Edgar Filing: Spansion Inc.

code20140630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2014

☐	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

Sunnyvale, California

94085

(Address of principal executive offices)

(Zip Code)

(408) 962-2500

(Registrant’s telephone number, including area code)

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐		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 ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of July 24, 2014, the registrant had 61,216,597 shares of Class A Common Stock outstanding at $0.001 par value per share.

Table of Contents

INDEX

			Page No.
Part I.	Financial Information		4

	Item 1.	Financial Statements	4

		Condensed Consolidated Statements of Operations – Three and Six Months Ended June 29, 2014 and June 30, 2013 (Unaudited)	4

		Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 29, 2014 and June 30, 2013 (Unaudited)	5

		Condensed Consolidated Balance Sheets – June 29, 2014 (Unaudited) and December 29, 2013	6

		Condensed Consolidated Statements of Cash Flows – Six Months Ended June 29, 2014 and June 30, 2013 (Unaudited)	7

		Notes to Condensed Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	42

Part II.	Other Information		43

	Item 1.	Legal Proceedings	43

	Item 1A.	Risk Factors	48

	Item 6.	Exhibits	48

		Signature	49

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Spansion Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 29,			June 30,			June 29,			June 30,
	2014			2013			2014			2013

Net sales	$	314,666		$	195,070		$	626,416		$	384,642
Cost of sales		221,844			137,714			443,762			281,431
Gross profit		92,822			57,356			182,654			103,211
Research and development		39,702			23,548			83,264			46,325
Sales, general and administrative		61,081			34,414			116,712			62,897
Operating loss		(7,961	)		(606	)		(17,322	)		(6,011	)
Interest income and other, net		5,941			3,118			1,341			4,080
Interest expense		(6,139	)		(7,378	)		(12,226	)		(14,982	)
Loss before income taxes		(8,159	)		(4,866	)		(28,207	)		(16,913	)
Provision (benefit) for income taxes		3,815			(1,635	)		6,262			753
Net loss		(11,974	)		(3,231	)		(34,469	)		(17,666	)

Net loss per share
Basic	$	(0.20	)	$	(0.06	)	$	(0.57	)	$	(0.30	)
Diluted	$	(0.20	)	$	(0.06	)	$	(0.57	)	$	(0.30	)

Shares used in per share calculation
Basic		60,799			58,646			60,285			58,366
Diluted		60,799			58,646			60,285			58,366

See accompanying notes.

Spansion Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
Net loss	$	(11,974	)	$	(3,231	)	$	(34,469	)	$	(17,666	)
Other comprehensive income (loss), net of tax:
Unrealized gain on recovery from impaired investments reclassified into earnings		-			-			-			(1,200	)
Net foreign currency translation gain (loss)		74			(482	)		370			(1,537	)
Net unrealized gain (loss) on cash flow hedges:
Net unrealized hedge gain (loss) arising during the period		(2,176	)		6,317			(6,890	)		14,060
Net gain reclassified into earnings for cash flow hedges (ineffective portion)		-			(2,415	)		-			(2,415	)
Net loss (gain) reclassified into earnings for cash flow hedges (effective portion)		1,601			(2,835	)		2,983			(4,588	)
Net unrealized gain (loss) on cash flow hedges		(575	)		1,067			(3,907	)		7,057
Other comprehensive income (loss), net of tax		(501	)		585			(3,537	)		4,320
Total comprehensive loss	$	(12,475	)	$	(2,646	)	$	(38,006	)	$	(13,346	)

See accompanying notes.

Spansion Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(Unaudited)

Assets	June 29, 2014			December 29, 2013
Current assets:
Cash and cash equivalents	$	268,930		$	286,069
Short-term investments		35,843			25,428
Accounts receivable, net		177,958			177,838
Inventories		251,564			254,154
Deferred income taxes		5,275			4,592
Prepaid expenses and other current assets		53,642			52,756
Total current assets		793,212			800,837

Property, plant and equipment, net		188,265			185,505
Intangible assets, net		150,118			167,949
Goodwill		166,508			166,422
Other assets		66,890			60,208
Total assets	$	1,364,993		$	1,380,921

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	147,606		$	126,680
Accrued compensation and benefits		39,281			57,876
Accrued liabilities and other		151,405			86,352
Income taxes payable		1,201			4,651
Deferred income		34,668			30,247
Current portion of long-term debt		2,390			97,320
Total current liabilities		376,551			403,126

Deferred income taxes		4,331			3,675
Long-term debt, less current portion		406,593			404,612
Other long-term liabilities		53,058			32,048
Total liabilities		840,533			843,461

