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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 26, 2010
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number 001-34747
SPANSION INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3898239 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
915 DeGuigne Drive
P.O. Box 3453
Sunnyvale, CA 94088
(408) 962-2500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
(Name of each exchange on which registered) | |
| Class A Common Stock, $0.001 par value per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of Class A Common Stock (Common Stock) held by non-affiliates of the registrant based upon the closing sale price on the New York Stock Exchange on June 27, 2010 was approximately $51.4 million. Shares held by each executive officer, director and by each person who owns 10 percent or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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. Yes x No ¨
The number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on February 17, 2011:
| Class |
Number of Shares | |
| Class A Common Stock, $0.001 par value per share | 62,390,784 | |
| Class B Common Stock, $0.001 par value per share | 1 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Meeting of Stockholders, which we expect will be held on or about May 6, 2011 (2011 Proxy Statement) are incorporated by reference into Part III hereof.
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FORM 10-K
For The Fiscal Year Ended December 26, 2010
INDEX
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PART I
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. Forward-looking statements may include words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed under “Risk Factors” in this report. We also face risks and uncertainties associated with emergence from bankruptcy ; claims not discharged in the bankruptcy proceedings and their effect on our results of operations and profitability; our substantial indebtedness and its impact on our financial health and operations; and the sufficiency of workforce and cost reduction initiatives. Other risks and uncertainties relating to our business include our ability to: succeed with our new business strategy focused primarily on the embedded Flash memory market; maintain or increase our average selling price and lower our average costs; accurately forecast customer demand for our products; attract new customers; obtain additional financing in the future; maintain our distribution relationships and channels in the future; successfully enter new markets and manage our international expansion; successfully compete with existing and new competitors, or with new memory or other technologies; successfully develop new applications and markets for our products; maintain manufacturing efficiency; obtain adequate supplies of satisfactory materials essential to manufacture our products; successfully develop and transition to the latest technologies; negotiate patent and other intellectual property licenses and patent cross-licenses and acquire additional patents; protect our intellectual property and defend against infringement or other intellectual property claims; effectively manage fluctuations in foreign currency exchange rates; maintain our business operations and demand for our products in the event of natural or man-made catastrophic events; and effectively manage, operate and compete in the extraordinarily volatile market conditions effected in part by cautious capital spending by our customers as they face their own business challenges. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report, or to conform such statements to actual results or changes in our expectations.
| ITEM 1. | BUSINESS |
Overview
We are a leading designer, manufacturer and developer of Flash memory semiconductors. We primarily focus on serving the embedded Flash memory market to customers worldwide. Our Flash memory products primarily store data and software code for microprocessors, controllers and other programmable semiconductors which run applications in a broad range of electronics systems. These electronic systems include computing and communications, automotive and industrial, consumer and gaming, wireless and machine-to-machine, or M2M, devices. In addition to Flash memory products, we assist our customers in developing and prototyping their designs by providing software and hardware development tools, drivers and simulation models for system-level integration.
Our Flash memory solutions are incorporated in products from leading original equipment manufacturers, or OEMs. Our products are designed to accommodate various voltage, interface and memory density requirements for a wide range of specific applications and customer platforms. The majority of our new product designs are based on our proprietary two-bit-per-cell MirrorBit technology which has a simpler cell architecture requiring fewer manufacturing steps, supporting higher yields and lower costs as compared to competing floating gate NOR Flash memory technology.
For fiscal 2010, our net sales of the Successor (see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Chapter 11 Cases and Emergence—General
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Information” for details of Successor and Predecessor) was $764.7 million and our net loss was $96.7 million. For fiscal 2010, the Predecessor had net sales of $403.6 million and net income of $363.6 million.
For fiscal 2009, the Predecessor had net sales of $1.4 billion and a net loss of $514.1 million.
We are headquartered in Sunnyvale, California, with research and development, manufacturing, assembly and sales operations in the United States, Asia, Europe and the Middle East. We own and operate one wafer fabrication facility located in Austin, Texas; three final manufacturing facilities in Bangkok, Thailand and in Kuala Lumpur and Penang, Malaysia. Final manufacturing consists of assembly, test, mark and pack operations. For financial information about geographic areas and for information with respect to our sales, refer to the information set forth in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Our mailing address and executive offices are located at 915 DeGuigne Drive, Sunnyvale, California 94088, and our telephone number is (408) 962-2500. References in this report to “Spansion,” “we,” “us,” “our,” or the “Company” shall mean Spansion Inc. and our consolidated subsidiaries, unless the context indicates otherwise. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, or Exchange Act, and, in accordance therewith, file periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Such periodic reports, proxy statements and other information is available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 or may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a Web site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. We also post on the Investor Relations page of our Web site, www.spansion.com, a link to our filings with the SEC, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Corporate Controller and other Senior Finance Executives, our Code of Business Conduct, which applies to all directors and all our employees, and the charters of our Audit, Compensation, Finance and Nominating and Corporate Governance committees. Our filings with the SEC are posted as soon as reasonably practical after they are filed electronically with the SEC. Please note that information contained on our Web site is not incorporated by reference in, or considered to be a part of, this document. You can also obtain copies of these documents free of charge by writing to us at: Corporate Secretary, Spansion Inc., 915 DeGuigne Drive, Sunnyvale, California 94085, or emailing us at: Corporate.Secretary@spansion.com.
Industry Overview
The proliferation of electronic systems, such as broadband access devices, automotive powertrain control, digital TVs, set-top boxes, printers, digital cameras, gaming machines, mobile phones, wireless and wired infrastructure, industrial control and M2M modules, drives increasing use of Flash memory to support the reliable operation of embedded software code. Electronic systems need to store both operating instructions in the form of software code as well as content or data that needs to be processed. As electronic systems add features to process rich multimedia content and require greater performance, they require increasingly complex software code and therefore more code storage. As a result, software code storage and content storage have become critical components of electronic systems across a variety of industries and applications.
The overall memory market can be divided into “volatile” and “non-volatile” categories. Volatile memory, such as dynamic random access memory, or DRAM, loses its content when the system is powered down while non-volatile memory retains its content even after power is turned off, allowing memory content to be retrieved at a later time. The primary semiconductor component used to store and access software code and digital content today is non-volatile Flash memory.
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Overview of Flash Memory
Flash memory is well suited for a variety of applications across a broad range of electronic products, including consumer electronics, networking and telecommunications equipment, mobile phones, PCs, automotive electronics, gaming and industrial equipment.
The Flash memory market consists of two major segments: NOR and NAND Flash memory. Different performance characteristics make NOR and NAND Flash memory suitable for different uses. NOR Flash memory is most often used for reliable code execution and data storage in consumer electronics, automobile and industrial applications and mobile phones. NAND Flash memory is used for data storage in solid-state removable memory applications, such as USB storage devices and data cards. NAND Flash memory is also used in high-end mobile phones, MP3 players, and other embedded applications.
NAND Flash memory is not well-suited for code storage and execution because it has slower read speeds along with lower reliability than NOR. On the other hand, NAND has faster write and erase speeds, and is available at higher densities than NOR with a lower cost per bit at these high densities. These attributes make NAND the preferred technology for data storage in removable storage applications and NOR the preferred technology for program code storage and execution. Further, customers seeking fast read performance and superior reliability have traditionally chosen NOR Flash memory over NAND.
Our Addressable Markets
The Flash memory market can be divided into two major categories based on application: the integrated category, which includes wireless and embedded applications, and the removable storage category, which includes Flash memory cards and USB drives. Within the integrated category, we refer to portable, battery-powered communications applications as “wireless” and all other applications, such as consumer, telecommunications, automotive and industrial electronics, as “embedded.” We have focused historically on the integrated category of the Flash memory market. In early 2009, we narrowed our strategic focus to the embedded portion of the Flash memory market and intend to continue to selectively engage in portions of the wireless market where we believe we can do so advantageously. The embedded Flash memory market is characterized by long design and life cycles, lower capital and technology investments, stable average selling prices, or ASPs, and fragmented competition with multiple suppliers.
In addition to our focus on our traditional embedded NOR Flash memory applications, we plan to expand our presence in growing portions of the embedded Flash memory market, including additional embedded NOR Flash memory applications and embedded NAND Flash memory applications. We believe our proprietary MirrorBit technology, licensing partners, customer relationships and broad product portfolio will enable us to extend our leadership in the attractive embedded Flash memory markets.
Technology
Our current product portfolio offers densities ranging from 1-megabit to 16-gigabits and a broad array of interfaces and features. We own and use fundamental intellectual property in two Flash memory technologies, single-bit-per-cell floating gate and two-bit-per-cell MirrorBit technology. Compared to competing floating gate multilevel cell NOR technology, two-bit-per-cell MirrorBit technology has a simpler cell architecture requiring fewer manufacturing steps and supporting higher yields, resulting in lower manufacturing costs. Our current and new products are based primarily on MirrorBit two-bit-per-cell technology and allow us to offer a broad range of product configurations and capabilities, including high density and high performance. We own fundamental intellectual property in both floating gate and MirrorBit technology.
Floating Gate Technology. Floating gate is the conventional Flash memory cell technology that is utilized by most Flash memory companies today for both NOR and NAND products. We have created innovations in
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floating gate technology that have become industry standards, such as negative gate erase, single power supply and embedded programming algorithms, and we continue to hold a strong position in the NOR Flash memory market with our products based on floating gate technology.
MirrorBit Technology. MirrorBit NOR technology is the foundation of our current product roadmap. Also referred to as charge trapping technology, MirrorBit NOR technology stores two distinct charges in a single memory cell, with each charge equivalent to one bit of data thereby doubling the density of each memory cell and enabling higher density, lower cost products.
Markets, Applications & Products
We design, develop and sell Flash memory solutions that are primarily used in the computing and communications, automotive and industrial, consumer and gaming and wireless and M2M end markets. Our products and solutions deliver a combination of high performance and competitive cost for a wide range of customer platforms and applications. The product offerings support various voltages, interfaces and memory densities. We offer 3-volt products to serve embedded applications, 1.8-volt products to serve Wireless applications and 5-volt products primarily for automotive and industrial applications.
GL and AL Families. The GL and AL product families address applications where high reliability coupled with low cost are important, including consumer, gaming, networking and telecommunications. The AL product family offers densities as low as 8-megabits, supports a simpler feature set and provides a standard parallel interface for value-focused applications, such as digital video disk, or DVD, players. The GL product family currently offers densities up to 2-gigabits in production and includes a page-mode interface and Advanced Sector Protection to support high performance consumer applications, such as high-end set top boxes, or STBs, and digital video recorders, or DVRs. MirrorBit technology is utilized for the GL family, while both MirrorBit and floating gate technology are utilized for the AL family.
CD and CL Families. The CD (2.5-volt) and CL (3.0-volt) product families address automotive engine and transmission control applications, which require high reliability, feature rich, high performance and capability to operate across wide temperature ranges. The CD and CL product families combine a high performance burst-mode interface, with Simultaneous Read/Write and Advanced Sector Protection at 16- and 32-megabit densities. Because engine and transmission control units must withstand extreme temperatures, this family operates at up to 150°C and is available in a fully tested die-only solution for incorporation into special customer modules.
FL Family. The FL family utilizes floating gate and MirrorBit technologies with a Serial Peripheral Interface, or SPI, and a low pin count package to provide low cost solutions that currently support densities from 4- to 256-megabits in production. This product line supports the option for single, dual or quad serial input/output, or I/O, thereby providing a lower system-cost, high performance solution for Industrial, Automotive, and Consumer markets.
WS/ NS/ VS Families. The WS/NS/VS product families, which operate with a 1.8-volt supply, are used for a broad range of mobile phones with features such as complex ring tones, enhanced color displays, higher resolution cameras and internal storage for multimedia content including music, videos and pictures. The WS and VS families, which include products based on floating gate and MirrorBit technology, combine a high performance burst-mode 1.8-volt interface, with Simultaneous Read/Write and Advanced Sector Protection features at 64-megabits to 512-megabits densities. These products are usually combined with third-party PSRAM or DRAM die in a single multi-chip packages, or MCP, to meet mobile phone memory needs.
JL and PL Families. The JL and PL product families, with a 3-volt interface, support mobile phone and automotive applications. Based on floating gate and MirrorBit technology, these products offer a page-mode interface, simultaneous Read/Write capability and Advanced Sector Protection at 32-megabit to 128-megabit densities.
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AS Family. The AS product family delivers small form-factor and reliable performance for module-based applications such as Bluetooth for consumer and automotive markets. This 1.8 volt product line supports densities from 8- to 16-megabits with a standard parallel interface to optimize value-driven performance.
F Family. The F product family is a 5-volt, legacy offering which primarily supports automotive markets.
Our goal is to streamline and simplify our customers’ design and development cycle by providing consistent and comprehensive tools to support customers’ development process, from initial system bring-up to final product deployment. In addition to Flash memory products, we assist customers in prototyping their designs by providing the necessary software and hardware development tools, drivers and simulation models for seamless system-level integration.
Sales and Marketing
We market and sell our products worldwide under the Spansion trademark. Since the beginning of the second quarter of fiscal 2006, we have sold our products to our customers directly or through distributors. We rely on Fujitsu to act as our largest distributor in Japan and our nonexclusive distributor throughout the rest of the world, other than Europe and the Americas, with limited exceptions.
We market our products through a variety of direct and indirect channels. We have direct relationships with many of our top customers worldwide. We supplement this effort with programs designed to support design-in of our products on reference designs from third parties, which are typically used by our Flash memory customers when choosing Flash memory solutions. In addition, we focus a portion of our marketing efforts on providers of complementary semiconductor products such as chipsets to ensure our products interoperate effectively with the most widely used components in various embedded applications.
Our marketing activities target customers, reference design houses and our potential partners include a combination of direct marketing activities such as trade shows, events and marketing collateral and indirect activities such as public relations and other marketing communications activities.
Customers
We serve our customers worldwide directly or through our distributors which buy products from us and resell them to OEMs and original design manufacturer, or ODMs, either directly or through their own distributors. Customers for our products consist of OEMs, ODMs and contract manufacturers.
After the deconsolidation of Spansion Japan as discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Chapter 11 Cases—Business Relationship with Spansion Japan and Foundry Agreement,” in fiscal 2009, sales to Spansion Japan accounted for approximately 21 percent of our total net sales. Net sales to Spansion Japan were $84.0 million or 7 percent of our total net sales, in fiscal 2010. Spansion Japan resold substantially all its purchases to Fujitsu who in turn acted as a distributor of our products in Japan. No OEM, ODM or contract manufacturer accounted for more than ten percent of our net sales for fiscal 2010. During the second quarter of fiscal 2010, we purchased Spansion Japan’s distribution business and began distributing our products in Japan through our wholly owned subsidiary, Nihon Spansion Limited to Fujitsu. Net sales to Fujitsu (in its capacity as a distributor), including sales made through Spansion Japan after its deconsolidation and Nihon Spansion Limited, accounted for approximately 23 percent of our total net sales in the Successor for fiscal 2010 and 18 percent of our total net sales in the Predecessor for fiscal 2010.
Original Equipment Manufacturers
OEMs consist primarily of foreign and domestic manufacturers of mobile phones, consumer electronics, automotive electronics and networking equipment companies, selected regional accounts and customers in other target applications.
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Third-Party Distributors
Our third-party distributors typically resell to OEMs, ODMs and contract manufacturers. Sales through our direct distributors are typically made pursuant to agreements that provide return rights for discontinued products or for products that are not more than twelve months older than their manufacturing date code. In addition, some of our agreements with distributors may contain standard stock rotation provisions permitting limited levels of product returns.
We generally warrant that products sold to our customers and our distributors will, at the time of shipment, be free from defects in workmanship and materials and conform to our approved specifications. Subject to specific exceptions, we offer a one-year limited warranty.
Research and Development
Research and development is critical to our success and is focused on process, product and system level development. We conduct our product and system engineering activities primarily in Sunnyvale, California and Netanya, Israel, with additional design and development engineering teams located in Europe and Asia. Our primary development focus is on MirrorBit products for embedded applications. We conduct our process and product development primarily in Sunnyvale, California, at our fabrication facility located in Austin, Texas (Fab 25) and at third party foundries that provide foundry services to us. We are developing non-volatile memory process technologies. Specifically, we continue to refine our 65-nanometer NOR process technology, intending to deploy 45-nanometer NOR process technology, and, through our joint development agreement with Elpida, continue to develop 43-nanometer charge trapping NAND process technology. We also intend to develop more advanced technologies independently or with partners. In April 2009, we stopped further production of development wafers at our research and development manufacturing facility known as the Submicron Development Center, or SDC, in Sunnyvale, California, as part of our strategy to reduce research and development costs by utilizing Fab 25 and third party facilities for technology development.
Our research and development expenses for fiscal 2010, fiscal 2009 and fiscal 2008 were $100.5 million, $136.4 million and $431.8 million, respectively. For more information, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Manufacturing
We own and operate one wafer fabrication facility, Fab 25, which is located in Austin, Texas and has approximately 114,000 square feet of clean room space. This facility produces 200-millimeter wafers, manufactured using 130-nanometer, 110-nanometer, 90-nanometer and 65-nanometer process technology. We also own three final manufacturing facilities in Bangkok, Thailand and in Kuala Lumpur and Penang, Malaysia. Final manufacturing may consist of assembly, test, mark and pack operations. We use a number of third party companies to provide supplemental final manufacturing services for us.
Like most semiconductor companies, we direct significant efforts toward the invention and development of manufacturing process technologies that achieve one or more of the following objectives: reduction of our manufacturing costs, improvement of our device performance and/or addition of product features and capabilities. We achieve these goals primarily through a combination of optimizing the number of process steps required to produce a product, and by reducing the scale or size of key structures in our integrated circuits such as the memory cells used to store charge and the surrounding circuits that manage and interface to these cells. We develop each process technology using particular design rules and refer to this as the process or technology node using nanometers as a measurement of length of certain critical structures in the process. By shrinking the features, we enable more cells in the same area, which allows us to incorporate more bits per wafer at each successive process node, decreasing material cost per bit and either increasing the number of die per wafer for a given density or increasing the density.
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During fiscal 2010, we offered products manufactured on technology nodes from 320-nanometer to 65-nanometer, utilizing MirrorBit and floating gate cell technology. We continue to manufacture products based on floating gate technology at process nodes from 320-nanometer to 110-nanometer. However, during fiscal 2010, the majority of our wafer production was comprised of MirrorBit products using 110- and 90-nanometer process technology. We also manufactured MirrorBit ORNAND products and MirrorBit NOR products on 65-nanometer process technology.
We outsource a significant portion of our manufacturing function to external foundry partners. To augment our internal wafer fabrication capacity, we have foundry agreements with Semiconductor Manufacturing International Corporation, or SMIC, Fujitsu Limited, Elpida Memory, Inc., or Elpida, and Texas Instruments Ltd. The arrangement with SMIC provides support for advanced technology products at 65-nanometer. The arrangement with Elpida provides for the development of charge trapping NAND products manufactured using 43-nanometer process technology. Also, the deployment of leading edge technology in support of foundry manufacturing provides a more cost efficient solution for future research and development wafer production as an alternative to an in house dedicated research and development manufacturing facility for wafer production. The arrangement with Fujitsu Limited, using our former JV1 and JV2 wafer fabrication facilities which we sold to them in April 2007, provides us with the ability to efficiently support the declining customer demand for legacy products on legacy production process nodes. We also obtain foundry services, including wafer and sort services, from Texas Instruments. In September 2009, we sold to Powertech Technology Inc. (PTI) our final manufacturing facility located in Suzhou, China, and certain related equipment. Following the sale, PTI began providing final manufacturing services to us at the Suzhou facility, further representing our shift to an outsourced manufacturing model. We may in the future change the location where our products are manufactured to reflect changes in customer demand. We have in the past, and may in the future, obtain foundry, subcontractor and other arrangements with third parties to meet demand.
Our manufacturing processes require many raw materials, such as silicon wafers, mold compound, substrates and various chemicals and gases, and the necessary equipment for manufacturing. We obtain these materials and equipment from a large number of suppliers located throughout the world.
Environmental Matters
Many of our facilities are located on properties or in areas with a long history of industrial activity. Prior to 2003, environmental audits were conducted for each of our manufacturing facilities. The audits described various conditions customary of facilities in our industry and, in particular, noted historical soil and groundwater contamination at our Sunnyvale, California facility arising from the leakage from chlorinated solvent storage tanks that previously had been located on this property. This property is listed on the U.S. Environmental Protection Agency’s Superfund National Priorities List. AMD, the former owner of the property and responsible party, is investigating and remediating this contamination.
In 2003, each of AMD and Fujitsu agreed to indemnify us against losses arising out of the presence or release, prior to June 30, 2003, of hazardous substances at or from these and other sites they each contributed to us. Conversely, our subsidiary agreed to indemnify each of AMD and Fujitsu from and against liabilities arising out of events or circumstances occurring after June 30, 2003, in connection with the operation of our business. AMD and Fujitsu, on the one hand, and we, on the other, agreed to indemnify the other against liability arising from permit violations attributable to our respective activities. To the extent AMD and Fujitsu cannot meet their obligations under any of their indemnity agreements, or material environmental conditions arise, we may be required to incur costs to address these matters, which could have a material adverse effect on us.
We have made and will continue to make capital and other expenditures to comply with environmental laws, but we do not expect compliance with environmental requirements to result in material expenditures in the foreseeable future. Environmental laws and regulations are complex, change frequently and have tended to
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become more stringent over time—factors that could alter the current outlook. See “Risk Factors—We are subject to a variety of environmental laws that could result in liabilities.”
Competition
Our principal NOR Flash memory competitors are Micron Technology, Inc., Macronix International Co., Ltd., Winbond Electronics Corp. and Samsung Electronics Co., Ltd. Additional NOR Flash memory competitors include Microchip Technology Inc., EON Silicon Solution Inc., Atmel Corporation and Toshiba Corporation.
We increasingly compete with NAND Flash memory manufacturers where NAND Flash memory has the ability to replace NOR Flash memory in customer applications. Our principal NAND Flash memory competitors include Samsung Electronics Co., Ltd. and Micron Technology, Inc.
We believe Flash memory providers must also possess the following attributes to remain competitive:
| • | strong relationships with OEMs, ODMs and contract manufacturers that are acknowledged leaders within their respective industries; |
| • | discipline to continually reduce costs ahead of historically declining semiconductor market prices; |
| • | strong market focus to identify emerging Flash memory applications; |
| • | advanced research and development; |
| • | flexibility in manufacturing capacity and utilization so as to take advantage of industry conditions through market cycles; |
| • | access to the financial resources needed to maintain a highly competitive technological position; |
| • | focus on sustainable and profitable portions of the Flash memory market; |
| • | the ability to establish and sustain strategic relationships and alliances with key industry participants; |
| • | the ability to manufacture products with a high degree of market acceptance and a low cost structure; and |
| • | rapid time to market for new products, measured by the time elapsed from first conception of a new product to its commercialization. |
Employees
We had approximately 3,400 employees at December 26, 2010.
Backlog
We generally manufacture and market standard lines of products. Sales are made primarily pursuant to purchase orders for current delivery or agreements covering purchases over a period of time. These orders or agreements may be revised or canceled without penalty. Generally, in light of current industry practice and experience, we do not believe that backlog information is necessarily indicative of actual sales for any succeeding period.
Intellectual Property
Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secrets, we believe that our success will depend upon technological expertise, continued development of new products, and successful cost reductions achievable by improving process technologies. In addition, we have access to intellectual property through certain cross-license
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arrangements with AMD and Fujitsu. There can be no assurance that we will be able to protect our technology or that competitors will not be able to develop similar technology independently. We currently have a number of United States and foreign patents and patent applications. There can be no assurance that the claims allowed on any patents we hold will be sufficiently broad to protect our technology, or that any patents will issue from any application pending or filed by us. In addition, there can be no assurance that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to us.
Rights to Intellectual Property
We rely on a combination of protections provided by contracts, including confidentiality and non-disclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protect our intellectual property. Our U.S. patents are potentially valid and enforceable for either 17 years from the date they were issued or 20 years from the date they were filed. Accordingly, some of our existing patents will only survive for a few more years while others will survive for approximately another 15 years. We do not believe that the expiration of any specific patent will have a material adverse effect on us. In addition, the duration of our valid and enforceable trademarks is indefinite.
AMD and Fujitsu have each contributed to us various intellectual property rights pursuant to an Amended and Restated Intellectual Property Contribution and Ancillary Matters Agreement. Under this agreement, we became owners, or joint owners with each of Fujitsu and AMD, of certain patents, patent applications, trademarks, and other intellectual property rights and technology. AMD and Fujitsu reserved rights, on a royalty-free basis, to practice the contributed patents and to license these patents to their affiliates and successors-in-interest to their semiconductor groups. AMD and Fujitsu each have the right to use the jointly-owned intellectual property for their own internal purposes and to license such intellectual property to others to the extent consistent with their non-competition obligations to us. In addition, we have granted a non-exclusive, perpetual, irrevocable, fully paid and royalty-free license of our rights in that technology to each of AMD and Fujitsu.
We have entered into separate patent cross-license agreements with each of AMD and Fujitsu in which we granted to AMD or Fujitsu, as applicable, and AMD or Fujitsu, as applicable, each granted to us, non-exclusive licenses under certain patents and patent applications of their semiconductor groups to make, have made, use, sell, offer to sell, lease, import and otherwise dispose of specific semiconductor-related products anywhere in the world. The patents and patent applications that are licensed are those with an effective filing date prior to the termination of our patent cross-license agreements. Each agreement will automatically terminate on the later of June 30, 2013 or the date AMD’s or Fujitsu’s, whichever is the other party to the agreement, ownership interest in us is transferred or disposed of in its entirety. Each agreement may be terminated by a party on a change in control of the other party or its semiconductor group. The licenses to patents under license at the time of the termination will survive until the last such patent expires.
Under each agreement, in cases where there is a change of control of us or the other party (AMD or Fujitsu, or each of their semiconductor groups, as applicable), the other party shall have the right to terminate the agreement (or to invoke the provisions described in this paragraph if the agreement had been previously terminated) by giving 30 days written notice within 90 days after receiving notice of the change of control. If so terminated, the rights, licenses and immunities granted under the agreement will continue solely with respect to those licensed patents that are entitled to an effective filing date that is on or before, and are licensed as of, the date of such change of control, and will continue until the expiration of the last to expire of such licensed patents. Moreover, with respect to circuit patents, which are patents (other than process patents) covering elements relating to electrical signals to achieve a particular function, the rights, licenses and immunities granted to the party undergoing the change of control are limited solely to:
| i. | each existing and pending product of such party as of the date of change of control; |
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| ii. | each existing and pending product of the acquiring third party of such party as of the date of change of control that would have been in direct competition with products described in (i) above; and |
| iii. | successor products described in (i) and (ii) above provided such successor product is based substantially on the same technology. |
Beginning in November 2008, we no longer incurred royalties associated with licenses that survive the termination of the cross-license agreement. In fiscal 2008, we incurred royalty expenses of approximately $3 million to each of AMD and Fujitsu under their respective patent cross-license agreements.
