller technology
nodes as well as approximately €77 million in our
ongoing research and development activities. After our IPO and
Infineon’s sale of 6.3 million shares upon the
exercise of the underwriters’ over-allotment option,
Infineon’s shareholding in our company was 85.9%.
On September 25, 2007, Infineon sold 28,750,000 Qimonda
shares to the public from its shareholdings in a secondary
public offering. On September 26, 2007 Infineon
Technologies Investment B.V. placed bonds exchangeable for up to
20.5 million Qimonda shares, equivalent to approximately
6.0% of our share capital. At the same time, Infineon loaned
3,550,098 Qimonda shares to an affiliate of J.P. Morgan
Securities, Inc. in connection with the placement of the
exchange bonds. These shares must be returned to Infineon no
later than August 31, 2010. Some of these shares have
already been returned to Infineon. As of September 30,2007, Infineon’s shareholding in our company was 77.5%. For
more information, see “Risk Factors — Risks
related to the securities markets and ownership of our shares or
ADSs”
In August 2007, Infineon announced that it intends to reduce its
stake in Qimonda to significantly less than 50% by the time of
its 2009 annual shareholders’ meeting.
Basis
of Presentation of Our Combined Financial
Statements
Our combined and consolidated financial statements have been
prepared in accordance with U.S. GAAP. These financial
statements are presented on a “carve-out” or combined
basis for all periods prior to our carve-out and comprise the
combined historical financial statements of the transferred
Memory Products business assuming that we had existed as a
separate legal entity for all of the financial periods
presented. Our financial statements are presented on a
consolidated basis for all periods thereafter. The combined
financial statements have been derived from the consolidated
financial statements and historical accounting records of
Infineon, employing the methods and assumptions we describe
below and in note 1 to the combined and consolidated
financial statements. Most of the assets, liabilities,
operations and activities of the Memory Products business are
those that comprised the Memory Products segment of Infineon
during the financial periods presented.
Methodology. Infineon took two broad steps to
reflect the structure of the Memory Products business in the
historical financial data for the periods presented in this
annual report. The first step was to determine which companies
and business areas of Infineon belong to the Memory Products
business. The second step was to combine these companies and
business areas for accounting purposes.
The combined financial statements differ from the segment data
in Infineon’s consolidated financial statements in terms of
their stated objectives as well as in aspects of the information
they convey. The objective of Infineon’s segment reporting
was to present its Memory Products business as an integral part
of Infineon. Infineon
historically allocated most financial statement items among its
segments, including the Memory Products segment. However, for
purposes of reporting segment data, Infineon did not allocate
some items among its various segments, including certain
corporate overhead costs that supported Infineon’s
businesses overall, including the Memory Products business. The
combined financial statements are intended to present the Memory
Products business on a “carve-out” basis, which means
as if it had been a separate legal entity during all of the
periods presented in this annual report. In other words, the
combined financial statements present our historical financial
condition, statements of operations and cash flows based on the
fictitious assumption that our structure as it stands after the
carve-out had already existed in the past. The combined
financial statements therefore reflect further allocations to
us, consistent with our post-carve-out operation as a separate
legal entity.
Statements of Operations. The combined
statements of operations reflect all revenues and expenses that
were attributable to the Memory Products business. Operating
expenses or revenues of the Memory Products business that could
be specifically identified as pertaining to the Memory Products
business were charged or credited directly to it without
allocation or apportionment. This was the case for all of the
revenues appearing on the combined statements of operations.
Operating expenses that could not be specifically identified as
pertaining solely to the Memory Products business were allocated
to us to the extent they were related to us. The combined
statements of operations include expense allocations for certain
corporate functions historically provided to us by Infineon,
including basic research costs, employee benefits, incentives
and pension costs, interest expense, restructuring costs, the
costs of our share of central departments such as finance and
treasury and controlling and other costs. These allocations were
made on a specifically identifiable basis or using the relative
percentages, as compared to Infineon’s other businesses, of
total sales, cost of goods sold, other cost measures, headcount
or other reasonable methods. We and Infineon considered these
allocations to be a reasonable reflection of the utilization of
services provided. Our expenses as a separate, stand-alone
company may be higher or lower than the amounts reflected in the
statement of operations for historical periods. We describe the
allocation methods we used in note 1 to the combined and
consolidated financial statements.
Balance Sheets. As a general rule, the assets
and liabilities attributable to the Memory Products business
were contributed to us at their historical book values as shown
in Infineon’s balance sheet. Unless otherwise noted, all
assets and liabilities specifically identifiable as pertaining
to the Memory Products business are included in the combined
financial statements. Where legal entities and their businesses
are wholly allocable to the Memory Products business, the shares
of these entities were transferred to the Memory Products
business. In some cases, including at the Infineon parent
company level, the memory-related assets and liabilities were
identified and carved out by means of asset and liability
transfer transactions.
The assets and liabilities that were directly identifiable as
pertaining to Infineon’s Memory Products business include
inventories, fixed assets and accounts receivable. The
assumptions and allocations used for assets and liabilities that
were not specifically identifiable as being part of
Infineon’s Memory Products business are set forth in
note 1 to the combined and consolidated financial
statements.
Investments by and Advances from Infineon and our Capital
Structure. Because a direct ownership
relationship did not exist among the various entities comprising
the Memory Products business prior to our carve-out,
Infineon’s investments in and advances to the Memory
Products business represent Infineon’s interest in the
recorded net assets of the Memory Products business. These are
shown as business equity in lieu of shareholder’s equity in
the combined financial statements. All intercompany
transactions, including purchases of inventory and charges and
cost allocations for facilities, functions and services
performed by Infineon for the Memory Products business, are
reflected in this business equity. After we became a separate
company and Infineon contributed the Memory Products business to
us, this business equity in the amount of
€3,372 million became our shareholders’ equity.
Capital Structure. The Memory Products
business has historically relied on Infineon to provide
financing of its operations. Because we have historically used
more cash in our investing activities than we have generated
through our operations, we have historically relied on Infineon
to provide a portion of the financing necessary to fund our
capital expenditures. These financings were reflected in our
short-term debt (which included €344 million of
interest-bearing advances to us from Infineon at
September 30, 2006) and in our business equity before
the carve-out. The capital structure attributed to the Memory
Products business in connection with the preparation of the
combined financial statements was based on the business equity,
and as such, is neither indicative of the capital structure that
the Memory Products business would have required had it been an
independent company during the financial periods presented
before the carve-out, nor is it indicative of the capital
structure that we may require in future. In April 2007, we
completely repaid our shareholder loan from Infineon.
The preparation of the accompanying combined and consolidated
financial statements required us to make estimates and
assumptions, as described in “— Critical Accounting
Policies” below. We believe that the estimates and
assumptions underlying the combined financial statements are
reasonable. However, the combined financial statements included
herein may not necessarily reflect our results of operations,
financial position and cash flows in the future or what our
results of operations, financial position and cash flows would
have been had we been a separate, stand-alone company during the
periods presented.
Factors
that Affect our Results of Operations
Relationship
between DRAM prices and reduced unit costs
The average selling prices of standard DRAMs and, to a certain
extent, other semiconductor memory products, have generally
declined throughout the semiconductor memory industry during the
past ten years. We expect them to continue to do so in future
periods irrespective of industry-wide fluctuations as a result
of, among other factors, technological advancements and cost
reductions. Although we may from time to time be able to take
advantage of higher selling prices typically associated with new
products and technologies, we nevertheless expect the prices of
new products to also decline over time, in certain cases very
rapidly, primarily as a result of market competition. We have
adopted enhancements to our technology to reduce our per-megabit
manufacturing costs. These efforts have included the
introduction of new technology such as smaller feature sizes and
manufacturing using 300mm wafers. We expect that these measures
will enable us to reduce our costs per chip and thereby offset
declining chip prices. We will realize the full effects of these
manufacturing unit cost reductions after our conversion to the
80nm and 75nm technology nodes. In the meantime, we are
incurring higher
per-unit
costs in connection with this conversion which is expected to
extend through our 2008 financial year. We have also increased
our production in Asia, where we can take advantage of
lower-cost economies. Our margins are to a significant extent
dependent on the extent to which we can reduce our unit
manufacturing costs as prices decline.
Relationship
between the Capital Intensive Nature of our Business and the
Industry’s Cyclicality
Declining prices have driven manufacturers, including ourselves,
to invest substantial sums to shrink die sizes and to construct
modern manufacturing facilities that permit the manufacture of
DRAM products using larger wafers at lower costs per chip. We
have made significant investments, individually and together
with the other companies with which we cooperate, to meet the
challenges these lower prices have brought. We invested a total
of €879 million in our 2007 financial year, a total of
€686 million during our 2006 financial year and a
total of €926 million in our 2005 financial year in
property, plant and equipment. As a result of this investment we
have substantially increased our ratio of bits manufactured
using 300mm wafers to the point where we believe we are ahead of
our major competitors on this measure. However, as we continue
to ramp up our 300mm capacity, many of our competitors are
expanding their own capacities. To the extent that demand for
DRAM does not keep pace with these capacity increases, an
oversupply situation could arise in the industry, as has
occurred on a cyclical basis in the past and as, we believe,
occurred during most of our 2007 financial year.
We recently announced plans to construct a new 300mm
manufacturing facility in Singapore, which we plan to fully own.
Depending on the growth and development of the world
semiconductor market, we intend to invest approximately
€2 billion in this facility over the next five years.
This facility may contribute to oversupply in the industry in
the future and we may have difficulty recovering our investment.
While we have reduced our planned capital expenditures for the
2008 financial year, through increased focus on our partnership
model, we still expect to spend between €650 million
to €750 million.
Exchange
Rate Fluctuations
We are subject to two categories of exchange rate risks,
transaction and translation risk.
Transaction risk arises where sales of a product are generated
in one currency but costs relating to those revenues are
incurred in a different currency. In the case of transaction
risk, changes in the value of the euro relative to the
U.S. dollar and other currencies generally have
interrelated consequences. For example, an increase in the value
of the euro relative to the U.S. dollar and other
currencies generally has these effects:
•
our margins (in euros) decline or become negative to the extent
our costs were incurred in euros and the sales were generated in
currencies weaker than the euro, and
•
Additionally our competitiveness may decline as compared with
competitors based in countries with weaker currencies while our
products manufactured in Europe will have been produced at
constant costs (in euro), their (constant) costs denominated in
weaker currencies will appear to have declined.
Conversely, as the value of the euro relative to the
U.S. dollar and other currencies decreases, generally has
these effects:
•
our margins (in euros) increase to the extent our costs were
incurred in euros and the sales were generated in currencies
stronger than the euro, and
•
our competitiveness may increase as compared with competitors
based in countries with stronger currencies because our products
manufactured in Europe will have been produced at constant costs
(in euro) while their (constant) costs denominated in stronger
currencies will appear to have increased.
We prepare our combined and consolidated financial statements in
euro. However, most of our sales volumes, as well as many of our
worldwide costs, primarily those relating to our design,
manufacturing, selling and marketing, general and
administrative, and research and development activities, are
denominated in other currencies, principally the
U.S. dollar. The portions of our sales and costs
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. If our non-euro denominated expenses do
not match our non-euro denominated sales, this currency
difference may have an adverse effect on our operating result.
Over time, transaction risk could adversely affect our cash
flows and results of operations to the extent we are unable to
reflect changes in exchange rates in the pricing of the products
in local currency. Given our revenue and expense structure, in
which most of our revenues are denominated in dollars but a
substantial portion of the costs relating to those revenues are
in euro, we experienced pressure, on our gross margin in
particular, in our 2004 and 2005 financial years and in the
financial year ended September 30, 2007. In our 2006
financial year we benefited from changes in exchange rates. The
effects of transaction risk are not quantified in our combined
and consolidated financial statements.
Translation
risk
Translation risk refers to the fact that the euro-denominated
amounts in our consolidated financial statements will differ
based on the exchange rates we use to prepare our
euro-denominated financial statements. Our subsidiaries located
outside the euro zone prepare their financial statements in
their local functional currencies. For us the most important
currency outside the euro zone is the U.S. dollar. The
U.S. dollar depreciated against the euro during our 2004
and 2005 financial years and appreciated against the euro during
our 2006 financial year, based on the average exchange rates we
use in our financial statements. The U.S. dollar
depreciated again during our 2007 financial year. The noon
buying rate of the Federal Reserve Bank of New York for euro
rose from €1.00=$1.2687 on September 29, 2006, the
last currency trading day in September 2006, to
€1.00=$1.4219 on September 28, 2007, the last currency
trading day in September 2007. Since the end of our financial
year, the noon buying rate has continued to rise to a high of
€1.00=$1.4691 on November 8, 2007. When we prepare our
financial statements, we translate the local functional currency
financial statements of our non-euro zone subsidiaries into
euro. Changes in the value of these currencies relative to the
euro from period to period therefore affect our results of
operations and financial condition as expressed in euro.
Currency translation risks do not affect local functional
currency cash flows or results of operations, but do affect our
consolidated annual financial statements. In general, an
increase in the euro value relative to the U.S. dollar and
other currencies will result in a lower euro value of the
sales generated in currencies that have depreciated relative to
the euro. Even if the margin on these sales remains constant in
a non-euro currency, its value translated into euro will be
reduced.
Additional information on transaction and currency translation
risks and our efforts to manage them are contained in
“— Quantitative and Qualitative Disclosure About
Market Risk”.
Strategic
Cooperations
We believe that cooperations, such as alliances for research and
development, and manufacturing and foundry partnerships, provide
us with access to several benefits that can be derived from
improved economies of scale. These benefits include sharing
risks and costs with our business partners, reducing our capital
requirements, developing a broader range of products, gaining
inter-cultural know-how and accessing additional production
capacities. We have invested substantial sums in these
cooperations in past periods. In addition, we have extensive
commitments to purchase products from our manufacturing
partners. These commitments can not be precisely quantified
because they are dependent on future market prices for memory
products. These purchases aggregated to approximately
€520 million in our 2005 financial year,
€1,185 million in our 2006 financial year and
€1,282 million in our 2007 financial year, as we
increased our share of foundry purchases from Winbond and SMIC,
and other purchases from Inotera.
The most significant of our current cooperations in terms of
impact on our financial statements are:
•
Nanya. Our strategic cooperation with Nanya
Technology Corporation, a Taiwanese corporation, encompasses the
joint development of DRAM products and DRAM process technology
as well as a joint venture called Inotera Memories, Inc. that
owns and operates a 300mm manufacturing facility in Taiwan.
Inotera uses production technology developed under our joint
development agreements with Nanya. We initially developed
advanced 90nm and 75nm process technologies together with Nanya
and shared the related development costs. In September 2005, we
agreed to continue developing advanced 58nm technologies
together. Under the terms of the joint venture, Nanya and we
each purchase 50% of Inotera’s output. Inotera completed an
initial public offering of its common stock in Taiwan in March
2006. In May 2006, Inotera listed Global Depositary Receipts, or
GDRs, on the Luxembourg Stock Exchange. After these transactions
we owned 35.6% of Inotera’s shares. We account for Inotera
using the equity method. Because of Inotera’s significance
for us within the meaning of
Rule 3-09
of the SEC’s
Regulation S-X,
we have incorporated by reference in this annual report,
Inotera’s audited consolidated financial statements as of
and for the years ended December 31, 2005 and 2006.
•
CSVC. In July 2003, Infineon established a
venture with China Singapore Suzhou Industrial Park Ventures
Co., Ltd. (CSVC) in Suzhou, China. CSVC is a limited liability
company organized under the laws of the People’s Republic
of China. The venture, renamed Qimonda Technologies (Suzhou)
Co., Ltd. after our carve-out and herein referred to as Qimonda
Suzhou, constructed a back-end facility for the assembly and
testing of our products, which officially opened in September
2004. We are required to purchase the entire output of the
facility. We currently hold 63% of Qimonda Suzhou’s share
capital, representing 72.5% of the voting rights. We expect to
invest a further $86.5 million in Qimonda Suzhou by the end
of July 2008 pursuant to our current contractual obligations,
and will hold approximately 72.5% of its share capital and
voting rights by that date, with CSVC owning the remaining
27.5%. We consolidate Qimonda Suzhou into our combined and
consolidated financial statements, because we have exercised
voting control over this venture from the outset. Dividends from
this venture belonging to CSVC are shown as minority interests
in our combined and consolidated financial statements. We have
the option to acquire CSVC’s stake at the nominal
investment value plus accrued and undistributed returns on that
investment.
In March 2007, we announced plans to expand capacity at our
Qimonda Suzhou venture, for which we expect to make capital
expenditures of €250 million over the next three
years. The venture intends to arrange external financing for any
additional investment required to purchase further equipment. We
cannot assure you that this external financing can be obtained
on favorable terms or at all.
•
SMIC. In December 2002 Infineon entered into
an agreement with Semiconductor Manufacturing International
Corporation (SMIC), a Cayman Islands corporation with head
offices in Shanghai, China. This
agreement was assigned to us as part of the carve-out. As most
recently amended in October 2007, the agreement provides us
access to additional DRAM manufacturing capacity.
•
Winbond. In May 2002 and August 2004, Infineon
entered into product purchase and capacity reservation
agreements with Winbond Electronics Corporation, a Taiwanese
corporation, which give us access to additional DRAM production
capacity. These agreements were assigned to us as part of the
carve-out. In 2006 and 2007, we entered into additional
agreements with Winbond, enabling 80mm, 75nm and 58nm DRAM
manufacturing for us.
Please see “Our Business” and “Arrangements
between Qimonda and the Infineon Group” for more details on
these strategic cooperations.
Critical
Accounting Policies
The preparation of our combined and consolidated financial
statements required us to apply accounting policies, and make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the years reported. We have identified the
following critical accounting policies and related assumptions,
estimates and uncertainties, which we believe are essential to
understanding the underlying financial reporting risks and the
impact that these accounting methods, assumptions, estimates and
uncertainties have on our reported financial results. These
policies have the potential to have a significant impact on our
combined and consolidated financial statements, either because
of the significance of the combined and consolidated financial
statement item to which they relate or because they require
judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are
continuous in nature. Actual results may differ from our
estimates under different assumptions and conditions. Our
critical accounting policies include:
•
those made in connection with our initial preparation of the
combined financial statements;
•
recoverability of long-lived assets;
•
valuation of inventory;
•
pension plan accounting;
•
realization of deferred tax assets;
•
revenue recognition; and
•
contingencies.
Assumptions
and Estimates We Made in Preparing Our Combined Financial
Statements
The preparation of our combined financial statements requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, as well as disclosure of
contingent amounts and liabilities, at the dates of the
financial statements and the reported amounts of revenues and
expenses during the financial periods we present. Actual results
could differ materially from these estimates. In addition, due
to the significant relationship between Infineon and our
company, the terms of the carve-out transactions, the
allocations and estimations of assets and liabilities and of
expenses and other transactions between our business and
Infineon are not the same as those that would have resulted from
transactions among unrelated third parties. We believe that the
assumptions underlying the combined financial statements are
reasonable.
Allocations from Infineon during the financial year ended
September 30, 2005, and the seven months ended
April 30, 2006 are reflected in the combined statements of
operations as follows:
The allocation during the 2006 financial year relates to the
seven-month period between October 1, 2005 and
April 30, 2006. After our carve-out on May 1, 2006,
costs were charged according to agreements with Infineon, which
amounted to €33 million for the five months period
ended September 30, 2006, and €56 million for the
year ended September 30, 2007. See note 1 to the
combined and consolidated financial statements for a description
of the assumptions used for periods prior to the carve-out.
However, these transactions, allocations and estimates are not
indicative of those that would have obtained had our company
actually operated on a stand-alone basis, nor are they
indicative of our future transactions or of our expenses or
results of operations. In addition, the process of preparing the
combined financial statements does not permit the revaluation of
historical transactions to attempt to introduce an arms’
length relationship where one did not at the time exist. We
believe that it is not practicable to estimate what the actual
costs of our company would have been on a stand-alone basis if
it had operated as an unaffiliated entity. Rather than
allocating the expenses that Infineon actually incurred on
behalf of our business, we would have had to choose from a wide
range of estimates and assumptions that could have been made
regarding joint overhead, joint financing, shared processes and
other matters. Any of these assumptions may have led to
unreliable results and would not have been more useful as an
indicator of historical business development and performance
than the methods employed in preparing the combined financial
statements.
Recoverability
of Long-Lived Assets
Our business is extremely capital-intensive, and requires
significant investment in property, plant and equipment. Due to
rapid technological change in the semiconductor industry, we
anticipate the level of capital expenditures to be significant
in future periods. We invested a total of €879 million
in our 2007 financial year, a total of €686 million
during our 2006 financial year and a total of
€926 million in our 2005 financial year in property,
plant and equipment. At September 30, 2007, the carrying
value of our property, plant and equipment was
€2,186 million.
Prior to our carve-out Infineon acquired other businesses to
augment the Memory Products business. These acquisitions
resulted in the generation of significant amounts of long-lived
intangible assets, including goodwill. At September 30,2007 we had long-lived intangible assets of
€143 million.
We apply the provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets”, and perform a test for impairment
at least once a year.
We also review long-lived assets, including intangible assets,
for impairment when events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying value of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment recognized is measured
by the amount by which the carrying value of the assets exceeds
the fair value of the assets. Estimated fair value is generally
based on either appraised value or discounted estimated future
cash flows. Considerable judgment is necessary to estimate
discounted future cash flows.
In applying this policy we did not recognize any goodwill
impairment charges during our 2005 or 2007 financial years.
However, in light of the weak market conditions for commodity
NAND flash memories in the three months ended September 30,2006, we decided to ramp down our flash production and stop the
current development of NAND-compatible flash memory products
based on Saifun’s proprietary NROM technology. We and
Saifun amended the license agreement relating to this technology
to terminate the payment of quarterly installments as of
December 31, 2006. As a result of the partial termination,
we reduced payables, goodwill and other intangible assets, and
recognized an impairment charge as of September 30, 2006 in
the aggregate amount of €9 million related to the
license (€7 million) and fixed assets
(€2 million) that were not considered to be
recoverable.
Valuation
of Inventory
The memory industry has historically experienced periods of
extreme volatility in product demand and in industry capacity,
resulting in significant price fluctuations. See
“— Factors that Affect our Results of
Operations” and “Risk Factors — Risks
related to the semiconductor memory industry — The
DRAM industry is subject to cyclical fluctuations, including
recurring periods of oversupply, which result in large swings in
our operating results, including large losses.” These
significant price fluctuations have often occurred within
relatively short timeframes. For example, the average
“spot” market price for 512Mb DDR2 DRAM as reported by
DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45
on September 28, 2007, a drop of 77% in nine months. Rapid
price increases can also occur. For example, the average
“spot” market price for 512Mb DDR2 DRAM as reported by
DRAMeXchange increased from $3.75 on January 2, 2006, to
$5.15 on February 2, 2006, a gain of over 37% in just one
month. Over the long term, however, DRAM prices have generally
tended to decline.
We value inventory on a quarterly basis at the lower of cost or
market value. Market value of inventory represents the net
realizable value for finished goods and
work-in-process.
As of September 30, 2006 and 2007, we had inventory of
€622 million and €619 million, respectively.
We review the recoverability of inventory based on regular
monitoring of the size and composition of inventory positions,
current economic events and market conditions, projected future
product demand and the pricing environment. This evaluation is
inherently judgmental and requires material estimates. These
estimates relate both to forecasted product demand and to the
pricing environment. Both of these are susceptible to rapid and
significant change.
In each of our three most recent financial years, we recorded
recurring adjustments to value our inventory according to this
policy. In the 2007 financial year, these adjustments amounted
to €85 million. These adjustments offset an increase
in the volume of inventory relating to the decision on our part
later in the 2007 financial year to hold finished products in
our inventory rather than sell them into an oversupplied market
characterized by swiftly falling prices. Our inventory in euro
terms was substantially the same as of September 30, 2006
and 2007 due to these offsetting factors. In future periods
write-downs on inventory may also be necessary due to one or
more of the following:
•
temporary or fundamental price declines as a consequence of an
imbalance of demand and supply, which can occur due to weak
demand
and/or
greatly increased supply;
•
technological obsolescence due to rapid developments of new
products and technological improvements; and
•
changes in economic circumstances or in other conditions that
impact the market price for our products.
These factors could result in adjustments to the valuation of
inventory in future periods, and have a material adverse effect
on our consolidated financial statements.
Pension
Plan Accounting
We account for our pension-benefit liabilities and related
postretirement benefit costs in accordance with
SFAS No. 87 “Employers’ Accounting for
Pensions”and SFAS No. 158
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”.
Prior to our carve-out, our employees participated in
Infineon’s defined benefit pension plans. The pension costs
and liabilities included in our combined and consolidated
financial statements for periods prior to the carve-out include
the portion of the Infineon pension costs and liabilities that
relate to our employees’ participation in the respective
Infineon pension plans. With the carve out, these pension
liabilities and related assets were legally transferred to us.
In September, 2006, we established the Qimonda Pension Trust for
the purpose of funding future pension benefit payments for our
employees in Germany. Subsequently, Infineon’s pension
trust transferred €26 million of cash, representing
our actuarially determined proportion of the funding in
Infineon’s pension trust as of the carve-out date, to this
trust for use in funding these pension benefit obligations. The
Qimonda Pension Trust’s investment strategy is to invest
this cash in a well-diversified portfolio of investments aimed
at maximizing long-term returns.
In February 2007,we established a uniform Qimonda Pension Plan
for Germany with effect from October 1, 2006, into which
the substantial majority of the employees were transferred,
representing more than 90% of the existing pension obligations.
The Qimonda Pension Plan is available to new employees. The
previous Infineon plan regulations continue to apply to existing
retirees and employees who did not consent to the new plan. The
Qimonda Pension Plan for Germany qualifies as a defined benefit
plan and, accordingly, the change from the previous defined
benefit plans is treated as a plan amendment pursuant to
SFAS No. 87, which increased the projected benefit
obligation by €4 million. This will be amortized as
part of net periodic pension cost in future periods.
The Infineon pension plan regulations continue to apply to our
foreign employees, although all respective assets and
obligations have been transferred to us.
Our pension costs and liabilities are actuarially calculated
using various assumptions, including discount rates, expected
return on plan assets, rate of compensation increase and rate of
projected future pension increases. These assumptions are based
on prevailing market conditions, long-term historical averages,
and estimates of future developments of rates of returns. Please
see note 28 to the combined and consolidated financial
statements for a quantification of the major assumptions
underlying our pension plan accounting, information on our plan
asset allocations and a discussion of our current funding
status. A significant variation in one or more of the underlying
assumptions could have a material effect on the measurement of
our long-term obligation or our pension cost and therefore our
financial condition or results of operations.
If the assumptions used to calculate the pension liabilities and
expected return on plan assets turn out to be accurate, we will
pay our recorded net liability as pension benefits to our
employees after they retire, and no adjustments to our balance
sheet accrual will be necessary. Prior to September 30,2007, however, our actual experience differed from those
assumptions. This resulted in differences between our recorded
net liability and the related actuarially calculated amount.
Those differences, also referred to as actuarial gains and
losses, were generally not recognized in the consolidated
statements of operations as they occurred. Instead, due to the
long-term nature of pensions and the related assumptions, they
affected pension costs over the remaining service years of the
relevant employees.
We adopted the recognition provision of SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans”, as of
September 30, 2007, pursuant to which the overfunded or
underfunded status of a defined benefit postretirement plan is
recognized as an asset or liability in the balance sheet and
changes in that funded status in the year in which the changes
occur through comprehensive income. As of September 30,2007 the adoption of the Recognition Provision of
SFAS No. 158 resulted in a decrease in other
non-current liabilities of €5 million, an increase in
non-current deferred tax liabilities of €2 million and
an increase in accumulated other comprehensive income of
€3 million.
The expense related to pension plans and similar commitments we
recognize in our consolidated financial statements is referred
to as net periodic pension cost (“NPPC”) and consists
of several separately calculated components. We estimate that
our NPPC for our 2008 financial year will be
€6.2 million. A one percentage point change in the
major assumptions mentioned above would result in the following
impact on the estimated pension cost for the 2008 financial year:
Effect on net periodic
pension costs
One percent
One percent
increase
decrease
(in millions)
Discount rate
€
(0.8
)
€
1.0
Rate of compensation increase
0.5
(0.5
)
Rate of projected future pension increases
0.2
(0.1
)
Expected return on plan assets
(0.3
)
0.3
Increases and decreases in the discount rate, rate of
compensation increase and rate of projected future pension
increases, which are used in determining the pension obligation,
do not have a symmetrical effect on NPPC primarily due to the
compound interest effect created when determining the present
value of the future pension obligation. If more than one
assumption were changed simultaneously, the impact would not
necessarily be the same as if only one assumption were changed
in isolation.
Our pension plans were underfunded by an aggregate of
€29 million as of September 30, 2006, and after
adjusting for unrecognized actuarial losses as described above
of €7 million, we recognized the remaining
€22 million as a liability on our balance sheet. Our
pension plans were underfunded by an aggregate of
€25 million as of September 30, 2007. After
adopting the recognition provision of SFAS No. 158 as
described above, we recognized this underfunded status as a
liability on our balance sheet. Since the present value of
future benefits we expect to pay over the next five financial
years totals €9 million as of September 30, 2007,
we do not perceive a need to increase our plan funding in the
immediate future.
Realization
of Deferred Tax Assets
Income taxes as presented in the accompanying combined and
consolidated financial statements are determined on a separate
return basis. Although in numerous tax jurisdictions, including
Germany, the company was included in the consolidated tax
returns of Infineon before the carve-out, where the Memory
Products business was only a part of an Infineon entity, the tax
provision was prepared on an as-if separate company basis except
that, pursuant to the terms of the contribution agreement
between us and Infineon, any net operating losses generated by
the Memory Products business and carried forward are treated as
a reduction of equity at the end of the year, as such losses
were retained by Infineon. Infineon evaluates its tax position
and related tax strategies for its entire group as a whole,
which may differ from the tax strategies we would have followed
as a stand-alone company.
We recognize deferred income tax assets only if we determine
that it is more-likely-than-not that we will be able to realize
the tax benefits in the future from accumulated temporary
differences and net operating loss and credit carry-forwards. At
September 30, 2006 and 2007, our total net deferred tax
assets were €153 million and €151 million,
respectively. Our gross deferred tax assets increased from
€316 million as of September 30, 2006 to
€438 million as of September 30, 2007,
principally due to the tax benefits of net operating loss and
credit carry-forwards of approximately €32 million as
of September 30, 2006 and of approximately
€187 million as of September 30, 2007. These net
operating loss and credit carry-forwards are generally limited
to the amount used by the particular entity that generated the
loss or credit and in certain circumstances do not expire under
current law. Because as a general matter net operating loss and
credit carry-forwards are not transferable, certain net
operating loss and credit carry-forwards remained on
Infineon’s balance sheet because they were generated by
legal entities not transferred to us in connection with our
carve-out. In the future, Infineon will be able to offset its
tax expense with these carry-forwards. The retention of these
carry-forwards is shown on our balance sheets prior to our
carve-out as a reduction in our business equity of
€6 million as of September 30, 2005. We provided
valuation allowance
against our total deferred tax assets of €70 million
and €204 million, as of September 30, 2006 and
2007, respectively.
We evaluate our deferred tax asset position and the need for a
valuation allowance on a regular basis. The assessment requires
the exercise of judgment on the part of our management with
respect to, among other things, benefits that can be realized
from available tax strategies and future taxable income. Our
ability to realize deferred tax assets depends on our ability to
generate future taxable income sufficient to use tax loss
carry-forwards or tax credits before their expiration. The
assessment is based on the benefits that could be realized from
available tax strategies, the reversal of taxable temporary
differences in future periods and, to the extent applicable, the
impact of forecasted future taxable income. If we do not expect
to be able to realize all of these benefits to the extent the
deferred tax asset would indicate, we increase the deferred tax
valuation allowance accordingly. As a result of this assessment,
we increased the deferred tax asset valuation allowance for our
2007 financial year by €134 million and in the 2006
financial year by €11 million to reduce the deferred
tax asset to an amount that we believe is more likely than not
expected to be realized in the future. The 2006 amount excluded
tax losses of €101 million before the carve-out that
could not be transferred to us and will instead be available to
Infineon in the future. The highly subjective character of many
of the determinations Statement of Financial Accounting
Standards (“SFAS”) No. 109 “Accounting
For Income Taxes” requires in measuring the valuation
allowance means that our deferred tax assets may be subject to
further reduction if our expectations, especially those relating
to the future taxable income from operations (and to benefits
from available tax strategies), prove to be too optimistic.
Revenue
Recognition
We sell our memory products throughout the world. Our policy is
to record revenue when persuasive evidence of an arrangement to
sell products exists, the price is fixed or determinable,
delivery has occurred and collectibility is reasonably assured.
In general, persuasive evidence of an arrangement exists when
the customer’s written purchase order has been accepted.
More judgment is required in the case of our licensing
agreements, whereas the revenues from most of our DRAM business
can be recognized using standardized processes.
We record reductions to revenue for estimated product returns
and allowances for discounts and price protection, based on
actual historical experience, at the time the related revenue is
recognized. We also establish reserves for sales discounts,
price protection allowances and product returns based upon our
evaluation of a variety of factors, including industry demand.
This process requires the exercise of substantial judgment in
evaluating the above-mentioned factors and requires material
estimates, including forecasted demand, returns and industry
pricing assumptions.
We have entered into licensing agreements for our technology in
the past, and anticipate that we will continue our efforts to
monetize the value of our technology in the future. As with
certain of our existing licensing agreements, any new licensing
arrangements may include capacity reservation agreements with
the licensee. Such transactions could represent multiple element
arrangements pursuant to SEC Staff Accounting Bulletin
(“SAB”) 104, “Revenue Recognition”,
and Emerging Issues Task Force (“EITF”) Issue
No. 00-21,
“Revenue Arrangements with Multiple
Deliverables”. This treatment can have the result of
deferring license revenues and recognizing them over the period
in which we are purchasing products from the licensee. The
process of determining the appropriate revenue recognition in
such transactions is highly complex and requires significant
judgment, which includes evaluating material estimates in the
determination of fair value and the level of our continuing
involvement.
Contingencies
We are subject to various legal actions and claims that arise in
the normal course of business. In particular, we are subject to
significant civil lawsuits that relate to the operations of the
Memory Products business prior to the carve-out, including the
civil antitrust litigation in the United States and Canada,
securities class actions and patent litigation. These matters
are described in “Our Business — Legal
Matters”. As part of our carve-out, we agreed to indemnify
Infineon with respect to claims (including any related expenses)
arising in connection with certain matters, which are described
under “Arrangements between Qimonda and the Infineon
Group”.
We regularly assess the likelihood of any adverse outcome or
judgments related to these matters and, where appropriate,
estimate the range of possible losses and recoveries. We record
liabilities, including accruals for
significant litigation costs related to legal proceedings, when
it is probable that a liability has been incurred and the
associated amount of the loss can be reasonably estimated. Where
the estimated amount of loss is within a range of amounts and no
amount within the range is a better estimate than any other
amount or the range cannot be estimated, we accrue the minimum
amount. Accordingly, we have accrued a liability and charged
operating income in our combined and consolidated financial
statements related to certain asserted and unasserted claims
existing as of each balance sheet date. As additional
information becomes available, we assess any potential liability
related to these actions and revise the estimates, if necessary.
These accrued liabilities may be insufficient and are subject to
change in the future based on new developments in each matter,
or changes in circumstances. Any change we make in them could
have a material impact on our results of operations, financial
position and cash flows. See “Risk Factors —
Risks related to our operations — Sanctions in the
United States and other countries against us and other DRAM
producers for anticompetitive practices in the DRAM industry and
related civil litigation may have a direct or indirect material
adverse effect on our operations” and “— An
unfavorable outcome in the pending securities litigation against
Infineon or the incurrence of significant costs in the defense
of this litigation may have a direct or indirect material
adverse effect on our operations.”
Results
of Operations
The following table presents the various line items in our
combined and consolidated statements of operations expressed as
percentages of net sales for the periods indicated.
We generate our net sales primarily from the sale of our memory
products. Our memory products consist primarily of dynamic
random access memory (DRAM) components and modules, which are
used in a wide variety of electronic products including PC,
notebook and workstation applications, more advanced
infrastructure applications as well as graphics, mobile and
consumer electronic devices. In 2007 we ceased offering the
limited range of non-volatile flash memory products we had
previously marketed and sold. The vast majority of our memory
product sales are made through our direct sales force, whereas
approximately 12% of our total sales in our 2007 financial year
were made through distributors.
We also generate a small stream of revenues from royalties and
license fees earned on technology that we own and license to
third parties. This often enables us to gain access to
manufacturing capacity at foundries through licensing and
capacity reservation arrangements, and also permits us to
recover a small portion of our research and development expenses.
The following table presents data on our net sales for the
periods indicated.
In our 2007 financial year our total net sales decreased by
€207 million, or 5%, to €3,608 million from
€3,815 million in our 2006 financial year. Primarily
responsible for the decrease were:
•
DRAM price declines of 29%; and
•
an 8% decrease in the average exchange rate of dollars for euro.
Offsetting these decreases in part were increases related to
higher bit shipments, which increased 44%
In our 2006 financial year our total net sales increased by
€990 million, or 35%, to €3,815 million from
€2,825 million in the 2005 our financial year.
Primarily responsible for the increase were:
•
higher bit shipments, which increased 79%; and
•
a 3% increase in the average exchange rate of dollars for euro.
Offsetting these increases in part were decreases related to:
•
DRAM price declines of 20%; and
•
the positive effect in our 2005 financial year of license income
from ProMOS of €118 million.
Price declines and increases. While we
generally expect prices for DRAM products to decline over time,
and this in fact occurred during each of our 2005, 2006 and 2007
financial years, our 2007 financial year was characterized by
particularly steep price declines for DRAM products. After
remaining stable until the end of December 2006, prices declined
significantly thereafter. We believe that a part of this price
decline, especially towards the end of March 2007, was driven by
seasonal demand weakness, the effects of an earlier
build-up of
inventories at original equipment manufacturers (OEMs) ahead of
the introduction of the new Windows Vista computer operating
system and capacity conversions from NAND to DRAM by some
competitors, following severe price erosion in the NAND Flash
area. During the three months ended June 30, 2007 the price
decline continued and was amplified by strong DRAM output growth
across the industry driven, we believe, mostly by capacity
increases and technology conversions to more efficient
technologies. In the three months ended September 30, 2007,
prices initially showed signs of improvement, but then resumed
their decline and ended up on average at the same low level as
during the previous three months. The average daily
“spot” market price for 512Mb DRAM as reported by
DRAMeXchange fell from $6.36 on December 29, 2006 to $1.45
on September 28, 2007, a drop of 77%.
In our 2007 financial year we continued to focus on our
diversification strategy, as indicated by the relative portions
of our product mix comprising DRAMs for PC applications, on the
one hand, and for infrastructure, graphics, consumer and mobile
applications, on the other. Measured in bit shipments, our share
of DRAMs for non-
PC applications was well above 50% during the seasonally
stronger December and September quarters and close to 50% in the
second and third quarters when there was a greater emphasis on
DRAMs for PC applications. The share of our net sales for non-PC
applications, which generally command higher and more stable
prices than standard DRAMs, increased to 60% in our 2007
financial year as compared to 51% in the 2006 financial year.
This increase was due both to seasonal factors and our ability
to increase bit shipments of DRAMs for non-PC applications.
Due, we believe, largely to our careful focus on market trends
and attention to our product mix, our average per-megabit
selling prices were 29% lower in the 2007 financial year than in
the 2006 financial year, a significantly smaller decline than
average market price decline for DRAM of 35%, based on data
reported by WSTS, over the same period.
DRAM prices were under substantial pressure during the first
quarter of our 2006 financial year, after which they recovered
over the remaining three quarters. Our average per-megabit
selling prices for DRAM products in the 2006 financial year were
approximately 20% less than they had been in with the 2005
financial year. The per-megabit selling prices in
U.S. dollars in the spot market of our major products with
DDR2 interfaces declined sharply at the start of our 2006
financial year, declining around 26% over the first three
months. During this quarter, we produced an excess of DDR2 DRAMs
because the corresponding DDR2 logic chipsets, which are
produced by logic semiconductor manufacturers, were not
available in quantities sufficient for PC manufacturers to
absorb the supply of DDR2 DRAMs in the market. A portion of the
DDR2 DRAMs that we produced remained unsold and in our inventory
until supply of appropriate logic chipsets created sufficient
demand for our accumulated DDR2 DRAMs. After December 2005
prices recovered somewhat and remained relatively stable until
May, when DDR2 pricing experienced some erosion until July
before again rising through to September 30, 2006 due to
tight market supply. DDR prices recovered steadily, albeit more
slowly than DDR2 prices, from the December 2005 low points,
continuing to increase through to the end of our 2006 financial
year.
In our 2006 financial year sales of DRAM products for use in
game consoles drove significant growth in bit shipments of
graphic products. This contributed to the increased share of net
sales from DRAMs for infrastructure, graphics, mobile and
consumer applications to 50% as compared to 38% in the 2005
financial year. Our average per-bit selling prices in the 2006
financial year were 27% lower than in our 2005 financial year.
DRAM prices remained relatively stable for most of the 2006
financial year. Towards the end of the year prices increased, we
believe, due to strong demand exceeding supply (our fourth
quarter has proven in recent years to be the strongest for DRAM
products for consumer electronics such as gaming consoles in
advance of the end-year peak retailing season). Early in our
2007 financial year, DRAM suppliers started to heavily increase
their output and bit growth rates, causing prices to come under
more pressure and to fall precipitously during our second and
third financial quarters.
The following graphic shows the average monthly market prices
for DRAM (expressed in 512Mb equivalents), as reported by WSTS,
for the three years ended September 30, 2007.
(Source: WSTS)
Increase in bit shipments. Our bit shipments
increased by 44% during the 2007 financial year compared to the
2006 financial year due to:
•
our progress in increasing the yield of our manufacturing
technologies,
•
the conversion of an increasing share of our capacities to our
80nm and 75nm technologies,
•
the increase of production volumes at our Richmond 300mm
facility.
•
our access to additional capacities of our joint venture
partners and our foundries, and
•
growth in demand, particularly for PCs, increased “bits per
box” and our continued diversification in new market areas,
especially with our consumer DRAM products.
The growth in our bit shipments was offset in part by our
decision, later in the financial year, to hold some products in
our inventory rather than sell them into a particularly
unfavorable market.
Our bit shipments increased by 79% during the 2006 financial
year as compared to the 2005 financial year. This growth was
primarily a result of:
•
our progress in increasing the yield of our 110nm technology,
•
the conversion of an increasing share of our capacities to our
90nm technology,
•
our access to additional capacities of our joint venture
partners and our foundries,
•
the overall demand growth in the DRAM market and our successful
diversification in new market segments, particularly with our
graphic DRAM products, and
•
the ramp-up
of production volumes at our Richmond 300mm facility.
Exchange rate effects. The U.S. dollar
weakened against the euro in the 2007 financial year, with the
average exchange rate for the period 8% lower than it was for
the 2006 financial year. This unfavorable U.S. dollar euro
exchange rate negatively affected our revenues during our 2007
financial year. We have calculated the effect of this change in
exchange rate on our revenues as follows: we would have achieved
€298 million more in net sales in the
2007 financial year had the average exchange rates we used to
translate our non-euro denominated sales into euros been the
same in the 2007 financial year as they were in the 2006
financial year.
The U.S. dollar/euro exchange rate had an opposite effect
in our 2006 financial year. Although the U.S. dollar was
slightly weaker on September 30, 2006 than it had been one
year earlier, the average exchange rate of U.S. dollars for
euro over the financial year was 3% higher than it was for the
2005 financial year. We have calculated the effect of this
change in exchange rate on our revenues as follows: we would
have achieved €117 million less in net sales in our
2006 financial year had the average exchange rates we used to
translate our non-euro denominated sales into euros been the
same in the 2006 financial year as they were in the 2005
financial year.
Decline in license revenue. In the 2005
financial year our license revenue increased to
€160 million, primarily due to the settlement Infineon
reached with ProMOS in November 2004. Under this agreement,
which resolved an intellectual property dispute that had begun
in 2003, Infineon licensed DRAM technology to ProMOS for ongoing
use by ProMOS, resulting in recognition of
€118 million in revenue during the 2005 financial
year. We recorded significantly less license revenue in our 2006
and 2007 financial years, and do not expect license revenues in
future periods to be as substantial as they were in our 2005
financial year.
Net
Sales by Region
The following table sets forth our sales by region for the
periods indicated. We categorize our sales geographically based
on the location where the customer chooses to be billed.
Delivery might be to another location and the customer may ship
the products on for further use.
The Rest of Europe region also includes other countries and
territories in the rest of the world outside of the listed main
geographic regions with aggregate sales representing no more
than 2% of total sales in any period.
The increased sales in Japan during our financial year ended
September 30, 2007 resulted from a strong growth in demand
for our specialty products, in particular for graphics and
consumer applications, as well as additional demand for standard
DRAM products for PC applications through an expansion of our
customer base. The decrease in sales in North America for 2007,
as compared to the previous period, was primarily caused by OEM
customers shifting their production to Asia.
The percentage of net sales in the Asia/Pacific region were
relatively high in our 2005 financial year due to the
recognition of license revenue of €118 million
relating to the ProMOS license agreement.
Cost
of Goods Sold and Gross Margin
Our cost of goods sold consists principally of expenses relating
to:
•
direct materials, principally raw wafers;
•
employee costs;
•
overhead, including maintenance of production equipment,
indirect materials (such as photomasks) and royalties;
production support, including facilities, utilities, quality
control, automated systems and management functions; and
•
foundry production (including purchases from our joint ventures
and other associated and related companies, such as Inotera).
In addition to factors that affect our revenues and those
affecting the components of cost of goods sold listed above, the
following factors, not all of which were material in the periods
under review, affected our gross margin:
•
foreign currency conversion gains (or losses) on transactions in
non-euro currencies and translations into euro;
•
amortization of purchased intangible assets;
•
product warranty costs;
•
provisions for excess or obsolete inventories and write-downs to
market value; and
•
government grants, which we recognize over the remaining useful
life of the related manufacturing assets.
The following table sets forth our cost of goods sold and
related data for the periods indicated.
Cost of goods sold increased by €342 million, or 11%,
from €3,048 million in our 2006 financial year to
€3,390 million in our 2007 financial year. The
increase in our cost of goods sold was due primarily to:
•
higher bit shipments; and
•
inventory revaluation and reserves.
Offsetting these increases in part were
•
improvements in our productivity; and
•
exchange rate effects.
Cost of goods sold increased by €884 million, or 41%,
from €2,164 million in our 2005 financial year to
€3,048 million in our 2006 financial year. The
increase in our cost of goods sold was due primarily to:
•
higher bit shipments;
•
higher absolute costs from production
ramp-up and
increased purchases from foundries; and
•
exchange rate effects.
Offsetting these increases in part were improvements in our
productivity.
Higher bit shipments. The 44% increase in bit
shipments in our 2007 financial year and the 79% increase in bit
shipments in our 2006 financial year were due primarily to the
increase of production volumes at our Richmond 300mm facility,
at Inotera and at those of our foundry partners manufacturing on
300mm wafers. In our 2006 financial year, we sourced in bits
over 198% more chips from these partners than we had during our
2005 financial year. As discussed below, we believe that
productivity improvements were partially responsible for holding
the percentage increase in costs below the percentage increase
in bit shipments, as was the spreading out of our fixed costs
over a greater level of bit shipments.
Inventory revaluation and reserves. We value
our inventory on a quarterly basis at the lower of cost or
market value. If the market price declines below the full
production cost of a particular product, then all inventories of
that product are written down to its market price. For some of
our products, the significant price decline in our 2007
financial year resulted in the write-down of inventory to market
value in an amount of €85 million in accordance with
our policy. Due to the volatility of the DRAM market,
write-downs of this nature may occur in periods of sharp price
decline and negatively impact our cost of sales and margins.
Productivity improvements. Similar to our 2006
financial year, we achieved productivity improvements in our
2007 financial year through the increased conversion of
capacities to 90nm, 80nm and 75nm process technologies and the
increasing share of our chips produced on 300mm wafers. The
increase of 300mm capacities at our Richmond facility, our joint
venture Inotera and our foundry partners SMIC and Winbond
contributed to the increased share of production on 300mm
wafers. Measured in wafer starts, 75% of our total production
(including capacity sourced from our joint ventures and foundry
partners) was on 300mm wafers in our 2007 financial year as
compared to 68% of our production in our 2006 financial year. We
believe that productivity improvements helped to increase our
bit shipments so that although our absolute costs increased, we
could achieve unit cost reductions because of the larger sales
volume over which our fixed costs are spread.
In our 2006 financial year we achieved productivity improvements
through the conversion of capacities to 110nm and 90nm process
technologies and the increasing share of our chips produced on
300mm wafers. The
ramp-up of
300mm capacities at our manufacturing facility at Richmond,
Virginia, at our joint venture Inotera and at our foundry
partner SMIC contributed to the increased share of production on
300mm wafers. Measured in wafer starts, 68% of our total
production (including capacity sourced from our strategic and
foundry partners) was on 300mm wafers in our 2006 financial year
as compared to 53% of our production in our 2005 financial year.
Exchange rate effects. The weaker exchange
rate of U.S. dollars for euro in the 2007 financial year,
as compared to the 2006 financial year, decreased the euro value
of our costs that are denominated in U.S. dollars by
approximately €188 million. This means that we would
have incurred approximately €188 million more in costs
of goods sold in our 2007 financial year, had the average
exchange rates we use to translate our non-euro expenses into
euros been the same in the 2007 financial year as they were in
the 2006 financial year. However, given the decrease in our net
sales due to foreign exchange effects, foreign currency
movements overall had a negative net effect on our gross margin
during the 2007 financial year.
The relative strength of the exchange rate of the
U.S. dollar against the euro in the 2006 financial year, as
compared to the 2005 financial year, increased the euro value of
our costs that are denominated in U.S. dollars by
approximately €45 million. This means that we would
have incurred approximately €45 million less in costs
of goods sold in our 2006 financial year, had the average
exchange rates we use to translate our non-euro expenses into
euros been the same in the 2006 financial year as they were in
the 2005 financial year. However, given the increase in our net
sales due to foreign exchange effects, foreign currency
movements overall had a positive net effect on our gross margin
during the 2006 financial year.
Purchases from foundries. Our purchases from
our joint ventures and other associated and related companies,
such as Inotera, amounted to €546 million in the 2007
financial year, €438 million in our 2006 financial
year and €247 million in our 2005 financial year. In
addition, we purchased €736 million of inventory from
our foundry partners in our 2007 financial year as compared to
€747 million in our 2006 financial year and
€273 million in our 2005 financial year.
Our gross margin decreased to 6% in our 2007 financial year,
from 20% in our 2006 financial year, primarily due to lower
average selling prices and inventory write downs. These could
not be offset by lower production cost per unit resulting from
increased manufacturing productivity and lower unit costs from
foundry partners.
Research
and Development (R&D) Expenses
Research and development (R&D) expenses consist primarily
of salaries and benefits for research and development personnel,
materials costs, depreciation and maintenance of equipment used
in our research and development efforts and contracted
technology development costs. Materials costs include expenses
for development wafers and costs relating to pilot production
activities prior to the commencement of commercial
production. R&D expenses also include our joint technology
development arrangements with partners such as Nanya. Some of
our research and development projects qualify for subsidies from
local and regional governments in the countries where we do
business. If the criteria to receive a grant are met, the
subsidies received reduce R&D expenses over the project
term as expenses are incurred.
The following table sets forth our R&D expenses and
government subsidies for the periods indicated:
In our 2007 financial year, R&D expenses decreased by 7%,
from €433 million to €401 million, due to
the completion of R&D work on our 80nm and 75nm technology
platforms earlier in the 2007 financial year and due to our
focus on production support research before development efforts
took off on our 58nm technology platform towards the end of the
2007 financial year. We also initiated cost saving measures in
an effort to increase the productivity of our development
efforts. Furthermore, the increase in governmental subsidies
from €17 million in our 2006 financial year to
€24 million in our 2007 financial year reduced the
development expenses.
In our 2006 financial year, R&D expenses increased by 11%,
from €390 million to €433 million, due to
our effort to strengthen the development capabilities with
respect to the next generation of memory technologies and
further diversify our portfolio of memory products. We also paid
€10 million for research services provided by Infineon
during the five months after the carve-out to our 2006 financial
year end, and €28 million during our 2007 financial
year.
Selling,
General and Administrative (SG&A) Expenses
Selling expenses consist primarily of salaries and benefits for
personnel engaged in sales and marketing activities, costs of
customer samples, non-R&D costs related to developing
prototypes, distribution center costs, other marketing
incentives and related marketing expenses.
General and administrative expenses consist primarily of
salaries and benefits for administrative personnel,
non-manufacturing related overhead costs, consultancy, legal and
other fees for professional services, and recruitment and
training expenses.
The following table sets forth information on our selling,
general and administrative (SG&A) expenses for the periods
indicated.
During the 2007 financial year SG&A expenses decreased by
7% as compared to the 2006 financial year, from
€215 million to €199 million. The primary
reason for the decline was that during the 2007 financial year
the combined costs under our post carve-out service agreements
with Infineon and to build out our corporate functions were less
than the costs Infineon allocated to us for the 2006 financial
year. We also incurred lower costs in the 2007 financial year
than we did for the same period one year earlier for special
projects, such as our carve-out and IPO.
Due to the decrease in net sales during our 2007 financial year,
SG&A expenses relative to net sales remained constant
compared to our 2006 financial year.
During the 2006 financial year SG&A expenses increased by
4% as compared to the 2005 financial year, from
€206 million to €215 million. The increase
was driven by higher cost allocations from Infineon through
April 30, 2006 and project costs related to the carve-out
and IPO. We also paid €14 million for corporate
services provided by Infineon during the five months after the
carve-out to our 2006 financial year end, and
€15 million during our 2007 financial year.
In addition, in the 2006 financial year we had expenses of
€8 million relating to stock-based compensation, of
which €3 million are included in SG&A expenses.
The remaining portion is reflected in different expense
categories based on the cost centers of the employees concerned.
These employees received these options on Infineon shares when
they were Infineon employees in periods prior to our carve-out.
We issued our own stock options for the first time in our 2007
financial year. Together with the cost of Infineon stock
options, we had total stock-based compensation expenses in our
2007 financial year of €6 million, of which
€2 million are included in SG&A expenses.
Restructuring
Charges
We did not incur any restructuring charges in our 2006 or 2007
financial years. In our 2005 financial year, we accrued charges
of €1 million for restructuring and cost-saving
efforts taken by Infineon, which included downsizing our
workforce and consolidating certain functions and operations.
In March 2007, we announced the building of a new DRAM module
manufacturing facility in Johor, Malaysia. Following the
construction of this facility, we plan to move the backend
production from our existing Malacca plant to this new backend
production facility. As of September 30, 2007 we have
implemented a restructuring plan pursuant to
SFAS No. 88, but we cannot yet make a reasonable
estimate of the amount of involuntary benefits to be paid.
Other
Operating (Expenses) Income, Net
Other operating (expenses) 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.
The following table sets forth information on our other
operating (expenses) income, net for the periods indicated.
Other operating income, net in our 2007 financial year related
primarily to subsidies, proceeds from insurance claims and the
adjustment of accruals for legal matters to reflect current
estimates. In our 2006 financial year other operating expenses,
net reflected expenses related to litigation settlement charges
of €54 million as well as impairment charges of
€9 million related to our decision to ramp down our
flash production and NROM development activities. Other
operating expenses, net in our 2005 financial year principally
reflected expenses related to antitrust matters.
Equity
in Earnings of Associated Companies
The equity in earnings of associated companies with financial
year ends that differ by not more than three months from the
Company’s financial year end is recorded with a three month
delay. This applies in particular to our joint venture Inotera
Memories, which has a December 31 financial year-end.
In the last three financial years, Inotera contributed most of
our equity in earnings from associated companies. This increased
in the 2006 financial year and the beginning of 2007, primarily
due to the increased volume production by Inotera and selling
prices that were at that time, on average, higher and stable.
Our equity in Inotera’s earnings is, however, sensitive not
only to fluctuations in the price of DRAM and production
volumes, but also to changes in the portion of our inventory
which we purchased from Inotera and that remains unsold. This is
because we eliminate Inotera’s profit from the inventory we
have not yet sold.
Gain
on Associated Company Share Issuance
The following table sets forth information on Gain on associated
company share issuance for the periods indicated.
On March 17, 2006 Inotera successfully completed its
initial public offering on the Taiwanese stock exchange of
200 million ordinary shares. On May 10, 2006 Inotera
successfully completed a public offering on the Luxembourg stock
exchange of 40 million global depositary shares
(representing 400,000,000 common shares). As a result, our
ownership was diluted from 45.9% to 36.0% while our proportional
share of Inotera’s equity increased by
€72 million. We reflected this gain as part of
non-operating income during the 2006 financial year.
Other
Non-Operating Income, Net
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.
The following table sets forth information on other
non-operating expenses or income for the periods indicated.
In the 2007 financial year other non-operating income related
principally to valuation of derivatives, dividend income and a
gain of €2 million on the sale of our investment in
Ramtron. In the 2006 financial year, other non-operating income
related principally to non-operating foreign currency
transaction gains. In the 2005 financial year, other
non-operating income, net included €18 million related
principally to non-operating foreign currency transaction gains,
which were partially offset by investment-related impairment
charges of €6 million.
We define EBIT as net income (loss) plus interest expense and
income tax expense. EBIT is not defined under U.S. GAAP and
may not be comparable with measures of the same or similar title
that are reported by other companies. Under SEC rules, EBIT is
considered a non-GAAP financial measure. It should not be
considered as a substitute for, or confused with, any
U.S. GAAP financial measure. We believe the most comparable
U.S. GAAP measure is net income. Our management uses EBIT
as a measure to establish budgets and operational goals, to
manage our business and to evaluate its performance. Because
many operating decisions, such as allocations of resources to
individual projects, are made on a basis for which the effects
of financing the overall business and of taxation are of
marginal relevance, management finds a metric that excludes the
effects of interest on financing and tax expense useful. In
addition, in measuring operating performance, particularly for
the purpose of making internal decisions such as those relating
to personnel matters, it is useful for management to consider a
measure that excludes items over which the individuals being
evaluated have minimal control, such as enterprise-level
taxation and financing. We report EBIT information because we
believe that it provides investors with meaningful information
about our operating performance in a manner similar to that
which management uses to assess and direct the business. EBIT is
not a substitute for net income, however, because the exclusion
of interest and tax expense is not appropriate when reviewing
the overall profitability of our company. Although EBIT is our
primary measure of evaluating operating performance, we also
evaluate the costs and benefits associated with various
financing structures and the income tax consequences, where
relevant and material independent of the operational assessment.
EBIT is determined from the consolidated statements of
operations as follows:
We derive interest income primarily from cash, cash equivalents
and marketable securities. Interest expense is primarily
attributable to loans from Infineon and external banks and
excludes interest capitalized on manufacturing facilities under
construction.
The following table sets forth information on our net interest
income (expense) for the periods indicated.
We earned interest income on cash and cash equivalents and
marketable securities in the 2007 financial year. Our interest
expense decreased in the 2007 financial year as compared to the
2006 financial year, due to our lower average borrowings from
Infineon, as we fully repaid a total of €344 million
of outstanding debt to Infineon. Our interest expense increased
in the 2006 financial year as compared to the 2005 financial
year, due to our higher average borrowings from Infineon.