Commitments and contingencies (Note 16)		-			-
Stockholders’ equity:
Capital stock:
Class A common stock, $0.001 par value, 150,000,000 shares authorized, 61,118,304 shares issued and outstanding as of June 29, 2014 (58,882,949 shares as of December 29, 2013)		61			59
Class B common stock, $0.001 par value, 1 share authorized, 0 shares issued and outstanding as of June 29, 2014 (1 share issued and outstanding as of December 29, 2013)		-			-
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding		-			-
Additional paid-in capital		772,398			747,393
Accumulated deficit		(240,429	)		(205,959	)
Accumulated other comprehensive loss (Note 5)		(7,570	)		(4,033	)
Total stockholders' equity		524,460			537,460
Total liabilities and stockholders' equity	$	1,364,993		$	1,380,921

See accompanying notes.

Spansion Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six Months Ended
	June 29,			June 30,
	2014			2013
Cash Flows from Operating Activities:
Net loss	$	(34,469	)	$	(17,666	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		53,256			39,269
Gain on recovery of impaired investments		(906	)		(1,200	)
Provision (benefit) for deferred income taxes		(78	)		9
Gain on pension assets		(2,494	)		-
Net gain on sale and disposal of property, plant and equipment		(24	)		(957	)
Loss on redemption of 7.875% Senior Unsecured Notes		1,137			-
Compensation recognized under employee stock plans		15,602			16,296
Reserve reversal on final settlement of bankruptcy claims		(3,205	)		-
Changes in assets and liabilities		18,127			(20,770	)
Net cash provided by operating activities		46,946			14,981

Cash Flows from Investing Activities:
Proceeds from recovery of impaired investments		906			1,530
Proceeds from sale of property, plant and equipment		107			934
Purchases of property, plant and equipment		(22,586	)		(24,712	)
Proceeds from sales and maturities of marketable securities		13,008			43,073
Purchases of marketable securities		(23,423	)		(91,104	)
Net cash used for investing activities		(31,988	)		(70,279	)

Cash Flows from Financing Activities:
Proceeds from issuance of common stock due to options exercised		9,406			1,459
Refinancing cost on Term Loan and Revolver		-			(198	)
Payments on financing arrangements		(100,985	)		(2,105	)
Net proceeds from sale of Sunnyvale property		58,908			-
Cash settlement on hedging activies		-			(268	)
Net cash used for financing activities		(32,671	)		(1,112	)
Effect of exchange rate changes on cash and cash equivalents		574			(232	)
Net decrease in cash and cash equivalents		(17,139	)		(56,642	)
Cash and cash equivalents, beginning of period		286,069			262,177
Cash and cash equivalents, end of period	$	268,930		$	205,535


Non-cash investing and financing activities:
Liabilities recorded for purchases of property, plant and equipment	$	17,525		$	11,210

See accompanying notes.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited interim financial statements reflect all normal and recurring adjustments considered necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. The December 29, 2013 condensed consolidated balance sheet data were derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2013, as amended by the Form 10-K/A filed on July 8, 2014, but does not include all disclosures required by U.S. GAAP for annual periods.

These condensed consolidated financial statements and related notes should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2013 as filed with the SEC on February 25, 2014, amended by the Form 10-K/A filed on July 8, 2014. The results of operations for the six months ended June 29, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

The Company operates on a 52- to 53-week fiscal year ending on the last Sunday in December. The additional week in a 53-week fiscal year is added to the second quarter to realign the Company’s fiscal quarters more closely to calendar quarters. Fiscal 2014 and fiscal 2013 are comprised of 52-week periods.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the results of operations of the Company and all of the Company’s wholly-owned subsidiaries. All intercompany accounts have been eliminated.

Use of Estimates

The preparation of the Company’s consolidated financial statements and disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of commitments and contingencies and the reported amounts of revenues and expenses during the reporting periods. Estimates are used to account for the fair value of certain marketable securities, revenue adjustments, the allowance for doubtful accounts, inventory write-downs, valuation of intangible assets, impairment of long-lived assets, legal contingencies, income taxes, stock-based compensation expenses, the fair value of long-term debt, product warranties and pension related liabilities. Actual results may differ from those estimates, and such differences may be material to the Company’s condensed consolidated financial statements

2. Recent Accounting Pronouncements

In May 2014, the FASB issued an accounting standard update that provides for a new single revenue accounting model that will replace existing revenue recognition guidance. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which a Company expects to be entitled in exchange for those goods or services. The guidance becomes effective in the first quarter of the Company’s fiscal year ending December 31, 2017. The Company will have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard update. The Company is evaluating the impact that the standard update will have on its consolidated financial statements.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

3. Acquisition

On August 1, 2013, the Company acquired the microcontroller and analog business (the MCA business) of Fujitsu Semiconductor Limited (FSL) for purchase consideration of $158.5 million, ($150.0 million, net of cash acquired). Pursuant to the terms and conditions of a Stock Purchase Agreement with FSL, the Company acquired certain subsidiaries and assets and assumed certain liabilities of FSL for purposes of acquiring FSL’s business of designing, developing, marketing and selling microcontroller and analog semiconductor products.