We may be subject to claims that we are infringing intellectual property rights of third parties through the manufacture and sale of our products and the operation of our business. Therefore, absent negotiating our own license agreements with the third parties who own such intellectual property, we will be vulnerable to claims by such parties that our products or operations infringe such parties’ patents or other intellectual property rights.
We will continue to attempt to negotiate our own agreements and arrangements with third parties for intellectual property and technology that is important to our business. We will also attempt to acquire new patents as our success in negotiating patent cross-license agreements with other industry participants will depend in large part upon the strength of our patent portfolio relative to that of the third party with which we are negotiating.
Patents and Patent Applications
As of December 26, 2010, we had 1,696 U.S. patents and 873 foreign patents as well as 502 patent applications pending in the United States and 840 patent applications pending outside the United States. We expect to file future patent applications in both the United States and abroad on significant inventions, as we deem appropriate. In addition, under our cross-license agreement with AMD, AMD granted us the right to use a substantial number of patents that AMD owns. Similarly, under our cross-license agreement with Fujitsu, Fujitsu also granted us the right to use a substantial number of patents that Fujitsu owns. There can be no assurance that the claims allowed on any patents we hold will be sufficiently broad to protect our technology, or that any patents will issue from any application pending or filed by us.
| ITEM 1A. | RISK FACTORS |
You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K. If any of the following risks materialize, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected.
The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business, results of operations, financial condition and liquidity.
We have recently transformed our business through the implementation of a new business strategy. If this strategy is unsuccessful, we will be materially adversely affected.
Shortly after our chapter 11 bankruptcy proceedings (the Chapter 11 Cases) commenced, we began implementing a new business strategy focused primarily on exiting a large portion of the wireless Flash memory market in order to reduce significantly our engineering expenses. We remain dedicated to, and focused on, the embedded portion of the Flash memory market and intend to continue to selectively engage in portions of the wireless market where we believe we can do so advantageously. The embedded market is more mature than the wireless market and is expected to grow more slowly than some other sectors of the semiconductor industry. In addition, the embedded market historically has been, and we anticipate that it will continue to be, subject to
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selling price reductions. If we are unable to successfully address these challenges and execute this new business strategy, our business will be materially adversely affected.
In addressing these challenges, our new business strategy has involved, and will continue to involve, cost containment, in particular with respect to our workforce and we will continue to make judgments as to whether we should further reduce, relocate or otherwise change our workforce. Costs incurred in connection with such workforce changes, should they occur, may be higher than estimated. In addition, such workforce changes may impair our ability to achieve our current or future business objectives. In addition, any workforce changes may not be effected on the planned timetable and may result in the recording of additional charges. Similarly, any decision by us to further limit investment in, or exit or dispose of parts of, our business may result in the recording of additional charges. As part of our review of our restructured business, we look at the recoverability of tangible and intangible assets. Future market conditions may indicate these assets are not recoverable based on changes in forecasts of future business performance and the estimated useful life of these assets, and this may trigger further write-downs of these assets which may have a material adverse effect on our business, results of operations and financial condition.
Our new business strategy may also include considering strategic transactions, such as acquisitions, divestitures, joint ventures, alliances or co-production programs, as such opportunities arise. We may not be able to effect any strategic transaction or if we enter into transactions, we may not realize the benefits we anticipate. Moreover, in the case of acquisitions, the integration of separate companies involves a number of integration risks. Consummating any acquisitions, divestitures, joint ventures, alliances or co-production programs could result in the incurrence of additional transaction-related expenses, as well as unforeseen contingent liabilities, which could materially adversely affect us.
Our business has been characterized by selling prices that decline over time, which can negatively affect our results of operations.
Historically, the selling prices of our products have decreased during the products’ lives, and we expect this trend to continue. When our selling prices decline, our net sales and gross margins also decline unless we are able to compensate by selling more units and thereby reducing our manufacturing costs per unit or by introducing and selling new, higher margin products with higher densities and/or advanced features. If the selling prices for our products continue to decline, our operating results could be materially adversely affected.
During downturns, periods of extremely intense competition, or the presence of oversupply in the industry, the selling prices for our products have declined at a rapid rate over relatively short time periods as compared to historical rates of decline. We are unable to predict selling prices for any future periods and may experience unanticipated, sharp declines in selling prices for our products. When such pricing declines occur, we may not be able to mitigate the effects by selling more or higher margin units, or by reducing our manufacturing costs. In such circumstances, our operating results could be materially adversely affected.
The Flash memory market is highly cyclical and has experienced severe downturns that have materially adversely affected, and may in the future materially adversely affect, our business.
The Flash memory market is highly cyclical and in the past has experienced severe downturns, generally as a result of wide fluctuations in supply and demand, constant and rapid technological change, continuous new product introductions and price erosion. Our financial performance has been, and may in the future be, adversely affected by these downturns. We have incurred substantial losses in past downturns, including the most recent downturn, due principally to:
| • | substantial declines in selling prices, particularly due to competitive pressures and an imbalance in product supply and demand; and |
| • | a decline in demand for end-user products that incorporate our products. |
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Our historical financial information is not necessarily indicative of what our results of operations, financial condition or cash flows will be in the future. If our net sales decline in the future, or if these or other similar conditions continue or occur again in the future, we would likely be materially adversely affected.
If demand for consumer products, industrial products or mobile phones utilizing Flash memory declines, as we experienced during the worldwide global recession, our business could be materially adversely affected. Also, if the functionality of successive generations of such products does not require increasing Flash memory density or if such products no longer require the type of Flash memory product we produce due to alternative technologies or otherwise, our operating results would be materially adversely affected.
We cannot be certain that the Chapter 11 Cases will not adversely affect our operations going forward.
Although we emerged from the Chapter 11 Cases on May 10, 2010, we cannot provide assurance that our prior bankruptcy will not adversely affect our future operations. Our suppliers and vendors could stop providing supplies or services to us or provide such supplies or services only on unfavorable terms such as “cash on delivery,” “cash on order” or other terms that could have an adverse impact on our short-term cash flows. In addition, the fact that we recently emerged from the Chapter 11 Cases may adversely affect our ability to retain existing customers, attract new customers and maintain contracts that are critical to our operations.
We lost a significant amount of market share while in bankruptcy as certain customers were unwilling to work with a vendor in bankruptcy and others reduced their dependence on us by shifting their business to other vendors. There can be no assurance as to whether we will be able, or how long it may take, to regain or retain all or any portion of that lost market share.
If we are unable to attract and retain qualified personnel at reasonable costs, we may not be able to achieve our business objectives.
We are dependent on the experience and industry knowledge of our senior management and other key employees to execute our current business plans and lead us through the implementation of the Plan of Reorganization. Competition for certain key positions and specialized technical and sales personnel in the high-technology industry remains strong. The Chapter 11 Cases, along with workforce reductions, created uncertainty that led to an increase in unwanted attrition and additional challenges in attracting and retaining new qualified personnel. We have lost many key employees with long tenures and broad knowledge about our technology and historical operations and we are at risk of losing or being unable to hire talent critical to a successful reorganization and ongoing operation of our business. If we are not able to attract, recruit or retain qualified employees (including as a result of headcount or salary reductions), we may not have the personnel necessary to successfully implement the Plan of Reorganization that was approved by the U.S. Bankruptcy Court on April 16, 2010 in connection with our emergence from the Chapter 11 Cases (the Plan). We also may not be able to successfully implement our new business strategy. If this occurs our business, results of operations and financial condition could be materially adversely impacted.
We may not satisfy the covenants, financial tests and ratios in our debt instruments, which if not met, would have a material adverse effect on us.
Our credit agreement, or Senior Secured Term Loan, our loan and security agreement, or Revolving Credit Facility, and the indenture governing our 7.875 percent Unsecured Senior Notes due 2017 require us to comply with covenants, financial tests and ratios. We cannot assure you that we will be able to satisfy or comply with these covenants, financial tests and ratios, as our ability to do so may be affected by events beyond our control. If we fail to satisfy or comply with such covenants, financial tests and ratios, or if we disagree with our lenders about whether or not we are in compliance, we cannot assure you that we will be able to obtain waivers or amendments if required to avoid a default. A breach of any of the provisions, covenants, financial tests or ratios under our debt instruments could prevent us from borrowing under our Revolving Credit Facility and result in an
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event of default under the applicable agreement, which in turn could trigger cross-defaults under other debt instruments, any of which would materially adversely affect us.
Transfers or issuances of our equity, or a debt restructuring, may impair or reduce our ability to utilize our net operating loss carry-forwards and certain other tax attributes in the future.
Pursuant to U.S. tax rules, a corporation is generally permitted to deduct from taxable income in any year net operating losses (NOLs) carried forward from prior years. We have NOL carry forwards in the United States of approximately $870.0 million as of December 26, 2010. Our ability to utilize these NOL carry forwards could be subject to a significant limitation if we were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended.
Our reliance on third-party manufacturers entails risks that could materially adversely affect us.
We have in the past and plan in the future to enter into foundry, subcontractor and other arrangements with third parties to meet demand for our products. Third-party manufacturers we have used in the past or expect to use in the future for foundry and other manufacturing services include Texas Instruments, or TI, Fujitsu Semiconductors Limited, or FSL, Elpida Memory, Inc., or Elpida, and Semiconductor Manufacturing International Corporation, or SMIC. We also use independent contractors to perform some of the assembly, testing and packaging of our products, including ChipMOS Technologies Limited. We depend on these manufacturers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs. Third-party manufacturers are generally under no obligation to provide us with any specified minimum quantity of product. We also depend on these manufacturers to produce products of acceptable quality and at acceptable manufacturing yields and to deliver those products to us on a timely basis at acceptable prices. In addition, we rely on these manufacturers to invest capital into their facilities and process technologies to meet our needs for new products using advanced process technologies. Given our recent emergence from the Chapter 11 Cases and the volatility and disruption in the capital and credit markets worldwide, we cannot assure you that they will make the investments in their facilities previously contemplated. We cannot assure you that these manufacturers will be able to meet our near-term or long-term manufacturing requirements and may not be able to attain qualification from our customers, which may be required prior to production of products at a third party facility. In addition, any significant change in the payment terms we have with these manufacturers could adversely affect us.
In the past, Spansion Japan Limited, a former wholly-owned subsidiary of Spansion LLC, or Spansion Japan, facilitated distribution of our products in Japan, manufactured and supplied sorted and unsorted silicon wafers for us, and provided sort services to us. In August 2010, we entered into a new foundry agreement with TI as a result of TI’s purchase of two wafer fabrication facilities and equipment from Spansion Japan. Accordingly, we rely on TI to manufacture wafers for and supply sort services to us. A sudden and unanticipated reduction or cessation of the supply of goods and services from TI would likely be disruptive and have a material adverse impact on our results of operations.
Third party manufacturers with whom we contract also make products for other companies, including certain of our competitors, and/or for themselves and could choose to prioritize capacity for themselves or other customers beyond any minimum guaranteed amounts, reduce deliveries to us or, in the absence of price guarantees, increase the prices they charge us on short notice, such that we may not be able to pass cost increases on to our customers. The likelihood of this occurring may be greater as a result of the Chapter 11 Cases. We may be unable to secure an alternative supply for specific products in a short timeframe or at all at an acceptable cost to satisfy our production requirements. In addition, we may be required to incur additional development, manufacturing and other costs to establish alternative sources of supply. Other risks associated with our increased dependence on third-party manufacturers include: their ability to adapt to our proprietary technology, reduced control over delivery schedules, quality assurance, manufacturing yields and cost, misappropriation of our intellectual property, reduced ability to manage inventory and parts and risks associated with operating in foreign
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countries. If we are unable to secure sufficient or reliable suppliers of wafers or obtain the necessary assembly, testing and packaging services, our ability to meet customer demand for our products may be adversely affected, which could have a material adverse effect on us.
We rely on Fujitsu Semiconductors Limited to distribute our products in Japan.
We currently rely on FSL through its subsidiary, Fujitsu Electronics Inc., to distribute our products to customers in Japan, which is an important geographic market for us. Under our distribution agreement with FSL, FSL has agreed to use its best efforts to promote the sale of our products in Japan and to other customers served by FSL. In the event that we reasonably determine that FSL’s sales performance in Japan and to those customers served by FSL is not satisfactory based on specified criteria, then we have the right to require FSL to propose and implement an agreed-upon corrective action plan. If we reasonably believe that the corrective action plan is inadequate, we can take steps to remedy deficiencies ourselves through means that include appointing another distributor as a supplementary distributor to sell products in Japan and to customers served by FSL. Pursuing these actions would be costly and disruptive to the sales of our products in Japan. If FSL’s sales performance in Japan is unsatisfactory or if we are unable to successfully maintain our distribution agreement and relationship with FSL and we cannot timely find a suitable supplementary distributor, we could be materially adversely affected.
Under the terms of our distribution agreement with FSL, either party may terminate the distribution agreement, for convenience upon 60 days written notice to the other party. If FSL unexpectedly terminates its distribution agreement with us, or otherwise ceases its support of our customers in Japan, we would be required to develop and rely on a relationship with another distributor or establish our own local sales organization and support functions. We cannot be certain that we would be successful in selling our products to customers currently served by FSL or new customers. If customers currently served by FSL, or potential new customers, refused to purchase our products directly from us or from another distributor, or either it or we are not successful in distributing our products, our sales in Japan might decline, and we could be materially adversely affected.
Inaccurate forecasting of customer demand could materially and adversely affect our business, results of operations and financial results and may lead to excess inventory and poor gross margins.
Although our manufacturing cycle times are relatively long, often in excess of ten weeks, we nevertheless compete in a market where suppliers’ ability to respond quickly to new orders is a competitive differentiator. Thus, we must forecast customer demand and produce sufficient amounts of our products in order to fill current and future orders even though demand is volatile and difficult to predict.
To forecast demand and value inventory, we consider, among other factors, the inventory on hand, historical customer demand data, backlog data, competitiveness of product offerings, market conditions and product life cycles. If we are unable to accurately assess these factors and anticipate future demand or market conditions, inventory write-downs may be required and would be reflected in cost of sales in the period the write-down is made. Similarly, when customers change orders booked with us, our planned manufacturing capacity may be greater or less than actual demand, resulting in less than optimal capacity usage. When this occurs, we adjust our production levels but such adjustments may not prevent our production of excess inventory. An inability to address challenges like the ones described above would have a negative impact on our gross margin in that period. Moreover, inaccurate forecasting could also result in excess or obsolete inventory that would reduce our margins or shortages in inventory that would cause us to fail to meet customer demand. If we are unable to produce the types and quantities of products required by our customers in the timeframes and on the delivery schedules required by our customers, we may lose customers or, in certain circumstances, be liable for losses incurred by our customers, which would materially adversely affect our business and financial results.
Industry overcapacity could require us to take actions which could have a material adverse effect on us.
Semiconductor companies with their own manufacturing facilities and specialist semiconductor foundries, which are subcontractors that manufacture semiconductors designed by others, have added significant capacity in
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recent years and during the first half of 2010 a number of companies announced plans to do so again. In 2008, the significant excess capacity led to oversupply and a downturn in the memory industry. The contraction of the worldwide economy, further compounded industry overcapacity. Fluctuations in the growth rate of industry capacity relative to the growth rate in demand for Flash memory products can contribute to cyclicality in the Flash memory market, which has in the past and may in the future negatively impact our selling prices and materially adversely affect us.
It is difficult to predict future growth or decline in the markets we serve, making it very difficult to estimate requirements for production capacity. If our target markets do not grow as we anticipate, we may under-utilize our manufacturing capacity or we may be contractually obligated to purchase minimum quantities of certain products from our subcontractors. This may result in write-downs or write-offs of inventories and losses on products the demand for which is lower than we anticipate. In addition, during periods of industry overcapacity, customers do not generally order products as far in advance of the scheduled shipment date as they do during periods when our industry is operating closer to capacity, which can exacerbate the difficulty in forecasting capacity requirements and may result in increased inventory levels.
Many of our costs are fixed. Additionally, pursuant to some of our subcontractor and foundry arrangements with third parties we may incur and pay penalties as a result of our agreements to pay for a certain amount of product even if we do not accept delivery of all of such amount. Accordingly, during periods in which we under-utilize our manufacturing capacity as a result of reduced demand for some of our products, our costs cannot be reduced in proportion to the reduced net sales for such periods. When this occurs, our operating results may be materially adversely affected.
A further significant shift in the Flash memory market to NAND architecture would materially adversely affect us.
Flash memory products are generally based on either NOR or NAND architecture. To date, our Flash memory products have been based on NOR architecture which are typically produced at a higher cost-per-bit than NAND-based products. We are developing our NAND architecture based on charge trapping technology primarily to address embedded applications currently served by NAND-based products or potentially served by NAND-based products in the future, but we cannot be certain that our NAND products will satisfactorily address those market needs.
Since 2004, industry sales of NAND-based Flash memory products increased as a percentage of total Flash memory sales compared to sales of NOR-based Flash memory products, resulting in NAND vendors in aggregate gaining a greater share of the overall Flash memory market and NOR vendors in aggregate losing overall market share. We expect the Flash memory market trend of decreasing market share for NOR-based Flash memory products relative to NAND-based Flash memory products to continue for the foreseeable future.
Customers manufacturing products for embedded applications may increasingly choose floating gate NAND-based Flash memory products over our NOR or NAND Flash memory products based on our charge trapping technology. If this occurs, our sales may be materially adversely affected. Moreover, some of our competitors are able to manufacture floating gate NAND-based Flash memory products on 300-millimeter wafers produced at a lower cost than we can currently achieve. In addition, some of our competitors may choose to utilize more advanced manufacturing process technologies than we may have available in order to offer competitive products at lower costs or with higher densities.
In addition, even if products based on NAND architecture are unsuccessful in displacing products based on NOR architecture, the average selling price for our products may be adversely affected by a significant decline in the price for NAND-based Flash memory products. Such a decline may result in downward price pressure in the overall Flash memory market affecting the price we can obtain for our NOR-based Flash memory products, which would adversely affect us. We believe such downward pricing pressure was a factor in the significant
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declines in the selling prices of our products in 2008. If the prices for NAND Flash memory products similarly decline in the future, we may be materially adversely affected.
If we fail to successfully identify new applications and markets for our products, our future operating results would be materially adversely affected.
We are identifying new applications and opportunities for our products beyond our traditional customer base and in some cases plan to deploy our Flash memory solutions beyond current Flash memory markets. However, some of these opportunities require that we succeed in creating, marketing, gaining customer acceptance of, and deploying these new system architectures into, a customer base where we do not have historic business relationships and where our solution is required to replace established and proven solutions. In some cases our solutions rely on third parties to contribute a significant and necessary component of the solution without which the solution will not be viable. If we are unsuccessful in our attempts to bring new products to market due to our failures or those of third parties, experience significant delays in generating sales, fail to establish their value or face competition from third parties or incumbent suppliers that result in lower margins than expected, our future operating results would be materially adversely affected.
We cannot be certain that we will have sufficient resources to invest in the level of research and development required to remain competitive or that our substantial research and development investments will lead to timely improvements in technology needed to successfully develop, introduce and commercialize new products and technologies.
The Flash memory industry is highly competitive and subject to rapid technological change. In order to compete, we are required to make substantial investments in research and development for product design, process technologies and production techniques in an effort to design and manufacture advanced Flash memory products. For example, in connection with our new business strategy, our research and development expenses for fiscal 2009 and 2010 were $136.4 million and $100.5 million, or approximately 10 percent and 9 percent of our total net sales, respectively. We cannot assure you that we will have sufficient resources independently or through joint development agreements to maintain the level of investment in research and development that is required for us to remain competitive, which could materially adversely affect us.
As part of our reorganization, our strategy has changed to increasingly seek to share research and development costs with third parties. For example, in 2009, we entered into a joint development agreement with Elpida for the development of products based on NAND architecture. However we cannot assure you that we will be able to negotiate such arrangements for more of our research and development needs, or that such arrangements will result in commercially successful technology and products in a timely manner or at all. We will be dependent on the third parties in such agreements to continue to invest financial and skilled human resources, and we cannot assure you that such third parties will make the necessary investments, the absence of which would materially adversely affect our business.
Our success depends to a significant extent on our ability to develop, qualify, produce, introduce and gain market acceptance of new product designs and improvements that provide value to Flash memory customers. Our ability to develop and qualify new products and related technologies to meet evolving industry requirements at prices acceptable to our customers and on a timely basis is critical to our competitiveness in our target markets. If we are delayed in developing or qualifying new products or technologies, we could be materially adversely affected.
Competitors may introduce new memory or other technologies that may make our Flash memory products uncompetitive or obsolete.
Our competitors are working on a number of new competitive technologies, including ferroelectric random access memory, or FRAM, magneto resistive random access memory, or MRAM, polymer, charge trapping and
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phase-change based memory, or PCM, technologies. If such products are successfully developed and commercialized as a viable alternative to MirrorBit or floating gate Flash memory, these other products could pose a competitive threat to existing Flash memory companies, including us. In addition, some of the licensees and customers of Saifun Semiconductors Ltd., or Saifun, which we purchased in 2008 and renamed Spansion Israel Ltd., are our competitors or work with our competitors and possess licenses from Spansion Israel Ltd. for intellectual property associated with charge trapping Flash memory technology. Use of this charge trapping intellectual property or use of independently developed charge trapping Flash memory technology by our competitors, if successfully developed and commercialized, may allow these competitors to develop Flash memory products that may compete with our products based on charge trapping technology. If we are unable to compete with these new technologies, we may be materially adversely affected.
Intense competition in the Flash memory market could materially adversely affect us.
Our principal NOR Flash memory competitors are Micron Technology, Inc., or Micron, Macronix International Co., Ltd., or Macronix, Winbond Electronics Corp. and Samsung Electronics Co., Ltd., or Samsung. Additional NOR Flash memory competitors include Microchip Technology Inc., EON Silicon Solution Inc., Atmel Corporation and Toshiba Corporation, or Toshiba.
We increasingly compete with NAND Flash memory manufacturers where NAND Flash memory has the ability to replace NOR Flash memory in customer applications. Our principal NAND Flash memory competitors include Samsung Electronics Co., Ltd. and Micron Technology, Inc. In the future, our principal NAND Flash memory competitors may include Elpida Memory, Inc., Hynix Semiconductor Inc., Toshiba Semiconductor Company, Powerchip Technology Corporation, Macronix International Co., Ltd., Intel Corporation and Sandisk Corporation.
The Flash memory market is characterized by intense competition. The basis of competition is cost, selling price, performance, quality, customer relationships and ability to provide value-added solutions. In particular, in the past our competitors have aggressively priced their products, which resulted in decreased selling prices for our products and adversely impacted our results of operations. Some of our competitors, including Samsung and Toshiba, are more diversified than we are and may be able to sustain lower operating margins in their Flash memory business based on the profitability of their other, non-Flash memory businesses. In addition, capital investments by competitors in the past have resulted in substantial industry manufacturing capacity and announced capital investments planned for the future may further contribute to a competitive pricing environment. Some of our competitors are able to manufacture NAND-based Flash memory products on 300-millimeter wafers at lower costs than us or may choose to utilize more advanced manufacturing process technologies than us. As a result, such competitors may be able to offer products competitive to ours at a lower cost or higher density. Moreover, our NAND-based Flash memory products based on our proprietary MirrorBit technology may not have the price, performance, quality and other features necessary to compete successfully for these applications.
We expect competition in the Flash memory market to intensify as existing manufacturers introduce new products, new manufacturers enter the market, industry-wide production capacity increases and competitors aggressively price their Flash memory products to increase market share. The competition we face intensified during the Chapter 11 Cases as our ability to compete was reduced. If our competitors, many of whom have greater financial resources than us, increase their focus on the Flash memory products or segments of the Flash memory markets that generate a significant portion of our net sales we could be materially adversely affected.
Competitive pressures may also increase if NOR memory vendors merge, if NAND memory vendors acquire NOR businesses or other NAND businesses, or if our competitors otherwise consolidate their operations. For example, on April 8, 2010, Microchip Technology announced that it had completed its acquisition of Silicon Storage Technology, Inc.; and on May 7, 2010, Micron announced that it had completed its acquisition of
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Numonyx Holdings B.V. Furthermore, we face increasing competition from NAND Flash memory vendors targeting the embedded portion of the Flash memory market.
To compete successfully, we must decrease our manufacturing costs and develop, introduce and sell products at competitive prices that meet our customers’ demands. If we are unable to compete effectively, we could be materially adversely affected.
Unless we maintain manufacturing efficiency, we may not become profitable and our future profitability could be materially adversely affected.
The Flash memory industry is characterized by rapid technological changes. For example, new manufacturing process technologies using smaller feature sizes and offering better performance characteristics are generally introduced every one to two years. The introduction of new manufacturing process technologies allows us to increase the functionality of our products while at the same time optimizing performance parameters, and increasing storage capacity. In addition, the reduction of feature sizes enables us to produce smaller chips offering the same functionality and thereby considerably reducing the cost per bit. In order to remain competitive, it is essential that we secure the capabilities to develop and qualify new manufacturing process technologies. For example, our leading Flash memory products must be manufactured at 65-nanometer and more advanced process technologies. If we are delayed in transitioning to these technologies and other future technologies, we could be materially adversely affected.
Manufacturing our products involves highly complex processes that require advanced equipment. Our manufacturing efficiency is an important factor in achieving profitability, and we cannot be sure that we will be able to maintain or increase our manufacturing efficiency to the same extent as our competitors. For example, we continuously modify our manufacturing processes in an effort to improve yields and product performance and decrease costs. We are continuing to transition to 65-nanometer process technology for the manufacture of some of our products. During periods when we are implementing new process technologies, manufacturing facilities may not be fully productive. We may fail to achieve acceptable yields or may experience product delivery delays as a result of, among other things, capacity constraints, delays in the development of new process technologies, changes in our process technologies, upgrades or expansion of existing facilities, impurities or other difficulties in the manufacturing process. Any of these occurrences could adversely impact our relationships with customers, cause harm to our reputation in the marketplace, cause customers to move future business to our competitors or cause us to make financial concessions to our customers.