We no longer have any outstanding debt to Infineon. With the
establishment of our own independent capital structure,
including our recent capital lease of 200mm equipment, we expect
interest expense to increase in future periods compared to the
2007 financial year. See “-Capital Requirements”.
Income
Taxes
The following table sets forth information on our income taxes
for the periods indicated.
We assess our deferred tax asset and the need for a valuation
allowance pursuant to SFAS No. 109. As a result of
this assessment, we have increased our deferred tax asset
valuation allowance in our 2005, 2006 and 2007 financial years
to reduce the net deferred tax asset to an amount that is more
likely than not expected to be realized in future periods. Our
effective tax rate in the 2006 financial year was substantially
higher than our statutory tax rate due to increases in our
valuation allowances, for losses which can not be utilized by us
and have been retained by Infineon. In the 2007 financial year
our effective rate decreased but was still higher than our
statutory rate, due to losses in jurisdictions for which tax
benefits could not be recognized.
Net
Income (Loss)
Our net income had improved from a net income of
€18 million in the 2005 financial year to
€74 million in the 2006 financial year before falling
to a net loss of €249 million in the 2007 financial
year.
Financial
Condition
The following table sets forth selected items from our
consolidated balance sheets for the periods indicated.
As of September 30, 2007, our current assets decreased
significantly as compared to September 30, 2006, primarily
due to lower trade accounts receivables which resulted from
lower revenues and faster collections in the 2007 financial year
compared to the 2006 financial year. This effect was partially
offset by investments made in marketable securities pending use
in capital expenditures and an increase of other current assets
mainly due to an increase of income tax refunds and the fair
value of derivatives. Inventory was essentially unchanged as
compared to September 30, 2006. While bit production growth
exceeded bit shipments during the financial year, and we held
some unsold inventory late in the year rather than sell it into
a very unfavorable market, these factors were offset by
the reduction in our manufacturing costs and our write-down of
inventory during the year ended September 30, 2007.
Non-current assets increased slightly because capital
expenditures exceeded the corresponding depreciation in the 2007
financial year.
As of September 30, 2007, current liabilities decreased as
compared to September 30, 2006 primarily as a result of the
full repayment of €344 million on our short-term loan
due to Infineon during the year ended September 30, 2007.
As of September 30, 2007, non-current liabilities increased
compared to September 30, 2006, mainly due to the increase
in capital lease obligations following the sale and lease back
of 200mm equipment.
As of September 30, 2007, our shareholders’ equity
decreased as compared to September 30, 2006 mainly due to
our net loss of €249 million and additional foreign
currency translation losses affecting equity of
€124 million during the 2007 financial year.
Liquidity
Cash
Flows
Our combined and consolidated statement of cash flows shows the
sources and uses of cash during the reported periods. It is of
key importance for the evaluation of our financial position.
Although our combined statements of operations and balance
sheets prior to our carve-out include allocations of financial
statement line items from Infineon’s financial statements,
the combined and consolidated statements of cash flows are
determined indirectly from these statements and do not reflect
any additional allocations.
Cash flows from investing and financing activities are both
indirectly determined based on payments and receipts. Cash flows
from operating activities are determined indirectly from net
income (loss). In accordance with U.S. GAAP, the line items
on the cash flow statement that reflect changes in balance sheet
items have been adjusted for the effects of foreign currency
exchange fluctuations and for changes in the scope of
consolidation. Therefore, they do not conform to the
corresponding changes you will find between the balance sheets
themselves.
Our operating cash flow increased from an inflow of
€326 million in the 2006 financial year to an inflow
of €980 million in the 2007 financial year. The growth
in cash generated was primarily due to working capital
improvements resulting from the substantial decrease in our
trade accounts receivable (which had increased in our 2006
financial year). The working capital improvements also result
from faster collections and improved payment terms with various
customers and suppliers and include some prepayments to secure
supply. Also positively affecting cash flow from operations as
compared with the prior year were the effect of, non-cash
inventory write-downs taken during the 2007 financial year and
with comparably larger decreases in other current assets and
larger increases in other liabilities. The effect of these
increases in operating cash flow was partially offset by our net
loss in the 2007 financial year, a comparably smaller increase
in trade accounts payable and decreases in accrued liabilities.
Cash used in investing activities in these periods principally
reflect the capital expenditures and investments in associated
companies during this period. Our cash used in investing
activities increased in the 2007 financial year, mainly because
we had higher capital expenditures than in the 2006 financial
year. This outflow was partially offset
by proceeds received of €156 million from our sale and
leaseback of 200mm equipment in Richmond in September 2007.
Cash used in financing activities in our 2007 financial year
mainly reflects the full repayment of our short term loan from
Infineon, By comparison, cash provided by financing activities
in the 2006 financial year mainly came from our IPO proceeds of
€415 million and advances by Infineon prior to our
carve-out.
Our operating cash flow in the 2006 financial year declined from
an inflow of €483 million to a €326 million
inflow. The reduction in cash generated was primarily due to
increases in our trade accounts receivable, inventory and trade
accounts payable, reflecting our sales growth. This was in part
offset by our higher net income and by depreciation and
amortization, which increased by €175 million mainly
as a result of our new facilities in Richmond, Virginia and
Suzhou.
Cash used in investing activities in both periods reflect the
capital expenditures and investments in associated companies
during both periods. Our cash used in investing activities was
lower in the 2006 financial year, mainly because we had lower
capital expenditures compared to the 2005 financial year, which
was partially offset by increased investments in marketable
securities.
Cash provided by financing activities in both periods relates
principally to investments by and advances from Infineon and, in
the 2006 financial year, our IPO proceeds of
€415 million, net of offering costs and tax benefits
thereon. Infineon advanced €484 million to us in the
2006 financial year, as compared to €500 million in
the same period one year earlier. We repaid
€163 million to Infineon in the 2006 financial year.
Free Cash
Flow
We define free cash flow as cash from operating and investing
activities excluding purchases or sales of marketable
securities. Free cash flow is not defined under U.S. GAAP
and may not be comparable with measures of the same or similar
title that are reported by other companies. Under SEC rules,
“free cash flow” is considered a non-GAAP financial
measure. It should not be considered as a substitute for, or
confused with, any U.S. GAAP financial measure. We believe
the most comparable U.S. GAAP measure is net cash provided
by operating activities. Since we operate in a capital-intensive
industry, we report free cash flow to provide investors with a
measure that can be used to evaluate changes in liquidity after
taking capital expenditures into account. It is not intended to
represent residual cash flow available for discretionary
expenditures, since debt service requirements or other
non-discretionary expenditures are not deducted. Free cash flow
is determined as follows from our combined and consolidated
statements of cash flows:
Free cash flow was negative in our 2005 and 2006 financial years
because capital expenditures exceeded the cash provided by
operating activities. Prior to our carve-out this shortfall was
financed principally by advances from Infineon and subsequent to
our carve-out was financed by our available cash balances.
Our free cash flow in the 2007 financial year was positive
mainly due to working capital improvements that increased our
operating cash flow by an amount in excess of our capital
expenditures.
The following table presents our gross and net cash positions
and the maturity of our debt. It is not intended to be a
forecast of cash available to us in future periods.
Our gross cash position (which we define as cash and cash
equivalents plus marketable securities) amounted to
€1.011 million at September 30, 2007, compared to
€1.070 million at September 30, 2006. As part of
Infineon, our historical capital structure was based on the
assumption that our net cash position was zero. Our net cash
position increased to €707 million at
September 30, 2007, compared to €575 million at
September 30, 2006 mainly as a result of our positive free
cashflow during the 2007 financial year. We fully repaid the
shareholder loan from Infineon by April 2007.
Long-term debt at September 30, 2007 principally consists
of an unsecured bank loan of €124 million related to
our Porto, Portugal backend facility, and a capital lease
obligation of €128 related to the sale and lease back of
200mm equipment.
To secure our cash position and to maintain flexibility with
regards to liquidity, we have implemented a risk management
policy with risk limits with respect to counterparty, credit
rating, sector, duration, credit support and type of instrument.
See note 30 to the combined and consolidated financial
statements included elsewhere in this annual report.
Return
on Capital Employed (RoCE)
In addition to EBIT, our management has committed itself since
the beginning of the 2007 financial year to focus on measuring
the profitability of the Company using a measure that compares
net income, with adjustments it believes necessary to make the
measure a meaningful assessment tool, to the capital that has
been required for the business. We began calculating and
reporting the financial indicator Return on Capital Employed or
“RoCE” for this purpose.
RoCE and its constituents, earnings before interest, capital
employed are non-GAAP financial measures, which means they are
not defined under U.S. GAAP and may not be comparable with
measures of the same or similar title that are reported by other
companies. Under SEC rules, “Return on Capital
Employed” is considered a non-GAAP financial measure. It
should not be considered as a substitute for, or confused with,
any U.S. GAAP financial measure. Reconciliations to the
closest GAAP measures net (loss) income to shareholders’
equity ratio, net (loss) income and shareholders’ equity
are presented below. We calculate our capital employed as our
end period shareholders’ equity less the net cash position
on that data. RoCE is calculated as earnings before interest
divided by capital employed. RoCE is determined as follows from
the consolidated financial statements:
Net income (loss) in percent of shareholder’s equity
1
%
2
%
(7
)%
Capital
Requirements
We require capital in our 2008 financial year to:
•
finance our operations;
•
make scheduled debt payments;
•
settle contingencies if and when they occur; and
•
make planned capital expenditures.
We expect to meet these requirements through:
•
cash flow generated from operations;
•
cash on hand and securities we can sell;
•
available credit facilities and
•
capital market and other financing transactions in which we may
engage in the future.
As of September 30, 2007, we required funds for our 2008
financial year aggregating €905 million. This
consisted of €828 million for commitments and
€77 million of short term debt. In addition, known
contingencies of less than one year as of September 30,2007 totaled €126 million. In our 2007 financial year
we spent €879 million in capital expenditures.
Approximately €237 million capital expenditures have
been committed and included in unconditional purchase
commitments for the 2008 fiscal year. We had a gross cash
position of €1,070 million as of September 30,2006 and €1,011 million as of September 30, 2007.
Our sources of funding, in addition to this cash position,
include our cash flows from operations — we generated
cash flows from operations of €326 million in our 2006
financial year and €980 million during the financial
year ended September 30, 2007. We can also draw, for
short-term purposes, on the working capital lines we maintain in
several locations in an aggregate amount of
€161 million.
We are also exploring whether other kinds of longer term
financing transactions may be arranged on favorable terms. One
kind of transaction that is common in our industry is a sale and
leaseback involving manufacturing equipment. We entered into
such an agreement as of September 28, 2007 for a part of
the 200mm equipment of our Richmond, Virginia, plant which
resulted in net proceeds of €156 million. We are
currently discussing further potential transactions of this
nature and evaluating whether to engage in other bilateral or
syndicated financing arrangements. Whether we do so depends on
market conditions and the attractiveness of the terms we are
able to achieve.
Other contractual liabilities reflected on the balance sheet:
Settlement for antitrust related
matters(4)
€
63
€
22
€
21
€
20
€
—
€
—
€
—
Contractual commitments:
Operating lease payments
€
95
€
27
€
25
€
17
€
9
€
8
€
9
Unconditional purchase
commitments(5)
787
737
43
5
2
—
—
Other long-term commitments
€
70
€
64
€
2
€
2
€
1
€
1
—
Total contractual commitments
€
952
€
828
€
70
€
24
€
12
€
9
€
9
Other contingencies:
Guarantees(6)
€
128
€
19
€
16
€
1
€
9
€
30
€
53
Contingent government
grants(7)
€
406
€
107
€
22
€
45
€
166
€
26
€
40
Total contingencies
€
534
€
126
€
38
€
46
€
175
€
56
€
93
(1)
The above table should be read together with note 31 to our
combined and consolidated financial statements.
(2)
Certain payments of obligations or expiration of commitments
that are based on the achievement of milestones or other events
that are not date-certain are included in this table, based on
our estimate of the reasonably likely timing of payments or
expirations in each particular case. Actual outcomes could
differ from those estimates.
(3)
Product purchase commitments associated with capacity
reservation agreements are not included in this table, since the
purchase prices are based in part on future market prices, and
are accordingly not quantifiable as of September 30, 2007.
Purchases under these agreements aggregated approximately
€1.131 million for the 2007 financial year and
€1,185 million for the 2006 financial year.
(4)
These amounts are recorded as accrued, other current or other
non-current liabilities on our balance sheet and reflect
payments to be made under settlement agreements relating to
antitrust matters.
(5)
Primarily purchase orders that have been placed with suppliers
of fixed assets, raw materials and services. Fixed price orders
for products from our foundry partners are also shown here.
(6)
Guarantees are mainly issued by the parent company for the
payment of import duties, rentals of buildings, contingent
obligations related to government grants received.
(7)
“Contingent government grants” refers to amounts
previously received that are related to the construction and
financing of certain production facilities, but that are not
guaranteed otherwise. These could be repayable if the total
project requirements are not met.
Our capital expenditures of €879 million for the 2007
financial year consisted primarily of equipment upgrades at our
300mm facility in Dresden, Germany capacity expansion at our
300mm facility in Richmond, Virginia and extension of our wafer
test and component capacities in Porto, Portugal. During the
2006 financial year we invested primarily in the capacity
expansion at our 300mm facility in Richmond, our 300mm facility
in Dresden and our back-end venture in Suzhou, China. In our
2005 financial year, we completed the construction of the 300mm
facility in Richmond, ramped up production there and also
invested in our back-end venture in Suzhou.
We have reduced our planned capital expenditures for the 2008
financial year to a range between €650 million to
€750 million and aim to increase our collaboration
with our partners. As of September 30, 2007, approximately
€237 million of capital expenditures have been
committed and included in unconditional purchase commitments for
our 2008 financial year. Due to the lead times between ordering
and delivery of equipment, a substantial amount of capital
expenditures typically is committed well in advance. The
majority of these expected capital expenditures will be made in
our front-end and back-end manufacturing facilities.
In March 2007, we announced plans to expand capacity at our
back-end manufacturing facility in Suzhou, China for which we
expect capital expenditures of €250 million over the
next three years. We also plan to invest up to
€150 million over the next five years to build a new
DRAM module manufacturing facility in Johor, Malaysia. In April
2007, we also announced plans to construct a new front-end
manufacturing facility in Singapore, for which we plan to invest
approximately €2 billion over the next five years.
Credit
Facilities
We have historically relied (directly or indirectly) on Infineon
to provide financing for a portion of our financing and capital
requirements. Under our Master Loan Agreement with Infineon
Technologies Holding B.V., we had $435 million
(€344 million) drawn at September 30, 2006 with
initial maturities in July and August 2007. We fully repaid this
shareholder loan by April 2007. We have also agreed not to draw
further amounts under the agreement.
In addition we have established both short- and long-term credit
facilities with a number of different financial institutions in
order to meet our anticipated funding requirements. We can draw,
for short term purposes, on the working capital lines we
maintain in several locations in an aggregate amount of
€161 million as of September 30, 2007. We already
drew €28 million under this short-term facility for
working capital purposes in China and fully repaid it on
October 10, 2007.
In August 2006 we entered into a multicurrency revolving loan
facility in an aggregate principal amount of
€250 million which we voluntarily cancelled on
September 28, 2007. Before cancellation, we did not have
any drawdown at any time from this revolving loan facility. This
cancellation was due to certain restrictions on asset
dispositions which limited us from pursuing engagements in sale
and leaseback transactions involving manufacturing equipment. We
entered into such an agreement on September 28, 2007 for a
portion of the 200mm equipment in our Richmond, Virginia, USA
plant and are considering further potential transactions of this
nature.
Subject to conditions in the capital markets, we expect from
time to time (but subject to the
lock-up
agreement we have agreed with the underwriters for the secondary
offering of our ADSs on September 20, 2007 by Infineon) to
consider engaging in additional financing transactions.
A €124 million non-recourse project financing facility
for the expansion of the Porto, Portugal manufacturing facility
was fully drawn as of September 30, 2007.
A €24 million note payable to a government entity in
connection with our Richmond, Virginia, USA plant had been fully
drawn as of September 30, 2007.
We plan to fund our working capital requirements from cash
provided by operations, available funds, bank loans, other
potential financing transactions, government subsidies and, if
needed, the issuance of additional debt or equity securities. We
have also applied for governmental subsidies in connection with
certain capital expenditure projects, but can provide no
assurance that such subsidies will be granted on a timely basis
or at all. We can provide no assurance that we will be able to
obtain additional financing for our research and development,
working capital or investment requirements or that any such
financing, if available, will be on terms favorable to us.
Taking into consideration the financial resources available to
us, including our internally generated funds and currently
available borrowing facilities, we believe that we will be in a
position to fund our capital requirements in our 2008 financial
year.
Pension
Plan Funding
The following table sets forth the status of our pension plan
funding for the periods indicated.
As of September 30, 2006, we recognized the funded status,
net of €7 million unrecognized actuarial losses as a
liability on our balance sheet. As of September 30, 2007 we
adopted SFAS No. 158 and recognized the funded status
as a liability on our balance sheet and recorded an actuarial
gain and prior service cost of €5 million as part of
equity. Since the present value of future benefits we expect to
pay over the next five financial years totals
€9 million as of September 30, 2007, we do not
perceive a need to increase our plan funding in the immediate
future.
We have estimated the return on plan assets for the next
financial year to be 6.3% for domestic plans and 6.4% for
foreign plans. The actual return on plan assets between the last
measurement dates amounted to 8.8% for domestic plans and 9.6%
for foreign plans, compared to the expected return on plan
assets for that period of 5.9% for domestic plans and 6.4% for
foreign plans.
Our investment approach with respect to the pension plans
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program. The
pension plans’ assets are invested with an investment
manager in co-operation with an investment consultant.
Considering the duration of the underlying liabilities, a
portfolio of investments of plan assets in equity securities,
debt securities and other assets is targeted to maximize the
long-term return on plan assets for a given level of risk.
Investment risk is monitored on an ongoing basis through
periodic portfolio reviews, meetings with investment managers
and liability measurements. Investment policies and strategies
are periodically reviewed to ensure the objectives of the plans
are met considering any changes in benefit plan design, market
conditions or other material items.
Our asset allocation targets for pension plan assets are based
on our assessment of business and financial conditions,
demographic and actuarial data, funding characteristics, related
risk factors, market sensitivity analyses and other relevant
factors. The overall allocation is expected to help protect the
plans’ level of funding while generating sufficiently
stable real returns (i.e., net of inflation) to meet current and
future benefit payment needs. Due to active portfolio
management, the asset allocation may differ from the target
allocation up to certain limits. As a matter of policy, our
pension plans are not permitted to invest in our company or
Infineon Technologies AG shares. The Qimonda Pension Trust has
adopted an asset allocation strategy similar to that of the
Infineon Pension Trust, which employs a mix of active and
passive investment management programs. In September and October
2006 Infineon Pension Trust transferred €26 million of
cash to the Qimonda Pension Trust for use in funding these
pension benefit obligations, thereby reducing accrued pension
liabilities. In October 2006 the Qimonda Pension Trust invested
this cash in a diversified portfolio of investments aimed at
maximizing long term returns.
Research and development form a significant part of our
operations. Our research and development expenses were
€401 million in the 2007 financial year and
€433 million in the 2006 financial year. We intend to
fund these expenditures in the normal course of business through
cash provided by operating activities. For a description of our
research and development policies, please see “Our
Business — Research and Development”.
Quantitative
and Qualitative Disclosure About Market Risk
Market risk is the risk of loss related to adverse changes in
market prices, including commodity prices, foreign exchange
rates and interest rates, of financial instruments. We are
exposed to various financial market risks in our ordinary course
of business transactions, primarily from changes in commodity
prices, foreign exchange rates and interest rates.
We use financial instruments, including derivatives, to manage
foreign exchange rate risks and interest rate risks. Since our
carve-out from Infineon, we have set up a separate financial
risk management function. We enter into diverse financial
transactions with several counterparties to limit our risk.
Derivative instruments are only used for hedging purposes and
not for speculative purposes.
You should read the following discussion of categories of market
risk to which we are exposed in conjunction with notes 2,
29 and 30 to our combined and consolidated financial statements.
Commodity
Price Risk
A significant portion of our business is exposed to fluctuations
in market prices for standard DRAM products. For these products,
the sales price responds to market forces in a way similar to
that of other commodities. This price volatility can be extreme
and has resulted in significant fluctuations within relatively
short time-frames. We attempt to mitigate the effects of
volatility by continuously improving our cost position, by
entering into new strategic partnerships and by focusing our
product portfolio on application-specific products that are
subject to less volatility, such as DRAM products for
infrastructure, graphics, mobile and consumer applications.
We are also exposed to commodity price risks with respect to raw
materials used in the manufacture of our products. We seek to
minimize these risks through our sourcing policies (including
the use of multiple sources, where possible) and our operating
procedures.
We do not use financial instruments to manage any exposure to
fluctuations in commodity prices remaining after the operating
measures we describe above.
Foreign
Exchange Rate Risk
Although we prepare our combined and consolidated financial
statements in euro, most of our sales volumes, as well as
slightly over one-half of our costs, (primarily those relating
to design, manufacturing, selling, marketing, general and
administrative functions, and research and development of
products), are denominated in other currencies, primarily
U.S. dollars. The portions of our sales and expenses
denominated in currencies other than the euro are exposed to
exchange rate fluctuations in the values of these currencies
relative to the euro. We are therefore subject to both
transaction and translation risk. For more information on these
risks, please refer to “— Factors that Affect our
Results of Operations — Exchange Rate
Fluctuations”. Exchange rate fluctuations may have
substantial effects on our sales, our costs and our overall
results of operations. Although the U.S. dollar was weaker
on September 30, 2006 than it had been one year earlier,
the average exchange rate of U.S. dollars for euro over the
2006 financial year was stronger than it had been in the 2005
financial year, increasing 3% from U.S. $1.00 =
€0.7869 to U.S. $1.00 = €0.8117. During the 2007
financial year, by contrast, the average exchange rate decreased
by 8% from U.S. $1.00 = €0.8117 to U.S. $1.00 =
€0.7497.
The table below provides information about derivative financial
instruments as of September 30, 2006 and as of
September 30, 2007, including those foreign currency
forward contracts sensitive to changes in foreign currency
exchange and interest rates. For foreign currency forward
contracts related to certain sale and purchase transactions, the
table presents the notional amounts and the weighted average
contractual foreign exchange rates.
The euro equivalent notional amounts in millions and fair values
of our derivative instruments as of September 30, 2006 and
as of September 30, 2007 are as follows:
Our policy with respect to limiting short-term foreign currency
exposure generally is to economically hedge at least 75% of our
estimated net exposure for a minimum period of two months in
advance and, depending on the nature of the underlying
transactions, a significant portion of the period thereafter.
Our foreign currency exposure resulting from differences between
actual and forecasted amounts cannot be mitigated. We calculate
this net exposure on a cash-flow basis taking into account
balance sheet items, actual orders received or made and all
other planned revenues and expenses.
We record our derivative instruments according to the provisions
of SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities”, as amended.
SFAS No. 133 requires all derivative instruments to be
recorded on the balance sheet at their fair value. Gains and
losses resulting from changes in the fair values of those
derivatives are accounted for depending on the use of the
derivative instrument and whether it qualifies for hedge
accounting. Our economic hedges are generally not considered
hedges under SFAS No. 133. We report these derivatives
at fair value in our combined and consolidated financial
statements, with changes in fair values recorded on our
statement of operations.
In the 2007 financial year, our allocated foreign exchange
transaction loss amounted to €39 million and was
offset by gains from our economic hedge transactions of
€25 million, resulting in a net loss of
€14 million. This compares to foreign exchange gains
of €2 million, offset by hedging losses of
€4 million, resulting in a net loss of
€2 million in the 2006 financial year. For purposes of
the carve-out, foreign exchange gains and losses were allocated
based on Infineon’s segments’ proportions of total
costs.
Interest
Rate Risk
We are exposed to interest rate risk through our fixed term
deposits and loans. Due to the high volatility of our core
business and to maintain high operational flexibility, we have
historically kept a substantial amount of cash and cash
equivalents. These assets are mainly invested in instruments
with contractual maturities ranging from three to twelve months,
bearing interest at short-term rates. To reduce the risk caused
by changes in market interest rates, we attempt to align the
duration of the interest rates of our debts and current assets
by the use of interest rate derivatives. We had no outstanding
interest rate derivatives at September 30, 2007. However,
we anticipate making use of such instruments depending on the
nature of our debt financing in the future.
Fluctuating interest rates have an impact on parts of our
financial instruments such as cash and marketable securities as
well as our interest-bearing debt obligations.
Based on our long and short term debt outstanding on
September 30, 2007 and the interest rates in effect at that
time for those loans, a 1% increase or decrease in our overall
interest rate environment would (keeping all other variables
constant) have increased or decreased our annualized debt
service cost by an estimated €3 million.
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements other than operating
leases in respect of office space, manufacturing land and office
equipment including PCs and workstations. As of
September 30, 2006, we had contractual commitments for
operating lease payments of €107 million. As of
September 30, 2007, those contractual commitments decreased
to €95 million.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — an amendment of FASB
Statements No. 87, 88, 106, and 132(R)”, which
requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization
(“Recognition Provision”). SFAS No. 158 does
not change the basic approach to measuring net periodic pension
cost. We adopted the Recognition Provision of
SFAS No. 158 as of September 30, 2007 as
described above in ‘‘— Critical Accounting
Policies — Pension Plan Accounting”.
In September 2006, the SEC issued SAB No. 108,
“Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements”. SAB No. 108 provides
interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements.
SAB No. 108 requires us to quantify misstatements
using both an income statement (“rollover”) and
balance sheet (“iron curtain”) approach and to
evaluate whether either approach results in a misstatement that,
when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been
previously considered immaterial are considered material upon
adoption based on either approach, no restatement is required so
long as management properly applied its previous approach and
all relevant facts and circumstances were considered. If prior
years are not restated, the cumulative effect adjustment is
recorded in opening accumulated earnings (deficit) as of the
beginning of the year of adoption. We adopted
SAB No. 108 as of the year ended September 30,2007 which did not result in restatement or cumulative effect
adjustment.
Issued
but principally applicable in future financial
years
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. FIN 48 is effective for us from
our financial year beginning October 1, 2007. The
differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the
amounts reported after adoption will be accounted for as a
cumulative-effect adjustment recorded to the beginning balance
of retained earnings. We are in the process of determining the
impact, if any, that the adoption of FIN 48 will have on
our consolidated financial position and results of operations.
In September 2006, the FASB released SFAS No. 157,
“Fair Value Measurements”, which provides
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. The standard also responds to investors’
requests for more information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect that fair
value measurements have on earnings. SFAS No. 157 will
apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. SFAS No. 157
does not expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for us from our financial
years beginning after October 1, 2008, and interim periods
within those financial years. We are in the process of
evaluating the impact that the adoption of
SFAS No. 157 will have on our consolidated financial
position and results of operations.
SFAS No. 158 also requires an employer to measure the
funded status of a plan as of the date of its year-end statement
of financial position, with limited exceptions
(“Measurement Date Provision”). We currently measure
the funded status of our plans annually on June 30. The
Measurement Date Provision is effective for us as of the end of
the fiscal year ending September 30, 2009. We do not expect
the application of the Measurement Date Provision of
SFAS No. 158 annually on September 30 to have a
significant impact on our results of operations or financial
position.
In February 2007, the FASB issued SFAS No. 159
“The Fair Value Option for Financial Assets and
Financial Liabilities — including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits
entities to choose to measure certain financial assets and
liabilities and other eligible items at fair value, which are
not otherwise currently required to be measured at fair value.
Under SFAS No. 159, the decision to measure items at
fair value is made at specified election dates on an irrevocable
instrument-by-instrument
basis. Entities electing the fair value option would be required
to recognize changes in fair value in earnings and to expense
upfront cost and fees associated with the item for which the
fair value option is elected. Entities electing the fair value
option are required to distinguish on the face of the statement
of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar
assets and liabilities measured using another measurement
attribute. If elected, SFAS No. 159 is effective as of
the beginning of the first fiscal year that begins after
November 15, 2007, with earlier adoption permitted provided
that the entity also early adopts all of the requirements of
SFAS No. 157. We are currently evaluating whether to
elect the option provided for in this standard.
On October 2, 2007 we and Sony Corporation announced that
we have signed an agreement to found the joint venture Qreatic
Design. 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 is intended to start with up
to 30 specialists from Sony and Qimonda, bringing together their
engineering expertise for the mutual benefit of both companies.
Qreatic Design, which will be located in Tokyo, Japan, is
planned to start operations by the end of the 2007 calendar
year, subject to regulatory approvals and other closing
conditions, and to substantially expand its capacities by hiring
additional designers.
On October 8, 2007, we entered into a rental agreement for
new headquarter offices south of Munich, Germany. The agreement
involves the construction of a building by a third party lessor,
and includes a 15 year non-cancelable lease term, which is
expected to start in early 2010. We have an option to extend the
lease for two 5 year periods at similar lease terms to the
initial non-cancelable lease term. The minimum rental payments
aggregate €96 million over the initial lease term. The
lease contract provides for rent escalation in line with
market-based increases in rent. The agreement will be accounted
for as an operating lease with monthly lease payments expensed
on a straight-line basis over the lease term.
On October 15, 2007, the court entered an order denying the
motion to dismiss in the Unisys and the DRAM Liquidation Trust
cases without prejudice. On October 29, 2007, Infineon
answered the Unisys complaint, denying liability and asserting a
number of affirmative defenses. On November 1, 2007,
Infineon answered the DRAM Claims Liquidation Trust complaint,
denying liability and asserting a number of affirmative
defenses. See “Our Business — Legal Matters”
for more information on these matters.
On November 9, our Supervisory Board allocated 200,000
options for grant to our Management Board in the 2008 financial
year.
Outlook
Our revenues are a function of the bit volume we ship and the
selling price we achieve for our products. While we have an
influence over our production growth, through capacity additions
and productivity improvements, our sales volume depends on the
extent to which our product offerings match market demand. Our
selling prices are a function of the supply and demand
relationship in the DRAM market. These market forces are beyond
our control and accordingly, it is difficult for us to reliably
estimate what these future sales prices, and the resulting
revenues and the contribution to our earnings will be.
In the first quarter of the 2008 financial year, we expect our
bit production to grow by approximately 5%, mainly based on
productivity improvements from the ongoing conversion to 80nm
and 75nm technologies and including effects from declining 200mm
capacities.
For the full 2008 financial year, we expect bit demand for DRAM
to be driven by the continued strong growth in graphics,
consumer and communication applications, by price elasticity and
the move to higher density modules in the PC market. For the
2008 financial year, we estimate an increase in bit production
of approximately 50%. We target our share of bit shipments to
non-PC applications to be more than 50% for the full financial
year.
We are continuously taking steps to reduce our
cost-per-bit
in manufacturing, such as the introduction of advanced process
technologies featuring smaller die-sizes, the
ramp-up of
more productive
300-mm
capacities and other cost savings and productivity improvement
measures. By the end of the first quarter of our 2008 financial
year we expect more than 50% of our manufacturing capacity to be
using 80nm and smaller die sizes, and we are targeting to
increase this share to approximately 75% by the end of the
second quarter.
We expect to make capital expenditures in the 2008 financial
year of between €650 and €750 million. In the
years thereafter our aim is to have capital expenditures of
approximately 15% to 25% of revenues on average over the DRAM
cycle.
Depreciation and amortization is estimated to range between
€700 million and €800 million for the 2008
financial year. For the years thereafter depreciation and
amortization is expected to be in line with capital expenditures.
Research and development expenses are anticipated to be between
€450 million and €490 million for the 2008
financial year. In the years thereafter our aim is to have
research and development expenses of approximately 10% of sales
on average over the DRAM cycle.
Selling, general and administrative expenses are expected to
range between €210 million and €230 million
for the 2008 financial year. In the years thereafter our aim is
to have selling, general and administrative expenses of
approximately 5% of sales on average over the DRAM cycle.
We anticipate that our number of employees will increase
moderately in certain areas in the current year due to the
expansion of our business and the diversification of our product
portfolio.
We no longer have any outstanding debt to Infineon. With the
establishment of our own independent capital structure, such as
the recent sale and leaseback of 200mm equipment, we expect
interest expense to increase in future periods compared to the
2007 financial year.
Semiconductor devices, generally referred to as integrated
circuits, or ICs, enable a wide variety of everyday electronic
products and systems to capture, process, store and transmit
data. In addition to their familiar use in computers,
semiconductors also increasingly enable or control functions in
mobile telephones, digital still cameras, digital audio players,
GPS devices, DVD recorders, digital TVs, electronic gaming
consoles and other telecom, consumer, automotive and industrial
electronic devices.
Semiconductor devices generally fall within three broad
categories: processors, which process instructions; logic
devices, which capture, manipulate and transmit data or monitor
or control functions within electronic devices; and memory
devices, which store data in digital form. Electronic devices
generally require a combination of processing, logic and memory
functions. Although these may be combined on a single chip, the
three are more typically produced on separate chips and then
integrated in a module or chipset or in an end product through
hardware and software interfaces.
There are three major types of semiconductor memory:
•
Dynamic Random Access Memory, or DRAM, products, which are the
most common volatile memories. A “volatile” memory IC
retains information only while electrical power is switched on,
while a “non-volatile” memory IC retains its data
content after the power supply is switched off. DRAM products
offer large densities at low cost with relatively fast access
times and virtually unlimited endurance for the life of the
product. They are “dynamic” because they must be
electronically refreshed frequently in order to retain the
stored data;
•
“Flash” memory products, which are non-volatile
memories offering large densities at low cost with slower access
times and limited endurance; and
•
Static Random Access Memory, or SRAM, products, which are
volatile memories offering low densities at relatively higher
cost with very fast access times and virtually unlimited
endurance for the life of the product.
DRAM manufacturers can sell either individual DRAM chips, known
as dies, or components, which are packaged dies, or DRAM
modules, which are printed circuit boards generally containing
between four and thirty-six components.
According to Gartner, DRAM sales in calendar year 2006 were
$34 billion, representing 56% of the $61 billion
semiconductor memory industry, which in turn represented 23% of
the $263 billion semiconductor industry. Sales of NAND
flash memory reached $14 billion or 22% of the
semiconductor memory industry in calendar year 2006.
Semiconductor
Memory Product Features
The increasing complexity of the electronic devices in which
memory ICs are used, including the ever more sophisticated
software needed to operate them, has required growing amounts of
memory to permit efficient and high-speed operation. At the same
time, many of these electronic devices are themselves becoming
smaller or more portable, with limited room to accommodate, and
limited power to operate, the additional semiconductors they
contain. These factors have driven continuous efforts to improve
semiconductor design and process technologies over the years to
enable manufacturers to produce ever smaller, more complex and
more powerful memory products at a lower
cost-per-megabit.
The principal technical features that DRAM suppliers have
focused on to meet these requirements are:
Memory
density
Density of a DRAM chip is the amount of data it can store and is
usually measured in megabits (Mb) or gigabits (Gb). Density of a
DRAM module is measured in megabytes (MB) and gigabytes (GB),
where each byte contains eight bits. DRAM chips are currently
offered in a variety of densities for different end uses,
generally ranging from 4Mb to 2Gb per chip, or 128MB to 8GB per
module for high-end modules. In recent years, the maximum
density of standard DRAM chips has generally doubled every
24 months. Smaller amounts of older generations of DRAM
(4Mb, 16Mb, 64Mb and 128Mb densities) continue to be supplied
for applications where memory density is less
critical, such as printers. The industry has migrated from a
256Mb standard density to a 512Mb standard density. According to
Gartner, the percentage of standard chips produced with 512Mb
was 14% in calendar year 2004 and increased to 75% in 2006.
The following table shows the percentage of worldwide DRAM bit
shipments in the period from 2000 to 2006, according to Gartner.
Year ended December 31
2000
2001
2002
2003
2004
2005
2006
4Mb
0.3%
0.1%
0.1%
—
—
—
—
16Mb
5.9%
2.4%
1.5%
0.8%
0.7%
0.4%
0.3%
64Mb
51.4%
16.8%
7.0%
3.8%
2.5%
1.3%
0.9%
128Mb
37.3%
61.8%
35.7%
14.2%
7.7%
4.2%
2.5%
256Mb
5.0%
18.8%
55.5%
78.9%
74.0%
48.0%
17.9%
512Mb
—
—
0.2%
2.2%
14.3%
43.2%
74.9%
1Gb
—
—
—
0.1%
0.9%
2.8%
3.5%
2Gb
—
—
—
—
—
—
0.1%
Data
transfer rates and interfaces
Data transfer rate is the rate at which the IC transfers data
and is usually measured either in megabytes per second or by the
clock frequency, which is measured in megahertz. DRAM interfaces
have constantly developed towards increasing the data transfer
rate from the DRAM to a device’s CPU, or central processing
unit, over the last decade. Data transfer rate is important
because it affects overall system performance, causing loss of
CPU speed if the data transfer rate is low compared to the
computation power of CPU. The rate of data transfer between the
DRAM and the CPU is governed by the clock frequency, which
operates in a wave-like cycle and has driven increasing clock
frequencies for CPUs and demand for faster data transfer from
the DRAM. In a synchronous DRAM (SDRAM) interface, data is
transferred from the DRAM to the CPU according to the system
clock rate. The most common current interfaces are double data
rate (DDR) SDRAM and double data rate 2 (DDR2) SDRAM. DDR SDRAM
supports data transfer on both edges of each clock cycle. Clock
frequencies for DDR reach a maximum of 200MHz, resulting in a
data transfer rate of approximately 3.2GB per second for a
standard PC module. The industry standard DRAM chip interface
has transitioned from DDR to DDR2. The DDR2 interface further
improves data transfer rates to a maximum of 6.4GB per second
for a standard PC module operating at the highest clock
frequencies. In the area of high-end specialty DRAM products,
such as graphics DRAM, clock frequencies today reach up to 1GHz,
resulting in data transfer rates of 32GB per second on a high
end graphic card. According to Gartner, the percentage of chips
produced with the DDR2 interface was 7% in calendar year 2004
and increased to 55% in calendar year 2006. The next generation,
higher bandwidth interface, double data rate 3 (DDR3), is
currently in the early production phase at some manufacturers,
including ourselves.
The following table shows the percentage of worldwide DRAM bit
shipments by interface generation in the period from 2000 to
2006, according to Gartner.
Another trend that is becoming increasingly important for DRAM
products is the continuous reduction of operating voltage and
power consumption. Whereas SDR SDRAM products are operated at
3.3 Volt, the voltage has been reduced to 2.5 Volt for DDR SDRAM
and to 1.5 Volt for DDR3 SDRAM products, thus constantly
reducing the power consumption by mainstream DRAMs. With the
increasing number of battery powered mobile applications such as
mobile phones, smart handheld devices and digital audio players,
the demand for ultra low-power memories has increased
significantly. Specifically designed DRAM products, such as
“mobile DRAM”, include active power saving features
that allow the further reduction of power consumption and thus
an increase in battery life for mobile applications. Recently,
heat dissipation has become an additional important driver for
low-power demand for DRAM products. The heat produced by high
density DRAM content in server farms and the related
expenditures for electricity has reached a level that has driven
server manufacturers to focus on low power DRAM products in the
market. Heat dissipation is also an important topic for
non-portable consumer applications such as digital TVs that use
slim cases and must avoid noisy cooling systems such as fans for
aesthetic reasons.
DRAM
Technologies
DRAM
architecture
A DRAM storage cell consists of a capacitor and a transistor,
and a key element in the physical layout of DRAM chips produced
today is the arrangement of capacitors and transistors on the
chip. In early DRAM chips, capacitors and transistors were
arranged in a plane across the surface of the chip. As DRAM
feature sizes have become smaller, the planar space for the
capacitor has become too small to hold a sufficient amount of
charges and the capacitor had to move in the third dimension.
Two different technological approaches have evolved to address
this issue, one in which the capacitor is laid into holes etched
into the surface of the silicon, commonly referred to as the
“trench” process, and another in which the capacitor
is laid on top of the silicon, commonly referred to as the
“stack” process. In the market today, each of several
manufacturers using stack technology has developed a unique
stack architecture, while all manufacturers using trench
architecture use technology first developed by Infineon, Toshiba
and IBM during the 1990s. We later advanced the trench
technology and have been developing it further in cooperation
with Nanya. Both stack and trench cell technology have to date
been accepted in the market. According to Gartner, based on bit
shipments, in 2006, trench-based DRAMs accounted for
approximately 24% of the worldwide DRAM market, while the
various stack technologies accounted for the remainder.
Feature
size
DRAM technology development has generally followed
“Moore’s Law”, which estimates that the number of
transistors per square inch of silicon doubles every two years.
Manufacturers have achieved this progress in chip productivity
by “shrinking” the circuitry on chips — that
is, by reducing the minimum distance between circuits, known as
the feature size. Smaller feature sizes require increasingly
sophisticated manufacturing process technology, including
advanced masks and photolithography techniques for printing the
circuitry on the chip. The distance between circuits on a
standard DRAM chip is measured in nanometers (nm) where one nm
equals
one-billionth
of a meter. The minimum feature size has declined from 250nm in
1998 to 75nm today. The future shrinkage of feature sizes is
estimated by the International Technology Roadmap for
Semiconductors, or ITRS, which provides details and naming
conventions for upcoming feature sizes called “technology
nodes”. The current and next technology nodes outlined by
the ITRS also generally referred to as the “shrinkage
roadmap”, are 90nm, 80nm, 70nm, 65nm, 57nm and 50nm.
However, the actual feature sizes of the technology nodes that
individual industry participants implement may differ from the
node naming convention because each participant adjusts its
technology to meet its manufacturing and capital requirements.
Industry participants are currently introducing and ramping
process technology for 75/70nm and are in the advanced stages of
developing process technology for 65/60nm feature sizes. They
anticipate the development down to approximately 50nm in the
coming years. We believe that industry participants are
currently working on concepts for smaller process technologies
and alternative platforms. The transition from one generation to
the next, for example from 170nm to 140nm technology, has
typically occurred every 12 to 18 months. Due to increasing
space restrictions necessitated by feature sizes of 70nm and
below, transistors are starting to move into the third dimension
in future feature size generations of both trench
and stack architectures. It is not yet clear if either approach
will produce greater space or cost efficiencies as chips become
still smaller and memory densities continue to increase.
The
Semiconductor Manufacturing Process
Semiconductor manufacturing is a very capital intensive process,
with substantial fixed costs for fabrication facilities, known
as “fabs”, and for manufacturing equipment. Moreover,
given the rapid technology transitions in the industry,
manufacturers must depreciate this equipment over short periods
of time, increasing the ratio of fixed costs to variable costs
per chip produced. The manufacturing process, which is
substantially the same for both DRAM and flash memory products,
is generally divided into two steps, referred to as the
front-end process and the back-end process.
The
front-end process
In the front-end process, electronic circuits are produced on a
silicon wafer. This process involves several hundred process
steps and takes place over a period of approximately two months
in a clean room environment in which humidity, temperature and
particle contamination are precisely controlled. Because of the
very small geometries involved in wafer processing, highly
complex and specialized equipment, materials and techniques are
used. The main process steps to build the circuit structures
include oxidation or deposition steps, photolithography, etching
and ion implantation. At the end of the front-end process the
chips are tested on the wafer for functionality.
Wafer processing is conducted in specialized fabrication
facilities, or fabs. A fab’s capacity is generally stated
in terms of the number of wafers on which processing can begin
in a given period, or “wafer starts per” week or
month. The standard diameter of silicon wafers used to produce
semiconductors increased from 50mm in 1970, to 100mm by 1980,
150mm by 1990 and 200mm by 1995, and has increased to 300mm
since 2000, although the industry transition to 300mm wafers is
still underway. To transition a fabrication facility to larger
wafer sizes requires the acquisition of adequate equipment and a
lengthy testing and
ramp-up
period to achieve satisfactory manufacturing yields. The
transition to still larger 450mm wafers, if and when it occurs,
will likely require a similarly long transition and substantial
investments.
While larger silicon wafers cost more than smaller ones and the
equipment used to manufacture chips on larger wafers costs more
than equipment used for smaller wafers, these additional costs
are more than offset by the productivity gains provided by the
larger wafer. These productivity gains are primarily driven by
the increase in the number of chips produced from each wafer.
For example, the surface area of 300mm wafers is approximately
2.25 times greater than that of 200mm wafers, which yields
approximately 140% more chips per wafer. Because the cost of
labor and certain other fixed costs are largely independent of
the size of the wafers used, the use of larger wafers results in
reduction of the costs per chip.
Increasing complexity and capital intensiveness of front-end
processing has facilitated emergence of front-end foundries, who
partner with semiconductor designers or manufacturers to perform
front-end processing services.
The
back-end process
In the back-end process, also called the packaging, assembly and
test phase, processed wafers are diced into individual chips,
which, after having interconnecting pins added, are encapsulated
into a packaged component using a compound material. Packaged
components are tested extensively to ensure quality and
technical specifications are maintained. After final testing,
components are often soldered onto printed circuit boards to
create modules, which themselves undergo application testing.
Increasing requirements for higher component performance and
smaller size have led to development of back-end processing
technologies and innovative package types that optimize speed
and reliability of device interconnects while reducing the extra
size added by a chip’s packaging. Because back-end
processing can take place in a different location than the
front-end processing, several back-end foundries have emerged to
specialize on back-end processing and offer outsourced services
to semiconductor manufacturers who desire to specialize in
front-end processing alone or augment their in-house back-end
capacity.
DRAM, the most common type of memory IC, is found in a wide
variety of electronic devices, including servers and
workstations, personal and notebook computers, upgrade modules,
graphic cards, game consoles, mobile phones, printers, digital
TVs, set-top boxes and other consumer electronic devices.
Because these applications require different DRAM products, we
believe the DRAM’s intended application determines its
pricing and competitive dynamics. We have identified the
following main applications for DRAMs:
Standard
DRAMs for PC and Workstation Applications
PCs, workstations and other computing applications were the
first users of DRAM and have historically represented the
majority of DRAM sales. DRAM components and modules for use in
desktop and notebook PCs and workstations accounted for
approximately 54% of global DRAM bit shipments in 2006,
according to Gartner’s report for the third quarter of the
2007 calendar year. These components and modules can be best
described as “standard DRAMs”, because they are
standardized across suppliers with respect to performance and
package specifications and trade like a commodity in a
relatively liquid market. They combine high-density and
high-speed data storage and retrieval with the lowest cost
per-megabit of any volatile memory product.
Typical customers of these standard DRAMs are large PC
manufactures, such as Dell, HP and Lenovo, either directly or
through contract manufacturers that assemble PCs for the large
manufacturers, as well as local original equipment
manufacturers, or OEMs, and module manufacturers, such as
Kingston. We believe that these customers tend to select their
standard DRAM suppliers on the basis of price and ability to
supply high volumes of product reliably. Some standard DRAM
customers also produce infrastructure equipment such as servers,
and networking and storage equipment, and we believe a
supplier’s ability to offer other DRAM products is an
additional factor that may influence these customers’
selection of standard DRAM suppliers.
The market for standard DRAMs has been characterized by intense
competition, often involving price cuts, and significant
volatility of revenues and operating results of market
participants. The major DRAM manufacturers typically have
contracts with each of their major OEM customers, with specific
prices negotiated twice per month. However, there are many
suppliers in the standard DRAM market, including module
manufacturers and smaller DRAM manufacturers, whose DRAM sales
prices are often based on spot market average selling prices, or
ASPs, which fluctuate daily.
DRAMs
for Infrastructure Applications
The high performance equipment that forms the backbone of the
Internet, such as servers and other networking and storage
equipment, also use DRAMs. DRAMs for these applications
accounted for approximately 18% of global DRAM bit shipments in
2006, according to Gartner’s report for the third quarter
of the 2007 calendar year. Due to the large data volume that is
handled by these applications, these customers usually demand
DRAM products with higher memory capacities. DRAM modules for
infrastructure applications differ from the modules used in PCs
by providing extra high densities and error correction features
to provide highest reliability. We believe that, because these
high-performance products often perform critical tasks, their
producers select DRAM suppliers whose DRAMs display advanced
features and reliability and whose manufacturing processes have
proven to be of high quality. In addition there is also demand
for customized products by some customers, who typically provide
their product specifications to DRAM suppliers, who in turn
design and produce the requested product. The customer will
“validate” the DRAM supplied, testing it rigorously
over a process that may last several months. DRAM products for
infrastructure applications such as Registered DIMMs generally
command a higher
per-unit
price than standard DRAM products. Typical customers who
purchase DRAM products for infrastructure applications are
server producers such as Sun Microsystems and network and
storage equipment vendors such as Cisco Systems and EMC.
Because DRAMs used in infrastructure applications tend to be
less standardized and more customer- or application-specific,
interchangeability is lower relative to standard DRAMs and
consequently the level of competition among suppliers is less
intense. In addition, there are fewer suppliers of these types
of DRAM products than standard DRAMs and these suppliers
typically sell infrastructure DRAM products pursuant to
contract. The smaller number of suppliers and high percentage of
these products sold pursuant to contract tends to result in the
prices for these DRAM products being less volatile than those
for standard DRAM products.
DRAMs
for Other Applications including Graphics, Mobile and Consumer
Applications
With the growth of the mobile communication industry and the
digitalization of consumer products during the last decade, the
range of applications using DRAM products has significantly
broadened. Graphics applications such as game consoles and
graphics cards are requiring and driving demand for
high-performance graphics DRAMs that support the increasingly
advanced graphics in computer games. The increasing number of
communication and consumer mobile devices, including mobile
phones and digital still cameras and audio players, has driven
growth in demand for low-power DRAM products that allow for
longer battery lifetimes. As a result, a variety of specialty
DRAM components have been developed to address the specific
needs of these applications. In addition there are a growing
number of other consumer applications such as digital TVs, DVD
players and recorders and set-top boxes that require a whole
range of standard or even customized DRAM products. Products for
graphics, mobile and consumer applications accounted for about
19% of DRAM bit shipments in 2006, according to Gartner’s
report for the third quarter of the 2007 calendar year.
Successful DRAM suppliers maintain close relationships with
mobile phone, game console and consumer electronic device
producers, to understand the customer’s requirements early
in their product development stage. Many of these customers
expect their DRAM suppliers to be able to proactively provide
advanced products so that customers can integrate them into
their product design. As a result, compared to standard DRAMs
with the same density, these DRAMs tend to be relatively higher
in price. Typical customers of these types of DRAMs include
mobile handset manufacturers such as Motorola, Nokia and Sony
Ericsson, graphic card manufacturers such as AMD and nVidia,
game console manufacturers such as Microsoft, Sony and Nintendo
and major consumer electronics manufacturers.
Unlike standard DRAMs, DRAM products for graphics, mobile and
consumer applications tend to be customer- and
application-specific, and, therefore, prices for these DRAM
products tend to be more stable, with prices fixed by
comparatively long-term contracts.
Drivers
of DRAM Demand and Recent Trends
According to Gartner’s report for the third quarter of the
2007 calendar year, between calendar years 1998 and 2006, bit
shipments grew at a CAGR of 55% over the period. Historically,
growth of DRAM bit shipments was driven by DRAM’s primary
application, computing, and depended on growth in units shipped
and DRAM content per unit. Rapid adoption of PCs by business and
home users, combined with operating system upgrades that
demanded more DRAM per unit, drove strong growth in bit demand.
However, as more DRAM components began to be used in a broader
range of applications, DRAMs for infrastructure and graphics,
mobile and consumer applications began to represent a larger
share of total DRAM bit shipments. In calendar year 2006, PCs,
workstations and memory modules and upgrades represented only
54% of total DRAM consumption as compared to 66% in 2001.
Current estimates by Gartner predict continued strong growth in
DRAM bit shipments at a CAGR of 52% between calendar years 2006
and 2011, according to Gartner’s report for the third
quarter of the 2007 calendar year. Overall semiconductor memory
sales were $61 billion in 2006, and DRAM sales were
$34 billion in that year. Market research firms expect DRAM
sales to remain volatile, as increases in bit shipments are
offset to varying levels of declines in the average selling
prices for DRAM products. Key drivers of the growth in DRAM bit
demand include the following:
•
Emergence of mobile phones as a significant consumer of
DRAM. While mobile phones consumed nearly no
DRAM six years ago, in calendar year 2006, this application
represented 3% of DRAM consumption and is expected to reach 6%
in calendar year 2011, according to Gartner. The 11% CAGR of
units shipped between calendar years 2006 and 2011, combined
with 55% CAGR in megabytes per unit, is expected to lead to 71%
CAGR of total DRAM consumption by mobile phones. Rapid growth in
DRAM content in phones is driven by emergence of multimedia
phones and adoption of sophisticated digital audio and video
functions into handsets.
New or increased DRAM consumption by graphics applications
and digital consumer devices. Evolution of
consumer electronics has created several device categories that
offer sophisticated functionality and require substantial amount
of DRAM to operate. These devices, including digital TVs and
digital audio players, are often characterized by strong unit
growth and represent a significant incremental opportunity for
DRAM suppliers. In addition, technological advances in
established consumer devices have led newer models to require
more advanced DRAM and consume more DRAM per unit. Such devices
include game consoles, where the latest products include 512 or
256 MB of highly specialized GDDR3 DRAM. All three major
game console developers introduced new consoles using these
technologies within the last twelve months. Newer DVD
technologies, including advanced optical drives that demand more
discrete DRAM chips per DVD player or recorder are also expected
to contribute to this growth. These and other trends are
expected to drive 36% CAGR of DRAM consumption in consumer
devices between calendar years 2006 and 2011, according to
Gartner.
•
Continuing strong growth in DRAMs for
infrastructure. DRAM consumption in servers
is expected to grow at a 49% CAGR between 2006 and 2011 and for
Infrastructure at 53%, according to Gartner, driven by an
estimated increase of DRAM content per unit at a CAGR of over
39% and continued unit growth of entry-level servers. Evolution
of processor architectures, combined with increasing complexity
of systems, places significant demands on DRAM components used
in these systems, including power efficiency, speed and density.
However, demand for such DRAMs tends to be contract-based and
therefore relatively steady, resulting in more stable and
favorable pricing than the overall DRAM market.
•
Multiple drivers of growth in DRAMs for PC and
workstations. PCs, workstations and memory
modules and upgrades are expected to increase DRAM consumption
at a 55% CAGR between 2006 and 2011, according to Gartner. One
of the drivers of this growth involves increasing adoption of
dual-core and 64-bit processors, which are expected to be
incorporated in almost half of total PC shipments by the end of
2007, according to IDC. In addition, Microsoft’s first
mainstream 64-bit operating system, Windows Vista, which was
launched in January 2007, is expected to stimulate DRAM demand
by facilitating higher DRAM per unit and by triggering PC
upgrades by consumers, followed by companies. Gartner expects
mobile PCs to play an important role in DRAM demand as their
strong unit growth is expected to continue at 21% CAGR in the
period between calendar years 2006 and 2011, driven by improved
power efficiency, wireless and multimedia functionality and
other trends, including substitution of desktop PCs. Given the
space and power constraints present in mobile devices, this is
expected to lead to increase in demand for advanced DRAM
components that address the above constraints. Significant DRAM
market potential also exists in desktop PC penetration in
emerging markets such as China and India.
Drivers
of DRAM Supply and Recent Trends
Given the standardized nature of a significant share of DRAM bit
shipments, supply plays a crucial role in determining DRAM
selling prices, which, in turn, drive industry revenues and the
financial performance of suppliers. Historically, DRAM supply
has grown at high rates to meet the increasing bit demand,
although time lags associated with increasing supply, coupled
with unexpected changes in demand have resulted in periods of
excess DRAM supply or demand. These mismatches of supply and
demand have caused severe price fluctuations that, in turn have
led to revenue fluctuations, such as the 51% increase in DRAM
revenues from calendar years 1998 to 1999, the 63% decline from
calendar years 2000 to 2001 and the 50% increase from calendar
years 2003 to 2004, according to Gartner. Further, DRAM supply
is relatively inelastic. In periods of declining selling prices,
suppliers nonetheless continue production at full capacity as
long as prices exceed their variable costs of production,
whereas in periods of increasing selling prices, suppliers
usually need a long time, up to two years, to bring new
capacities on-stream.
Supply of DRAM components involves constructing and equipping
complex and expensive fabrication, assembly and test facilities
as well as developing and continuously improving semiconductor
manufacturing technologies. Growth of DRAM supply is driven by
several factors, including:
•
Capacity additions. DRAM suppliers
periodically build new manufacturing facilities or upgrade
existing facilities to increase their overall capacity.
Historically, periods of supply shortages led many market
participants to decide to add more capacity or accelerate
existing capacity addition plans. Given the long time required
to bring new capacity on-stream, these capacity additions may
result in excess supply if a significant amount of capacity
comes on-stream simultaneously, in particular when demand had
subsided. Recently, several market participants have experienced
strong revenue growth and have announced (or completed)
increased investment in new manufacturing capacities. However,
some of these capacities have been or will be used to produce
non-DRAM products as well, as discussed below.
•
Wafer size, process technology and other manufacturing
improvements. Successive generations of
semiconductor manufacturing technology enable higher output and
productivity, resulting in growth of supply without investments
in incremental capacity. For example, the transition from 200mm
to 300mm wafer-based manufacturing yields higher output given
the larger size of wafers being processed. The production
capacity on 300mm wafers has increased almost eight fold since
the beginning of calendar year 2004. According to iSuppli, the
worldwide percentage of DRAM bits output on 300mm wafers was 19%
in the first quarter of calendar year 2004. By the end of the
fourth quarter of calendar year 2005, the percentage of bit
output produced on 300mm wafers was 49%, according to iSuppli,
which further reported that this percentage had increased to 66%
in the fourth quarter of the 2006 calendar year. In addition,
transition to smaller process technology, for example from 110nm
to 90nm and then to 75nm nodes, reduces the die size and
increases the density per unit of die surface. As a result, more
chips are produced from the same wafer and higher bit shipments
are achieved without adding incremental capacity. When these
major transitions occur in DRAM manufacturing, lithography
methods or materials used, initial manufacturing yields tend to
be low, resulting in output below full potential. Over time, as
DRAM suppliers solve the manufacturing problems and increase
their yield, a higher proportion of usable components are
produced per wafer and bit supply increases.
We have observed the following trends in DRAM supply in recent
periods:
•
Consolidation among DRAM
suppliers. Market dynamics have driven
significant consolidation in the DRAM industry, as a number of
major manufacturers have withdrawn from the industry. NEC and
Hitachi combined their DRAM operations into Elpida Corporation
in December 1999, later consolidating some of Mitsubishi’s
DRAM development activities. Texas Instruments sold its DRAM
operations to Micron Corporation in calendar year 1998 and
Toshiba sold its U.S. DRAM fab to Micron in calendar year
2002. In January 2006, Micron combined its flash activities with
Intel. Hyundai merged its DRAM operations with those of LG in
calendar year 1999 (later renaming its DRAM operations as
Hynix). According to Gartner, market share (measured by revenues
in U.S. dollars) commanded by the four largest vendors has
increased during the last decade from 46% in calendar year 1995
to 72% in calendar year 2006.
•
Increasing cost of technology development and
manufacturing facilities. The level of
complexity increases with each successive generation of
semiconductor manufacturing technology, as the leading edge
processes are nearing limits caused by the physical properties
of materials employed in the process. To solve such problems and
to successfully introduce technologically advanced manufacturing
capacity, DRAM suppliers need to consistently make significant
investments in research and development and in expensive
manufacturing equipment.