There were no changes in the first half of fiscal 2014 to the allocation of purchase price to the net assets acquired under the MCA business.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

4. Balance Sheet Components

	June 29, 2014			December 29, 2013
	(in thousands)

Cash and cash equivalents
Cash	$	265,437		$	282,163
Cash equivalents:
Money market funds		115			3,906
Certificates of deposit		3,378			-
Cash and cash equivalents	$	268,930		$	286,069

Short-term investments
Time deposits		14,063			14,045
Certificates of deposit		21,780			11,383
Short-term investments	$	35,843		$	25,428

Account receivable, net
Accounts receivable, gross	$	178,378		$	178,252
Allowance for doubtful accounts		(420	)		(414	)
Account receivable, net	$	177,958		$	177,838

Inventories
Raw materials	$	9,334		$	11,056
Work-in-process		199,806			176,601
Finished goods		42,424			66,497
Inventories	$	251,564		$	254,154

Property, plant and equipment, net
Land	$	45,168		$	45,168
Buildings and leasehold improvements		68,938			61,923
Equipment		412,927			385,679
Construction in progress		15,685			19,734
Accumulated depreciation and amortization		(354,453	)		(326,999	)
Property, plant and equipment, net	$	188,265		$	185,505

Other long term assets
Long term license	$	22,271		$	30,273
Others		44,619			29,935
Other long term assets	$	66,890		$	60,208

Accrued compensation and benefits
Accrued vacation	$	11,940		$	11,077
MCA business pension related obligation		6,770			22,406
Others		20,571			24,393
Accrued compensation and benefits	$	39,281		$	57,876

Accrued liabilities and other
Short term license liability	$	8,687		$	13,003
Obligation recorded from sale of Sunnyvale property		59,903			-
Litigation reserve		26,583			20,419
Others		56,232			52,930
Accrued liabilities and other	$	151,405		$	86,352

Other long term liabilities

MCA business employees pension related obligation	$	18,033		$	-
Others		35,025			32,048
Other long term liabilities	$	53,058		$	32,048

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The Company’s cash balances are held in numerous locations throughout the world, with the majority in the United States. As of June 29, 2014, the Company had cash, cash equivalents, and short-term investments of $289.1 million held within the United States and $15.7 million held outside of the United States. As of December 29, 2013, the Company has cash, cash equivalents, and short term investments of $298.3 million held within the United States and $13.2 million held outside the United States.

All securities other than the FDIC insured certificates of deposit were designated as available-for-sale. FDIC insured certificates of deposit are held to maturity. Gross unrealized gains and losses on cash equivalents and short term investments were not material as of June 29, 2014 and December 29, 2013. Gross realized gains and losses on cash equivalents and short-term investments were not material for the three months and six months ended June 29, 2014 and June 30, 2013.

Sale of Sunnyvale property and new headquarters lease

On January 23, 2014, the Company sold property in Sunnyvale, California, consisting of 24.5 acres of land with approximately 471,000 square feet of buildings that include its headquarters building and submicron development center, a Pacific Gas & Electric transmission facility and a warehouse building, for a net consideration of $58.9 million. The Company concurrently leased back approximately 170,000 square feet of the headquarters building on a month-to-month basis with the Company having the option to continue the lease for up to 24 months; thereafter either party can terminate the lease. The first six months of the lease are rent free. For accounting purposes, the rents relating to the rent-free period have been netted against the sale proceeds and represent prepaid rent. The Company’s rent-free use of this building constitutes continuing involvement by the Company as lessee, and recognition of the sale of the property and the related gain is deferred until the lease period ends.

Due to the Company’s continuing involvement under the lease, the cash proceeds net of third-party costs were recorded under the financing method as a short term financing obligation, in accordance with the authoritative guidance on leases and sale of real estate. Interest is imputed on the financing obligation until such time as the sale can be recognized. The property will continue to remain on the Company’s condensed consolidated balance sheet and the buildings will be depreciated over their remaining useful life. As of June 29, 2014, $59.9 million, including interest, was recorded in Accrued liabilities and other as a financing obligation. After the rent-free period, a portion of the lease payments will be recorded as a decrease to the financing obligation and the remainder will be recognized as interest expense.