Improving our manufacturing efficiency in future periods is dependent on our ability to:
| • | develop advanced process technologies and advanced products that utilize those technologies; |
| • | successfully transition to advanced process technologies; |
| • | continue to reduce test times; |
| • | ramp product and process technology improvements rapidly and effectively to commercial volumes; |
| • | achieve acceptable levels of manufacturing wafer output and yields, which may decrease as we implement more advanced technologies; and |
| • | maintain our quality controls and rely upon the quality and process controls of our suppliers. |
Our ability to generate sufficient operating cash flows depends in part on maintaining our expense reduction efforts.
Our business is capital intensive and our ability to generate operating cash flows depends in large part on the maintenance of our low cost strategy. In response to decreasing cash balances of the Predecessor prior to the Chapter 11 Cases and as part of our strategy going forward, we intend to continue our low cost strategy. Some
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cost cutting activities may require initial cash outlays before the cost reductions are realized. We cannot assure you that we will be able to achieve anticipated expense reductions. If our expense reduction efforts are unsuccessful, our operating results and business may be materially adversely affected. Furthermore, in certain instances our cost reductions may make it more difficult for us to succeed in the extremely competitive Flash memory market.
Our working capital, investments and capital requirements may require us to seek additional financing, which may not be available to us.
Our debt instruments may not be sufficient for our future working capital, investments and capital requirements. We also may not be able to access additional financing resources due to a variety of reasons, including the restrictive covenants in the Senior Secured Term Loan, the Revolving Credit Facility and the Senior Unsecured Notes indenture and the lack of available capital due to the tight nature of global credit markets. If our financing requirements are not met by the Senior Secured Term Loan and the Revolving Credit Facility and we are unable to access additional financing, our business, operations, financial condition and cash flows will be materially adversely affected.
If we cannot adequately protect our technology or other intellectual property in the United States and abroad, through patents, copyrights, trade secrets, trademarks and other measures, we may lose a competitive advantage and incur significant expenses as a result of litigation and other claims.
We rely on a combination of protections provided by contracts, including confidentiality and non-disclosure agreements, copyrights, patents, trademarks and common law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from third-party infringement or from misappropriation in the United States and abroad. Any patent owned or licensed by us or issued to us could be challenged, invalidated or circumvented or rights granted under these patents or licenses may not provide a competitive advantage to us. Furthermore, patent applications that we file may not result in issuance of a patent or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other intellectual property rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. Foreign laws may provide less intellectual property protection than is afforded in the United States. Our efforts to protect our intellectual property in the United States and abroad, through lawsuits such as those that have been filed between us and Samsung may be time-consuming and costly. If we cannot adequately protect our technology or other intellectual property rights in the United States and abroad, we may be materially adversely affected.
We are currently party to various lawsuits brought by third parties alleging that we infringe their intellectual property rights. In the future, third parties may bring additional actions against us based on similar allegations. To resolve such claims, we may seek to obtain a license under the third party’s intellectual property rights. We cannot assure you that we will be able to obtain all of the necessary licenses on satisfactory terms, if at all. These parties have or may in the future file lawsuits against us seeking damages (potentially including treble damages or willful infringement) or an injunction against the sale of our products that incorporate allegedly infringed intellectual property or against the operation of our business as presently conducted, which could result in our having to stop the sale of some of our products, increase the costs of selling some of our products, or cause damage to our reputation. The award of damages, including material royalty payments, or the entry of an injunction against the manufacture and sale of some or all of our products, would have a material adverse effect on us. We could decide, in the alternative, to redesign our products or to resort to litigation to challenge or defend such claims, either of which could be expensive and time-consuming and may have a material adverse effect on us.
We expect to attempt to negotiate agreements and arrangements with third parties for the license of intellectual property and technology that are important to our business. We also expect to continue to apply for
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new patents as our success in negotiating patent cross-license agreements with other industry participants will depend in large part upon the strength of our patent portfolio relative to that of the third party with which we are negotiating. If we are unable to negotiate agreements or arrangements for intellectual property, or to obtain patents, necessary for the success of our business, we may be materially adversely affected.
We provide indemnities relating to non-infringement of patents and other intellectual property indemnities to certain of our customers in connection with the delivery, design, manufacture and sale of our products. If we incur substantial costs in connection with any claim pursuant to such indemnification, our business, results of operations and financial condition could be materially adversely affected.
If essential equipment or adequate supplies of satisfactory materials are not available to manufacture our products, we could be materially adversely affected.
Our manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and materials from a number of suppliers. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity constraints or other factors. Because the equipment that we purchase is complex, it is difficult for us to substitute one supplier for another or one piece of equipment for another. Some raw materials we use in the manufacture of our products are available from a limited number of suppliers or only from a limited number of suppliers in a particular region. In addition, we purchase raw materials such as gold for which prices on the world markets have fluctuated significantly during recent periods. Our manufacturing operations also depend upon the quality and usability of the materials we use in our products, including raw materials and wafers we receive from our suppliers. If the materials we receive from our suppliers do not meet our manufacturing requirements or product specifications, are not obtained in a timely manner or if there are significant increases in costs of materials, we may be materially adversely affected.
We also rely on purchasing commercial memory die such as PSRAM from third-party suppliers to incorporate these die into multi-chip package products. The availability of these third-party purchased commercial die is subject to market availability, and the process technology roadmaps and manufacturing capacities of our vendors. In addition, some of our suppliers may also be our competitors. Interruption of supply from a competitor that is a supplier or otherwise or increased demand in the industry could cause shortages and price increases in various essential materials. If we are unable to procure these materials, or if the materials we receive from our suppliers do not meet our production requirements or product specifications, we may have to reduce our manufacturing operations or our manufacturing yields may be adversely affected. Such a reduction and yield issues have in the past and could in the future have a material adverse effect on us.
Costs related to defective products could have a material adverse effect on us.
One or more of our products may be found to be defective or we may initiate voluntary recalls of products after they have been shipped to customers in volume. We generally provide a limited warranty with respect to our products. Accordingly, if we recall products or are forced to replace defective products, the cost of product replacements or product returns may be substantial, and our reputation with our customers could be damaged. In addition, we could incur substantial costs to implement modifications to fix defects. Any of these problems could materially adversely affect us.
Worldwide economic and political conditions and risks may adversely affect demand for our products and have a material adverse effect on us.
We operate in more than ten countries and we derive a majority of our net sales outside the United States. For example, a significant portion of our planned wafer fabrication capacity for existing and future products is provided by third parties located in Japan and China, and nearly all final tests and assembly of our products is performed at our facilities in Malaysia and Thailand and by third parties in China, Taiwan, Korea and Thailand.
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Our business depends on overall worldwide economic conditions and the economic and business conditions within our customers’ industries. Our business may also be affected by economic factors that are beyond our control, such as downturns in economic activity in a specific country or region. A further weakening of the worldwide economy or the economies of individual countries or the demand for our customers’ products may cause a decrease in demand for our products, which could materially adversely affect us.
We could also be significantly and adversely affected by geopolitical concerns and world events, such as wars and terrorist attacks. Our net sales and financial results have been and could be negatively affected to the extent such geopolitical concerns continue or similar events occur or are anticipated to occur. Terrorist attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us.
The political and economic risks associated with our sales to, and operations in, foreign countries include:
| • | expropriation; |
| • | changes in political or economic conditions; |
| • | compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act and export control laws; |
| • | changes in tax laws, trade protection measures and import or export licensing requirements; |
| • | difficulties in protecting our intellectual property; |
| • | changes in foreign currency exchange rates; |
| • | restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions; |
| • | changes in freight and interest rates; |
| • | disruption in air transportation between the location of our facilities; and |
| • | loss or modification of exemptions for taxes and tariffs. |
In particular, consequences of military action in the Middle East have in the past, and may in the future, adversely affect demand for our products and our relationship with various third parties with which we collaborate. Our subsidiary, Spansion Israel, conducts business in Israel, which is affected and surrounded by unstable political, economic and military conditions. We cannot predict the effect of continued or increased violence, or the effect of military action in that region. Continued armed conflicts or political instability in the region would harm business conditions and could adversely affect our results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may limit our ability to make sales in those countries, and, as a global company, may limit our own ability to efficiently administer our worldwide resources.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. economy and worldwide financial markets.
Unfavorable currency exchange rate fluctuations could adversely affect us.
As a result of our foreign operations, we have sales, expenses, assets and liabilities that are denominated in Japanese yen and other foreign currencies. For example:
| • | some of our costs are denominated in Japanese yen, Thai baht and Malaysian ringgit; |
| • | sales of our products to, and purchases from, TI are denominated in both U.S. dollars and Japanese yen; and |
| • | some fixed asset purchases are denominated in Japanese yen and European Union euros. |
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Consequently, movements in exchange rates could cause our net sales and expenses to fluctuate, affecting our results of operations and cash flows. We use foreign currency forward contracts to reduce our exposure to foreign currency exchange rate fluctuations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on our operating results and on our foreign currency denominated monetary assets and liabilities. We do not use these contracts for speculative or trading purposes. We cannot assure you that these activities will be successful in reducing our foreign currency exchange rate exposure. If these activities are unsuccessful, our financial condition could be materially adversely affected.
We are subject to a variety of environmental laws that could result in liabilities.
Our properties and many aspects of our business operations are subject to various domestic and international environmental laws and regulations, including those relating to materials used in our products and manufacturing processes; chemical use and handling; waste minimization; discharge of pollutants into the environment; the treatment, transport, storage and disposal of solid and hazardous wastes; and remediation of contamination. Certain of these laws and regulations require us to obtain permits for our operations, including permits related to the discharge of air pollutants and wastewater. From time to time, our facilities are subject to investigation by governmental regulators. Environmental compliance obligations and liability risks are inherent in many of our manufacturing and other activities. Any failure to comply with applicable environmental laws, regulations or permits may subject us to a range of consequences, including fines, suspension of production, alteration of manufacturing processes, sales limitations, and criminal and civil liabilities or other sanctions. We could also be held liable for any and all consequences arising out of exposure to hazardous materials used, stored, released, disposed of by us or located at or under our facilities, or for other environmental or natural resource damage. Certain environmental laws, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or the Superfund Act, impose joint and several liabilities on current and previous owners or operators of real property for the cost of removal or remediation of hazardous substances and costs related to damages to natural resources. Liability can attach even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. These environmental laws also can result in liability for persons, like us, who arrange for hazardous substances to be sent to disposal or treatment facilities, in the event such facilities are found to be contaminated. Such persons can be responsible for cleanup costs at a disposal or treatment facility, even if they never owned or operated the contaminated facility. One of our properties is listed on the U.S. Environmental Protection Agency’s Superfund National Priorities List. However, other parties currently are responsible for all investigation, cleanup and remediation activities. Although we have not been named a responsible party at this site, if we were so named, costs associated with the cleanup of the site could have material adverse effect upon us. We have not been named a responsible party at any Superfund or other contaminated site. If we were ever so named, costs associated with the cleanup of the site could be material. Additionally, contamination that has not yet been identified could exist at one or more of our facilities, and identification of such contamination could have a material adverse effect on us.
Our business is subject to complex and dynamic environmental regulatory schemes. While we have budgeted for reasonably foreseeable environmental expenditures, we cannot assure you that environmental laws will not change or become more stringent in the future. Future environmental regulations could require us to procure expensive pollution abatement or remediation equipment; to modify product designs; or to incur other expenses associated with compliance with such regulations. For example, the European Union and China recently began imposing stricter requirements regarding reduced lead content in semiconductor packaging. Therefore, we cannot assure you that our costs of complying with current and future environmental and health and safety laws, or liabilities arising from past or future releases of, or exposure to, hazardous substances, will not have a material adverse effect on our business.
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Our business, worldwide operations and the operations of our suppliers could be subject to natural disasters and other business disruptions, which could harm our future net sales and financial condition and increase our costs and expenses.
Our worldwide operations and business could be subject to natural disasters and other business disruptions, such as a world health crisis, fire, earthquake, tsunami, volcano eruption, flood, hurricane, power loss, power shortage, telecommunications failure or similar events, which could harm our future net sales and financial condition and increase our costs and expenses. Our corporate headquarters are located near major earthquake fault lines in California and TI’s wafer fabrication facilities, Fujitsu’s manufacturing facilities and Elpida’s manufacturing facilities are located near major earthquake fault lines in Japan. Also, our assembly and test facility located in Thailand and our subcontractors’ assembly and test facilities in Asia may be affected by tsunamis. In the event of a major earthquake or tsunami, we could experience loss of life of our employees, destruction of facilities or other business interruptions. If such business disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or demand for our products, or directly impact our marketing, manufacturing, financial, and logistics functions, our results of operations and financial condition could be materially adversely affected.
Furthermore, the operations of our suppliers could be subject to natural disasters and other business disruptions, which could cause shortages and price increases in various essential materials, which are required to manufacture our products or commercial memory die such as PSRAMs for incorporation into our MCP products. If we are unable to procure an adequate supply of materials that are required for us to manufacture our products, or if the operations of our other suppliers of such materials are affected by an event that causes a significant business disruption, we may have to reduce our manufacturing operations. Such a reduction could in the future have a material adverse effect on us.
Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.
We prepare our financial statements in accordance with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and various bodies formed to interpret and create appropriate accounting policies. A change in those policies or other requirements with respect to the reporting of financial statements can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced.
For example, the SEC has released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards, or IFRS. Under the proposed roadmap, we may be required to prepare financial statements in accordance with IFRS. The SEC announced it will make a determination in 2011 regarding the mandatory adoption of these new standards. It is unclear at this time how the Commission will propose GAAP and IFRS be harmonized if the proposed changes are adopted. If adopted, we will need to develop new systems and controls around IFRS principles. Since this would be a new endeavor, the specific costs associated with this conversion are uncertain and could have a material impact on our results of operations.
AMD and Fujitsu may continue to use all of our intellectual property and the intellectual property they have transferred to us.
In connection with our reorganization as Spansion LLC in June 2003, Advanced Micro Devices, Inc., or AMD, and Fujitsu transferred approximately 400 patents and patent applications to us. In addition, AMD and Fujitsu contributed additional patents to us at the time of our initial public offering. However, both AMD and Fujitsu have retained license rights under the patents they contributed to us. In addition, under their respective patent cross-license agreements with us, AMD and Fujitsu have also obtained licenses to our present and future
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patents with effective filing dates prior to June 30, 2013, although the scope of patents under license can be impacted by a change in control of the parties or their semiconductor groups. These licenses continue until the last to expire of the patents under license expires and provide AMD and Fujitsu with licenses to all of our present and future patents in existence through such cross-license termination date. In addition, we have granted a non-exclusive, perpetual, irrevocable fully paid and royalty-free license under our rights, other than patent and trademark rights, in our technology to each of AMD and Fujitsu. Under our non-competition agreement, both AMD and Fujitsu have agreed that they will not directly or indirectly engage in a business, and have agreed to divest any acquired business, that manufactures or supplies standalone semiconductor devices (including single chip, multiple chip or system devices) containing certain Flash memory, which is the business in which we primarily compete. With respect to each of AMD and Fujitsu, this non-competition restriction will last until May 10, 2012. After the expiration of the non-competition restriction period, should either AMD or Fujitsu decide to re-enter the Flash memory business, it could use our present and future patents and technologies licensed by us to AMD and Fujitsu to compete against us. If either AMD or Fujitsu were to compete with us, we could be materially adversely affected.
Our stock price may be volatile, and stockholders may lose all or part of their investment.
The market price of our common stock has been volatile and may in the future be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
| • | actual or anticipated changes in our operating results; |
| • | changes in financial estimates by securities analysts; |
| • | fluctuations in the valuation of companies perceived to be comparable to us; |
| • | announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; and |
| • | stock price and volume fluctuations attributable to inconsistent trading volume levels or other factors. |
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could materially adversely affect us.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Our principal engineering, manufacturing and administrative facilities as of December 26, 2010, comprise approximately 2.8 million square feet and are located in the United States, Europe, Middle East and Asia. Over 2.6 million square feet of this space is in buildings we own in Sunnyvale, California; Austin, Texas; Kuala Lumpur, Malaysia; Penang, Malaysia; and Bangkok, Thailand. The remainder of this space is leased. We lease approximately 156,000 square feet of office and warehouse space in Europe and Asia. Our Fab 25 facility in Austin, Texas and our facility in Sunnyvale, California are encumbered by liens securing our Senior Secured
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Term Loan and Revolving Credit Facility. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”
Our facility leases have terms of generally one to five years. We currently do not anticipate difficulty in either retaining occupancy of any of our facilities through lease renewals prior to expiration or through month-to-month occupancy or replacing them with equivalent facilities.
| ITEM 3. | LEGAL PROCEEDINGS |
Tessera District Court Action
On October 7, 2005, Tessera, Inc. filed a complaint, Civil Action No. 05-04063, for patent infringement against Spansion LLC in the United States District Court for the Northern District of California under the patent laws of the United States of America, 35 U.S.C. section 1, et seq., including 35 U.S.C. section 271. The complaint alleges that Spansion LLC’s Ball Grid Array (BGA) and multichip packages infringe the following Tessera patents: United States Patent No. 5,679,977, United States Patent No. 5,852,326, United States Patent No. 6,433,419 and United States Patent No. 6,465,893. On December 16, 2005, Tessera filed a First Amended Complaint naming Spansion Inc. and Spansion Technology Inc., our wholly owned subsidiary, as defendants. On January 31, 2006, Tessera filed a Second Amended Complaint adding Advanced Semiconductor Engineering, Inc., Chipmos Technologies, Inc., Chipmos U.S.A., Inc., Silicon Precision Industries Co., Ltd., Siliconware USA, Inc., ST Microelectronics N.V., ST Microelectronics, Inc., Stats Chippac Ltd., Stats Chippac, Inc., and Stats 34 Chippac (BVI) Limited.
The Second Amended Complaint alleges that Spansion LLC’s BGA and multichip packages infringe the four Tessera patents identified above. The Second Amended Complaint further alleges that each of the newly named defendants is in breach of a Tessera license agreement and is infringing on a fifth Tessera patent, United States Patent No. 6,133,627. The Second Amended Complaint seeks unspecified damages and injunctive relief, a trebling of damages for alleged willful conduct and attorney’s fees (the “Tessera District Court Action”). On February 9, 2006, Spansion filed an answer to the Second Amended Complaint and asserted counterclaims against Tessera. On April 18, 2006, the U.S. District Court issued a Case Management Order that set a trial date of January 28, 2008. On March 13, 2007, the U.S. District Court issued an order vacating the trial date. On April 12, 2007, the U.S. District Court issued an order referring case management scheduling issues to a Special Master, and directing that the court will appoint an expert in the case to testify on the ultimate merits of the technical issues relating to infringement and patent validity. On April 26, 2007, we, along with other defendants, filed a motion to stay the Tessera District Court action pending resolution of the proceeding before the International Trade Commission described below (the “ITC Action”). On May 24, 2007, the U.S. District Court issued an order staying the Tessera District Court action until final resolution of the ITC action.
On January 29, 2010, a claim estimation hearing was conducted in the U.S. Bankruptcy Court, and on February 9, 2010, the U.S. Bankruptcy Court issued a ruling estimating the potential damages in this case for post-petition infringement by Spansion to be approximately $4.2 million. The U.S. Bankruptcy Court as a result of a stipulation of the parties also set an estimated reserve of $130M for the pre-petition amount of Tessera’s claim.
Tessera ITC Action
On April 17, 2007, Tessera, Inc. filed a complaint under section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, in the United States International Trade Commission (“ITC”) against respondents ATI Technologies, Inc., Freescale Semiconductor, Inc., Motorola, Inc., Qualcomm, Inc., Spansion Inc., Spansion LLC and STMicroelectronics N.V. Tessera claims that “face up” and “stacked-chip” small format laminate Ball Grid Array (“BGA”) packages, including the Spansion 5185941F60 chip assembly, infringe certain specified claims of United States Patent Nos. 5,852,326 and 6,433,419 (“Asserted Patents”). The complaint requests that the ITC
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institute an investigation into the matter. The complaint seeks a permanent exclusion order pursuant to section 337(d) of the Tariff Act of 1930, as amended, excluding from entry into the United States all semiconductor chips with small format laminate BGA semiconductor packaging that infringe any of the Asserted Patents, and all products containing such infringing small format laminate BGA semiconductor packaged chips. The complaint also seeks a permanent cease and desist order pursuant to section 337(f) of the Tariff Act of 1930, as amended, directing respondents with respect to their domestic inventories to cease and desist from marketing, advertising, demonstrating, sampling, warehousing inventory for distribution, offering for sale, selling, distributing, licensing, or using any semiconductor chips with small format laminate BGA semiconductor packaging that infringe any of the Asserted Patents, and/or products containing such semiconductor chips. On May 15, 2007, the ITC instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter of Certain Semiconductor Chips with Minimized Chip Package Size and Products Containing Same, Inv. No. 337-TA-605, identifying ATI Technologies, ULC, Freescale Semiconductor, Inc., Motorola, Inc., Spansion Inc., Spansion LLC and STMicroelectronics N.V. (“Respondents”) as respondents. On June 8, 2007, Respondents filed a motion to stay the ITC investigation pending reexamination of the Asserted Patents by the U.S. Patent and Trademark Office. On February 26, 2008, the assigned administrative law judge issued an Initial Determination granting respondents’ motion for a stay of the ITC investigation pending completion of the re-examination of the Asserted Patents by the U.S. Patent and Trademark Office. On March 4, 2008, Tessera filed with the ITC a Petition for Review of the Initial Determination Ordering Stay. On March 27, 2008, the ITC issued an order reversing the Initial Determination, and denying Respondents’ motion for a stay of the ITC investigation pending reexamination of the Asserted Patents. On December 1, 2008, Judge Essex issued an Initial Determination, ruling that the accused small-format BGA packages of Spansion Inc. and Spansion LLC and the other Respondents did not infringe the asserted claims of the Asserted Patents and, therefore, Spansion Inc. and Spansion LLC and the other Respondents were not in violation of section 337 of the Tariff Act of 1930. On December 15, 2008, Tessera filed with the ITC a petition to review the Initial Determination. On January 30, 2009, the ITC issued a notice to review in part Judge Essex’s decision finding no violation of section 337. On May 20, 2009, the ITC issued a Final Determination reversing the Initial Determination by finding that there was a violation of 19 U.S.C. § 1337 by Spansion Inc. and Spansion LLC, Qualcomm, Inc., ATI Technologies, Motorola, Inc. STMicroelectronics N.V. and Freescale Semiconductor, Inc., and determined that the appropriate form of relief is (1) a limited exclusion order under 19 U.S.C. § 1337(d)(1) prohibiting the unlicensed entry of semiconductor chips with minimized chip package size and products incorporating these chips that infringe one or more of claims 1, 2, 6, 12, 16-19, 21, 24-26, and 29 of the ‘326 patent and claims 1-11, 14, 15,19, and 22-24 of the ‘419 patent, and are manufactured abroad by or on behalf of, or imported by or on behalf of, Spansion, Qualcomm, ATI, Motorola, STMicroelectronics N.V. and Freescale; and (2) cease and desist orders directed to Motorola, Qualcomm, Freescale and Spansion. The cease and desist order directed to Spansion prohibits importing, selling, marketing, advertising, distributing, offering for sale, transferring (except for exportation) and soliciting U.S. agents or distributors for certain semiconductor chips that are covered by the patents asserted in the action. On June 2, 2009, Spansion and the other respondents to the investigation jointly filed with the ITC a motion to stay the effect of the ITC decision pending appeal to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”). On July 17, 2009, the ITC denied the motion. On July 20, 2009, Spansion appealed the ITC decision to the Federal Circuit and filed an emergency motion for stay pending appeal and immediate temporary stay. The Federal Circuit denied the stay motions on September 8, 2009. The principal brief in the Federal Circuit appeal was filed on October 30, 2009. On September 24, 2010, the Asserted Patents expired, thereby terminating the exclusion order. Consolidated appeals 2009-1461, -1462 and -1465 were also filed along with Spansion’s appeal number 2009-1460 by appellants Freescale Semiconductor, Inc., ATI Technologies, ULC, STMicroelectronics N.V. and Qualcomm Incorporated. Oral arguments were heard in June 2010. On December 21, 2010, the Federal Circuit affirmed the Commission opinion.
Fast Memory Erase LLC v. Spansion Inc., et al.
On June 9, 2008, Fast Memory Erase LLC filed a complaint in the U.S. District Court for the Northern District of Texas alleging patent infringement against Spansion Inc., Spansion LLC, Intel Corp., Numonyx B.V., Numonyx, Inc., Nokia Corp., Nokia Inc., Sony Ericsson Mobile Communications AB, Sony Ericsson Mobile
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Communications (USA), Inc., and Motorola, Inc. The case is styled, Fast Memory Erase, LLC v. Spansion Inc., Spansion LLC, et al., Case No. 3:08-CV-00977-M (N.D. Tex.). Fast Memory Erase’s complaint alleges that Spansion’s NOR Flash products using floating gate technology infringe one or more claims of U.S. Patent No. 6,236,608 (the ‘608 patent). Fast Memory Erase has also asserted U.S. Patent No. 6,303,959 (the ‘959 patent) in its complaint against the products of other defendants, namely Intel and Numonyx, but it has not asserted the ‘959 patent against any Spansion products. On December 22, 2008, Fast Memory Erase filed an amended complaint. In its amended complaint, Fast Memory Erase added Apple, Inc. as a defendant. Spansion has answered Fast Memory Erase’s complaint and amended complaint. Spansion’s answers assert that Spansion does not infringe the ’608 patent and that the ‘608 patent is invalid. In its answers, Spansion also asserts counterclaims against Fast Memory Erase for declaratory judgments of non-infringement and invalidity. The case was stayed against Spansion as a result of the Chapter 11 Cases until May 18, 2009. The U.S. Bankruptcy Court preliminarily lifted the stay and set June 23, 2009 as the date for a final determination on the stay. The parties subsequently agreed to lift the stay so that the U.S. District Court could proceed with a Markman hearing to determine the meaning of certain claims, which was held on September 16, 2009. No ruling has yet been issued as a result of the Markman hearing.