•
Increasing use of foundries, joint ventures and licensing
agreements. In recent years, the high costs of constructing fabs
have led to the expansion of the use of semiconductor foundries,
which are contract manufacturers that produce chips to the
specifications of others. Historically, foundries have produced
chips for what are known as “fabless semiconductor
companies”, which are firms that design chips but that do
not have their own manufacturing facilities. Increasingly,
however, even large semiconductor companies that do have their
own facilities are supplementing their capacity by making use of
foundries. Using foundries involves less capital investment and
may provide greater flexibility to increase or decrease output
in a volatile market.
Among companies seeking to share the risks and costs of
manufacturing investments, these factors have likewise increased
the attractiveness of joint venture and partnership
arrangements, as well as of licensing and cross-licensing
arrangements. For companies with substantial intellectual
property portfolios, including manufacturing know-how, licensing
arrangements present an opportunity to supplement income from
manufacturing semiconductors. Because technological know-how is
very concentrated in the semiconductor memory industry, many
manufacturers would be unable to produce memory chips were it
not for their access to the relevant technology through
licensing. For example, we estimate that four of the nine
largest DRAM suppliers today license most of their technology
from the other top-nine suppliers.
•
Expansion of DRAM suppliers into flash memory
products. Driven by the historical and
projected strong growth in the NAND flash market, and taking
advantage of similarities between DRAM and NAND flash
manufacturing, some DRAM suppliers have entered or expanded
their presence in particular in the NAND flash market by adding
new NAND flash manufacturing capacity or converting existing
DRAM capacity to the manufacture of NAND flash memory. DRAM
manufacturing capacity can generally be transferred to NAND
flash and back without major cost or investment and in
relatively short time. We believe that this gives suppliers
flexibility to allocate capacity away from a product in periods
of excess supply. As suppliers convert capacity from DRAM to
NAND flash, the impact may be beneficial to DRAM producers
because the resulting reduced rate of growth in the supply of
DRAM could operate to moderate price declines for DRAM products
that would likely have occurred had the new capacity been
dedicated to DRAM production. After capacity conversions from
DRAM to NAND flash memory products in the calendar year 2006,
the industry has recently seen capacity conversions back to DRAM
in reaction to the severe price erosion for NAND flash products.
We believe that capacity conversions will continue to take place
in both directions whenever substantial differences arise in
margins between those product types.
We believe that the above trends are having an effect on the
fundamentals of the DRAM industry and may be facilitating a
reduction in the severity of supply and demand imbalances, and
of price fluctuations, in the future.
We are one of the world’s leading suppliers of
semiconductor memory products. We design semiconductor memory
technologies and develop, manufacture, market and sell a large
variety of semiconductor memory products on a chip, component
and module level. We began operations within the Semiconductor
Group of Siemens AG, whose roots in semiconductor R&D and
manufacturing date back to 1952, and operated as the Memory
Products segment of Infineon Technologies AG since its carve-out
from Siemens AG in 1999. In each of the past five calendar
years, we captured between 12% and 16% of the worldwide DRAM
market based on revenues, according to industry research firm
Gartner. Although our market share fluctuates, and we may gain
or lose market share
quarter-to-quarter
(for example, we lost market share in the fourth quarter of the
2006 calendar year and in the first quarter of the 2007 calendar
year) or year-to-year, in each of those five years, we remained
among the four largest DRAM suppliers worldwide based on
revenues. For the full calendar year 2006, we were the
world’s third largest supplier of DRAM, with market share
of approximately 16% both in revenues and bit shipments,
according to Gartner. For the first nine months of the 2007
calendar year, we remained the third largest supplier of DRAM by
revenue and were the fourth largest supplier of DRAM by bit
shipments with market shares of approximately 13%, according to
iSuppli’s preliminary report in November 2007.
Our revenues are derived from:
•
Technologically advanced DRAM products used in infrastructure,
graphics, mobile and consumer applications. Our infrastructure
DRAMs address the high reliability requirements of servers,
networking and storage equipment. Our graphics, mobile and
consumer DRAMs principally include “specialty DRAMs”
that are designed for high performance or incorporate logic
circuitry to enable low power consumption. Our graphics DRAMs
deliver advanced performance to graphics cards and game
consoles, and our mobile and consumer DRAMs provide low power
consumption benefits to mobile phones, digital audio players,
GPS devices, televisions, set-top boxes, DVD recorders and other
consumer electronic devices. Sales of infrastructure, graphics,
mobile and consumer DRAM products accounted for approximately
38% of our net sales in our 2005 financial year, for
approximately 50% of our net sales in our 2006 financial year
and for approximately 60% of our net sales for our 2007
financial year;
•
Standard DRAM products used in personal computers, or PCs and
workstations. Sales of these standard DRAM products accounted
for approximately 51% of our net sales in our 2005 financial
year, approximately 47% of our net sales in our 2006 financial
year and approximately 39% of our net sales in our 2007
financial year; and
•
Other products, including embedded DRAM, technology licensing
and NAND-compatible flash memory products. We ramped down flash
memory products during the 2007 financial year. Sales of these
products and revenues from technology licensing and royalties
accounted for approximately 11% of our net sales in our 2005
financial year, for approximately 3% of our net sales in our
2006 financial year and for approximately 1% of our net sales in
our 2007 financial year.
The memory products business of Infineon, substantially all of
which Infineon has contributed to us, had a long-standing
reputation as a supplier of high-quality DRAMs. We intend to
continue to build on this reputation to broaden our product
portfolio and, in turn, our customer base, by focusing on DRAM
products for infrastructure and for graphics, mobile and
consumer applications. In our experience, demand for DRAM
products used in these applications is generally more stable
than the demand for standard DRAM products due to their
customized nature and advanced features, making them subject to
relatively less price volatility. We believe that increasing the
share of our revenues from these products will improve our
average selling price and make our operating results more stable.
Our customers include the world’s largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs in the PC and Server markets, including
HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer
coverage and breadth, we also sell a wide range of products to
memory module manufacturers that have diversified customer bases
such as Kingston, and to a number of distributors. More recently
and in connection with the ongoing expansion of our product
portfolio, especially into graphics applications, we have added
customers with a strong focus on enabling these applications,
such as nVidia, AMD and customers who are active in the game
console market, such as Microsoft, Sony and Nintendo. In
addition, we have added customers in the area of consumer and
mobile applications, such as LG, Spansion and SanDisk. We
believe that having a close relationship with these customers
can benefit us in the development of future memory generations
by making it easier to develop memory solutions for future end
applications and improve our product designs.
We supply our customers through our own front-end facilities in
Germany and the United States, and through our back-end
facilities in Germany, Portugal and Malaysia. We supplement our
manufacturing capacity through two joint ventures, Inotera
Memories, Inc. and Qimonda Technologies (Suzhou) Co., Ltd.,
China, and through supply agreements with the DRAM foundries
SMIC and Winbond. In addition, we supplement our back-end
manufacturing through agreements with several subcontractors. We
operate these facilities as a coherent unit via our “fab
cluster” concept, which enables us to share manufacturing
best practice and gain operational flexibility through customer
qualification of our entire cluster of fabs.
Our
Strengths
We believe that we are well positioned to benefit from the
projected growth in the semiconductor memory industry and to
remain at its technological forefront. We consider our key
strengths to include the following:
•
We are a leading supplier of DRAM
products. We have grown our operations
significantly over the last decade and, as the suppliers in our
industry have continued to consolidate, we have increased our
market share from 3% to 16% (based on revenues) between calendar
years 1995 and 2006, according to Gartner. Although our market
share fluctuates from quarter-to-quarter and year-to-year, by
the end of calendar year 2006, we were among the four largest
DRAM suppliers, which together accounted for 72% of the global
DRAM market that year. For the calendar year 2006, we were the
world’s third largest supplier of DRAM with market share of
approximately 16% both in revenues and bit shipments, according
to Gartner. For the first nine months of calendar year
2007, we remained the third largest supplier of DRAM by revenue
and were the fourth largest supplier of DRAM by bit shipments,
with market shares of approximately 13%, according to
iSuppli’s preliminary report in November 2007. We believe
that our size and scale will enable us to continue to improve
our position as a prominent developer of leading semiconductor
memory technologies, as a manufacturer with facilities among the
most modern in our industry and as a supplier of an increasingly
broad portfolio of competitive products to customers worldwide.
•
We possess one of the broadest product portfolios in the
DRAM industry. We have in recent years
significantly broadened our product portfolio of DRAM products
for infrastructure, graphics, consumer and mobile applications,
which we believe offer on average higher and less volatile
prices than those for standard PC applications. In our 2007
financial year, our product portfolio included over 100 distinct
products in these application areas that each accounted for
revenues in excess of €1 million, as compared with
about 70 such products in our 2005 financial year. Within these
application areas, we have focused on products that we design to
meet the particular specifications customers identify for
individual applications (which we refer to as “design
ins”). We believe that this focus on individual
applications and customers can help us mitigate the effects of
price declines. In addition, our broadened product portfolio has
enabled us to strengthen our customer base, both by adding new
customers and expanding existing customer relationships to
encompass more products.
•
We demonstrate strong application and product design
know-how. We believe that strong application
and product design know-how is necessary to achieve design wins
in applications outside the PC area, and that this know-how is
not widely available in the market. We have strengthened our
product design know-how in recent years through experienced
design teams, and have continued to view the further
strengthening of our capabilities in these areas as a priority.
We believe that our application and design know-how has been
instrumental in being selected as a lead supplier in many of the
more technologically advanced applications in the graphics,
consumer and mobile areas in recent years. For example, the
number of our customers who are among the leading suppliers in
the area of consumer and mobile applications increased from 5 in
the 2005 financial year to 19 in the 2007 financial year.
We are a leading developer of semiconductor process
technologies and an active innovator. We have
successfully developed and implemented several generations of
process technologies. We believe that our accumulated
experience, including that which we have acquired through our
strategic alliances, is enabling us to introduce new memory
technology platforms with smaller feature sizes on a schedule
and at costs that enable us to remain among the leaders in
standardized DRAMs while focusing on the more specialized
products and designins described above. For example, we achieved
the qualification of our 75nm node in approximately 30% less
time than we did when shrinking from the 110nm to the 90nm node
and have fully converted the production of standard DRAM
products in our lead manufacturing facility in Dresden to the
latest 80nm and 75nm technologies. We are also maintaining, as a
focus of our continuing research and development efforts, the
development of process technologies and architectures that
possess physical characteristics that can be utilized to yield
advantages for customer specific applications in terms of
performance and power consumption. We believe these
characteristics are important in DRAM products for use in
applications such as infrastructure, graphics, mobile and
consumer devices and have enabled us to achieve important design
wins for products for use in applications ranging from game
consoles and MP3 players to advanced servers. In this context,
we are currently preparing for the qualification of our trench
technology at the 58nm technology node by the end of our 2008
financial year. At the same time we are working on designs
beyond this technology node with an open platform approach and a
range of architectures and technologies under review.
•
We are among the leaders in the transition to
manufacturing on 300mm wafers. We were among
the first DRAM suppliers to transition a substantial portion of
our manufacturing to 300mm technology and began volume
production on this basis in 2001. Today, we own and operate two
300mm facilities and have access through our Inotera Memories,
Inc. joint venture to one of the largest 300mm facilities in the
world, according to Gartner. In the second quarter of the
calendar year 2007, about 81% of the DRAM bits we produced were
manufactured using 300mm wafers. This compares favorably to the
industry average of 75%, as reported by iSuppli for the same
quarter. We believe this places us ahead of our major
competitors, many of which still manufacture to a larger extent
on 200mm technology. We believe the primary benefit of this
early transition to 300mm has been and will continue to be a
reduction in our costs per bit, as our fixed costs of production
can be spread over a higher number of chips per wafer. Because
implementation of 300mm technology is complex and requires time
and substantial capital investments, we expect our 300mm
leadership to give us an advantage relative to competitors who
have not yet transitioned as great a proportion of their
capacity to 300mm as we have.
•
Our business model leverages strong strategic
alliances. We have entered into strategic
alliances that leverage our research and development
capabilities and augment our front- and back-end manufacturing
capacity in a capital-efficient manner. We believe that we use
strategic alliances to a greater extent than our competitors and
that the continued success of our “fab cluster”
concept is a key element of our business model. We believe that
our strategic alliances, including our Inotera and Qimonda
Suzhou joint ventures, as well as our foundry partnerships with
SMIC and Winbond, enable us to benefit from significant
economies of scale at a reduced level of capital expenditures,
even as we seek, through productivity improvements and new
capacity such as the manufacturing facility we plan to construct
in Singapore, to maintain at least half of our production
capacity in house. We also believe that these arrangements
increase our operating flexibility by reducing our fixed costs,
which, in turn, can help us reduce volatility in our operating
margins throughout our industry’s business cycle.
Our
Strategy
In formulating our strategy, we aim to leverage our key
strengths to address our target markets and emerging
opportunities that we have identified. The key elements of our
strategy include the following:
•
Improve our average selling price by maintaining our focus
on technologically advanced, customer and application specific
DRAM products for infrastructure, graphics, mobile and consumer
applications. We believe significant growth
opportunities exist for application-specific DRAMs used in
servers, graphics cards, game consoles, mobile phones, digital
audio players, GPS devices, televisions, set-top boxes, DVD
recorders and other consumer electronic devices. Our customers
and the other original equipment manufacturers we target in
these areas increasingly require DRAM products with higher
performance, lower power consumption and smaller form factors,
all at an attractive price. We intend to focus on memory
products for applications in these areas as we seek to develop,
frequently together with research and development partners, new
solutions to the physical and economic challenges posed by the
ever-increasing technical and financial demands of these
customer requirements. We plan to meet and drive this demand by
continuing to exploit our strengths in technology innovation,
not only in the form of our trench technology but also in the
form of new architectures and platforms that may result from
these research and development activities. We have enhanced our
product development capabilities and have recruited a
significant number of product development engineers, many of
whom work directly with customers on application- and
customer-specific product designs. This has already enabled us
to substantially expand our product offerings and market share
in these areas. Because in our experience these
application-specific products generally command higher and more
stable prices, we believe that these efforts will result in a
higher blended average selling price for our DRAMs as compared
with the industry as a whole and reduced volatility of our
operating results.
•
Leverage our technology leadership and increase our
presence in low cost regions to continue to reduce unit
costs. We believe that our leadership in the
transition to 300mm manufacturing technology will enable us to
realize the potential benefits of reduced unit costs offered by
this transition earlier than our major competitors. We intend to
remain ahead of our major competitors in this process and plan
to substantially complete our transition to manufacturing on
300mm wafers within the next few years. We are also seeking to
successfully ramp up manufacturing yield on the 80nm and the
75nm technology nodes and to introduce a 58nm technology by the
end of our 2008 financial year, which we believe will enable us
to derive unit cost improvements. We further intend to
successfully develop and implement future process technology
nodes by leveraging our accumulated expertise, R&D
capabilities and strategic alliances. In addition, we are
actively increasing the proportion of our manufacturing located
in low cost Asian regions. We expect our focus on Asia to remain
a key part of our strategy as we seek further opportunities to
reduce our fixed and variable production costs.
•
Improve profitability and return on capital throughout our
industry’s business cycle. We believe
that we will achieve significantly improved profitability
throughout our industry’s business cycle through the
average selling price improvement and unit cost reduction
strategies outlined above. We also believe that we will reduce
the volatility of our operating results by increasing the
flexibility of our operations through our foundry partnerships
and by maintaining or expanding the share of our revenues that
are from advanced infrastructure, graphics, mobile and consumer
DRAM products. While we intend to maintain at least half of our
production capacity in-house, through productivity improvements
and new capacity such as the manufacturing facility we plan to
construct in Singapore, we plan to continue to focus on our
strategic alliances and our fab cluster-based business model to
optimize capital efficiency of our operations. We believe this
capital efficiency, combined with our targeted profitability,
will enable us to significantly improve our return on capital
employed.
Our
History
We began operations as a part of Siemens’s Semiconductor
Group, whose roots in semiconductor R&D and manufacturing
date back to 1952, four years after the invention of the
transistor. In 1999, Siemens contributed substantially all of
its Semiconductor Group, including both logic and memory
semiconductor activities, to its subsidiary, Infineon
Technologies AG. Following the formation of Infineon, we
continued operations as the Memory Products segment of Infineon.
Infineon contributed substantially all of the assets,
liabilities, operations and activities, as well as the
employees, of its Memory Products segment to our company
effective May 1, 2006. This excluded the Memory Products
operations in Korea and Japan, which were placed in trust for us
by Infineon pending their contribution and transfer. The
operations in Korea and Japan have since been transferred to us.
While Infineon’s investment in the Advanced Mask Technology
Center (AMTC) and the Maskhouse Building Administration Company
(BAC) in Dresden has been contributed to us, the legal transfers
of these investments are not yet effective, since
Infineon’s co-venturers have not yet given the required
consent to the transfer of the AMTC and
BAC interest. While pursuant to the AMTC and BAC limited
partnership agreements, such consent may not be unreasonably
withheld. Infineon and we are currently finalizing negotiations
with AMD and Toppan concerning an agreement that provides the
consent to the assignment to us and addresses Infineon’s
intention to reduce its stake in us below 50%. The AMTC and BAC
interest is held by Infineon for our economic benefit pursuant
to the contribution agreement. For as long as Infineon holds our
interests in AMTC and BAC, we must exercise our shareholder
rights with respect to these investments through Infineon, which
is a more cumbersome and less efficient method of exercising
these rights than if we held the interests directly. We do not
expect these administrative complexities to have a material
adverse effect on our business, financial condition and results
of operations.
Benefits
of our Carve-out
We believe that operating as an independent company allows us to
realize the following benefits:
•
Increased market responsiveness through an exclusive focus
on the memory products business: DRAMs are
subject to different market dynamics compared to Infineon’s
other products. By operating as a separate business we are able
to react more effectively to the dynamics of the memory market
through simplified decision-making processes independent from
the requirements of Infineon’s remaining businesses. We
believe that this independence permits us to focus exclusively
and quickly on our customers, and anticipate their specific
needs.
•
Direct access to a distinct investor
base: We believe that as a stand-alone
U.S.-listed
semiconductor memory company, with distinct opportunities and
risk characteristics, we appeal more readily to those investors
interested in a focused semiconductor memory company.
Furthermore, as a stand-alone company, we enjoy direct access to
the capital markets.
•
Incentives for our employees directly tied to our own
performance: We believe that our share price
reflects our performance more accurately than Infineon’s
share price did and therefore can be used as a more effective
compensation tool for our employees. Our shareholders have
authorized the Supervisory Board to grant to the members of the
Management Board, and the Management Board to grant to certain
key executives in our group, through September 30, 2009, a
total of 6,000,000 non-transferable option rights to receive our
ordinary shares in the form of ADSs. As of September 30,2007, a total of 1,883,400 options were outstanding. We have not
granted any options since that date.
•
Increased flexibility to pursue strategic
cooperations: We believe that by becoming an
independent business, we have substantially increased our
flexibility to engage in strategic cooperations such as
alliances or joint ventures of particular benefit to the
semiconductor memory business. In addition, we are in a position
to issue our own securities, which may enable us to participate
more readily in the further consolidation of the memory business
should opportunities, which are attractive from a strategic,
operating and financial perspective, arise.
Products
and Applications
We design semiconductor memory technologies and develop,
manufacture, market and sell a large variety of semiconductor
memory products with various packaging and configuration
options, architectures and performance characteristics on a
chip, component and module level. We currently offer
technologically more advanced DRAM products for infrastructure,
graphics, mobile and consumer applications, as well as standard
DRAM products for PCs, notebooks and workstations. We also
offered a small number of non-volatile NAND-compatible flash
memory products, but discontinued production of these products
in our 2007 financial year.
Standard DRAMs for PCs, Notebooks and workstations
€
1,435
51
%
€
1,784
47
%
€
1,407
39
%
DRAMs for infrastructure, graphics, mobile and consumer
applications
1,089
38
%
1,928
50
%
2,160
60
%
Total DRAMs
2,524
89
%
3,712
97
%
3,567
99
%
Other products and
services(1)
301
11
%
103
3
%
41
1
%
Total
€
2,825
100
%
€
3,815
100
%
€
3,608
100
%
(1)
Primarily includes embedded DRAM products, flash memory products
and technology licensing revenues. Technology licensing revenues
consists of revenues from licensing our technology to third
parties in connection with manufacturing agreements that provide
us with access to manufacturing capacity. See
“— Strategic Alliances and Agreements.”
Brands
Most of our products are sold under our Qimonda brand, and we
are working to establish a brand identity for ourselves using
the Qimonda name. See “Risk Factors — Risks
related to our carve-out as a stand-alone company and our
continuing relationship with Infineon — We may not be
successful in establishing a brand identity.” We have
applied for protection of our Qimonda brand as a trademark,
domain and company name, but may not gain protection in all
jurisdictions. Qimonda is intended to be the market brand for
memory products exclusively sold to OEMs (Original Equipment
Manufacturers) in the IT industry. We also sell DRAM products
under our
AENEON®
brand. Our AENEON brand is positioned as a separate memory
brand, dedicated to serving the needs of the “channel”
& “retail” market. “Channel” refers to
the hundreds of small PC manufacturers and systems integrators
or system builders worldwide. They typically assemble and
install PC systems serving both consumer and corporate segments
that require these services. “Retail” refers typically
to retail storefronts or online retail that sell computer
systems, components and upgrade parts to consumers. It also
covers specialists who configure individual PCs and sell memory
upgrades to consumers. The products sold under the AENEON brand
include DRAM modules for notebooks, PC desktops and servers; as
well as flash based products such as USB sticks, SD cards and
MicroSD cards. We test the quality of our
AENEON®
products through testing the compatibility with major PC and
notebook platforms. This process is often shorter and more
cost-efficient than the testing required by high-end
applications of our OEM customers. We sell our
AENEON®
products via an extensive network of distributors and retailers
worldwide, and have recently begun to offer them through a
dedicated online sales channel.
DRAMs
for Infrastructure, Graphics, Mobile and Consumer
Applications
We design, manufacture and sell technologically advanced DRAM
components and modules for use in servers, networking and
storage equipment and a variety of specialty DRAMs for use
primarily in graphics, as well as in mobile and consumer
applications.
Infrastructure
Applications
Our current portfolio of DRAMs for use in servers, networking
and storage equipment includes FB-DIMMs, which we believe will
serve as the next generation of memory used in high-end servers,
and very-low-profile-DIMMs, intended for the blade server
market. DRAM consumption in entry level servers is expected to
enjoy 60%
compound annual growth rate (CAGR) (based on bits shipped) from
2006 to 2011, according to iSuppli. We believe we are the only
FB-DIMM supplier who has in-house capabilities to design a key
component of this module, a logic chip called Advanced Memory
Buffer, or AMB. This allows us to customize the AMB design
specifically for our memory modules, providing us better
know-how transfer from chip to system level and vice versa. We
also provide customized modules to server manufacturers, in each
case specifically designed to meet the individual
customer’s unique platform requirements. We expect the
markets for servers to grow substantially in the next few years,
and we are currently engaged in the development of products we
believe will address that growth. For example, we are developing
new generations of standard DRAM with 2 gigabits of capacity for
use in future IT infrastructure applications.
Graphics
Applications
We offer a broad portfolio of graphics DRAMs that support
applications with performance ranging from entry level to very
advanced. Due to their speed, low power consumption and limited
heat generation, our graphics DRAM components are used in game
consoles, graphics cards, PCs and notebook computers. In some
cases, we make customized products for use in entertainment
applications, including game consoles and imaging devices. We
believe that the trend towards the extensive use of
sophisticated graphics applications will result in strong growth
in high performance graphics systems which we believe will in
turn drive the demand for our graphics DRAM products.
Mobile
and Consumer Applications
We offer low-power specialty DRAM products, such as Mobile-RAM
and
CellularRAM®,
that are suited for use in a variety of mobile and consumer
applications, such as:
•
mobile phones;
•
mobile consumer products, such as digital still cameras and
digital audio players; and
•
stationary consumer products, such as digital televisions and
DVD recorders.
Our Mobile-RAM is specifically designed for ultra-low power
consumption that is increasingly demanded by today’s
battery powered mobile communication, especially in high end
phones and handheld consumer products. We intend to focus
further on driving technological innovations in this area and we
believe we were the first to produce chips with a temperature
sensor integrated onto the chip as well as the first to
introduce a DDR interface for a Mobile-RAM to further reduce
power consumption or alternatively offer higher performance. We
also expect that new consumer products that combine more
features will require DRAMs that consume very low power, yet
operate at adequate speeds. We believe that the
trench-architecture-based products we currently offer allow for
a significantly longer battery life and reduced heat
dissipation, both important features for potential customers and
their end users.
Our
CellularRAM®
is designed to be the best choice of memory for entry and mid
range handset models. This market segment is characterized by
stringent low power requirements, but more moderate density and
bandwidth needs. CellularRAM balances low power efficiency with
high data throughput. We are also a founding member of the
CellularRAM®
specification co-development team and together with six other
industry members, we create common specifications for
high-performance pseudo-SRAM devices, enabling us to take an
active role in the development of DRAM memory products for one
of the fastest-growing technology sectors.
Both our Mobile-RAM and
CellularRAM®
products are offered as components and as so-called
Known-Good-Dies, or KGDs, for use in Multi-Chip-Packages, or
MCPs. MCPs combine different memory chips, usually a
non-volatile
flash chip, and a faster, volatile RAM, and are increasingly
used in mobile communication and consumer devices due to their
lower space consumption. We supply our Mobile-RAM and
CellularRAM®
as KGDs on wafer level to MCP manufacturers.
We also offer a broad range of DRAM products for consumer
applications, some of which are of smaller memory densities or
older interface generations, such as SDRAM. These are often
referred to as “legacy” DRAM products. For example the
manufacturers of hard disk drives, DVD players, home gateways
and some printers do not
require large amounts of DRAM, but do require a DRAM product
that is guaranteed to be available for the printer’s entire
life cycle, which may be many years. In addition, we sell
products with industrial-level tolerance for cases when consumer
applications require a broader guaranteed temperature range. For
high-end digital televisions, we offer modules with up to DDR2
800. Demand for these ’dedicated’ consumer DRAM
products is often less volatile, and their prices are relatively
steadier, as compared to other standard DRAM products.
Standard
DRAMs for PC, Notebook and Workstation
Applications
In addition to the DRAMs for infrastructure, graphics, mobile
and consumer applications, we believe we offer a complete
portfolio of standard DRAM products that provide a variety of
speeds, configurations and densities suited to particular end
uses. We sell the majority of our standard DRAM products, to
desktop and notebook computer manufacturers for use in PCs and
workstations and to distributors who sell DRAMs on to smaller
original equipment manufacturers and contract manufacturers. Our
standard modules, including Unbuffered DIMMs and SO-DIMMs, are
used primarily for PCs and notebooks, while our more specialized
modules such as High-Density SO-DIMMs and Micro-DIMMs are
typically used in high-end notebook computers and sub-notebooks.
We believe our engineering capabilities permit us to offer these
specialized modules and differentiate us from suppliers focused
primarily on standard DRAM products. Many of our customers that
produce PCs and workstations also produce servers, networking
and storage equipment or graphics, mobile and consumer products.
We believe these customers expect us to offer both standard DRAM
products and other types of DRAM products so that we can supply
their entire product ranges. We intend to invest in technology
development and anticipate playing an active role in the
development of future DRAM architectures, including
third-generation DDR, or DDR3.
The large size of the standard DRAM market has made possible the
substantial capital investments required to achieve ever more
advanced manufacturing capabilities. Being active in the
high-volume standard DRAM market enabled us to build our current
scale and develop our existing manufacturing capabilities
forming the basis to expand our production of DRAMs for advanced
infrastructure applications and specialty DRAM products.
Other
Products and Technology Licensing
In the 2006 financial year, we offered data flash memory
products, primarily in the form of cards and to a lesser extent
in component form, for use in digital still cameras, USB flash
drives, digital audio players and mobile phones. Due to the
significant price decline for data flash memory since the
beginning of the 2006 calendar year, we decided to ramp down the
production of our flash products during our 2007 financial year
and to convert our flash production capacities to DRAM
production capacities. We stopped developing NAND-compatible
flash memory products based on Saifun’s proprietary NROM
technology, which we licensed from Saifun when we purchased its
remaining interest in our joint venture. See
“— Intellectual Property — Amendment
and Partial Termination of Our License Agreement with
Saifun”.
We continue to be engaged in technology development for
non-volatile memories to address a market, if one develops, in
which we can provide a competitive platform for flash systems
(which are modules containing flash memory and a controller). We
conduct our non-volatile memory development activities through
our wholly-owned subsidiary Qimonda Flash at our facilities in
Dresden and Munich, Germany and Padua, Italy.
We sell a relatively small volume of embedded DRAM products in
the form of
“system-on-chip”
ICs that integrate memory and logic circuitry on a single chip.
In addition, we grant technology licenses of our intellectual
property to our alliance partners, including Winbond and Nanya.
These licenses are often granted as part of cross licensing
arrangements. They often enable us to gain access to
manufacturing capacity at foundries through these kinds of cross
licenses and capacity reservation arrangements.
The following table presents summary information regarding our
principal products.
Products
Principal features
Principal applications
Standard DRAM Components
Memory components in different package configurations with
different interfaces
(DDR, DDR2) and densities (128Mb, 256Mb, 512Mb and 1Gb)
• Mainstream bandwidths from DDR-333 to
DDR2-800
• Organization: x4, x8, x16
• Memory modules
• Components-on-mainboards
Personal Systems DRAM Modules
Unbuffered Dual Inline Memory Modules (DIMMs) based on DDR and
DDR2 components, with densities ranging from 256MB to 2GB
• Mainstream bandwidths from DDR-333 to
DDR2-800
• Desktop computers
• Workstations
Unbuffered Dual Inline Memory Modules (DIMMs) with ECC (Error
Correction Code) based on DDR and DDR2 components, with
densities ranging from 256MB to 2GB
• Mainstream bandwidths from DDR-333 to
DDR2-800
• Error correction code
• Workstations
• Entry-level Servers
SO (Small-Outline)-DIMMs based on DDR or DDR2 components, with
densities ranging from 256MB to 2GB
• Mainstream bandwidths from DDR-333 to
DDR2-800
• Notebook computers
Micro-DIMMs based DDR2 components, with densities ranging from
256MB to 1GB
• Bandwidths from DDR2-400 to DDR2-667
• 35% smaller than standard SO-DIMMs
• Sub-Notebooks
• Ultra-mobile PCs
Infrastructure DRAM modules
Registered DIMMs and customized DIMMs based on DDR and DDR2
components, with densities ranging from 256MB to 8GB
• Mainstream bandwidths from DDR-266 to
DDR2-800
• Servers
FB (Fully Buffered) DIMMs based on DDR2 components, with
densities from 512MB to 4GB
• Bandwidths from DDR2-533 to DDR2-800
• Advanced Memory Buffer technology
• Servers
• Workstations
Very-low-profile-Registered DIMMs based on DDR2 components, with
densities ranging from 512MB to 4GB
• Bandwidths from DDR2-533 to DDR2-800
• Reduced height
Memory components and modules in different package
configurations with different interfaces (SDR, DDR, DDR2) and
densities (128Mb, 256Mb, 512Mb, 1Gb, 2Gb) High Density DIMMs
(DDR1, DDR2) and Fully Buffered DIMMs (DDR2)
• Industrial temperature Capabilities
• Lead-containing DRAM packages
• Low power self refresh
• Mainstream bandwidths from DDR-266 to
DDR2-800
• Networking, Telecom and Industrial
equipment
• Storage
Graphics
Graphics RAM (256Mb, 512Mb) based on DDR2 and GDDR3 interfaces
• Bandwidth per pin from 0.8Gb per second
up to 2Gb per second
• Organization: x16, x32
• Manufactured in 75nm, 80nm, 90nm and
110nm process technology
• Graphics cards in desktop and note-book
computers
• Game consoles
Customized DRAM components
Application specific DRAM configurations in terms of memory
density and memory interface
Gaming application and Digital TV applications
Mobile and
Consumer(1)
Mobile-RAM (128Mb, 256Mb, 512Mb, 1Gb) based on SDR and DDR
interfaces; also available as “known good dies”
CellularRAM®
(64Mb, 128Mb); also available as “known good dies”
• Low operating current
• Low standby current
• Low power consumption
• Manufactured in 110nm process Technology
• Digital still cameras
• Digital audio players
• Mid-range mobile phones (2.5G/3G)
• GPS
(1)
We also sell our range of standard DRAM components to customers
who manufacture infrastructure equipment and consumer electronic
devices including digital televisions, set-top boxes and DVD
recorders.
We believe we are an industry leader in transitioning to next
generation memory density and interface. According to iSuppli,
we were the largest supplier of 512M DDR2 products, based on
bits shipped, during the
ramp-up
phase of this product density in the market, which occurred in
the first half of the 2006 calendar year. The following table
sets forth the percentage of our total DRAM bit shipments (by
density and interface) for the periods indicated:
For the financial year ended September 30,
DRAM:
2005
2006
2007
(in percent)
By density:
128Mb
1
0
0
256Mb
51
24
12
512Mb
47
74
86
1Gb
1
2
2
By interface:
SDRAM
5
3
2
DDR
60
30
15
DDR2
27
51
64
Specialty DRAMs
8
16
19
We believe we were one of the first suppliers to deliver DDR3
components and modules in the third quarter of our 2007
financial year, to leading motherboard vendors and manufacturers
of overclocking memory modules. In addition, our DDR3 products
have been validated on Intel reference platforms.
Customers,
Sales and Marketing
Our customers include the world’s largest suppliers of
computers and electronic devices. Our current principal
customers include major computing original equipment
manufacturers, or OEMs in the PC and Server markets, including
HP, Dell, IBM, Sun Microsystems and Sony. To expand our customer
coverage and breadth, we also sell a wide range of products to
memory module manufacturers that have diversified customer bases
such as Kingston, and to a number of distributors. More recently
and in connection with the ongoing expansion of our product
portfolio, especially into graphics applications, we have added
customers with a strong focus on enabling these applications,
such as nVidia, AMD and customers who are active in the game
console market, such as Microsoft, Sony and Nintendo. In
addition, we have added customers in the area of consumer and
mobile applications, such as LG, Spansion and SanDisk. We
believe that having a close relationship with these customers
can benefit us in the development of future memory generations
by making it easier to develop memory solutions for future end
applications and improve our product designs.
We have been a primary DRAM supplier to major OEMs, including HP
and Dell, in a number of recent years. These customers generally
provide relatively more stable demand for standard DRAM than is
available on the spot market, and we believe they are good
partners for product development. In the infrastructure area, we
believe that we have been able to establish a strong presence
based on our high performance and high quality products,
including application-specific and customized products. For
example, we have received supplier awards from Sun Microsystems
in each of the last five years.
The number of customers we serve has increased over recent years
from about 150 in our 2003 financial year to about 170 in our
2006 financial year as we continued to diversify our product
portfolio. In our 2007 financial year the number of customers we
serve declined slightly compared to our 2006 financial year due
to the phase out of our flash production and of our support to
certain Infineon customers. In our 2007 financial year, our five
largest customers accounted for 48% of our total sales. HP, our
largest customer, accounted for 17% of our sales and Dell, our
second largest customer, accounted for 12% of our sales during
that period. In our 2006 financial year five largest customers
accounted for 49% of our total sales. HP, our largest customer,
accounted for 18% of our sales and Dell, our second largest
customer, accounted for 16% of our sales during that period. In
our 2005 financial year, our
five largest customers accounted for 52% of our sales and our 20
largest customers accounted for nearly 76% of our sales. HP
accounted for nearly 19% of our sales, Dell accounted for 14% of
our sales and three additional customers each accounted for more
than 5% of our sales during that period.
We sell our semiconductor memory products throughout the world,
primarily in the United States, Europe and the Asia/Pacific
region. We make our sales primarily through direct sales
channels and, in order to ensure best possible customer coverage
and reach, make use of distributors. We focus our principal
sales and marketing efforts on the technology leaders in each of
the DRAM markets we serve. We believe we have strong customer
relationships and that our customers, many of which are leaders
in their respective fields, provide us with special insights
into the current state of their respective markets. Our sales
strategy has three main focus points, which we believe will
continue to position us to better serve our customers:
•
Key Account approach: Via our Key
Account Centers, we tailor our sales approach to our customers,
serving our largest customers, primarily global PC and Server
OEMs, and serve our local OEMs, module manufacturers and
distributors via our regional sales organizations. Each Key
Account Center team is responsible for the needs of its
customers on a global basis, and we expect them to achieve or
maintain a position as a top supplier of DRAM to that customer
in terms of quality and volume. We believe that our key account
approach assists us in developing and maintaining strong
relationships with our major customers, which is particularly
important for customers who purchase primarily standard DRAMs
who could easily migrate to other suppliers.
•
Leveraging our existing relationships to expand the
applications with which we serve our
customers: Because many of our Key Accounts
in the PC and Server markets also produce graphics, mobile and
consumer products, we work with our existing customer base to
sell a wider range of our products and applications. For
example, during the last year, we have been increasing our
efforts to market customer- and application-specific DRAMs for
graphics, mobile and consumer applications, because we believe
the market for these applications will be attractive with
respect to price, stability and demand growth.
•
Leveraging our strong technical skills to work directly
with customers to design specific memory
products: The third key focus of our sales
strategy is to continue to expand the product portfolio we
deliver to each of our customers by leveraging our strong
technical skills and working directly with them to design
specific memory products for use in their end products. Our
development engineering teams, composed of trained engineers,
work directly with customers, creating products specifically
designed for particular customers in a process we call
“design-in”. In some cases, several DRAM producers may
attempt to design their product into the customer’s
application, each vying to best meet the customer’s
requirements. Our development engineering teams play a key role
in this regard.
Our regional sales teams are located in Europe, North America,
Asia/Pacific and Japan, and are supported by our headquarters in
Germany. These regional sales centers enable us to bring our
business to our customer base and to provide local contact and
support to the Key Account Center teams in those regions. Each
of our regional sales centers is equipped to perform all key
sales support, and each of our regional sales organizations is
responsible for acquiring new customers and managing the
region’s product mix and inventory.
We generally enter into agreements with our customers specifying
the terms and conditions under which they agree to purchase our
products and the terms and conditions under which we agree to
supply them. The period of time over which prices and volume are
fixed depends on the application market in which the customer
operates. In general, prices and volumes are negotiated for
periods ranging from a few days, for standard DRAMs for PC,
notebook and workstation products in the spot market, up to one
year for customer- and application-specific DRAMs used in
graphics, mobile and consumer applications. The majority of our
sales volume, however, is based on contracts in which prices and
volumes are re-negotiated twice a month. The majority of our
customer agreements require our customers to provide us with a
regular forecast of their DRAM demand. Our determination of the
mix of products to be manufactured is primarily based on our own
internal forecasts in combination with the forecasts our
customers provide.
We categorize our sales geographically based on chosen billing
location.
In many cases, our customers then choose to ship our products to
locations other than the billing locations. Accordingly, we do
not believe that the geographical distribution of our sales are
necessarily indicative of where our products are actually used.
The geographical distribution of our sales by percentage during
the periods indicated was as follows:
The Rest of Europe region also includes other countries and
territories in the rest of the world outside of the listed main
geographic regions with aggregate sales representing no more
than 2% of total sales in any period.
The increased sales in Japan during the 2007 financial year
resulted from a strong growth in demand for our specialty
products, in particular for graphics and consumer applications,
as well as additional demand for standard DRAM products for PC
applications during the 2007 financial year. The decrease in
sales in North America for the 2007 financial year, as compared
to the previous period, was primarily caused by OEM customers
shifting their production to Asia.
As of September 30, 2007, we had 391 sales and marketing
employees worldwide. In connection with our focus on expanding
our customer and product portfolios, we have added employees to
our marketing teams in recent years, many of which are directly
engaged with our customers.
Our marketing teams determine the products required to meet our
customers’ needs and support both our Key Account Centers
and regional sales forces. Our marketing organization is divided
into product marketing groups and various regional marketing
groups, and both groups work closely with our customers and with
our sales and R&D organizations. Our product marketing
groups help plan our product roadmap, to enable us to develop
and manufacture products that we believe will meet our
customers’ changing requirements. Our regional marketing
teams collect local customer requirements, work together with
the product marketing groups and support their respective
regional sales organization. A large portion of our product
marketing organization is based in Germany, complemented with
product marketing teams in North America and Asia.
Competition
We compete generally on the basis of price, product design,
technical performance, production capacity, product features,
product system compatibility, quality, product reliability, and
support. Production capacity and quality, in addition to the
ability to deliver products reliably and within a very short
period of time, play particularly important roles. The
importance, however, of these factors varies based on the market
for the product group in question.
•
Standard DRAMs for PC and workstation
applications. We compete in this market on
the basis of price, delivery reliability and logistical support.
We consider a strong reputation in delivery reliability to be
vital for this market.
•
DRAMs for infrastructure, graphics, mobile and consumer
applications. We compete in these markets on
the basis of product quality, performance, reliability and
engineering support. Logistical support is particularly
important for infrastructure applications. Our engineering teams
are able to design customer-specific products based on our DRAM
trench technology, with high performance for uses such as in
graphics
applications, and with relatively lower power consumption, which
enables longer battery life and lower heat generation in mobile
and consumer electronics devices, key areas of concern for our
customers. We believe the Sun Microsystems (Best In
Class Memory Supplier) award we earned in 2007 for the
third consecutive year is an indicator of the high quality and
reliability of our products geared toward infrastructure
applications.
The markets for our products, especially our standard DRAM
products, are intensely competitive. Our principal competitors
include other major international DRAM producers as well as many
smaller manufacturers that manufacture DRAM using design and
manufacturing technologies licensed from the major DRAM
producers. Several of these companies license technology from us
and, in some cases, we purchase a portion of their DRAM output,
while at the same time competing with them for sales. See
“— Strategic Alliances and Agreements” for a
description of our manufacturing arrangements with strategic
partners.
The following table sets forth the market share in percentage
based on DRAM revenues in the 2006 calendar year of our
principal competitors, according to Gartner, and the primary
areas in which we believe we compete with them:
Principal Competitor
Areas of competition
Market share
Samsung Electronics
Standard, infrastructure, graphics, mobile and consumer DRAMs
29
%
Hynix Semiconductor, Inc.
Standard, infrastructure, graphics, mobile and consumer DRAMs
17
%
Micron Technology, Inc.
Standard, infrastructure, mobile and consumer DRAMs
11
%
Elpida Memory, Inc.
Standard, infrastructure, mobile and consumer DRAMs
10
%
Nanya Technology
Corporation(1)
Standard DRAMs
6
%
(1)
Nanya Technology Corporation is our joint venture partner in
Inotera Memories, Inc.
According to Gartner, we had the third largest market share
based on DRAM revenue and bits in the 2006 calendar year, with a
16% share. For the first nine months of the 2007 calendar
year, we remained the third largest supplier of DRAM by revenue
and were the fourth largest supplier of DRAM by bit shipments
with market shares of approximately 13% according to
iSuppli’s preliminary report in November 2007.
Research
and Development
We believe that research and development, or R&D, will
continue to be critical in developing technologically advanced
products that are sought after by our customers, as well as
manufacturing processes that improve our productivity. Our
R&D efforts are intended to build upon our past successes.
We believe that we remain at the forefront of our industry in
the process of converting DRAM manufacturing from 200mm wafers
to 300mm wafers and we were the first to implement 193nm
lithography in mass production. In the late 1990s, we were among
the first to introduce the 256Mb density generation to the
market, and we believe we were among the leaders in the
industry’s transition to 512Mb DDR2 DRAM and are currently
in a leading position for the introduction of 512Mb DDR3 DRAM.
We believe we were the first DRAM developer to bring DDR
MobileRAM to the market in October 2004 and we believe that as
of the end of our 2007 financial year, we are the only DRAM
supplier that has developed and is producing an Advanced Memory
Buffer Chip for use in FB-DIMMs for server applications.
Our R&D activities are broadly divided into two major
steps. First we develop a manufacturing process technology and a
design platform in conjunction with a “lead” product.
Subsequently, the rest of the product portfolio is developed as
“follower” products which utilize the design platform
established in the first step
Product
Development
Our product development activities focus on those specialized
and advanced products that we believe provide us more stable and
higher selling prices than standard DRAMs. To enable this, we
have increased the number of
product development engineers from around 560 at the end of the
2003 financial year to more than 1,100 worldwide by the end of
the 2007 financial year. We believe these enhanced resources
have resulted in the recent successes we have had developing new
products. For example, we expanded our graphic DRAM product
portfolio from a single product in 2003 to a range of seven
products we currently offer in different densities, interfaces
and speed for the full range of graphics applications from entry
level to high-end.
We have placed particular emphasis in recent years to the
expansion of our R&D resources in lower cost locations. For
example, we rapidly built up our team in Xi’an, China, in
the 2005 financial year. In addition, we are setting up a new
development center for the development of memory products in
Suzhou, China, that started activities in October 2007. We
believe that appropriate use of skilled R&D personnel in
lower-cost locations will improve our ability to maintain our
technical position while managing costs.
We define our products in close cooperation with lead customers
and industry partners. We actively drive new standards and
participate in standardization committees such as the Joint
Electron Device Engineering Council (JEDEC). Our worldwide
operating Application Engineering teams help our customers to
design in our products into their systems. These teams provide
technical support to our customers and work to qualify our
memory components and modules for inclusion in our
customers’ products. They also work with the suppliers of
components designed to function together with DRAMs to ensure
that our products are validated for use with their products.
Process
Technologies
Process technologies have been a key focus for our R&D
activities, as we seek to reduce feature sizes and develop new
processes. We have successfully developed and implemented
several generations of process technologies. We believe that our
accumulated experience, including that which we have acquired
through our strategic alliances, is enabling us to introduce new
memory technology platforms with smaller feature sizes on a
schedule and at costs that enable us to remain among the leaders
in standardized DRAMs while focusing on more specialized
products and design-ins for applications in the graphics,
consumer and mobile areas. The goal of our technology
development efforts is to support our product designers in
meeting customer requirements regarding high performance, low
power consumption and small form factors at a competitive cost
level.
To maintain a competitive technology roadmap at an affordable
cost level, we have been pursuing strategic alliances with
several partner companies and consortia. Strategic development
alliances, such as the one we maintain with Nanya for DRAM
technology and lead product development, allow us to share costs
and resources. In particular, our Nanya alliance finalized the
process technology development of the 75nm process technology in
2006. Since September 2005, this alliance has been developing
58nm process technology for DRAM products, including the lead
products which will use these new technologies. We also
cooperate with Advanced Micro Devices Inc. and Toppan Photomasks
Inc. in the joint ventures AMTC and BAC. AMTC is currently
developing and pilot manufacturing the next generation of
photomasks. BAC operates and leases the facility in which AMTC
and Toppan Photomasks Germany GmbH are located. All of our DRAM
and flash technology development takes place at our DRAM and
Flash technology development center in Dresden, Germany.
We are also maintaining as a focus of our continuing research
and development efforts, the development of process technologies
that possess physical characteristics that can be utilized to
yield advantages for customer specific applications in terms of
performance and power consumption. We believe these
characteristics are important in DRAM products for use in
applications such as infrastructure, graphics, mobile and
consumer devices and have enabled us to achieve important design
wins for products for use in applications ranging from game
consoles and MP3 players to advanced servers. In this context,
we are currently preparing for the qualification of our trench
technology at the 58nm technology node by the end of our 2008
financial year.
We are at the same time working on designs beyond this
technology node with an open platform approach and a range of
architectures and technologies under review. We are also engaged
in the research and development of various emerging memory
technologies. We are focusing primarily on Phase Change Random
Access Memories (PCRAM), Conductive Bridging RAM (CBRAM) and
Magnetoresistive RAM (MRAM). These emerging memories use
alternative methods to store information. These technologies may
be candidates to replace existing mainstream memory technologies
in the long-term, although it is too early for us to make any
prediction about the potential for any of these technologies.
Since 2002, we have concentrated our development activities for
packaging technology in Dresden, at our back-end pilot fab,
where work focuses on both development of new packages and
assembly innovation. The development of follower packages or
products is conducted at our high volume backend sites in Porto,
Portugal, Suzhou, China and Malacca, Malaysia. We also cooperate
with Infineon on various aspects of package development as well
as with United Test and Assembly Center, Singapore on the
development of multichip packages. In August 2007, we
established a jointly owned company with SanDisk for the
development of multichip packages for use in mobile
communication applications such as mobile phones.
Cooperation
with Infineon
In connection with our carve-out, we have entered into various
agreements with respect to our R&D activities. In
particular, the Framework Agreement on Research and Development
Services defines the parameters of our cooperation with Infineon
with respect to certain R&D areas. See “Related Party
Transactions and Relationships — with Infineon”
for more details on these parameters. Under the Framework
Agreement on Research and Development Services, we will continue
to work together with Infineon on various common development
activities, including jointly funded R&D projects that
focus on process development and packaging technologies. We
anticipate that most of these projects will be carried out in
Germany. We expect to continue to cooperate with Infineon,
sharing equipment and making use of synergies at our Reliability
Lab, and failure analysis, both of which help us reduce yield
loss, or manufacturing errors, in production.
Locations
We conduct R&D activities in various locations around the
world. The following table shows our major R&D locations
and their areas of competence, including the principal R&D
joint ventures in which we participate:
Principal
Research and Development Locations
Location
Areas of competence
Burlington, Vermont
Low power and mobile and consumer DRAMs
Dresden,
Germany(1)
DRAM technology, flash technology, emerging memory technology,
package technology and photomask technology development
Munich,
Germany(2)
Computing and graphic DRAMs, as well as emerging memory
research; flash product development
Padua, Italy
Flash product development and design
Raleigh, North Carolina
Product development for standard and specialty DRAM
Xi’an, China
Computing and consumer DRAMs
(1)
Includes our own research and research conducted in conjunction
with our development partner, Nanya ,our photomask related
research and development conducted in conjunction with AMD and
Toppan, our process and tool development in the Center for
Nanoelectronic Technologies together with AMD and the Fraunhofer
Society and our material research conducted in
“namlab” in cooperation with the Technical University
of Dresden.
(2)
Includes our own research and research conducted in conjunction
with our development partner, Nanya.
In addition to our principal locations, we have smaller
locations in San Jose, California, Milan, Italy and Tokyo,
Japan, where we support development of specific applications or
specific customers’ lead products. At our back-end location
in Porto, Portugal, we support high speed test and back-end
technology development. We have established an additional
development center in Suzhou, China focused on product
development for computing and consumer DRAM that started
activities in October 2007.
We conduct DRAM product and process technology development on
three continents at a number of major development centers. Our
Dresden 300mm fab has an R&D center integrated directly
into it, enabling us to conduct R&D at the production site,
which we believe enables us to quickly transfer know-how from
development into manufacturing. Our Research and Development
Center, where we conduct manufacturing process technology
development, is located at the Dresden center. The Center for
Nanoelectronic Technology, operated in cooperation with the
Fraunhofer Society and Advanced Micro Devices, is also located
at our Dresden facility. The Center further strengthens our
research capabilities with respect to both DRAM and non-volatile
memory process technology. Also, the AMTC, the Advanced Mask
Technology Center operated together with AMD and Toppan, is
located at Dresden. Together with the Technical University of
Dresden, we operate the new Nanoelectronic Materials Laboratory
(namlab) at the university campus focusing on material research.
Our development center in Munich, Germany focuses on lead
products for computing and graphics applications. The design
center in Raleigh, North Carolina, focuses on
“follower” products for computing and graphics, while
our design center at Burlington, Vermont, focuses on mobile
products. Our design center in Xi’an, China focuses on
computing and consumer DRAM products. In addition to DRAM
products, we also design and develop flash memory products in
Padua, Italy, and Munich, Germany, and develop high speed AMB
chips in Munich, Germany. Additional customer specific product
development work is done in smaller development centers.
Finally, we maintain an extensive network of cooperation
arrangements with technical institutes and universities to
remain current with technological developments.
At September 30, 2007, our research and development staff
consisted of 2,506 employees working in our R&D units
throughout the world, a net increase of 750 compared to 1,756 at
September 30, 2006. The net increase of R&D employees
in the 2007 financial year resulted mainly from organizational
changes implemented at the beginning of our 2007 financial year
dedicating the activities of existing employees to the R&D
field. Moreover, we strengthened our R&D force in the area
of product and technology development.
Strategic
Alliances and Agreements
Our strategic alliances include both research and development
and manufacturing alliances. We believe that these strategic
alliances confer a number of important benefits, including:
•
worldwide access to the expertise of other industry
participants, including manufacturing competence in new
locations and additional experienced R&D employees;
•
sharing the risks inherent in the development and manufacture of
new products;
•
sharing costs, including the costs of R&D and production
ramp-up; and
•
efficiency gains, including reduced time-to-market of new
generations of semiconductor devices and greater economies of
scale.
We believe that a key element of the success of our strategic
alliances and foundry agreements results from our philosophy
that these alliances should be mutually beneficial. For example,
our foundry agreements provide us access to flexible
manufacturing capacity, while our partners can benefit from
access to our technology and manufacturing expertise.
The following table shows our principal strategic manufacturing
and R&D alliances, as well as their respective activities
and locations, as of September 30, 2007:
Principal
Strategic Alliances
Partner
Relationship
Principal Activity
Location
Nanya
Joint venture participant in Inotera, in which we hold a 35.6%
interest(1)
DRAM manufacturing at Inotera’s new 300mm facility
Taoyuan, Taiwan
Nanya
Joint R&D activities
R&D in both product and technology development for 90nm,
75nm and 58nm process technologies
Dresden and Munich, Germany
CSVC
Joint venture participant in Qimonda Suzhou in which we hold a
72.5% economic
interest(2)
Back-end assembly and test at the joint venture’s new
facility
Suzhou, China
SMIC
Foundry manufacturing
Manufacturing capacity at SMIC’s facilities
Shanghai and Beijing, China
Winbond
Foundry manufacturing
Manufacturing capacity at Winbond’s facilities
Hsinchu, and Taichung, Taiwan
(1)
Nanya holds slightly more Inotera shares than we do, and the
public and employees of Inotera own the remainder.
(2)
We are obligated to inject additional equity of
$86.5 million into the joint venture by July 2008 financial
year. This would increase our ownership percentage accordingly.
In addition to these principal alliances, we also participate or
have participated in a number of smaller alliances, especially
in the area of emerging memory development. These include a
development alliance with IBM on Phase Change Memories (PCRAM)
and development activities with Altis concerning Conductive
Bridging (CBRAM) and Magnetoresistive RAM (MRAM). We are also
cooperating with Advanced Micro Devices, Inc., (AMD), and Toppan
Photomasks (formerly DuPont Photomasks Inc.) on the development
and production of photomasks at the Advanced Mask Technology
Center GmbH & Co. KG, (AMTC), in Dresden, Germany. We
maintain an equity investment in Maskhouse Building
Administration GmbH & Co. KG, (BAC) a German limited
partnership company that owns the premises used by AMTC
described below and Toppan Photomasks Germany. Infineon’s
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest to us. While pursuant to
the AMTC and BAC limited partnership agreements, such consent
may not be unreasonably withheld, we, Infineon and
Infineon’s co-venturers are finalizing an agreement that
provides such consent and also addresses Infineon’s
intention to reduce its stake in us below 50%. The AMTC and BAC
interest is held in trust by Infineon for our economic benefit
pursuant to the contribution agreement.
We also had an equity investment in Hwa-Keng, a Taiwanese
company formed for the purpose of facilitating the distribution
of Inotera shares to Inotera’s employees. This company was
liquidated because its business purpose has been fulfilled with
the completion of the initial public offering of Inotera’s
shares. We and Nanya purchased half of the Inotera shares held
by Hwa-Keng. Upon completion of the liquidation, Hwa-Keng’s
assets (principally the proceeds from the sale of the shares)
were distributed to its shareholders, Nanya and Infineon. As
required by the contribution agreement, Infineon has transferred
these assets to us.
Research
and Development Alliances
Infineon has entered into a number of agreements to cooperate
with industry participants to conduct R&D related to the
development of new products and manufacturing process
technologies. These agreements enable us to benefit from the
expertise of other industry participants and to share the costs
and risks inherent in the development
of new products and process technologies. Our principal R&D
alliance is with Nanya Technology Corporation, a Taiwanese
company with which we also have a manufacturing collaboration
through our Inotera joint venture.
In November 2002, Infineon entered into agreements with Nanya to
establish a strategic cooperation for the development of DRAM
products and to form Inotera Memories, Inc. Inotera is a
joint venture the purpose of which is to construct and operate a
300mm manufacturing facility with two manufacturing modules in
Taiwan. Under the terms of the initial development agreement, we
were jointly developing and sharing development costs with Nanya
for advanced 90nm and 75nm process technologies. By June 2005,
we and Nanya had qualified the 90nm DRAM technology and achieved
validation by Intel. By September 2006, we and Nanya had
qualified the 75nm DRAM technology and achieved validation by
Intel.
In September 2005, Infineon entered into another agreement with
Nanya to expand their joint development cooperation on DRAM
process technologies. The new agreement provides for the joint
development of advanced 58nm production technologies for 300mm
wafers. Joint development began upon signing the agreement. The
research is being conducted in Dresden and Munich. We believe
the extension of the existing co-development of projects could
help us expand our position in the DRAM market and reduce our up
front development costs.
The November 2002 agreement, as amended, entitles Nanya to
receive from us or our then-existing foundry partners 60% of the
amount of our foundry capacity that is in excess of the foundry
capacity we receive as of December 2006. Nanya may also receive
50% of our foundry capacity for which we contract after
March 1, 2006, with new foundry partners. Our obligation to
provide foundry capacity is capped at one third of our total
90nm foundry capacity. In combination, the 2002 and 2005
agreements, also entitle Nanya to receive from us or our foundry
partners one third of our 75nm foundry capacity and one third of
our 58nm foundry capacity. As of the end of our 2007 financial
year, we have not contracted for foundry capacity that would
require us to cede capacity to Nanya under these agreements. We
do not expect that any foundry capacity that we may be required
to provide to Nanya will have a material adverse effect on our
business, financial condition or results of operations.
Infineon was free to assign the agreements mentioned above to us
and has done so in connection with the carve-out. The 2002
development agreement remains in effect until the date of
completion of the last technical cooperation project, but may be
terminated by either party for cause, such as a material breach
by the other party, insolvency or bankruptcy of the other party,
or the acquisition, by a third party, of at least half of the
voting stock or control of the other party. The 2005 development
agreement remains in effect at least until December 2007, at
which point, if the goals of the cooperation project have not
been completed, the parties agree to continue working for an
additional six months and then discuss the extension of the
timeframe for the project. The agreement may also be terminated
by either party for cause, such as a material breach by the
other party, insolvency or bankruptcy of the other party, or the
acquisition, by a third party, of at least half of the voting
stock or control of the other party.
Inotera completed an initial public offering of its shares on
March 17, 2006 and an offering of its global depositary
shares on May 10, 2006. Its shares are now listed on the
Taiwan Stock Exchange and its global depositary shares are
listed on the Luxembourg Stock Exchange. The initial public
offering of shares and the offering of global depositary shares
raised approximately $619 million which will, together with
debt financing, be used to fund the second manufacturing module.
Manufacturing
Alliances
We also have a number of long-term strategic agreements with
leading industry participants to manufacture products. We intend
to use these agreements to assist us in maintaining our strong
technological position and sharing
start-up
costs inherent in transitioning to successive generations of
semiconductor memory products. We believe these alliances allow
us to reduce the capital we would have had to invest if we were
to engage in these activities alone. In addition, they provide
us with access to modern manufacturing capacity in low cost
regions. Our manufacturing alliances are part of our global
“fab cluster”. This concept permits us to share
engineering know-how, manufacturing and quality control best
practices and common rollouts of process improvements among all
of the facilities in which our products are produced.