On May 22, 2014, the Company entered into a new headquarters lease for renting office space in San Jose, CA. The lease term is for a period of 12 years, with two options to extend for periods of five years each after the initial lease term. The initial lease term will commence on January 1, 2015 and expire on December 31, 2026.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

5. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the activity related to accumulated other comprehensive loss, net of tax:

	Foreign Currency Translation Adjustment			Net Gains and Losses on Cash Flow Hedges			Total
		(in thousands)

Beginning Balance, December 29, 2013	$	(4,035	)	$	2		$	(4,033	)
Other comprehensive income before reclassification, net of tax		370			(6,890	)		(6,520	)
Amounts reclassified to earnings		-			2,983	⁽¹⁾		2,983
Net other comprehensive income (loss)	$	370		$	(3,907	)	$	(3,537	)
Ending Balance, June 29, 2014	$	(3,665	)	$	(3,905	)	$	(7,570	)

(1) Reclassified into the Net sales line item of the Condensed Consolidated Statement of Operations. Please see Note 11 for further details.

6. Equity Incentive Plan and Stock-Based Compensation

Equity Incentive Plan

The Company’s 2010 Equity Incentive Award Plan (2010 Plan) provides for the grant of stock options, stock appreciation rights, restricted stock units, restricted stock, performance awards, and deferred stock to its employees, consultants and non-employee members of its Board of Directors.

In the first quarter of fiscal 2014, the Company granted performance awards to certain senior executives with vesting subject to achievement of performance goals established by the Compensation Committee of the Company’s Board of Directors. Performance goals are based on a combination of Company- specific financial targets, and a relative total shareholder return (TSR) target that compares the Company’s TSR over a three-year period to a benchmark peer-group TSR. These awards vest at the end of the performance period of three years from the grant date. The number of stock awards that can vest range from 0% to 150% of those initially awarded. In evaluating the fair value of these awards, the Company used a combination of the stock price at the close of market on grant date, for the performance condition and a Monte Carlo simulation on grant date, taking the market-based goal into consideration, for the market condition.

The shares of common stock available for grant under the 2010 Plan are shown in the following table:

	Shares Available For Grant
Balance as of December 29, 2013		2,350,404
Additional shares issuable under 2010 plan (annual increase for 2014)		2,069,902
Stock options forfeited/cancelled through June 29, 2014		298,269
RSU awards granted, net of forfeitures/cancellations		(952,239	)
Key executive RSU awards forfeited/cancelled through June 29, 2014		357,870
PSU awards granted, net of forfeitures/cancellations ⁽¹⁾		(256,000	)
Balance as of June 29, 2014		3,868,206

(1) Includes performance awards granted in fiscal 2014 at target. Additional awards that could be earned under the fiscal 2014 grant total 137,000.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

Stock-Based Compensation

The following table presents the total stock-based compensation expense by financial statement caption resulting from the Company’s stock options and RSU and PSU awards:

	Three Months Ended				Six Months Ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
		(in thousands)
Cost of sales	$	1,432	$	1,379	$	2,923	$	2,852
Research and development		1,850		2,673		3,814		5,468
Sales, general and administrative		3,839		3,619		8,865		7,976
Stock-based compensation expense after income taxes⁽¹⁾	$	7,121	$	7,671	$	15,602	$	16,296

⁽¹⁾There was no income tax benefit related to stock-based compensation because all of the Company's U.S. deferred tax assets, net of U.S. deferred tax liabilities, continue to be subject to a full valuation allowance.

The fair value of each stock option was estimated at the date of grant using a Black-Scholes option pricing model, with the following assumptions for grants:

	Three Months Ended			Six Months Ended
	June 30, 2013			June 30, 2013

Expected volatility		43.79	%		49.45	%
Risk-free interest rate		1.15	%		0.85	%
Expected term (in years)		4.35			4.35
Dividend yield		0.00	%		0.00	%

The weighted average fair value of the Company’s stock options granted is as follows:

	Three Months Ended		Six Months Ended
	June 30, 2013		June 30, 2013

Weighted average fair value of stock options granted	$	4.48	$	4.88

As of June 29, 2014, the total unrecognized compensation cost related to unvested stock options and RSU awards was approximately $27.3 million after reduction for estimated forfeitures which will be recognized by the end of first quarter of fiscal 2017. No stock options were granted in fiscal 2014.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The fair value of each PSU award granted in fiscal 2014 and fiscal 2013 was determined using a Monte Carlo pricing model, and was estimated using the following assumptions:

	Six Months Ended
	June 29, 2014			June 30, 2013

Stock price on grant date	$	16.58		$	11.50
Expected volatility		42.79	%		50.90	%
Risk-free interest rate		0.73	%		0.21	%
Dividend yield		0.00	%		0.00	%

Stock Option and Restricted Stock Unit Activity

The following table summarizes stock option activities and related information under the 2010 Plan for the periods presented:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares			Price		Life (in Years)		Value
								(in thousands)
Outstanding stock options as of December 29, 2013		6,542,929		$	13.03		4.42	$	14,061
Granted		-		$	-
Cancelled/Forfeited		(298,269	)	$	15.41
Exercised		(896,345	)	$	17.05			$	5,875
Outstanding stock options as of June 29, 2014		5,348,315		$	13.34		3.98	$	40,296
Total vested and exercisable as of June 29, 2014		4,467,057		$	13.86		3.75	$	31,306

No income tax benefit was realized from stock option exercises for the three and six months ended June 29, 2014.

The following table summarizes RSU award activities and related information for the six months ended June 29, 2014:

				Weighted Average
	Number of			Grant-date
	Shares			Fair Value
Outstanding as of December 29, 2013		2,384,712		$	14.01
Granted		1,042,532		$	15.38
Cancelled/Forfeited		(90,293	)	$	12.93
Vested		(1,148,613	)	$	12.73
Outstanding as of June 29, 2014		2,188,338		$	15.38

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The following table summarizes key executive RSU and PSU award activities and related information for the six months ended June 29, 2014.

	Key Executive RSU					PSU
				Weighted Average					Weighted Average
	Number of			Grant-date		Number of			Grant-date
	Shares			Fair Value		Shares			Fair Value
Outstanding as of December 29, 2013		974,286		$	12.40		362,000		$	7.38
Granted		-		$	-		274,000	⁽¹⁾	$	2.25
Cancelled/Forfeited		(357,870	)	$	11.03		(18,000	)	$	7.40
Vested		(318,781	)	$	12.77		-		$	-
Outstanding as of June 29, 2014		297,635		$	13.65		618,000		$	5.10

(1) Includes performance awards granted in fiscal 2014 at target. Additional awards that could be earned under the fiscal 2014 grant total 137,000.

2014 Employee Stock Purchase Plan

On May 16, 2014 the stockholders of the Company approved the Spansion Inc. 2014 Employee Stock Purchase Plan (ESPP), which is qualified under Section 423 of the Internal Revenue Code. The ESPP provides that eligible employees may contribute up to 10% of their base salary towards the purchase of the Company’s common stock. The per share purchase price of the employee will be 85% of the fair market value of the stock at the beginning or the end of the offering period, whichever is lower.

The total number of shares of common stock reserved for issuance under the plan is 2.0 million shares. The plan shares will be increased automatically on an annual basis on January 1 of each year. The increase will be equal to one percent of total number of outstanding shares of the Company’s Common Stock on the immediately preceding December 31, subject to certain restrictions. The initial offering period under the ESPP commences on August 15, 2014 and ends on February 13, 2015.

7. Net Income (Loss) Per Share

The following table presents the computation of basic and diluted net loss per share:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
	(in thousands except for per-share amounts)
Numerator:
Net loss	$	(11,974	)	$	(3,231	)	$	(34,469	)	$	(17,666	)
Denominator:
Denominator for basic / diluted net loss per share, weighted average shares		60,799			58,646			60,285			58,366

Net loss per share:
Basic / Diluted net loss per share	$	(0.20	)	$	(0.06	)	$	(0.57	)	$	(0.30	)
Potentially dilutive shares excluded from the diluted loss per share computation because their effect would have been anti-dilutive
- RSUs and Options		7,266			5,782			6,771			4,555
- Conversion of Senior Exchangeable Notes		10,814			-			10,814			-
Total antidilutive shares		18,080			5,782			17,585			4,555

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

8. Intangible Assets and Goodwill

Intangible Assets

The following table presents the balance of intangible assets as of the dates indicated below:

			June 29, 2014							December 29, 2013
	Estimated range of lives (in years)		Gross Amount ⁽²⁾		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
			(in thousands)
Developed technology		5 to 10	$	140,976	$	(64,109	)	$	76,867	$	140,476	$	(53,661	)	$	86,815
Customer relationships		5 to 10		110,772		(43,012	)		67,760		110,509		(36,366	)		74,143
Trade names		0.5 to7		8,252		(5,151	)		3,101		9,652		(5,719	)		3,933
Trademarks		7 to 8		2,700		(310	)		2,390		2,700		(142	)		2,558
IP R&D ⁽¹⁾				-		-			-		500		-			500
Total Intangible Assets			$	262,700	$	(112,582	)	$	150,118	$	263,837	$	(95,888	)	$	167,949

(1)	All of the IP R&D reached technological feasibility during the six months ended June 29, 2014 and was reclassified into developed technology.