LSI, Agere ITC Investigation
On April 18, 2008, LSI Corporation and Agere Systems, Inc. (collectively “Complainants”) filed a complaint under section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, in the ITC against respondents United Microelectronics Corporation, Integrated Device Technology, Inc., AMIC Technology Corporation, Elpida Memory, Inc., Freescale Semiconductor, Inc., Grace Semiconductor Manufacturing Corporation, Microchip Technology, Inc., Micronas Semiconductor Holding, AG, National Semiconductor Corporation, Nanya Technology Corporation, NXP B.V., ON Semiconductor Corporation, Powerchip Semiconductor Corporation, ProMOS Technologies, Inc., Spansion, Inc., STMicroelectronics NV and Vanguard International Semiconductor Corporation. The complaint alleges that certain Spansion Flash products, including Spansion’s 4 Mb CMOS 3.0 Volt-only Simultaneous Read/Write Flash Memory and 1 G MirrorBit NOR Flash products, infringe at least claim 1 of U.S. Patent No. 5,227,335 (the “Asserted Patent”). The complaint identifies, under the heading “Related Litigations,” other lawsuits involving the Asserted Patent, including Agere Systems, Inc. v Atmel Corporation, Civil Action No. 2:02-CV-864 (E.D. Pa.) (The “Atmel case”). The complaint requests that the ITC institute an investigation into the matter. The complainant seeks a permanent exclusion order pursuant to section 337(d) of the Tariff Act of 1930, as amended, excluding from entry into the United States all semiconductor IC devices and products containing same, made by a method that infringes one or more claims of the Asserted Patent. The complainant also seeks a permanent cease and desist order pursuant to section 337(1) of the Tariff Act of 1930, as amended, directing respondents to cease and desist from importing, selling, offering for sale, using, demonstrating, promoting, marketing, and/or advertising in the United States, or otherwise transferring outside the United States for sale in the United States, semiconductor IC devices and products containing same made by a method that infringes one or more claims of the Asserted Patent. On May 16, 2008, the ITC instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter of Certain Semiconductor Integrated Circuits Using Tungsten Metallization and Products Containing Same No. 337-TA-648, identifying United Microelectronics Corporation, Integrated Device Technology, Inc., AMIC Technology Corporation, Elpida Memory, Inc., Freescale Semiconductor, Inc., Grace Semiconductor Manufacturing Corporation, Microchip Technology, Inc., Micronas Semiconductor Holding, AG, National Semiconductor Corporation, Nanya Technology Corporation, NXP B.V., ON Semiconductor Corporation, Powerchip Semiconductor Corporation, ProMOS Technologies, Inc., Spansion, Inc., STMicroelectronics NV and Vanguard International Semiconductor Corporation (“Respondents”) as respondents. On June 5, 2008, respondents Elpida Memory, Inc., Freescale Semiconductor, Inc., Grace Semiconductor Manufacturing Corporation, Integrated Device Technology, Microchip Technology, Inc., Nanya Technology Corp., Powerchip Semiconductor Corp., Spansion Inc. and ST Microelectronics N.V. filed a joint motion for summary determination that Complainant is precluded from re-litigating an invalid patent, based upon the jury finding of invalidity and the court ruling affirming the invalidity finding of the Asserted Patent in the Atmel case. On June 27, 2008, Administrative Law Judge Carl L. Charneski set an Initial Determination date of May 21, 2009, with a hearing to be completed by March 13, 2009,
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and a target date for completion of the ITC investigation of August 21, 2009. On September 18, 2008, Judge Charneski granted Complainants’ motion to add five respondents, Dongbu HiTek Semiconductor Business; Jazz Semiconductor, Magnachip Semiconductor; Qimonda AG, and Tower Semiconductor, Ltd. On October 30, 2008, Judge Charneski denied Complainants’ request to add additional claims of infringement against Spansion, and also suspended the current procedural schedule. On November 5, 2008, Judge Charneski issued an order modifying procedural schedule, setting a hearing date of July 20, 2009 and issued a separate order setting an Initial Determination date of September 21, 2009, and a target date for completion of the ITC investigation of January 21, 2010. On December 11, 2008, Judge Charneski issued an Initial Determination denying respondents’ motion for summary determination that Complainant should be precluded from re-litigating an invalid patent. On February 3, 2009, the ITC issued an opinion affirming the ITC determination that Complainant is not precluded from re-litigating the validity of the patent.
A hearing was held July 20, 2009 through July 27, 2009. The initial determination based upon that hearing was issued on September 21, 2009. The judge held that the patent asserted by LSI and Agree is invalid and that Spansion is not a proper party to the action. On April 19, 2010, the Commission issued its Opinion with a finding of no violation of Section 337 of the Tariff Act of 1930.
On May 14, 2010, LSI Corporation and Agere Systems Inc. filed an appeal to the United States Court of Appeals for the Federal Circuit. On November 15, 2010, the United States Court of Appeals for the Federal Circuit entered an order dismissing the appeal as moot and vacating the Commission’s opinion. On November 30, 2010, the Commission dismissed the investigation.
LSI, Agere v. Spansion, Inc., et al.
On April 18, 2008, LSI Corporation and Agere Systems, Inc. filed a complaint, Civil Action No. 2-08 CV-165, in the United States District Court for the Eastern District of Texas, against defendants United Microelectronics Corporation, Integrated Device Technology, Inc., AMIC Technology Corporation, Elpida Memory, Inc., Freescale Semiconductor, Inc., Grace Semiconductor Manufacturing Corporation, Microchip Technology, Inc., Micronas Semiconductor Holding, AG, National Semiconductor Corporation, Nanya Technology Corporation, NXP B.V., ON Semiconductor Corporation, Powerchip Semiconductor Corporation, ProMOS Technologies, Inc., Spansion, Inc., STMicroelectronics NV and Vanguard International Semiconductor Corporation (“Defendants”). The complaint alleges that certain Spansion Flash products, including Spansion’s 4 Mb CMOS 3.0 Volt-only Simultaneous Read/Write Flash Memory and 1 G MirrorBit NOR Flash products, infringe at least claim 1 of U.S. Patent No. 5,227, 335 (the “Asserted Patent”). The complaint seeks a declaration that Spansion infringes the Asserted Patent, permanent injunctive relief and unspecified reasonable royalty and other damages, a trebling of damages for alleged willful conduct and attorney’s fees. On June 13, 2008 Defendants filed an Unopposed Motion to stay the Eastern District of Texas action pending resolution of an International Trade Commission investigation (“ITC”) that is described above. On June 13, 2008, Judge T. John Ward issued an order staying the Eastern District of Texas action until a final determination of the ITC investigation described above. The stay has not yet been lifted in light of the dismissal of the ITC investigation described above.
Spansion v. Samsung Patent Infringement Litigation
Spansion is currently a party to eight, patent infringement proceedings involving Samsung Electronics Co., Ltd.:
Patent Litigation Settlement Agreement with Samsung Electronics Co., Ltd. (Samsung)
On April 7, 2009, Spansion announced that it had settled its patent litigation lawsuits with Samsung. As part of the settlement, Samsung agreed to pay Spansion $70 million and both parties agreed to exchange rights in their patent portfolios in the form of licenses and covenants subject to a settlement agreement. On June 2, 2009, the U.S. Bankruptcy Court entered an order denying Spansion’s motion seeking approval of the settlement
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agreement. By its terms, the settlement agreement has been terminated automatically as a result of the failure of the U.S. Bankruptcy Court to approve the settlement agreement by June 2, 2009 (sixty days from when Spansion filed a motion seeking U.S. Bankruptcy Court approval). In addition, as a result of the failure of the U.S. Bankruptcy Court to approve the settlement agreement, the lawsuit by Samsung against Spansion Japan Limited is no longer stayed, and the cases in the U.S. District Court and the ITC have resumed.
Samsung ITC Investigation
On November 17, 2008 Spansion Inc. and Spansion LLC filed a complaint under section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, in the United States International Trade Commission (“ITC”) against respondents Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung International, Inc., Samsung Semiconductor, Inc., and Samsung Telecommunications America, LLC and Apple, Inc., Hon Hai Precision Industry Co., Ltd., AsusTek Computer Inc., Asus Computer International, Inc., Kingston Technology Company, Inc., Kingston Technology (Shanghai) Co. Ltd., Kingston Technology Far East Co., Kingston Technology Far East (Malaysia) Sdn. Bhd., Lenovo Group Limited, Lenovo (United States) Inc., Lenovo (Beijing) Limited, Lenovo Information Products (Shenzhen) Co., Ltd., Lenovo (Huiyang) Electronic Industrial Co., Ltd., Shanghai Lenovo Electronic Co., Ltd., PNY Technologies, Inc., Research In Motion, Ltd., Research In Motion Corporation, Sony Corporation, Sony Corporation of America, Sony Ericsson Mobile Communications AB, Sony Ericsson Mobile Communications (USA), Inc., Beijing SE Putian Mobile Communication Co., Ltd., Transcend Information Inc., Transcend Information Inc. (US), Transcend Information Inc. (Shanghai Factory), Verbatim Americas LLC, and Verbatim Corporation (collectively “Downstream Respondents”). In the ITC Complaint, Spansion alleges that Samsung and Downstream Respondents infringe United States Patent Nos. 6,380,029, 6,080,639, 6,376,877, and 5,715,194 (the “Asserted Patents”), which are owned by Spansion, through the unlawful importation into the United States of certain Samsung flash memory chips. The complaint seeks a permanent general exclusion order pursuant to section 337(d) of the Tariff Act of 1930, as amended, excluding from entry into the United States the Samsung chips that infringe any of the Asserted Patents, and all products produced by Downstream Respondents that contain such chips. The complaint also seeks a permanent cease and desist order pursuant to section 337(f) of the Tariff Act of 1930, as amended, prohibiting Samsung and Downstream Respondents from importing, selling for importation, using, offering for sale, selling after importation, building inventory for distribution, distributing, licensing, or otherwise transferring within the United States, Samsung chips that the Asserted Patents, and/or products containing such chips. On December 18, 2008 the ITC instituted an investigation pursuant to 19 U.S.C. § 1337, entitled In the Matter of Certain Flash Memory Chips and Products Containing Same, Inv. No. 337-TA-664, identifying Samsung and Downstream Respondents (“Respondents”) as respondents. On December 19, 2008, Administrative Law Judge Charles E. Bullock set a target date for completion of the ITC Investigation of April 19, 2010, and set the hearing to begin July 27, 2009. Subsequently, on February 9, 2009, Judge Bullock extended the target date for the investigation to June 18, 2010, and re-set the hearing to begin on September 28, 2009. Each of the Respondents has entered an appearance and answered the complaint. On January 30, 2009, the parties submitted their respective discovery statements, which included proposed discovery schedules, to Judge Bullock. On March 12, 2009, this action was stayed pending U.S. Bankruptcy Court approval of a settlement agreement between Spansion and Samsung. On June 2, 2009, the U.S. Bankruptcy Court entered an order denying Spansion’s motion seeking approval of the settlement agreement. As a result of the failure of the U.S. Bankruptcy Court to approve the settlement agreement, Spansion’s case against Samsung in the ITC resumed. A trial was held from May 3, 2010 through May 14, 2010. On October 22, 2010, the judge issued his Initial Determination concluding that there was no violation of 19 U.S.C. § 1337 with respect to either of the two remaining Asserted Patents. The investigation was terminated on December 23, 2010 with a decision by the ITC to not review the Initial Determination.
Spansion v. Samsung District Court Action
On November 17, 2008, Spansion LLC filed a complaint, Civil Action No. 08-855-SLR, in the United States District Court for District of Delaware, against defendants Samsung Electronics Co. LTD., and Samsung Electronics America, Inc., Samsung Semiconductor, Inc., Samsung Telecommunications America, LLC, and
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Samsung Austin Semiconductor, LLC (“Samsung U.S.”). The complaint alleges that certain Samsung flash memory chips infringe United States Patent Nos. 6,455,888, 6,509,232, 5,831,901, 5,991,202, 6,433,383, and 6,246,610 (the “Spansion Patents”). The complaint seeks a judgment that Samsung infringes the Spansion Patents, permanent injunctive relief and damages, a trebling of damages for alleged willful conduct, and attorney’s fees, costs, and expenses. On January 8, 2009, Samsung U.S. answered the Complaint, and asserted a number of affirmative defenses. Samsung U.S.’s answer seeks a judgment of non-infringement as well as attorney’s fees, costs, and expenses in connection with defending against Spansion’s claims. On January 16, 2009, Samsung answered the Complaint, asserted affirmative defenses and counterclaimed that Spansion infringes United States Patent Nos. 6,930,050, 5,748,531, 5,740,065, 5,567,987, and 5,173,442 (the “Samsung Patents”), owned by Samsung. Samsung’s counterclaim seeks a judgment that Spansion infringes the Samsung Patents, permanent injunctive relief and damages, a trebling of damages for alleged willful conduct, and attorney’s fees, costs, and expenses. On March 31, 2009, this action was stayed pending U.S. Bankruptcy Court approval of a settlement agreement between Spansion and Samsung. On June 2, 2009, the U.S. Bankruptcy Court entered an order denying Spansion’s motion seeking approval of the settlement agreement. As a result of the failure of the U.S. Bankruptcy Court to approve the settlement agreement, Spansion’s case against Samsung in the U.S. District Court for District of Delaware has resumed. On August 3, 2009, Samsung amended its counterclaims to remove Patent Nos. 6,930,050 and 5,740,065, from the action. On August 13, 2009, Spansion responded to Samsung’s counterclaims as to the remaining patents asserted by Samsung (i.e., United States Patent Nos., 5,748,531, 5,567,987, and 5,173,442). The action is presently scheduled for trial on October 31, 2011 and discovery is underway. The U.S. Bankruptcy Court has set a reserve of approximately $75 million for any pre-petition damages that Samsung may have for its counterclaims.
Samsung v. Spansion Japan Ltd.
On January 28, 2009, Samsung filed two patent infringement actions in the Tokyo District Court in Japan against Spansion Japan Ltd. (“Spansion Japan”) alleging that certain flash memory chips manufactured or sold by Spansion Japan infringe certain Japanese patents allegedly owned by Samsung. The actions allege infringement of Japanese patents JP 3834189 and JP 3505324, respectively. The two actions have been consolidated for trial. The complaints seek both injunctive relief and damages. On March 31, 2009, this action by Samsung against Spansion Japan was stayed pending U.S. Bankruptcy Court approval in the U.S. and Japan of a settlement agreement between Spansion and Samsung.
On April 7, 2009, Spansion announced that it had settled its patent infringement litigation with Samsung including the proceedings referenced above. As part of the settlement, Samsung agreed to pay Spansion $70 million and both parties exchanged rights in their patent portfolios in the form of licenses and covenants subject to a confidential settlement agreement. The settlement was subject to Bankruptcy Court approval in both the U.S. and Japan and, if approved, would end the patent disputes between the two companies. On May 18, 2009, the U.S. Bankruptcy Court held a hearing to review Spansion’s motion for approval of the settlement. On June 2, 2009, the U.S. Bankruptcy Court entered an order denying Spansion’s motion seeking approval of the settlement agreement. By its terms, the settlement agreement has been terminated automatically as a result of the failure of the U.S. Bankruptcy Court to approve the settlement agreement by June 2, 2009 (sixty days from when Spansion filed a motion seeking U.S. Bankruptcy Court approval). In addition, as a result of the failure of the U.S. Bankruptcy Court to approve settlement agreement, the action by Samsung against Spansion Japan is no longer stayed, and the cases in the U.S. District Court and the ITC have resumed. A technical hearing was held on December 18, 2009, and a subsequent hearing was held January 28, 2010. On August 31, 2010, the Tokyo High Court issued a decision in case H21-Wa-1986 that Spansion Japan did not infringe the Samsung patent at issue in that case. The Tokyo High Court subsequently expressed its view that the patent in case H21-Wa-39933 is invalid. On November 29, 2010 a hearing was held. In response to the court’s suggestion for Samsung to withdraw the claims, Samsung told the court that it had no intention to withdraw the claims. The court will now proceed to deliver the decisions on these two cases. A hearing was held on January 18, 2011 to terminate both cases. A decision of the Tokyo High Court is expected by the end of March 2011.
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Samsung v. Spansion ITC Investigation
On July 31, 2009, Samsung filed a patent infringement complaint with the ITC against Spansion Inc. and Spansion LLC (collectively, “Spansion”), Spansion Japan Limited, and the following downstream respondents: Alpine Electronics, Inc., Alpine Electronics of America, Inc., D-Link Corporation, D-Link Systems, inc., Slacker, Inc., Synology, Inc., Synology North America Corp., Shenzhen Egreat Co., Ltd., EGreat USA, and Appro International, Inc. The ITC commissioned its investigation of Samsung’s complaint on August 27, 2009. Subsequently, certain of Spansion’s creditors sought an order from the U.S. Bankruptcy Court seeking a stay of Samsung’s ITC action. On October 1, 2009, the U.S. Bankruptcy Court issued an order granting the motion to stay Samsung’s ITC action against Spansion. Both Samsung and the ITC have appealed this order. The investigation has been terminated with respect to Slacker, Synology, Shenzhen Egreat, Egreat, and Appro International based on consent order stipulations entered into by those respondents. On September 22, 2010 the investigation was terminated with respect to U.S. Patent No. 6,930,050 without prejudice on Samsung’s unopposed motion. A hearing was held December 6-14, 2010, and the Initial Determination of the judge is expected in February 2011.
Samsung v. Spansion International, Inc.
On July 31, 2009, Samsung Electronics Co., Ltd. commended an action in the Fourth Civil Division of the Federal Court in Dusseldorf, Germany against Spansion International Inc. and other third parties alleging patent infringement since March 2, 2009 of German patent DE 693 27 499 T2 (EP 0 591 009 B1). The action seeks damages in the amount of € 500,000 (approximately $655,750 as of December 26, 2010). An initial hearing to establish the schedule for the case was set for October 20, 2009. On September 4, 2009, Spansion filed a motion seeking to enforce the automatic stay as to this action, and on November 4, 2009, the U.S. Bankruptcy Court issued an order granting Spansion’s motion to stay this action. On August 27, 2010, Spansion filed a nullity action (Case no. 2 Ni 22/10 (EP)) in the Federal Patent Court in Munich, Germany seeking a decision that the patent asserted by Samsung is invalid. A hearing in the infringement action has been scheduled for October 25, 2011.
Spansion LLC v. Samsung Electronics Co., Ltd., et al. (ITC)
On August 6, 2010, Spansion LLC filed a complaint (Investigation No. 337-TA-735) with the ITC seeking institution of an investigation by the ITC pursuant to Section 337 of the Tariff Act of 1930, as amended, with respect to violations of Section 337 based on the sale for importation into the United States, importation and/or sale within the United States after importation of Samsung Chips and downstream products containing those chips that infringe one or more claims of certain Spansion U.S. Patents. The proposed Respondents in the action are Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung International, Inc., Samsung Semiconductor, Inc., Samsung Telecommunications America, LLC, Apple, Inc., BenQ Corp., BenQ America Corp., Qisda Corp., Kingston Technology Company, Inc., Kingston Technology (Shanghai) Co. Ltd., Kingston Technology Far East Co., Kingston Technology Far East (Malaysia) Sdn Bhd, MiTAC Digital Corporation (aka Magellan), MiTAC International Corporation, Nokia Corp., Nokia Inc., PNY Technologies, Inc., Research In Motion Ltd., Research In Motion Corporation, Sirius XM Radio Inc., Transcend Information Inc., Transcend Information, Inc. (US), and Transcend Information Inc. (Shanghai Factory).
The complaint alleges infringement of U.S. Patent Nos.: 7,018,922; 6,900,124; 6,459, 625; and 6,369,416, which are owned by Spansion. The Complaint seeks issuance of a permanent general exclusion order excluding from entry into the United States Samsung Chips and downstream products containing Samsung Chips as described and claimed in Spansion’s Patents, a permanent limited exclusion order excluding from entry into the United States Samsung Chips and all Respondents’ downstream products containing Samsung Chips as described and claimed in Spansion’s Patents, and a permanent cease and desist order prohibiting the importation, sale for importation, use, offering for sale, sale after importation, inventory for distribution, distribution, licensing, or otherwise transferring within the United States Samsung Chips and downstream products containing Samsung Chips.
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On September 7, 2010, the ITC issued a Notice of Investigation advising us that it has instituted an investigation based upon the Complaint filed by Spansion. On October 7, 2010, the judge issued an order establishing the procedural schedule in this action. The order sets certain procedural due dates including June 20, 2011 as the trial date, September 12, 2011 as the due date for the Initial Determination, and January 12, 2012 as the Target Date for completion of the investigation.
Spansion LLC v. Samsung Electronics Co., Ltd., et al (N.D. Cal.)
On August 6, 2010, Spansion LLC filed a complaint in the U.S. District Court for the Northern District of California—San Jose Division (CV 10-03446 JCS) for patent infringement against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, and Samsung Austin Semiconductor, LLC (“Samsung Defendants”). The complaint alleges infringement of U.S. Patent Nos.: 7,018,922; 6,900,124; 6,459, 625; and 6,369,416, which are owned by Spansion (“Spansion Patents”).
The Complaint seeks entry of a judgment that:
| • | the Samsung Defendants have infringed the Spansion Patents; |
| • | the infringement of the Spansion Patents has been willful; |
| • | the Samsung Defendants be preliminarily and permanently enjoined from infringement of the Spansion Patents; |
| • | Spansion be awarded compensatory damages, together with prejudgment interest and costs; |
| • | Spansion be awarded treble damages for willful past infringement; |
| • | This case be adjudged an exceptional case under 35 U.S.C. § 285 in favor of Spansion and that Spansion be awarded its costs, attorneys’ fees, and all other expenses incurred in this action; and |
| • | Spansion be awarded such other relief as the Court deems just and proper. |
This action has been stayed pending the ITC Investigation No. 337-TA-735 referenced above.
Spansion LLC v. Samsung Electronics Co., Ltd, et al (E.D. Va.)
On August 6, 2010, Spansion LLC filed a complaint in the U.S. District Court for the Eastern District of Virginia—Alexandria Division (1-10 CV 881 CMH/JFA) for patent infringement against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, and Samsung Austin Semiconductor, LLC (“Samsung Defendants”). The complaint alleges infringement of U.S. Patent Nos.: 7,151,027; 6,359,307; and 6,232,630, which are owned by Spansion (“Spansion Patents”).
The Complaint seeks entry of a judgment that:
| • | the Samsung Defendants have infringed the Spansion Patents; |
| • | the infringement of the Spansion Patents has been willful; |
| • | the Samsung Defendants be preliminarily and permanently enjoined from infringement of the Spansion Patents; |
| • | Spansion be awarded compensatory damages, together with prejudgment interest and costs; |
| • | Spansion be awarded treble damages for willful past infringement; |
| • | This case be adjudged an exceptional case under 35 U.S.C. § 285 in favor of Spansion, and that Spansion be awarded its costs, attorneys’ fees, and all other expenses incurred in this action; and |
| • | Spansion be awarded such other relief as the Court deems just and proper. |
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Samsung filed a motion to transfer this case to the Northern District of California. A hearing on this motion was held on October 22, 2010 at which the judge denied the motion. On October 28, 2010, Samsung filed an answer to the Complaint denying the allegations and alleging infringement by Spansion of three Samsung U.S. patent: 6,777,812; 6,602,733; and 5,508,564. On January 4, 2011, the court issued a scheduling order setting a final pretrial conference for April 21, 2011, with trial expected to be then set for a date four to eight weeks later.
Spansion LLC v. Samsung Electronics Co., Ltd, et al (W.D. Wi.)
On August 13, 2010, Spansion LLC filed a complaint in the U.S. District Court for the Western District of Wisconsin (Civil Action No. 3:10-cv-453) for patent infringement against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, and Samsung Austin Semiconductor, LLC (“Samsung Defendants”). The complaint alleges infringement of U.S. Patent Nos.: 5,793,677 (“Spansion Patent”).
The Complaint seeks entry of a judgment that:
| • | the Samsung Defendants have infringed the Spansion Patent; |
| • | the infringement of the Spansion Patent has been willful; |
| • | the Samsung Defendants be preliminarily and permanently enjoined from infringement of the Spansion Patent; |
| • | Spansion be awarded compensatory damages, together with prejudgment interest and costs; |
| • | Spansion be awarded treble damages for willful past infringement; |
| • | This case be adjudged an exceptional case under 35 U.S.C. § 285 in favor of Spansion, and that Spansion be awarded its costs, attorneys’ fees, and all other expenses incurred in this action; and |
| • | Spansion be awarded such other relief as the Court deems just and proper. |
On October 28, 2010, Samsung filed an answer to the Complaint denying the allegations and alleging infringement by Spansion of two Samsung U.S. patents: 6,734,065 and 6,828,229. In addition, on October 29, 2010, Samsung filed a motion to transfer this case to the Northern District of California. A hearing date on this motion has not yet been set. Discovery is ongoing. Trial has been set for February 27, 2012.
Spansion v. Samsung Electronics Co., Ltd, et al (W.D. Wi.)
On November 8, 2010, Spansion LLC filed a complaint in the U.S. District Court for the Western District of Wisconsin (Civil Action No. 3:10-cv-685) for patent infringement against Samsung Electronics Co., Ltd., Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, and Samsung Austin Semiconductor, LLC (“Samsung Defendants”). The complaint alleges infringement of U.S. Patent Nos.: 5,715,194 (“Spansion Patent”).
The Complaint seeks entry of a judgment that:
| • | the Samsung Defendants have infringed the Spansion Patent; |
| • | the infringement of the Spansion Patent has been willful; |
| • | the Samsung Defendants be preliminarily and permanently enjoined from infringement of the Spansion Patent; |
| • | Spansion be awarded compensatory damages, together with prejudgment interest and costs; |
| • | Spansion be awarded treble damages for willful past infringement; |
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| • | This case be adjudged an exceptional case under 35 U.S.C. § 285 in favor of Spansion, and that Spansion be awarded its costs, attorneys’ fees, and all other expenses incurred in this action; and |
| • | Spansion be awarded such other relief as the Court deems just and proper. |
On December 12, 2010, Samsung filed a motion to stay this action because of the Samsung ITC Investigation referenced above that involves the same patent. Samsung also filed a motion to transfer this case. These motions are pending. Trial has been set for March 19, 2012. On February 7, 2011, Samsung filed an answer to the complaint denying the allegations and alleging infringement by Spansion of three Samsung U.S. patents: 6,383,882; 6,806,574; and 7,005,373. Samsung also alleged tortious interference with Samsung’s business relationships and malicious prosecution.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Price of Common Stock
Pursuant to the Plan of Reorganization (see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—The Chapter 11 Cases and Emergence—General Information”), all outstanding shares of our Class A common stock outstanding prior to the Emergence Date were cancelled effective May 10, 2010. Our new Class A common stock issued in accordance with the Plan of Reorganization was initially listed on the New York Stock Exchange Amex LLC, or NYSE Amex, from May 18, 2010 to June 23, 2010. On June 23, 2010, the Class A common stock was transferred from the NYSE Amex to The New York Stock Exchange, or NYSE, under the symbol “CODE.” The following table sets forth the high and low per share sales prices for our new Class A common stock, as reported by the NYSE Amex and the NYSE, as applicable.
| High | Low | |||||||
| Fiscal Year Ended December 26, 2010 |
||||||||
| Fourth Quarter |
$ | 20.95 | $ | 14.09 | ||||
| Third Quarter |
$ | 17.96 | $ | 13.73 | ||||
| Second Quarter (from May 10, 2010) |
$ | 20.00 | $ | 10.51 | ||||
As of February 17, 2011, there were 414 holders of record of our Class A common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The closing sale price of our New Common Stock on February 17, 2011 was $21.12 per share.