As described above, in November 2002 Infineon entered into
agreements with Nanya to establish a strategic cooperation in
the development of DRAM products and to form Inotera
Memories, Inc., a joint venture to construct and operate a 300mm
manufacturing facility with two manufacturing modules in Taiwan.
We expect that Inotera’s 300mm manufacturing facility in
Taiwan will employ the production technology developed under our
separate joint development agreement with Nanya. The
construction of the first Inotera module was completed and mass
production began in the 2004 financial year. The capacity
ramp-up of
this first module with a capacity of up to 62,000 wafer starts
per month, was completed during our 2006 financial year. Inotera
broke ground for the second manufacturing module in May 2005 and
completed construction in our 2006 financial year. The total
capacity of both modules reached 120,000 300mm wafer starts per
month by the end of the third quarter of the 2007 calendar year.
Under the terms of the venture, Nanya and we each purchase 50%
of Inotera’s output. The joint venture agreement does not
have a fixed term. It can be terminated by either party upon
material breach by the other party of the agreement, the 2002
development agreement, the product purchase agreement or the
ancillary know-how transfer agreement, if the 2002 development
agreement is terminated, upon bankruptcy or liquidation of the
other party or if the other party’s share ownership in
Inotera drops below 30%. The party serving termination notice
under the agreement can choose to either sell its shares to the
other party at 120% of the higher of either the net asset value
or market value, or purchase the other party’s shares at
80% of the lower of either the net asset value or market value.
The joint venture agreement is automatically terminated when one
of the parties transfers or sells all of its shares in Inotera
unless such shares are transferred to an affiliate or were
previously offered to the other party on the same terms as any
proposed sale or transfer and any third-party purchaser has
agreed to enter into the joint venture agreement.
The purchase price per DRAM wafer we pay to Inotera is
calculated using a profit and loss sharing formula set forth in
the product purchase and capacity reservation agreement we have
entered into with Nanya and Inotera. The calculation is
performed monthly and the purchase price is equal to the sum of:
•
an amount representing the front-end cost per wafer Inotera
incurs, plus
•
a fixed percentage of the notional total profit (or loss) the
buyers realize when they sell the wafer.
The profit (or loss) per wafer is calculated by subtracting the
following items from the average selling price per wafer the
buyers realize when they sell to their customers the functional
chips on the wafer:
•
the front-end cost per wafer Inotera incurred (including its
cost of goods sold and research and development expenses,
•
the back-end cost per wafer the buyers incurred (including the
costs of back-end assembly and testing processes); and
•
a fixed percentage of the average selling price per wafer we
realize to cover overhead costs we incur, which is in line with
other companies in the industry.
This profit and loss sharing formula, including the fixed
percentages, cannot be modified without the consent of the three
parties and the approval of such change by the Board of
Directors of Inotera. The product purchase and capacity
reservation agreement remains in effect for as long as the joint
venture agreement is in effect. It can also be terminated upon
material breach by the other party of this agreement or by both
parties concurrently with the termination for cause of the joint
venture agreement or 2002 development agreement.
The agreement governing our joint venture with Nanya allowed
Infineon to transfer its shares in Inotera to us. However, under
Taiwanese law, Infineon’s shares in Inotera were subject to
a compulsory restriction on transfer
(lock-up) as
a result of Inotera’s IPO in March 2006. For that reason we
established a separate trust agreement pursuant to which
Infineon agreed to hold title to the Inotera shares in trust for
us until they could be transferred. In October 2006, the
Taiwanese authorities granted an exemption to Infineon
permitting it to transfer the shares. The transfer from Infineon
to us was completed on March 13, 2007 other than a portion
representing 0.24% of the total Inotera shares which Infineon
holds in trust for us due to Taiwanese legal restrictions.
If Infineon were to reduce its shareholding in our company to a
minority level before the earlier of the fifth anniversary of
our carve-out from Infineon and the achievement of early mass
production using 58nm process technology at our manufacturing
site in Dresden, the joint venture agreement with Nanya, as
amended, could require us to transfer these Inotera shares back
to Infineon. We agreed with Infineon that, in this event, we
would transfer the Inotera shares back to the trust. The trust
agreement provides for Infineon to again hold the Inotera shares
in trust for us until they could be transferred back to us.
CSVC
Infineon established a joint venture, Infineon Technologies
Suzhou Co., Ltd. (recently renamed Qimonda Technologies (Suzhou)
Co., Ltd., and referred to herein as Qimonda Suzhou) with China
Singapore Suzhou Industrial Park Venture Co., Ltd. (CSVC) in
Suzhou, China and constructed a back-end facility for the
assembly and testing of our products. The joint venture
agreement was entered into in July 2003 and has an initial term
of 50 years. Infineon contributed this agreement to us in
the carve-out. It can generally be terminated upon material
breach by the other party, a party’s bankruptcy or
insolvency and various other events relating to a party’s
financial condition. The facility officially opened in September
2004 and is scheduled to have capacity of up to one billion
chips per year. The facility is being ramped up in a number of
stages as dictated by growth and trends in the global
semiconductor memory market. We are required to purchase the
entire output of the facility. We have invested
$155 million in Qimonda Suzhou and expect to invest a
further $86.5 million in the venture by the end of our 2008
financial year pursuant to our current contractual obligations.
Infineon contributed its ownership in Qimonda Suzhou to us in
the carve-out effective May 1, 2006 (45% of the
venture’s share capital, representing 72.5% of the voting
rights in the venture). We currently hold 63% of Qimonda Suzhou.
We plan to increase our investment in Qimonda Suzhou such that
we will hold approximately 72.5% of its share capital by July
2008, with CSVC owning the remaining 27.5%. We have the option
to acquire the remaining CSVC stake at the nominal investment
value plus accrued and unpaid return. The joint venture intends
to arrange external financing for any further investment
required to purchase additional equipment. There can be no
assurance that this external financing can be obtained at
favorable terms or at all. We have always consolidated Qimonda
Suzhou as a subsidiary due to our management and voting right
control and eliminate income or losses as minority interests.
In March 2007, we announced plans to expand capacity at our
back-end manufacturing facility in Suzhou, China for which we
expect capital expenditures of €250 million over the
next three years. The joint venture intends to arrange external
financing for any further investment required to purchase
additional equipment. We cannot assure you that this external
financing can be obtained on favorable terms or at all.
SMIC
In December 2002, we entered into a Product Purchase and
Capacity Reservation Agreement, as most recently amended in
October 2007, with Semiconductor Manufacturing International
Corporation (SMIC), a Chinese foundry. As amended, this
agreement provides us access to additional DRAM manufacturing
capacity. Under the terms of this agreement, SMIC agreed to
manufacture, and we have agreed to purchase, up to 20,000 wafers
per month at SMIC’s 200mm production facility in Shanghai
until at least 2007 and up to 15,000 wafers per month at
SMIC’s 300mm production facility in Beijing until at least
2010. The agreement remains in effect until December 31,2010 and may be extended. We have the unilateral right to
terminate this agreement in the event that one of our
semiconductor competitors acquires 50% of SMIC’s voting
shares. In addition, either party may terminate the agreement
upon material breach by the other party of any obligation under
this or the ancillary know-how transfer agreement or upon
bankruptcy or insolvency of the other party.
Under the terms of the agreements, Infineon was free to assign
the agreement to us and has done so in connection with the
carve-out.
Winbond
In May 2002, we entered into a Product Purchase and Capacity
Reservation Agreement with Winbond, a Taiwanese foundry. This
agreement provides us access to additional DRAM production
capacity. Under the terms of this agreement, Winbond agreed to
manufacture, and we agreed to purchase, up to 19,000 wafer
starts per month from Winbond’s 200mm production facility
in Hsinchu, Taiwan until 2007. We have now phased out our
purchases of 200mm wafers from Winbond.
In August 2004, we entered into an extended Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2006, with Winbond. This agreement gives us access to
additional DRAM production capacity of up to 18,000 wafers per
month in Winbond’s 300mm facility in Taiwan until 2009. We
have exceeded this level from time to time. Under the terms of
this agreement we agreed to provide our 80nm DRAM trench
technology to Winbond’s
300mm-wafer
facility and Winbond agreed to manufacture DRAMs for computing
applications using this technology exclusively for us. Under the
terms of these agreements, Infineon was free to assign these
agreements to us and has done so in connection with the
carve-out. Each agreement remains in effect until the last
shipment of, and payment for, products manufactured under the
agreement unless it is earlier terminated for breach.
On June 27, 2007, we signed agreements with Winbond to
expand our existing cooperation with Winbond and our reservation
of capacity at Winbond’s facility for up to 24,000 300mm
wafer starts per month. Under the terms of the agreements, we
will provide our 75nm and 58nm DRAM trench technology to
Winbond’s
300mm-wafer
facility. In return, Winbond will manufacture DRAMs for
computing applications using this technology exclusively for us.
Facilities
and Manufacturing
Manufacturing
Facilities
Including our joint ventures and foundry relationships, we
operate manufacturing facilities in Europe, North America and
Asia. The following table shows information with respect to our
current manufacturing facilities and our facilities that are
either under construction or in the ramp up phase and the
portion of the output of the facility to which we are entitled.
Output is measured in wafer starts per month, or
“wspm”.
Current
and Planned Manufacturing Facilities
Year production
line came or is
expected to come
Output to which
on-stream
Clean room
m2
we are entitled
Front-end facilities (wafer fabrication):
Our Own Facilities
300mm facility, Dresden, Germany
2001
10,177
All
200mm facility, Richmond, Virginia
1998
16,771
All
300mm facility, Richmond, Virginia
2005
12,218
All
300mm facility,
Singapore(1)
2009
20,000
All
Joint Venture Facilities
300mm Inotera Memories facility, first module,
Taiwan(2)
2004
N/A
Half
300mm Inotera Memories facility, second module,
Taiwan(2)
2006
N/A
Half
Foundry Capacity
200mm Infineon facility, Dresden,
Germany(3)
1996
—
Variable corridor
200mm Winbond facility,
Taiwan(4)
1999
—
up to 19,000 wspm
300mm Winbond facility,
Taiwan(4)
2006
—
up to 24,000 wspm
200mm SMIC facility, Shanghai,
China(4)
2003
—
up to 20,000 wspm
300mm SMIC facility, Beijing,
China(4)
2004
—
up to 15,000 wspm
Back-end facilities (packaging, assembly and
testing):(5)
On April 25, 2007, we announced plans to construct a
fully-owned manufacturing facility in Singapore. Depending on
the growth and development of the world semiconductor market, we
plan to invest approximately €2 billion in the
facility over the next five years.
(2)
Owned by Inotera Memories, Inc., our joint venture with Nanya in
which we and Nanya each own minority shares. We own 35.6% of the
shares as of September 30, 2007. Our share in the
production of the joint venture is 50%. The 35.6% of the shares
we own include 0.24% of the share capital that remained held by
Infineon Technologies Investment B.V. at the time of the
carve-out. These shares cannot be transferred to us because of
Taiwanese legal restrictions, and Infineon Investments holds
them in trust for us.
(3)
During our 2007 financial year, approximately 57% of this
facility’s capacity was used for the production of our
products. As described under “Related Party Transactions
and Relationships — with Infineon”, we use
capacity at Infineon’s 200mm manufacturing facility in
Dresden pursuant to an agreement with Infineon, as amended in
January 2007. Under this agreement we have agreed to share
equally with Infineon any potential restructuring costs that
might be incurred in connection with the ramp-down of
production, if neither company can use that capacity.
(4)
We own no equity interest in this facility but have licensed
technology to the third-party owner. We are contractually
entitled to a stated amount of the facility’s DRAM output,
which is manufactured using our technology. See
“— Strategic Alliances and Agreements” for
more detail on these arrangements. We have recently phased out
capacity utilization at the 200mm line at Winbond.
(5)
In addition, we have agreements with EEMS Italia SpA and UTAC,
which provide additional back-end subcontracting services at
their facilities in Italy and China and Singapore. We have also
entered into a partnership with EEMS Italia SpA for the assembly
and testing of memories in a dedicated facility in Suzhou, China.
(6)
Includes about
2,000m2
cleanroom and
10,000m2
not cleanroom classified production area.
(7)
We constructed this facility pursuant to our joint venture
agreement with CSVC. See “— Strategic Alliances
and Agreements” for more detail on these arrangements. We
recently announced plans to construct a second manufacturing
module with an additional cleanroom area of about
10,000m2
in calendar year 2007 for which we expect capital expenditures
of €250 million over the next three years.
(8)
We recently announced plans to construct a new facility for
module manufacturing in Johor, Malaysia for which we expect to
invest €150 million over the next five years.
In the fourth quarter of our 2007 financial year we had access
to a total front-end capacity of about 193,000 wafer starts in
300mm equivalents per month (equivalent to approximately 435,000
wafer starts in 200mm equivalents) through our own facilities,
our joint venture and our foundry agreements. The capacities
provided by our joint venture Inotera constituted 30%, the
capacities sourced from our non-affiliated foundry partners SMIC
and Winbond together constituted about 24% and the capacities
sourced from Infineon’s 200mm facility at Dresden
constituted about 7% of these capacities.
Process
technology
In the front-end process, electronic circuits are produced on a
silicon wafer. This process involves several hundred process
steps and takes place over a period of approximately two months
in a clean room environment in which humidity, temperature and
particle contamination are precisely controlled. Because of the
very small geometries involved in wafer processing, highly
complex and specialized equipment, materials and techniques are
used. The main process steps to build the circuit structures
include oxidation or deposition steps, photolithography, etching
and ion implantation. At the end of the front-end process the
chips are tested on the wafer for functionality.
Our trench architectures requires a special deep trench etch
process to etch the holes for the capacitors into the bare
silicon wafer surface, a process which is undertaken early in
the chip manufacturing process. These holes can be etched into
silicon with very high aspect ratios (depth divided by the
diameter of the hole). As a result, the trench capacitor has a
very high surface area and therefore a high capacitance, or
ability to store electrical charges. The higher the capacitance,
the higher the number of electric charges a capacitor can store.
We have used the high capacitance of the chips we have been
manufacturing to reduce the voltage required to power the cell
array.
In the front-end manufacturing process, chips are produced on
silicon wafers. Our front-end fabs generally operate
24 hours per day, 7 days per week, not including
scheduled maintenance downtime (which generally involves only
individual pieces or clusters of equipment, rather than entire
facilities) and unscheduled stoppages. We do not generally
adjust our manufacturing schedule in response to changes in
demand. Maximum utilization of our facilities allows us to
spread our high fixed-costs over a larger number of chips. In
addition, given the complexity involved, our manufacturing
processes are more stable if operated continuously. We had no
significant unplanned production stoppages at our own front-end
fabs during our 2006 financial year or our 2007 financial year.
Wafer
Size Roadmap
In our efforts to continue to reduce our
per-unit
manufacturing costs, we continue to ramp up our volume of
production on 300mm wafers. In the 2006 financial year, we
continued to increase our share of DRAM manufacturing on 300mm
wafers. Our 300mm Dresden facility has started commercial
production using 75nm technology. In addition, our 300mm
facility at Richmond, Virginia started commercial production in
September 2005 and completed the first phase of its
ramp-up to a
capacity of approximately 25,000 wafer starts in April 2006. The
maximum capacity of this facility is expected to amount to
50,000 wafer starts per month and we plan to ramp up production
based on market developments. While we targeted a capacity of
36,000 wafer starts per month by the end of the 2007 financial
year we decided to hold this capacity at 30,000 wafers per
month. The first manufacturing module of Inotera, our 300mm
manufacturing joint venture with Nanya, reached a maximum of
62,000 wafer starts per month during the 2006 financial year.
The second manufacturing module of Inotera was constructed in
the 2006 financial year and completed its ramp up in September
2007. With this, Inotera reached an aggregate capacity of
120,000 wafer starts per month by the end of the third quarter
of the 2007 calendar year. Qimonda and Nanya are each entitled
to 50% of Inotera’s capacity. Our foundry and development
partner Winbond has officially opened its new 300mm facility in
Taiwan end of April 2006 and began volume production in 2006. In
April 2007 we announced plans to construct a fully-owned 300mm
manufacturing facility in Singapore. Construction of the new
facility is expected to start by the end of the 2007 calendar
year, with the first wafer produced in the 2009 calendar year.
We are planning a cleanroom size for a maximum capacity of
60,000 wafer starts per month. Given the cost efficiencies of
production on larger wafer sizes, we believe that increasing the
share of our 300mm production will substantially reduce our
overall
per-unit
production cost for memory chips.
We believe that, among our principal competitors we are one of
only two that have made substantial progress in ramping up 300mm
production. With 81% of the DRAM bits we produced in the second
quarter of the 2007 calendar year taking place on 300mm wafers,
we believe, based on iSuppli research, that we have the highest
percentage of bit production on 300mm wafers of the three
largest DRAM suppliers. Through our early
ramp-up, we
have gained expertise in 300mm manufacturing techniques and
technologies. We believe that, as we equip our remaining owned
facilities with 300mm wafer technology, we will be able to gain
additional cost advantages over competitors that have not yet
switched a substantial portion of their manufacturing to 300mm
technology.
Feature
Size Roadmap
The increase in memory density and resulting reduction of chip
feature sizes through the introduction of advanced process
technologies is one of the key factors in reducing manufacturing
costs. Innovations in process technologies and continual
reductions in per-bit manufacturing costs have been driven
largely by the needs of the standard DRAM market. The dynamics
of this market have caused continuous evolution of process
technologies, with an ongoing race for smaller die sizes and
higher memory densities at lower prices. During the 2006
financial year, we increased the capacity share based on 90nm
DRAM technology and started commercial production based on our
75nm DRAM technology. In addition, we developed and released for
production in October 2006 an 80nm technology, which contains
fewer technological upgrades than previous new technologies, but
which we believe will improve the number of dies we are able to
produce per wafer. In the fourth quarter of our 2007 financial
year, approximately 25% of our capacities used to manufacture
DRAMs had been converted to 80nm and 75nm technologies. With our
joint venture partner Nanya, we are currently developing the
58nm technology node and we are targeting its introduction by
the end of the 2008 financial year.
We intend to leverage the advantageous physical characteristics
provided by our trench technology to develop three different
platforms that address the specific needs of different customers
for DRAM products that emphasize high performance, low-power
consumption or low cost. We believe the ability to offer
customers products tailored to their specific application
requirements will increase our flexibility and help us improve
the breadth of our product design-ins.
Back-End
Manufacturing
In back-end manufacturing, chips are packaged, assembled and
tested. We believe that our back-end facilities are equipped
with state-of-the-art equipment and highly automated
manufacturing technology, enabling us to perform assembly and
test on a cost-efficient basis. In an effort to further enhance
our back-end manufacturing efficiency and improve our cost
position, we have increased our production volumes in lower-cost
countries such as Malaysia and China. In March 2007, we
announced plans to further expand our backend operations at
Suzhou, China, with the construction of a second manufacturing
module. In addition, we announced the construction of a new
module house at Johor, Malaysia to increase our capacities for
module manufacturing. Our back-end facilities provide us with
the flexibility needed to customize products according to
individual customer specifications.
To ensure the commercial viability of our products, we have
completed the conversion of all Qimonda product packages to
comply with the European Directive on the restriction of use of
certain hazardous substances in electronic and electrical
equipment, or RoHS Directive. In particular, the RoHS Directive
sets forth lead-free standards for many types of electronic and
electrical equipment. The obligation to comply with the RoHS
Directive ultimately lies with the equipment’s producer.
These customers therefore require us to supply lead-free
products, and we regularly provide certificates that document
our products’ compliance with the RoHS Directive’s
lead-free standards.
To address the needs of electronic equipment manufacturers whose
products require an exemption from the application of the RoHS
Directive, typically for technical or economic reasons,
exemptions are available which permit the use of lead-containing
parts for specific applications. In addition, certain
manufacturers have been individually exempted from compliance
with the RoHS Directive by the relevant governmental
authorities. We continue to supply a small number of
lead-containing products for these exempted applications and
manufacturers. Additionally, we have a number of customers who
require delivery of lead-containing products to non-European
markets, where the RoHS Directive does not apply.
“Fab
Cluster” System
In 1998, we introduced our fab cluster system, through which we
link and coordinate activities at our own front-end and back-end
sites with those sites that are operated by our alliance,
foundry and back-end partners. We operate these facilities as a
cohesive unit which enables us to align these facilities through
synchronized technical, quality and reporting guidelines. This
system allows us to:
•
implement identical technology roadmaps at all sites where the
equipment permits this;
•
synchronize manufacturing processes and quality control at all
sites; and
•
quickly move “best practices” developed at one
facility to all operations, which helps us to maximize quality
and accelerate
ramp-up
times. For example, we continuously monitor yield at each of the
sites in our fab cluster. Differences in yield lead to a
comparison of practices and to an identification of each
site’s comparative strengths. This results in our ability
to set best practices for the entire fab cluster.
When one of our fab cluster’s facilities is qualified by a
customer to make a specific product, qualification of the
remaining fabs in the cluster is typically easy to achieve. By
qualifying the entire cluster to a customer, we can supply that
customer with products from any of our fabs, which affords us
significant operational flexibility. Further, by maintaining
access to facilities around the world, we are also able to
attract highly skilled workers on a more global basis, and
maintain access to lower-cost workers as required. This system
permitted our joint venture Inotera to complete its first fab
ramp-up to
50,000 wafer starts per month in four quarters which we believe
is the benchmark in the industry.
Currently, our fab cluster includes our own front-end facilities
in Dresden and Richmond, Virginia, our
back-end
facilities in Dresden, Malacca and Porto, as well as our
front-end manufacturing joint venture Inotera, our
back-end
manufacturing joint venture Qimonda Suzhou, our front-end
foundry partners Winbond, SMIC and Infineon (Dresden 200mm) and
the dedicated back-end facility in Suzhou, China, of EEMS Italia
SpA that is currently under construction and scheduled to start
operations early in the 2008 calendar year.
Mask
Manufacturing
High-end photomask technology is a prerequisite for achieving
small feature size. Since May 2002, the Advanced Mask Technology
Center, or AMTC, Infineon’s joint venture with Advanced
Micro Devices and Toppan Photomasks in Dresden, Germany, has
developed advanced photomasks. Since 2004 the joint venture has
developed and produced high-end photomasks at AMTC’s pilot
production facility. We purchase some of our mask supply from
that pilot production facility. We also purchase masks from
Toppan Photomasks under a cooperative arrangement with Infineon,
and expect to continue to do so for as long as Infineon is our
majority shareholder.
ISO
Certification
We have held ISO 9001 certification since 1986 and ISO/TS 16949
certification (which elaborates on particular requirements for
the application of ISO 9001) since 2004. Qimonda has passed
the re-certification audit in December 2006, with the result
that the certification for ISO 9001 will be valid until end of
December 2009 and the certification for ISO/TS 16949 will be
valid until March 2010. Annual surveillance audits are performed
by our Third Party Body, DNV Det Norske Veritas Zertifizierung
und Umweltgutachter GmbH, Essen, Germany.
ISO quality management standards are developed by the
International Organization for Standardization (ISO), the
world’s leading developer of international standards to
specify the requirements for state-of-the-art products,
processes and managerial practices. ISO quality management
certification is an indispensable condition to enjoying sound
relationships with our customers.
Intellectual
Property
Our intellectual property rights include patents, copyrights,
trade secrets, trademarks, utility models, designs and maskwork
rights. The subjects of our patents primarily relate to IC
designs and process technologies. We believe that our
intellectual property is a valuable asset which protects our
investment in technology, and supports our licensing efforts
with third parties.
Allocation
of Existing Patents
In connection with our carve-out, the Infineon Group transferred
to us ownership of all those patents and patent applications
(which we refer to simply as patents in this section)
attributable to the Memory Products business. The ownership of
all other patents remained with the Infineon Group.
Qimonda’s patent portfolio at the end of September 2007
included more than 20,000 patents and patent applications
(representing more than 6,000 patent families) compared to more
than 23,000 patents and patent applications that remained on the
side of Infineon at the time of the carve-out.
Pursuant to the contribution agreement, the Infineon Group may
continue to use any patents transferred to us outside the memory
products business for their lifetimes. The contribution
agreement likewise permits us to use those patents remaining
with the Infineon Group within the memory products business
under terms corresponding to those we extended to Infineon under
this agreement.
Cross-License
Under Future Patents
We will own any patents that have been or will be applied for in
our name after the carve-out.
As part of the contribution agreement, we agreed to the
following terms with respect to patents applied for by either
party and its subsidiaries within five years of the effective
date of the carve-out or as long as Infineon owns a majority of
the shares of our company, whichever period is longer.
The Infineon Group will receive royalty-free licenses to use our
patents outside the memory products business for the lifetimes
of the patents or until a change of control of Infineon occurs.
If a change of control of Infineon occurs, the licenses would
continue if we received corresponding licenses for the memory
products field from the third party then controlling Infineon.
The contribution agreement likewise permits us to use those
patents applied for by Infineon in the memory products business,
under terms equivalent to those we extended to Infineon under
this agreement, including a mechanism for handling any change of
control equivalent to the one described above.
Sublicense
Rights
In connection with a spin-off or the creation of a joint
venture, Infineon has the right to sub-license any patents
transferred to us as part of the carve-out, as well as any
Qimonda patents subject to the cross-license arrangements
between Infineon and us, as described above, as long as:
•
the patents are used outside the memory products business;
•
we receive a grant-back license from the spin-off or joint
venture and its majority shareholder in the memory products
business; and
•
such majority shareholder has no pending patent law suit with us.
In connection with a spin-off or joint venture involving
Qimonda, the contribution agreement likewise permits us to
sub-license those patents remaining with Infineon, as well as
any of Infineon’s patents subject to the cross-license
arrangements, described above, within the memory products
business, under terms equivalent to those we extended to
Infineon under this agreement.
As
long as we are a Majority-Owned Subsidiary of
Infineon
Infineon is permitted to license any patents for which we apply
while Infineon is our majority shareholder within cross-license
agreements it had already concluded with third parties as of the
carve-out date and which require the licensing of patents of
subsidiaries.
Furthermore, as long as Infineon holds a majority share in our
company, Infineon is permitted to license any patents created by
us within cross-license agreements it concludes with third
parties after the carve-out, subject to our consent, which we
may not unreasonably withhold.
Patent
Licensing Negotiations with Third Parties
Under the contribution agreement, Infineon is entitled to raise
claims against third parties with respect to a small number of
transferred patents that are the subject of licensing
negotiations between Infineon and these third parties. We agreed
to take the steps necessary to enable Infineon to make such
claims. For as long as these negotiations have not been
completed and we remain a majority-owned subsidiary of Infineon,
we may not license the relevant patents to such third parties or
pursue claims against such parties without Infineon’s
consent.
Cross-License
Agreements with Third Parties
It is common in the semiconductor industry for companies,
including competitors, to enter into patent cross-license
agreements with each other. In the event of an imbalance in the
size of the respective portfolios of two companies or other
factors, such as revenue, such an agreement may also provide for
a cash payment from one party to the other. Infineon is a party
to a number of patent cross-license agreements from which we
benefit as a majority-owned subsidiary of Infineon. Although we
believe that our own substantial patent portfolio will position
us to conclude patent cross-license agreements on favorable
terms and conditions with other semiconductor companies, we may
find that our bargaining position is substantially less than
that of the Infineon Group as a whole. In addition, if Infineon
ceases to own at least a majority of our shares, we will lose
the benefit of coverage under certain of Infineon’s
cross-license agreements with other parties while the parties
may continue to be licensed under the patents Infineon has
transferred to us. We are currently in patent cross-license
negotiations with several major
semiconductor industry participants and expect to enter into
additional patent cross-license agreements with other parties in
the future.
If Infineon ceases to own the majority of our shares, our rights
to use patents under some of these cross licensing agreements
will terminate. See “Risk Factors — Risks related
to our operations — We may not be able to protect our
proprietary intellectual property or obtain rights to
intellectual property of third parties needed to operate our
business” and “Risk Factors — Risks related
to our carve-out as a stand-alone company and our continuing
relationship with Infineon — We may lose rights to
intellectual property arrangements if Infineon’s ownership
in our company drops below certain levels.”
Protecting
Our Intellectual Property
Our success depends in part on our ability to obtain patents,
licenses and other intellectual property rights covering our
products and their design and manufacturing processes. To that
end, we have obtained many patents and patent licenses and
intend to continue to seek patents on our developments. The
process of seeking patent protection can be lengthy and
expensive. Patents might not be issued from currently pending or
future applications or if patents are issued, they may not be of
sufficient scope or strength to provide us with meaningful
protection or a commercial advantage. In addition, effective
copyright and trade secret protection may be limited in some
countries or even unavailable.
Many of our competitors also seek to protect their technology by
obtaining patents and asserting other forms of intellectual
property rights. Third-party technology that is protected by
patents and other intellectual property rights may be
unavailable to us or available only on unfavorable terms and
conditions. Third parties may also claim that our technology
infringes their patents or other intellectual property rights,
and they may bring suit against us to protect their intellectual
property rights. From time to time, it may also be necessary for
us to initiate legal action to enforce our own intellectual
property rights. We believe that, while as a stand-alone company
we may enjoy more flexibility to vigorously defend our
intellectual property, we also will not be able to make use in
litigation of those patents that remained with the Infineon
Group. Furthermore, litigation can be very expensive and can
divert financial resources and management attention from other
important uses. It is difficult or impossible to predict the
outcome of most litigation matters, and an adverse outcome can
result in significant financial costs that can have a material
adverse effect on the losing party. We are currently engaged in
several material disputes over intellectual property rights.
Several disputes were settled in 2006, in particular those
relating to MOSAID and Tessera.
While it may be possible that Infineon could compete with us on
the basis of those patents that remained with Infineon we do not
view this possibility as a material threat to our business.
Infineon transferred all patents to us that were attributable to
the Memory Products business and are licensed to use those
patents in the future only outside of the memory products
business. In addition, since Infineon transferred to us all of
the assets and development resources attributable to the Memory
Products business, Infineon would need to make very substantial
investments or independently acquire technology to re-enter and
compete with us in the memory products business.
Settlement
Agreement with Rambus
In March 2005, Infineon reached an agreement with Rambus Inc.,
settling all claims between them and licensing the Rambus patent
portfolio for use in current and future Infineon products.
Rambus has granted to Infineon a worldwide license to existing
and future Rambus patents and patent applications for use in
Infineon memory products. The agreement provides that the
duration of the license shall continue until the last of the
licensed Rambus patents has expired. The license includes an
unspecified number of patents, which expire on different dates
over a period ending in 2026. Neither party may terminate the
agreement for any reason prior to its expiration. In exchange
for this worldwide license, Infineon agreed to pay
$50 million in quarterly installments of $6 million
between November 15, 2005 and November 15, 2007. After
November 15, 2007, and only if Rambus enters into
additional specified licensing agreements with certain other
DRAM manufacturers, Infineon would be required to make
additional quarterly payments which may total an additional
$100 million. Because Rambus’ ability to conclude the
agreements is not within our control, we are not able to
estimate whether additional payment obligations may arise. The
agreement also provides Infineon an option for acquiring certain
other licenses. All licenses provide for Infineon to be treated
as a “most-favored customer” of Rambus. Infineon has
simultaneously
granted to Rambus a fully-paid perpetual license for memory
interfaces. These contingencies were assigned to us pursuant to
the contribution agreement.
Amendment
and Partial Termination of Our License Agreement with
Saifun
In April 2001, we established the Infineon Technologies Flash
joint venture with Saifun in which we held a 51% ownership
interest. In the 2003 financial year, we increased our ownership
interest to 70% by contributing additional capital and
converting existing shareholder loans to equity. The joint
venture operated through two companies, Infineon Technologies
Flash GmbH & Co. KG, located in Dresden, Germany, and
Infineon Technologies Flash Ltd., located in Netanya, Israel.
During December 2004, we modified the cooperation agreement with
Saifun. As a consequence, we consummated the acquisition of
Saifun’s remaining 30% share in the joint venture in
January 2005 and were granted a license for the use of Saifun
NROM®
technologies, in exchange for $95 million to be paid in
quarterly installments over 10 years and additional
purchase consideration primarily in the form of net liabilities
assumed aggregating €7 million. We retained the option
to terminate the entire license or parts thereof at any time
without penalty. During the quarter ended June 30, 2005, we
exercised our termination option and cancelled the portion of
the license encompassing
NROM®
Code Flash products. As a result of the partial termination, the
license asset and related liability were reduced to
€28 million and €29 million, respectively,
as of June 30, 2005. In light of the weak market conditions
for commodity NAND flash memories in the fourth quarter of our
2006 financial year, we decided to ramp down our Flash
production and cease the current development of NAND-compatible
flash memory products based on Saifun’s proprietary
NROM®
technology. We and Saifun amended the license agreement to
terminate quarterly installment payments as of December 31,2006. As a result, we reduced our payables, goodwill and other
intangible assets, and recognized an impairment charge of
€9 million related to license and fixed assets which
were not considered to be recoverable as of September 30,2006.
Equipment
We purchase most of our front-end equipment from Applied
Materials, ASM Lithography and Tokyo Electron. In periods of
high market demand, the lead times from order to delivery of
such specialized equipment can be as long as six to twelve
months. We seek to manage this process through early reservation
of appropriate delivery slots and constant communication with
our suppliers, as well as by pursuing a multiple-vendor strategy
to avoid undue dependence on a single supplier. Because we
manufacture DRAMs using trench cell technology, we require
special equipment for etching the ultra deep trenches into the
silicon. These so called “trench etchers” are based on
common etch tools that we have modified together with our
equipment suppliers to suit our special needs. We currently
source our trench etch equipment from two etch equipment
suppliers.
We purchase testing equipment for front-end and back-end
principally from Advantest. In addition to specialized testing
equipment, we maintain a variety of other types of equipment
that are used in the testing process.
Raw
Materials
The most important raw materials in our front-end process are
polished silicon wafers, chemicals, precious and other metals,
and gases. The principal suppliers for our wafers are Siltronic,
SEH, MEMC, and SUMCO. The principal raw materials used in
back-end packaging, assembly and test are leadframes or laminate
substrates, gold wire and molding compound. Purchased materials
and supplies in our 2006 financial year were approximately 38%
of our net sales and 28% in our 2007 financial year
We generally purchase raw materials based on the non-binding
forecasts provided to us by our customers. We are not dependent
on any one supplier for a substantial portion of our raw
material requirements for packaging, assembly and test. Our raw
material procurement policy is to select vendors that have
demonstrated quality control and reliability with respect to
delivery time. In addition, we maintain multiple sources for
each raw material so that a quality or delivery problem with any
one vendor will not adversely affect our operations. We
generally enter into one-year supply agreements with raw
material suppliers that offer competitive prices. Although
shortages have occurred from time to time and lead times have
been extended on occasion in the industry, we have not
experienced any significant production interruption as a result
of difficulty in obtaining raw materials to date.
Our operations in Japan and Korea were legally transferred from
Infineon in our 2007 financial year.
In the 2007 financial year, our headcount increased by
1,679 employees, principally due to increased capacities,
especially in the production areas in Suzhou, Porto and Dresden.
In addition, we further increased the number of product design
engineers at various development centers and filled positions at
our sales, marketing and general administration departments. The
numbers presented in this table as of September 30, 2005,
represent the headcount of the memory products business and
exclude any allocation of corporate functions performed by
Infineon. The numbers presented as of and after
September 30, 2006, show the headcount of Qimonda and
include our corporate functions. The net increase of R&D
employees results mainly from organizational changes implemented
at the beginning of our 2007 financial year, dedicating the
activities of existing employees from production to the R&D
field. Moreover, we strengthened our R&D force in the area
of product and technology development.
Our employees in Germany are represented by local works councils
(lokale Betriebsräte) and a Qimonda group works
council (Konzernbetriebsrat). Works councils are
employee-elected bodies established at each location in Germany
and also at a company/group level (on the basis of German labor
laws). Close cooperation between management and works councils
can be a strong source of stability, minimizing employee unrest
and strikes, and ensuring management the ability to execute
strategy changes
and/or
restructuring in a cooperative manner. Works councils have
numerous rights to receive notice and participate in policy
making in matters regarding personnel, social and economic
matters. Under the German Works Constitution Act
(Betriebsverfassungsgesetz), the works councils must be
notified in advance of any proposed employee termination, they
must confirm hirings and relocations and similar matters, and
they have a right to participate in policy making regarding
social matters such as work schedules and rules of conduct.
Management considers its relations with the works councils to be
good. A separate works council exists at our subsidiary in
Dresden, Qimonda Dresden GmbH & Co. OHG. The members
of our senior management are represented by a senior management
committee (Sprecherausschuss) in Germany.
Approximately 700 Infineon employees in Germany who were
transferred to our company are covered by the terms of
collective bargaining agreements between unions and the
Employers’ Association (Arbeitgeberverband) of which
Infineon is a member. The agreements cover both working
conditions (Rahmentarifvertrag) such as hours and
holidays as well as wages (Gehaltstarifvertrag). The
working conditions and similar types of agreements
applicable as of April 30, 2006 to these 700 employees
will remain applicable until their planned revision by the end
of 2008. The wage agreements are typically re- negotiated each
year. The wage agreement for this year was signed in May 2007.
No short “warning” work stoppages took place during
these negotiations.
Although we will not be a member of the Employers’
Association, and therefore not obligated by future collective
bargaining agreements, the approximately 700 employees who
transferred from Infineon to us will receive wages equal to
those agreed between the unions and Employers’ Association
during their yearly re-negotiations through June 2008. Beginning
in the first quarter of our 2009 financial year, we plan to be
no longer bound by these collective bargaining agreements and
will introduce our own compensation systems, based on the
outcome of negotiations with the works council.
During the last three years we have not experienced any major
labor disputes resulting in significant work stoppages.
Backlog
The prices for portions of our standard DRAM products are
generally set every two weeks, based on market demand. Customers
enter into purchase orders for supply during two-week periods.
While DRAMs for infrastructure applications and graphics, mobile
and consumer products are sometimes priced like standard DRAM,
they are often sold under longer-term contracts with fixed
prices. We do not consider our backlog at any time to be a
reliable indicator of future sales and do not rely on backlog to
manage our business or to evaluate performance.
Legal
Matters
Infineon is the subject of a number of governmental
investigations and civil lawsuits that relate to the operations
of its Memory Products business prior to our carve-out. The most
significant of these matters are described in this section. In
addition, under the contribution agreement, we are required to
indemnify Infineon, in whole or in part as specified below, for
any liability Infineon incurs in connection with the matters
described below.
The contribution agreement is based on the principle that all
potential liabilities and risks in connection with legal matters
existing as of the carve-out date are generally to be borne by
the business unit which caused the risk or liability or where
the risk or liability arose. Except to the limited extent
described below for the securities class action litigation and
the settled Tessera litigation (for which we have different
arrangements), we have agreed to indemnify Infineon for all
liabilities arising in connection with all legal matters
specifically described below, including court costs and legal
fees. Infineon will not settle or otherwise agree to any of
these liabilities without our prior consent.
Liabilities and risks relating to the securities class action
litigation, including court costs, will be equally shared by
Infineon and us, but only with respect to the amount by which
the total amount payable exceeds the amount of the corresponding
accrued liability that Infineon transferred to us pursuant to
the contribution agreement. Infineon has agreed not to settle
this lawsuit without our prior consent. Any expenses incurred in
connection with the assertion of claims against the provider of
directors’ and officers’ (D &
O) insurance covering Infineon’s two current or former
officers named as defendants in the suit will also be equally
shared. The D & O insurance provider has so far
refused coverage. We have agreed to indemnify Infineon for 80%
of the court costs and legal fees relating to the litigation
settled with Tessera.
In accordance with the general principle that all potential
risks or liabilities are to be borne by the entity which caused
the risk or liability or where the risk or liability arose, the
indemnification provisions of the contribution agreement include
the following specific provisions with respect to claims or
lawsuits arising after the carve-out date:
•
liabilities arising in connection with intellectual property
infringement claims relating to memory products were fully
allocated to us; and
•
liabilities arising in connection with actual or alleged
antitrust violations with respect to DRAM products were fully
allocated to us.
Subsequent developments in any pending matter, as well as
additional claims that may arise from time to time, including
additional claims similar to those described below, could become
significant to Infineon or us.
We cannot predict with certainty the outcome of any proceedings
in which we are or may become involved. An adverse decision in a
lawsuit seeking damages from Infineon or us, or Infineon’s
or our decision to settle certain cases, could result in
monetary payments to the plaintiff and other costs and expenses.
If Infineon or we lose a case in which we seek to enforce our
patent rights or in which we have been accused of infringing
another company’s patent rights, we will sustain a loss of
future revenue if we no longer can sell the product covered by
the patent or command prices for the affected products that
reflect the exclusivity conferred by the patent. While payments
and other costs and expenses we might have to bear as a result
of these actions are covered by insurance in some circumstances,
other payments may not be covered by our insurance policies in
full or at all. Accordingly, each of the legal proceedings
described in the following discussion could be significant to
us, and any payments, costs and expenses we may incur in
addition to any that have already been incurred or accrued could
have a material adverse effect on our results of operations,
financial position or cash flows.
Antitrust
Matters
U.S.
Department of Justice Investigation
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its investigation of alleged antitrust
violations in the DRAM industry. Pursuant to this plea
agreement, Infineon agreed to plead guilty to a single count of
conspiring with other unspecified DRAM manufacturers to fix the
prices of DRAM products between July 1, 1999 and
June 15, 2002, and to pay a fine of $160 million. The
fine plus accrued interest is being paid in equal annual
installments through 2009. Infineon has a continuing obligation
to cooperate with the DOJ in its ongoing investigation of other
participants in the DRAM industry. The price fixing charges
related to DRAM product sales to six Original Equipment
Manufacturer (OEM) customers that manufacture computers and
servers. Infineon has entered into settlement agreements with
five of these OEM customers and is considering the possibility
of a settlement with the remaining OEM customer, which purchased
only a very small volume of DRAM products from Infineon.
U.S.
Civil Litigation
Subsequent to the commencement of the DOJ investigation, a
number of putative class action lawsuits were filed against
Infineon, its principal U.S. subsidiary and other DRAM
suppliers.
Direct
Purchaser Litigation
Sixteen cases were filed between June 2002 and September 2002 in
several U.S. federal district courts purporting to be on
behalf of a class of individuals and entities who purchased DRAM
directly from the various DRAM suppliers in the United States
during a specified time period (the “Direct
U.S. Purchaser Class”), alleging price-fixing in
violation of the Sherman Act and seeking treble damages in
unspecified amounts, costs, attorneys’ fees, and an
injunction against the allegedly unlawful conduct.
In September 2002, the Judicial Panel on Multi-District
Litigation ordered that the foregoing federal cases be
transferred to the U.S. District Court for the Northern
District of California for coordinated or consolidated pre-trial
proceedings as part of a Multi District Litigation (MDL). In
June 2006, the court issued an order certifying a direct
purchaser class.
In September 2005, Infineon and its principal
U.S. subsidiary entered into a definitive settlement
agreement with counsel to the Direct U.S. Purchaser Class
(granting an opportunity for individual class members to opt out
of the settlement). The settlement agreement was approved by the
court on November 1, 2006 and the court entered final
judgment and dismissed the class action with prejudice on
November 2, 2006. Under the terms of the settlement
agreement Infineon agreed to pay approximately $21 million.
In addition to this settlement payment, Infineon agreed to pay
an additional amount if it is proven that sales of DRAM products
to the settlement class after opt-outs during the settlement
period exceeded $208.1 million. We would also be
responsible for this payment. The additional amount payable
would be calculated by multiplying the amount by which these
sales exceed
$208.1 million by 10.53%. We do not currently expect to pay
any additional amount to the class. We have reached individual
settlements with eight direct customers in addition to those
OEMs identified by the DOJ.
In April 2006, Unisys Corporation filed a complaint against
Infineon and its principal U.S. subsidiary, among other
DRAM suppliers, alleging state and federal claims for price
fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International,
Inc. filed a complaint against Infineon and its principal
U.S. subsidiary, among other DRAM suppliers, alleging a
claim for price fixing under federal law, and seeking recovery
as a direct purchaser of DRAM. Both Unisys and Honeywell opted
out of the direct purchaser class and settlement, and therefore
their claims are not barred by the Company’s settlement
with the Direct U.S. Purchaser Class. Both of these
complaints were filed in the Northern District of California,
and have been related to the MDL described above. On
April 5, 2007 the court dismissed Unisys’s initial
complaint with leave to amend for failing to give proper notice
of its claims. Unisys filed a First Amended Complaint on
May 4, 2007. Infineon, its principal U.S. subsidiary,
and the other defendants again filed a motion to dismiss certain
portions of the Unisys First Amended Complaint on June 4,2007. On October 15, 2007, the court entered an order
denying the motion to dismiss without prejudice. After Honeywell
had filed a stipulation of dismissal without prejudice of its
lawsuit against Infineon, the court entered the dismissal order
on April 26, 2007.
Between February 28, 2007 and March 8, 2007 four more
opt-out cases were filed by All American Semiconductor, Inc.,
Edge Electronics, Inc., Jaco Electronics, Inc. and DRAM Claims
Liquidation Trust, by its Trustee, Wells Fargo Bank, N.A. The
All American Semiconductor complaint alleges claims for
price-fixing under the Sherman Act. The Edge Electronics, Jaco
Electronics and DRAM Claims Liquidation Trust complaints allege
state and federal claims for price-fixing. As with Unisys and
Honeywell, the claims of these plaintiffs are not barred by
Infineon’s settlement with the Direct U.S. Purchaser
Class, since they opted out of the Direct U.S. Purchaser
Class and settlement. All four of these opt-out cases were filed
in the Northern District of California and have been related to
the MDL described above. Based upon the Court’s order
dismissing portions of the initial Unisys complaint above, the
plaintiffs in all four of these opt-out cases filed amended
complaints on May 4, 2007. On June 4, 2007 Infineon
and its principal U.S. subsidiary answered the amended
complaints filed by All American Semiconductor, Inc., Edge
Electronics, Inc., and Jaco Electronics, Inc. Also on
June 4, 2007, Infineon and its principal
U.S. subsidiary, along with its co-defendants filed a joint
motion to dismiss certain portions of the DRAM Claims
Liquidation Trust and Unisys amended complaint. On
October 15, 2007, the court entered an order denying the
motion to dismiss without prejudice. On October 15, 2007,
the court entered an order denying the motions to dismiss in the
Unisys and the DRAM Liquidation Trust cases without prejudice.
On October 29, 2007, Infineon answered the Unisys
complaint, denying liability and asserting a number of
affirmative defenses. On November 1, 2007, Infineon
answered the DRAM Claims Liquidation Trust complaint, denying
liability and asserting a number of affirmative defenses.
Indirect
Purchaser Litigation
Sixty-four additional cases (including a lawsuit discussed
separately under “— Foreign Purchaser
Litigation” below) were filed between August 2002 and
October 2005 in numerous federal and state courts throughout the
United States. Each of these state and federal cases (except the
lawsuit discussed under “— Foreign Purchaser
Litigation”) purports to be on behalf of a class of
individuals and entities who indirectly purchased DRAM in the
United States during specified time periods commencing in or
after 1999. The complaints variously allege violations of the
Sherman Act, California’s Cartwright Act, various other
state laws, unfair competition law and unjust enrichment and
seek treble damages in generally unspecified amounts,
restitution, costs, attorneys’ fees and injunctions against
the allegedly unlawful conduct.
Subsequently, twenty-three of the state (outside California) and
federal court cases and the U.S. District Court for the
Eastern District of Pennsylvania case were ordered transferred
to the U.S. District Court for the Northern District of
California for coordinated and consolidated pre-trial
proceedings as part of the MDL described above. After this
transfer, the plaintiffs dismissed two of the transferred cases.
Two additional transferred cases were subsequently remanded back
to their relevant state courts. Nineteen of the twenty-three
transferred cases are currently pending in the MDL-litigation.
The California state cases were ordered transferred for
coordinated and consolidated pre-trial proceedings to the
San Francisco County Superior Court. The plaintiffs in the
indirect purchaser cases that originated outside California
which have not been transferred to the MDL agreed to stay
proceedings in those cases in favor of proceedings on the
indirect purchaser cases pending as part of the MDL
pretrial-proceedings through a single complaint on behalf of a
putative nationwide class of indirect purchasers in the MDL. The
defendants filed two motions for judgment on the pleadings
directed at several of the claims in the indirect purchaser case
pending in the MDL. The court entered an order on June 1,2007 granting in part and denying in part the defendants’
motions. The order dismissed a large percentage of the indirect
purchaser plaintiff’s claims, and granted leave to amend
with regard to claims, under three specific state statutes. The
court ruled that the indirect purchaser plaintiffs must file a
motion for leave to amend the complaint with regard to any of
the other dismissed claims. On June 29, 2007, the indirect
plaintiffs filed both a First Amended Complaint, and a motion
for leave to file a Second Amended Complaint that attempted to
resurrect some of the claims that were dismissed. On
August 17, 2007, the court entered an order granting the
motion to file the Second Amended Complaint, which repleaded
part of the previously dismissed claims. On October 1,2007, all defendants filed a joint motion to dismiss several of
the claims in the Second Amended Complaint. The hearing on the
motion to dismiss is scheduled for December 12, 2007. The
indirect plaintiff’s motion for class certification was
filed on July 10, 2007, and defendants filed a joint
opposition to that motion on September 28, 2007. The
hearing on the motion for class certification is scheduled for
January 16, 2008.
Foreign
Purchaser Litigation
A lawsuit filed on May 5, 2005 in the Eastern District of
Pennsylvania, purporting to be on behalf of a class of foreign
individuals and entities who directly purchased DRAM outside of
the United States from July 1999 through at least June 2002, was
dismissed with prejudice and without leave to amend in March
2006. In July 2006, Plaintiffs filed their opening brief on
appeal, and defendants filed their joint opening brief in
September 2006. No hearing date has yet been scheduled for the
appeal. Infineon intends to defend itself vigorously if the
court of appeals remands this lawsuit.
State
Investigations
In July 2006, the New York state attorney general filed an
action in the U.S. District Court for the Southern District
of New York against Infineon, its principal U.S. subsidiary
and several other DRAM manufacturers on behalf of New York
governmental entities and New York consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs
allege violations of state and federal antitrust laws arising
out of the same allegations of DRAM price-fixing and artificial
price inflation practices discussed above, and seek recovery of
actual and treble damages in unspecified amounts, penalties,
costs (including attorneys’ fees) and injunctive and other
equitable relief. In October 2006, the New York case was
transferred to the Northern District of California and made part
of the MDL proceeding. In July 2006, the state attorneys general
of California, Alaska, Arizona, Arkansas, Colorado, Delaware,
Florida, Hawaii, Idaho, Illinois, Iowa, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Nebraska,
Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia and Wisconsin filed a
lawsuit in the U.S. District Court for the Northern
District of California against Infineon, its principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities, consumers and businesses in
each of those states who purchased products containing DRAM
beginning in 1998. On September 8, 2006, the complaint was
amended to add claims by the state attorneys general of
Kentucky, Maine, New Hampshire, North Carolina, the Northern
Mariana Islands and Rhode Island. This action is based on state
and federal law claims relating to the same alleged
anticompetitive practices in the sale of DRAM and plaintiffs
seek recovery of actual and treble damages in unspecified
amounts, penalties, costs (including attorneys’ fees) and
injunctive and other relief. On October 10, 2006, Infineon
joined the other defendants in filing motions to dismiss several
of the claims alleged in these two actions. A hearing on these
motions to dismiss was held on February 7, 2007. On
August 31, 2007, the court entered orders granting the
motions in part and denying the motions in part. The
court’s order dismissed the claims on behalf of consumers,
businesses and governmental entities in a number of states, and
dismissed certain other claims with leave to amend. On
October 1, 2007, the plaintiffs filed amended complaints in
both the New York and Multi-state actions, and, on
October 3, they filed requests for leave to file further
amendments to their complaints. Between June 25 and
August 15, 2007, the state attorneys general of four
states, Alaska, Ohio, New Hampshire and Texas, filed requests
for dismissal of their claims without prejudice.
In April 2003, Infineon received a request for information from
the European Commission (the “Commission”) to enable
the Commission to assess the compatibility with the
Commission’s rules on competition of certain practices of
which the Commission has become aware in the European market for
DRAM products. Infineon has reassessed the matter after its plea
agreement with the DOJ and made an accrual during the 2004
financial year for an amount representing the probable minimum
fine that may be imposed as a result of the Commission’s
investigation. Any fine actually imposed by the Commission may
be significantly higher than the reserve established, although
Infineon cannot more accurately estimate the amount of the
actual fine. Infineon is fully cooperating with the Commission
in its investigation.
Canadian
Competition Bureau Investigation
In May 2004, the Canadian Competition Bureau advised
Infineon’s principal U.S. subsidiary that it, its
affiliates and present and past directors, officers and
employees are among the targets of a formal inquiry into an
alleged conspiracy to prevent or lessen competition unduly in
the production, manufacture, sale or supply of DRAM, contrary to
the Canadian Competition Act. No formal steps (such as
subpoenas) have been taken by the Competition Bureau to date.
Infineon is cooperating with the Competition Bureau in its
inquiry.
Canadian
Civil Litigation
Between December 2004 and February 2005, two putative class
proceedings were filed in the Canadian province of Quebec and
one was filed in each of Ontario and British Columbia against
Infineon, its principal U.S. subsidiary and other DRAM
manufacturers on behalf of all direct and indirect purchasers
resident in Canada who purchased DRAM or products containing
DRAM between July 1999 and June 2002, seeking damages,
investigation and administration costs, as well as interest and
legal costs. Plaintiffs primarily allege conspiracy to unduly
restrain competition and to illegally fix the price of DRAM. In
the British Columbia action, a hearing on the certification
motion has been scheduled for August 2007 and will resume in
November 2007. In one Quebec class action, a tentative date for
the motion for authorization (certification) has been set for
May 2008 (with some possibility of a March 2008 date if the
court calendar opens); the other Quebec action has been stayed
pending developments in the one that is going forward.
Securities
Class Actions
Between September 2004 and November 2004, seven securities class
action complaints were filed against Infineon and three of its
current or former officers (of which one officer was
subsequently dropped as defendant and one of which is currently
the chairman of our Supervisory Board) in the U.S. District
Courts for the Northern District of California and the Southern
District of New York. The plaintiffs voluntarily dismissed the
New York cases, and in June 2005 filed a consolidated amended
complaint in California on behalf of a putative class of
purchasers of Infineon’s publicly-traded securities, who
purchased them during the period between March 2000 and July
2004, effectively combining all lawsuits. The consolidated
amended complaint added Infineon’s principal
U.S. subsidiary and four then-current or former employees
of Infineon and its affiliate as defendants. It alleges
violations of the U.S. securities laws and asserts that the
defendants made materially false and misleading public
statements about Infineon’s historical and projected
financial results and competitive position because they did not
disclose Infineon’s alleged participation in DRAM
price-fixing activities and that, by fixing the price of DRAM,
defendants manipulated the price of Infineon’s securities,
thereby injuring its shareholders. The plaintiffs seek
unspecified compensatory damages, interest, costs and
attorneys’ fees. Infineon, its principal
U.S. subsidiary and the two Infineon officers filed motions
to dismiss the consolidated amended complaint. In September
2006, the court dismissed the complaint with leave to amend and
in October 2006 the plaintiffs filed a second amended complaint.
In March 2007, pursuant to a stipulation agreed with the
defendants, the plaintiffs withdrew the second amended complaint
and were granted a motion for leave to file a third amended
complaint. The plaintiffs filed a third amended complaint on
July 17, 2007 and Infineon has filed a further brief in
support of its motion to dismiss in October 2007. The court has
scheduled the hearing on the motion on November 19, 2007.
In the contribution agreement we entered into with Infineon, we
agreed to share any future liabilities arising out of this
lawsuit equally with Infineon, including the cost of defending
the suit.
Infineon believes these claims are without merit. We are
currently unable to provide an estimate of the likelihood of an
unfavorable outcome to Infineon or of the amount or range of
potential loss arising from these actions. If the outcomes of
these actions are unfavorable or if Infineon incurs substantial
legal fees in defending these actions regardless of outcome, it
may have a material adverse effect on our financial condition
and results of operations. Infineon’s directors’ and
officers’ insurance carriers have denied coverage in the
securities class actions and Infineon filed suits against the
carriers in December 2005 and August 2006. Infineon’s
claims against one D&O insurance carrier were finally
dismissed in May 2007. The claims against the other insurance
carrier are still pending.
Patent
Litigation
Lin
Packaging Technologies, Ltd.
On April 10, 2007, Lin Packaging Technologies, Ltd. (Lin)
filed a lawsuit against Infineon, Infineon Technologies North
America Corp. and an additional DRAM manufacturer in the
U.S. District Court for the Eastern District of Texas,
alleging that certain DRAM products were infringing two Lin
patents. In May 2007, Lin amended its complaint to include
Qimonda AG, Qimonda North America Corp. and Qimonda Richmond
LLC. Under the contribution agreement with Infineon, we are
required to indemnify Infineon for claims (including any related
expenses), if any, arising in connection with the aforementioned
suit.
Accruals
and the Potential Effect of these Lawsuits on Our
Business
Liabilities related to legal proceedings are recorded when it is
probable that a liability has been incurred and the associated
amount can be reasonably estimated. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
September 30, 2007, we have accrued liabilities in the
amount of €101 million related to potential
liabilities and risks with respect to the DOJ and European
antitrust investigations and the direct and indirect purchaser
litigation and settlements described above, as well as for legal
expenses relating to the securities class actions and the
Canadian antitrust investigation and litigation described above.
The accrued liabilities, other current and non-current
liabilities, and other commitments and contingencies related to
legal proceedings are further reported in Notes 16 and 18
of our unaudited condensed combined and consolidated financial
statements.
As additional information becomes available, the potential
liability related to these matters will be reassessed and the
estimates revised, if necessary. These accrued liabilities would
be subject to change in the future based on new developments in
each matter, or changes in circumstances, which could have a
material adverse effect on our financial condition and results
of operations.
An adverse final resolution of the investigations or lawsuits
described above could result in significant financial liability
to, and other adverse effects on, Infineon, and most likely us,
which would have a material adverse effect on our business,
results of operations, financial condition and cash flows. In
each of these matters we are continuously evaluating the merits
of the respective claims and defending ourselves vigorously or
seeking to arrive at alternative resolutions in our best
interest, as we deem appropriate. Irrespective of the validity
or the successful assertion of the claims described above, we
could incur significant costs with respect to defending against
or settling such claims, which could have a material adverse
effect on our results of operations, financial condition and
cash flows.
Other
Matters
We are subject to various other lawsuits, legal actions, claims
and proceedings related to products, patents and other matters
incidental to our businesses. We have accrued a liability for
the estimated costs of adjudication of various asserted and
unasserted claims existing as of the balance sheet date. Based
upon information presently known to management, we do not
believe that the ultimate resolution of such other pending
matters will have a material adverse effect on our financial
condition, although the final resolution of such matters could
have a material adverse effect on our results of operations or
cash flows at that time.
Our global Environmental, Safety and Health Management System is
structured and designed to mitigate the risks associated with
our manufacturing processes. These risks include the integrity
of our operations, risks relating to the health and well-being
of our employees, risks relating to the environment, our assets
and third parties. All production sites worldwide and our
headquarters are certified according to EN/ISO 14001 and OSHAS
18001.