(2)	The changes in gross balance of intangible assets since December 29, 2013 resulted from fully amortized assets no longer in use and from foreign currency translation adjustments.

The actual amortization expense for the intangible assets are as shown below:

	Three Months Ended				Six Months Ended
	June 29, 2014		June 30, 2013		June 29, 2014		June 30, 2013
	(in thousands)


Amortization expense	$	8,939	$	6,813	$	18,094	$	13,626

The estimated future amortization expense for intangible assets as summarized below:

	Estimated Future Amortization
	(in thousands)
Fiscal 2014 (remaining 6 months)	$	17,212
Fiscal 2015		35,759
Fiscal 2016		35,926
Fiscal 2017		25,061
Fiscal 2018		19,607
Fiscal 2019 and beyond		16,553
Total	$	150,118

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

Goodwill

The following table represents the balance of goodwill as of the dates indicated below:

	June 29, 2014		December 29, 2013
	(in thousands)

Goodwill	$	166,508	$	166,422

The changes in the carrying amount of goodwill since December 29, 2013 resulted from foreign currency translation adjustments.

9. Financing arrangements

The following table summarizes the Company’s debt:

	June 29, 2014		December 29, 2013
	(in thousands)
Debt obligations:
Term Loan	$	294,933	$	296,135
2.00% Senior Exchangeable Notes		114,050		111,733
7.875% Senior Notes		-		94,064
Total debt	$	408,983	$	501,932
Less: current portion		2,390		97,320
Long-term debt	$	406,593	$	404,612

2.00% Senior Exchangeable Notes due 2020

The net carrying amount of the liability component of 2.00% Senior Exchangeable Notes due 2020 (the Notes) consists of the following:

	June 29, 2014
	(in thousands)
Principal amount	$	150,000
Unamortized debt discount		(35,950	)
Net carrying value	$	114,050

The following table presents the interest expense recognized on the Notes:

	Six Months Ended
	June 29, 2014
	(in thousands)
Contractual interest expense at 2% per annum	$	1,484
Amortization of debt issuance costs		261
Accretion of debt discount		2,317
Total	$	4,062

Capped Calls

In connection with the issuance of the Notes, the Company entered into capped call transactions with certain bank counterparties to reduce the potential dilution to the Company’s common stock upon exchange of the Notes. The capped call transactions have a strike price of approximately $13.87 and a cap price of approximately $18.14, and are exercisable when and if the Notes are converted. If upon conversion of the Notes, the price of the common stock is above the strike price of the capped calls, the counterparties will deliver shares of the Company’s common stock and/or cash with an aggregate value approximately equal to the difference between the price of our common stock at the conversion date (with a maximum price for purposes of this determination equal to the cap price) and the strike price, multiplied by the number of shares of our common stock related to the capped call transactions being exercised. The capped call transactions expire on September 1, 2020.

The Company is in compliance of all the covenants under its existing debt obligations as of June 29, 2014.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

7.875% Senior Notes due 2017

On January 21, 2014, the Company redeemed the remaining $94.1 million aggregate principal amount outstanding of 7.875% Senior Notes due 2017 (the Senior Notes) at a redemption price that was 103.938% of their face value. The Company paid an aggregate amount of $99.1 million, including redemption price, accrued and unpaid interest, and repurchase premium, and recorded a loss on redemption of $4.8 million within Interest income and other, net in the Condensed Consolidated Statement of Operations. The Company redeemed these Senior Notes with the proceeds from the issuance of the 2.00% Senior Exchangeable Notes due 2020.

2012 Revolving Credit Facility

As of June 29, 2014, the Company was in compliance with all of the 2012 Revolving Credit Facility’s covenants. However, drawdown under the 2012 Revolving Credit Facility requires that the Company meet or obtain a waiver to certain conditions including the senior secured leverage ratio not to exceed 2.75:1.00 and compliance with coverage and leverage ratios, as of the last day of the most recently ended fiscal quarter. Based on the financial results for the quarter ended June 29, 2014, the Company does not meet the maximum leverage ratio limit. The Company has not obtained a waiver for those conditions, so it is not able to draw down on the 2012 Revolving Credit Facility. The Company did not need to draw on the revolving line of credit during the quarter ended June 29, 2014 and believes that its sources of cash and liquidity are sufficient to meet the business requirements for the next 12 months.