We currently do not plan to pay dividends on shares of our Class A common stock in the foreseeable future and are currently prohibited from doing so in specific circumstances under agreements governing our borrowing arrangements.
The information under the caption “Equity Compensation Plan Information” in Part III, Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
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Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Spansion under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from May 18, 2010, (the date our Class A common stock commenced trading) through December 26, 2010 of the cumulative total return for our Class A common stock, the NYSE Composite Index and the S&P Semiconductors Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NYSE Composite Index and the S&P Semiconductors Index assume reinvestment of dividends.
COMPARISON OF 8 MONTH CUMULATIVE TOTAL RETURN*
Among Spansion Inc., the NYSE Composite Index
and the S&P Semiconductors Index
| * | $100 invested on 5/18/2010 in Spansion Inc. Class A common stock (CODE) or 4/30/2010 in NYSE Composite index or S&P Semiconductors index, including reinvestment of dividends. The graph shows the cumulative total returns from 5/10 (May 2010) to 12/10 (December 2010). |
| Fiscal year ending December 26, 2010. |
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| ITEM 6. | SELECTED FINANCIAL DATA |
The following summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Fiscal years in the table below included 52 weeks each, except for fiscal 2006, which included 53 weeks.
| Year Ended December 26, 2010 | ||||||||||||||||||||||||||||
| Successor(1) | Predecessor(1) | Predecessor | ||||||||||||||||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Year Ended December 27, 2009 |
Year Ended December 28, 2008 |
Year Ended December 30, 2007 |
Year Ended December 31, 2006 |
|||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||
| Statement of Operations Data: |
||||||||||||||||||||||||||||
| Net sales |
$ | 759,886 | $ | 324,914 | $ | 1,061,487 | $ | 1,630,573 | $ | 1,627,253 | $ | 1,310,479 | ||||||||||||||||
| Net sales to related party |
4,801 | 78,705 | 349,166 | 651,230 | 873,560 | 1,268,795 | ||||||||||||||||||||||
| Total net sales |
764,687 | 403,619 | 1,410,653 | 2,281,803 | 2,500,813 | 2,579,274 | ||||||||||||||||||||||
| Cost of sales |
647,381 | 274,817 | 1,103,757 | 2,193,345 | 2,065,143 | 2,063,639 | ||||||||||||||||||||||
| Gross profit |
117,306 | 128,802 | 306,896 | 88,458 | 435,670 | 515,635 | ||||||||||||||||||||||
| Other expenses: |
||||||||||||||||||||||||||||
| Research and development |
65,414 | 35,068 | 136,449 | 431,808 | 436,785 | 342,033 | ||||||||||||||||||||||
| Sales, general and administrative |
122,478 | 68,105 | 216,298 | 253,878 | 239,317 | 264,358 | ||||||||||||||||||||||
| In-process research and development |
— | — | — | 10,800 | — | — | ||||||||||||||||||||||
| Restructuring charges |
— | (2,772 | ) | 46,852 | 11,161 | — | — | |||||||||||||||||||||
| Asset impairment charges(2) |
— | — | 12,538 | 1,652,622 | — | — | ||||||||||||||||||||||
| Operating income (loss) before reorganization items |
(70,586 | ) | 28,401 | (105,241 | ) | (2,271,811 | ) | (240,432 | ) | (90,756 | ) | |||||||||||||||||
| Interest and other income, net |
175 | (2,904 | ) | 4,038 | 5,200 | 32,595 | 11,681 | |||||||||||||||||||||
| Interest expense(3) |
(24,180 | ) | (30,573 | ) | (50,976 | ) | (105,536 | ) | (87,460 | ) | (74,156 | ) | ||||||||||||||||
| Gain on deconsolidation of subsidiary(4) |
— | — | 30,100 | — | — | — | ||||||||||||||||||||||
| Loss before reorganization items and income taxes |
(94,591 | ) | (5,076 | ) | (122,079 | ) | (2,372,147 | ) | (295,297 | ) | (153,231 | ) | ||||||||||||||||
| Reorganization items |
— | 370,340 | (391,383 | ) | — | — | — | |||||||||||||||||||||
| Income (loss) before income taxes |
(94,591 | ) | 365,264 | (513,462 | ) | (2,372,147 | ) | (295,297 | ) | (153,231 | ) | |||||||||||||||||
| (Provision) benefit for income taxes(5) |
(2,101 | ) | (1,640 | ) | (597 | ) | (62,865 | ) | 25,144 | 2,215 | ||||||||||||||||||
| Net income (loss) |
$ | (96,692 | ) | $ | 363,624 | $ | (514,059 | ) | $ | (2,435,012 | ) | $ | (270,153 | ) | $ | (151,016 | ) | |||||||||||
| Net income (loss) per common share |
||||||||||||||||||||||||||||
| Basic |
$ | (1.60 | ) | $ | 2.24 | $ | (3.18 | ) | $ | (15.69 | ) | $ | (2.00 | ) | $ | (1.17 | ) | |||||||||||
| Diluted(6) |
$ | (1.60 | ) | $ | 2.24 | $ | (3.18 | ) | $ | (15.69 | ) | $ | (2.00 | ) | $ | (1.17 | ) | |||||||||||
| Shares used in per share calculation: |
||||||||||||||||||||||||||||
| Basic |
60,479 | 162,439 | 161,847 | 155,162 | 134,924 | 128,965 | ||||||||||||||||||||||
| Diluted(6) |
60,479 | 162,610 | 161,847 | 155,162 | 134,924 | 128,965 | ||||||||||||||||||||||
| December 26, 2010 |
December 27, 2009 |
December 28, 2008 |
December 30, 2007 |
December 31, 2006 |
||||||||||||||||||||||||
| Balance Sheet Data: |
||||||||||||||||||||||||||||
| Cash, cash equivalents and marketable securities |
$ | 354,273 | $ | 425,238 | $ | 116,387 | $ | 415,742 | $ | 885,769 | ||||||||||||||||||
| Working capital (deficit) |
439,970 | 553,023 | (1,183,337 | ) | 592,518 | 1,085,027 | ||||||||||||||||||||||
| Total assets |
1,399,305 | 1,437,977 | 1,773,872 | 3,813,863 | 3,547,726 | |||||||||||||||||||||||
| Long-term debt and capital lease obligations, including current portion, short term note, and notes payable to banks under revolving loans |
454,509 | 64,150 | 1,442,782 | 1,294,189 | 1,004,036 | |||||||||||||||||||||||
| Liabilities subject to compromise |
— | 987,127 | — | — | — | |||||||||||||||||||||||
| Total stockholders’ equity (deficit) |
624,285 | (857,693 | ) | (450,647 | ) | 1,737,810 | 1,957,780 | |||||||||||||||||||||
| (1) | Please refer to Note 2 of the Notes to Consolidated Financial Statements for explanation of basis of ‘Successor’ and ‘Predecessor’ presentations. |
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| (2) | The asset impairment charge for fiscal 2009 includes pre-tax impairment on an equity investment and loan to an investee. The asset impairment charge for fiscal 2008 includes pre-tax impairment related to long-lived assets held for use of $1.6 billion, and impairment related to goodwill and intangible assets of $20.8 million and $53.5 million, respectively. |
| (3) | Contractual interest expense for the year ended December 27, 2009 was approximately $89.4 million. |
| (4) | The gain on deconsolidation of subsidiary represents the difference between the carrying value of our investment in and receivables from Spansion Japan immediately before deconsolidation and the estimated fair value of our retained non-controlling interest in Spansion Japan, which was zero then and as of December 27, 2009. |
| (5) | The provision for income taxes in fiscal 2009 includes a decrease of $457.9 million in valuation allowances against deferred tax assets in our Japanese subsidiary resulting from the deconsolidation of our Japanese subsidiary in March 2009. However, the decrease in the amount of deferred tax assets had no impact on the provision for income taxes since the deferred tax assets had a full valuation allowance. The provision for income taxes in fiscal 2008 includes an increase of $462.6 million in valuation allowances against deferred tax assets in foreign jurisdictions. This increase occurred because we did not believe it was more likely than not that these deferred tax assets would be realized in these jurisdictions. The increase in valuation allowance resulted in a $64.5 million income tax expense associated with deferred tax assets of Spansion Japan. |
| (6) | Diluted net loss per share is computed using the weighted-average number of common shares and excludes potential common shares, as their effect is anti-dilutive. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes as of December 26, 2010 and December 27, 2009 and for the fiscal years ended December 26, 2010, December 27, 2009, and December 28, 2008, which are elsewhere in this Annual Report on Form10-K.
Executive Summary
Historically, one-half or more of our revenues came from cell phone manufacturers, or the “wireless” market. Over the last decade, the dynamics of that market changed as a result of increasing feature sets that drove an increased need for data storage that favored an implementation of NAND over NOR memory architectures, and a consolidation of cell phone manufacturers. At the same time, customers constituting a large portion of demand for NOR Flash memory demanded increasing investment in engineering and leading edge wafer manufacturing capability, as well as ever faster decreases in the prices for products. These changes adversely impacted our operational performance and financial results to unsustainable levels.
Shortly after entering the Chapter 11 bankruptcy proceedings, we began exiting a large portion of the wireless market and focusing on the embedded market. While this significantly reduced our revenue, it allowed us to significantly reduce our engineering expenses without impairing our ability to compete in other areas of the Flash memory market. Our exit from a large portion of the wireless market, related reductions in research and development spending and capital expenditures, combined with other cost reductions including disposal of manufacturing facilities, enabled us to begin generating significant cash flow. Ultimately, we achieved modest profitability in the second half of 2009 despite a significant decline in our net sales.
We continue to be a leader in the NOR portion of the Flash memory market and remain dedicated to, and focused on, the embedded market, which uses code storage in industrial, consumer, communications, gaming and automotive applications. We intend to continue to selectively engage in portions of the wireless market where we can do so advantageously. We believe that although the embedded market is mature and will grow more slowly than some other sectors of the semiconductor industry, we can compete successfully with our continued focus on providing best-in-class customer service, quality and reliability and solutions engineering. We also believe that we can mitigate the historical and anticipated trend of selling price reductions by serving applications with growing unit demand, migrating customers to higher density and more feature-rich devices, capturing market share and expanding our product offerings.
Circumstances Leading to the Commencement of Bankruptcy Proceedings in 2009
A variety of external economic factors contributed to the decline in our operating performance prior to our seeking relief under Chapter 11 of the U.S. Bankruptcy Code, such as persistent oversupply in the Flash memory industry compounded by the global economic recession, which significantly reduced demand for our products beginning in the fourth quarter of 2008 and continues to negatively impact demand. These two factors were further complicated by our inability to obtain the additional external financing necessary to meet capital expenditure needs and operational costs in a market characterized by swift technological advances and constantly changing manufacturing processes.
Our strategy was historically based on aggressive revenue and market share growth, leveraging advanced technology and low cost, high-volume manufacturing. In our 2006 long range planning cycle, forecasted revenue growth supported the construction of a $1.2 billion advanced wafer fabrication facility called SP1. Debt financing was arranged and construction on SP1 commenced in early 2007.
Although we continued to increase our NOR memory market segment share, steep ASP declines during the first half of 2007 negatively affected revenue and operating cash flow. At that time, we anticipated an
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improvement in the market environment for the second half of 2007 and aggressively continued the construction of SP1 and incurred associated capital expenditures with the ultimate goal of significant cost reductions that would enhance our competitive position.
During the second half of 2007, the ASP environment stabilized relative to earlier in the year. However, we faced customer qualification issues resulting in a shortfall of anticipated revenue and increased inventory levels which contributed to our failure to meet financial performance targets in the second half of 2007. For fiscal 2007, cash flow from operations was $216.3 million, which was significantly lower than anticipated. Driven by the SP1 and investments in our research and development facilities, our capital spending in 2007 was approximately $1.1 billion.
Our 2008 operating plan included capital expenditures of approximately $535.0 million, of which approximately 80 percent was expected to occur in the first half of the year in order to complete the phase 1 SP1. Upon completion of the first phase, SP1 was anticipated to generate approximately $300 million in revenue in 2008.
In the first quarter of 2008, we lost liquidity in our investment in $121.9 million of AAA/Aaa-rated auction rate securities, or ARS, because the auctions in which these ARS were traded failed. Throughout the second and third quarters of 2008, the credit markets continued to deteriorate and we intensified our cash management efforts. Operationally, the ramp-up of SP1 was delayed due to slower than expected customer qualifications and a sharp decline in the Japanese wireless market. In the third quarter of 2008, we engaged investment bankers and capital restructuring advisors to evaluate the situation and to accelerate plans to improve liquidity. Multiple initiatives were launched and/or accelerated, including efforts to sell production facilities, raise capital and seek liquidity options for the ARS.
In the fourth quarter of 2008, the macroeconomic environment deteriorated significantly, causing a sharp decline in worldwide demand for consumer goods, and consequently a sharp reduction of demand for our products. Furthermore, continued tightening of credit availability and general market liquidity initiatives curtailed our ability to execute the liquidity initiatives launched in the third quarter of 2008. As these events unfolded, we intensified our strategic restructuring efforts to include, among other things, pursuing a potential sale of some or all of our assets. The sharp decline in demand, coupled with our inability to execute liquidity initiatives limited our ability to generate sufficient funding for our operations and meet our debt servicing requirements, ultimately leading to our seeking relief under Chapter 11 of the U.S. Bankruptcy Code.
The Chapter 11 Cases and Emergence
General Information
On March 1, 2009, Spansion Inc., Spansion LLC, Spansion Technology LLC, Spansion International, Inc., and Cerium Laboratories LLC (collectively, the Debtors) each filed a voluntary petition for relief under the Chapter 11 Cases. On May 10, 2010 (the Emergence Date), the Debtors emerged from the Chapter 11 Cases, following the confirmation of the Plan of Reorganization.
Upon emergence from the Chapter 11 Cases, we adopted fresh start accounting in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 852 “Reorganizations.” The adoption of fresh start accounting resulted in us becoming a new entity for financial reporting purposes. Accordingly, the Consolidated Financial Statements on or after May 11, 2010 are not comparable to the Consolidated Financial Statements prior to that date.
We qualified for fresh start accounting, in accordance with ASC 852, due to:
| • | the reorganization value of the Debtors’ assets immediately before the date of confirmation being less than the total of all their post-petition liabilities and allowed claims; and |
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| • | holders of our existing voting shares immediately before confirmation receiving less than 50 percent of the voting shares following the Emergence Date. |
Reorganization value is the value attributed to the reorganized entity, in addition to the expected net realizable value of those assets that will be disposed of before reorganization occurs. This reorganization value is viewed as the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization. Reorganization value is generally determined by discounting future cash flows. Immediately prior to the Emergence Date, the Debtors’ reorganization value of $1.2 billion was less than the sum of post-petition liabilities of $617 million and allowed claims of $939 million.
Also, holders of Class A common stock outstanding prior to the Emergence Date (Old Common Stock) did not receive any consideration for their shares or any pre-determined allocation of Class A common stock of the reorganized Company (New Common Stock). Holders of New Common Stock issued by the reorganized Company after the Emergence Date primarily include unsecured creditors who have received or will receive shares of New Common Stock in settlement of their allowed claims, and participants in a rights offering that we conducted in February 2010, as described below under “—Effectiveness of the Plan and Exit Financing.”
Fresh start accounting required resetting the historical net book values of our assets and liabilities as of Emergence Date to the related fair values by allocating our reorganization value to our assets and liabilities pursuant to ASC 805 “Business Combinations” and ASC 852-10 “Reorganizations.” The excess reorganization value over the fair value of tangible and identifiable intangible assets has been recorded as goodwill on our Consolidated Balance Sheet. Deferred taxes have been determined in conformity with ASC 740 “Income Taxes.” For additional information regarding the impact of fresh start accounting on our Consolidated Balance Sheet as of the Emergence Date, see Note 2 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
References herein in the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements to the “Successor” refer to Spansion and its consolidated subsidiaries after May 10, 2010, after giving effect to: (i) the cancellation of Old Common Stock issued prior to May 10, 2010; (ii) the issuance of New Common Stock and settlement of existing debt and other adjustments in accordance with the Plan; and (iii) the application of fresh start accounting. References to the “Predecessor” refer to Spansion and its consolidated subsidiaries up to May 10, 2010.
Effectiveness of the Plan and Exit Financing
Under the Plan, most holders of allowed general, unsecured claims against the Predecessor received or will receive New Common Stock in satisfaction of their claims. Holders of allowed general, unsecured claims subject to a low payout threshold received cash in satisfaction of their claims. Holders of Senior Secured Floating Rate Notes (FRNs) received cash of approximately $638 million to fully discharge their claims. The $638 million was primarily provided by the exit financing discussed below.
Pursuant to the Plan, the holders of allowed claims were offered the right to purchase a total of 12,974,496 shares of the New Common Stock upon emergence from the Chapter 11 Cases at a price of $8.43 per share (Rights Offering). The number of shares available to each eligible claimant was based on each claimant’s proportionate allowed claim. In connection with the Rights Offering, we entered into a Backstop Rights Purchase Agreement with Silver Lake Management Company Sumeru, LLC whereby they committed to purchase the remaining balance of Rights Offering shares that are not otherwise subscribed for by the Rights Offering participants. Based on the agreement, Silver Lake Management Company Sumeru, LLC purchased 3,402,704 shares of the New Common Stock that had not been subscribed for by the Rights Offering participants. As of May 10, 2010, we received net proceeds of approximately $104.9 million through the Rights Offering, which was used in full to partially discharge the FRN claims.
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On February 9, 2010, we closed a five-year Senior Secured Term Loan agreement of $450 million with a group of lenders. The proceeds of the Senior Secured Term Loan, together with cash proceeds from other sources of cash available to us, were used in full to partially discharge the remaining balance of the FRN claims. See Note 12 of the Notes to Consolidated Financial Statements for more information.
On May 10, 2010, we entered into a senior revolving credit facility agreement (Revolving Credit Facility) with Bank of America and other financial institutions in an aggregate amount of up to $65 million to fund bankruptcy related expenses and ongoing working capital. As of December 26, 2010, we have not drawn under this facility which was entered into as a pre-condition to obtaining the Senior Secured Term Loan facility. See Note 12 of the Notes to Consolidated Financial Statements for more information.
The Plan contemplates the distribution of 65.8 million shares of New Common Stock, consisting of: (i) 46,247,760 shares to holders of allowed general, unsecured claims; (ii) 12,974,496 shares to subscribers of the Rights Offering; and (iii) 6,580,240 shares reserved for issuance to eligible employees in connection with grants of stock options and restricted stock units (RSUs) under our new 2010 Equity Incentive Award Plan (the 2010 Plan). As of December 26, 2010, we had granted options to purchase 3,027,943 shares of New Common Stock and 3,040,566 RSUs under the 2010 Plan to our directors and employees, and 511,731 shares were eligible for future equity awards.
In accordance with the Plan, holders of Old Common Stock , or stock options exercisable for Old Common Stock and RSUs which convert into Old Common Stock, outstanding as of May 10, 2010 did not receive any distributions, and their equity interests were cancelled on May 10, 2010.
Business Relationship with Spansion Japan and Foundry Agreement
Prior to the Debtors’ filing of the Chapter 11 Cases, on February 10, 2009, Spansion Japan Limited, a wholly-owned subsidiary of Spansion LLC (Spansion Japan) filed a proceeding under the Corporate Reorganization Law of Japan to obtain protection from Spansion Japan’s creditors (the Spansion Japan Proceeding). On March 3, 2009 the Tokyo District Court approved the filing of the Spansion Japan Proceeding and appointed the incumbent representative director of Spansion Japan as trustee. As a result, we no longer controlled Spansion Japan despite our 100 percent equity ownership interest and, effective March 3, 2009, we deconsolidated Spansion Japan and have accounted for its interest in Spansion Japan as a cost basis investment. Effective September 28, 2010, our 100 percent equity ownership interest in Spansion Japan was extinguished by the Tokyo District Court and Spansion Japan was no longer our subsidiary.
Spansion Japan manufactured and supplied silicon wafers, and provided sort services to us through August 31, 2010 when Spansion Japan sold its manufacturing facilities (known as JV3 and SP1) located at Aizu Wakamatsu, Japan to a subsidiary of Texas Instruments Incorporated (TI) which began to provide such services to us on September 1, 2010. Spansion Japan also functioned as the sole distributor of our products in Japan whereby it purchased products from us and sold them to customers in Japan, primarily through a subsidiary of Fujitsu Limited. The wafers purchased from Spansion Japan were a material component of our cost of goods sold, and historically the wafer prices were governed by a foundry agreement. Management believed that the prices under that foundry agreement greatly exceeded the amounts that the U.S. Bankruptcy Court would have required us to pay for wafers purchased during the period from February 9, 2009 through October 27, 2009 (the date when Spansion and Spansion Japan mutually agreed to pricing terms through executed purchase orders).
After unsuccessful efforts by us and Spansion Japan to renegotiate the prices under the foundry agreement, we filed a motion with the U.S. Bankruptcy Court in October 2009 to reject the foundry agreement. An order rejecting the foundry agreement was issued by the U.S. Bankruptcy Court on November 19, 2009. As a result, there was no valid contract establishing pricing for the wafers we received from Spansion Japan from February 9, 2009 through October 27, 2009 (Disputed Period).
On January 8, 2010, we reached an agreement in principle (the Settlement) with Spansion Japan, subject to the completion of definitive agreements and our emergence from the Chapter 11 Cases, to: (i) acquire Spansion
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Japan’s distribution business; (ii) obtain foundry services, including wafer and sort services, from Spansion Japan; (iii) resolve our dispute with Spansion Japan relating to pricing of wafers purchased during the Disputed Period; and (iv) pay to Spansion Japan of approximately $45 million of which approximately $10 million was outstanding as of December 26, 2010. The outstanding balance of $10 million will be fully settled in the first quarter of fiscal 2010. The U.S. Bankruptcy Court and the Tokyo District Court approved the Settlement on January 29, 2010 and February 1, 2010, respectively.
On February 2, 2010, we entered into a foundry agreement with Spansion Japan whereby we agreed to purchase from Spansion Japan: (i) a minimum of 10 billion yen (equivalent to approximately $120.7 million at December 26, 2010) worth of wafers over six quarters, beginning with the first quarter of 2010 and ending with the second quarter of 2011; and (ii) minimum sort services of $7.7 million for the first quarter of 2010 and $8.9 million for each quarter from the second quarter of 2010 to the second quarter of 2011, with both sort services and wafer production to be subject to normal and customary foundry performance conditions. On March 29, 2010, we executed with Spansion Japan various agreements implementing the Settlement, which included the purchase of Spansion Japan’s distribution business, which was consummated on May 24, 2010 for a total cash purchase price of $13.1 million. With the acquisition of Spansion Japan’s distribution business, all material conditions of the Settlement were fulfilled and we set off the receivable and payable balances due from/to Spansion Japan as of October 27, 2009 (the date when we and Spansion Japan mutually agreed to pricing terms through executed purchase orders). All transactions with Spansion Japan are now being settled on a regular basis on mutually agreed upon terms.
The purchase price relating to the acquisition of Spansion Japan’s distribution business was allocated to the acquired business based on its estimated fair values as of May 24, 2010, as set forth below:
| In millions | ||||
| Tangible assets |
$ | 1.5 | ||
| Customer relationships |
10.1 | |||
| Goodwill |
3.3 | |||
| Liabilities |
(1.8 | ) | ||
| Total purchase price |
$ | 13.1 | ||
See Note 6 of the Notes to the Consolidated Financial Statements for more information relating to the above intangible assets.
Until May 24, 2010, Spansion Japan continued in its historical role as the sole distributor of our products in Japan. After the purchase of the distribution business from Spansion Japan on May 24, 2010, we distribute our products in Japan through our wholly owned subsidiary, Nihon Spansion Limited.
Effective June 27, 2010, Spansion Japan’s Plan of Reorganization (the POR) was confirmed by the Tokyo District Court. The POR provided for Spansion Japan to redeem shares held by its shareholders without consideration, cancel such shares and issue new shares to unsecured creditors. The redemption, cancellation and new issuance were completed effective September 28, 2010. As a result, we no longer had any equity ownership of Spansion Japan. Until this date, we had accounted for our interest in Spansion Japan as a cost basis investment since we had not controlled Spansion Japan since March 3, 2009.
On August 31, 2010, Spansion Japan sold its manufacturing facilities to a subsidiary of TI. At the same time, we terminated our foundry agreement with Spansion Japan and entered into a new foundry agreement with TI whereby we agreed to purchase from TI: (i) a minimum of $235.5 million worth of wafers over eight quarters, beginning with the third quarter of 2010 and ending with the second quarter of 2012; and (ii) minimum sort services of $8.9 million for each quarter from the fourth quarter of 2010 to the second quarter of 2011 and $8.5 million each from the third quarter of 2011 through the second quarter of 2012, with both sort services and wafer
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production to be subject to normal and customary foundry performance conditions. The foundry agreement with TI stipulates the minimum purchases for wafers and sort services in Japanese Yen and United States Dollars (USD) respectively. Minimum wafer purchase commitments as disclosed above were translated in to USD as of December 26, 2010 and are subject to currency fluctuations over the term of the foundry agreement.
Pursuant to the Plan, a claims agent has been appointed to analyze and, at the claims agent’s discretion, contest outstanding disputed claims totaling $1.5 billion, which included the $936 million general unsecured proof of claim filed by Spansion Japan as a result of the November 19, 2009 foundry agreement rejection order. The Company accrued its best estimate of the liability which was included in the $938.5 million of liabilities subject to compromise as of the Emergence Date. Since these claims are being handled by the claims agent and are under the jurisdiction of the U.S. Bankruptcy Court, their sole recourse is to receive shares reserved under the plan and, therefore, any outcome of the claims adjudication process will have no direct impact on the Successor.