In the last few years, there has been increased media scrutiny
and reports focusing on a potential link between working in
semiconductor manufacturing clean room environments and certain
illnesses, primarily different types of cancers. Regulatory
agencies and industry associations have begun to study the issue
to see if any actual correlation exists. We have carried out
bio-monitoring programs since 1990, testing both those employees
who work in clean room environments and those who do not.
Employees that do not work in clean room environments thus serve
as a control group, enabling us to determine whether clean room
environment employees have been exposed to hazardous chemicals.
Our testing has consistently shown that employees who work in
our clean rooms have not been exposed to elevated levels of the
relevant chemicals. Our bio-monitoring program is a pro-active
approach to employee health and safety, and we believe it
exceeds the health monitoring efforts of others in our industry.
Accordingly, we do not believe that scrutiny of these potential
links will negatively affect our ability to recruit and retain
employees.
Where we are not able to eliminate adverse environmental impacts
entirely, we aim to minimize any such impact. For example, in
some of our manufacturing processes we use Perfluorinated
Compounds, or PFCs. As early as 1992, we began to install
exhaust air filter systems to reduce PFC emissions. We have
documented our commitment to protect the environment by signing
the global voluntary agreement designed by World Semiconductor
Council to reduce greenhouse gases as defined under the Kyoto
Protocol. The target is to reduce total PFC emissions of this
substance group by 10% compared with the baseline emission level
from 1995. After 5 years of data collection, we have
determined that our reduction measures, including using
alternative chemistry, improving efficiency and installing
abatement systems, were appropriate to meet this goal. Assuming
an annual production volume growth within the semiconductor
industry of 15%, this would represent an emission reduction by
2010 of approximately 90% from the 1995 level, calculated in
CO2
equivalents.
Another aspect of our efforts to minimize our impact on the
environment is our comprehensive “green product”
strategy, which refers to our efforts to eliminate lead and
halogen from our products. We first produced green products and
modules in December 2002 and as of September 30, 2007, 86%
of all our products were “green” while 95% of our
manufactured modules used “green components”. The
remaining products that cannot be classified as
“green” are produced with these substances due, in
most cases, to customers’ specific requirements.
Due to the fact that a damage and loss of a semiconductor
facility caused by a fire can be substantial, we have installed
automatic protection systems such as sprinklers into all of our
production facilities. We have also standardized the loss
prevention procedures in all of our facilities. We regularly
review our protection status at all of our facilities including
audits by external property protection engineers and continue to
invest in loss prevention equipment and training at our
facilities.
Relevant
Environmental Laws and Regulations
We are subject to a variety of laws relating to the use,
disposal, cleanup of and human exposure to hazardous materials
in most of the jurisdictions we operate in. Within the past
decade, the European Union has proposed or enacted certain
environmental directives that may be or are required to be
enacted in each EU member state. A brief discussion of the most
important directives, in terms of their effect, or potential
effect, on our business of these follows.
The Restriction of the use of certain Hazardous Substances in
electrical and electronic equipment, or the RoHS Directive,
prohibits placing products on the EU market that contain more
than certain levels of lead, cadmium, mercury and other
substances. We comply with this law through implementation of
our “green products” strategy discussed above.
To ensure the commercial viability of our products, we have
completed the conversion of all Qimonda product packages to
comply with, in particular, the RoHS Directive which sets forth
lead-free standards for many types of
electronic and electrical equipment. The obligation to comply
with the RoHS Directive ultimately lies with the
equipment’s producer. These customers therefore require us
to supply lead-free products, and we regularly provide
certificates that document our products’ compliance with
the RoHS Directive’s lead-free standards.
To address the needs of electronic equipment manufacturers whose
products require an exemption from the application of the RoHS
Directive, typically for technical or economic reasons,
exemptions are available which permit the use of lead-containing
parts for specific applications. In addition, certain
manufacturers have been individually exempted from compliance
with the RoHS Directive by the relevant governmental
authorities. We continue to supply a small number of
lead-containing products for these exempted applications and
manufacturers. Additionally, we have a number of customers who
require delivery of lead containing products to non-European
markets, where the RoHS Directive does not apply.
A similar set of rules has recently been implemented in the
People’s Republic of China. Beginning on March 1,2007, these rules imposed labeling requirements on all
electronic information products, as defined in those rules that
are sold in the Chinese retail market. In addition, a
self-declaration containing details on the affected chemicals
and compounds must be created and communicated within the supply
chain. The future implementation obligations of this new law may
impose additional costs upon our business or may have an effect
on our ability to timely meet customer demand for our products
in China.
The Waste Electrical and Electronic Equipment Directive, or
WEEE, imposes “take back” obligations on manufacturers
for the financing of the collection, recovery and disposal of
electrical and electronic equipment. The implementation of the
WEEE directive has not been completed in most EU Countries and
therefore the potential costs are not foreseeable. We have begun
supplying WEEE-compliant products in the German market. The
related cost impact is minor in Germany, but could be higher in
other countries depending on their implementation of the
directive.
The Registration, Evaluation and Authorization of Chemicals used
in the European Union, or REACH Regulation, is a regulatory
framework that concerns the registration, evaluation and
authorization of certain chemicals. This regulatory framework
came into effect in December 2006. While it has not been fully
determined which chemicals will fall under these regulations, we
believe the regulation is targeted towards chemical companies
and industries in which significant volumes of chemicals are
used. As we use very few chemicals whose volume exceeds 100 tons
per year, we are classified as a “down-stream user category
II” under this legislation. Furthermore, this legislation
contains a proposal to exempt companies who meet certain
standards from the authorization process. Due to these
uncertainties, we believe it is premature to estimate the
potential costs this regulation could impose on us.
The Energy-using Products, or EuP Directive establishes
ecologically sound development requirements for electrical
devices. This directive applies generally to consumer products
such as home appliances, and does not specifically regulate our
products. However, our customers who do produce electronic or
electrical consumer devices need to be able to demonstrate to
consumers that their products do conform to the directive and so
we may need to supply our customers with information that will
enable them to comply with these obligations. We believe this
Directive may have a positive influence on those of our DRAM
products that consume relatively less power than comparable
products of our competitors.
The following table sets forth, as of September 30, 2007,
the location, size and primary use of our major real properties
and whether such real properties are owned or leased.
Approximate size
Owned or leased
Location
Land
Building
Primary uses (in square meters)
Land
Building
(in
1,000m2)
Burlington, Vermont
*
3
Research
*
Leased
Dresden,
Germany(1)
132
154
Research, Wafer fabrication, Assembly and Testing
Owned
Partly owned
and leased
Malacca,
Malaysia(2)
13
16
Assembly and Testing
Leased
Partly owned
and leased
Munich,
Germany(3)
*
48
Headquarters and Research
*
Leased
Padua, Italy
*
**
Research
*
Leased
Porto,
Portugal(4)
220
57
Assembly and Testing
Owned
Owned
Raleigh, North Carolina
*
9
Research
*
Leased
Richmond,
Virginia(5)
853
126
Wafer Fabrication
Owned
Owned
Suzhou, China
200
41
Assembly and Testing
Leased
Owned
Xi’an, China
*
2
Research
*
Leased
*
Not applicable for leased properties.
**
The premises in Padua, Italy, consists of
450m2
(1)
Refers to our 300mm wafer fabrication, back-end manufacturing
and research facility, including research conducted in
conjunction with our development partner, Nanya. The building
space is in two locations, of which
20.000m2
is leased.
(2)
Includes a
13,000m2
building owned by our company and
3,000m2
of space leased from Infineon.
(3)
Includes research and office space at our five locations in and
around Munich.
(4)
Subject to limited exceptions, under the terms of the financing
arrangements relating to the site, we must receive the consent
of Portuguese authorities to sell, lease or assign this property.
(5)
We currently have five buildings on this property.
As of September 30, 2007, we also leased more than
10,000m2
of office space for administrative, sales, logistics and other
use, at various locations around the world.
On October 8, 2007, we entered into a rental agreement for
a new headquarters in Neubiberg (near Munich), Germany. The
agreement involves the construction of a building by a third
party lessor on land adjacent to Infineon’s corporate
headquarters, and provides for a 15 year initial
non-terminable tenancy. We expect the lease to commence when the
construction of the building is completed, which is currently
scheduled for early 2010.
We recently agreed to lease approximately
100,000m2
of land in Malaysia. We are currently constructing an additional
building with a total size of
15,500m2
and expect it to be completed in February 2008.
In accordance with the German Stock Corporation Act
(Aktiengesetz), our company has a Supervisory Board and a
Management Board. The two boards are separate and no individual
may simultaneously serve as a member of both boards. The
Management Board is responsible for managing our business in
accordance with applicable laws, the Articles of Association of
our company and the rules of procedure of the Management Board.
Moreover, it represents us in our dealings with third parties.
The Supervisory Board appoints and removes the members of the
Management Board and oversees the management of our company but
may not make management decisions.
In carrying out their duties, members of both the Management
Board and Supervisory Board must exercise the standard of care
of a prudent and diligent businessman, and they are liable to
our company for damages if they fail to do so. Both boards are
required to take into account a broad range of considerations in
their decisions, including the interests of our company and its
shareholders, employees and creditors. The Management Board is
required to respect the shareholders’ rights of equal
treatment and equal information.
The Supervisory Board has comprehensive monitoring functions. To
ensure that these functions are carried out properly, the
Management Board must, among other things, regularly report to
the Supervisory Board with regard to current business operations
and future business planning. The Supervisory Board is also
entitled to request special reports at any time. The Management
Board is required to ensure appropriate risk management within
our company and must establish an internal monitoring system.
Under German law, shareholders of a company, like other persons,
are liable to the company for damages if they intentionally use
their influence on the company to cause a member of the
Management Board, the Supervisory Board or holders of special
proxies to act in a way that is harmful to the company. If a
member of the Management Board or Supervisory Board neglects his
or her duties, such member is jointly and severally liable with
the persons exercising such influence. Infineon is our
controlling shareholder. Under German law, a controlling
shareholder may not cause us to act against our interests unless
we are compensated by the controlling shareholder for any
resulting detriment or we have entered into a control agreement
governed by German law (Beherrschungsvertrag). Infineon
and we have not entered into a control agreement. Members of our
Supervisory and Management Boards who have not acted in our
interest in their dealings with a controlling shareholder are,
together with the controlling shareholder, jointly and severally
liable to our company for damages.
We must bring an action against members of the Supervisory and
Management Boards for breach of duty in our name if a majority
of the shares voting at a shareholders’ meeting so resolve.
We may only waive our right to damages under, or settle claims
arising out of, an action like this three years after the date
that the cause of action accrued and if the shareholders approve
the waiver or settlement at a meeting of the shareholders by
majority vote, as long as shareholders holding 10% or more of
our share capital do not object and have their opposition
formally noted in the minutes maintained by a German notary.
Under German law, individual shareholders can sue members of the
Supervisory and Management Boards on behalf of the company in a
manner analogous to a shareholder’s derivative action under
U.S. law only if they hold at least 1% of the
company’s share capital or shares with a notional value of
€100,000 and only with court permission. Under German law,
directors may be liable for breach of duty to shareholders (as
opposed to a duty to the company itself) only where a breach of
duty to the company also constitutes a breach of a statutory
provision enacted specifically for the protection of
shareholders. As a practical matter, shareholders are able to
assert liability against directors for breaches of this sort
only in unusual circumstances.
We adopted new Articles of Association in connection with our
carve-out and amended them at the occasion of our extraordinary
shareholders’ meetings on July 14, 2006 and on
July 27, 2006. These, taken together with German corporate
law, provide as follows with respect to our Supervisory Board
and our Management Board.
After the transfer of employees from Infineon to us in
connection with our carve-out, our Management Board determined,
and publicly announced on May 4, 2006, that under the
German Act on the One-Third Participation of Employees in
Supervisory Boards (Gesetz über die Drittelbeteiligung
der Arbeitnehmer im Aufsichtsrat), one third of the members
of our Supervisory Board must henceforth be elected by our
employees. In accordance with this announcement, we amended our
Articles of Association to provide that our Supervisory Board
must consist of six members, four of whom must be elected by our
shareholders in a shareholders’ meeting, and two of whom
must be elected by our employees.
In general, the four shareholder representatives on the
Supervisory Board are elected by a majority of the votes cast at
a shareholders’ meeting. During our extraordinary
shareholders’ meeting held on July 14, 2006, four new
Supervisory Board members were elected. With effect as of the
close of the Supervisory Board’s meeting on July 24,2007, Mr. Michael von Eickstedt resigned from office as a
shareholder representative on the Supervisory Board. As our next
annual general meeting will not take place before 2008, we,
together with other applicants, initiated a court proceeding in
accordance with Section 104 of the German Stock Corporation
Act to have the competent court appoint a shareholder
representative for a transitional period that will continue
until the next annual general meeting has taken place.
Section 104 of the German Stock Corporation Act generally
provides that application for a court appointment can be made if
the actual number of Supervisory Board members is below the
number required by law or the articles of association for a
period in excess of three months or, if the matter is urgent,
before expiration of the three month period. On August 27,2007, the court appointed Prof. Dr. Claus Weyrich as a
member of the Supervisory Board.
The two employee representatives on our Supervisory Board come
from the ranks of our employees (excluding executive employees
(leitende Angestellte)). As the voting procedure with
respect to the employee representatives is time-consuming, the
two employee representatives, Messrs. Johann Grundbacher
and Lothar Armbrecht, were appointed by the court on
July 20, 2006 based on the court proceeding in accordance
with Section 104 of the German Stock Corporation Act.
Our Articles of Association allow the shareholders, by a vote of
three quarters of the votes cast in a general meeting, to remove
any member of the Supervisory Board they have elected. The
employee representatives may be removed by the group of
employees that were entitled to elect them by a vote of
three-quarters of the votes cast. The Supervisory Board will
elect a chairman and a deputy chairman from among its members.
The Supervisory Board normally acts by simple majority vote with
the chairman having a casting vote. Supervisory Board
resolutions are subject to a quorum of half of the members of
which the Supervisory Board must be composed.
The Supervisory Board meets at least twice during each half of a
calendar year. Its main functions are:
•
to appoint our Management Board;
•
to monitor our management;
•
to approve matters in areas that the Supervisory Board has made
generally subject to its, or one of its committee’s,
approval; and
•
to approve matters that the Supervisory Board decides on a case
by case basis to make subject to its approval.
The following table lists current members of our Supervisory
Board, their ages, their functions and their principal
occupations:
Name
Age
Function
Principal occupation
Peter J. Fischl
61
Chairman
CFO and Member of the Management Board of Infineon Technologies
AG.
Richard Previte
72
Deputy
Chairman
Former President, Advanced Micro Devices, Inc.
Prof. Dr. Claus Weyrich
63
Member
Former Member of the Management Board of Siemens AG
Yoshio Nishi
67
Member
Professor, Stanford University
Johann Grundbacher
43
Member
Electrical Engineer, Qimonda AG
Dr. Lothar Armbrecht
54
Member
Member of Works Council
Under German law, the shareholders may determine the term of
each shareholder-elected member of the Supervisory Board. The
maximum term of office of each Supervisory Board member runs
until the close of the meeting of the shareholders that passes a
resolution concerning the discharge (Entlastung) of the
respective member in respect of the fourth financial year after
the beginning of his or her term. The financial year in which
the term begins is not included in this calculation. Under
German law, “discharge” in this context means to
approve, in a general manner, the member’s actions in his
or her capacity as a Supervisory Board member. It does not
relieve the member of his or her legal liability under German
law for his or her actions as a Supervisory Board member.
Neither we nor any of our subsidiaries have entered into special
service contracts with the members of the Supervisory Board that
provide for benefits during or upon termination of their board
membership other than as described under
“— Management Board —
Compensation”.
The current members of our Supervisory Board do not own,
directly or indirectly, any of our share capital. The business
address of each of the members of our Supervisory Board is
Gustav-Heinemann-Ring 212, 81739 Munich, Germany.
Significant
Differences between our Corporate Governance Practices and those
of U.S. Companies Listed on the New York Stock
Exchange
Our Supervisory Board has established the following committees:
Investment,
Finance and Audit Committee
Our Supervisory Board has established an Investment, Finance and
Audit Committee, comprising two shareholder representatives and
one employee representative. The Investment, Finance and Audit
Committee carries out the functions normally carried out by the
audit committee of a U.S. company, among other duties,
including:
•
preparing the decisions of the Supervisory Board concerning
approval of our company’s annual financial statements,
including review of the financial statements, the management
report, the proposed application of earnings and the reports of
our registered public accounting firm;
•
reviewing the (interim) financial statements of our company that
are made public or otherwise filed with any securities
regulatory authority;
handling auditor independence issues, the proposal to the
Supervisory Board with respect to the appointment of the
independent auditor by the general shareholders’ meeting,
mandating our auditor (including the fee arrangement and the
determination of the focus of the audit) to audit our
consolidated and unconsolidated annual financial statements,
approving any consulting services by the auditor and supervising
the auditor including the resolution of disputes between the
Management Board and the auditor;
•
approving decisions of our Management Board or one of its
committees regarding increases of our company’s capital
through the issuance of new shares from our authorized capital,
to the extent that we are not either issuing the shares to
employees or using them for a share option plan (subject to
contrary resolutions of the shareholders’ meeting);
•
approving decisions of our Management Board in relation to any
investment or disposition if its value exceeds 10% of the total
financial year’s investment budget, in relation to the
agreement of securities, guarantees and loans to or from third
parties outside our group of companies which in each case
exceeds 5% of our shareholders’ equity
(Eigenkapital) on the latest audited consolidated balance
sheet of our group of companies and in relation to the financial
year’s budget (including finance, investment and personnel
planning);
•
handling risk management issues and supervising the risk
management system;
•
establishing procedures pursuant to which our employees can
report to the Investment, Finance and Audit Committee, on an
anonymous and confidential basis, complaints regarding our
accounting and auditing practices, including internal accounting
controls, and enacting rules pursuant to which such complaints
received by us from third parties will be reported to the
Investment, Finance and Audit Committee;
•
discussing any flaws relating to our internal control systems,
which come to the attention of the Investment, Finance and Audit
Committee;
•
examination of our bookkeeping, documents and assets;
•
approval of Management Board resolutions on the utilization of
the authorization granted by our shareholders to issue
convertible bonds, including, in particular, the maximum amount
of the issuance and the exclusion of shareholders’
preemptive rights.
The Investment, Finance and Audit Committee also supports the
Supervisory Board in its exercise of its duty to supervise our
business. It may exercise certain oversight powers conferred
upon the Supervisory Board by German law for this purpose.
Decisions of the Investment, Finance and Audit Committee are
subject to the quorum that two thirds, but at least three of its
members participate and require a simple majority.
Messrs. Previte (chairman), Weyrich and Armbrecht sit on
the Investment, Finance and Audit Committee.
Technology
Committee
Our Supervisory Board has established a Technology Committee.
This committee advises the Management Board on technology
related issues. Messrs. Nishi (chairman), Fischl and
Grundbacher sit on this committee.
Presidential
Committee
Our Supervisory Board has established a Presidential Committee.
Among other things, this committee handles, and prepares
resolutions of the full Supervisory Board on, all matters
relating to the relationship between us and the Management
Board, including the execution, amendment and termination of the
service agreements with the Management Board members, as well as
the appointment and removal of Management Board members. In this
function, the Presidential Committee carries out tasks that are
normally carried out by compensation committees of
U.S. public companies. Messrs. Fischl (chairman),
Weyrich and Previte sit on this committee.
Our Articles of Association require our Management Board to have
at least two members. Our Supervisory Board may increase the
size of the Management Board and appoints its members.
Currently, our Management Board consists of three members.
The Management Board has adopted rules of procedure for the
conduct of its affairs and a plan for the assignment of business
(Geschäftsverteilungsplan) which have been approved
by the Supervisory Board. The Management Board may substantially
amend them at any time. The adoption and amendment of these
rules require the unanimous vote of the Management Board and the
consent of the Supervisory Board. The Supervisory Board may,
however, decide to adopt rules of procedure for the Management
Board instead.
The rules of procedure provide that the chairman of the
Management Board will be required to notify the chairman of the
Supervisory Board of any pending matter that is significant. The
chairman of the Supervisory Board will be required, at the next
meeting of the Supervisory Board, to notify the other members of
the Supervisory Board of such matter, and the Supervisory Board
will then be able, on a
case-by-case
basis, to designate such matter as one requiring Supervisory
Board approval.
In general, our Management Board members are jointly responsible
for all management matters and, pursuant to the rules of
procedure, will be required to decide jointly on a number of
issues, including:
•
preparation of the annual financial statements;
•
calling shareholders meetings;
•
matters for which the consent of the shareholders or of the
Supervisory Board must be obtained; and
•
matters involving basic organizational policy, business policy
and investment and financial planning questions for our company.
Notwithstanding the joint responsibility of all Management Board
members for management matters, the rules of procedure provide
that the Management Board may, with the consent of the
Supervisory Board, establish a plan on the internal allocation
of responsibilities among the Management Board members.
According to the plan we have established, Mr. Kin Wah Loh
is responsible for strategy and business development, personnel
strategy, regions, law, communications, technology, innovation,
patents, products, product development, quality management, IT
and procurement. Mr. Seifert is responsible for the areas
computing, graphics, consumer and mobile, AENEON, purchasing,
production, supply chain and logistics, sales and regional
centers. Dr. Majerus is responsible for planning and
controlling, bookkeeping, accounting and reporting, tax,
participation management, finance, internal audit and
compliance, security (including data protection and
environmental matters), investor relations, export control and
duties and personnel.
The rules of procedure provide that the Management Board shall,
in general, pass its resolutions by unanimous vote.
Under German law, the Supervisory Board appoints the members of
the Management Board for a maximum term of five years. They may
be reappointed or have their terms extended for one or more
terms of up to five years each. The Supervisory Board may remove
a member of the Management Board prior to expiration of such
member’s term for “good cause”, as defined in
German law. “Good cause” includes a serious breach of
duty or a bona fide vote of no confidence by the shareholders. A
member of the Management Board may not deal with, or vote on,
matters that relate to proposals, arrangements or contracts
between that member and our company.
The members of our Management Board, their ages, the year in
which their current term expires and their position and
principal business activities outside our company, including
principal directorships, is as follows:
Kin Wah Loh has served on Infineon’s Management
Board since December 2004, serving from January to July 2005 as
the Head of the Communication segment, and, since July 28,2005, as the Executive Vice President of the Memory Products
segment. From 1999 until 2004 he served as President and
Managing Director of Infineon Technologies Asia Pacific,
Singapore. Mr. Loh began his career at Siemens Components
in 1978 as a quality engineer in Malacca, Malaysia, later
serving as General Manager (Production) of Siemens Components
Singapore between 1993 and 1996. In 1997, he was appointed
Managing Director of Siemens Components. He holds an honors
degree in chemical engineering University of Malaysia, Kuala
Lumpur and a certified diploma in finance and accounting from
ACCA UK.
Dr. Michael Majerus has served as the Chief
Financial Officer of the Memory Products Group of Infineon since
December 2000. He has been a member of the Board of Directors of
Inotera in Taiwan since its founding. Previously,
Dr. Majerus held various positions in finance within the
Mannesmann Group, including as the head of controlling and
accounting at Mannesmann AG, which he joined in 1989. He holds a
diploma in business administration from the University of
Cologne, Germany, and a doctorate in economics from the
University of Siegen, Germany, where he served as assistant at
the Institute of Business Administration and Production.
Thomas Seifert has served on the Memory Products Group
Management Board since 2004. He is also a member of the Board of
Directors of Inotera in Taiwan. From 2000 to 2004,
Mr. Seifert worked with the Wireline Communications
Business Group, where he served first as Chief Operating Officer
and then Chief Executive Officer. From 1996 to 2000,
Mr. Seifert led the White Oak Semiconductor plant,
Infineon’s joint venture with Motorola in Richmond,
Virginia. Starting in 1993, he spent three years working on the
manufacturing cooperation with IBM on the Management Board in
Essonnes, France. Mr. Seifert joined the Corporate
Management Group of Siemens in 1990. Mr. Seifert holds a
diploma in business administration from the University of
Erlangen, Germany and a masters degree in economics from Wayne
State University, Michigan, United States of America.
These Management Board members have served in their positions
since April 15, 2006.
The current members of our Management Board do not own, directly
or indirectly, any of our share capital. We do not expect that
the members of our Management Board will, individually or in the
aggregate, own, directly or indirectly, more than 1% of our
company’s outstanding share capital, including for these
purposes any ADSs or options they may acquire in or at the time
of the offering. The business address of each of the members of
our Management Board is Gustav-Heinemann-Ring 212, 81739 Munich,
Germany.
Compensation
Our Articles of Association provide that the annual compensation
for each member of the Supervisory Board will be $50,000. The
chairman of the Supervisory Board will receive $150,000 and the
deputy chairman, as well as each chairman of a Supervisory Board
committee, will receive $100,000, in each case per full
financial year. Shareholder representatives on the Supervisory
Board affiliated with Infineon have waived their right to
receive compensation for as long as Infineon remains a
significant shareholder of the Company. Our Articles of
Association
provide that each member of the Supervisory Board will receive,
for each full financial year, 5,000 ADS appreciation rights.
These are automatically granted, and may later be exercised,
under the same terms and conditions that apply under the stock
option plan approved by the shareholders’ meeting that will
be in force in the year of the grant of the ADS appreciation
rights. See “— Employee Stock Option
Program”. These rights will provide the member the cash
benefit of any appreciation in our ADS price during the time the
right is held but will not entitle any member to receive ADSs or
the underlying shares. That is, upon exercise of such rights, we
will pay the member the amount of cash equal to the difference
between the grant price and the average ADS price over a several
day period before the exercise date. The annual appreciation
rights were automatically granted on November 24, 2006, the
date on which the stock options were granted under our stock
option program (5,000 appreciation rights were granted to
Messrs. Previte, Nishi, Armbrecht and Grundbacher; Prof.
Weyrich received pro rata 486 appreciation rights).
For our 2007 financial year, the individual members of the
Supervisory Board received the following cash remuneration:
Fixed
remuneration
Peter J. Fischl
$
—
Richard Previte
100,000
Yoshio Nishi
100,000
Prof. Claus Weyrich
4,861
Michael v. Eickstedt
—
Dr. Lothar Armbrecht
50,000
Johann Grundbacher
50,000
Total
$
304,861
We entered into employment service contracts with each of the
members of the Management Board. Pursuant to these contracts,
the members of the Management Board are entitled to receive an
annual base salary plus a regular annual bonus, the amount of
which will depend upon Qimonda’s return on invested
capital. We will pay a total of €2,250,000 in base salary
to the members of our Management Board each year under these
contracts. We may pay between €700,000 and €2,460,000
in total to the members of our Management Board under their
service contracts in the form of a yearly bonus dependent on
company performance as measured by return on assets (year-end
EBIT divided by the sum of equity and debt). The yearly bonus
for each member may be increased in €20,000 increments for
each percentage point return on assets exceeding 12% in any
given year. In addition, each member is eligible to receive a
discretionary bonus in the event the member achieves additional
performance targets established by the Supervisory Board. The
Management Board may also receive other compensation, including
continued remuneration in the event of sickness, allowances for
insurances, and non cash benefits for business trips, as well as
company cars. Under the service contracts, Management Board
members are also entitled to receive a fixed annual pension that
increases over time depending on the number of years served on
the Management Board. We will pay up to a maximum of
€750,000 per year in pension to the members of our
Management Board. In principle, members of the Management Board
are entitled to such pension after the age of 65. Upon a
Management Board member’s death, benefits may be payable to
the deceased’s spouse or orphaned children. Each of the
service contracts expires when the Management Board
member’s term of office is terminated. In the absence of
arrangements to the contrary, the contract expires on the
member’s 65th birthday.
None of Infineon, us or our subsidiaries have extended any loans
to any member of our Supervisory or Management Boards.
If a person (alone or together with others) acquires 30% or more
of the voting rights in our company, which the service
agreements with our Management Board members define as a change
of control, and a member of the Management Board then resigns or
his service agreement is terminated, that member of the
Management Board is entitled to a severance payment calculated
based on the member’s fixed annual salary and in some
circumstances taking into account the otherwise remaining term
on the Management Board of that member. The Chairman of the
Management Board is entitled to a larger severance payment than
the other members of the Management Board. The pension rights
and rights with respect to granted stock options of any member
of the Management Board that resigns or whose service agreement
is terminated in the event of a change of control remain
unaffected.
For our 2007 financial year, beginning on October 1, 2006,
the individual members of the Management Board were entitled to
following compensation:
Our shareholders have authorized the Supervisory Board to grant
to the members of the Management Board, and the Management Board
to grant to certain key executives in our group, through
September 30, 2009, a total of 6,000,000 non-transferable
option rights to receive ordinary shares issued by us.
The option rights may be allocated as follows: the first group,
consisting of the members of our Management Board, may receive a
total of up to 1,200,000 option rights. Our Supervisory Board
allocated 400,000 options for grant in the 2007 financial year
of which 200,000 are for Mr. Loh, 100,000 are for
Mr. Majerus and 100,000 are for Mr. Seifert. These
options were granted on November 24, 2006. In addition, our
Supervisory Board allocated 200,000 options for grant to our
Management Board in the 2008 financial year of which 100,000 are
for Mr. Loh, 50,000 are for Mr. Majerus and 50,000 are for
Mr. Seifert. These options have not yet been granted. The
second group, consisting of the members of the executive boards
of our subsidiaries in Germany and abroad, may receive a total
of up to 1,000,000 option rights. The third group, consisting of
further key executives who will be nominated based on their
performance to receive up to a specific number of options based
on their job classification, may receive a total of up to
3,800,000 option rights. For the second group, 215,600 options
and for the third group 1,284,600 options were granted on
November 24, 2006. In total, about 4% of our work force
participates in the plan. During any fiscal year, not more than
40% of the total option rights allocable to the respective group
may be issued to the members of such group. No option rights may
be issued to executives of any of our group companies that are
listed on a stock exchange and their subsidiaries, if and for as
long as such companies maintain their own stock option plans.
Option rights may be granted within 45 days upon the
publication of our results for the preceding fiscal year or
within 45 days of publication of our results for the first
or second quarter of a fiscal year, but, in each case, no later
than two weeks prior to the end of the respective quarter.
The option rights may be exercised within six years after their
grant, but not before the expiration of a vesting period that
will be at least three years. The exercise of each option right
is subject to the condition that the exchange price of our ADSs
on the New York Stock Exchange will, during the life of the
respective option right, exceed the index “Philadelphia
Semiconductor Sector (SOX)” on at least three consecutive
days. In order to determine whether such exceeding has taken
place, the SOX and the strike price of the respective option
right will be set at 100 at the day on which the option right is
granted.
For as long as our shares are not listed on any organized market
with the European Union or the European Economic Area, the
strike price will be the average of the opening prices of our
ADSs on the New York Stock Exchange on the five trading days
prior to the day of the grant (or a fraction thereof, if an ADS
does not represent exactly one of our ordinary shares).
Otherwise, the strike price will be the average of the opening
prices of our shares on the respective organized market on the
five trading days prior to the day of the grant.
The holders of option rights will benefit from certain
anti-dilution protection provisions, particularly in the case of
certain capital measures performed by us.
Upon exercise of an option right, the holder will generally
receive new ordinary shares to be issued by us. Our Management
Board (with approval by the Supervisory Board) will, however,
instead be allowed to deliver existing shares or pay a cash
compensation to be calculated on the basis of the difference
between the strike price and the exchange price of our ADSs or
shares on the exercise date.
The Management Board and, to the extent options to be granted to
the Management Board are concerned, the Supervisory Board are
entitled to determine further details of the option plan,
including, in particular, the inclusion of the new shares
granted upon exercise of the option rights into our ADS program.
The following table shows the beneficial ownership of our
company’s share capital by (1) the principal
shareholders (each person or entity who owns beneficially 5% or
more of our shares), (2) the public and (3) the
members of our Management Board and Supervisory Board, each as a
group, on September 30, 2007. We are not directly or
indirectly owned or controlled by any foreign government.
Shares and ADSs owned after
the initial public offering
Percent
Number
Infineon Technologies Investment
B.V.(1)
49.03
%
167,686,026
Infineon Technologies
AG(2)
28.44
%
97,293,975
Public Shareholders
22.53
%
77,050,000
All the members of our Supervisory and Management Boards as a
group
0
0
100
%
342,000,001
(1)
On July 17, 2006, Infineon Technologies Holding B.V., a
wholly-owned subsidiary of Infineon Technologies AG, transferred
its Qimonda shares, representing approximately 55.9% of our
total share capital at that time, to its wholly-owned subsidiary
Infineon Technologies Investment B.V., a private limited
liability company under Dutch law. On July 18, 2007, in
connection with the transfer of ownership of Qimonda Japan K.K.
from Infineon, a capital increase of Qimonda AG comprising a
single share was registered with the Commercial Register. The
current registered share capital of Qimonda AG amounts to
€684,000,002. On September 26, 2007, Infineon
Technologies Investment B.V. placed bonds that are exchangeable
for an aggregate of up to 20,515,267 of Qimonda ADSs
(representing approximately 6% of our current share capital)
currently held by Infineon Technologies Investment B.V at
specified times until August 31, 2010.
(2)
On September 25, 2007, Infineon sold 28,750,000 Qimonda
shares to the public from its shareholdings in a public
secondary offering. Infineon’s holdings include 3,550,098
Qimonda shares equal to 1.04% of the equity interests in Qimonda
that Infineon loaned to an affiliate of J.P. Morgan
Securities, Inc. in connection with Infineon Technologies
Investment B.V.’s placement of bonds exchangeable into
shares of our company as described above. These shares must be
returned no later than August 31, 2010 upon the termination
of the loan. Infineon has advised us that J.P. Morgan has
already returned some of these shares.
The major shareholders appearing in the table above do not have
different voting rights from any of our other shareholders.
Under German law, for so long as Infineon holds more than 25% of
the shares in our company, it will be in a position to block
shareholder action on a variety of matters, such as:
•
a resolution not to give effect to existing shareholders’
preemptive rights in a capital increase;
•
any capital decrease, merger, consolidation, spin-off, sale or
other transfer of all or substantially all of our assets;
•
a change in the corporate form or business purpose of the
company; or
We have previously entered into various short-term borrowing
arrangements with Infineon. The largest amount outstanding under
these arrangements during the two financial years ended
September 30, 2004 and 2005 was €524 million, as
determined on a pro-forma basis for these periods only. As of
September 30, 2006, our indebtedness to Infineon amounted
to $435 million (€344 million) bearing interest
at a weighted average rate of 6.23%. We repaid the outstanding
amount of this loan in April 2007 from available funds.
Carve-out
and Control
We were carved out as a wholly-owned subsidiary of Infineon
effective May 1, 2006. Pursuant to the contribution
agreements Infineon and we entered into in connection with the
carve-out, Infineon contributed substantially all of the assets,
liabilities, operations and activities, as well as the
employees, of its Memory Products segment to us. This excluded
the Memory Products operations in Korea and Japan, which have
since been transferred to us. While Infineon’s investment
in the Advanced Mask Technology Center (AMTC) and in the
Maskhouse Building Administration Company (BAC) in Dresden have
been contributed to us, only the legal transfer of this
investment is not yet effective, because Infineon’s
co-venturers have not yet given the required consent to the
transfer of the AMTC and BAC interest. While pursuant to the
AMTC and BAC limited partnership agreements, such consent may
not be unreasonably withheld Infineon and we are currently
finalizing negotiations with AMD and Toppan concerning an
agreement that provides the consent to the assignment to us and
addresses Infineon’s intention to reduce its stake in us
below 50%. The assets, liabilities, operations and activities
that have not yet been contributed or legally transferred are
described in greater detail under “— Contribution
Agreements — Arrangements relating to Inotera, Memory
Products’ Japanese and Korean Operations, AMTC and
BAC.”
The contribution took legal effect as of its registration in the
commercial register (Handelsregister) at the local court
(Amtsgericht) of Munich. In the contribution agreement,
however, Infineon had granted us an unrestricted license to use
all resources of the transferred business beginning on
May 1, 2006. As of that date, Infineon transferred direct
or indirect possession to us of all of the assets that are the
subject of the contribution.
We agreed with Infineon that, if the legal transfer of specific
assets or other rights was not possible as of the effective date
of the contribution, we would position ourselves in relation to
each other as if the transfer of these assets or rights had
occurred as of that date. We also agreed with Infineon that, if
further legal steps are necessary to transfer the assets or
other rights, both parties will take the relevant steps without
delay. If third party consent is required for the transfer of
specific liabilities, or the assignment of specific contracts,
offers or permits, Infineon and we agreed to attempt to obtain
that consent without delay and position ourselves in relation to
each other as if the transfer of these liabilities, or the
assignment of these contracts, offers or permits had occurred as
of the effective date of the contribution.
We have entered into arrangements with Infineon with respect to
various interim and ongoing relationships between the two
groups. Some of these arrangements are covered in the
contribution agreement. Others are the subject of separate
agreements, the principal of which are described below.
Infineon is currently our largest shareholder, with a direct and
indirect shareholding of 77.5% in our company. Infineon has
publicly announced that it aims to reduce its stake in Qimonda
to significantly below 50% by the time of Infineon’s Annual
Shareholder Meeting in 2009, at the latest. The temporary
majority ownership by Infineon permits us to use the entire
intellectual property umbrella as well as other benefits from
contracts between the Infineon group of companies and third
parties. Infineon has already begun to re-negotiate or establish
intellectual property cross-licensing and other contractual
relationships with third parties for our benefit. For as long as
Infineon, directly or indirectly, owns a majority of our shares,
it will also have the majority of votes in our
shareholders’ general meeting and will therefore be in a
position to elect all of the shareholder-elected members of our
Supervisory Board. The composition of the Supervisory Board is
set forth under “Management — Supervisory
Board”.
All of the agreements relating to our carve-out from Infineon,
including those governing our ongoing relationship with
Infineon, were and will be concluded in the context of a
parent-subsidiary relationship and in the overall context of our
carve-out from Infineon. The terms of these agreements may be
less favorable to us than had they been negotiated with
unaffiliated third parties. See “Risk Factors —
Risks related to our carve-out as a stand-alone company and our
continuing relationship with Infineon”.
Contribution
Agreements
Contribution
Agreement between Infineon AG and Qimonda AG
The contribution agreement between Infineon AG and Qimonda AG
contains provisions that:
•
define the assets, liabilities and employees that were
transferred to us;
•
govern the intercompany licensing of intellectual
property; and
•
delineate the indemnification claims that Infineon will have
against us in respect of legal matters and other liabilities and
contingencies.
Pursuant to the contribution agreement, Infineon contributed
substantially all of the operations of its Memory Products
segment, including the assets that were used exclusively for
these operations, to Qimonda AG with economic effect as of
May 1, 2006. As consideration, we granted Infineon
132,288,975 of our no-par value ordinary registered shares
(Namensaktien). In order to issue the shares to be
granted to Infineon, we increased our capital from €50,000
to €264,627,950 on April 25, 2006.
Contributed
assets and liabilities
The individual assets and liabilities contributed to us under
the contribution agreement include:
•
fixed assets and current assets attributable to the Memory
Products segment (not including trade accounts receivable for
products and services provided to third parties and certain
related parties, which are netted against trade accounts
payable);
•
intellectual property, including patents (as described in more
detail in “Our Business — Intellectual
Property”), trade marks, know-how, software and other
intellectual property;
•
contracts and offers relating exclusively to products and
services provided by the Memory Products segment;
•
rights and obligations arising under permits and other legal
relationships with governmental entities (including those
arising under subsidies), so long as they do not relate to
individual persons;
•
liabilities attributable exclusively to the Memory Products
segment, including those contained in the carve-out balance
sheet, those arising under contracts with third parties and
employment relationships (including pension liabilities),
contingencies (including those arising in the future on the
basis of events that occurred prior to the carve-out date) and
other liabilities attributable exclusively to the Memory
Products segment and which have arisen by the carve-out date
(not including trade accounts payable — see above);
•
risks and liabilities arising out of financings, credit lines,
leases and guarantees, which Infineon entered into for the
benefit of the Memory Products segment; and
•
ownership in certain equity investments, including in Inotera
Memories, Inc., Infineon Technologies SC 300 GmbH &
Co. OHG, Maskhouse Building Administration GmbH & Co.
KG, Advanced Mask Technology Center GmbH & Co. KG
(legal transfer is still pending) and Hwa-Keng Investment Inc.
(meanwhile liquidated. Pursuant to the contribution agreement
Infineon has transferred to us the assets it received upon the
liquidation.)
Infineon did not contribute any real estate to us in the
carve-out other than the property held in legal entities that it
transferred to us.
Arrangements
relating to Inotera, Memory Products’ Japanese and Korean
Operations, AMTC and BAC
Infineon’s Memory Products assets in Japan and Korea were
not contributed to us at the time of the initial contribution. A
contribution of our Japanese assets had, for practical reasons,
to be preceded by the rollout of new software. The contribution
of the Korean assets and employees, which represent an
insignificant portion of Qimonda’s total assets and
employees, was also postponed for practical reasons. We entered
into an agreement with Infineon on June 27, 2006, pursuant
to which Infineon agreed to hold these Japanese and Korean
assets in trust pending the contribution. The Korean assets were
transferred to us in October 2006. Infineon transferred the
operations in Japan into a wholly-owned subsidiary of Infineon.
The legal transfer of that subsidiary to us took place in July
2007.
The agreement governing our joint venture with Nanya, named
Inotera Memories, Inc. (Inotera), allows Infineon to transfer
its shares of Inotera to us. However, under Taiwanese law,
Infineon’s shares in Inotera are subject to a compulsory
restriction on transfer
(lock-up) as
a result of Inotera’s IPO in March 2006. For that reason we
had established a separate trust agreement pursuant to which
Infineon held title to the Inotera shares in trust for us and
exercised shareholder rights (including board appointments and
voting) at our instructions until they could be transferred. See
“Our Business — Strategic Alliances and
Agreements” for a description of these arrangements.
Taiwanese law generally provides that Infineon may only transfer
these shares to us gradually over the four years following
Inotera’s IPO. In October 2006, the Taiwanese authorities
granted an exemption to Infineon permitting it to release the
shares from the restriction. We completed the share transfer
from Infineon to us in the first quarter of the 2007 calendar
year other than a portion representing 0.24% of the total
Inotera shares which Infineon holds in trust for us due to
Taiwanese legal restrictions.
In addition, our limited partnership agreement with Advanced
Micro Devices (AMD) and Toppan Photomask relating to the
Advanced Mask Technology Center (AMTC) and to the Maskhouse
Building Administration Company (BAC) in Dresden requires prior
written consent from the other partners before Infineon can
assign its partnership interest to us. This consent may not be
unreasonably withheld. Under the current agreement, the interest
must be transferred back to Infineon should Infineon cease to be
our majority shareholder. Infineon and we are currently
finalizing negotiations with AMD and Toppan concerning an
agreement that provides the consent to the assignment to us and
addresses Infineon’s intention to reduce its stake in us
below 50%. Under this agreement, a “change of control”
that could lead to termination of the agreements with AMD and
Toppan would only be deemed to occur if a direct competitor of
AMD or Toppan becomes the beneficial owner of 30% or more of our
equity interests or obtains the power to appoint the majority of
the members of our Supervisory Board. Infineon’s investment
in the AMTC and BAC is being held by Infineon for our economic
benefit pursuant to the contribution agreement.
A number of additional contracts with respect to which the
economic benefits and obligations had been assigned to Memory
Products in the carve-out require third party consent before the
benefits and obligations can be assigned. As disclosed above, to
the extent these consents are not received, Infineon and we
agreed to position ourselves in relation to each other as if
assignment of these contracts had occurred as of May 1,2006.
Employment
Matters
The employment relationships that Infineon had with its Memory
Products employees, including all rights and obligations
relating to these relationships, were automatically transferred
to us to the extent employees did not object to that transfer.
Arrangement
concerning the Licensing of Intellectual Property
In connection with the transfer of intellectual property to us,
Infineon and we have entered into certain cross-licensing
arrangements, which are described in “Our
Business — Intellectual Property”.
Indemnification
The contribution agreement includes provisions pursuant to which
we agreed to indemnify Infineon against any claim (including any
related expenses) arising in connection with the liabilities,
contracts, offers, uncompleted
transactions, continuing obligations, risks, encumbrances and
other matters relating to the Memory Products segment that were
transferred to us in the carve-out. We also agreed to indemnify
Infineon against any losses it may suffer under several
guarantee and financing arrangements that relate to our business
but that cannot be transferred to us for legal, technical or
practical reasons. In addition, the contribution agreement
provides for indemnification of Infineon with respect to certain
existing and future legal claims (as described in “Our
Business — Legal Matters”) and if a ramp-down of
production in the Dresden 200mm fab is needed, 50% of any
restructuring costs that may be incurred (as described in
“— Dresden 200mm Fab”). With the exception
of the securities and certain patent infringement and antitrust
claims identified in “Our Business — Legal
Matters,” for which different arrangements apply as
described in that section, we are obligated to indemnify
Infineon against any liability arising in connection with the
claims described in that section. Finally, the contribution
agreement in principle provides for us to bear 60% of the total
license fee payments payable by Infineon and us to which
Infineon and we may agree in connection with two cases in which
negotiations relating to licensing and cross-licensing were
ongoing at the time of the carve-out, one of which is still
ongoing. These payments could be substantial and could remain in
effect for lengthy periods. The contribution agreement does not
limit the aggregate liability we may incur as a result of our
indemnification obligations, nor does it restrict the
obligations to a certain time period after the carve-out as long
as the events giving rise to them occurred prior to the
carve-out.
Costs and
taxes; future tax liabilities
Infineon agreed to bear the costs and taxes in conjunction with
entering into the contribution agreement, while expenses
incurred on or after May 1, 2006 are divided between
Infineon and us. Infineon has agreed to bear all tax liabilities
arising in the future that relate to Memory Products businesses
that were previously part of legal entities that remain with
Infineon for periods prior to the carve-out.
Contribution
Agreement between Infineon Technologies Holding B.V. and Qimonda
AG
Prior to our carve-out, Infineon Technologies Holding B.V. held
the entire share capital of Qimonda Holding B.V., an entity
recently established to hold Infineon’s equity in foreign
companies that form part of the Memory Products business.
Pursuant to a separate contribution agreement we entered into
with Infineon Technologies Holding B.V., all shares in Qimonda
Holding B.V. were contributed to us as of May 1, 2006. In
return for this contribution, we granted Infineon Technologies
Holding B.V. 167,686,025 of our no-par value ordinary registered
shares. To issue these shares, we had previously increased our
share capital from €264,627,950 to €600,000,000.
Shares that were not either granted to Infineon or Infineon
Technologies Holding B.V. in connection with the carve-out are
reflected in our capital reserves. The contribution by Infineon
Technologies Holding B.V. took legal effect as of its
registration in the commercial register (Handelsregister)
at the local court (Amtsgericht) of Munich.
On July 17, 2006, Infineon Technologies Holding B.V.
transferred its Qimonda shares, representing approximately 55.9%
of our total share capital at that time to its wholly-owned
subsidiary Infineon Technologies Investment B.V., a private
limited liability company under Dutch law. In return, Infineon
Technologies Investment B.V. issued 50 of its shares with a
nominal value of €1,000 each to Infineon Technologies
Holding B.V.
Dresden
200mm Fab
The current production capacity for memory products of
Infineon’s Dresden 200mm fab is approximately 7,000 wafer
starts per week. We entered into an agreement with Infineon for
the production of wafers in the Dresden 200mm fab. Pursuant to
the agreement, as amended in January 2007, Infineon has agreed
to manufacture specified semiconductor memory products at the
Dresden 200mm fab, using our manufacturing technologies and
masks, and to sell them to us at prices specified in the
agreement. These prices are based on the cost of manufacture. We
are required under this agreement to pay for idle costs
resulting from our purchasing fewer wafers from Infineon than
agreed upon, if Infineon cannot otherwise utilize the capacity.
We are also obliged to indemnify Infineon against any third
party claims based on or related to any products manufactured
for us under this agreement and against any intellectual
property infringement claims related to the products covered by
the agreement. In addition, we agreed to share equally with
Infineon any potential restructuring costs that might be
incurred in connection with the ramp-down of production of the
Dresden 200mm fab if neither company can use the capacity.
Restructuring costs may
include severance payments. The capacity arrangements terminate
on September 30, 2009 unless we terminate them earlier.
Ongoing
Services Relationships
Prior to our carve-out, most of the administrative, financial,
risk management, information technology and other services that
we required were provided centrally by Infineon. The Infineon
Group will continue to provide some of these services under
services agreements described below. The terms of these
agreements may be less favorable to us than they might have been
had they been negotiated with unaffiliated third parties.
General
Support Services
Framework
Agreement on Standard Support Services
In connection with our carve-out, we entered into a Global
Service Agreement (the “GSA”) with Infineon, which
took effect as of our carve-out date and which serves as the
framework under which we have entered into individual standard
service agreements, the most important of which are listed
below. Under these agreements, the Infineon Group and we provide
standard support services to one another. Certain services in
the areas of manufacturing, product supply and distribution,
licensing, research and development, accounting and information
technology support, as well as comprehensive services provided
to us by the Infineon Group in specified countries have been
covered under separate agreements.
Under the GSA, the service recipient agrees to pay the service
provider a fee based on actual or estimated total costs incurred
plus a margin This margin has been 3% since May 1, 2006.
Unless otherwise agreed in individual service level agreements,
the service provider may choose to provide the services itself
or through an affiliated or unaffiliated subcontractor. If the
service provider chooses to subcontract to a non-affiliate
services it had previously provided itself, the service
recipient must agree to the subcontractor and the terms of the
subcontract. If this agreement cannot be reached, the service
level agreement may be terminated with 90 days prior
notice. Under the GSA, each service provider must perform
services using the level of care that it customarily applies in
its own matters of a similar nature. Damages under this
agreement are payable only if caused by grossly negligent or
malicious behavior and, in the case of grossly negligent
behavior, are subject to an annual cap represented by the total
payments received by the service provider under the relevant
standard service agreement in the relevant calendar year. The
GSA allows either party to an individual standard service
agreement to terminate that agreement upon 90 days written
notice, unless otherwise agreed in the individual agreement or
in a subcontract between the service provider and a
subcontractor, or upon 30 days written notice in case of
default of the other party. The GSA will terminate once all
standard service agreements concluded under the GSA have expired
or been terminated. A number of the standard service agreements
were terminated on September 30, 2007. However, several of
the agreements including in the accounting, infrastructure,
facility management and research and development are still in
effect.
General
Support Services
The general support services that Infineon agreed to provide
under the umbrella of the GSA and individual standard service
agreements that we and Infineon entered into, that are still in
effect include:
•
sales support in various countries, most significantly France,
Hong Kong, Ireland, Switzerland, United Kingdom and the United
States;
•
logistics services, including call center services in Europe,
logistics support services in the Asia-Pacific region and
freight forwarding services in the United States;
•
purchasing services at locations
and/or with
respect to areas of expertise where we do not have sufficient
purchasing resources;
•
human resources services, including recruiting, compensation and
benefits, payroll, site health care and training;
facility management, including office and manufacturing space
leasing, security, storage and transportation management;
•
patent support, including patent administration, external
support and reverse engineering;
•
finance, accounting, including risk management and back-office
support, for as long as we have not reached full staffing levels
in this area
•
strategy services, including support relating to market
research; and
•
certain other services in which our staff still needs to develop
expertise.
In addition we agreed to provide Infineon with purchasing
services in locations where Infineon does not have sufficient
purchasing power, as well as with finance and treasury, tax,
human resources and communications services under the GSA.
Other
Services
Framework
Agreements on Information Technology Services
We entered into two master information technology agreements
with Infineon effective May 1, 2006.
Under the master information technology cost sharing agreement,
Infineon and we agreed to share costs of a variety of
information technology services provided by one or both parties
in the common interest and for the common benefit of both
parties. In general, the parties agreed to share the fixed costs
of the services provided (accounting for approximately 53% of
total costs) roughly equally and to share variable costs in a
manner that reflects each party’s consumption. The
parties’ respective shares of the variable costs are
subject to adjustment on an annual basis in accordance with the
agreement. Any material or related intellectual property rights
created by the parties in the course of the performance of the
agreement will be jointly owned by each party, unless otherwise
agreed to by the parties. Either party may terminate any
individual shared service upon 30 days written notice,
unless otherwise agreed in a subcontract between the service
provider and a subcontractor. Any ramp down costs will be shared
by the parties. The agreement will terminate once all shared
services provided under the agreement have expired or been
terminated; neither party can terminate a shared service for
convenience prior to September 30, 2007 without mutual
agreement. The parties have started negotiations with the goal
to terminate and ramp down all individual shared services by
March 31, 2008.
Under the master information technology service agreement,
Infineon and we agreed to provide information technology
services to one another. The scope of the services (generally
including the designing, building, module testing, documenting,
deployment and rollout of IT projects), fees payable for the
services and other service-specific provisions will be contained
in individual “statements of work” entered into
between the Infineon and Qimonda entities providing and
receiving the respective services. In general, the service
recipient pays a fee based on actual or estimated total costs
incurred plus a margin of 3% for the period from May 1,2006 to September 30, 2006 and thereafter as mutually
agreed from year to year. The fee for the 2007 financial year is
also based on actual or estimated total costs incurred plus a
margin of 3%. The agreement grants either party termination
rights upon 90 days written notice, unless otherwise agreed
in the individual statements of work or in a subcontract between
the service provider and a subcontractor, or upon 30 days
written notice in case of default of the other party. Costs
associated with an early termination by the service recipient
will be borne by the service recipient. The master information
technology service agreement will terminate once all statements
of work concluded under the agreement have expired or been
terminated. We generally expect the statements of work to
terminate by the end of the first half of our 2008 financial
year.
Both agreements specify that, unless otherwise agreed in
individual statements of work, the service provider may choose
to provide the services itself or through an affiliated or
unaffiliated subcontractor. If the service provider chooses to
subcontract to a non-affiliate services it had previously
provided itself, the service recipient must agree to the
subcontractor and the terms of the subcontract. If this
agreement cannot be reached, the relevant services may be
terminated with 90 days prior notice. If a party chooses to
terminate any individual shared service or statement of work
under either agreement, it is obligated to enter into a
termination assistance agreement with the other party, the
purpose of which is to secure the operational stability of the
service during the wind down phase. Under both master
agreements, each service provider must perform services using
the level of care that it customarily applies in its own matters
of a similar nature. Damages under both agreements are excluded
to the extent legally permissible.
Framework
Agreement on Research and Development Services
In 2006, we negotiated a Global Research and Development
Services Agreement with Infineon, which provides a framework
surrounding the provision of research and development services
between Infineon on one hand and Qimonda AG and its subsidiaries
on the other hand. The service recipient agrees to pay the
service provider a fee based on actual or estimated total costs
incurred (where total costs include depreciation on equipment
and tools as well as the cost of materials) plus a margin. This
margin has been 3% since May 1, 2006. The agreement grants
either party termination rights upon 90 days notice, unless
otherwise agreed in a subcontract between the service provider
and a subcontractor.
Under the Global Research and Development Services Agreement,
the deliverables to be developed by the service provider are
owned by the recipient of the deliverables, except background
intellectual property rights of the provider. The recipient
grants the provider a non-exclusive, perpetual license to use
the deliverables and the related intellectual property rights in
its respective field of business. Expenses incurred in research
and development in connection with employee inventions are to be
paid by the recipient of the invention.
Special
Services
In addition to the general services scheduled to be provided
under the GSA, the information technology services agreements
and the research and development services agreement and the
services provided under the agreement for the production of
wafers in the Dresden 200mm fab, Infineon intends to provide to
us special services, including manufacturing services for the
supply of advanced module buffers for use in our modules.
Any other services not covered under the above agreements will
be provided as mutually agreed on a
case-by-case
basis.
With
Management
A member of our Supervisory Board, Mr. Fischl, is a member
of Infineon’s Management Board and serves as
Infineon’s chief financial officer. See
“Management — Supervisory Board —
Supervisory Board Members.” Two members of our Management
Board, Dr. Majerus and Mr. Seifert, are members of the
Board of Directors of Inotera Memories, Inc. our joint venture
with Nanya. See “Our Business — Strategic
Alliances and Agreements” for a discussion of our
relationship with Nanya, Inotera and CSVC.
We sometimes extend travel and moving expenses and other types
of advances to our employees. As a matter of policy, such
advances are not provided to the members of our Supervisory
Board and Management Board. See Notes 14 and 27 to the
combined and consolidated financial statements included
elsewhere in this annual report.
Until 1999, the entire business of Infineon, including the
Memory Products business, formed the Semiconductor Group of
Siemens AG, a large German electronics conglomerate. In 1999,
Siemens formed Infineon as a separate legal entity, transferred
its semiconductor business to Infineon, and conducted an initial
public offering of Infineon’s ordinary shares with listing
on the Frankfurt Stock Exchange and the New York Stock Exchange.
Siemens subsequently took a variety of steps to further reduce
its ownership interest in Infineon. On April 3, 2006
Siemens disposed of its remaining shares in Infineon.
Transactions between us and Siemens subsequent to this date are
no longer reflected as related party transactions.
In the 2004 and 2005 financial years, 4% and 3% of our net sales
resulted from direct sales to the Siemens-Fujitsu joint venture,
a member of the Siemens group, and in the 2006 financial year
through to Siemens’ disposal of its remaining Infineon
shares such sales amounted to €17 million. We believe
that these transactions were on terms no less favorable to us
than we could obtain from third parties.
This section summarizes the material rights of holders of the
shares of our company under German law and the material
provisions of our Articles of Association. This description is
only a summary and does not describe everything that the
Articles of Association contain. Copies of the Articles of
Association will be publicly available from the Commercial
Register in Munich, and an English translation is incorporated
by reference as an exhibit to this annual report.
Share
Capital
The issued share capital of our company consists of
€684,000,002 divided into 342,000,001 individual registered
shares. The individual shares do not have a par value but they
do have a notional value that can be determined by dividing the
share capital amount by the number of shares.
On July 27, 2006, our shareholders resolved to increase our
share capital by €84 million against cash
contributions through the issuance of 42 million no-par
value ordinary registered shares. The capital increase became
effective on August 8, 2006. Shareholders’ preemptive
rights were excluded.
On May 29, 2007, our Management Board resolved to increase
our share capital by €2.00 against the contribution of all
shares in Qimonda Japan K.K. from €684,000,000 to
€684,000,002 through the issuance of one no-par value
ordinary registered share from our authorized capital. The
capital increase was approved by the Investment, Finance and
Audit Committee of our Supervisory Board and became effective on
July 18, 2007. Shareholders’ preemptive rights were
excluded. Qimonda Japan K.K. comprises our operations in Japan
(Sales and Marketing). These were not contributed to us at the
time of the initial contribution of Infineon’s Memory
Products assets but initially held in trust for Qimonda’s
benefit; the share capital increase described above was carried
out in order to effect the contribution of these assets. See
“Related Party Transactions and Relationships —
with Infineon— Carve-out and Control —
Contribution Agreements”.
Registrar Services GmbH, the transfer agent and registrar of our
company in Germany, will register record holders of shares in
the share register on our behalf pursuant to a transfer agency
agreement. The transfer agent will also maintain the register of
our shareholders.
Authorized
Capital
Under the German Stock Corporation Act, a stock
corporation’s shareholders can authorize the Management
Board to issue shares in a specified aggregate nominal amount of
up to 50% of the issued share capital at the time the resolution
becomes effective. The shareholders’ authorization may
extend for a period of no more than five years after
registration of the capital increase in the commercial register
(Handelsregister).