10. Fair Value Measurement

The fair value measurements of the Company’s financial assets and liabilities, categorized into types of instruments, are set forth in the table below based upon the fair value hierarchy:

	June 29, 2014							December 29, 2013
	Level 1		Level 2		Total			Level 1		Level 2		Total
	(in thousands)

Money market funds	$	115	$	-	$	115	⁽¹⁾	$	3,906	$	-	$	3,906	⁽²⁾
Foreign Exchange Forward Contracts		-		-		-			-		3,493		3,493
Total financial assets	$	115	$	-	$	115		$	3,906	$	3,493		7,399
Foreign Exchange Forward Contracts			$	4,029	$	4,029		$	-	$	313	$	313
Total financial liabilities	$	-	$	4,029	$	4,029		$	-	$	313	$	313

⁽¹⁾ Total cash and cash equivalents and short-term investments of $304.8 million as of June 29, 2014 includes cash of $265.5 million held in operating accounts, $25.2 million held in certificates of deposit and $14.1 million held in time deposit accounts.

⁽²⁾ Total cash and cash equivalents and short-term investments of $311.5 million as of December 29, 2013 includes cash of $282.2 million held in operating accounts, $3.9 million in money market funds, $11.4 million held in certificates of deposit and $14.0 million in time deposit accounts.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

Fair Value of Other Financial Instruments Not Carried At Fair Value

The Company’s Term Loan and Notes are traded in the market and the fair values are Level 1, as they are based on quoted market prices. Prior to redemption in fiscal 2013, the Senior Notes were traded in the market and the fair value was Level 1. The carrying amounts and estimated fair values of the Company’s debt obligations are as follows:

	June 29, 2014				December 29, 2013
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
	(in thousands)

Debt traded in the market:
Term Loan	$	294,933	$	295,670	$	296,135	$	295,170
2.0% Senior Exchangeable Notes		114,050		185,616		111,733		129,104
7.875% Senior Notes		-		-		94,064		97,591
Total Debt Obligations	$	408,983	$	481,286	$	501,932	$	521,865

The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximates their carrying value.

11. Derivative Financial Instruments

The Company entered into multiple foreign exchange forward contracts to hedge certain operational exposures resulting from movements in Japanese yen (JPY) exchange rates. The Company’s hedging policy is designed to mitigate the impact of foreign currency exchange rate movements on its operating results. Some foreign currency forward contracts were considered to be economic hedges that were not designated as hedging instruments while others were designated as cash flow hedges. Whether designated or undesignated, these forward contracts protect the Company against the variability of forecasted foreign currency cash flows resulting from revenues and net asset or liability positions designated in currencies other than the U.S. dollar and they are not speculative in nature.

Cash Flow Hedges

The Company’s foreign currency forward contracts that were designated as cash flow hedges have maturities between three and eight months. The maximum original duration of any contract allowable under the Company’s hedging policy is fifteen months.

At June 29, 2014, the Company had outstanding forward contracts to buy USD for $145.3 million with Japanese Yen.

Over the next twelve months, the Company expects to reclassify $3.9 million from accumulated other comprehensive loss to earnings as the related forecasted transactions occur.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The following table summarizes the activity related to derivatives in accumulated other comprehensive loss, net of tax:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
				(in thousands)

Beginning Balance	$	(3,330	)	$	5,991		$	2		$	1
Net loss (gain) reclassified into earnings on cash flow hedges (effective portion)		1,601			(2,835	)		2,983			(4,588	)
Net gain reclassified into earnings on cash flow hedges (ineffective portion)		-			(2,415	)		-			(2,415	)
Net unrealized hedge gain (loss) arising during the period		(2,176	)		6,317			(6,890	)		14,060
Ending Balance	$	(3,905	)	$	7,058		$	(3,905	)	$	7,058

Non-designated hedges

Total notional amounts of outstanding contracts were as summarized below:

Buy / Sell	June 29, 2014		December 29, 2013
	(in millions)

Japanese Yen / US dollar		-	JPY 2,945/$28.2
US dollar / Japanese Yen	$51.1/JPY 5,206		$42.0/JPY 4,047
US dollar / EUR	$33.4/EUR 24.5		$23.4/EUR 17.1