On October 20, 2010, the claims agent entered into an agreement with Spansion Japan to settle all claims asserted by and between Spansion Japan and the chapter 11 estates of the Debtors. Spansion Japan had asserted a claim for approximately $936 million related to damages allegedly incurred as a result of our rejection of our foundry agreement with Spansion Japan. The claims agent had been engaged in litigation with Spansion Japan over the amount of damages sustained by Spansion Japan. As part of the agreement, Citigroup Global Markets Inc. (Citi), which was not a party to this litigation, purchased the rejection damages claim from Spansion Japan for $100 million in cash. In separate transactions, the claims agent agreed to allow the rejection damages claim held by Citi in the amount of $200 million, and we purchased 85 percent of the allowed claim from Citi for $85 million in cash which was recorded as an adjustment to the Successor’s Stockholders’ Equity. See the Consolidated Statement of Stockholders’ Equity (Deficit) for more information.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In preparing the Consolidated Financial Statements for the Predecessor, we applied ASC 852 “Reorganizations,” which requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly, professional fees associated with the Chapter 11 Cases and certain gains and losses resulting from reorganization of our business have been reported separately as reorganization items. In addition, interest expense for the Predecessor has been reported only to the extent that it was paid during the Chapter 11 Cases or that it was probable that it would be an allowed priority, secured, or unsecured claim under the Chapter 11 Cases. Interest income earned during the Chapter 11 Cases is reported as a reorganization item.
Upon emergence from Chapter 11, we adopted fresh start accounting in accordance with ASC 852 “Reorganizations”. The adoption of fresh start accounting results in us becoming a new entity for financial reporting purposes. Accordingly, the Consolidated Financial Statements on or after May 10, 2010 are not comparable to the Consolidated Financial Statements prior to that date. Our Consolidated Statements of Operations for fiscal year ended December 26, 2010 and for subsequent periods through fiscal year 2012 will be split into Predecessor and Successor financial statements for as long as any Predecessor financial statements are disclosed.
Fresh start accounting requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s reorganization value to its assets and liabilities pursuant to ASC 805 “Business Combinations” and ASC 820 “Fair Value Measurements and Disclosures”. The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on the Consolidated Balance Sheet. Deferred taxes are determined in conformity with ASC 740 “Income Taxes”. For additional information regarding the impact of fresh start accounting on our Consolidated Balance Sheet as of December 26, 2010, see Note 2 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
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Furthermore, effective March 3, 2009, we deconsolidated Spansion Japan because, despite its 100 percent equity ownership interest, we no longer controlled Spansion Japan due to the appointment of a trustee in the Spansion Japan Proceeding. Since March 3, 2009, we have accounted for its interest in Spansion Japan as a cost basis investment. Transactions between us and Spansion Japan after March 3, 2009, have been reflected as transactions with a third party. Effective, September 28, 2010, the Company’s 100 percent equity ownership interest in Spansion Japan was extinguished by the Tokyo District Court. See “Business Relationship with Spansion Japan and Foundry Agreement” above for further details.
With the exception of Spansion Japan as described above, the consolidated financial statements include all our accounts and those of its wholly owned subsidiaries, and all intercompany accounts and transactions have been eliminated.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S.GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our net sales, inventories, asset impairments, stock-based compensation expense, legal reserve and income taxes. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Our critical accounting policies incorporate our more significant judgments and estimates used in the preparation of our consolidated financial statements. We believe the following critical accounting policies are significant to the presentation of our financial statements and require difficult, subjective and complex judgments.
Revenue Recognition
We generally recognize revenue when we sell our products to OEM customers and title and risk of loss for the products have transferred to the OEM. Estimates of product returns and sales allowances, related to reasons other than product quality, are based on actual historical experience and are recorded as a reduction in revenue at the time revenue is recognized. For the year ended December 27, 2009 and December 26, 2010, the Company deferred the recognition of revenues and related product costs on sales to Spansion Japan until the products were resold by Spansion Japan’s distributors.
We sell to distributors and provide such distributors certain rights of return, stock rotation and price protection as discussed below. We defer the recognition of revenue and related product costs on these sales as deferred income on shipments until the merchandise is resold by our distributors. We also sell some of our products to certain distributors under sales arrangements with terms that do not allow for rights of returns or price protection on unsold products held by them. In these instances, we recognize revenue when we ship the product directly to the distributors.
Rights of return are granted whereby we are obligated to repurchase inventory from a distributor upon termination of the distributor’s sales agreement with us. However, we are not required to repurchase the distributor’s inventory under certain circumstances, such as the failure to return the inventory in saleable condition or we may only be required to repurchase a portion of distributor’s inventory, for example when distributor has terminated the agreement for its convenience.
Stock rotation rights are provided to distributors when we have given written notice to the distributor that a product is being removed from our published price list. The distributor has a limited period of time to return the
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product. All returns are for credit only; the distributor must order a quantity of products, the dollar value of which equals or exceeds the dollar value of the products being returned. Some distributors are also offered quarterly stock rotation. Such stock rotation is limited to a certain percentage of the previous three months’ net shipments.
A general price protection is granted to a distributor if we publicly announce a generally applicable price reduction relating specifically to certain products, whereby the distributor is entitled to a credit equal to the difference between the price paid by the distributor and the newly announced price.
Price protection adjustments are provided to distributors solely for those products that: 1) are shipped by us to the distributor during the period preceding the price reduction announcement by us, 2) are part of the distributor’s inventory at the time of the announcement, and 3) are located at geographic territories previously authorized by us.
In addition, if in our sole judgment, a distributor demonstrates that it needs a price lower than the current published price list in order to secure an order from the distributor’s customers, we may, but we have no obligation to, grant the distributor a credit to our current published price. The distributor must submit the request for a reduction in price prior to the sale of products to its customer. If the request is approved and the sale occurs, the distributor must make a claim with the proof of resale to end customers for a credit within a specified time period.
Gross deferred revenue and gross deferred cost of sales on shipments to distributors as of December 26, 2010 and December 27, 2009 are as follows:
| December 26, 2010 |
December 27, 2009 |
|||||||
| (in thousands) | ||||||||
| Deferred revenue |
$ | 61,855 | $ | 90,465 | ||||
| Less: deferred costs of sales |
(40,562 | ) | (36,308 | ) | ||||
| Deferred income on shipments(1) |
$ | 21,293 | $ | 54,157 | ||||
| (1) | The deferred income of $22.2 million and $63.0 million on the consolidated balance sheet as of December 26, 2010 and December 27, 2009 included $0.9 million and $8.8 million of defered revenue related to our licensing revenue that was excluded in the table above, respectively. |
Our distributors provide us with periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. We reconcile distributors’ reported inventories to their activities.
Estimates of Sales Returns and Allowances
From time to time we may accept sales returns or provide pricing adjustments to customers who do not have contractual return or pricing adjustment rights. We record a provision for estimated sales returns and allowances on product sales in the same period that the related revenues are recorded, which primarily impacts gross margin. We base these estimates on actual historical sales returns, allowances, historical price reductions, market activity and other known or anticipated trends and factors. These estimates are subject to management’s judgment, and actual provisions could be different from our estimates and current provisions, resulting in future adjustments to our revenues and operating results.
Inventory Valuation
At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand. These projections assist
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us in determining the carrying value of our inventory and are also used for near-term factory production planning. We write off inventories that we consider obsolete and adjust remaining specific inventory balances to approximate the lower of our standard manufacturing cost or market value. Among other factors, management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining obsolescence and net realizable value. If we anticipate future demand or market conditions to be less favorable than our previous projections, additional inventory write-downs may be required and would be reflected in cost of sales in the period the write-down is made. This would have a negative impact on our gross margin in that period. A continued weak economy could lead to additional write downs of inventory. If in any period we are able to sell inventories that were not valued or that had been written down in a previous period, related revenues would be recorded without any offsetting charge to cost of sales, resulting in a net benefit to our gross margin in that period.
Stock-Based Compensation Expenses
We estimated the fair value of our stock-based awards to employees using the Black-Scholes-Merton option pricing model, which requires the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the grant date fair value. Stock-based compensation expense recognized during a period is based on the higher of the grant-date fair value of the portion of share-based payment awards that is ultimately expected to vest, or actually vest, during the period. Compensation expense for all share-based payment awards was recognized using the straight-line attribution method reduced for estimated forfeitures.
We estimate volatility based on our recent historical volatility and the volatilities of our competitors who are in the same industry sector with similar characteristics (guideline companies) because of the lack of historical realized volatility data on our business. We have used the simplified calculation of expected life since our emergence from the Chapter 11 Cases and continue to use this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of share options since our initial public offering. If we determined that another method used to estimate expected volatility or expected life was more reasonable than our current methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant.
In addition, we are required to develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates in order to derive the Company’s best estimate of awards ultimately expected to vest. We do not have sufficient historical forfeiture experience related to our own stock-based awards granted subsequent to emergence from Chapter 11 in May 2010, and therefore, estimated our forfeitures based on the average of our own post-emergence fiscal 2010 forfeiture rate and historical forfeiture rates of peer companies over the expected vesting term of our stock based awards. These estimates will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
In determining taxable income for financial statement reporting purposes, we must make estimates and judgments. These estimates and judgments are applied in the calculation of specific tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes.
We must assess the likelihood that we will be able to recover our deferred tax assets. Unless recovery of these deferred tax assets is considered more likely than not, we must increase our provision for taxes by
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recording a charge to income tax expense, in the form of a valuation allowance against those deferred tax assets for which we believe it is more likely than not they will be realized. We consider past performance, future expected taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance.
In addition, the calculation of our tax liabilities involves the application of complex tax rules and the potential for future adjustments by the relevant tax jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.
In determining the financial statement effects of an unrecognized tax position, we must determine when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In this determination, we must assume that the position will be examined by a taxing authority that has full knowledge of all relevant information, and will be resolved in the court of last resort. The more likely than not recognition threshold means that no amount of tax benefits may be recognized for a tax position without a greater than 50 percent likelihood that it will be sustained upon examination.
Goodwill and Intangible Assets
Goodwill represents the excess of our enterprise value upon emergence over the fair value of our net tangible and identifiable intangible assets acquired. We recorded goodwill in the second quarter of fiscal 2010 in connection with fresh start accounting (see Note 2 and Note 6 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for more information relating to fresh start accounting and valuation of Goodwill). In accordance with the provisions of ASC 350, “Intangibles, Goodwill and Other”, goodwill amounts are not amortized, but rather are tested for impairment at the reporting unit level at least annually, or more frequently if there are indicators of impairment present. We have determined that we have a single reporting unit and we will perform the annual goodwill impairment analysis as of the fourth quarter of each fiscal year, with the first annual testing carried out in the fourth quarter of fiscal 2010.
We have determined that the annual goodwill impairment test will be performed on November 30th of each fiscal year commencing from November 30, 2010. ASC 350 requires a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates that the fair value is less than the carrying value, then step two is required to compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill.
We determine the fair value of our single reporting unit to be equal to our market capitalization plus a control premium. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of our common stock over a 10-day period before and a 10-day period after each assessment date. We use this 20-day duration to consider inherent market fluctuations that may affect any individual closing price. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium—which seeks to give effect to the increased consideration a potential acquirer would be required to pay in order to gain sufficient ownership to set policies, direct operations and make decisions related to our company—to our market capitalization.
No goodwill impairment was recorded in fiscal 2010. We performed the step one fair value comparison as of November 30, 2010 and our market capitalization, calculated as described above, was $1.3 billion and our carrying value, including goodwill, was $644 million. Because market capitalization significantly exceeded our carrying value, our estimate of the control premium was not a determining factor in the outcome of step one of the impairment assessment and we therefore did not incorporate a control premium into out step one computation.
We recorded In-process research and development of approximately $43 million in the second quarter of fiscal 2010 in connection with fresh start accounting (See Note 3 and Note 6 of the Notes to our Consolidated
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Financial Statements included in Part II, Item 8 of this Annual Report for more information relating to fresh start accounting). Intangible assets include projects that have not reached technological feasibility and have no alternative future use at the time of the valuation. These projects related to the development of process technologies to manufacture flash memory products based on 65 nanometer process technology and primarily includes certain new products from the GL and FL product families. As of December 26, 2010, none of these projects had reached technological feasibility but the Company expects these projects to attain technological feasibility and commence commercial production during fiscal 2011 and the first half of fiscal 2012.
We will consider quarterly whether indicators of impairment relating to the intangible assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an intangible asset, significant changes in the extent or manner in which an intangible asset is used or an adverse change in our overall business climate. If these or other indicators are present, we test for recoverability of the intangible asset by determining whether the estimated undiscounted cash flows attributable to the intangible asset in question is less than its carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the intangible asset over its respective fair value. (See Note 7 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for more information relating to the above).
Impairment of Long-Lived Assets including Acquisition-Related Intangible Assets
We consider quarterly whether indicators of impairment of long-lived assets and intangible assets are present. These indicators may include, but are not limited to, significant decreases in the market value of an asset, significant changes in the extent or manner in which an asset is used or an adverse change in our overall business climate. If these or other indicators are present, we test for recoverability of the asset (asset group) by determining whether the estimated undiscounted cash flows attributable to the asset (asset group) in question are less than their carrying value. If less, we recognize an impairment loss based on the excess of the carrying amount of the asset (asset group) over its respective fair value. Significant judgment is involved in determining whether impairment is measured at the individual asset or at an asset group level.
Our manufacturing processes are vertical in nature and we have had multiple foundries, assembly and test facilities. As a result, the cash flows of our assets and liabilities below the entity level are not largely independent of one another and we concluded impairment should be evaluated at the single entity-wide asset group (i.e., consolidated Spansion) level. Fair value is determined by discounted future cash flows, appraisals or other methods. Significant judgment is involved in estimating future cash flows and deriving the discount rate to apply to the estimated future cash flows and in evaluating the results of appraisals or other valuation methods. If the asset (asset group) determined to be impaired is to be held and used, we recognize an impairment loss through a charge to our operating results which also reduces the carrying basis of the related asset or assets in an asset group. The adjusted carrying value of the related asset (asset group) establishes a new cost basis and accumulated depreciation is reset to zero. The asset (asset group) is depreciated or amortized over the remaining estimated useful life of the asset. We also must make subjective judgments regarding the remaining useful life of the asset. If the asset (asset group) determined to be impaired is held for sale, we measure the new carrying value of the asset (asset group) at fair value less estimated cost to dispose, with the impairment loss being charged to operations.
Estimates Relating to Litigation Reserve
Upon emergence and as part of fresh start accounting, we adopted our litigation reserve policy whereby we record our estimates of litigation expenses to defend ourselves over the course of a reasonable period of time, currently estimated at twelve months in accordance with the provisions of ASC 450, Contingencies. Considerable judgment is necessary to estimate these costs and an accrual is made when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. (See Part I, Item 3- Legal Proceedings for more information regarding our outstanding legal proceedings).
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Results of Operations
The following is a summary and analysis of our net sales, gross margin, operating expenses, interest and other income, net, interest expense and income tax provision for the two periods in fiscal 2010, fiscal 2009 and fiscal 2008.
In addition, we have presented a combined summary and analysis of the two periods in fiscal 2010. The combined summary of our net sales, gross margin, operating expenses, interest and other income, net, interest expense and income tax provision shown in the table for fiscal 2010 is not a required presentation under U.S. GAAP, but disclosed as we believe that it would assist the reader to understand the historical financial trends of the Company.
| Successor | Predecessor | Predecessor | ||||||||||||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Combined for the Fiscal Year Ended December 26, 2010 |
Year Ended December 27, 2009 |
Year Ended December 28, 2008 |
||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Net sales |
$ | 764,687 | $ | 403,619 | $ | 1,168,306 | $ | 1,410,653 | $ | 2,281,803 | ||||||||||||||
| Cost of sales |
647,382 | 274,817 | 922,199 | 1,103,757 | 2,193,345 | |||||||||||||||||||
| Gross profit |
117,305 | 128,802 | 246,107 | 306,896 | 88,458 | |||||||||||||||||||
| Gross margin |
15 | % | 32 | % | 21 | % | 22 | % | 4 | % | ||||||||||||||
| Research and development |
65,414 | 35,068 | 100,482 | 136,449 | 431,808 | |||||||||||||||||||
| Sales, general and administrative |
122,478 | 68,106 | 190,584 | 216,298 | 253,878 | |||||||||||||||||||
| In-process research and development |
— | — | — | — | 10,800 | |||||||||||||||||||
| Restructuring charges |
— | (2,772 | ) | (2,772 | ) | 46,852 | 11,161 | |||||||||||||||||
| Asset impairment charges |
— | — | — | 12,538 | 1,652,622 | |||||||||||||||||||
| Operating income (loss) |
(70,587 | ) | 28,400 | (42,186 | ) | (105,241 | ) | (2,271,811 | ) | |||||||||||||||
| Gain on deconsolidation of subsidiary |
— | — | — | 30,100 | — | |||||||||||||||||||
| Interest and other income (expense), net |
175 | (2,904 | ) | (2,728 | ) | 4,038 | 5,200 | |||||||||||||||||
| Interest expense |
(24,180 | ) | (30,573 | ) | (54,754 | ) | (50,976 | ) | (105,536 | ) | ||||||||||||||
| Reorganization items |
— | 370,340 | 370,340 | (391,383 | ) | — | ||||||||||||||||||
| Provision for income taxes |
(2,101 | ) | (1,640 | ) | (3,741 | ) | (597 | ) | (62,865 | ) | ||||||||||||||
Total Net Sales Comparison for Fiscal 2010 and Fiscal 2009
For fiscal 2010, net sales in the Predecessor was $764.7 million while that of the Successor was $403.6 million.
Total net sales in fiscal 2010 decreased 17.2 percent compared to total net sales in fiscal 2009. Approximately 19.4 percent or $273 million, of the decrease was attributable to our decision to exit a large portion of the wireless market and approximately 3.7 percent or $52.0 million was attributable to deferred revenue lost as a result of fresh start accounting required for the Successor. This decrease was offset by an approximately 5.9 percent, or $83.0 million, increase in sales in the embedded market where we recaptured business lost during the Chapter 11 Cases.
Total Net Sales Comparison for Fiscal 2009 and Fiscal 2008
Total net sales in fiscal 2009 decreased 38 percent compared to total net sales in fiscal 2008. The decrease in total net sales was primarily attributable to a 34 percent decrease in unit shipments. The decrease in unit
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shipments was largely due to (i) a decrease in customer demand for our products, spurred by a worldwide decrease in demand for Flash memory in addition to loss of business as a result of our filing for bankruptcy, and (ii) our strategic decision to exit a large portion of the wireless market. Partially offsetting the decrease in overall demand was an increase in customer purchases of buffer inventory in the period just prior to and after commencement of the Chapter 11 Cases.
Gross Margin; Operating Expenses; Interest and Other Income, Net; Interest Expense and Income Tax Provision
The following is a summary of gross margin; operating expenses; interest and other income, net; interest expense and income tax provision for each fiscal 2010, fiscal 2009 and fiscal 2008.
Gross margin
For fiscal 2010, gross profit in the Predecessor was $128.8 million while the gross profit for the Successor, which was impacted by the fresh start accounting adjustments as mentioned below, was $117.3 million.
Our gross margin decreased by approximately one percent in fiscal 2010 compared to gross margin in fiscal 2009. Successor’s fresh start accounting related adjustments included amortization of approximately $90.2 million of inventory mark-up, a charge of approximately $64.6 million on higher valuation of fixed assets and a decrease in revenues due to “fresh start” accounting adjustments that eliminated some of our revenue (See Note 2). The overall decrease was partially offset by lower expenses resulting from operating efficiencies in factory utilization, a product mix shift from wireless to embedded products and better pricing from suppliers during the year.
Our gross margin increased by approximately 18 percent in fiscal 2009 compared to gross margin in fiscal 2008. Our gross margin in fiscal 2009 was higher primarily due to (i) the $253.2 million write-down of inventory in 2008, which is described below; (ii) certain fixed overhead costs and underutilization charges relating primarily to an advanced wafer fabrication facility in Aizu-Wakamatsu, Japan (SP1) in fiscal 2008 that did not fully reoccur in fiscal 2009 because we deconsolidated Spansion Japan in the first quarter of fiscal 2009; and (iii) a decrease in depreciation expense resulting from the write-down of certain manufacturing assets at the end of fiscal 2008. The increase in gross margin due to the aforesaid factors was partially offset by lower revenues in fiscal 2009 and an increase in fixed manufacturing costs resulting from the underutilization of our factories, primarily in the first quarter of 2009.
Research and development
R&D expenses for the Successor from May 11, 2010 to December 26, 2010 were $65.4 million which included, among other items, approximately (i) $36.4 million of labor costs, (ii) $5.6 million of expenses relating to outside service providers, (iii) $6.3 million of material costs, and (iv) $17.1 million of building and other allocated operating expenses.
For the Predecessor, from December 28, 2009 to May 10, 2010, R&D expenses of $35.1 million included, among other items, approximately (i) $22.8 million of labor costs, (ii) $3.7 million of expenses relating to outside service providers, (iii) $1.8 million of material costs, and (iv) $4.3 million of building and other allocated operating expenses.
Research and development, or R&D, expenses decreased by approximately 26 percent in fiscal 2010 compared to fiscal 2009. The decrease in R&D expenses were primarily due to lower operational expenses incurred in fiscal 2010 of approximately: (i) $26.8 million as a result of the closure of our Sub-micron Development Center (SDC) located at Sunnyvale, California in fiscal 2009; and (ii) $7.1 million as a result of the closure of R&D operations in certain of our foreign final manufacturing locations.
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Research and development expenses decreased by approximately 68 percent in fiscal 2009 compared to fiscal 2008. The decrease in research and development expenses was primarily due to: (i) labor cost savings of approximately $96.4 million from shutdowns, furloughs and workforce reductions, and material cost and technology savings of approximately $32.0 million, resulting from our continued efforts to reduce costs and conserve cash in fiscal 2009; (ii) a decrease of approximately $57.1 million in depreciation expense resulting from the write-down of certain long-lived assets at the end of fiscal 2008, which significantly reduced the cost basis of our depreciable assets; (iii) a decrease of approximately $49.9 million in research and development expenses related to Spansion Japan as a result of the deconsolidation; (iv) a decrease of approximately $31.3 million attributable to the shutdown of our SDC in April 2009; (v) a decrease of approximately $17.8 million in outside services including engineering, software and consulting services and travel expenses due to cost reduction measures; and (vi) a decrease of approximately $5.7 million research and development expenses related to Spansion Israel Ltd. as a result of its workforce reduction.
Sales, general and administrative
For the Successor, during the period from May 11, 2010 to December 26, 2010, SG&A expenses of $122.5 million included among other items, approximately (i) $49.3 million of labor costs, (ii) $51.1 million of expenses relating to outside service providers and (iii) $14.5 million of building and other allocated operating expenses.
For the Predecessor, during the period from December 28, 2009 to May 10, 2010, SG&A expenses of $68.1 million included among other items, approximately (i) $25.9 million of labor costs, (ii) $25.1 million of expenses relating to outside service providers, and (iii) $6.6 million of building and other allocated operating expenses.
Sales, general and administrative, or SG&A, expenses in fiscal 2010 decreased by approximately 12 percent compared to fiscal 2009. This decrease was principally due to (i) a decrease of approximately $12.9 million in expense for doubtful accounts; (ii) savings of approximately $16.6 million in labor costs and approximately $6.2 million relating to a planned reduction of information technology expenses; and (iii) the Successor’s allocation based on utilization, of approximately $5.9 million of information technology charges from SG&A to R&D and Cost of Goods Sold. The information technology charges were not allocated to other functional areas in the Predecessor.
The overall decrease was partially offset by: (i) an increase of approximately $12.9 million in accrued bonuses primarily related to our 2010 performance-based bonus plan; and (ii) an increase of approximately $6.8 million of operating expenses in fiscal 2010 due to the acquisition of Spansion Japan’s sales and distribution organization in May 2010 which is now operated by our subsidiary, Nihon Spansion Limited.
SG&A expenses in fiscal 2009 decreased by approximately 15 percent compared to fiscal 2008. The decrease in SG&A expenses in fiscal 2009 was primarily due to: (i) labor cost savings of approximately $27.4 million from workforce reductions; (ii) a decrease of approximately $20.7 million in professional services fees; and (iii) a decrease of approximately $6.8 million in travel expenses and $8.6 million in other miscellaneous operating expenses including reductions in building cost, supplies, repair, employee training and development, and telecommunication expenses. Further, as a result of the deconsolidation of Spansion Japan, SG&A expenses attributable to Spansion Japan decreased to $4.3 million for fiscal 2009, from $27.3 million for fiscal 2008.
The decrease in SG&A expenses was partially offset by an increase of approximately $19.8 million in provisions for doubtful accounts and approximately $43.2 million in provisions for litigation and other related matters, which occurred in the first quarter of fiscal 2009.
In-process research and development (IPR&D)
In the first quarter of fiscal 2008, we expensed $10.8 million of IPR&D charges in connection with the acquisition of Saifun Semiconductor Ltd. (subsequently renamed as Spansion Israel Ltd). Projects that qualify as
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IPR&D are those that have not reached technological feasibility and have no alternative future use at the time of the acquisition. We did not have a similar charge during fiscal 2009 or fiscal 2010.
Restructuring charges
Restructuring charges for the Predecessor from December 28, 2009 to May 10, 2010 decreased by approximately $49.6 million compared to the fiscal 2009. The decrease in restructuring charges was primarily due to: (i) approximately $ 39.4 million of lower cash settled restructuring charges on employee severance pay and benefits, professional fees, and relocation of property, plant and equipment in the second quarter of fiscal 2010; (ii) an approximately $5.5 million gain on the sale of SDC fixed assets; (iii) increase of approximately $0.6 million gain from the sale of our plant in Suzhou, China in fiscal 2010 when compared to fiscal 2009; and (iv) an approximately $1.7 million lower depreciation and fixed assets write-offs . There were no restructuring charges in the Successor period.
In fiscal 2009, we implemented various restructuring measures, including workforce reductions of approximately 3,200. The related restructuring charges, primarily comprised of severance costs and other related costs, were $46.9 million for fiscal 2009.
In fiscal 2008, we incurred $11.2 million of restructuring charges.
Asset impairment charges
In accordance with the guidance in ASC Topic 360, Property, Plant, and Equipment we did not record any impairment charges as there are no impairment triggers for the Predecessor or Successor.