On July 14, 2006, our shareholders resolved to amend our
Articles of Association to authorize the Management Board to
increase the share capital with the Supervisory Board’s
consent. The Management Board may use this authorization until
July 13, 2011 to increase the share capital by up to
€30 million through the issuance, in one or more
tranches, of new ordinary registered shares with no par value
against cash contributions for the purpose of issuing shares to
our and our subsidiaries’ employees. Shareholders’
preemptive rights are excluded. This increase in our authorized
capital became effective with its registration in the commercial
register on July 24, 2006.
In addition on July 27, 2006, our shareholders resolved to
amend the Articles of Association of our company to authorize
the Management Board to increase the share capital with the
Supervisory Board’s consent against contributions in cash
or in kind. The Management Board may use these authorizations
until July 26, 2011 to issue new shares in one or more
tranches for any legal purpose:
in an aggregate amount of up to €239.4 million, in
which case existing shareholders have pre-emptive rights, which
may be excluded in the following circumstances:
(i)
to the extent that new shares must be granted to holders of
subscription warrants or convertible bonds that we have issued,
in accordance with the terms of issuance of such warrants or
convertible bonds;
if (1) the new shares represent 10% or less of the existing
share capital when the authorized capital or issuance of the new
shares is registered and (2) the issue price of the new
shares is not considerably less than the stock exchange price of
the shares in our company; or
(iii)
to the extent necessary to avoid balancing out fractional
residual amounts.
In the case of a capital increase against contributions in kind,
the Management Board may exclude the shareholders’
preemptive rights with the consent of the Supervisory Board.
This increase in our authorized capital became effective with
its registration in the commercial register on August 8,2006.
In connection with the share capital increase by €2.00
described above, our authorized share capital was decreased from
€239,400,000 to €239,399,998.
Conditional
Capital
Under the German Stock Corporation Act, a stock
corporation’s shareholders can authorize conditional
capital of up to 50% of the issued share capital at the time of
the resolution. During our extraordinary shareholders’
meeting on July 14, 2006, our shareholders passed the
following resolutions with regard to conditional capital:
First, our share capital is conditionally increased by up to
€12 million through the issuance of up to
6 million ordinary registered shares with no par value in
connection with the employee stock option and share purchase
plans described above under “Management —
Employee Stock Option Program and — Employee Share
Purchase Programs.”
Second, our share capital is conditionally increased by up to
€240.1 million through the issuance of up to
120.05 million ordinary registered shares with no par
value. This conditional capital may only be used in connection
with an issuance of a convertible bond, which our shareholders
authorized by resolution of July 14, 2006.
These resolutions on conditional capital were registered in the
commercial register on July 24, 2006.
Preemptive
Rights
Under the German Stock Corporation Act, an existing shareholder
in a stock corporation has a preferential right to subscribe for
new shares to be issued by that corporation in proportion to the
number of shares he holds in the corporation’s existing
share capital. These rights do not apply to shares issued out of
conditional capital. Preemptive rights also apply to securities
that may be converted into shares, securities with warrants,
profit-sharing certificates and securities with dividend rights.
The German Stock Corporation Act only allows the exclusion of
this preferential right in limited circumstances. At least three
quarters of the share capital represented at the relevant
shareholders’ meeting must vote for exclusion. In addition
to approval by the shareholders, the exclusion of preemptive
rights requires a justification. The justification must be based
on the principle that the interest of the company in excluding
preemptive rights outweighs the shareholders’ interest in
their preemptive rights.
Shareholders’
Meetings and Voting Rights
A general meeting of the shareholders of our company may be
called by the Management Board or, under certain circumstances,
by the Supervisory Board. Shareholders holding in the aggregate
at least 5% of our issued share capital may also require the
Management Board to call a meeting. The annual general meeting
must take place within the first eight months of the financial
year. The Management Board calls this meeting upon the receipt
of the Supervisory Board’s report on the annual financial
statements.
Under German law and the Articles of Association of our company,
our company must publish invitations to shareholders’
meetings in the electronic version of the German Federal Gazette
(elektronischer Bundesanzeiger) at least thirty days
before the last day on which the shareholders must notify our
company that they intend to attend the meeting (not counting the
date of publication and the last day of notification).
A shareholder or group of shareholders holding a minimum of
either 5% of the share capital of our company or shares
representing at least €500,000 of its registered capital
may require that additional items be put on the agenda of our
shareholders’ general meeting.
Shareholders who are registered in the share register may
participate in and vote at the shareholders’ general
meeting. A notice by a shareholder of his intention to attend a
shareholders’ general meeting must be given to our company
at least six days (or a shorter period, if so determined by
management) before the meeting, not counting the day of notice
and the day of the meeting. In certain cases, a shareholder can
be prevented from exercising his voting rights. This would be
the case, for instance, for resolutions on the waiver or
assertion of a claim by our company against the shareholder.
Each share carries one vote at general meetings of the
shareholders. Resolutions are generally passed with a simple
majority of the votes cast. Resolutions that require a capital
majority are passed with a simple majority of the issued
capital, unless statutory law or the Articles of Association of
our company require otherwise. Under the German Stock
Corporation Act, a number of significant resolutions must be
passed by a majority of at least 75% of the share capital
represented in connection with the vote taken on that
resolution. The majority required for some of these resolutions
may be lowered by the Articles of Association. The shareholders
of our company have lowered the majority requirements to the
extent permitted by law.
Although our company must notify shareholders of an ordinary or
extraordinary shareholders’ meeting as described above,
neither the German Stock Corporation Act nor the Articles of
Association of our company has a minimum quorum requirement.
This means that holders of a minority of our shares could
control the outcome of resolutions not requiring a specified
majority of the outstanding share capital of our company.
According to the Articles of Association of our company,
resolutions to amend the Articles of Association must be passed
by at least a majority of the nominal capital represented at the
meeting of shareholders at which the resolution is considered.
However, resolutions to amend the business purpose stated in the
Articles of Association of our company also require a majority
of at least three-quarters of the share capital represented at
the meeting. The 75% majority requirement also applies to the
following matters:
•
the exclusion of preemptive rights in a capital increase;
•
capital decreases;
•
the creation of authorized capital or conditional capital;
•
dissolution;
•
a merger (Verschmelzung) with another company or another
corporate transformation;
•
a transfer of all or virtually all of the assets of our
company; and
•
the conclusion of any direct control, profit and loss pooling or
similar intercompany agreements.
Dividend
Rights
Shareholders participate in profit distributions in proportion
to the number of shares they hold.
Under German law, our company may declare and pay dividends only
from balance sheet profits as they are shown in our
company’s unconsolidated annual financial statements
prepared in accordance with applicable German law. In
determining the distributable balance sheet profits, the
Management Board and the Supervisory Board may allocate to
profit reserves up to one half of the annual surplus remaining
after allocations to statutory reserves and losses carried
forward. Under certain circumstances all or part of the
remaining half of the annual surplus may also be allocated to
the statutory reserves.
The shareholders, in determining the distribution of profits,
may allocate additional amounts to profit reserves and may carry
forward profits in part or in full.
Dividends approved at a shareholders’ general meeting are
payable on the first stock exchange trading day after that
meeting, unless otherwise decided at the shareholders’
general meeting. If you hold shares that are entitled to
dividends through a clearing system, the dividends will be paid
according to that clearing system’s rules. We will publish
notice of dividends paid and the paying agent or agents that we
have appointed in the German Federal Gazette.
In accordance with the German Stock Corporation Act, if we are
liquidated, any liquidation proceeds remaining after all of our
liabilities have been paid off would be distributed among our
shareholders in proportion to their holdings.
Repurchase
of Our Own Shares
We may not acquire our own shares unless authorized by the
shareholders’ general meeting or in other very limited
circumstances set out in the German Stock Corporation Act.
Shareholders may not grant a share repurchase authorization
lasting for more than 18 months. The rules in the German
Stock Corporation Act generally limit repurchases to 10% of our
share capital and resales must be made either on a stock
exchange, in a manner that treats all shareholders equally or in
accordance with the rules that apply to preemptive rights
relating to a capital increase. On July 27, 2006, our
shareholders granted us such an authorization.
The corporate purpose of our company, described in
section 2 of the Articles of Association, is direct or
indirect activity in the field of research, development,
manufacture and marketing of electronic components, electronic
systems and software, as well as the performance of related
services.
Registration
of the Company with Commercial Register
Our company was entered into the commercial register of Munich,
Germany, as a stock corporation on May 25, 2004 under the
number HRB 152545.
Distribution, Sales & Marketing, Research and Development
100
%
Qimonda Asia Pacific Pte Ltd.
Singapore
Distribution
100
%
Qimonda Malaysia Sdn. Bhd
Malaysia
Production
100
%
Qimonda Module (Suzhou) Co. Ltd.
China
Production
100
%
Qimonda Technologies (Suzhou) Co., Ltd.
China
Production
62.8
%
Qimonda Japan
K.K(1)
Japan
Sales and Marketing
100
%
Inotera Memories
Inc.(2)
Taiwan
Production
35.6
%
(1)
At the time of our carve-out, our operations in Japan were held
in trust for Qimonda’s benefit until the legal transfer to
Qimonda in the 2007 financial year took place.
(2)
Because of Inotera’s significance for us within the meaning
of
Rule 3-09
of the SEC’s
Regulation S-X,
we have incorporated by reference in this annual report,
Inotera’s audited consolidated financial statements as of
and for the years ended December 31, 2005 and 2006
Dividend
Policy
We have not declared any cash dividends on our ordinary shares
and have no present intention to pay dividends on our ordinary
shares in the foreseeable future. Any determination by our
Supervisory and Management Boards to pay dividends will depend
on many factors, including our financial condition, results of
operations, legal requirements and other factors. We may also
become subject to debt instruments or other agreements that
limit our ability to pay dividends.
Under the German Stock Corporation Act (Aktiengesetz),
the amount of dividends available for distribution to our
shareholders is based on the level of earnings
(Bilanzgewinn) of the parent company, Qimonda AG, as
determined in accordance with the German Commercial Code. All
dividends must be approved by shareholders. No earnings are
available for distribution as a dividend for the 2007 financial
year, since Qimonda AG, on a standalone basis, as the parent
company, incurred a cumulative loss (Bilanzverlust) as of
September 30, 2007.
All of the shares represented by ADSs have the same dividend
rights as all of our other outstanding shares. Any distribution
of dividends jointly proposed by our Management and Supervisory
Boards requires the approval of our shareholders in a general
meeting. The section “Articles of Association —
Dividend Rights” explains in more detail
the procedures we must follow and the German law provisions that
determine whether we are entitled to declare a dividend.
For information regarding the German withholding tax applicable
to dividends and related United States refund procedures, see
“Taxation — German Taxation” in this 20-F
Significant
Changes
Except as discussed elsewhere in this annual report on
Form 20-F,
no significant change has occurred since the date of the annual
financial statements included in this annual report on
Form 20-F.
Market
Information
General
The principal trading market for our company’s ADSs, each
representing one share, is the New York Stock Exchange. The ADS
trade under the symbol QI. All of our company’s shares are
in registered form. The depositary for the ADSs is Citibank,
N.A. We do not currently intend to list our shares or ADSs on
any stock exchange outside the United States.
Trading
on the New York Stock Exchange
ADSs representing our company’s shares have traded on the
New York Stock Exchange since August 9, 2006. The table
below sets forth, for the periods indicated, the high and low
closing sales prices for the ADSs on the New York Stock
Exchange:
Price per ADS in
U.S. dollars
High
Low
August 2006 (beginning August 9)
16.28
13.54
September 2006
17.91
15.90
October 2006
17.50
13.82
November 2006
18.85
14.11
December 2006
18.65
17.00
January 2007
17.45
15.17
February 2007
15.60
14.45
March 2007
14.93
13.81
April 2007
15.69
14.09
May 2007
15.16
14.14
June 2007
17.00
14.94
July 2007
17.04
14.80
August 2007
14.81
12.20
September 2007
13.42
10.91
October 2007
11.37
9.37
November 2007 (through November 15)
9.64
8.63
On November 15, 2007, the closing sales price per ADS on
the New York Stock Exchange was $8.63.
Exchange
Rates
Fluctuations in the exchange rate between the euro and the
U.S. dollar will affect the U.S. dollar amounts
received by owners of our ADSs on conversion of dividends, if
any, paid in euro on the ordinary shares and will affect the
U.S. dollar price of our ADSs on the New York Stock
Exchange. In addition, to enable you to ascertain how the trends
in our financial results might have appeared had they been
expressed in U.S. dollars, the table below shows the
average exchange rates of U.S. dollars per euro for the
periods shown. Average rates are computed by
using the noon buying rate of the Federal Reserve Bank of New
York for the euro on the last business day of each month during
the period indicated.
Average
exchange rates of the U.S. dollar per euro
Financial year
Average
2002
0.9208
2003
1.0919
2004
1.2199
2005
1.2727
2006
1.2361
2007
1.3582
The table below shows the high and low Federal Reserve noon
buying rates for euro in U.S. dollars per euro for each
month from August 2006 through November 15, 2007:
Recent
high and low exchange rates of the U.S. dollar per
euro
The following is a summary discussion of the material German tax
consequences for holders of ADSs who are not resident in Germany
for income tax purposes and who do not hold ADSs as business
assets of a permanent establishment or fixed base in Germany
(“Non-German Shareholders”). The discussion does not
purport to be a comprehensive description of all the tax
considerations that may be relevant to a decision to invest in
or hold our ADSs. The discussion is based on the tax laws of
Germany as in effect on the date of this annual report, which
may be subject to change at short notice and, within certain
limits, possibly also with retroactive effect. You are advised
to consult your tax advisors in relation to the tax consequences
of the acquisition, holding and disposition or transfer of ADSs
and in relation to the procedure which needs to be observed in
the event of a possible reduction or refund of German
withholding taxes. Only these advisors are in a position to duly
consider your specific tax situation.
On August 17, 2007, the Business Tax Reform Act of 2008 was
enacted in Germany, introducing several changes to the taxation
of German business activities, including a reduction of the
combined corporate and trade tax rate from approximately 39% to
approximately 30%. Most of the changes come into effect for our
2008 financial year. Statements below regarding periods after
2007 take into account the anticipated changes to be made by the
Business Tax Reform Act.
In principle, German corporations are subject to corporate
income tax at a rate of 25% (after 2007: 15%). This tax rate
applies irrespective of whether profits are distributed or
retained. Solidarity surcharge of 5.5% is levied on the assessed
corporate income tax liability, so that the combined effective
tax burden of corporate income tax and solidarity surcharge is
26.375% (after 2007: 15.825%). Certain foreign source income is
exempt from corporate income tax. Generally, any dividends
received by us and capital gains realized by us on the sale of
shares in other corporations will also be exempt from corporate
income tax. However, 5% of such dividends and capital gains are
considered nondeductible business expenses.
In addition, German corporations are subject to a profit-based
trade tax, the exact amount of which depends on the municipality
in which the corporation conducts its business. With effect as
of January 1, 2008, trade tax is no longer a deductible
item in calculating the corporation’s tax base for
corporate income and trade tax purposes.
According to a minimum taxation regime applicable as of 2004,
not more than €1 million plus 60% of the amount
exceeding €1 million of the income of one fiscal year
may be offset against tax losses carried forward.
Taxation
of Dividends
Tax must be withheld at a rate of 20% (after 2008: 25%) plus
solidarity surcharge of 5.5% (in total 21.1%; after 2008:
26.375%) on dividends paid (if any).
Pursuant to most German tax treaties, including the income tax
treaty between Germany and the United States (the
“Treaty”) the German withholding tax may not exceed
15% of the dividends received by Non-German Shareholders who are
eligible for treaty benefits. The difference between the
withholding tax including solidarity surcharge that was levied
and the maximum rate of withholding tax permitted by an
applicable tax treaty is refunded to the shareholder by the
German Federal Tax Office (Bundeszentralamt für
Steuern, An der Küppe 1, D-53225 Bonn, Germany) upon
application. Forms for a refund application are available from
the German Federal Tax Office or the German embassies and
consulates in the various countries. A further reduction applies
pursuant to most tax treaties if the shareholder is a
corporation which holds a stake of 25% or more, and in some
cases (including under the Treaty) of 10% or more, of the
registered share capital (or according to some tax treaties of
the votes) of a company. After 2008, two-fifths of the
withholding tax will be refunded to corporations subject to
taxation as non-residents in Germany, upon application. This
does not preclude a further reduction of withholding tax, if
any, available under a relevant tax treaty. If the shareholder
is a parent company resident in the European Union as defined in
Directive No. 90/435/EEC of the Council of July 23,
1990 (the so-called Parent-Subsidiary Directive), upon
application and subject to further requirements, no tax may have
to be withheld at all.
Withholding
Tax Refund for U.S. Shareholders
U.S. shareholders who are eligible for treaty benefits
under the Treaty (as discussed below in “— United
States Taxation”) are entitled to claim a refund of the
portion of the otherwise applicable 20% (after 2008: 25%) German
withholding tax and 5.5% solidarity surcharge on dividends that
exceeds the applicable Treaty rate (generally 15%).
For ADSs kept in custody with the Depository Trust Company
in New York or one of its participating banks, the German tax
authorities have introduced a collective procedure for the
refund of German dividend withholding tax and solidarity
surcharge thereon. Under this procedure, the Depository
Trust Company may submit claims for refunds payable to
U.S. shareholders under the Treaty collectively to the
German tax authorities on behalf of these
U.S. shareholders. The German Federal Tax Office will pay
the refund amounts on a preliminary basis to the Depository
Trust Company, which will redistribute these amounts to the
U.S. shareholders according to the regulations governing
the procedure. The Federal Tax Office may review whether the
refund was made in accordance with the law within four years
after making the payment to the Depository Trust Company.
Details of
this collective procedure are available from the Depository
Trust Company. This procedure is currently permitted by
German tax authorities but that permission may be revoked, or
the procedure may be amended, at any time in the future.
Individual claims for refunds may be made on a special German
form, which must be filed with the German Federal Tax Office
(Bundeszentralamt für Steuern, An der Küppe 1,
D-53225 Bonn, Germany) within four years from the end of the
calendar year in which the dividend is received. Copies of the
required forms may be obtained from the German tax authorities
at the same address or from the Embassy of the Federal Republic
of Germany, 4645 Reservoir Road, NW, Washington D.C.
20007-1998.
As part of the individual refund claim, a U.S. shareholder
must submit to the German tax authorities the original
withholding certificate (or a certified copy thereof) issued by
the paying agent documenting the tax withheld and an official
certification of United States tax residency on
IRS Form 6166. IRS Form 6166 generally may be
obtained by filing a properly completed IRS Form 8802 with
the Internal Revenue Service, Philadelphia Service Center,
U.S. Residency Certification Request,
P.O. Box 16347, Philadelphia, PA
19114-0447.
Requests for certification must include the
U.S. shareholder’s name, Social Security Number or
Employer Identification Number, the number of the form on which
the tax return was filed and the tax period for which the
certification is requested. The Internal Revenue Service will
send the certification on IRS Form 6166 to the
U.S. shareholder who then must submit the certification
with the claim for refund.
Taxation
of Capital Gains
Generally, capital gains from the disposition of ADSs realized
by a Non-German shareholder are only subject to German tax if
such shareholder at any time during the five years preceding the
disposition, directly or indirectly, held an interest of 1% or
more in a company’s issued share capital. If the
shareholder has acquired the ADSs without consideration, the
previous owner’s holding period and size of shareholding
will also be taken into account.
If the shareholder is an individual, one half (after 2008: 60%)
of the capital gain will generally be taxable. If the
shareholder is a corporation, effectively 5% of the capital gain
will generally be taxable. However, most German tax treaties,
including the Treaty, provide that Non-German Shareholders who
are beneficiaries under the respective treaty are generally not
subject to German tax even under the circumstances described in
the preceding paragraph. See the discussion regarding
shareholders that generally are eligible for benefits under the
Treaty in “— United States Taxation,” below.
After 2008, capital gains from the disposition of ADSs held with
a German paying agent (including a German branch of a non-German
financial services institution) may be subject to a withholding
tax of 25% plus solidarity surcharge of 5.5% (in total; 26.375%)
Special rules may apply to certain companies of the finance or
insurance sector (including pension funds) that are not
protected from German tax under a tax treaty.
Inheritance
and Gift Tax
Under German domestic law, the transfer of ADSs will be subject
to German inheritance or gift tax on a transfer by reason of
death or as a gift if:
(a) the donor or transferor or the heir, donee or other
beneficiary is resident in Germany at the time of the transfer,
or, if a German citizen, was not continuously outside of Germany
and without German residence for more than five years; or
(b) at the time of the transfer, the ADSs are held by the
decedent or donor as assets of a business for which a permanent
establishment is maintained or a permanent representative is
appointed in Germany; or
(c) the decedent or donor has held, alone or together with
related persons, directly or indirectly, 10% or more of a
company’s registered share capital at the time of the
transfer.
The few presently existing German estate tax treaties (e.g., the
Estate Tax Treaty with the United States) usually provide that
German inheritance or gift tax may only be imposed in cases
(a) and (b) above.
There are no transfer, stamp or similar taxes which would apply
to the sale or transfer of the ADSs in Germany. Such sale or
transfer, however, would be subject to Value Added Tax (VAT) if
an option to subject such transfer to VAT were exercised. Net
worth tax is no longer levied in Germany.
United
States Taxation
This section is a summary, under current law, of the material
U.S. federal income tax considerations relevant to an
investment by a U.S. shareholder in the ADSs. This summary
applies only to holders that are eligible for benefits as
U.S. residents under the Treaty in respect of their
investment in the ADSs (“U.S. shareholders”). In
general, a shareholder will be eligible for such benefits if the
shareholder:
(i)
is:
•
an individual U.S. citizen or resident;
•
a corporation organized under the laws of the United States of
America or any state thereof; or
•
an entity otherwise subject to U.S. federal income taxation
on a net basis with respect to the underlying shares or the ADSs;
(ii)
is not also a resident of Germany for German tax purposes;
(iii)
is the beneficial owner of the ADSs (and the dividends paid with
respect thereto);
(iv)
holds the ADSs as a capital asset for tax purposes;
(v)
does not hold the ADSs in connection with the conduct of
business through a permanent establishment, or the performance
of personal services through a fixed base, in Germany; and
(vi)
is not subject to an anti-treaty shopping provision in the
Treaty that applies in limited circumstances.
This summary does not purport to be a comprehensive description
of all of the tax considerations that may be relevant to any
particular investor, and does not address the tax treatment of
investors who are subject to special rules, such as financial
institutions and persons whose functional currency is not the
U.S. dollar. It is based upon the assumption that
prospective shareholders are familiar with any special tax rules
to which they may be subject. Prospective purchasers should
consult their own tax advisers concerning the U.S. federal,
state, local and other national tax consequences of purchasing,
owning and disposing of the ADSs in light of their particular
circumstances.
In general, for U.S. federal income tax purposes and for
purposes of the Treaty, holders of ADSs will be treated as the
owners of our shares represented by those ADSs.
Taxation
of Dividends
U.S. shareholders must include the gross amount of cash
dividends paid in respect of the ADSs, without reduction for
German withholding tax, in ordinary income on the date that they
are treated as having received them, translating dividends paid
in euro into U.S. dollars using an exchange rate in effect
on that date.
Subject to certain exceptions for short-term and hedged
positions, the U.S. dollar amount of dividends received by
a non-corporate U.S. shareholder with respect to the ADSs
before January 1, 2011 will be subject to taxation at a
maximum rate of 15% if the dividends are “qualified
dividends”. Dividends received with respect to the ADSs
will be qualified dividends if (i)(a) the company is eligible
for the benefits of a comprehensive income tax treaty with the
United States that the IRS has approved for the purposes of the
qualified dividend rules or (b) the ADSs of the company are
readily tradable on an established securities market in the
United States, and (ii) the company was not, in the year
prior to the year in which the dividend was paid, and is not, in
the year in which the dividend is paid, a passive foreign
investment company (“PFIC”). ADSs traded on the New
York Stock Exchange will be treated as readily tradeable on an
established securities market in the United States. The Treaty
has been approved for the purposes of the qualified dividend
rules. Based on the company’s audited financial statements
and relevant market
and shareholder data, the company believes that it was not
treated as a PFIC for U.S. federal income tax purposes with
respect to its taxable year ended September 30, 2007. In
addition, based on its audited financial statements and its
current expectations regarding the value and nature of its
assets, the sources and nature of its income, and relevant
market and shareholder data, the company does not anticipate
becoming a PFIC for its taxable year ending September 30,2008 or in the foreseeable future.
German tax withheld from dividends will be treated, up to the
15% rate provided under the Treaty, as a foreign income tax
that, subject to generally applicable limitations under
U.S. tax law, is eligible for credit against the
U.S. federal income tax liability of U.S. shareholders
or, if they have elected to deduct such taxes, may be deducted
in computing taxable income. As discussed in the preceding
section regarding German Taxation, German withholding tax will
generally be imposed at a rate of 20% (after 2008: 25%) plus
solidarity surcharge of 5.5% (in total 21.1%; after 2008:
26.375%). However, U.S. taxpayers who qualify for benefits
under the Treaty as discussed above may request a refund of
German tax withheld in excess of the 15% rate provided in the
treaty. A new protocol to the Treaty was signed in Berlin on
June 1, 2006 but it has not yet been ratified. Among other
items, the protocol provides for new limitation of benefit
provisions. Fluctuations in the dollar-euro exchange rate
between the date that U.S. shareholders receive a dividend
and the date that they receive a related refund of German
withholding tax may give rise to foreign currency gain or loss,
which generally is treated as ordinary income or loss for
U.S. tax purposes.
Taxation
of Sales or Other Taxable Dispositions
Sales or other taxable dispositions by U.S. shareholders of
ADSs generally will give rise to capital gain or loss equal to
the difference between the U.S. dollar value of the amount
realized on the disposition and the U.S. shareholder’s
U.S. dollar basis in the ADSs. Any such capital gain or
loss will be long-term capital gain or loss, subject to taxation
at reduced rates for non-corporate taxpayers, if the ADSs were
held for more than one year. Gain, if any, realized by a
U.S. shareholder on the sale or other disposition of ADSs
generally will be treated as U.S. source income for
U.S. foreign tax credit purposes. The deductibility of
capital losses is subject to limitations.
Deposits and withdrawals of underlying shares by
U.S. shareholders in exchange for ADSs will not result in
the realization of gain or loss for U.S. federal income tax
purposes. Such an exchanging U.S. shareholder will have a
tax basis in the securities received equal to the basis such
holder had in the exchanged securities. A
U.S. shareholder’s holding period for securities
received in such an exchange will include the holding period
such U.S. holder had in the securities prior to such
exchange.
Information
Reporting and Backup Withholding
Dividends paid in respect of ADSs, and payments of the proceeds
of a sale of ADSs, paid within the United States or through
certain
U.S.-related
financial intermediaries are subject to information reporting
and may be subject to backup withholding unless the holder
(i) is a corporation or other exempt recipient or
(ii) provides a taxpayer identification number and
certifies that no loss of exemption from backup withholding has
occurred. Holders that are not U.S. persons generally are
not subject to information reporting or backup withholding.
However, such a holder may be required to provide a
certification to establish its
non-U.S. status
in connection with payments received within the United States or
through certain
U.S.-related
financial intermediaries (generally an IRS
Form W-8BEN).
Backup withholding is not an additional tax. Amounts withheld as
backup withholding may be credited against a holder’s
U.S. federal income tax liability. A holder may obtain a
refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund
with the IRS and furnishing any required information.
Exchange
Controls and Limitations Affecting Shareholders
There are currently no legal restrictions in Germany on
international capital movements and foreign exchange
transactions, except in limited embargo circumstances relating
to certain areas, entities or persons as a result of applicable
resolutions adopted by the United Nations and the European
Union. Restrictions currently exist with respect to, among
others, Burma, Cote d’ Ivoire, Republic of Congo, North
Korea, Iran, Iraq, Lebanon, Syria, Zimbabwe, Somalia and Sudan.
For statistical purposes, with some exceptions, every
corporation or individual residing in Germany must report to the
German Central Bank any payment received from or made to a
non-resident corporation or individual if the payment exceeds
€12,500 (or the equivalent in a foreign currency).
Additionally, corporations and individuals residing in Germany
must report to the German Central Bank any claims of a resident
corporation or individual against, or liabilities payable to,
non-resident corporations or individuals exceeding an aggregate
of €5 million (or the equivalent in a foreign
currency) at the end of any calendar month.
German residents are also required to report annually to the
German Central Bank any shares or voting rights of 10% or more
they hold or control in non-resident corporations with total
assets of more than €3 million. Corporations residing
in Germany with assets in excess of €3 million must
report annually to the German Central Bank any shares or voting
rights of 10% held by a non-resident.
Neither German law nor our Articles of Association restricts the
right of non-resident or foreign owners of shares to hold or
vote the shares.
Documents
on Display
Our Company is subject to the informational requirements of the
Securities Exchange Act of 1934 as amended. We file reports and
other information with the Securities and Exchange Commission.
Such reports and other information, including this annual report
and its exhibits, can be inspected and copied at the public
reference facilities of the SEC located at the SEC’s Public
Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information
on the operation of the SEC’s Public Reference Room by
calling the SEC in the United States at
1-800-SEC-0330.
The SEC also maintains a web site at
http://www.sec.gov
that contains reports and other information regarding
registrants that file electronically with the SEC.
Controls
and Procedures
Disclosure
Controls and Procedures
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our company’s disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act) as of September 30, 2007. Based on
this evaluation, our chief executive officer and chief financial
officer concluded that, as of September 30, 2007, our
company’s disclosure controls and procedures were
(1) designed to ensure that material information relating
to Qimonda, including its consolidated subsidiaries, is made
known to our chief executive officer and chief financial officer
by others within those entities, as appropriate, to allow timely
decisions regarding required disclosure and (2) effective,
in that they provide reasonable assurance that information
required to be disclosed by Qimonda in the reports that it files
or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms.
Management’s
Annual Report on Internal Control over Financial
Reporting
Our management is also responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in
Rule 13a-15(f)
or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or
under the supervision of, our chief executive and chief
financial officers and effected by our board, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles, and includes
those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of our company;
•
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of our company are being made
only in accordance with authorizations of management and board
of our company; and
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
company’s assets that could have a material effect on our
financial statements.
Our management assessed the effectiveness of our internal
control over financial reporting as of September 30, 2007.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control-Integrated
Framework”. Based on our assessment, management concluded
that, as of September 30, 2007, our internal control over
financial reporting is effective based on those criteria.
Our independent auditors have issued an audit report on our
assessment of our company’s internal control over financial
reporting. This report which appears in the accompanying
Item 18: Financial Statements is included elsewhere in this
annual report.
Changes
in Internal Controls over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) occurred during the financial year ended
September 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Limitations
There are inherent limitations to the effectiveness of any
system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple
error or mistake, fraud, the circumvention of controls by
individual acts or the collusion of two or more people, or
management override of controls. Accordingly, even an effective
disclosure and internal control system can provide only
reasonable assurance with respect to disclosures and financial
statement preparation. Furthermore, because of changes in
conditions, the effectiveness of a disclosure and internal
control system may vary over time.
Use
of Proceeds
On August 8, 2006, a registration statement (Registration
No. 333-135913)
relating to our initial public offering was declared effective
by the Securities and Exchange Commission. Under this
registration statement, we registered 72,450,000 of our ordinary
shares. A maximum of 42,000,000 ordinary shares registered were
to be offered by us at a proposed aggregate offering price of
$756,000,000, and a maximum of 30,450,000 of the ordinary shares
registered were to be offered by Infineon Technologies AG,
including 9,450,000 shares subject to the
underwriters’ over-allotment option, at a proposed
aggregate offering price of $548,100,000. A total of 48,300,000
ordinary shares registered under the registration statement were
ultimately sold in the United States (in the form of American
Depositary Shares, or ADSs). 42,000,000 ADSs were sold by us at
an aggregate offering price of $546,000,000 and 6,300,000 ADSs
covered by the over-allotment option were sold by Infineon
Technologies AG at an aggregate offering price of $81,900,000.
The offering was completed on August 9, 2006. The
underwriters were Credit Suisse Securities (USA) LLC, Citigroup
Global Markets Inc., J.P. Morgan Securities, Inc., ABN AMRO
Rothschild, Bayerische Hypo- und Vereinsbank AG and Deutsche
Bank Securities Inc.
The aggregate net proceeds to us from the offering were
approximately €415 million, net of offering costs and
net of tax benefits thereon. We paid $16.38 million in
total underwriting discounts and commissions paid to the
underwriters, total underwriters’ expenses of $750,000 and
an estimated $9.65 million in other expenses incurred in
connection with the offering. No amount of these expenses was
paid to our directors and officers, our major shareholders or
our affiliates. We used the net offering proceeds of
€415 million to finance investments in our
manufacturing facilities and for research and development. In
our 2007 financial year we invested these proceeds primarily in
our 300mm front-end manufacturing sites in Richmond, Virginia
and Dresden, Germany for capacity expansion and new equipment
for the technical conversion to the 80nm and smaller technology
nodes as well as approximately €77 million in our
actual research and development activities.
Our Supervisory Board has determined that Mr. Previte is an
“audit committee financial expert”, as such term is
defined in item 16A(b) of
Form 20-F.
Principal
Accountant Fees and Services
Audit Fees. KPMG, our auditors, charged
us an aggregate of €3.4 and €3.0 million for the
2006 and 2007 financial years, respectively, in connection with
professional services rendered for the audit of our annual
consolidated financial statements and services normally provided
by them in connection with statutory and regulatory filings or
other compliance engagements. These services consisted of
quarterly review engagements and the annual audit.
Audit-Related Fees. In addition to the
amounts described above, KPMG charged us an aggregate amount of
€3,000 for compliance work on subsidies in the 2006
financial year and €100,000 for compliance and information
technology system audits as well as professional services in
connection with the filing of our registration statement in the
2007 financial year.
Tax Fees. KPMG did not charge us any
amounts in the 2006 and 2007 financial year, respectively for
tax services
All Other Fees. KPMG did not charge us
any amounts in the 2006 and 2007 financial year, respectively
for other professional services.
The above services fall within the scope of audit and permitted
non-audit services within the meaning of section 201 of the
Sarbanes-Oxley Act of 2002. Our Investment, Finance and Audit
Committee has pre-approved KPMG’s performance of these
audit and permitted non-audit services and set limits on the
types of services and the maximum cost of these services in any
financial year. KPMG reports to our Investment, Finance and
Audit Committee on an annual basis on the type and extent of
non-audit services provided during the period and compliance
with these criteria.
Code
of Ethics
We have adopted a code of ethics (as a part of our
“Business Conduct Guidelines”) that applies to all of
our employees worldwide, including our principal executive
officer, principal financial officer and principal accounting
officer within the meaning of Item 16B of
Form 20-F.
These guidelines provide rules and conduct guidelines aimed at
ensuring high ethical standards throughout our organization. You
may obtain a copy of our code of ethics, at no cost, by writing
to us at Qimonda AG, Gustav-Heinemann-Ring 123, D-81739 Munich,
Germany, Attention: Legal Department.
Exemption
from the Listing Standards for Audit Committee
We rely on the exemption afforded by
Rule 10A-3(b)(1)(iv)(C)
under the Securities and Exchange Act of 1934, as amended. We
believe that such reliance does not materially adversely affect
the ability of our audit committee to act independently or to
satisfy the other requirements of
rule 10A-3.
Contracts that are material to us are described in
“Operating and Financial Review — Capital
Requirements — Credit Facilities”, “Our
Business — Strategy Alliances and Agreements” and
“Related Party Transactions and Relationships —
with Infineon”.
American Depositary Shares. ADSs are securities issued by a
depositary that represent ownership interests in underlying
ordinary shares held by the depositary’s custodian. ADSs
may be evidenced by American Depositary Receipts (ADRs). Each
Qimonda AG ADS represents one ordinary share.
Advanced Memory Buffer (AMB)
A logic chip that enables high speed communication between the
memory controller and a fully buffered DIMM in a server system.
back-end
The packaging, assembly and testing stages of the semiconductor
manufacturing process, which take place after electronic
circuits are imprinted on silicon wafers in the front-end
process.
bit
A unit of information; a computational quantity (binary pulse)
that can take one of two values, such as true and false or 0 and
1; also the smallest unit of storage sufficient to hold one bit.
byte
A unit of measurement equal to eight bits.
Computer Aided Design (CAD)
A designation of software tools used in the design of integrated
circuits.
capacitor
An electronic device that stores electrical charges. Capacitors
are used to store information in a DRAM chip.
cell
A primary unit that normally repeats many times in an integrated
circuit. Cells represent individual functional design units or
circuits that may be reused as blocks in designs. For example, a
memory cell represents a storage unit in a memory array.
chip
Popular term describing a section of a wafer that contains a
discrete component or an integrated circuit. Also called a
“die”.
circuit
A combination of electrical or electronic components,
interconnected to perform one or more functions.
clean room
An area within a fab in which the wafer fabrication takes place.
The classification of a clean room relates to the maximum number
of particles of contaminants per cubic foot within that room.
For example, a class 100 clean room contains fewer than 100
particles of contaminants per cubic foot.
DDR SDRAM
Double Data Rate SDRAM. A form of DRAM chip that activates
output on both the rising and falling edge of the system clock
rather than on just the rising edge, potentially doubling output.
DDR2 SDRAM
Double Data Rate 2 SDRAM is an enhanced form of DDR SDRAM that
offers higher data transfer rates compared to its predecessor.
DDR3 SDRAM
Double Data Rate 3 SDRAM. Successor to DDR2 SDRAM currently in
advanced stages of development.
Die
A chip.
Dual Inline Memory Module (DIMM)
A type of printed circuit board composed of DRAM chips mounted
on a circuit board in a particular configuration.
The most common type of random access memory. Each bit of
information is stored as an amount of electrical charge in a
storage cell consisting of a capacitor and a transistor. The
capacitor discharges gradually due to leakage and the memory
cell loses the information stored. To preserve the information,
the memory has to be refreshed periodically and is therefore
referred to as “dynamic”. DRAM is the most widespread
memory technology because of its high memory density and
relatively low price.
fab
A semiconductor fabrication facility, in which the front-end
manufacturing process takes place.
feature size
A measurement (generally in micron or nm) of the width of the
smallest patterned feature or circuit on a semiconductor chip.
flash memory
A type of non-volatile memory that can be erased and
reprogrammed.
front-end
The wafer processing stage of the semiconductor manufacturing
process, in which electronic circuits are imprinted onto raw
silicon wafers. This is followed by the packaging, assembly and
testing stages, which comprise the back-end process.
foundry
A semiconductor manufacturer that makes chips for third parties.
gigabit (Gb)
Approximately one billion bits (1,073,741,824 bits). Generally
used to indicate the storage capacity (or density) of memory
chips.
gigabyte (GB)
Approximately one billion bytes (1,073,741,824 bytes). Generally
used to indicate the storage capacity (or density) of memory
modules.
Integrated Circuit (IC)
An electronic circuit in which all elements of the circuit are
integrated on a single semiconductor device.
ISO
International Standards Organization. The international
organization responsible for developing and maintaining
worldwide standards for manufacturing, environmental protection,
computers, data communications and many other fields.
library
The collection of representations required by various design
tools. The representations, such as symbol, simulation model,
layout abstract, and transistor schematic, are used by different
tools in the design system to create or analyze some portion of
an IC or otherwise aid in the design process. Creating a design
library requires inserting the fabrication technologies in the
design system in a form that allows designers to create circuits
in the most efficient manner.
logic
One of the three major classes of integrated circuits (along
with processors and memory). Logic ICs are used for data
manipulation and control functions.
mask
A transparent glass or quartz plate covered with an array of
patterns used in the IC manufacturing process to create
circuitry patterns on a wafer. Each pattern consists of opaque
and transparent areas that define the size and shape of all
circuit and device elements. The mask is used to expose selected
areas, and defines the areas to be processed. Masks may use
emulsion, chrome, iron oxide, silicon or other material to
produce the opaque areas.
Approximately one million bits (1,048,576 bits). Generally used
to indicate the storage capacity (or density) of memory chips.
megabyte (MB)
Approximately one billion bytes (1,048,576 bytes). Generally
used to indicate the storage capacity (or density) of memory
modules.
memory semiconductors
Semiconductors that store data in digital form.
NAND flash
A type of flash memory commonly used for mass storage
applications such as digital audio players and digital cameras.
nanometer (nm)
A metric unit of linear measure that equals one billionth of a
meter (or 1/1,000th of a micron). This unit of measurement is
commonly used to indicate the width of the smallest patterned
feature or circuit on a semiconductor chip (the so-called
feature size).
non-volatile memory
A type of semiconductor memory that retains data even when
electrical power is shut off.
NOR flash
A type of flash memory commonly used for the storage of code
data, such as the software instructions in a mobile phone.
NROM Flash
Nitrided Read Only Memory. A flash technology that can store two
bits per cell. Charges are locally separated on both ends of the
memory transistor cell. This compares with other non-volatile
technologies like floating gate technology, which store one or
two bits by different charge amounts spread over the whole
transistor cell.
OEM
Original Equipment Manufacturer. A company that acquires a
product or component and reuses or incorporates it into a new
product with its own brand name.
package
The protective container of an electronic component or die, with
external terminals to provide electrical access to the
components inside.
photolithography
A step in the front-end process of semiconductor manufacturing
in which a form of ultraviolet light is used to draw a pattern
of an IC on a silicon wafer. The sophistication of this process
and the related equipment determines the achievable feature
sizes on memory chips, and therefore is a key determinant in the
ability of manufacturers continuously to improve the capacity
(or density) of memory ICs.
process technology
The procedures used in the front-end process to convert raw
silicon wafers into finished wafers containing hundreds or
thousands of chips.
Random Access Memory (RAM)
A type of digital memory that functions as the main workspace of
a computer. The order of access to bits at different locations
does not affect the speed of access (and is therefore
“random”). This is in contrast to, for example, a
magnetic or optical disk or magnetic tape, which are used for
long-term storage of data on a computer, but which are too slow
to be used for primary workspace.
photoresist
A photoactive chemical that is used in the photolithography
process, in which the design of an integrated circuit is drawn
on a silicon wafer.
semiconductor
Generic name for devices, such as transistors and integrated
circuits that control the flow of electrical signals. More
generally, a material, typically crystalline, that can be
altered to allow electrical current to
flow or not flow in a pattern. The most common semiconductor
material for use in integrated circuits is silicon.
server
A computer that provides a service for other computers connected
to it via a network. The most common example is a file server,
which has a local disk and services requests from remote clients
to read and write files on that disk.
silicon
A type of semiconducting material used to make a wafer. Silicon
is widely used in the semiconductor industry as a base material.
Static Random Access Memory (SRAM)
A type of volatile memory product that is used in electronic
systems to store data and program instructions. Unlike the more
common DRAM, it does not need to be electronically refreshed
(and is therefore “static”).
Synchronous DRAM (SDRAM)
A generic name for various kinds of DRAM that are synchronized
with the clock speed for which the microprocessor is optimized.
This tends to increase the number of instructions that the
processor can perform in a given time.
transistor
An individual circuit that can amplify or switch electric
current. This is the building block of all integrated circuits.
volatile memory
A type of semiconductor memory that loses stored information if
the power source is removed.
wafer
A disk made of a semiconducting material such as silicon,
currently usually either 200mm or 300mm in diameter, used to
form the substrate of a chip. A finished wafer may contain
several thousand chips.
yield
The percentage of usable dies produced on a silicon wafer in the
front-end process.
USB
Universal Serial Bus. A protocol for transferring data to and
from digital devices.
USB drive
A portable data storage device based on flash memory that uses
USB interface protocol.
Pursuant to
Rule 3-09
of
Regulation S-X,
separate financial statements for Inotera Memories, Inc. are
herein incorporated by reference. Reference is made to pages F-1
through F-45, incorporated herein by reference, on
Form 20-F/A
filed on March 30, 2007, which include the following
consolidated financial statements of Inotera Memories, Inc.
•
Report of Independent Registered Public Accounting Firm.
•
Consolidated Statements of Operations for the years ended
December 31, 2005 and 2006.
Consolidated Statements of Shareholders’ Equity for the
years ended December 31, 2005 and 2006.
•
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2006.
•
Notes to the Consolidated Financial Statements.
Reference is made to pages F-61 through F-93, incorporated
herein by reference, on
Form 20-F
filed on November 21, 2006, which include the following
consolidated financial statements of Inotera Memories, Inc.
•
Report of Independent Registered Public Accounting Firm.
•
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2005.
Report
of Independent Registered Public Accounting Firm
The Supervisory Board
Qimonda AG:
We have audited the accompanying consolidated balance sheets of
Qimonda AG and subsidiaries (the “Company”) as of
September 30, 2006 and 2007, and the related combined and
consolidated statements of operations,
business/shareholders’ equity, and cash flows for each of
the years in the three-year period ended September 30,2007. We also have audited management’s assessment,
included in the accompanying Item 15: Controls and
Procedures — Management’s Annual Report on
Internal Control over Financial Reporting, that Qimonda AG and
subsidiaries maintained effective internal control over
financial reporting as of September 30, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). The Company’s
management is responsible for these combined and consolidated
financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these combined and
consolidated financial statements, an opinion on
management’s assessment, and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the combined and consolidated financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the combined and
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a
material effect on the financial statements. Because of its
inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the combined and consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Qimonda AG and subsidiaries
as of September 30, 2006 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2007, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, management’s assessment that Qimonda AG and
subsidiaries maintained effective internal control over
financial reporting as of September 30, 2007, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework issued by
COSO. Furthermore, in our opinion, Qimonda AG and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of September 30, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by COSO.
Notes to the Combined and Consolidated Financial Statements
(euro in millions, except where otherwise stated)
1.
Description
of Business, Formation and Basis of Presentation
Description
of Business
Qimonda AG and its subsidiaries (collectively, the
“Company” or “Qimonda”) is one of the
world’s leading suppliers of semiconductor memory products.
It designs memory technologies and develops, manufactures,
markets and sells a large variety of memory products on a
module, component and chip level. Qimonda has operations,
investments and customers located mainly in Europe, Asia and
North America. The Company is a majority-owned subsidiary of
Infineon Technologies AG 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. In cases where physical
contribution (ownership transfer) of assets and liabilities were
not feasible or cost effective, the monetary value was
transferred in the form of cash or debt.
On August 9, 2006the Company completed its Initial Public
Offering (“IPO”) on the New York Stock Exchange
through the issuance of 42 million ordinary shares, which
are traded as American Depositary Shares (“ADSs”)
under the symbol “QI” (note 23). In addition,
Infineon sold 6.3 million shares upon exercise of the
underwriters’ over-allotment option. Infineon’s
ownership interest in the Company was 85.9% at
September 30, 2006 and was reduced to 77.5% at
September 30, 2007 (note 27).
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. The
Company’s Korea and Japan operations were legally
transferred to Qimonda during the year ended September 30,2007. Infineon contributed additional equity of €14 during
the financial year ended September 30, 2007, principally
related to the transfer of the Japan operations.
The Company’s investment in Inotera Memories Inc.
(“Inotera”), previously held in trust by Infineon, was
transferred to Qimonda in March 2007 (note 16).
Infineon’s investments in Advanced Mask Technology Center
GmbH & Co. (“AMTC”) and Maskhouse Building
Administration GmbH & Co. KG (“BAC”) are
intended to be transferred by Infineon after approval by the
other shareholders in the venture, although pursuant to the AMTC
and BAC limited partnership agreements, such consent may not be
unreasonably withheld. The accompanying financial statements
include the results of operations of these activities for all
periods presented.
Basis
of Presentation
The accompanying combined and consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America
(U.S. GAAP).
The accompanying combined and consolidated financial statements
are presented on a combined basis for periods prior to the
Formation and on a consolidated basis for all periods thereafter.
Periods prior to the Formation (that is until May 1,2006) are presented on a “carve-out” basis and
comprise the combined historical financial statements of the
transferred Memory Products business assuming that the Company
had existed as a separate legal entity. These combined financial
statements have been derived from the consolidated financial
statements and historical accounting records of Infineon,
employing the methods and assumptions set forth below.
Substantially all of the assets, liabilities, operations and
activities of the Memory Products business are those that
comprised the Memory Products segment of Infineon during the
financial periods presented prior to the Formation.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Qimonda AG is incorporated in Germany. Pursuant to
paragraph 291 of the German Commercial Code
(“Handelsgesetzbuch” or “HGB”) the
Company is exempted from preparing consolidated financial
statements in accordance with either the HGB accounting
principles and regulations (“German GAAP”) or
international financial reporting standards (“IFRS”),
since its ultimate parent company, Infineon, prepares and issues
consolidated financial statements according to U.S. GAAP in
compliance with the transitional regulation of the German
Bilanzrechtsreformgesetz Article 58, paragraph 3
EGHGB. Accordingly, the Company presents the U.S. GAAP
combined and consolidated financial statements contained herein.
All amounts herein are shown in millions of euro (or
“€”) except where otherwise stated. The
accompanying balance sheet as of September 30, 2007, and
the statements of operations and cash flows for the year then
ended are also presented in U.S. dollars (“$”),
solely for the convenience of the reader, at the rate of €1
= $1.4219, the Federal Reserve noon buying rate on
September 28, 2007, the last currency trading day in
September 2007.
Certain amounts in prior year consolidated financial statements
and notes have been reclassified to conform to the current year
presentation. Dividends received from Associated Companies,
previously reported as part of cash flows from investing
activities in the consolidated statements of cash flows, have
been reclassified to cash flows from operating activities. The
Company’s consolidated results of operations or overall
cash flows have not been affected by these reclassifications.
Statements
of Operations
Through the Formation, the combined statements of operations
were prepared on a carve-out basis and reflect all revenues and
expenses that were attributable to the Memory Products business.
Operating expenses or revenues of the Memory Products business
specifically identified as pertaining to the Memory Products
business were charged or credited directly to it without
allocation or apportionment. This is the case for all of the
revenues appearing on the combined statements of operations.
Operating expenses that Infineon incurred were allocated to the
Memory Products business to the extent that they were related
and indirectly attributable to it. These expenditures, with the
exception of certain corporate items, were mainly allocated from
each of a number of what Infineon refers to as
“clusters”, which are groups of functional departments
for which Infineon accounts on a cost center basis.
The costs allocated from the clusters include charges for
facilities, functions and services provided by shared Infineon
facilities for the Memory Products business, expenses for
certain functions and services performed by centralized Infineon
departments, a portion of Infineon’s general corporate
expenses and certain research and development expenses. The
allocations from each cluster were made based on allocation
methods, or allocation keys, which vary depending on the nature
of the expenditures being allocated. The allocation keys are
consistent with those Infineon used to allocate expenses among
its segments, although historically Infineon did not allocate
the expenses of some central activities and instead accounted
for these as corporate costs.
The following assumptions and allocation methods were used for
significant allocated expenses included in the combined
statements of operations:
• The Infineon Central R&D cluster costs include
research and development activities related to semiconductor
electronic technologies, circuits, and related systems. The
allocation is based on total sales.
• The Infineon Logistic cluster costs include all
logistics expenses related to distribution centers including
handling, traffic and customs, packaging and freight. It also
includes expenses for corporate logistics in Europe, Asia and
North America. The allocation to the Memory Products business is
based partly on unit volume and partly on sales.
• The Infineon Sales cluster covers all central
selling expenses related to the activities of pricing office,
account management, distribution management, receivables
management, export control and commissions.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The allocation to the Memory Products business is based,
depending on the relevant function, on the dedicated headcount
of the business and also on sales.
• The Infineon IT-Services cluster costs include all
expenses incurred relating to the design, implementation and
operation of IT systems and related administration. The
allocation is based, depending on the relevant function, on
either the total direct cost, the total research and development
cost or the total cost of sales of the Memory Products business.
• The Infineon Finance and Treasury cluster costs
include all financial income and expense, as well as foreign
exchange gains and losses, related to treasury market activities
(foreign exchange management, money market transactions and
interest rate management). The allocation is based on the total
direct costs.
• The Infineon Central cluster costs include strategic
and general central functions within the Infineon headquarters
or its regional organizations. The allocation is based on the
total direct costs.
The combined statements of operations include depreciation
expense for all property, plant and equipment owned and operated
by the Memory Products business.
Allocations from Infineon during the year ended
September 30, 2005 and the seven months ended
April 30, 2006, are reflected in the combined statements of
operations as follows:
Since the Formation, the Company entered into several service
agreements with Infineon. As a result, costs are no longer
allocated after the Formation, but rather charged on the basis
of the respective agreements (note 27).
For periods prior to the Formation, income taxes, as presented
in the accompanying combined and consolidated financial
statements, were calculated as if the Company had filed separate
tax returns for each of the years presented (separate return
basis), although in numerous tax jurisdictions, including
Germany, the Company was included in the consolidated tax
returns of Infineon prior to the Formation. Where the Memory
Products business was only a part of an Infineon entity, the tax
provision was prepared on an as-if separate company basis except
that, pursuant to the terms of the contribution agreement
between the Company and Infineon, any net operating losses
generated by the Memory Products business and carried forward
were treated as a reduction of business equity, as such losses
were retained by Infineon. Infineon evaluates its tax position
and related tax strategies for its entire group as a whole,
which may differ from the tax strategies the Company would have
followed as a stand-alone company. The Company’s future
effective tax rate after the Formation may differ from those
indicated in the accompanying combined and consolidated
financial statements prior to the Formation.
Balance
Sheets
The assets and liabilities attributable to the Memory Products
business were contributed to the Company, in general, at their
historical costs. In certain jurisdictions where tax regulations
do not permit the tax-free transfer of assets or liabilities to
the Company, they were revalued for tax purposes, but not for
accounting purposes. Unless otherwise noted, all assets and
liabilities specifically identifiable as pertaining to the
Memory Products business are included in the combined and
consolidated financial statements. Where legal entities were
wholly allocable to the
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Memory Products business, the shares of these entities were
transferred to the Memory Products business. In some cases,
including at the Infineon parent company level, the
memory-related assets and liabilities were identified and carved
out by means of asset and liability transfer transactions.
For carve-out transfers, the assets and liabilities directly
identifiable as pertaining to the Memory Products business
include inventories, long-term investments, fixed assets and
accounts receivable. The following assumptions and allocations
were used for those assets and liabilities that were not
specifically identifiable to the Memory Products business:
Trade
Accounts Payable
Trade accounts payable include identifiable payables from
specific Memory Products business’ vendors and service
suppliers as well as an allocation of payables from
Infineon-specified vendors.
Other
Current and Accrued Liabilities
Other current and accrued liabilities include direct payroll
obligations and payroll obligations, which were allocated based
on the Memory Products business and an allocation of the
Infineon employees in corporate functions that in part supported
the Memory Products business.
Pension
Liabilities
Pension expenses and related liabilities were measured based on
actuarial computations and were determined, with respect to all
of the employees that participate in Infineon’s defined
benefit pension plans, based on the number of employees of the
Memory Products business and an allocation of the Infineon
employees in corporate functions that, in part, supported the
Memory Products business.
Investments
by and Advances from Infineon
Because a direct ownership relationship did not exist among the
various entities comprising the Memory Products business prior
to the Formation, Infineon’s investments in and advances to
the Memory Products business represent Infineon’s interest
in the recorded net assets of the Memory Products business, and
are shown as business equity in lieu of shareholder’s
equity in the combined financial statements. Prior to the
Formation, net income (loss) of the Memory Products business
forms part of business equity (investments by and advances from
Infineon). Subsequent to the Formation, net income (loss) is
attributed to retained earnings since the Company exists as a
separate legal entity. The effects of equity transactions prior
to Formation are included in “Investments and advances from
Infineon” in the accompanying combined and consolidated
financial statements. At the Formation, net investments by and
advances from Infineon were contributed to the company as
equity, which is reflected as share capital and as additional
paid in capital in the accompanying combined and consolidated
statement of business/shareholders’ equity. All
intercompany transactions, including purchases of inventory,
charges and cost allocations for facilities, functions and
services performed by Infineon for the Memory Products business
are reflected in this amount.
Capital
Structure
The Memory Products business historically relied on Infineon to
provide the financing of its capital requirements, as Infineon
uses a centralized approach to cash management and the financing
of its operations. The historical capital structure of Qimonda
was considered to be based on the following:
• instruments that were directly identified with the
Memory Products business;
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
• cash and intercompany financial receivables reduce
total short and long-term debt, so that the Company has no net
debt;
• a proportional share of total assets constitutes
total cash, cash equivalents, marketable securities and
intercompany financial receivables;
• a proportional share of aggregate total debt and
total business equity constitutes total short and long-term debt.
The allocation of Infineon’s cash and debt in conjunction
with the historical capital structure of the Memory Products
business in the combined and consolidated financial statements
is reflected through the following:
• through the Formation, contribution of €582 in
cash through business equity;
• as of September 30, 2005 and the Formation, the
reduction of inter-company financial receivables of €227
and €66, respectively, by inter-company debt.
At the Formation, net investments by and advances from Infineon
in the amount of €3,372 were contributed to the Company as
equity, which is reflected as €600 ordinary share capital
and €2,772 as additional paid in capital in the
accompanying combined and consolidated statement of
business/shareholders’ equity.
The capital structure attributed to the Memory Products business
in connection with the preparation of the combined financial
statements prior to Formation, based as it is on the business
equity concept and without fully independent financing by the
Company, may not be indicative of the capital structure that the
Memory Products business would have required had it been an
independent company during the financial periods presented.
The Company’s operations were historically financed largely
through contributions from Infineon and, to a lesser extent,
third-party borrowings. The Company’s interest expense
prior to the Formation includes interest charges on certain
intercompany financial liabilities to the Infineon group
companies and interest expense on its external debt based on the
aforementioned capital structure. Interest income prior to the
Formation includes allocations based on the proportional share
of cash and cash equivalents. The Company’s capital
structure after the Formation may differ from the capital
structure presented in the accompanying combined and
consolidated financial statements prior to the Formation as a
result of the issuance of additional ordinary shares by Qimonda
AG as part of its IPO and subsequent financing transactions.
Accordingly, interest expense prior to the Formation reflected
in the accompanying combined and consolidated financial
statements may not necessarily be indicative of the interest
expense that Qimonda AG would have incurred as a stand-alone
entity or will incur in the future.
Estimates
The preparation of the accompanying combined and consolidated
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, as well as disclosure of contingent amounts and
liabilities, at the date of the financial statements and the
reported amounts of revenues and expenses during the periods
presented. Actual results could differ materially from such
estimates made by management. In addition, due to the
significant relationship between Infineon and the Company, the
terms of the carve-out transactions, the allocations and
estimations of assets and liabilities and of expenses and other
transactions between the Memory Products business and Infineon
may not be the same as those that would have resulted from
transactions among unrelated third parties. Management believes
that the assumptions underlying the combined and consolidated
financial statements are reasonable. However, these
transactions, allocations and estimates may not be indicative of
actual results that would have been obtained if the Company had
operated on a stand-alone basis, nor are they indicative of
future transactions or of the expenses or results of operations
of the Company. In addition, the process of preparing the
combined and consolidated financial statements does not permit
the revaluation of historical transactions to attempt to
introduce an arms’-length relationship where one did not
exist at the time. Management believes that it is not
practicable to estimate what the actual costs of the Company
would
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
have been on a stand-alone basis if it had operated as an
unaffiliated entity. Rather than allocating the expenses that
Infineon actually incurred on behalf of the Memory Products
business, management would have had to choose from a wide range
of estimates and assumptions that could have been made regarding
joint overhead, joint financing, shared processes and other
matters. Any of these assumptions may have led to unreliable
results and would not have been more useful as an indicator of
historical business development and performance than the methods
employed in preparing the combined and consolidated financial
statements.