For the year ended December 27, 2009, we recorded an impairment charge of approximately $12.5 million primarily due to impairment on its equity investment and loan to an investee.
We recorded an impairment charge of $1.6 billion in the fourth quarter of fiscal 2008. Reduced unit demand resulted in factory underutilization, lower prices, and negative margins and together these effects resulted in a lower fair value for our plant and equipment than their then current carrying value. Furthermore, we determined that the carrying values of goodwill and intangible assets from our Spansion Israel Ltd. acquisition exceeded fair value. The impairment charges were comprised of impairments of property, plant and equipment (approximately $1,578.4 million), goodwill (approximately $20.8 million) and intangible assets (approximately $53.5 million).
Gain on deconsolidation of subsidiary
Effective March 3, 2009, we deconsolidated Spansion Japan because, despite our 100 percent ownership interest, we were no longer deemed to control Spansion Japan as a result of the appointment of a trustee in the Spansion Japan Proceeding. The gain recognized upon deconsolidation of Spansion Japan was $30.1 million gain, which represents the difference between the carrying value of our investment in and receivables from Spansion Japan immediately before deconsolidation and the estimated fair value of our retained non-controlling interest in Spansion Japan, which was zero then and as of December 27, 2009. We did not have a similar gain during either fiscal 2010 period or fiscal 2008.
Interest and other income, net
Interest and other income, net, in the Successor for fiscal 2010 was $0.2 million and in the Predecessor for fiscal 2010 was an expense of $2.9 million which mainly consisted of approximately $3.0 million in impairment charges on certain investments in privately held companies.
Interest and other income, net, decreased by approximately $6.8 million in fiscal 2010 compared to fiscal 2009. The decrease was mainly due to approximately $3.0 million in impairment charges on certain investments
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in privately held companies during fiscal 2010 and approximately $2.0 million relating to penalty on early repayment of the Senior Secured Term Loan. In addition, interest and other income, net, was lower due to a decrease in our average investment portfolio yield as a result of decrease of approximately $85.0 million on our investment in Auction Rate Securities (ARS) which earned higher interest as compared to the yields on our cash and cash equivalents. The decrease is partially offset by preferential claim payments received during the last quarter of fiscal 2010 of $0.7 million.
Interest and other income, net, decreased by approximately $1.2 million in fiscal 2009 compared to fiscal 2008. The decrease in interest and other income, net, was mainly due to the combined effect of decreases in our invested cash, cash equivalents and ARS balances, and a decrease in our average investment portfolio yield of approximately 1.9 percent.
Interest expense
For the Successor, there was an increase in interest expense in fiscal 2010 mainly due to approximately (i) 18.7 million of term loan interest compared to none in fiscal 2009, (ii) $2.1 million of interest relating to our New Senior Unsecured Notes issued in the fourth quarter of fiscal 2010 compared to none in fiscal 2009, and (iii) $1.3 million of interest rate swap loss as the hedge was de-designated due to ineffectiveness of our hedging activities as a result of the term loan amendments during the fourth quarter of fiscal 2010. The increase in interest expense was partially offset by the elimination of interest expense of approximately $15.2 million relating to the Senior Floating Rate Notes (Old), which were fully settled upon our emergence from the Chapter 11 Cases and lower accretion of interest on long term license and other software contract obligations of approximately $4.8 million.
For the Predecessor, the increase was primarily due to interest expense of approximately $9.3 million and amortization of financing costs of approximately $11.2 million on our Senior Secured Term Loan, partially offset by decreases of approximately:
| (i) | $7.1 million in interest expenses for our 11.75% Senior Unsecured Notes due 2016, or Old Senior Unsecured Notes, and our Exchangeable Senior Subordinated Debentures as interest expenses on these obligations were accrued only through the Petition Date as a result of the Chapter 11 Cases; |
| (ii) | $2.8 million in interest expense for FRNs due to a decrease in interest rate from 4.6 percent in the six months ended June 28, 2009 to 3.4 percent in the Predecessor period from December 28, 2009 through May 10, 2010. |
| (iii) | $3.4 million in interest expense related to capital leases as a result of lease buy-outs, terminations upon expiration of lease term and lease rejections as a result of reorganization efforts; and |
| (iv) | $2.2 million in interest expense as a result of the deconsolidation of Spansion Japan effective March 3, 2009. |
Interest expense for fiscal 2010 increased by $3.8 million compared to fiscal 2009.
Interest expense decreased by approximately $54.6 million in fiscal 2009 as compared to fiscal 2008. The decrease in interest expense was primarily due to decreases of approximately:
| (i) | $32.2 million in interest expense for Old Senior Unsecured Notes and Exchangeable Senior Subordinated Debentures as interest expense on these obligations was only accrued through the Petition Date pursuant to the accounting guidance for entities in reorganization, wherein interest expense is recognized during reorganization only to the extent the underlying debt is well secured or the interest will be paid; |
| (ii) | $13.8 million in interest expense for the FRNs, resulting from lower interest rates; |
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| (iii) | $11.2 million in interest expense for Spansion Japan, resulting from the deconsolidation; and |
| (iv) | $9.2 million in interest expense due to capital lease rejections as a result of reorganization efforts and the cessation of amortization of debt discount and financing costs since the Petition Date pursuant to the accounting guidance for entities in reorganization. |
The average interest rate on our debt portfolio was 6.00 percent for the Successor period ended September 26, 2010 and 4.85 percent for the Predecessor period ended May 10, 2010. The average interest rate on our debt portfolio for fiscal 2009 was 3.44 percent.
These decreases were partially offset by (i) approximately $6.5 million of capitalized interest related to the financing of SP1 during the first quarter of fiscal 2008, while no such interest was capitalized for the corresponding period in fiscal 2009 and (ii) an increase of approximately $3.6 million in interest expense due to accrued interest for liabilities to Spansion Japan.
The average interest rate on our debt portfolio was 3.44 percent in fiscal 2009 compared to 6.14 percent for fiscal 2008.
Reorganization items
Reorganization items of $370.3 million for the fiscal 2010 primarily consisted of a gain of approximately $434.0 million which resulted from the discharge of pre-petition obligations, and a gain of approximately $22.5 million, which resulted from settlement of rejected capital leases and various license agreements. The overall gain was partially offset by (i) approximately $59.5 million in professional fees, (ii) approximately $12.7 million of debt financing costs written-off, (iii) approximately $10.8 million in adjustments related to accrued claims and cancellation of old equity incentive plans, and (iv) approximately $7.0 million of withholding tax liability related to a foreign subsidiary.
Reorganization items for fiscal 2009 were comprised of a provision for expected allowed claims of approximately $354.9 million related primarily to rejection or repudiation of executory contracts and leases and the effects of approved settlements and approximately $37.1 million for professional fees. No corresponding charges were incurred in fiscal 2008.
Income tax provision
We recorded income tax expense of $2.1 million for the period from May 11, 2010 to December 26, 2010 and $1.6 million for the period from December 28, 2009 to May 10, 2010. We recorded income tax expense of $0.6 million in fiscal 2009 and $62.9 million in fiscal 2008.
Income tax expense recorded for the period from May 11, 2010 to December 26, 2010 differs from the benefit for income taxes that would be derived by applying a U.S. statutory 35 percent rate to the loss before income taxes primarily due to our inability to benefit from U.S. operating losses due to lack of a history of earnings and income that was earned and tax effected in foreign jurisdictions with different tax rates.
Income tax expense recorded for the period from December 28, 2009 to May 10, 2010 differs from the income tax expense that would be derived by applying a U.S. statutory 35 percent rate to the income before income taxes primarily due to the exclusion of cancellation of debt income as taxable income, our inability to benefit from U.S. operating losses after exclusion of cancellation of debt income due to a lack of a history in earnings, and income that was earned and tax effected in foreign jurisdictions with different tax rates.
Income tax expense recorded for fiscal 2009 differs from the benefit for income taxes that would be derived by applying a U.S. statutory 35 percent rate to the loss before income taxes primarily due to our inability to
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benefit from U.S. operating losses due to lack of a history of earnings and income that was earned and tax effected in foreign jurisdictions with different tax rates.
The income tax expense recorded for fiscal 2008 differs from the benefit for income taxes that would be derived by applying a U.S. statutory 35 percent rate to the loss before income taxes primarily because we cannot benefit from U.S. operating losses due to lack of a history of earnings, an increase of $64.5 million in the valuation allowance associated with deferred tax assets of Spansion Japan, and income that was earned and tax effected in foreign jurisdictions with different tax rates.
The increase of $64.5 million in the valuation allowance associated with deferred tax assets of Spansion Japan was recorded due to a change in our judgment about the ability to realize our Japanese deferred tax assets and the filing of the Spansion Japan Proceeding. We believe it is not more likely than not that these deferred tax assets will be realized in these jurisdictions.
As of December 26, 2010, we recorded a valuation allowance of approximately $301.3 million against our U.S. deferred tax assets, net of deferred tax liabilities. This valuation allowance offsets all of our net U.S. deferred tax assets. As of December 26, 2010 we have also recorded valuation allowances of approximately $3.5 million against various foreign deferred tax assets for which we believe it is not more likely than not that they will be realized.
Contractual Obligations
The following table summarizes our contractual obligations at December 26, 2010. The table is supplemented by the discussion following the table.
| Total | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 and Beyond |
||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Senior Secured Term Loan |
251,749 | $ | 10,530 | $ | 2,530 | $ | 2,530 | $ | 2,530 | $ | 233,629 | $ | — | |||||||||||||||||||
| Senior Unsecured Notes |
200,000 | — | — | — | — | — | 200,000 | |||||||||||||||||||||||||
| Capital lease obligations |
3,159 | 3,159 | — | — | — | — | — | |||||||||||||||||||||||||
| Interest expense on debt |
179,687 | 33,282 | 32,676 | 31,878 | 31,189 | 19,162 | 31,500 | |||||||||||||||||||||||||
| Interest expense on capital leases |
79 | 79 | — | — | — | — | — | |||||||||||||||||||||||||
| Other long term liabilities(1) |
6,768 | 3,000 | 3,768 | — | — | — | — | |||||||||||||||||||||||||
| Operating leases |
8,201 | 5,423 | 1,394 | 574 | 348 | 348 | 114 | |||||||||||||||||||||||||
| Unconditional purchase commitments(2) |
242,553 | 144,794 | 52,618 | 19,365 | 13,034 | 12,742 | — | |||||||||||||||||||||||||
| Total contractual obligations(3) |
$ | 892,196 | $ | 200,267 | $ | 92,986 | $ | 54,347 | $ | 47,101 | $ | 265,881 | $ | 231,614 | ||||||||||||||||||
| (1) | The other long term liabilities comprise payment commitments under long term software license agreements with vendors and asset retirement obligations. |
| (2) | Unconditional purchase commitments (UPC) include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These agreements are related principally to inventory and other items. UPCs exclude agreements that are cancelable without penalty. The table above excludes the payments we expect to pay to Spansion Japan in connection with the Settlement. Additionally, the foundry agreement with TI stipulates the minimum purchases for wafers and sort services in Japanese Yen and United States Dollars (USD) respectively. Minimum wafer purchase commitments as disclosed above were translated in to USD as of December 26, 2010 and are subject to currency fluctuations over the term of the foundry agreement. See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations as described in Business Relationship with Spansion Japan and Foundry Agreement for more information. |
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| (3) | As of December 26, 2010, the liability for uncertain tax positions was $14.5 million including interest and penalties. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid. |
Senior Secured Term Loan
On February 9, 2010, Spansion LLC, our wholly owned operating subsidiary, borrowed $450 million under a Senior Secured Term Loan. In connection with the Senior Secured Term Loan, the Predecessor incurred financing points, fees to the arrangers and legal costs of approximately $11.1 million as interest expense. In addition, we paid the lenders approximately $10 million of financing fees upon the release of Senior Secured Term Loan funds from escrow.
On November 9, 2010, Spansion LLC amended its Senior Secured Term Loan Agreement to, among other things, allow the issuance of the $200 million of 7.875% Senior Unsecured Notes due 2017 reduce interest rates on outstanding Senior Secured Term Loan balances, remove the requirement of maintaining interest rate hedging arrangements and amend its financial covenants of: (i) a minimum consolidated interest coverage ratio from 3.75 to 1.0 to 3.50 to 1.0; (ii) a maximum leverage ratio from 2.50 to 1.0 until September 25, 2011 and 2.0 to 1.0 thereafter to 3.00 to 1.0; and (iii) maximum permitted capital expenditures from $100 million in 2011 and $125 million in 2012 and each fiscal year thereafter to $150 million. Furthermore, any capital expenditure amount not expended in the fiscal year for which we are permitted may be carried over for expenditure in the succeeding fiscal year in an amount not to exceed $40 million in any fiscal year. We also obtained a waiver to a mandatory prepayment requirement that we use 50 percent of the net proceeds we received from the sale of shares of our Class A common stock in November 2010 (the Stock Offering) to pay down the Senior Secured Term Loan.
As of December 26, 2010, we are in compliance with all of the covenants under the Senior Secured Term Loan.
Interest on the Senior Secured Term Loan accrues at a rate per annum, reset quarterly, equal to the prime lending rate or the Federal Funds rate plus 0.50 percent, whichever is higher but not less than 2.75 percent, plus 3.75 percent. Alternatively, we have the option to choose 1-month, 3-month, and 6-month LIBOR rate, or choose 9-month and 12-month LIBOR with the consent of all the lenders, in which case the interest on the Senior Secured Term Loan accrues at a rate per annum equal to the LIBOR or 1.75 percent, whichever is higher, plus 4.75 percent. Interest is payable quarterly in arrears. As of December 26, 2010, the Senior Secured Term Loan carried interest at 6.5 percent and the principal amount outstanding was $259.8 million.
The Senior Secured Term Loan is secured by our assets including, among other items, a first priority lien on property, plant and equipment and inventory, and a second priority lien on account receivables and cash. Based on certain agreed upon thresholds, the Senior Secured Term Loan will require net cash proceeds from asset sales or other dispositions of property, extraordinary cash receipts, and other future cash flows to be used to prepay the outstanding balance of the loan. Voluntary prepayments of borrowings will be permitted in whole or in part, in minimum principal amounts to be agreed upon, (i) at any time on or prior to November 9, 2011, provided if we make any prepayment of the Senior Secured Term Loan in connection with any repricing transaction or effects any amendment resulting in a repricing transaction, a prepayment premium of 1 percent of the amount being repaid plus all accrued and unpaid interest plus breakage costs, if any, or a payment equal to 1 percent of the aggregate amount outstanding immediately prior to such amendment; and (ii) thereafter at any time without premium or penalty.
During the third quarter of fiscal 2010, we entered into a hedging arrangement with a financial institution to hedge the variability of interest payments attributable to fluctuations in the LIBOR benchmark interest rate relating to the interest payments under the Senior Secured Term Loan. We entered into a $250 million interest rate swap where we pay the independent swap counterparty a fixed rate of 2.42 percent and, in exchange, the
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swap counterparty pays us an interest rate equal to the floor rate of 2 percent or three-month LIBOR, whichever is higher. These swap agreements effectively fixed the interest rate at 7.92 percent through 2013 for the Senior Secured Term Loan. As of November 9, 2010 due to amendment of the term loan (see above), the critical terms of the swap and the Senior Secured Term Loan were no longer matched and the hedge was rendered ineffective. As a result, the hedge has been de-designated as a cash flow hedge in accordance with ASC Topic 815, “Derivatives and Hedging,” and the mark-to-market of the swap has been reported as a component of Interest expense for the fourth quarter of fiscal 2010. See Note 10 Financial Instruments for more information.
Senior Unsecured Notes
On November 9, 2010, Spansion LLC completed an offering of $200 million aggregate principal amount of 7.875 percent Senior Unsecured Notes due 2017, resulting in net proceeds of approximately $195.6 million after related offering expenses. The Senior Unsecured Notes are general unsecured senior obligations of Spansion LLC and are guaranteed by Spansion Inc. and Spansion Technology LLC on a senior unsecured basis. Interest is payable on May 15 and November 15 of each year beginning May 15, 2011 until and including the maturity date of November 15, 2017.
Prior to November 15, 2013, Spansion LLC may redeem some or all of the Notes at a price equal to 100 percent of the principal amount, plus accrued and unpaid interest and a “make-whole” premium. Thereafter, Spansion LLC may redeem all or part of the Notes at any time at the redemption prices set forth in the Indenture plus accrued and unpaid interest, if any, to the date of redemption.
In addition, on or prior to November 15, 2013, Spansion LLC may redeem up to 35 percent of the Notes with the proceeds of certain sales of equity securities at 107.875 percent (100 percent of the principal amount plus a premium equal to the interest rate applicable to the Notes), plus accrued and unpaid interest, if any, to the date of redemption.
Upon a change of control (as defined in the Senior Unsecured Notes indenture), holders of the Notes may require Spansion LLC to repurchase all of their notes at a repurchase price equal to 101 percent of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of redemption.
Certain events are considered “Events of Default,” which may result in the accelerated maturity of the Notes, including: (i) a default in any interest, principal or premium amount payment; (ii) a merger, consolidation or sale of all or substantially all of its property; (iii) a breach of covenants in the Notes or the Indenture; (iv) a default in certain debts; (v) if we incur any judgment for the payment of money in an aggregate amount in excess of $25 million; or (vi) if a court enters certain orders or decrees under any bankruptcy law. Upon occurrence of one of these events, the trustee or certain holders may declare the principal of and accrued interest on all of the Notes to be immediately due and payable. If certain events of bankruptcy, insolvency or reorganization with respect to us occur, all amounts on the Notes shall be due and payable immediately without any declaration or other act by the trustee or holders of the Notes.
As of December 26, 2010, we are in compliance with all of the covenants under the Senior Unsecured Notes indenture.
Obligations under Capital Leases
As of December 26, 2010 and December 27, 2009, we had aggregate outstanding capital lease obligations, net of imputed interest, of approximately $3.2 million and $18.9 million, respectively. The aggregate weighted average interest rate for the capital lease obligations was 7.5 percent as of December 26, 2010. Obligations under these lease agreements are collateralized by the assets leased and are payable through 2011. Leased assets consist principally of machinery and equipment.
As of December 26, 2010, the gross amount of assets recorded under capital leases and accumulated amortization thereon was approximately $4.1 million and $3.0 million, respectively. As of December 27, 2009,
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the gross amount of assets recorded under capital leases and accumulated amortization thereon was approximately $67.4 million and $63.5 million, respectively.
During the first and second quarter of 2009, we submitted various motions to the U.S. Bankruptcy Court seeking rejection of certain equipment leases with future principal and interest payments of approximately $54.5 million through 2011, all of which have been approved by the Court as of August 10, 2009. Accordingly, such amount was written off and recorded in reorganization items in the Predecessor.
Liquidity and Capital Resources
Cash Requirements
As of December 26, 2010, our cash, cash equivalents and short term investments totaled $354.3 million. We had not borrowed under the Revolving Credit Facility as of December 26, 2010. As of December 26, 2010, the availability under this facility was $27.0 million after deducting the standby letters of credit of $1.5 million issued to certain vendors.
During the fourth quarter of fiscal 2010, we issued $200.0 million of our Senior Unsecured Notes and concurrently repaid $196.0 million of our Senior Secured Term Loan.
In connection with the October 20, 2010 settlement agreement between the claims agent appointed to resolve certain pre-bankruptcy claims and Spansion Japan, Citigroup Global Markets Inc. (Citi), which was not a party to this litigation, purchased the rejection damages claim from Spansion Japan for $100 million in cash. In separate transactions, the claims agent agreed to allow the rejection damages claim held by Citi in the amount of $200 million, and we purchased 85 percent of the allowed claim from Citi for $85 million in cash.
Our future uses of cash are expected to be primarily for working capital, debt service, capital expenditures, purchase of our bankruptcy claims and other contractual obligations. We also expect the remaining Plan disbursements and expenses incurred for outstanding claims resolution will continue using cash from operations for at least for the first half of fiscal 2011, or until all outstanding claims are resolved. We believe our anticipated cash flows from operations, current cash balances, and our existing revolving credit facility will be sufficient to make remaining Plan disbursements and expenses incurred for outstanding claims resolution, fund working capital requirements, debt service, and operations and to meet our cash needs for at least the next twelve months.
Financial Condition (Sources and Uses of Cash)
Our cash and cash equivalents consisted of demand deposits, treasury bills and money market funds with a total amount of $329.3 million as of December 26, 2010.
Our cash flows for fiscal 2010, fiscal 2009 and fiscal 2008 are summarized as follows:
| Year Ended December 26, 2010 | ||||||||||||||||
| Successor | Predecessor | Predecessor | ||||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Year Ended December 27, 2009 |
||||||||||||||
| (in thousands) | ||||||||||||||||
| Net cash provided by operating activities |
$ | 66,319 | $ | 1,359 | $ | 236,549 | ||||||||||
| Net cash provided by (used in) investing activities |
(22,169 | ) | 76,686 | (62,833 | ) | |||||||||||
| Net cash provided by (used in) financing activities |
30,238 | (148,219 | ) | 37,895 | ||||||||||||
| Effect of exchange rate changes on cash |
178 | — | (3,095 | ) | ||||||||||||
| Net increase (decrease) in cash and cash equivalents |
$ | 74,566 | $ | (70,174 | ) | $ | 208,516 | |||||||||
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Net Cash Provided by Operating Activities
Net cash provided by operations was $66.3 million during the period from May 11, 2010 to December 26, 2010, and was primarily due to net loss adjustments for non-cash items of $231.0 million and a decrease in operating assets and liabilities of $68.0 million.
Net cash provided by operations was $1.4 million during the period from December 28, 2009 to May 10, 2010, and was primarily due to net income adjustments for non-cash items of $382.8 million and a decrease in operating assets and liabilities of $20.5 million.
While our net loss was $514.1 million, we generated $236.5 million in cash from operating activities in fiscal 2009, due to significant non-cash items and changes in operating assets and liabilities. Non-cash items primarily consisted of $168.4 million of depreciation and amortization, $14.0 million of asset impairment charges, $19.8 million of provisions for doubtful accounts, and $12.4 million of stock compensation costs, and the $30.1 million of gain from the deconsolidation of Spansion Japan. The $629.4 million increase in accounts payable and accrued liabilities was primarily due to the various liabilities subject to compromise provided in connection with the Chapter 11 Cases. The $180.6 million decrease in inventories was primarily due to the reduction of production at our factories in our effort to minimize cash outlays in the first quarter of fiscal 2009, the effects of deconsolidation of Spansion Japan and our strategic decision to exit a large portion of the wireless market. The $248.4 million increase in receivables primarily reflects sales to Spansion Japan, which were eliminated on consolidation at the end of fiscal 2008, but not as of December 27, 2009, due to the deconsolidation.
Net Cash Provided by (Used in) Investing Activities
Net cash used by investing activities was $22.2 million during the period from May 11, 2010 to December 26, 2010, primarily due to purchases of treasury bills totaling $55.0 million during the year, and $49.3 million of capital expenditures used to purchase property, plant and equipment, and $13.1 million of cash decrease due to purchase of Spansion Japan’s distribution business, partially offset by proceeds of $44.7 million from redemption of ARS, $30.0 million proceeds from maturity of treasury bills, and $20.5 million from sale of property, plant and equipment. Purchases of treasury bills for $55.0 million mentioned above includes approximately $30 million of purchases that were reported as cash equivalents in our Form 10-Q for the third quarter of fiscal 2010.
Net cash provided by investing activities was $76.7 million during the period from December 28, 2009 to May 10, 2010, primarily due to $62.4 million of proceeds from the sale of ARS, $18.7 million of proceeds from the sale of the Suzhou plant, and $9.6 million from the sale of other property, plant and equipment, offset by $14.0 million of capital expenditures used to purchase property, plant and equipment.
Net cash used in investing activities was $62.8 million in fiscal 2009, primarily consisted of cash reduction of $52.1 million related to the deconsolidation of Spansion Japan, capital expenditures of $29.7 million, decrease in cash of $10.4 million related to the sale of the Suzhou assembly and test facility, and a loan (investment) of $5.3 million made to an investee in January 2009 pursuant to terms of an existing contractual obligation, partially offset by proceeds of $14.8 million from redemptions of ARS and proceeds of $15.5 million from the sale of our Suzhou assembly and test facility.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $30.2 million during the period from May 11, 2010 to December 26, 2010, primarily due to net proceeds of $195.6 million from borrowing under Senior Unsecured Notes, $124.4 net proceeds from issuance of common stock, partially offset by payments of $204.8 million on debt and capital lease obligations, and $85.0 million of cash decrease due to purchase of Spansion Japan claim in shares.
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Net cash used by financing activities was $148.2 million during the period from December 28, 2009 to May 10, 2010, primarily due to payments of $691.2 million on debt and capital lease obligations, partially offset by $438.1 million from the Senior Secured Term Loan net of issuance costs and $104.9 million from the Rights Offering.
Net cash provided by financing activities in fiscal 2009 was primarily comprised of $117.8 million from borrowings mainly under the UBS AG Loan and the Spansion Japan 2007 Revolving Credit Facility (borrowed prior to the Spansion Japan Proceeding), offset in part by $79.9 million in repayments of debts, primarily the Senior Secured Revolving Credit Facility, UBS Loan Secured by ARS, and certain capital lease obligations.
Off-Balance-Sheet Arrangements
During the normal course of business, we make certain indemnities and commitments under which we may be required to make payments in relation to certain transactions. These indemnities include non-infringement of patents and intellectual property, indemnities to our customers in connection with the delivery, design, manufacture and sale of our products, indemnities to our directors and officers in connection with legal proceedings, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to other parties to certain acquisition agreements. The duration of these indemnities and commitments varies, and in certain cases, is indefinite. We believe that substantially all of our indemnities and commitments provide for limitations on the maximum potential future payments we could be obligated to make. However, we are unable to estimate the maximum amount of liability related to our indemnities and commitments because such liabilities are contingent upon the occurrence of events which are not reasonably determinable. Management believes that any liability for these indemnities and commitments would not be material to our accompanying consolidated financial statements.
We do not have any other significant off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K, as of December 26, 2010 or December 27, 2009.
| ITEM 7A. | QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK |
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our cash deposits, invested cash and debt. At December 26, 2010, we had approximately $224.3 million held in demand deposit accounts, approximately $130.0 million invested in Treasury Bills of which $105.0 million are with maturity terms of 30 to 90 days and remaining $25.0 million is with a maturity term of six months. Accordingly, our interest income fluctuates with short-term market conditions. Our cash and short term investment position is highly liquid and our exposure to interest rate risk is minimal.