2.
Summary
of Significant Accounting Policies
The following is a summary of significant accounting policies
followed in the preparation of the accompanying combined and
consolidated financial statements.
Basis
of Consolidation
The accompanying combined and consolidated financial statements
include the accounts of the Qimonda AG and its subsidiaries on a
combined and consolidated basis. Consolidated subsidiaries are
entities which are directly or indirectly controlled. Control is
generally conveyed by ownership of the majority of voting
rights. Additionally, the Company consolidates variable interest
entities (VIE’s) pursuant to Financial Accounting Standards
Board (“FASB”) Interpretation No. 46 (R)
“Consolidation of Variable Interest Entities”(“FIN 46(R)”) where the Company is deemed to
be the primary beneficiary. VIE’s are entities for which
either the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional
subordinated financial support, or the equity investors lack an
essential characteristic of a controlling financial interest, or
the investors’ economic interests are disproportionate to
the attached voting rights and substantially all of the
entity’s activities involve or are conducted for an
investor with disproportionately few voting rights.
Investments in companies in which the Company has the ability to
exercise significant influence over operating and financial
policies, generally with an ownership interest of 20% or more
but that are not controlled by the Company, (“Associated
Companies”) are accounted for using the equity method of
accounting (note 16). The equity in earnings of Associated
Companies with financial year ends that differ by not more than
three months from the Company’s financial year end is
recorded on a three month lag. Other equity investments
(“Related Companies”), generally in which the Company
has an ownership interest of less than 20%, are recorded at
cost. The effects of all significant intercompany transactions
are eliminated.
The Qimonda group consists of the following number of entities
in addition to the parent company, Qimonda AG:
The Company’s reporting currency is the euro, and therefore
the accompanying combined and consolidated financial statements
are presented in euro.
The assets and liabilities of foreign subsidiaries with
functional currencies other than the euro are translated using
period-end exchange rates, while the revenues and expenses of
such subsidiaries are translated using average exchange rates
during the period. Differences arising from the translation of
assets and liabilities in comparison
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
with the translation of the previous periods are included in
other comprehensive income (loss) and reported as a separate
component of business/shareholders’ equity as a functional
currency translation adjustment.
The exchange rates of the primary currencies used in the
preparation of the accompanying combined and consolidated
financial statements are as follows:
Exchange Rate
Annual Average
September 30,
Exchange Rate
Currency
2006
2007
2006
2007
euro
euro
euro
euro
U.S. dollar
1$
=
0.7899
0.7052
0.8117
0.7497
New Taiwan dollar
100NTD
=
2.3866
2.1481
2.4823
2.2743
Chinese Yuan Renminbi
100CNY
=
9.9934
9.3844
10.1172
9.7269
Revenue
Recognition
Sales
Revenue from products sold to customers is recognized, pursuant
to U.S. Securities and Exchange Commission
(“SEC”) Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition”, when
persuasive evidence of an arrangement exists, the price is fixed
or determinable, delivery has occurred and collectability is
reasonably assured. The Company records reductions to revenue
for estimated product returns and allowances for discounts,
volume rebates and price protection, based on actual historical
experience, at the time the related revenue is recognized. In
general, returns are permitted only for quality related reasons
within the applicable warranty period, which is typically twelve
months. Distributors can, in certain cases, apply for stock
rotation or scrap allowances and price protection. Allowances
for stock rotation returns are accrued based on expected stock
rotation as per the contractual agreement. Distributor scrap
allowances are accrued based on the contractual agreement and,
upon authorization of the claim, reimbursed up to a certain
maximum of the average inventory value. Price protection
programs allow distributors to apply for a price protection
credit on unsold inventory in the event the Company reduces the
standard list price of the products included in such inventory.
In some cases, rebate programs are offered to specific
distributors whereby the distributor may apply for a rebate upon
achievement of a defined sales volume. Distributors are also
partially compensated for commonly defined cooperative
advertising on a
case-by-case
basis.
License
Income
License income is recognized when earned and realizable
(note 5). Lump sum payments are generally non-refundable
and are deferred where applicable and recognized over the
estimated life span of the technology or the shorter contractual
period. Pursuant to Emerging Issues Task Force
(“EITF”) Issue
00-21,
“Revenue Arrangements with Multiple
Deliverables”, revenues from contracts with multiple
elements entered into after July 1, 2003 are recognized as
each element is earned based on the relative fair value of each
element and when there are no undelivered elements that are
essential to the functionality of the delivered elements and
when the amount is not contingent upon delivery of the
undelivered elements. Royalties are recognized as earned.
Grants
Grants for capital expenditures include both tax-free government
grants (Investitionszulage) and taxable grants for
investments in property, plant and equipment
(Investitionszuschüsse). Grants receivable are
established when a legal right for the grant exists and the
criteria for receiving the grant have been met. Tax-free
government grants are deferred (note 22) and
recognized over the remaining useful life of the related asset.
Taxable grants are deducted from the acquisition costs of the
related asset (note 6) and thereby reduce depreciation
expense in future periods. Other taxable grants reduce the
related expense (notes 6, 20 and 22).
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Product-related
Expenses
Shipping and handling costs associated with product sales are
included in cost of sales. Expenditures for advertising, sales
promotion and other sales-related activities are expensed as
incurred. Provisions for estimated costs related to product
warranties are generally made at the time the related sale is
recorded, based on estimated failure rates and claim history.
Principally, research and development costs are expensed as
incurred.
Income
Taxes
Income taxes are accounted for under the asset and liability
method pursuant to FASB Statement of Financial Accounting
Standards (“SFAS”) No. 109, “Accounting
for Income Taxes”. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Valuation allowances are recorded to reduce deferred tax assets
to an amount that is more-likely-than-not to be realized in the
future. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Investment tax
credits are accounted for under the flow-through method.
Stock-based
Compensation
Prior to the adoption of SFAS No. 123 (revised
2004) “Share Based Payment”, the Company
accounted for stock-based compensation using the intrinsic value
method pursuant to Accounting Principles Board (“APB”)
Opinion 25, “Accounting for Stock Issued to
Employees”, recognized compensation cost over the pro
rata vesting period, and applied the disclosure-only provisions
of SFAS No. 123, “Accounting for Stock-Based
Compensation”as amended by SFAS No. 148
“Accounting for Stock-Based Compensation —
Transition and Disclosure, an Amendment of FASB Statement
No. 123”.
Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method. Under this application, the
Company records stock-based compensation expense for all awards
granted on or after the date of adoption and for the portion of
previously granted awards that remained unvested at the date of
adoption. Stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as
expense over the period during which the employee is required to
provide service in exchange for the award. Upon this
application, prior period amounts have not been restated and do
not reflect the recognition of stock-based compensation
(note 24).
Issuance
of shares by Subsidiaries or Associated Companies
Gains or losses arising from the issuances of shares by
subsidiaries or Associated Companies, due to changes in the
Company’s proportionate share of the value of the
issuer’s equity, are recognized in earnings pursuant to
SAB Topic 5:H, “Accounting for Sales of Stock by a
Subsidiary”(note 16).
Cash
and Cash Equivalents
Cash and cash equivalents represent cash, deposits and liquid
short-term investments with original maturities of three months
or less.
Marketable
Securities
The Company’s marketable securities are classified as
available-for-sale and are stated at fair value as determined by
the most recently traded price of each security at the balance
sheet date. Unrealized gains and losses are included in
accumulated other comprehensive income, net of applicable income
taxes. Realized gains or losses
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
and declines in value, if any, judged to be other-than-temporary
on available-for-sale securities are reported in other
non-operating income or expense. For the purpose of determining
realized gains and losses, the cost of securities sold is based
on specific identification.
Inventories
Inventories are valued at the lower of cost or market, cost
being generally determined on the basis of an average method.
Cost consists of purchased component costs and manufacturing
costs, which comprise direct material and labor costs and
applicable indirect costs.
Property,
Plant and Equipment
Property, plant and equipment are valued at cost less
accumulated depreciation. Spare parts, maintenance and repairs
are expensed as incurred. Depreciation expense is recognized
using the straight-line method. Construction in progress
includes advance payments for construction of fixed assets. Land
and construction in progress are not depreciated. The cost of
construction of qualifying long-term assets includes capitalized
interest, which is amortized over the estimated useful life of
the related asset. During the years ended September 30,2006 and 2007 interest capitalized was less than €1 in
total. The estimated useful lives of assets are as follows:
Years
Buildings
10-25
Technical equipment and machinery
3-10
Other plant and office equipment
1-10
Leases
The Company is a lessee of property, plant and equipment. All
leases where the Company is the lessee that meet certain
specified criteria intended to represent situations where the
substantive risks and rewards of ownership have been transferred
to the lessee are accounted for as capital leases pursuant to
SFAS No. 13, “Accounting for Leases”,
and related interpretations. All other leases are accounted for
as operating leases.
Intangible
Assets
The Company accounts for business combinations using the
purchase method of accounting pursuant to
SFAS No. 141, “Business Combinations”.
Intangible assets acquired in a purchase method business
combination are recognized and reported apart from goodwill,
pursuant to the criteria specified by SFAS No. 141.
Intangible assets consist primarily of purchased intangible
assets, such as licenses and purchased technology, which are
recorded at acquisition cost, and goodwill resulting from
business acquisitions, representing the excess of purchase price
over fair value of net assets acquired. Intangible assets other
than goodwill are amortized on a straight-line basis over the
estimated useful lives of the assets ranging from 3 to
10 years (note 17). Pursuant to SFAS No. 142
“Goodwill and Other Intangible Assets”,
goodwill is not amortized, but instead tested for impairment at
least annually in accordance with the provisions of
SFAS No. 142. The Company tests goodwill annually for
impairment in the fourth quarter of the financial year, whereby
if the carrying amount of a reporting unit with goodwill exceeds
its fair value, the amount of impairment is determined by the
excess of recorded goodwill over the implied fair value of
goodwill. The determination of fair value of the reporting units
and related goodwill requires considerable judgment by
management.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Impairment
of Long-lived Assets
The Company reviews long-lived assets, including property, plant
and equipment and intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Estimated fair
value is generally based on either market value, appraised value
or measured by discounted estimated future cash flows.
Considerable management judgment is necessary to estimate
discounted future cash flows.
Long-term
Investments
The Company assesses declines in the value of investments
accounted for under the equity and cost methods to determine
whether such decline is other-than-temporary, thereby rendering
the investment impaired. This assessment is made by considering
available evidence including changes in general market
conditions, specific industry and individual company data, the
length of time and the extent to which the market value has been
less than cost, the financial condition and near-term prospects
of the individual company, and the Company’s intent and
ability to hold the investment for a period of time sufficient
to allow for any anticipated recovery in market value.
Financial
Instruments
The Company operates internationally, giving rise to exposure to
changes in foreign currency exchange rates. The Company uses
financial instruments, including derivatives such as foreign
currency forward and option contracts, to reduce this exposure
based on the net exposure to the respective currency. The
Company applies SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, as
amended by SFAS No. 137, SFAS No. 138 and
SFAS No. 149, which provides guidance on accounting
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. Derivative financial instruments are recorded at
their fair value and included in other current assets or other
current liabilities. Generally the Company does not designate
its derivative instruments as hedge transactions. Changes in
fair value of undesignated derivatives that relate to operations
are recorded as part of cost of sales while undesignated
derivatives relating to financing activities are recorded in
other non-operating expense, net. The fair value of derivatives
and other financial instruments is discussed in note 29.
Pension
Plans
The measurement of pension-benefit liabilities is based on
actuarial computations using the
projected-unit-credit
method in accordance with SFAS No. 87,
“Employers’ Accounting for Pensions”.
Pension plan assets are measured at fair value and reduce
the net pension liability recognized. The assumptions used to
calculate pension liabilities and costs are shown in
note 28.
Prior to the adoption of the recognition provision of
SFAS No. 158 “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement
Plans — an amendment of FASB Statements No. 87,
88, 106, and 132(R)”, changes in the amount of the
projected benefit obligation or plan assets resulting from
experience differing from that assumed and from changes in
assumptions could result in gains or losses not yet recognized
in the Company’s consolidated financial statements.
The Company adopted the Recognition Provision of
SFAS No. 158 as of September 30, 2007. Pursuant
to SFAS No. 158 the Company recognizes the overfunded
or underfunded status of its defined benefit postretirement
plans as an asset or liability and recognizes changes in that
funded status in the year they occur as part of other
comprehensive income. As of September 30, 2007 the adoption
of the Recognition Provision of SFAS No. 158
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
resulted in a decrease in other non-current liabilities of
€5, an increase in non-current deferred tax liabilities of
€2 and an increase in accumulated other comprehensive
income of €3 (note 28).
Accumulated actuarial gains or losses are amortized as part of
net periodic pension cost for a year if, as of the beginning of
that year, the accumulated actuarial gain or loss exceeds 10% of
the greater of the projected benefit obligation or the fair
value of the plan assets. In that case, the amount of
amortization recognized is the resulting excess divided by the
average remaining service period of the active employees
expected to receive benefits under the plan. Accumulated prior
service costs or credits are amortized as part of net periodic
pension cost over the remaining service period.
The Company also records a liability for amounts payable under
the provisions of its various defined contribution plans.
In September 2006, the FASB issued SFAS No. 158, which
requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization
(“Recognition Provision”). SFAS No. 158 does
not change the basic approach to measuring net periodic pension
cost. The Company adopted the Recognition Provision of
SFAS No. 158 as of September 30, 2007
(note 28).
In September 2006, the SEC issued SAB No. 108,
“Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements”. SAB No. 108 provides
interpretive guidance on how the effects of prior-year
uncorrected misstatements should be considered when quantifying
misstatements in the current year financial statements.
SAB No. 108 requires the Company to quantify
misstatements using both an income statement
(“rollover”) and balance sheet (“iron
curtain”) approach and to evaluate whether either approach
results in a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial are
considered material upon adoption based on either approach, no
restatement is required so long as management properly applied
its previous approach and all relevant facts and circumstances
were considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated earnings
(deficit) as of the beginning of the year of adoption. The
Company adopted SAB No. 108 as of the year ended
September 30, 2007, which did not result in restatement or
cumulative effect adjustment.
Issued
but principally applicable in future financial years
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. FIN 48 is effective for the
Company from its financial year beginning October 1, 2007.
The differences between the amounts recognized in the statements
of financial position prior to the adoption of FIN 48 and
the amounts reported after adoption will be accounted for as a
cumulative-effect adjustment recorded to the beginning balance
of retained earnings. The Company is in the process of
determining the impact, if any, that the adoption of FIN 48
will have on its consolidated financial position and results of
operations.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
In September 2006, the FASB released SFAS No. 157,
“Fair Value Measurements”, which provides
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. The standard also responds to investors’
requests for more information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect that fair
value measurements have on earnings. SFAS No. 157 will
apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. SFAS No. 157
does not expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for the Company from its
financial years beginning after October 1, 2008, and
interim periods within those financial years. The Company is in
the process of evaluating the impact, if any, that the adoption
of SFAS No. 157 will have on its consolidated
financial position and results of operations.
SFAS No. 158 also requires an employer to measure the
funded status of a plan as of the date of its year-end statement
of financial position, with limited exceptions
(“Measurement Date Provision”). The Company currently
measures the funded status of its plans annually on
June 30. The Measurement Date Provision is effective for
the Company as of the end of the fiscal year ending
September 30, 2009. The Company does not expect the
application of the Measurement Date Provision of
SFAS No. 158 annually on September 30 to have a
significant impact on its results of operations or financial
position.
In February 2007, the FASB issued SFAS No. 159
“The Fair Value Option for Financial Assets and
Financial Liabilities — including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits
entities to choose to measure certain financial assets and
liabilities and other eligible items at fair value, which are
not otherwise currently required to be measured at fair value.
Under SFAS No. 159, the decision to measure items at
fair value is made at specified election dates on an irrevocable
instrument-by-instrument
basis. Entities electing the fair value option would be required
to recognize changes in fair value in earnings and to expense
upfront cost and fees associated with the item for which the
fair value option is elected. Entities electing the fair value
option are required to distinguish on the face of the statement
of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar
assets and liabilities measured using another measurement
attribute. If elected, SFAS No. 159 is effective as of
the beginning of the first fiscal year that begins after
November 15, 2007, with earlier adoption permitted provided
that the entity also early adopts all of the requirements of
SFAS No. 157. The Company is currently evaluating
whether to elect the option provided for in this standard.
3.
Acquisitions
During December 2004, Saifun Semiconductors
Ltd. (“Saifun”) and the Company modified their
existing flash memory cooperation agreement. As a consequence,
the Company consummated the acquisition of Saifun’s
remaining 30% share in the Infineon Technologies Flash joint
venture in January 2005 and was granted a license for the use of
Saifun
NROM®
technologies, in exchange for $95 million (subsequently
reduced to $48 million) to be paid in quarterly
installments over 10 years and additional purchase
consideration primarily in the form of net liabilities assumed
aggregating to €7 (note 17). The assets acquired and
liabilities assumed were recorded in the accompanying combined
and consolidated balance sheet based upon their estimated fair
values as of the date of the acquisition (note 21). The
excess of the purchase price over the estimated fair values of
the underlying assets acquired and liabilities assumed amounted
to €7 and was allocated to goodwill. The Company has sole
ownership and responsibility for the business and started to
account for its entire financial results in the three months
ended March 31, 2005. In light of the weak market
conditions for commodity NAND Flash memories in the three months
ended September 30, 2006, Qimonda decided to ramp down its
Flash production and stop the development of NAND-compatible
flash memory products based on Saifun’s proprietary
NROM®
technology. Qimonda and Saifun amended the above license
agreement to terminate the payment of quarterly installments as
of December 31, 2006. As a result of the above, Qimonda
reduced payables, goodwill and other intangible assets, and
recognized an impairment charge of €9
(note 7) related to the license (€7) and fixed
assets (€2) that were not considered to be recoverable as
of September 30, 2006.
The above acquisition has been accounted for by the purchase
method of accounting and, accordingly, the combined and
consolidated statements of operations include the results of the
acquired company from its acquisition date. Pro forma financial
information relating to this acquisition is not material either
individually or in the aggregate to the results of operations
and financial position of the Company and has been omitted. For
each significant acquisition the Company engages an independent
third party to assist in the valuation of net assets acquired.
4.
Divestitures
Effective October 1, 2005 Infineon transferred the
development facility Infineon Technologies MP Development Center
France S.A.S located in Corbeil-Essonnes, France
(“IFMDF”) from the Memory Products business to the
Logic business of Infineon, due to the revised scope of its
future development activities. Accordingly, the Infineon Logic
business took over the management responsibility for this
operation from the transfer date. Through September 30,2005 the IFMDF balance sheet and income statement is included in
the Company’s historical combined financial statements
because the business was owned and operated as part of the
Memory Products business. The results of the transferred
facility’s operations during the year ended
September 30, 2005 are not material. The net book value of
€10 was reflected as a non-cash reduction to
business/shareholders’ equity as of October 1, 2005
(note 26).
Except for the disposal of investments in Associated Companies
(note 16), the Company had no further divestitures during
the years ended September 30, 2006 and 2007.
5.
License
Income
During the years ended September 30, 2005, 2006 and 2007,
the Company recognized revenues related to license and
technology transfer fees of €160, €7 and €8,
respectively, which are included in net sales in the
accompanying statements of operations. Included in these amounts
are previously deferred license fees of €33, €2 and
€3, which were recognized as revenue pursuant to
SAB No. 104, in the years ended September 30,2005, 2006 and 2007, respectively, since the Company had
fulfilled all of its obligations and the amounts were realized.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
On November 10, 2004, the Company and ProMOS Technologies
Inc., Hsinchu, Taiwan (“ProMOS”) reached an agreement
regarding ProMOS’ license of the Company’s previously
transferred technologies, pursuant to which ProMOS may continue
to produce and sell products using those technologies and to
develop its own processes and products. The Company has no
continuing future involvement with the licensing of these
products to ProMOS. As full consideration, ProMOS agreed to pay
the Company $156 million in four installments through
April 30, 2006, against which the Company’s accrued
payable for DRAM products from ProMOS of $36 million was
offset. The parties agreed to withdraw their respective claims,
including arbitration. The present value of the settlement
amounted to €118 and was recognized as license income
during the year ended September 30, 2005.
In connection with its joint technology development with Nanya
Technology Corporation, Taoyuan, Taiwan (“Nanya”), in
2003, the Company granted Nanya a license to use its 110nm
technology and to do joint development on the 90nm and 70nm
technologies. On September 29, 2005, the Company and Nanya
signed an agreement to expand their development cooperation with
respect to the joint development of advanced 58nm production
technologies for 300mm wafers (note 16). On
September 24, 2007, the Company and Nanya entered into an
agreement for further know-how transfer to Nanya. License income
related to the transferred technology is recognized over the
estimated life of the technology.
In connection with a capacity reservation agreement with Winbond
Electronics Corp., Hsinchu, Taiwan (“Winbond”) in
August 2004, the Company granted Winbond a license to use its
110nm technology to manufacture DRAM exclusively for the Company
and to develop and sell Winbond proprietary Specialty DRAM
products to third parties. In August 2006, the Company entered
into an agreement with Winbond whereby the Company transferred
its 80nm DRAM technology to Winbond to manufacture DRAM using
this technology exclusively for the Company. In June 2007, the
Company entered into agreements with Winbond to expand their
existing cooperation and capacity reservation. Under the terms
of the agreements, the Company agreed to transfer its 75nm and
58nm technologies to Winbond. In return, Winbond will
manufacture DRAM using these technologies exclusively for the
Company. Winbond can also use the 58nm technology to develop and
sell Winbond proprietary Specialty DRAM products to third
parties, for which the Company would receive license fees and
royalties.
6.
Grants
The Company has received economic development funding from
various governmental entities, including grants for the
construction of manufacturing facilities, as well as grants to
subsidize research and development activities and employee
training. Grants and subsidies included in the accompanying
combined and consolidated financial statements during the years
ended September 30, 2005, 2006 and 2007, are as follows:
2005
2006
2007
Included in the combined and consolidated statements of
operations:
Research and development expenses
16
17
24
Cost of goods sold
94
95
72
Other operating income
—
—
4
Total
110
112
100
Construction grants deducted from the cost of fixed assets
(note 26)
—
49
1
Deferred government grants at September 30 (notes 20 and 22)
208
179
146
Grants receivable at September 30 (note 14 and 17)
Litigation settlement charges, net of recoveries (note 31)
(20
)
(54
)
9
Impairment charges (note 3)
—
(9
)
—
Insurance claim
—
—
2
Other, net
7
3
7
Total
(13
)
(60
)
18
Litigation settlement charges refer primarily to the settlement
of an antitrust investigation by the U.S. Department of
Justice and related settlements with customers (note 19),
as well as, during the year ended September 30, 2006, the
settlement of the Tessera litigation (note 17).
8.
Restructuring
In 2004, Infineon announced restructuring measures aimed at
reducing costs. As part of the restructuring, the Company’s
Maskhouse operations were relocated from Munich to Dresden. This
plan was completed during the year ended September 30,2005, although lease termination costs related to the
U.S. operations remained accrued at September 30, 2005
and were settled during the year ended September 30, 2006.
During the years ended September 30, 2005, 2006 and 2007,
charges of €1, €0 and €0, respectively, were
recognized as a result of these restructuring initiatives. As of
September 30, 2006 and 2007, no restructuring liabilities
were recorded.
In March 2007, Qimonda announced the building of a new DRAM
module manufacturing facility in Johor, Malaysia. Following its
construction, the Company plans to move the backend production
from its existing Malacca plant to this new backend production
facility. As of September 30, 2007the Company has
implemented a restructuring plan pursuant to a
SFAS No. 88, however, the amount of involuntary
benefits to be paid can not be reasonably estimated at
September 30, 2007.
9.
Income
Taxes
Income (loss) before income taxes and minority interests is
attributable to the following geographic locations for the years
ended September 30, 2005, 2006 and 2007:
Through September 30, 2007the Company’s statutory tax
rate in Germany was 25%. Additionally, a solidarity surcharge of
5.5% and trade tax of 13% is levied, for a combined statutory
tax rate of 39%.
On August 17, 2007 the Business Tax Reform Act of 2008 was
enacted in Germany. This bill introduces several changes to the
taxation of German business activities, including a reduction of
the combined corporate and trade tax rate in Germany from
approximately 39% to 30%. Most of the changes come into effect
for the Company’s 2008 financial year and affect the
Company’s current tax rate from that date. Pursuant to
SFAS No. 109, the Company recorded a deferred tax
charge of €25 as of September 30, 2007, reflecting the
reduction in value of the Company’s deferred tax assets in
Germany upon enactment.
A reconciliation of income taxes for the years ended
September 30, 2005, 2006 and 2007, determined using the
German corporate tax rate plus trade taxes, net of federal
benefit, for a combined statutory rate of 39% for 2005, 2006 and
2007 is as follows:
2005
2006
2007
Expected expense (benefit) for income taxes
40
75
(91
)
Decrease (increase) in available tax credits
11
2
(28
)
Non-taxable investment income
(21
)
(50
)
(24
)
Foreign tax rate differential
(8
)
(38
)
(43
)
Non deductible expenses and other provisions
3
5
4
Increase in valuation allowance
14
11
168
Change in German tax rate
—
—
25
Losses not available to Qimonda due to Formation
43
114
—
Other
4
(5
)
(1
)
Actual expense for income taxes
86
114
10
The current tax expense resulting from the Formation was €6
for the year ended September 30, 2006. The deferred tax
expense for the year ended September 30, 2006 resulting
from the Formation was €13 due to reduced deferred tax
benefits available to the Company and €101 due to net
operating losses which are to be utilized by Infineon.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The Company has operations in a jurisdiction which grants a tax
holiday from the 2005 financial year onwards, which has a
remaining term of two years. Compared to ordinary taxation in
this jurisdiction, the tax holiday results in tax savings of
€0, €16 and €6 for the years ended
September 30, 2005, 2006 and 2007, respectively, which are
reflected in the foreign tax rate differential.
Deferred income tax assets and liabilities as of
September 30, 2006 and 2007 relate to the following:
2006
2007
Deferred tax assets:
Trade accounts receivable
16
45
Property, plant and equipment
71
63
Intangible assets
79
49
Remaining assets
7
22
Accrued liabilities
31
18
Deferred income
65
44
Remaining liabilities
15
10
Net operating loss and tax credit carry-forwards
32
187
Gross deferred tax assets
316
438
Valuation allowance
(70
)
(204
)
Deferred tax assets
246
234
Deferred tax liabilities:
Trade accounts receivable
(12
)
(17
)
Inventories
(3
)
—
Property, plant and equipment
(44
)
(41
)
Long-term investments
(3
)
(3
)
Accrued liabilities
(15
)
(3
)
Remaining assets and liabilities
(16
)
(19
)
Deferred tax liabilities
(93
)
(83
)
Deferred tax assets, net
153
151
Net deferred income tax assets and liabilities are presented in
the accompanying combined and consolidated balance sheets as of
September 30, 2006 and 2007 as follows:
2006
2007
Deferred tax assets:
Current
47
32
Non-current
160
147
Deferred tax liabilities:
Current
(18
)
(5
)
Non-current
(36
)
(23
)
Deferred tax assets, net
153
151
Pursuant to the terms of the contribution agreement between the
Company and Infineon, substantially all net operating losses
generated and not utilized by the Company prior to the Formation
were transferred to and retained
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
by Infineon. As such, net deferred tax assets, reflecting
valuation allowances calculated on a separate return basis by
the Company for losses it could not utilize, of €6, €0
and €0 for the years ended September 30, 2005, 2006
and 2007, respectively, have been accounted for as equity
transactions with Infineon (note 26).
As of September 30, 2006 and 2007, the Company had tax loss
carry-forwards of €0 and €399 from both German and
foreign operations, and tax-effected credit carry-forwards of
€32 and €60, respectively, which will be retained by
the Company. Such tax loss and tax credit-carry-forwards are
generally limited to be used by the particular entity that
generated the loss or credit and do not expire under current
law. The benefit for tax credits is accounted for on the
flow-through method when the individual entity is entitled to
the claim.
Pursuant to SFAS No. 109, the Company has assessed its
deferred tax asset and the need for a valuation allowance. Such
an assessment considers whether it is more likely than not that
some portion or all of the deferred tax assets may not be
realized. The assessment requires considerable judgment on the
part of management, with respect to, among other factors,
benefits that could be realized from available tax strategies
and future taxable income as well as other positive and negative
factors. The ultimate realization of deferred tax assets is
dependent upon the Company’s ability to generate the
appropriate character of future taxable income sufficient to
utilize loss carry-forwards or tax credits before their
expiration. The assessment was based on the benefits that could
be realized from available tax strategies, forecasted future
taxable income to the extent applicable, and the reversal of
temporary differences in future periods. As a result of this
assessment, the Company has increased its deferred tax asset
valuation allowance in those tax jurisdictions as of
September 30, 2006 and 2007 to reduce the deferred tax
asset to an amount that is more likely than not expected to be
realized in future.
The changes in valuation allowance for deferred tax assets
during the years ended September 30, 2006 and 2007 were as
follows:
2006
2007
Balance, beginning of the year
59
70
Increase applicable to continuing operations
11
168
Decrease due to change in German tax rate
—
(34
)
Balance, end of the year
70
204
The Company did not provide for income taxes or foreign
withholding taxes on cumulative earnings of foreign subsidiaries
as of September 30, 2006 and 2007, because these earnings
are intended to be indefinitely reinvested in those operations.
It is not practicable to estimate the amount of unrecognized
deferred tax liabilities for these undistributed foreign
earnings.
10.
Earnings
(Loss) Per Share
Basic earnings (loss) per share (“EPS”) are calculated
by dividing net income (loss) by the weighted average number of
ordinary shares outstanding during the year.
In connection with the Formation, the ordinary shares
outstanding were increased to 300 million owned by Infineon
(note 1). Accordingly, all applicable references to the
number of ordinary shares and per share information for periods
prior to the Formation have been restated to reflect the
300 million ordinary shares outstanding. On August 9,2006the Company completed its IPO on the New York Stock
Exchange through the issuance of 42 million ordinary
shares, which are traded as ADSs. On July 18, 2007 in
connection with the transfer of ownership of Qimonda Japan K.K.
from Infineon, the Company’s share capital was increased
through the issuance of one ordinary share (note 23).
The Company did not have any potentially dilutive instruments
outstanding for the years ended September 30, 2005 and
2006. On November 24, 2006the Company granted
1.9 million stock options pursuant to the Qimonda Stock
Option Plan (note 24). None of these options were dilutive
to EPS for the year ended September 30, 2007. The
Unrealized losses as of September 30, 2006 and 2007 related
to debt securities held for less than 12 months. In each of
the years ended September 30, 2005, 2006 and 2007 realized
gains or losses were less than €1.
The following table presents contractual maturities of debt
securities as of September 30, 2007:
Cost
Fair Value
Within 1 year
—
—
after 1 year through 5 years
129
125
after 5 years through 10 years
10
10
Securities with no stated maturity date
137
135
Total
276
270
Actual maturities may differ due to call or prepayment rights.
Investments in Related Companies principally relate to
investment activities aimed at strengthening the Company’s
future intellectual property potential.
The following Associated Companies as of September 30, 2007
are accounted for using the equity method of accounting due to
the lack of unilateral control (note 2):
Direct and
Indirect
Name of the Associated Company
Ownership
Inotera
35.6
%
AMTC
33.3
%
BAC
33.3
%
On November 13, 2002, the Company entered into agreements
with Nanya relating to a strategic cooperation in the
development of DRAM products and the foundation of a joint
venture called Inotera Memories Inc., a 300mm manufacturing
facility in Taiwan to employ production technology developed
under the Companies’ joint development agreements. Pursuant
to the agreements, the Company and Nanya developed advanced 90nm
and 75nm technology. On September 29, 2005, the Company and
Nanya signed an agreement to expand their development
cooperation with respect to the joint development of advanced
58nm production technologies for 300mm wafers. Technology
development costs are shared two-thirds by the Company and
one-third by Nanya. The 2002 and 2005 cooperative agreements
will remain in force until the product and process technologies
developed pursuant to the agreements have achieved required
qualifications.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
During the year ended September 30, 2004, Inotera completed
the construction and started mass production in its first
manufacturing module. The final stage of the capacity was
completed during the year ended September 30, 2006. In May
2005 the groundbreaking for the second manufacturing module took
place. During the year ended September 30, 2007 Inotera
completed the construction and started mass production in its
second manufacturing module, which was independently financed by
Inotera. The joint venture partners are obligated to each
purchase one-half of Inotera’s production based, in part,
on market prices.
The November 2002 agreement, as amended, entitles Nanya to
receive from the Company or its then-existing foundry partners
60% of that amount of its foundry capacity that is in excess of
the foundry capacity the Company receives as of December 2006.
Nanya may also receive 50% of the Company’s foundry
capacity for which it contracts after March 1, 2006 with
new foundry partners. The Company’s obligation to provide
foundry capacity is capped at one third of its total 90nm
foundry capacity. In combination, the 2002 and 2005 agreements
also entitle Nanya to receive from the Company or its foundry
partners one third of its 75nm foundry capacity and one third of
its 58nm foundry capacity. As of September 30, 2007 the
Company has not contracted for foundry capacity that would
require it to cede capacity to Nanya under these agreements. The
Company does not expect that any foundry capacity that it may be
required to provide to Nanya will have a material adverse effect
on its business, financial condition or results of operations.
If Infineon were to reduce its shareholding in the Company to a
minority level before the earlier of the fifth anniversary of
its Formation from Infineon and the achievement of early mass
production using 58nm process technology at its manufacturing
site in Dresden, the joint venture agreement with Nanya, as
amended, could require Qimonda to transfer its Inotera shares to
Infineon. The Company agreed with Infineon that, in this event,
it would retransfer the Inotera shares back to the trust. The
trust agreement provides for Infineon to hold the Inotera shares
in trust for Qimonda until they could be retransferred back to
the Company.
On March 17, 2006 Inotera successfully completed its IPO on
the Taiwanese stock exchange of 200 million ordinary
shares, representing 7.97% of its outstanding share capital
before IPO, for an issuance price of NT$33 per ordinary share.
As a result, the Company’s ownership interest was diluted
to 41.4% while the book value of Inotera’s equity increased
by approximately €30, which gain the Company recognized as
part of non-operating income during the year ended
September 30, 2006.
On May 10, 2006, Inotera successfully completed a public
offering on the Luxembourg Stock Exchange of 40 million
global depositary shares (representing 400 million common
shares) which are traded on the Euro MTF market and represent
14.8% of its outstanding share capital before the offering, for
an issuance price of NT$33 per ordinary share. As a result, the
Company’s ownership interest was diluted to 36.0% while the
book value of Inotera’s equity increased by €42, which
gain the Company reflected as part of non-operating income
during the year ended September 30, 2006. On
August 20, 2007 Inotera issued 40 million common shares,
representing 1.2% of its outstanding share capital, as bonuses
to its employees, which dilutes the company’s ownership
interest to 35.6%, the effect of which is to be recognized by
the Company during the three months ending December 31,2007.
In connection with the Formation, Infineon and Qimonda entered
into a trust agreement under which Infineon placed the Inotera
shares in trust for the Company until the shares could legally
be transferred. In March 2007, the Inotera shares (except for a
portion representing less than 1% of the total shares) were
transferred to Qimonda. The Inotera shares remain subject to
Taiwanese
lock-up
provisions related to the Inotera IPO through January 2008,
after which the remaining shares are to be transferred to
Qimonda.
On May 16, 2002, Infineon entered into the AMTC and BAC
joint ventures with its partners Advanced Micro Devices, Inc.,
Sunnyvale, California, USA (“AMD”), and Toppan
Photomasks, Inc., Round Rock, Texas, USA (formerly DuPont
Photomasks Inc.) (“Toppan”), with the purpose of
developing and manufacturing advanced photomasks.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The Company also maintains equity investments in BAC, a German
company that owns the premises used by AMTC and Toppan
Photomasks Germany GmbH, Dresden. The purpose of BAC is
acquisition, administration, and letting of real estate and
corresponding facilities for the production of photo masks.
The limited partnership agreements relating to AMTC and BAC
require prior written consent from the other partners before
Infineon can assign its partnership interest to the Company. In
the case of a transfer to an affiliate, such as Qimonda, the
consent may not be unreasonably withheld, but the interest must
be transferred back to Infineon should Infineon cease to be the
majority shareholder. Infineon and the Company are currently
finalizing negotiations with AMD and Toppan concerning an
agreement that provides such consent and would allow the Company
to retain the interest even if Infineon ceases to be the
majority shareholder.
Hwa-Keng Investment Corp. (“Hwa-Keng”), a Taiwanese
company, was formed for the purpose of facilitating the
distribution of Inotera shares to Inotera’s employees. As a
result of the Inotera IPO, Hwa-Keng’s business purpose was
fulfilled and therefore it was dissolved during the year ended
September 30, 2007. The dissolution did not have a
significant financial impact on the Company.
On November 13, 2006the Company sold its investment in
Ramtron through a private placement. As a result of the sale,
the Company recorded a gain of €2 as part of other
non-operating income during the year ended September 30,2007.
The Company recognized impairment charges related to certain
investments for which the carrying value exceeded the fair value
on an other-than-temporary basis, of €6, €0 and
€0 for the years ended September 30, 2005, 2006 and
2007, respectively, which are reflected as other non-operating
expense.
Goodwill of €2 and €0 is included in the amount of
long-term investments at September 30, 2006 and 2007,
respectively.
For the Associated Companies as of September 30, 2007, the
aggregate summarized financial information for the years ended
September 30, 2005, 2006 and 2007, respectively, is as
follows:
The estimated aggregate amortization expense relating to other
intangible assets for each of the five succeeding financial
years is as follows: 2008 €18; 2009 €16; 2010
€14; 2011 €13; 2012 €9.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
In connection with the acquisition of Saifun’s remaining
30% share in Infineon Technologies Flash during January 2005,
the Company was granted a license for the use of Saifun NROM(R)
technologies (note 3). The Company recorded the intangible
license asset of €58, representing the estimated fair value
of the license, and a corresponding liability of €58,
representing the minimum future license payments. The Company
retained the option to terminate the entire license, or parts
thereof, at any time without penalty. During the three months
ended June 30, 2005, the Company exercised its termination
option and cancelled the portion of the license encompassing
NROM(R) Code Flash products. As a result of the partial
termination, the license asset and related liability were
reduced to €28 as of September 30, 2005. Effective
September 30, 2006, the Company and Saifun amended its
license agreement (note 3). As a result of the amendment,
the Company reduced payables, goodwill and other intangible
assets, and recognized an impairment charge of €9
(note 7) related to the license (€7) and fixed
assets (€2) that were not considered to be recoverable as
of September 30, 2006.
On March 18, 2005, the Company and Rambus reached an
agreement settling all claims between them and licensing the
Rambus patent portfolio for use in current and future Company
products. Rambus granted to the Company a worldwide license to
existing and future Rambus patents and patent applications for
use in the Company’s memory products. In exchange for this
worldwide license, the Company agreed to pay $50 million in
quarterly installments of $6 million between
November 15, 2005 and November 15, 2007. As of
March 31, 2005the Company recorded a license and
corresponding liability in the amount of €37, representing
the estimated present value of the minimum future license
payments. After November 15, 2007, and only if Rambus
enters into additional specified licensing agreements with
certain other DRAM manufacturers, the Company would make
additional quarterly payments which may accumulate up to a
maximum of an additional $100 million. Because Rambus’
ability to conclude the agreements is not within the
Company’s control, the Company is not able to estimate
whether additional payment obligations may arise. The agreement
also provides the Company an option for acquiring certain other
licenses. All licenses provide for the Company to be treated as
a “most-favored customer” of Rambus. The Company
simultaneously granted to Rambus a fully-paid perpetual license
for memory interfaces. In addition to the licenses, the two
companies agreed to the immediate dismissal of all pending
litigation and released each other from all existing legal
claims. The license of €37 is being amortized over the
expected useful life of the related technologies of ten years.
In June 2006, the Company and Infineon reached an agreement with
MOSAID Technologies Inc., Ottawa, Ontario, Canada
(“MOSAID”) settling all claims between them and
licensing the MOSAID patent portfolio for use in current and
future Company products. MOSAID granted to Infineon a six year
license to use any MOSAID patents in the manufacturing and sale
of semiconductor products, as well as a “lives of the
patents” license to certain MOSAID patent families. In
exchange for these licenses, the Company agreed to make license
payments commencing on July 1, 2006 over a six-year term.
The license of €32 is being amortized over the expected
useful life of the related technologies of six years.
On August 1, 2006, Infineon and the Company entered into
settlement agreements with Tessera Inc., San Jose,
California, USA (“Tessera”) in respect of all of
Tessera’s patent infringement and antitrust claims and all
counterclaims and other claims Infineon and the Company had
raised against Tessera. As part of the settlement, Infineon and
the Company entered into license agreements with Tessera,
effective July 1, 2006, that provide the Infineon and the
Company world-wide, nonexclusive, non-transferable and
non-sublicensable license to use a portfolio of Tessera patents
relating to packaging for integrated circuits in Infineon’s
and the Company’s production. The license agreements have a
six-year term and can be extended. Under the license agreement,
the Company agreed to pay Tessera an initial upfront fee and
additional royalty payments over a six year period based on the
volume of components it sells that are subject to the license.
The Company recognized the litigation settlement portion of
€31 as other operating expense (note 7) during
the year ended September 30, 2006. The remaining license
portion is amortized over the term of the agreement and the
royalty payments are recognized as the related sales are made.
Settlement for antitrust related matters (note 31)
53
38
Warranties
1
3
Other
11
9
Total
160
147
In September 2004 Infineon entered into a plea agreement with
the United States Department of Justice in connection with its
antitrust investigation (note 31) and agreed to pay a
fine aggregating $160 million over a five-year period. The
related expense is reflected as other operating expense
(note 7) whereas the amount due within one year as of
the balance sheet date is included in accrued liabilities and
other current liabilities (note 20), and the remaining
long-term portion is reflected as other non-current liabilities
(note 22). As a result of this agreement and other
anti-trust related investigations and customer settlements
(note 31), the Company recorded other operating (expenses)
income €(20), €(23) and €9 during the years ended
September 30, 2005, 2006 and 2007, respectively
(note 7).
A tabular reconciliation of the changes in the aggregate product
warranty liability for the years ended September 30, 2006
and 2007 is as follows:
Notes payable to governmental entity, rate 5,06%, due 2027
27
24
Capital Lease obligation
—
100
Total long-term debt
151
227
In September 2007, the Company entered into a sale and leaseback
transaction of 200mm equipment. The four year lease is accounted
for as a capital lease (note 15) whereby the present
value of the lease payments is reflected as a capital lease
obligation.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The Company can also draw, for short term purposes, on the
working capital lines it maintains in several locations with an
aggregate amount of €161, of which €28 was drawn for
working capital purposes and reflected as short-term notes
payable to banks as of September 30, 2007 and fully repaid
on October 10, 2007.
In August 2006, the Company entered into a committed
multicurrency revolving loan facility with an aggregate
principal amount of €250, which the Company voluntarily
cancelled on September 28, 2007. This cancellation was due
to certain restrictions on asset dispositions which had limited
the Company when pursuing engagements in sale and leaseback
transactions for manufacturing equipment. Before cancellation,
Qimonda did not have any drawdown at any time from this
revolving loan facility.
Aggregated amounts of debt, including capital lease obligations,
maturing subsequent to September 30, 2007 are as follows:
Settlement for antitrust related matters — payable to
Infineon (notes 19 and 31)
64
41
Licenses payable
37
27
Pension liabilities (note 28)
26
24
Asset retirement obligation
—
10
Other
4
5
Total
324
370
On July 28, 2003, the Company entered into a joint venture
agreement with China-Singapore Suzhou Industrial Park Venture
Company (“CSVC”) for the construction of a back-end
manufacturing facility in the People’s Republic of China.
The capital invested by CSVC earns an annual return and has a
liquidation preference. All accumulated earnings and dividend
rights accrue to the benefit of the Company. Accordingly, the
Company has consolidated 100% of the results of operations of
the joint venture from inception, although the capital invested
and annual return of CSVC is reflected as minority interest. The
Company currently holds 63% of Qimonda Suzhou representing 72.5%
of the voting rights in the venture.
On April 25, 2007, the Company and SanDisk Corporation
(“SanDisk”), Milpitas, California, USA entered into a
collaboration to develop and manufacture multichip packages
(“MCPs”) utilizing SanDisk’s NAND flash and
controllers and the Company’s low power mobile DRAM. The
collaboration targets the need for high capacity,
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
integrated memory solutions for data-intensive mobile
applications. This collaboration is executed through an entity,
SanQi Solutions Lda. (“SanQi”), based in Portugal and
owned 50.1% by Qimonda and 49.9% by SanDisk. SanQi is a variable
interest entity of which Qimonda is the primary beneficiary.
Accordingly, the Company has consolidated SanQi and presents
SanDisk’s interest as minority interest.
23.
Ordinary
Share Capital
On April 25, 2006 the initial 50,000 registered shares of
(in euro) €1.00 notional value were combined to 25,000
registered shares of (in euro) €2.00 notional value.
Pursuant to the contribution agreement, in exchange for the
Infineon contributions as part of the Formation, and based on a
shareholders’ resolution dated April 25, 2006, the
Company issued 132,288,975 ordinary registered shares to
Infineon, which increased the Company’s share capital from
(in euro) €50,000.00 to (in euro) €264,600,000.00 on
April 25, 2006 (Capital Increase I), and 167,686,025
ordinary registered shares to Infineon Technologies Holding
B.V., which increased the Company’s share capital from (in
euro) €264,627,950.00 to (in euro) €600,000,000.00
(Capital Increase II).
On July 27, 2006, the Company’s shareholders resolved
to increase the share capital to (in euro) €684,000,000.00
in exchange for cash contributions through the issuance of
42,000,000 ordinary registered shares, that exclude subscription
rights of existing shareholders, and became effective on
August 8, 2006 (Capital Increase III) (note 1). In
connection with the Company’s IPO, the Company received
offering proceeds of €415, net of offering costs of
€19 and tax benefit thereon of €9, in exchange for the
issuance of 42,000,000 shares.
On May 29, 2007, the Management Board resolved to increase
the Company’s ordinary share capital by (in euro)
€2.00 in exchange for the contribution of all shares in
Qimonda Japan K.K. from (in euro) €684,000,000.00 to (in
euro) €684,000,002.00 through the issuance of one no-par
value ordinary registered share from the authorized capital. The
capital increase was approved by the Investment, Finance and
Audit Committee of the Company’s Supervisory Board and
became effective on July 18, 2007.
As of September 30, 2007the Company had a total of
342,000,001 no par value ordinary registered shares
(Namensaktien) outstanding.
Authorized
and Conditional Share Capital
Under the German Stock Corporation Act (Aktiengesetz), a
stock corporation’s shareholder can authorize the
management board to issue shares in a specified aggregate
nominal amount up to 50% of the issued share capital at the time
the resolution is passed. The shareholders’ authorization
may extend for a period of no more than five years.
On July 14, 2006, the Company’s shareholders resolved
to amend the Company’s Articles of Association to authorize
the Management Board to increase the share capital with the
Supervisory Board’s consent. The Management Board may use
this authorization until July 13, 2011 to increase the
share capital by up to (in euro) €30,000,000.00 through the
issuance, in one or more tranches, of new ordinary registered
shares with no par value, that exclude subscription rights of
existing shareholders, in exchange for cash contributions for
the purpose of issuing shares to the Company’s and the
subsidiaries’ employees.
In addition on July 27, 2006, the Company’s
shareholders resolved to amend the Company’s Articles of
Association to authorize the Management Board to increase the
share capital with the Supervisory Board’s consent against
contributions in cash or in kind. The Management Board may use
these authorizations until July 26, 2011 to issue new
shares in one or more tranches for any legal purpose in an
aggregate amount of up to (in euro) €239,400,000.00 in
which case existing shareholders have preemptive rights, which
may be excluded in specified circumstances.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
In connection with the share capital increase by (in euro)
€2.00 described above, the authorized share capital was
decreased from (in euro) €239,400,000.00 to (in euro)
€239,399,998.00.
During the Company’s extraordinary shareholders’
meeting on July 14, 2006, its shareholders passed the
following resolutions with regard to conditional capital:
• First, the Company’s share capital is
conditionally increased by up to (in euro) €12,000,000.00
through the issuance of up to six million ordinary registered
shares with no par value in connection with the employee stock
option and share purchase plans described in note 24.
• Second, the Company’s share capital is
conditionally increased by up to (in euro) €240,100,000.00
through the issuance of up to 120,050,000 ordinary registered
shares with no par value. This conditional capital may only be
used in connection with an issuance of a convertible bond, which
the shareholders authorized by resolution of July 14, 2006.
Dividends
Under the German Stock Corporation Act (Aktiengesetz),
the amount of dividends available for distribution to
shareholders is based on the level of earnings
(Bilanzgewinn) of the parent company, Qimonda AG, as
determined in accordance with the HGB on a stand-alone basis.
All dividends must be approved by shareholders. No earnings are
available for distribution as a dividend for the 2007 financial
year, since Qimonda AG on a stand-alone basis, as the parent
company, incurred a cumulative loss (Bilanzverlust) as of
September 30, 2007.
24.
Stock-based
Compensation
Infineon
Stock Option Plans
In periods prior to the Formation, certain of the Company’s
employees were granted Infineon stock options as Infineon
employees pursuant to Infineon’s stock option plans. The
aggregate number of such options outstanding were
11.6 million, 11.4 million and 9.9 million (of
which 5.6 million, 6.6 million and 6.7 million
were exercisable) as of September 30, 2005, 2006 and 2007,
respectively. If such options are exercised, the employees are
to be given Infineon shares in exchange for payment of the
exercise price to Infineon. Accordingly, such options do not
represent potential dilutive instruments to the Company.
Fair
value disclosures of Infineon Stock Option Plans
Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method, and accounts for stock option
grants to its employees under the Infineon stock option plans
according to the fair value method of SFAS No. 123
(revised 2004) from that date.
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model. Prior to the
adoption of SFAS No. 123 (revised 2004), the Company
relied on historical volatility measures when estimating the
fair value of stock options granted to employees. Following the
implementation of SFAS No. 123 (revised 2004),
Infineon uses a combination of implied volatilities from traded
options on Infineon’s stock and historical volatility when
estimating the fair value of stock options granted to employees,
as it believes that this methodology better reflects the
expected future volatility of its stock. The expected life of
options granted is estimated based on historical experience.
Beginning on the date of adoption of SFAS No. 123
(revised 2004), forfeitures are estimated based on historical
experience; prior to the date of adoption, forfeitures were
recorded as they occurred. The risk-free rate is based on
treasury note yields at the time of grant for the estimated life
of the option. Infineon has not made any dividend payments
during the years ended September 30, 2005, 2006 and 2007,
nor has it communicated plans to pay dividends in the
foreseeable future. Infineon has not granted stock options to
Qimonda employees after March 1, 2006.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The following weighted-average assumptions were used in the
Black-Scholes option-pricing model:
2005
2006
2007
Weighted-average assumptions:
Risk-free interest rate
3.03
%
3.08
%
—
Expected volatility
58
%
43
%
—
Expected life in years
4.50
5.07
—
Weighted-average fair value per option at grant date in euro
4.06
3.19
—
Qimonda
Stock Option Plan
During an extraordinary shareholders’ meeting held on
July 14, 2006, the shareholders authorized the Supervisory
Board to grant to the members of the Management Board, and the
Management Board to grant to certain key executives in the
group, through September 30, 2009, a total of 6,000,000
non-transferable option rights to receive ordinary shares issued
by the Company (note 23). The shareholders’ meeting
resolved on the following key features of such stock option plan:
The option rights may be allocated as follows: the first group,
consisting of the members of the Management Board, may receive a
total of up to 1,200,000 option rights. The second group,
consisting of the members of the executive boards of the
subsidiaries in Germany and abroad, may receive a total of up to
1,000,000 option rights. The third group, consisting of further
key executives who will be nominated based on their performance
to receive up to a specific number of options based on their job
classification, may receive a total of up to 3,800,000 option
rights. The Company expects that, in total, about 6% of the work
force will be eligible to participate in the plan. During any
fiscal year, not more than 40% of the total option rights
allocable to the respective group may be issued to the members
of such group. No option rights may be issued to executives of
any of the group companies that are listed on a stock exchange
and their subsidiaries, if and for as long as such companies
maintain their own stock option plans.
Option rights may be granted within 45 days upon the
publication of the results for the preceding fiscal year or
within 45 days upon publication of the results for the
first or second quarter of a fiscal year, but, in each case, no
later than two weeks prior to the end of the respective quarter.
The option rights may be exercised within six years after their
grant, but not before the expiration of a vesting period that
will be at least three years. The exercise of each option right
is subject to the condition that the exchange price of the ADSs
on the New York Stock Exchange, during the exercise period of
the respective option right, exceeds the Philadelphia
Semiconductor Sector (“SOX”) index on at least three
consecutive days. In order to determine whether such excess has
taken place, the SOX and the strike price of the respective
option right will be set at 100 at the day on which the option
right is granted.
For as long as the Company’s shares are not listed on any
organized market with the European Union or the European
Economic Area, the strike price will be the average of the
opening prices of the ADSs on the New York Stock Exchange on the
five trading days prior to the day of the grant (or a fraction
thereof, if an ADS does not represent exactly one of the
ordinary shares). Otherwise, the strike price will be the
average of the opening prices of the shares on the respective
organized market on the five trading days prior to the day of
the grant.
The holders of option rights will benefit from certain
anti-dilution protection provisions, particularly in the case of
certain capital measures performed by the Company.
Upon exercise of an option right, the holder is generally able
to receive new ordinary shares to be issued by the company. The
Management Board (with approval by the Supervisory Board) is,
however, allowed to decide to instead deliver existing shares or
pay a cash compensation to be calculated on the basis of the
difference between the strike price and the exchange price of
the ADSs or shares on the exercise date.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The Management Board and, to the extent options to be granted to
the Management Board are concerned, the Supervisory Board are
entitled to determine further details of the option plan,
including, in particular, the inclusion of the new shares
granted upon exercise of the option rights into the ADS program.
No options were granted as part of the Company’s IPO. The
Supervisory Board allocated 400,000 options for grant to the
Management Board in the 2007 financial year. On
November 24, 2006, the Company granted 1,899,200 Qimonda
stock options, thereof 1,499,200 to employees and 400,000 to the
Management Board of the Company. Accordingly, such options
represent potential dilutive instruments to the Company. In
addition, the Supervisory Board received 20,486 stock
appreciation rights during the year ended September 30,2007, with the same conditions as Qimonda stock options, except
that they can only be settled in cash if exercised, which
results in their classification as a liability.
A summary of the status of the Qimonda stock option plan 2006 as
of September 30, 2007, and changes during the year then
ended is presented as follows:
Fair
value disclosures of Qimonda Stock Option Plan
Qimonda accounts for stock option grants to its employees under
the Qimonda stock option plan according to the fair value method
of SFAS No. 123 (revised 2004).
The fair value of each option grant is estimated on the grant
date using a specific Monte Carlo simulation-based
option-pricing model. This model accounts for vesting conditions
relating to the SOX Index and its impact on
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
fair value. The Company uses a combination of implied and
historical volatilities from traded options on the
Company’s peer group when estimating the fair value of
stock options granted, as it believes that this methodology
better reflects the expected future volatility of its stock. The
peer group is a group of publicly listed companies deemed to
reflect fundamentals of the Company’s stock. Forfeitures
are estimated based on historical experience. The expected life
and expected vesting period of options granted are estimated
using the simulation model. The risk-free rate is based on
treasury note yields at the time of grant for the estimated life
of the option.
The following assumptions were used in the Monte Carlo
simulation to determine the fair value of options granted during
the period:
2005
2006
2007
Weighted-average assumptions:
Risk-free interest rate
—
—
4.62
%
Expected volatility, underlying ADS
—
—
45
%
Expected volatility, SOX Index
—
—
29
%
Forfeiture rate, per year
—
—
3.40
%
Dividend yield
—
—
0
%
Expected life in years
—
—
4.62
Weighted-average fair value per option at grant date
—
—
$
4.23
Stock-Based
Compensation Expense
Stock-based compensation expenses for the Infineon and the
Qimonda SOP were allocated as follows for the years ended
September 30, 2005, 2006 and 2007:
2005
2006
2007
Compensation expense recognized:
Cost of sales
—
3
2
Selling, general and administrative expenses
—
3
2
Research and development expense
—
2
2
Total stock-based compensation expense
—
8
6
Related to:
Infineon Stock Options:
—
8
4
Qimonda Stock Options:
—
—
2
The amount of stock-based compensation cost which was
capitalized and remained in inventories during the year ended
September 30, 2006 and 2007 was immaterial. Stock-based
compensation expense does not reflect income tax benefits, since
stock options are primarily granted in tax jurisdictions where
the expense is not deductible for tax purposes. In addition,
stock-based compensation expense did not have a cash flow effect
during the year ended September 30, 2007, since no
exercises of stock options occurred during the period. As of
September 30, 2007, for Infineon related stock options
there was a total of €3 in unrecognized compensation
expense related to unvested stock options which is expected to
be recognized over a remaining total period of 2.5 years,
and for Qimonda related stock options there was a total of
€4 in unrecognized compensation expense related to unvested
stock options which is expected to be recognized over a
remaining total period of 2.27 years.
As noted above, options on Infineon stock do not represent
potential dilutive instruments for Qimonda AG and accordingly,
they have no dilutive impact on diluted EPS (note 10). The
Qimonda stock options were not dilutive to EPS for the year
ended September 30, 2007 (note 10).
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Through September 30, 2005the Company applied the
provisions of APB No. 25, as permitted under
SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure an amendment
of SFAS No. 123”. If the Company had
accounted for stock-based compensation according to the fair
value method of SFAS No. 123, and thereby recognized
compensation expense based on the above fair values over the
respective option vesting periods, net income would have been
reduced to the pro forma amounts indicated below, pursuant to
the provision of SFAS No. 148:
2005
Net (loss) income:
As reported
18
Less: Total stock-based employee compensation expense determined
under fair
value based method for all awards, net of related tax effects
(9
)
Pro forma
9
Basic and diluted earnings (loss) per share:
As reported in euro
0.06
Pro forma in euro
0.03
25.
Accumulated
Other Comprehensive Loss
The changes in the components of other comprehensive income
(loss) for the years ended September 30, 2005, 2006 and
2007 are as follows:
2005
2006
2007
Tax
Tax
Tax
Pretax
Effect
Net
Pretax
Effect
Net
Pretax
Effect
Net
Accumulated other comprehensive (loss) income —
beginning of year
(111
)
—
(111
)
(68
)
1
(67
)
(136
)
2
(134
)
Other comprehensive (loss) income:
* Unrealized losses on securities, net (note 11)
—
—
—
—
—
—
(6
)
—
(6
)
* Additional minimum pension liability
(2
)
1
(1
)
(2
)
1
(1
)
4
(2
)
2
* Foreign currency translation adjustment
45
—
45
(66
)
—
(66
)
(124
)
—
(124
)
Other comprehensive income (loss)
43
1
44
(68
)
1
(67
)
(126
)
(2
)
(128
)
Adoption of SFAS No. 158 (note)
* Pension net actuarial gain (loss)
—
—
—
—
—
—
9
(3
)
6
* Pension net prior service credit (cost)
—
—
—
—
—
—
(4
)
1
(3
)
Accumulated other comprehensive (loss) income — end of
year
Construction grants deducted from the cost of fixed assets
(note 6)
—
49
1
Non-cash financing activities:
Distribution to Infineon
(374
)
(19
)
—
Deferred tax assets retained by Infineon (note 9)
(6
)
—
—
Capital lease obligation (note 21)
—
—
128
Cash paid for Interest to Infineon related to the period before
Formation is based on the historical capital structure
(note 1).