As of December 26, 2010, approximately 45 percent of the aggregate principal amounts outstanding under our third party debt obligations were fixed rate, and approximately 55 percent of our total debt obligations were variable rate comprised of the Senior Secured Term Loan with an outstanding balance of approximately $251.8 million as of December 26, 2010. The Senior Secured Term Loan has a LIBOR floor of 1.75 percent. While LIBOR is below 1.75 percent, our interest expense will not change along with short-term change in interest rate environment. When LIBOR is above 1.75 percent, changes in interest rates associated with the term loan could then result in a change to our interest expense. For example, a one percent aggregate change in interest rates would increase/decrease our contractual interest expense by approximately $2.5 million annually.
As of December 26, 2010, we have a hedging arrangement with a financial institution to partially hedge the variability of interest payments attributable to fluctuations in the LIBOR benchmark interest rate. See Note 10 to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
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Default Risk
We intend to actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that our policy is to invest only in highly-rated securities with relatively short maturities and we do not invest in securities we believe involve a higher degree of risk.
The following table presents the cost basis, fair value and related weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of December 26, 2010 and comparable fair values as of December 27, 2009:
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | 2010 Fair value |
2009 Fair value |
||||||||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||
| Investment Portfolio |
||||||||||||||||||||||||||||||||||||
| Cash equivalents: |
||||||||||||||||||||||||||||||||||||
| Fixed rate amounts |
$ | 104,977 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 104,977 | $ | 104,977 | $ | — | ||||||||||||||||||
| Weighted-average rate |
0.13 | % | — | — | — | — | — | 0.13 | % | — | — | |||||||||||||||||||||||||
| Variable rate amounts |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 20 | ||||||||||||||||||
| Weighted-average rate |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Short Term Investment: |
||||||||||||||||||||||||||||||||||||
| Fixed rate amounts |
$ | 24,979 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 24,979 | $ | 24,979 | $ | — | ||||||||||||||||||
| Weighted-average rate |
0.17 | % | — | — | — | — | — | 0.17 | % | — | — | |||||||||||||||||||||||||
| Variable rate amounts |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | — | $ | 107,125 | |||||||||||||||||||
| Weighted-average rate |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Total Investment Portfolio |
$ | 129,956 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 129,956 | 129,956 | $ | 107,145 | |||||||||||||||||||
| Debt Obligations |
||||||||||||||||||||||||||||||||||||
| Debt—fixed rate amounts |
$ | 3,159 | $ | — | $ | — | $ | — | $ | — | $ | 200,000 | $ | 203,159 | $ | 203,159 | $ | 368,146 | ||||||||||||||||||
| Weighted-average rate |
7.50 | % | — | — | — | — | 7.88 | % | 7.87 | % | — | — | ||||||||||||||||||||||||
| Debt—variable rate amounts |
$ | 10,530 | $ | 2,530 | $ | 2,530 | $ | 2,530 | $ | 233,630 | $ | — | $ | 251,750 | $ | 254,582 | $ | 696,963 | ||||||||||||||||||
| Weighted-average rate |
6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % | 6.50 | % | — | 6.50 | % | — | — | |||||||||||||||||||||
| Total Debt Obligations |
$ | 13,689 | $ | 2,530 | $ | 2,530 | $ | 2,530 | $ | 233,630 | $ | 200,000 | $ | 454,909 | 457,741 | 1,065,109 | ||||||||||||||||||||
Foreign Exchange Risk
Our sales, expenses, assets and liabilities denominated in Japanese yen and other foreign currencies were exposed to foreign currency exchange rate fluctuations. For example,
| • | some of our manufacturing costs are denominated in Japanese yen, and other foreign currencies such as the Thai baht and Malaysian ringgit; |
| • | sales of our products to Fujitsu are denominated in both US dollars and Japanese yen; and |
| • | some fixed asset purchases are denominated in Japanese yen and European Union euros. |
Consequently, movements in exchange rates could cause our net sales and our expenses to fluctuate, affecting our profitability and cash flows. We use foreign currency forward contracts to reduce our foreign exchange exposure on our foreign currency denominated monetary assets and liabilities. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements to our operating results. We do not use these contracts for speculative or trading purposes.
We had an aggregate of $39.9 million (notional amount) of short-term foreign currency forward contracts denominated in Japanese yen outstanding as of December 26, 2010. The unrealized gain or loss related to the foreign currency forward contracts for the year ended December 26, 2010 was not material. We do not anticipate any material adverse effect on our consolidated financial position, results of operations or cash flows resulting from the use of these instruments in the future. However, we cannot assure you that these strategies will be
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effective, in particular, we generally cover only a portion of our foreign currency exchange exposure. We cannot assure you that these activities will eliminate foreign exchange rate exposure. Failure to eliminate this exposure could have an adverse effect on our business, financial condition and results of operations.
The following table provides information about our foreign currency forward contracts as of December 26, 2010 and December 27, 2009.
| December 26, 2010 | December 27, 2009 | |||||||||||||||||||||||
| Notional Amount |
Average Contract Rate |
Estimated Fair Value |
Notional Amount |
Average Contract Rate |
Estimated Fair Value |
|||||||||||||||||||
| (in thousands, except contract rates) | ||||||||||||||||||||||||
| Foreign currency forward contract: |
||||||||||||||||||||||||
| Japanese yen |
$ | 39,884 | ¥ | 82.74 | $ | 67 | — | ¥ | — | — | ||||||||||||||
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Spansion Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
| Year Ended December 26, 2010 | ||||||||||||||||||||
| Successor(1) | Predecessor(1) | Predecessor(1) | Predecessor(1) | |||||||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Year Ended December 27, 2009 |
Year Ended December 28, 2008 |
|||||||||||||||||
| Net sales |
$ | 759,886 | $ | 324,914 | $ | 1,061,487 | $ | 1,630,573 | ||||||||||||
| Net sales to related parties |
4,801 | 78,705 | 349,166 | 651,230 | ||||||||||||||||
| Total net sales |
764,687 | 403,619 | 1,410,653 | 2,281,803 | ||||||||||||||||
| Cost of sales (Note 9) |
647,381 | 274,817 | 1,103,757 | 2,193,345 | ||||||||||||||||
| Research and development (Note 9) |
65,414 | 35,068 | 136,449 | 431,808 | ||||||||||||||||
| Sales, general and administrative (Note 9) |
122,478 | 68,105 | 216,298 | 253,878 | ||||||||||||||||
| In-process research and development |
— | — | — | 10,800 | ||||||||||||||||
| Restructuring charges (credits) |
— | (2,772 | ) | 46,852 | 11,161 | |||||||||||||||
| Asset impairment charges |
— | — | 12,538 | 1,652,622 | ||||||||||||||||
| Operating income (loss) before reorganization items |
(70,586 | ) | 28,401 | (105,241 | ) | (2,271,811 | ) | |||||||||||||
| Other income (expense): |
||||||||||||||||||||
| Interest and other income, net |
175 | (2,904 | ) | 4,038 | 5,200 | |||||||||||||||
| Interest expense(2) |
(24,180 | ) | (30,573 | ) | (50,976 | ) | (105,536 | ) | ||||||||||||
| Gain on deconsolidation of subsidiary |
— | — | 30,100 | — | ||||||||||||||||
| Loss before reorganization items and income taxes |
(94,591 | ) | (5,076 | ) | (122,079 | ) | (2,372,147 | ) | ||||||||||||
| Reorganization items |
— | 370,340 | (391,383 | ) | — | |||||||||||||||
| Income (loss) before income taxes |
(94,591 | ) | 365,264 | (513,462 | ) | (2,372,147 | ) | |||||||||||||
| Provision for income taxes |
(2,101 | ) | (1,640 | ) | (597 | ) | (62,865 | ) | ||||||||||||
| Net income (loss) |
$ | (96,692 | ) | $ | 363,624 | $ | (514,059 | ) | $ | (2,435,012 | ) | |||||||||
| Net income (loss) per share: |
||||||||||||||||||||
| Basic |
$ | (1.60 | ) | $ | 2.24 | $ | (3.18 | ) | $ | (15.69 | ) | |||||||||
| Diluted |
$ | (1.60 | ) | $ | 2.24 | $ | (3.18 | ) | $ | (15.69 | ) | |||||||||
| Shares used in per share calculation: |
||||||||||||||||||||
| Basic |
60,479 | 162,439 | 161,847 | 155,162 | ||||||||||||||||
| Diluted |
60,479 | 162,610 | 161,847 | 155,162 | ||||||||||||||||
| (1) | Please refer to Note 2 for explanation of basis of ‘Successor’ and ‘Predecessor’ presentation. |
| (2) | Contractual interest expense for the year ended December 27, 2009 was approximately $89,380. |
See accompanying notes
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Spansion Inc.
Consolidated Balance Sheets
(in thousands, except par value and share amounts)
| Successor | Predecessor | |||||||||||
| December 26, 2010 |
December 27, 2009 |
|||||||||||
| Assets |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 329,294 | $ | 324,903 | ||||||||
| Short-term investment |
24,979 | 100,335 | ||||||||||
| Accounts receivable |
166,301 | 129,174 | ||||||||||
| Accounts receivable from related party (Note 9) |
— | 366,602 | ||||||||||
| Allowance for doubtful accounts |
(326 | ) | (56,408 | ) | ||||||||
| Accounts receivable, net |
165,975 | 439,368 | ||||||||||
| Inventories: |
||||||||||||
| Raw materials |
16,537 | 14,202 | ||||||||||
| Work-in-process |
128,753 | 112,469 | ||||||||||
| Finished goods |
23,647 | 15,052 | ||||||||||
| Total inventories |
168,937 | 141,723 | ||||||||||
| Deferred income taxes |
6,321 | 13,332 | ||||||||||
| Prepaid expenses and other current assets |
50,210 | 49,533 | ||||||||||
| Total current assets |
745,716 | 1,069,194 | ||||||||||
| Property, plant and equipment: |
||||||||||||
| Land |
51,778 | 20,107 | ||||||||||
| Buildings and leasehold improvements |
68,437 | 117,553 | ||||||||||
| Equipment |
242,240 | 318,592 | ||||||||||
| Construction in progress |
18,745 | 14,345 | ||||||||||
| Total property, plant and equipment |
381,200 | 470,597 | ||||||||||
| Accumulated depreciation and amortization |
(121,260 | ) | (147,887 | ) | ||||||||
| Property, plant and equipment, net |
259,940 | 322,710 | ||||||||||
| Intangible assets, net |
197,733 | — | ||||||||||
| Goodwill |
153,338 | — | ||||||||||
| Other assets |
42,578 | 46,073 | ||||||||||
| Total assets |
$ | 1,399,305 | $ | 1,437,977 | ||||||||
| Liabilities and Stockholders’ Deficit |
||||||||||||
| Current liabilities: |
||||||||||||
| Short term note |
$ | — | $ | 64,150 | ||||||||
| Accounts payable |
119,288 | 33,463 | ||||||||||
| Accounts payable to related party (Note 9) |
— | 221,211 | ||||||||||
| Accrued compensation and benefits |
39,978 | 21,630 | ||||||||||
| Other accrued liabilities |
109,444 | 112,676 | ||||||||||
| Income taxes payable |
1,107 | 83 | ||||||||||
| Deferred income |
22,198 | 50,929 | ||||||||||
| Deferred income to related party |
40 | 12,029 | ||||||||||
| Current portion of long-term debt and obligations under capital leases |
13,689 | — | ||||||||||
| Total current liabilities |
305,744 | 516,171 | ||||||||||
See accompanying notes
67
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Spansion Inc.
Consolidated Balance Sheets—(Continued)
(in thousands, except par value and share amounts)
| Successor | Predecessor | |||||||
| December 26, 2010 |
December 27, 2009 |
|||||||
| Deferred income taxes |
$ | 3,877 | $ | 13,405 | ||||
| Long-term debt and capital lease obligations, less current portion |
441,220 | — | ||||||
| Other long-term liabilities |
24,179 | 9,825 | ||||||
| Total long-term liabilities |
469,276 | 23,230 | ||||||
| Liabilities subject to compromise |
— | 1,756,269 | ||||||
| Total liabilities |
775,020 | 2,295,670 | ||||||
| Commitments and contingencies (Note 13) |
— | — | ||||||
| Stockholders’ equity (deficit): |
||||||||
| Old Class A common stock, $0.001 par value, 714,999,998 shares authorized, 162,291,633 shares issued and outstanding |
— | 162 | ||||||
| New Class A common stock, $0.001 par value, 150,000,000 shares authorized, 61,741,598 shares issued and outstanding (Note 19) |
62 | — | ||||||
| New Class B common stock, $0.001 par value, 1 share authorized, 1 share issued and outstanding (Note 19) |
— | — | ||||||
| New preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding (Note 19) |
— | — | ||||||
| Additional paid-in capital |
721,712 | 2,484,320 | ||||||
| Accumulated deficit |
(96,692 | ) | (3,342,370 | ) | ||||
| Accumulated other comprehensive income (loss) |
(797 | ) | 195 | |||||
| Total stockholders’ equity (deficit) |
624,285 | (857,693 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) |
$ | 1,399,305 | $ | 1,437,977 | ||||
See accompanying notes
68
Table of Contents
Spansion, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended December 26, 2010 | ||||||||||||||||
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Year Ended December 27, 2009 |
Year Ended December 28, 2008 |
|||||||||||||
| Cash Flows from Operating Activities: |
||||||||||||||||
| Net income (loss) |
$ | (96,692 | ) | $ | 363,624 | $ | (514,059 | ) | $ | (2,435,012 | ) | |||||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||||||
| Depreciation and amortization, and in-process research and development write-off |
137,206 | 43,788 | 168,368 | 644,492 | ||||||||||||
| Asset impairment charges |
— | — | 14,045 | 1,652,622 | ||||||||||||
| Provision for doubtful accounts |
331 | 7,229 | 19,832 | 1,799 | ||||||||||||
| Provision for deferred income taxes |
15,492 | 7,000 | 18 | 49,887 | ||||||||||||
| Net (gain) loss on sale and disposal of property, plant, and equipment |
(1,483 | ) | (2,107 | ) | 76 | (28,238 | ) | |||||||||
| Other than temporary impairment on marketable securities |
— | — | — | 3,270 | ||||||||||||
| Impairment on investment |
— | 3,011 | — | 2,648 | ||||||||||||
| Mark to market on hedging derivatives |
1,329 | — | — | — | ||||||||||||
| Gain on sale of marketable securities |
— | — | — | (621 | ) | |||||||||||
| Non-cash compensation under equity incenive plans |
8,323 | 7,052 | 12,419 | 21,578 | ||||||||||||
| Gain on deconsolidation of subsidiary |
— | — | (30,100 | ) | — | |||||||||||
| Gain on sale of Suzhou plant |
(3,701 | ) | (5,224 | ) | (4,669 | ) | — | |||||||||
| (Gain) Loss from approved settlement of rejected capital leases and various licenses |
— | (22,517 | ) | 3,090 | — | |||||||||||
| Non-cash inventory expenses related to fresh start markup |
90,173 | — | — | — | ||||||||||||
| Amortization of debt premium and discount, net |
— | — | 1,540 | 9,950 | ||||||||||||
| Gain on discharge of pre-petition obligations |
— | (434,046 | ) | — | — | |||||||||||
| Write-off of financing costs for old debts |
— | 13,022 | — | — | ||||||||||||
| Changes in operating assets and liabilities, net of effects of deconsolidation of subsidiary and acquisition of Saifun: |
||||||||||||||||
| (Increase) decrease in accounts receivable and other receivables |
(27,857 | ) | 10,156 | (248,352 | ) | 141,202 | ||||||||||
| Decrease (increase) in inventories |
31,552 | (7,242 | ) | 180,569 | 204,713 | |||||||||||
| (Increase) decrease in prepaid expenses and other current assets |
(16,577 | ) | (3,894 | ) | (10,448 | ) | 14,799 | |||||||||
| (Increase) decrease in other assets |
652 | 1,534 | (5,165 | ) | (1,183 | ) | ||||||||||
| Increase (decrease) in accounts payable, accrued liabilities, and accrued compensation |
(79,554 | ) | 23,213 | 629,395 | (4,720 | ) | ||||||||||
| (Decrease) increase in income taxes payable |
— | — | (2,708 | ) | (9,846 | ) | ||||||||||
| Increase (decrease) in deferred income to a related party |
— | — | 11,665 | (218 | ) | |||||||||||
| Increase (decrease) in deferred income |
7,125 | (3,240 | ) | 11,032 | (4,570 | ) | ||||||||||
| Net cash provided by operating activities |
66,319 | 1,359 | 236,549 | 262,552 | ||||||||||||
69
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Spansion, Inc.
Consolidated Statements of Cash Flows—(Continued)
(in thousands)
| Year Ended December 26, 2010 | ||||||||||||||||
| Successor | Predecessor | Predecessor | Predecessor | |||||||||||||
| Period from May 11, 2010 to December 26, 2010 |
Period from December 28, 2009 to May 10, 2010 |
Year Ended December 27, 2009 |
Year Ended December 28, 2008 |
|||||||||||||
| Cash Flows from Investing Activities: |
||||||||||||||||
| Proceeds from sale of property, plant and equipment |
20,534 | 9,620 | 4,352 | 6,743 | ||||||||||||
| Purchases of property, plant and equipment |
(49,299 | ) | (14,046 | ) | (29,713 | ) | (430,831 | ) | ||||||||
| Business acquisition, net of cash acquired |
(13,125 | ) | — | — | 733 | |||||||||||
| Proceeds from maturity and sale of marketable securities |
29,989 | — | — | 133,695 | ||||||||||||
| Purchases of marketable securities |
(54,968 | ) | — | — | (36,950 | ) | ||||||||||
| Loan made to an investee |
— | — | (5,263 | ) | (5,136 | ) | ||||||||||
| Cash proceeds from sale of Suzhou plant |
— | 18,687 | 15,539 | — | ||||||||||||
| Proceeds from redemption of auction rate securities |
44,700 | 62,425 | 14,775 | — | ||||||||||||
| Cash decrease due to deconsolidation of subsidiary |
— | — | (52,092 | ) | — | |||||||||||
| Cash decrease due to the sale of Suzhou plant |
— | — | (10,431 | ) | — | |||||||||||
| Net cash provided by (used by) investing activities |
(22,169 | ) | 76,686 | (62,833 | ) | (331,746 | ) | |||||||||
| Cash Flows from Financing Activities: |
||||||||||||||||
| Proceeds from borrowings, net of issuance costs |
195,588 | 438,082 | 117,758 | 250,558 | ||||||||||||
| Payments on debt and capital lease obligations |
(204,798 | ) | (691,176 | ) | (79,863 | ) | (241,806 | ) | ||||||||
| Proceeds from rights offering |
— | 104,875 | — | — | ||||||||||||
| Purchase of Spansion Japan claim in shares |
(85,000 | ) | — | — | — | |||||||||||
| Proceeds from issuance of common stock, net of offering costs |
124,448 | — | — | — | ||||||||||||
| Net cash provided by (used in) financing activities |
30,238 | (148,219 | ) | 37,895 | 8,752 | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents |
178 | — | (3,095 | ) | (22,263 | ) | ||||||||||
| Net (decrease) increase in cash and cash equivalents |
74,566 | (70,174 | ) | 208,516 | (82,705 | ) | ||||||||||
| Cash and cash equivalents at the beginning of period |
254,729 | 324,903 | 116,387 | 199,092 | ||||||||||||
| Cash and cash equivalents at end of period |
$ | 329,295 | $ | 254,729 | $ | 324,903 | $ | 116,387 | ||||||||
| Supplemental Cash Flows Disclosures: |
||||||||||||||||
| Interest paid (including $0, $0, $11,306 of interest related to obligations to related parties) |
$ | 33,991 | $ | 6,130 | $ | 38,638 | $ | 94,593 | ||||||||
| Income taxes paid (refunded) |
$ | 643 | $ | 408 | $ | 2,845 | $ | (15,155 | ) | |||||||
| Non-cash investing and financing activities: |
||||||||||||||||
| Settlement of liabilities subject to compromise through issuance of reorganized Spansion Inc. common stock |
$ | — | $ | 486,064 | $ | — | $ | — | ||||||||
| Equipment capital leases |
$ | — | $ | — | $ | — | $ | 56,611 | ||||||||
| Issuance of common stock and stock options to acquire Saifun |
$ | — | $ | — | $ | — | $ | 108,898 | ||||||||
See accompanying notes
70
Table of Contents
Spansion, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands)
| Shares | Amount | Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||
| Balance at December 30, 2007 |
135,372 | $ | 135 | $ | 2,336,448 | $ | (562,577 | ) $ | (36,195 | ) $ | 1,737,811 | |||||||||||||
| Comprehensive loss: |
||||||||||||||||||||||||
| Net loss |
— | — | — | (2,435,012 | ) | — | (2,435,012 | ) | ||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Net unrealized gain on investment |
— | — | — | — | 662 | 662 | ||||||||||||||||||
| Change in pension plan and post-retirement benefit , net of taxes of $0 |
— | — | — | — | (34,985 | ) | (34,985 | ) | ||||||||||||||||
| Net change in cumulative translation adjustment |
— | — | — | — | 145,397 | 145,397 | ||||||||||||||||||
| Total other comprehensive income |
— | — | — | — | — | 111,074 | ||||||||||||||||||
| Total comprehensive loss |
— | — | — | — | — | (2,323,938 | ) | |||||||||||||||||
| Issuance of shares: |
||||||||||||||||||||||||
| Vesting of RSUs |
1,368 | 1 | (1 | ) | — | — | — | |||||||||||||||||
| Exercise of options |
26 | — | 1 | — | — | 1 | ||||||||||||||||||
| Issuance of common stock to acquire Saifun |
22,729 | 23 | 108,876 | — | — | 108,899 | ||||||||||||||||||
| Issuance of common stock to purchase asset |
1,608 | 2 | 4,998 | — | — | 5,000 | ||||||||||||||||||
| Compensation recognized under employee stock plans |
— | — | 21,580 | — | — | 21,580 | ||||||||||||||||||
| Balance at December 28, 2008 |
161,103 | 161 | 2,471,902 | (2,997,589 | ) | 74,879 | (450,647 | ) | ||||||||||||||||
| Comprehensive loss: |
||||||||||||||||||||||||
| Net loss |
— | — | — | (514,059 | ) | — | (514,059 | ) | ||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Net unrealized gain on investment |
— | — | — | — | (465 | ) | (465 | ) | ||||||||||||||||
| Change in pension plan and post-retirement benefit , net of taxes of $0 |
— | — | — | — | 123 | 123 | ||||||||||||||||||
| Net change in cumulative translation adjustment |
— | — | — | — | (25,073 | ) | (25,073 | ) | ||||||||||||||||
| Total other comprehensive loss |
(25,415 | ) | ||||||||||||||||||||||
| Total comprehensive loss |
(539,474 | ) | ||||||||||||||||||||||
| Effect of Spansion Japan deconsolidation |
— | — | — | 169,278 | (49,269 | ) | 120,009 | |||||||||||||||||
| Issuance of shares: |
||||||||||||||||||||||||
| Vesting of RSUs |
1,027 | 1 | — | — | — | 1 | ||||||||||||||||||
| Exercise of options |
162 | — | — | — | — | — | ||||||||||||||||||
| Compensation recognized under employee stock plans |
— | — | 12,418 | — | — | 12,418 | ||||||||||||||||||
| Balance at December 27, 2009 |
162,292 | 162 | 2,484,320 | (3,342,370 | ) | 195 | (857,693 | ) | ||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||
| Net income from December 27, 2009 to May 10, 2010 |
— | — | — | 363,624 | — | 363,624 | ||||||||||||||||||
71
Table of Contents
Spansion, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)—(Continued)
(in thousands)
| Shares | Amount | Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders’ Equity (Deficit) |
|||||||||||||||||||
| Other comprehensive income |
||||||||||||||||||||||||
| Net change in cumulative translation adjustment |
— | — | — | — | — | — | ||||||||||||||||||
| Total other comprehensive income |
— | |||||||||||||||||||||||
| Total comprehensive income |
— | — | — | — | — | 363,624 | ||||||||||||||||||
| Issuance of shares under old employee stock plans: |
— | — | — | — | — | — | ||||||||||||||||||
| Vesting of RSUs |
176 | — | — | — | — | — | ||||||||||||||||||
| Exercise of options |
83 | — | — | — | — | — | ||||||||||||||||||
| Equity settlement for liabilities subject to compromise |
— | 486 | 485,578 | — | — | 486,064 | ||||||||||||||||||
| Compensation recognized under old employee stock plans |
— | — | 1,595 | — | — | 1,595 | ||||||||||||||||||
| Cancellation of old employee stock plans |
— | — | 5,457 | — | — | 5,457 | ||||||||||||||||||
| Balance at May 10, 2010 (Predecessor) |
162,551 | 648 | 2,976,950 | (2,978,746 | ) | 195 | (953 | ) | ||||||||||||||||
| Fresh start adjustments: |
||||||||||||||||||||||||
| Cancellation of Predecessor common stock |
(162,551 | ) | (648 | ) | (2,976,950 | ) | — | — | (2,977,598 | ) | ||||||||||||||
| Elimination of Predecessor accumulated deficit and accumulated other comprehensive loss |
— | — | — | 2,978,746 | (195 | ) | 2,978,551 | |||||||||||||||||
| Balance at May 11, 2010 (Successor) |
— | — | — | — | — | — | ||||||||||||||||||
| Comprehensive income: |
||||||||||||||||||||||||
| Net loss from May 11 to December 26, 2010 |
— | — | — | (96,692 | ) | — | (96,692 | ) | ||||||||||||||||
| Other comprehensive income: |
||||||||||||||||||||||||
| Net change in cumulative translation adjustment |
— | — | — | — | (797 | ) | (797 | ) | ||||||||||||||||
| Total other comprehensive income |
(797 | ) | ||||||||||||||||||||||
| Total comprehensive income |
(97,489 | ) | ||||||||||||||||||||||
| Issuance of Successor common stock ($0.001 per share) |
46,248 | 46 | 569,079 | — | — | 569,125 | ||||||||||||||||||
| Vesting of RSUs |
72 | — | — | — | — | — | ||||||||||||||||||
| Retirement of common stock |
(5,316 | ) | (5 | ) | — | — | — | (5 | ) | |||||||||||||||
| Rights offering settlement |
12,974 | 13 | 104,862 | |||||||||||||||||||||