The historical net book value of DD200 of €374 transferred
from the Company to the Logic business of Infineon is reflected
as a non-cash equity transaction as of the October 1, 2004
transfer date (note 4).
Effective October 1, 2005 Infineon transferred the IFMDF
development facility from the Memory Products business to the
Logic business of Infineon. The net book value of €10 was
reflected as a non-cash reduction to business equity as of
October 1, 2005 (note 4).
Deferred tax assets related to tax loss carry-forwards, net of
valuation allowance, or tax credits that have been retained by
Infineon and not transferred to the Company at the Formation of
€6, €0 and €0 as of September 30, 2005, 2006
and 2007 are reflected as non-cash decreases to
business/shareholders’ equity in the accompanying combined
and consolidated financial statements.
Cash equivalents as of September 30, 2006 and 2007 were
€895 and €718 respectively, and consisted mainly of
bank term deposits and fixed income securities with original
maturities of three months or less.
27.
Related
Parties
The Company has transactions in the normal course of business
with Infineon group companies, Siemens group companies and with
Related and Associated Companies (together, “Related
Parties”). The Company purchases certain of its raw
materials, especially chipsets, from, and sells certain of its
products to, Related Parties. Purchases and sales to Related
Parties are generally based on market prices or manufacturing
cost plus a
mark-up.
Contributions by Infineon in connection with the Formation and
allocations by Infineon prior to that date are explained in
note 1.
On April 3, 2006, Siemens disposed of its remaining
shareholding in Infineon. Transactions between Qimonda and
Siemens subsequent to this date are no longer reflected as
Related Party transactions.
Associated and Related Companies — trade (note 12)
—
3
Associated and Related Companies — financial and other
(note 14)
—
2
Employee receivables (note 14)
2
3
Total Related Party receivables
63
19
As of September 30, 2006 receivables from Infineon mainly
represent amounts due to the Company’s operations in Japan.
Infineon legally transferred the Japan operations during the
year ended September 30, 2007.
Associated and Related Companies — trade (note 18)
76
99
Infineon group — financial and other (note 20)
9
—
Total Related Party payables
156
155
Related Party receivables and payables have been segregated
first between amounts owed by or to Infineon group companies and
companies in which the Company has an ownership interest, and
second based on the underlying nature of the transactions. Trade
receivables and payables include amounts for the purchase and
sale of products and services. Financial and other receivables
and payables represent amounts owed relating to loans and
advances and accrued interest at interbank rates.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Transactions with Related Parties during the years ended
September 30, 2005, 2006 and 2007, include the following:
2005
2006
2007
Sales to Related Parties:
Siemens group companies
3
17
—
Associated and Related Companies
1
—
—
4
17
—
Purchases from Related Parties:
Siemens group companies
13
4
—
Infineon group companies
265
403
294
Associated and Related Companies
247
438
546
525
845
840
Purchases from Infineon during the years ended
September 30, 2005, 2006 and 2007 are principally related
to products purchased from the DD200 facility and are based on
Infineon’s cost plus a margin. Purchases from Siemens group
companies during the years ended September 30, 2005 and
2006 primarily include purchases of fixed assets and rent
payments.
2005
2006
2007
Interest income from (expense to) Infineon group companies:
Interest income from Infineon group companies
40
15
—
Interest expense to Infineon group companies
(34
)
(38
)
(8
)
6
(23
)
(8
)
Since the Formation, the Company entered into several service
agreements with Infineon. These include general support services
(including sales support, logistics services, purchasing
services, human resources services, facility management
services, patent support, finance, accounting and treasury
support, legal services and strategy services), R&D
services and IT services. Transactions under these agreements
during the five months ended September 30, 2006 and the
year ended September 30, 2007, are reflected in the
consolidated statements of operations as follows:
In connection with the Formation, the Company entered into a
global service agreement with Infineon, whereby the parties
intend to provide standard support services to one another based
on actual costs plus a margin of 3 percent. The Company and
Infineon have also entered into a research and development
services agreement for the provision of research and development
services between the parties based on actual cost plus a margin
of 3 percent.
Under the master information technology cost sharing agreement,
Infineon and the Company generally agree to share costs of a
variety of information technology services provided by one or
both parties in the common interest and for the common benefit
of both parties. In general, the parties agree to share the
fixed costs of the services
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
provided (accounting for approximately 53% of total costs)
roughly equally and to share variable costs in a manner that
reflects each party’s contribution to those costs. Under
the master information technology service agreement, Infineon
and the Company agree to provide information technology services
to one another. In general, under all of these agreements, the
service recipient pays a fee based on actual or estimated total
costs incurred plus a margin of 3% for the period from
May 1, 2006 to September 30, 2008 and thereafter as
mutually agreed from year to year.
Major
shareholders
Concurrent with the Company’s IPO, Infineon sold
6.3 million Qimonda ADSs upon exercise of the
underwriters’ over-allotment option. As a result,
Infineon’s shareholding in the Company decreased and was
85.9% as of September 30, 2006.
In August 2007, Infineon announced its intention to reduce its
stake in Qimonda to ’significantly’ less than
50 percent by the time of its 2009 annual
shareholders’ meeting.
In September 2007 Infineon sold 28.75 million Qimonda ADSs,
including the underwriters’ over-allotment option, in a
registered offering. As a result, Infineon’s shareholding
in Qimonda decreased and was 77.5% as of September 30, 2007.
On September 26, 2007, Infineon Technologies Investment
B.V., a wholly owned subsidiary of Infineon Technologies AG,
issued bonds in the amount of €215, including the
underwriters’ over-allotment option, exchangeable for
Qimonda ADSs. The coupon of the three-year exchangeable bond is
1.375% per year. The exchange period starts 40 days after
issuance and ends August 31, 2010. The exchange price is
$14.74 for each Qimonda ADS, corresponding to an exchange
premium of 35%. If all bondholders exercise their exchange
rights, Infineon would deliver 20.5 million Qimonda ADSs,
equivalent to approximately 6.0% of Qimonda’s share
capital. Concurrently with this transaction, Infineon loaned an
affiliate of J.P. Morgan Securities Inc. 3.55 million
Qimonda ADSs ancillary to the placement of the exchangeable
bond, which must be returned no later than August 31, 2010
and some of which Infineon has advised the Company have already
been returned.
Dresden
200mm Facility
Effective October 1, 2004 Infineon transferred the 200mm
front-end manufacturing facility located in Dresden, Germany
(“DD200”) from the Memory Products business to the
Logic business of Infineon, since the facility would be used to
manufacture logic products in the future. Accordingly, the
Infineon Logic business took over the management responsibility
for this operation from the transfer date. Through
September 30, 2004 the DD200 balance sheet and income
statement are included in the Company’s historical combined
financial statements because the business was owned and operated
as part of the Memory Products business. Since the transfer was
between entities under common control, the transfer was
effective at historical book value as a non-cash reduction of
business equity (note 26). Prior to the Formation, the
Company was charged for the capacity utilized to manufacture the
products it purchases from Infineon.
In April 2006, Infineon and Qimonda entered into a product
purchase agreement for the production of wafers at DD200 through
September 30, 2007. Pursuant to the agreement, Infineon
agreed to manufacture wafers at DD200, using the Company’s
manufacturing technologies and masks, and to sell them to the
Company at prices specified in the agreement. The Company is
required under this agreement to pay for idle costs resulting
from its purchasing fewer wafers from Infineon than agreed upon,
if Infineon cannot otherwise utilize the capacity. The Company
is obliged to indemnify Infineon against any third party claims
based on or related to any products manufactured for the Company
under this agreement. In addition, the Company has to indemnify
Infineon against any intellectual property infringement claims
related to the products covered by the agreement. Infineon and
the Company have agreed in principle that they will share
equally any potential restructuring costs arising in
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
connection with one module. Although no restructuring plan has
been established, these costs could be material and adversely
affect the Company’s financial condition and results of
operations.
Prior to the Formation, the Company’s employees
participated in Infineon’s defined benefit pension plans.
The pension costs and liabilities included in the accompanying
combined and consolidated financial statements and presented
below for periods prior to the Formation include the portion of
the Infineon pension costs and liabilities that relate to the
Company’s employees participating in the respective
Infineon pension plans. With the Formation, these pension
liabilities and related assets were legally transferred to
Qimonda.
In February 2007, the Company established a uniform Qimonda
Pension Plan for Germany with effect from October 1, 2006,
into which the substantial majority of the employees were
transferred, representing more than 90 percent of the
existing pension obligations, and which is available to new
employees. The previous Infineon plan regulations continue to
apply to existing retirees and employees who did not consent to
the new plan. These previous Infineon plan regulations and the
new Qimonda Pension Plan for Germany are reflected below as
“Domestic plans”.
The Qimonda Pension Plan for Germany qualifies as a defined
benefit plan and, accordingly, the change from the previous
defined benefit plans is treated as a plan amendment pursuant to
SFAS No. 87, which increased the projected benefit
obligation by €4 and is amortized as part of net periodic
pension cost (“NPPC”) in future periods.
The Infineon pension plan regulations continue to apply to
Company’s employees in foreign countries (collectively,
“Foreign plans”), although all respective assets and
obligations have been transferred to the Company.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Adoption
of SFAS No. 158
The Company adopted the recognition provision of
SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”, as
of September 30, 2007, whereby the overfunded or
underfunded status of a defined benefit postretirement plan is
recognized as an asset or liability in the balance sheet and
changes in that funded status in the year in which the changes
occur through comprehensive income. The incremental effect of
applying the recognition provision of SFAS No. 158 as
of September 30, 2007 is as follows:
Domestic
Foreign
Plans
Plans
Total
Accumulated other comprehensive income
* actuarial gain (loss) before tax (note 25)
8
1
9
* prior service credit (cost) before tax (note 25)
(4
)
—
(4
)
Impact of adopting SFAS No. 158 before tax
4
1
5
* Tax effect (note 25)
(2
)
—
(2
)
Impact of adopting SFAS No. 158 after tax
2
1
3
Deferred tax liability — non-current (note 9)
2
—
2
Accrued pension liability — non-current (note 22)
4
1
5
According to SFAS No. 158, the following table
presents the actuarial (gain) loss and prior service (credit)
cost before tax as components of accumulated other comprehensive
income (gain) loss not yet recognized as NPPC as a result of the
adoption of SFAS No. 158 at September 30, 2007,
and the expected impact during the year ending
September 30, 2008:
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The net pension liability is recognized as follows in the
accompanying combined and consolidated balance sheets as of
September 30, 2005, 2006 and 2007:
2005
2006
2007
Domestic
Foreign
Domestic
Foreign
Domestic
Foreign
Plans
Plans
Plans
Plans
Plans
Plans
Accumulated other comprehensive Income —
Additional Minimum Pension Liability
2
—
4
—
—
—
Accrued pension liabilities (note 20 and 22)/
(26
)
(3
)
(24
)
(2
)
(24
)
(1
)
Net liability recognized
(24
)
(3
)
(20
)
(2
)
(24
)
(1
)
Information for pension plans with projected benefit obligations
and accumulated benefit obligations in excess of plan assets as
of September 30, 2005, 2006 and 2007 are as follows:
2005
2006
2007
Domestic
Foreign
Domestic
Foreign
Domestic
Foreign
Plans
Plans
Plans
Plans
Plans
Plans
Projected benefit obligation
59
6
53
3
51
3
Fair value of plan assets
31
3
25
2
27
2
Accumulated benefit obligation
49
4
41
3
46
3
Fair value of plan assets
31
3
25
2
27
2
The weighted-average assumptions used in calculating the
actuarial values for the pension plans as of September 30,2005, 2006 and 2007 are as follows:
2005
2006
2007
Domestic
Foreign
Domestic
Foreign
Domestic
Foreign
Plans
Plans
Plans
Plans
Plans
Plans
Discount rate
4.5
%
4.9
%
4.8
%
5.9
%
5.5
%
5.8
%
Rate of compensation increase
2.5
%
3.6
%
2.5
%
3.6
%
2.5
%
0.4
%
Projected future pension increases
1.3
%
1.7
%
1.8
%
2.3
%
1.8
%
2.2
%
Expected return on plan assets
7.3
%
6.4
%
6.5
%
6.6
%
5.9
%
6.4
%
Discount rates are established based on prevailing market rates
for high-quality fixed-income instruments that, if the pension
benefit obligation were settled at the measurement date, would
provide the necessary future cash flows to pay the benefit
obligation when due. The Company believes short-term changes in
interest rates should not affect the measurement of the
Company’s long-term obligation.
Investment
strategies
The investment approach of Qimonda’s pension assets
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program.
Qimonda’s pension assets are invested with one investment
manager. The plans employ a mix of active and passive investment
management programs. Considering the duration of the underlying
liabilities, a portfolio of investments of plan assets in equity
securities, debt securities and other assets is targeted to
maximize the long-term return on assets for a given level of
risk. Investment risk is monitored on an ongoing basis through
periodic portfolio reviews, meetings with investment management
and annual liability measurements. Investment policies and
strategies are periodically reviewed to ensure the objectives of
the plans are met considering any changes in benefit plan
design, market conditions or other material items.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Expected
long-term rate of return on plan assets
Establishing the expected rate of return on pension assets
requires judgment. Infineon’s approach in determining the
long-term rate of return for plan assets is based upon
historical financial market relationships that have existed over
time, the types of investment classes in which pension plan
assets are invested, long-term investment strategies, as well as
the expected compounded return Qimonda can reasonably expect the
portfolio to earn over appropriate time periods.
The Company reviews the expected long-term rate of return
annually and revises it as appropriate. Also, Qimonda
periodically commissions detailed asset/liability studies to be
performed by third-party professional investment advisors and
actuaries.
Plan
asset allocation
As of September 30, 2006 and 2007 the percentage of plan
assets invested and the targeted allocation in major asset
categories are as follows:
2006
2007
Targeted Allocation
Domestic
Foreign
Domestic
Foreign
Domestic
Foreign
Plans
Plans
Plans
Plans
Plans
Plans
Equity securities
—
61
%
46
%
29
%
45
%
—
Debt securities
—
39
%
43
%
65
%
52
%
—
Cash
100
%
—
11
%
—
3
%
100
%
Other
—
—
—
6
%
—
—
Total
100
%
100
%
100
%
100
%
100
%
100
%
In September 2006 the Company established the Qimonda Pension
Trust. The Infineon Pension Trust transferred €26 in cash
to the Qimonda Pension Trust, representing the pro rata portion
of the Infineon Plan Assets related to the actual Qimonda
employees at the Formation. The Qimonda Pension Trust is to
invest these funds according to the targeted investment
allocation. The difference between the actually transferred
assets and the previously allocated plan assets of € 9 is
reflected as a non-cash equity transaction in the statement of
business/shareholders’ equity for the year ended
September 30, 2006 (note 26).
The Company’s asset allocation targets for its pension plan
assets are based on its assessment of business and financial
conditions, demographic and actuarial data, funding
characteristics, related risk factors, market sensitivity
analysis and other relevant factors. The overall allocation is
expected to help protect the plans’ funded status while
generating sufficiently stable real returns (i.e. net of
inflation) to meet current and future benefit payment needs. Due
to active portfolio management, the asset allocation may differ
from the target allocation up to certain limits for different
classes. As a matter of policy, the Company’s pension plans
do not invest in the Company’s or Infineon’s shares.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The components of NPPC for the years ended September 30,2006 and 2007 are as follows:
2005
2006
2007
Domestic
Foreign
Domestic
Foreign
Domestic
Foreign
Plans
Plans
Plans
Plans
Plans
Plans
Service cost
(3
)
(1
)
(6
)
—
(6
)
—
Interest cost
(2
)
—
(3
)
—
(2
)
—
Expected return on plan assets
2
—
2
—
2
—
Amortization of unrecognized actuarial gains (losses)
—
—
—
—
(1
)
—
Curtailment gain recognized
—
—
—
1
—
—
NPPC
(3
)
(1
)
(7
)
1
(7
)
—
On January 1, 2006the Company converted the existing
defined benefit plan in the US into a defined contribution plan,
which resulted in a curtailment gain of €1.
Actuarial (losses) gains amounted to €(4), €0 and
€15 for the years ended September 30, 2005, 2006, and
2007 respectively.
The future benefit payments, which reflect future service, as
appropriate, that are expected to be paid from the
Company’s pension plan for the next five financial years
and thereafter are as follows:
Domestic
Foreign
Years Ending September 30,
Plans
Plans
2008
2
—
2009
1
—
2010
2
—
2011
2
—
2012
2
—
2013-2017
21
1
Other
post-retirement benefits
The Company has a deferred savings plan for its employees in
Germany, whereby a portion of the employee’s salary is
invested for a lump sum benefit payment including interest upon
retirement. The liability for such future payments of €4
and €6 as of September 30, 2006 and 2007,
respectively, is actuarially determined and accounted for on the
same basis as the Company’s other pension plans.
The Company provides post-retirement health care benefits to
eligible employees in the United States. The Company recognized
net periodic benefit cost of less than €1 for each of the
years ended September 30, 2005, 2006 and 2007. The net
liability recognized in the accompanying balance sheet was
€1 and €1 as of September 30, 2006 and 2007,
respectively.
29.
Financial
Instruments
The Company periodically enters into financial instruments,
including foreign currency forward contracts. The objective of
these transactions is to reduce the impact of exchange rate
fluctuations on the Company’s foreign currency denominated
net future cash flows. The Company does not enter into
derivatives for trading or speculative purposes.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
The euro equivalent notional amounts in millions and fair values
of the Company’s derivative instruments as of
September 30, 2006 and 2007 are as follows:
Gains and losses on derivative financial instruments principally
included in determining cost of goods sold were as follows for
the years ended September 30:
2005
2006
2007
Gains (losses) from foreign currency derivatives:
Cost of sales
(1
)
(4
)
25
Gains (losses) from foreign currency transactions:
Cost of sales
—
(1
)
(35
)
Other non-operating income (expense)
18
3
(4
)
18
2
(39
)
Net gains (losses) from foreign currency derivatives and
transactions
17
(2
)
(14
)
Fair values of financial instruments are determined using quoted
market prices or discounted cash flows. The fair values of the
Company’s cash and cash equivalents, receivables,
related-party receivables and payables and other financial
instruments approximated their carrying values due to their
short-term nature. Marketable securities are classified as
available for sale and therefore recorded at fair value
(note 11).
30.
Risks
Financial instruments that expose the Company to credit risk
consist primarily of trade receivables, cash equivalents,
marketable securities and financial derivatives. Concentrations
of credit risks with respect to trade receivables are limited by
the large number of geographically diverse customers that make
up the Company’s customer base. The Company manages credit
risk through credit approvals, credit limits and monitoring
procedures, as well as comprehensive credit evaluations for all
customers. The credit risk with respect to cash equivalents,
marketable securities and financial derivatives is limited by
transactions with a number of large international financial
institutions, with pre-established limits. The Company does not
believe that there is significant risk of non-performance by
these counterparties because the Company monitors their credit
risk and limits the financial exposure and the amounts of
agreements entered into with any one financial institution.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
In order to remain competitive, the Company must continue to
make substantial investments in process technology and research
and development. Portions of these investments might not be
recoverable if these research and development efforts fail to
gain market acceptance or if markets significantly deteriorate.
Due to the high-technology nature of the Company’s
operations, intellectual property is an integral part of the
Company’s business. The Company has intellectual property
which it has self-developed, purchased or licensed from third
parties. The Company is exposed to infringements by others on
such intellectual property rights. Conversely, the Company is
exposed to assertions by others of infringement by the Company
of their intellectual property rights.
The Company, through its use of third-party foundry and joint
venture arrangements, uses a significant portion of
manufacturing capacity that is outside of its direct control. As
a result, the Company is reliant upon such other parties for the
timely and uninterrupted supply of products and is exposed, to a
certain extent, to fluctuations in product procurement cost.
As a subsidiary of Infineon, the Company benefits under a number
of patent cross-licenses, technology licenses and purchasing
agreements. The benefits of such agreements would be lost if
Infineon’s ownership were to fall below 50%. The Company is
in the process of negotiating certain replacement contracts with
third parties related to such patents. There is no assurance
that the Company will be able to successfully negotiate such
replacement contracts at all or on similar terms. If the Company
is unable to do so, it could have a material adverse impact on
its business and results of operations.
As part of the Formation, certain agreements, including
licensing, purchasing and shareholding, and investments of
Infineon relating to the Company’s business may not be
transferable to the Company or restrictions may exist that
prolong the ownership transfer which may adversely affect our
business or operating results. For example, Infineon must obtain
the prior written consent of the other investors in AMTC and BAC
before its ownership interest can be transferred to the Company.
The Company has established policies and procedures which serve
as business conduct guidelines for its employees. Should these
guidelines not be adhered to, the Company could be exposed to
risks relating to wrongful actions by its employees.
After the Formation, the Company is not legally bound to
collective bargaining agreements of the employer association to
which Infineon belongs. The terms and conditions of those
agreements remain valid for those employees who were employed by
the Company as of the Formation, until new agreements are
negotiated. However, as part of an agreement with the
workers’ council, the Company agreed to apply the same
conditions to its employees as those to which Infineon is bound
through wage agreements entered until July 30, 2008.
Approximately 700 of the Company’s employees are covered by
these regulations. The Company intends to negotiate a new
agreement with the workers’ council. There is no assurance
that the Company will be able to successfully negotiate such
replacement contracts at all or on similar terms. If the Company
is unable to do so, work stoppages are possible which could have
a material adverse impact on its business and results of
operations.
During the year ended September 30, 2005the Company had
one customer with 19% and one other customer with 14% which
individually accounted for more than 10% of the Company’s
net sales. During the year ended September 30, 2006 the
Company had one customer with 18% and one other customer with
16% which individually accounted for more than 10% of the
Company’s net sales. During the year ended
September 30, 2007the Company had one customer with 17%
and one other customer with 12% which individually accounted for
more than 10% of the Company’s net sales.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
31.
Commitments
and Contingencies
Contribution
from Infineon
These contingencies described below were assigned to the Company
pursuant to the contribution agreement entered into between
Infineon and the Company in connection with the Formation.
Under the contribution agreement, the Company is required to
indemnify Infineon, in whole or in part as specified below, for
any claim (including any related expenses) arising in connection
with the liabilities, contracts, offers, uncompleted
transactions, continuing obligations, risks, encumbrances and
other liabilities Infineon incurs in connection with the matters
described below.
The contribution agreement is based on the principle that all
potential liabilities and risks in connection with legal matters
existing as of the Formation date are generally to be borne by
the business unit which caused the risk or liability or where
the risk or liability arose. Except to the limited extent
described below for the securities class action litigation and
the settled Tessera litigation (for which the Company has
different arrangements), the Company has agreed to indemnify
Infineon for all liabilities arising in connection with all
legal matters specifically described below, including court
costs and legal fees. Infineon will not settle or otherwise
agree to any of these liabilities without the Company’s
prior consent. Liabilities and risks relating to the securities
class action litigation, including court costs, will be equally
shared by Infineon and the Company, but only with respect to the
amount by which the total amount payable exceeds the amount of
the corresponding accrued liability that Infineon transferred to
the Company at the Formation. Infineon has agreed not to settle
this lawsuit without the Company’s prior consent. Any
expenses incurred in connection with the assertion of claims
against the provider of directors’ and officers’
(D & O) insurance covering Infineon’s two
current or former officers named as defendants in the suit will
also be equally shared. The D & O insurance provider
has so far refused coverage. The Company has agreed to indemnify
Infineon for 80% of the court costs and legal fees relating to
the settled litigation with Tessera (note 17).
The Company has further agreed to pay 60% of the total license
fees payable by Infineon and the Company to which Infineon and
the Company may agree in connection with two cases in which
negotiations relating to licensing and cross-licensing were
ongoing at the time of the Formation, one of which is still
ongoing.
In accordance with the general principle that all potential
risks or liabilities are to be borne by the entity which caused
the risk or liability or where the risk or liability arose, the
indemnification provisions of the contribution agreement include
the following specific provisions with respect to claims or
lawsuits arising after the Formation:
•
liabilities arising in connection with intellectual property
infringement claims relating to memory products are to be borne
by the Company.
•
liabilities arising in connection with actual or alleged
antitrust violations with respect to DRAM products are to be
borne by the Company.
Litigation
In September 2004, Infineon entered into a plea agreement with
the Antitrust Division of the U.S. Department of Justice
(“DOJ”) in connection with its ongoing investigation
of alleged antitrust violations in the DRAM industry. Pursuant
to this plea agreement, Infineon agreed to plead guilty to a
single count related to the pricing of DRAM between July 1,1999 and June 15, 2002, and to pay a fine of
$160 million. The fine plus accrued interest is to be paid
in equal annual installments through 2009. On October 25,2004, the plea agreement was accepted by the U.S. District
Court for the Northern District of California. Therefore, the
matter has been fully resolved as between Infineon and the DOJ,
subject to Infineon’s obligation to cooperate with the DOJ
in its ongoing investigation of other participants in the DRAM
industry. The charges by the DOJ related to DRAM-product sales
to six Original Equipment Manufacturer (“OEM”)
customers that manufacture computers and servers. Infineon has
entered into
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
settlement agreements with five of these OEM customers and is
considering the possibility of a settlement with the remaining
OEM customer, which purchased only a very small volume of DRAM
from Infineon.
Subsequent to the commencement of the DOJ investigation, a
number of purported class action lawsuits were filed against
Infineon, its principal U.S. subsidiary and other DRAM
suppliers.
Sixteen cases were filed between June 2002 and September 2002 in
several U.S. federal district courts purporting to be on
behalf of a class of individuals and entities who purchased DRAM
directly from various DRAM suppliers in the U.S. during a
specified time period (“Direct U.S. Purchaser
Class”), alleging price-fixing in violation of the Sherman
Act and seeking treble damages in unspecified amounts, costs,
attorneys’ fees, and an injunction against the allegedly
unlawful conduct.
In September 2002, the Judicial Panel on Multi-District
Litigation ordered that the foregoing federal cases be
transferred to the U.S. District Court for the Northern
District of California for coordinated or consolidated pre-trial
proceedings as part of a Multi-District Litigation
(“MDL”). In June 2006, the court issued an order
certifying a direct purchaser class.
In September 2005, Infineon and its principal
U.S. subsidiary entered into a definitive settlement
agreement with counsel to the Direct U.S. Purchaser Class
(granting an opportunity for individual class members to opt out
of the settlement). The settlement agreement was approved by the
court on November 1, 2006 and the court entered final
judgment and dismissed the class action claims with prejudice on
November 2, 2006. Under the terms of the settlement
agreement Infineon agreed to pay approximately $21 million.
In addition to this settlement payment, Infineon agreed to pay
an additional amount if it is proven that sales of DRAM products
to the settlement class after opt-outs during the settlement
period exceeded $208.1 million. The Company would also be
responsible for this payment. The additional amount payable is
calculated by multiplying the amount by which these sales exceed
$208.1 million by 10.53%. The Company does not currently
expect to pay any additional amount to the class. The Company
has reached individual settlements with eight direct customers
in addition to those OEMs identified by the DOJ.
In April 2006, Unisys Corporation filed a complaint against
Infineon and its principal U.S. subsidiary, among other
DRAM suppliers, alleging state and federal claims for price
fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International,
Inc. filed a complaint against Infineon and its
U.S. subsidiary, among other DRAM suppliers, alleging a
claim for price fixing under federal law, and seeking recovery
as a direct purchaser of DRAM. Both of these complaints were
filed in the Northern District of California, and have been
related to the MDL described above. Both Unisys and Honeywell
opted out of the Direct U.S. Purchaser Class and
settlement, so their claims are not barred by Infineon’s
settlement with the Direct U.S. Purchaser Class. On
April 5, 2007 the court dismissed Unisys’ initial
complaint with leave to amend for failing to give proper notice
of its claims. Unisys filed a First Amended Complaint on
May 4, 2007. Infineon, its principal U.S. subsidiary,
and the other defendants again filed a motion to dismiss certain
portions of the Unisys First Amended Complaint on June 4,2007. After Honeywell had filed a stipulation of dismissal
without prejudice of its lawsuit against Infineon, the court
entered the dismissal order on April 26, 2007. Between
February 28, 2007 and March 8, 2007 four more opt-out
cases were filed by All American Semiconductor, Inc., Edge
Electronics, Inc., Jaco Electronics, Inc. and DRAM Claims
Liquidation Trust, by its Trustee, Wells Fargo Bank, N.A. The
All American Semiconductor complaint alleges claims for
price-fixing under the Sherman Act. The Edge Electronics, Jaco
Electronics and DRAM Claims Liquidation Trust complaints allege
state and federal claims for price-fixing. As with Unisys and
Honeywell, the claims of these plaintiffs are not barred by
Infineon’s settlement with the Direct U.S. Purchaser
Class, since they opted out of the Direct U.S. Purchaser
Class and settlement. All four of these opt-out cases were filed
in the Northern District of California and have been related to
the MDL described above. Based upon the Court’s order
dismissing portions of the initial Unisys complaint above, the
plaintiffs in all four of these opt-out cases filed amended
complaints on May 4, 2007. On June 4, 2007, Infineon
and its principal U.S. subsidiary answered the amended
complaints filed by All American Semiconductor, Inc., Edge
Electronics, Inc., and Jaco Electronics, Inc. Also on
June 4, 2007, Infineon and
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
its principal U.S. subsidiary, along with its co-defendants
filed joint motions to dismiss certain portions of the DRAM
Claims Liquidation Trust and Unisys amended complaint
(note 33).
Sixty-four additional cases were filed between August 2002 and
October 2005 in numerous federal and state courts throughout the
United States of America. Each of these state and federal cases
(except a case filed in the U.S. District Court for the
Eastern District of Pennsylvania in May 2005 on behalf of
foreign purchasers) purports to be on behalf of a class of
individuals and entities who indirectly purchased DRAM in the
U.S. during specified time periods commencing in or after
1999. The complaints variously allege violations of the Sherman
Act, California’s Cartwright Act, various other state laws,
unfair competition law and unjust enrichment and seek treble
damages in generally unspecified amounts, restitution, costs,
attorneys’ fees and an injunction against the allegedly
unlawful conduct.
Twenty-three of the state (outside California) and federal court
cases and the U.S. District Court for the Eastern District
of Pennsylvania case were ordered transferred to the
U.S. District Court for the Northern District of California
for coordinated and consolidated pre-trial proceedings as part
of the MDL described above. After this transfer, the plaintiffs
dismissed two of the transferred cases. Two additional
transferred cases were subsequently remanded back to their
relevant state courts. Nineteen of the twenty-three transferred
cases are currently pending in the MDL-litigation. The Eastern
District of Pennsylvania case purporting to be on behalf of a
class of foreign individuals and entities who directly purchased
DRAM outside of the United States of America from July 1999
through at least June 2002, was dismissed with prejudice and
without leave to amend in March 2006. Plaintiffs in that case
have filed a notice of appeal. In July 2006, plaintiffs filed
their opening brief on appeal, and defendants filed their joint
opening brief in September 2006. No hearing date has yet been
scheduled for the appeal. The California state cases were
ordered transferred for coordinated and consolidated pre-trial
proceedings to the San Francisco County Superior Court. The
plaintiffs in the indirect purchaser cases that originated
outside California which have not been transferred to the MDL
agreed to stay proceedings in those cases pending resolution of
the MDL pretrial-proceedings through a single complaint on
behalf of a putative nationwide class of indirect purchasers in
the MDL. The defendants filed two motions for judgment on the
pleadings directed at several of the claims in the indirect
purchaser case pending in the MDL. The court entered an order on
June 1, 2007 granting in part and denying in part the
defendants’ motions. The order dismissed a large percentage
of the indirect purchaser plaintiffs’ claims, and granted
leave to amend with regard to claims under three specific state
statutes. The court ruled that the indirect purchaser plaintiffs
must file a motion for leave to amend the complaint with regard
to any of the other dismissed claims. On June 29, 2007, the
indirect plaintiffs filed both a First Amended Complaint, and a
motion for leave to file a Second Amended Complaint that
attempted to resurrect some of the claims that were dismissed.
On August 17, 2007, the court entered an order granting the
motion to file the Second Amended Complaint, which repleaded
part of the previously dismissed claims. The indirect
plaintiff’s motion for class certification was filed on
July 10, 2007, and defendants filed a joint opposition to
that motion on September 28, 2007. The hearing on the
motion for class certification is scheduled for January 16,2008.
In July 2006, the New York state attorney general filed an
action in the U.S. District Court for the Southern District
of New York against Infineon, its principal U.S. subsidiary
and several other DRAM manufacturers on behalf of New York
governmental entities and New York consumers who purchased
products containing DRAM beginning in 1998. The plaintiffs
allege violations of state and federal antitrust laws arising
out of the same allegations of DRAM price-fixing and artificial
price inflation practices discussed above, and seek recovery of
actual and treble damages in unspecified amounts, penalties,
costs (including attorneys’ fees) and injunctive and other
equitable relief. On October 23, 2006, the New York case
was transferred to the Northern District of California and made
part of the MDL proceedings. In July 2006, the attorneys general
of California, Alaska, Arizona, Arkansas, Colorado, Delaware,
Florida, Hawaii, Idaho, Illinois, Iowa, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Nebraska,
Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia and Wisconsin filed a
lawsuit in the U.S. District Court for the Northern
District of California against Infineon, its
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
principal U.S. subsidiary and several other DRAM
manufacturers on behalf of governmental entities, consumers and
businesses in each of those states who purchased products
containing DRAM beginning in 1998. On September 8, 2006,
the complaint was amended to add claims by the attorneys general
of Kentucky, Maine, New Hampshire, North Carolina, the Northern
Mariana Islands and Rhode Island. This action is based on state
and federal law claims relating to the same alleged
anticompetitive practices in the sale of DRAM and plaintiffs
seek recovery of actual and treble damages in unspecified
amounts, penalties, costs (including attorneys’ fees) and
injunctive and other relief. On October 10, 2006 Infineon
joined the other defendants in filing motions to dismiss several
of the claims alleged in these two actions. A hearing on these
motions was heard on February 7, 2007. On August 31,2007, the court entered orders granting the motions in part and
denying the motions in part. The court’s order dismissed
the claims on behalf of consumers, businesses and governmental
entities in a number of states, and dismissed certain other
claims with leave to amend, with any amended complaints to be
filed by October 1, 2007. Between June 25, 2007 and
August 15, 2007, the attorneys general of four states,
Alaska, New Hampshire, Ohio and Texas, filed requests for
dismissal of their claims without prejudice.
In April 2003, Infineon received a request for information from
the European Commission (the “Commission”) to enable
the Commission to assess the compatibility with the
Commission’s rules on competition of certain practices of
which the Commission has become aware in the European market for
DRAM products. Infineon reassessed the matter after its plea
agreement with the DOJ and made an accrual during the 2004
financial year for a probable minimum fine that may be imposed
as a result of the Commission’s investigation. Any fine
actually imposed by the Commission may be significantly higher
than the reserve established, although Infineon cannot more
accurately estimate the amount of such actual fine. Infineon is
fully cooperating with the Commission in its investigation.
In May 2004, the Canadian Competition Bureau advised
Infineon’s principal U.S. subsidiary that it and its
affiliated companies are among the targets of a formal inquiry
into alleged violations of the Canadian Competition Act. No
compulsory process (such as subpoenas) has commenced. Infineon
is cooperating with the Competition Bureau in its inquiry.
Between December 2004 and February 2005, two putative class
proceedings were filed in the Canadian province of Quebec and
one was filed in each of Ontario and British Columbia against
Infineon, its principal U.S. subsidiary and other DRAM
manufacturers on behalf of all direct and indirect purchasers
resident in Canada who purchased DRAM or products containing
DRAM between July 1999 and June 2002, seeking damages,
investigation and administration costs, as well as interest and
legal costs. Plaintiffs primarily allege conspiracy to unduly
restrain competition and to illegally fix the price of DRAM. In
the British Columbia action, a hearing on the certificate motion
was scheduled for August 2007 and will resume in November 2007.
In one Quebec class action, a tentative date for the motion for
authorization (certification) has been set for May 2008 (with
some possibility of a March 2008 date if the court calendar
opens); the other Quebec action has been stayed pending
developments in the one that is going forward.
Between September 2004 and November 2004, seven securities class
action complaints were filed against Infineon and three of its
current or former officers (of which one officer was
subsequently dropped as a defendant) in the U.S. District
Courts for the Northern District of California and the Southern
District of New York. The plaintiffs voluntarily dismissed the
New York cases, and in June 2005 filed a consolidated amended
complaint in California on behalf of a putative class of
purchasers of Infineon’s publicly-traded securities, who
purchased them during the period between March, 2000 and July
2004, effectively combining all lawsuits. The consolidated
amended complaint added Infineon’s principal
U.S. subsidiary and four then-current or former employees
of Infineon and its affiliate as defendants. It alleges
violations of the U.S. securities laws and asserts that the
defendants made materially false and misleading public
statements about Infineon’s historical and projected
financial results and competitive position because they did not
disclose Infineon’s alleged participation in DRAM
price-fixing activities and that, by fixing the price of DRAM,
defendants manipulated the price of Infineon’s
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
securities, thereby injuring its shareholders. The plaintiffs
seek unspecified compensatory damages, interest, costs and
attorneys’ fees. In September 2006, the court dismissed the
complaint with leave to amend and in October 2006 the plaintiffs
filed a second amended complaint. In March 2007, pursuant to a
stipulation agreed with the defendants, the plaintiffs withdrew
the second amended complaint and were granted a motion for leave
to file a third amended complaint. The plaintiffs filed a third
amended complaint on July 17, 2007. In the contribution
agreement the Company entered into with Infineon, the Company
agreed to share any future liabilities arising out of this
lawsuit equally with Infineon, including the cost of defending
the suit.
Infineon believes these claims are without merit. The Company is
currently unable to provide an estimate of the likelihood of an
unfavorable outcome to Infineon or of the amount or range of
potential loss arising from these actions. If the outcome of
these actions is unfavorable or if Infineon incurs substantial
legal fees in defending these actions regardless of outcome, it
may have a material adverse effect on the Company’s
financial condition and results of operations. Infineon’s
directors’ and officers’ insurance carriers have
denied coverage in the securities class actions and Infineon
filed suits against the carriers in December 2005 and August
2006. Infineon’s claims against one D&O insurance
carrier were finally dismissed in May 2007. The claims against
the other insurance carrier are still pending.
On April 10, 2007, Lin Packaging Technologies,
Ltd. (Lin) filed a lawsuit against Infineon, its principal
U.S. subsidiary and an additional DRAM manufacturer in the
U.S. District Court for the Eastern District of Texas,
alleging that certain DRAM products were infringing two Lin
patents. In May 2007, Lin amended its complaint to include
Qimonda AG, Qimonda North America Corp. and Qimonda Richmond
LLC. Under the contribution agreement with Infineon, the Company
is required to indemnify Infineon for claims (including any
related expenses) arising in connection with the aforementioned
suit.
Accruals
and the potential effect of these lawsuits
Liabilities related to legal proceedings are recorded when it is
probable that a liability has been incurred and the associated
amount can be reasonably estimated. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
September 30, 2007, the Company had accrued liabilities in
the amount of €101 related to the DOJ and European
antitrust investigations and the direct and indirect purchaser
litigation and settlements described above, as well as for legal
expenses relating to the securities class actions and the
Canadian antitrust investigation and litigation described above
(notes 19, 20, 22). As additional information becomes
available, the potential liability related to these matters will
be reassessed and the estimates revised, if necessary. These
accrued liabilities would be subject to change in the future
based on new developments in each matter, or changes in
circumstances, which could have a material adverse effect on the
Company’s results of operations and financial condition.
An adverse final resolution of the antitrust investigations or
related civil claims or the securities class action lawsuits
described above could result in substantial financial liability
to, and other adverse effects upon the Company, which would have
a material adverse effect on the Company’s business,
results of operations, financial condition and cash flows. In
each of these matters, the Company is continuously evaluating
the merits of its respective claims and defending itself
vigorously or seeking to arrive at alternative resolutions in
the best interests of the Company, as its deems appropriate.
Irrespective of the validity or the successful assertion of the
above referenced claims, the Company could incur significant
costs with respect to defending against or settling such claims,
which could have a material adverse effect on the Company’s
results of operations and financial condition and cash flows.
The Company is subject to various other lawsuits, legal actions,
claims and proceedings related to products, patents and other
matters incidental to its businesses. The Company has accrued a
liability for the estimated costs of adjudication of various
asserted and unasserted claims existing as of the balance sheet
date. Based upon information
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
presently known to management, the Company does not believe that
the ultimate resolution of such other pending matters will have
a material adverse effect on the Company’s financial
position, although the final resolution of such matters could
have a material adverse effect on the Company’s results of
operations or cash flows in the year of settlement.
Contractual
Commitments
The following table summarizes the Company’s commitments
with respect to external parties as of September 30,2007(1)(2):
Payments Due to Period
Less than
After
Total
1 Year
1-2 Years
2-3 Years
3-4 Years
4-5 Years
5 Years
Contractual commitments:
Operating lease
payments(3)
95
27
25
17
9
8
9
Unconditional purchase commitments
787
737
43
5
2
—
—
Other long-term commitments
70
64
2
2
1
1
—
Total Commitments
952
828
70
24
12
9
9
(1)
Certain payments of obligations or expirations of commitments
that are based on the achievement of milestones or other events
that are not date-certain are included for purposes of this
table based on estimates of the reasonably likely timing of
payments or expirations in the particular case. Actual outcomes
could differ from those estimates.
(2)
Product purchase commitments associated with continuing capacity
reservation agreements are not included in this table, since the
purchase prices are based, in part, on future market prices, and
are therefore not accurately quantifiable at September 30,2007. Purchases under these arrangements aggregated
approximately €1,131 for the year ended September 30,2007.
(3)
Operating lease payments include amounts paid to Infineon for
lease payments. Premises currently occupied by the Company that
are leased by Infineon are expected to be the subject of a
sublease agreement between Infineon and the Company.
The Company has capacity reservation agreements with certain
Associated Companies and external foundry suppliers, such as
Winbond and SMIC, for the manufacturing and testing of
semiconductor products. These agreements generally have
durations greater than one year and are renewable. Under the
terms of these agreements, the Company has agreed to purchase a
portion of their production output based, in part, on market
prices.
Purchases under these agreements are recorded as incurred in the
normal course of business. The Company assesses its anticipated
purchase requirements on a regular basis to meet customer demand
for its products. An assessment of losses under these agreements
is made on a regular basis in the event that either budgeted
purchase quantities fall below the specified quantities or
market prices for these products fall below the specified prices.
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
Other
Contingencies
The following table summarizes the Company’s contingencies
with respect to external parties, other than those related to
litigation, as of September 30,2007(1):
Expirations by Period
Less than
After
Total
1 year
1-2 Years
2-3 Years
3-4 Years
4-5 Years
5 Years
Maximum potential future payments:
Guarantees
128
19
16
1
9
30
53
Contingent government grants
406
107
22
45
166
26
40
Total contingencies
534
126
38
46
175
56
93
(1)
Certain expirations of contingencies that are based on the
achievement of milestones or other events that are not
date-certain are included for purposes of this table based on
estimates of the reasonably likely timing of expirations in the
particular case. Actual outcomes could differ from those
estimates.
The Company has guarantees outstanding to external parties of
€128 as of September 30, 2007, that mainly expire
through 2013. Guarantees are mainly issued by Infineon for the
payment of import duties, rentals of buildings, contingent
obligations related to government grants received and the
consolidated debt of subsidiaries. Such guarantees which relate
to Qimonda AG were transferred to the Company as part of the
Formation. The Company also agreed to indemnify Infineon against
any losses it may suffer under several guarantee and financing
arrangements that relate to its business but that cannot be
transferred to it for legal, technical or practical reasons.
The Company has received government grants and subsidies related
to the construction and financing of certain of its production
facilities. These amounts are recognized upon the attainment of
specified criteria. Certain of these grants have been received
contingent upon the Company maintaining compliance with certain
project-related requirements for a specified period after
receipt. The Company is committed to maintaining these
requirements. Nevertheless, should such requirements not be met,
as of September 30, 2007, a maximum of €406 of these
subsidies could be refundable. The Company repaid grants of
€3 in the year ended September 30, 2007 as a result of
asset relocations.
The Company, through certain of its sales and other agreements
may, in the normal course of business, be obligated to indemnify
its counterparties under certain conditions for warranties,
patent infringement or other matters. The maximum amount of
potential future payments under these types of agreements is not
predictable with any degree of certainty, since the potential
obligation is contingent on conditions that may or may not occur
in future, and depends on specific facts and circumstances
related to each agreement. Historically, payments made by the
Company under these types of agreements have not had a material
adverse effect on the Company’s business, results of
operations or financial condition.
32.
Operating
Segment and Geographic Information
The Company has reported its operating segment and geographic
information in accordance with SFAS No. 131,
“Disclosure about Segments of an Enterprise and Related
Information”. The accounting policies applied for
segment reporting are substantially the same as described in the
summary of significant accounting policies (note 2).
The Company’s Management Board, consisting of its Chief
Executive Officer, Chief Operating Officer and Chief Financial
Officer, has been collectively identified as the Chief Operating
Decision Maker (“CODM”). The CODM makes decisions
about resources to be allocated to the business and assesses the
Company’s performance on a functional and project basis.
Only consolidated operating results of the Company are regularly
presented to the
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
CODM to make such decisions. Furthermore, the CODM does not
evaluate performance or review asset information by product line
on a regular basis, except that the CODM is provided information
regarding certain inventories on a product basis. Accordingly,
the Company has one operating segment, Memory Products, which is
also its reportable segment, consistent with the manner in which
financial information is internally reported and used by the
CODM for purposes of evaluating business performance and
allocating resources.
The Memory Products segment designs semiconductor memory
technologies and develops, manufactures, markets and sells a
large variety of semiconductor memory products on a chip,
component and module level. The principal products are DRAM
components and modules for use in a wide variety of electronic
products.
Prior to the Formation, the Company operated as a segment of
Infineon. Following the Formation, the Company continues to be
reported as an operating segment of Infineon, although its
operations are contained in a stand-alone legal entity. Segment
information is shown for all periods presented, including
periods prior to the Formation, consistent with the current
organization structure.
The following is a summary of net sales and of property, plant
and equipment by geographic area for the years ended
September 30, 2005, 2006 and 2007:
2005
2006
2007
Net sales:
Germany
232
316
256
Rest of Europe
333
482
399
North America
1,067
1,591
1,323
Asia/Pacific
1,091
1,174
1,182
Japan
102
252
448
Total
2,825
3,815
3,608
2005
2006
2007
Property, plant and equipment:
Germany
804
654
684
Rest of Europe
175
144
193
North America
1,082
1,100
1,093
Asia/Pacific
155
182
216
Total
2,216
2,080
2,186
For practical purposes, the Rest of Europe region also includes
other countries and territories in the rest of the world outside
of the listed main geographic regions with aggregate sales
representing no more than 2% of total sales in any period.
Revenues from external customers are based on the
customers’ billing location.
The Company defines EBIT as earnings (loss) before interest and
taxes. The Company’s management uses EBIT, among other
measures, to establish budgets and operational goals, to manage
the combined and consolidated Company’s business and to
evaluate and report performance as part of the Infineon Group.
Because many operating decisions, such as allocations of
resources to individual projects, are made on a basis for which
the effects of financing the overall business and of taxation
are of marginal relevance, management finds a metric that
excludes the effects of interest on financing and tax expense
useful. In addition, in measuring operating performance,
particularly for the purpose of making internal decisions, such
as those relating to personnel matters, it is useful for
Notes to the Combined and Consolidated Financial
Statements — (Continued)
(euro in millions, except where otherwise stated)
management to consider a measure that excludes items over which
the individuals being evaluated have minimal control, such as
enterprise-level taxation and financing. The Company reports
EBIT information because it believes that it provides investors
with meaningful information about the operating performance of
the Company in a manner similar to that which management uses to
assess and direct the business. EBIT is not a substitute for net
income, however, because the exclusion of interest and tax
expense is not appropriate when reviewing the overall
profitability of the Company.
EBIT is determined as follows from the combined and consolidated
statements of operations, without adjustment to the
U.S. GAAP amounts presented:
2005
2006
2007
Net (loss) income
18
74
(249
)
Adjust: Income tax expense
86
114
10
Interest
expense, net
7
25
(7
)
EBIT
111
213
(246
)
The above EBIT results for periods prior to the Formation differ
from the Memory Products segment results previously reported by
Infineon, primarily due to allocations of Infineon corporate
expenses (reported by Infineon as part of its Corporate and
Reconciliation segment, since they arise from corporate directed
decisions not within the direct control of Infineon’s
segment management), which have been reallocated to the Company
for purposes of preparing the accompanying combined and
consolidated financial statements on a stand-alone basis. After
the Company’s IPO, Infineon reports the Company’s EBIT
results as its segment net of the minority interest in Qimonda.
On October 2, 2007 Sony Corporation and Qimonda AG
announced that they have signed an agreement to found the joint
venture Qreatic Design. 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 is intended to start
with up to 30 specialists from Sony and Qimonda, bringing
together their engineering expertise for the mutual benefit of
both companies. Qreatic Design, which will be located in Tokyo,
Japan, is planned to start operations by the end of the 2007
calendar year, subject to regulatory approvals and other closing
conditions, and to substantially expand its capacities by hiring
additional designers.
On October 8, 2007, Qimonda entered into a rental agreement
for new headquarter offices south of Munich, Germany. The
agreement involves the construction of a building by a third
party lessor, and includes a 15 year non-cancelable lease
term, which is expected to start in early 2010. Qimonda has an
option to extend the lease for two 5 year periods at
similar lease terms to the initial non-cancelable lease term.
The minimum rental payments aggregate €96 over the initial
lease term. The lease contract provides for rent escalation in
line with market-based increases in rent. The agreement will be
accounted for as an operating lease with monthly lease payments
expensed on a straight-line basis over the lease term.
On October 15, 2007, the court entered an order denying the
motion to dismiss in the Unisys and the DRAM Liquidation Trust
cases without prejudice. On October 29, 2007, Infineon
answered the Unisys complaint, denying liability and asserting a
number of affirmative defenses. On November 1, 2007,
Infineon answered the DRAM Claims Liquidation Trust complaint,
denying liability and asserting a number of affirmative defenses
(note 31).
On November 9, the Company’s Supervisory Board allocated
200,000 options for grant to the Management Board in
the 2008 financial year.
The registrant hereby certifies that it meets all of the
requirements for filing on
Form 20-F
and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
Rules of Procedure for the Management Board of Qimonda AG, as
amended (English translation).
1(ii)(B)
Rules of Procedure for the Supervisory Board of Qimonda AG, as
amended (English translation).
2
The total amount of long-term debt securities of Qimonda AG
authorized under any instrument does not exceed 10% of the total
assets of the group on a consolidated basis. Qimonda AG hereby
agrees to furnish to the SEC, upon its request, a copy of any
instrument defining the rights of holders of long-term debt of
Qimonda AG or of its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed.
4(i)(A)
Contribution Agreement (Einbringungsvertrag) between
Infineon Technologies AG and Qimonda AG, dated as of
April 25, 2006, and addendum thereto, dated as of
June 2, 2006 (English translation). (incorporated by
reference to Exhibit 10(i)(A) of Qimonda AG’s
Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(B)
Contribution Agreement (Einbringungsvertrag) between
Infineon Holding B.V. and Qimonda AG, dated as of May 4,2006 (English translation). (incorporated by reference to
Exhibit 10(i)(B) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(C)
Contribution Agreement (Einbringungsvertrag) between
Infineon Holding B.V. and Qimonda AG, dated as of June 25,2007 (English translation). (incorporated by reference to
Exhibit 10(iii) of Qimonda AG’s Registration Statement
on
Form F-3,
filed with the SEC on September 11, 2007)
4(i)(D)
Trust Agreement between Infineon Technologies AG and
Qimonda AG, dated as of April 25, 2006, as amended (English
translation). (incorporated by reference to Exhibit 4(i)(C)
of Qimonda AG’s
Form 20-F,
filed with the SEC on November 21, 2006)
4(i)(E)
Master Loan Agreement between Qimonda AG and Infineon
Technologies Holding B.V., dated April 28, 2006.
(incorporated by reference to Exhibit 10(i)(D) of Qimonda
AG’s Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(F)
Global Services Agreement between Infineon Technologies AG and
Qimonda AG, effective May 1, 2006. (incorporated by
reference to Exhibit 10(i)(E) of Qimonda AG’s
Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(G)
Joint Venture Agreement between Infineon and Nanya Technology
Corporation, executed on November 13, 2002. (incorporated
by reference to Exhibit 10(i)(G) of Qimonda AG’s
Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(H)
Amendments No. 1, 2 and 3 to the Joint Venture Agreement
between Infineon and Nanya Technology Corporation, executed on
November 13, 2002. (incorporated by reference to
Exhibit 10(i)(H) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(I)
Amendment No. 4 to the Joint Venture Agreement between
Infineon and Nanya Technology Corporation, executed on
November 13, 2002. (incorporated by reference to
Exhibit 10(i)(I) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(J)
60nm Technical Cooperation Agreement between Nanya Technology
Corporation and Infineon Technologies AG for DRAM Process
Technology, dated September 29, 2005. (incorporated by
reference to Exhibit 10(i)(J) of Qimonda AG’s
Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
110nm License and 90/70nm Technical Cooperation Agreement
between Nanya Technology Corporation and Infineon Technologies
AG for DRAM Process Technology, dated November 13, 2002, as
amended. (incorporated by reference to Exhibit 10(i)(K) of
Qimonda AG’s Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(L)
Product Purchase and Capacity Reservation Agreement by and
between Hwa-Ya Semiconductor Inc. (Inotera), Nanya Technology
Corporation and Infineon Technologies AG, dated July 15,2003, as amended. (incorporated by reference to
Exhibit 10(i)(L) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(M)
Product Purchase and Capacity Reservation Agreement by and
between Semiconductor Manufacturing International Corporation,
Semiconductor Manufacturing International (Shanghai) Corporation
and Infineon Technologies AG, dated December 4, 2002, as
amended. (incorporated by reference to Exhibit 10(i)(M) of
Qimonda AG’s Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(N)
Product Purchase and Capacity Reservation Agreement 300nm by and
between Winbond Electronics Corporation and Infineon
Technologies AG, dated August 6, 2004. (incorporated by
reference to Exhibit 10(i)(N) of Qimonda AG’s
Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(O)
Cooperative Joint Venture Contract between Infineon Technologies
China Co., Ltd. and China-Singapore Suzhou Industrial Park
Ventures Co., Ltd., dated July 28, 2003, as amended.
(incorporated by reference to Exhibit 10(i)(O) of Qimonda
AG’s Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(P)
Settlement and License Agreement by and among Rambus Inc.,
Infineon, Infineon Technologies North America Corp. and Infineon
Technologies Holding North America Inc., dated as of
March 21, 2005. (incorporated by reference to
Exhibit 10(i)(P) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(Q)
Master IT Cost Sharing Agreement by and between Infineon
Technologies AG and Qimonda AG, effective May 1, 2006.
(incorporated by reference to Exhibit 10(i)(Q) of Qimonda
AG’s Registration Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(R)
License Agreement between Tessera, Inc. and Qimonda AG, dated
August 1, 2006. (incorporated by reference to
Exhibit 10(i)(R) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006, for
portions of which confidential treatment has been granted)
4(i)(S)
Eleventh Amendment to License and Technical Cooperation
Agreement dated November 13, 2002 and First Amendment to
60nm Technical Cooperation Agreement dated September 29,2005, both between Nanya Technology Corporation and Infineon
Technologies AG. (incorporated by reference to
Exhibit 10(i)(S) of Qimonda AG’s Registration
Statement on
Form F-1,
as amended, filed with the SEC on August 8, 2006)
4(i)(T)
Twelfth Amendment to License and Technical Cooperation Agreement
dated November 13, 2002 between Nanya Technology
Corporation and Infineon Technologies AG. (incorporated by
reference to Exhibit 4(i)(T) of Qimonda AG’s
Form 20-F,
filed with the SEC on November 21, 2006, f for portions of
which confidential treatment has been granted)
4(i)(U)
Addenda No. 6 and 7 to Product Purchase and Capacity
Reservation Agreement by and between Semiconductor Manufacturing
International Corporation, Semiconductor Manufacturing
International (Shanghai) Corporation and Infineon Technologies
AG, dated December 4, 2002. (incorporated by reference to
Exhibit 4(i)(U) of Qimonda AG’s
Form 20-F,
filed with the SEC on November 21, 2006, for portions of
which confidential treatment has been granted)
First Addendum to Product Purchase and Capacity Reservation
Agreement 300mm by and between Winbond Electronics Corporation
and Infineon Technologies AG, dated August 6, 2004.
(incorporated by reference to Exhibit 4(i)(V) of Qimonda
AG’s
Form 20-F,
filed with the SEC on November 21, 2006, for portions of
which confidential treatment has been granted)
4(i)(W)
Addenda No. 2 and 3 to Contribution Agreement
(Einbringungsvertrag) between Infineon Technologies AG
and Qimonda AG, dated as of April 25, 2006 (English
Translation). (incorporated by reference to Exhibit 4(i)(W)
of Qimonda AG’s
Form 20-F,
filed with the SEC on November 21, 2006)
4(i)(X)
Second Addendum to the Product Purchase and Capacity Reservation
Agreement 300nm by and between Winbond Electronics Corporation
and Qimonda AG, dated June 27, 2007. (incorporated by
reference to Exhibit 10(i) of Qimonda AG’s
Registration Statement on
Form F-3,
filed with the SEC on September 11, 2007 for portions of
which confidential treatment has been granted)
4(i)(Y)
Addendum No. 8 to Product Purchase and Capacity Reservation
Agreement by and between Semiconductor Manufacturing
International Corporation, Semiconductor Manufacturing
International (Shanghai) Corporation and Qimonda AG, dated
June 25, 2007. (incorporated by reference to
Exhibit 10(ii) of Qimonda AG’s Registration Statement
on
Form F-3,
filed with the SEC on September 11, 2007 for portions of
which confidential treatment has been granted)
4(i)(Z)
Addendum No. 9 to Product Purchase and Capacity Reservation
Agreement by and between Semiconductor Manufacturing
International Corporation, Semiconductor Manufacturing
International (Shanghai) Corporation and Qimonda AG, dated
October 13, 2007 for portions of which confidential
treatment has been requested.
8
List of Significant Subsidiaries and Associated Companies of
Qimonda AG as defined in
Rule 1-02(w)
of
Regulation S-X:
See “Additional Information — Group
Structure — Significant Subsidiaries.”
12(i)
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
12(ii)
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act.
13
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act.
Financial statements for Inotera as of and for the years ended
December 31, 2005 and 2006 and the years ended December 31,2004 and 2005, including the report of the independent
registered public accounting firm KPMG Certified Public
Accountants with respect thereto.
Dates Referenced Herein and Documents Incorporated by Reference