As of June 30, 2013, the Company had entered into an economic hedge using foreign exchange forward contracts and options to mitigate the impact of foreign currency fluctuations relating to the acquisition of the MCA business. These forward contracts and options are not designated hedges and are carried at fair value with changes in the fair value recorded in Interest income and other, net in the accompanying Condensed Consolidated Statement of Operations.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2014 and June 30, 2013 was as follows:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
	(in thousands)
Derivatives Designated as Hedging Instruments
Foreign Exchange Forward Contracts
Net unrealized gain (loss) recognized in OCI ⁽¹⁾	$	(2,176	)	$	6,317		$	(6,890	)	$	14,060
Net loss (gain) reclassified from accumulated OCI into income (effective portion)⁽²⁾	$	1,601		$	(2,835	)	$	2,983		$	(4,588	)
Net gain reclassified from accumulated OCI into income (ineffective portion) ⁽³⁾	$	-		$	(2,415	)	$	-		$	(2,415	)
Derivatives Not Designated as Hedging Instruments
Net gain (loss) recognized in income
Swap interest expense ⁽⁴⁾	$	-		$	(2	)	$	-		$	(8	)
Foreign Exchange Forward Contracts ⁽⁵⁾	$	1,204		$	(2,349	)	$	1,994		$	240
Foreign Exchange Options Contracts ⁽⁵⁾	$	-		$	197		$	-		$	197

(1)

Net change in the fair value of the effective portion classified in other comprehensive income (OCI)

(2)

Effective portion classified as net product revenue

(3)

Classified in interest income and other, net

(4)

Classified in interest expense

(5)

Classified in interest income and other, net

The gross fair values of derivative instruments on the Condensed Consolidated Balance Sheets as of June 29, 2014 and December 29, 2013 were as follows:

	June 29, 2014				December 29, 2013
Balance sheet location	Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments		Derivatives designated as hedging instruments		Derivatives not designated as hedging instruments
	(in thousands)
Prepaid expenses and other current assets Foreign Exchange Forward Contracts	$	-	$	-	$	-	$	3,493

Accrued liabilities and other Foreign Exchange Forward Contracts	$	3,757	$	272	$	-	$	313

The Company had an unrealized loss for the three and six months ended June 29, 2014, and a derivative liability from its cash flow hedges as of June 29, 2014, due to the strengthening of the Yen against the US Dollar during the first six months of fiscal 2014. The Company had an unrealized gain for the three and six months ended June 29, 2013, and a derivative asset from its cash flow hedges as of December 29, 2013, due to the weakening of the Yen against the US Dollar during the first six months of fiscal 2013. Cash flow hedges are usually entered into at the beginning of each fiscal year.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

Offsetting Derivative Assets and Liabilities

The Company presents its derivatives at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. The following table sets forth the offsetting of derivative assets December 29, 2013. The Company did not have derivative assets as of June 29, 2014.

							Gross amounts not offset in the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Assets		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Assets presented in the Condensed Consolidated Balance Sheets		Financial Instruments ⁽¹⁾			Cash collateral pledged		Net amount
	(in thousands)
As of December 29, 2013:
Foreign exchange contracts	$	3,493	$	-	$	3,493	$	(1,572	)	$	-	$	1,921

⁽¹⁾ Financial Instruments as of December 29, 2013 relates to derivative liabilities and the Term Loan facility which are allowed to be net settled against derivative assets in accordance with our master netting agreements.

The following table sets forth the offsetting of derivative liabilities as of June 29, 2014 and December 29, 2013:

							Gross amounts not offset in the Condensed Consolidated Balance Sheets but have legal rights to offset
	Gross amounts of recognized Liabilities		Gross amounts offset in the Condensed Consolidated Balance Sheets		Net amounts of Liabilities presented in the Condensed Consolidated Balance Sheets		Financial Instruments			Cash collateral pledged		Net amount
	(in thousands)
As of June 29, 2014:
Foreign exchange contracts	$	4,029	$	-	$	4,029	$	(2,076	)⁽¹⁾	$	-	$	1,953
As of December 29, 2013:
Foreign exchange contracts	$	313	$	-	$	313	$	(226	)⁽²⁾	$	-	$	87

(1)

Financial Instruments as of June 29, 2014 relates to cash and cash equivalents and short-term investments, which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

(2)

Financial Instruments as of December 29, 2013 relates to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.

12. Employee related pension obligation

A majority of the employees transferred as part of the MCA business acquisition were participants in the Fujitsu Corporate Pension Fund and Retirement Allowance Plan (together, the Fujitsu Defined Benefit Plan) until March 31, 2014. The Company accounted for its participation in the Fujitsu Defined Benefit Plan on behalf of these employees (Plan participants) as a multiemployer plan participant and recorded pension expense of $1.5 million for the fiscal quarter ended March 30, 2014.

On January 15, 2014, the Company received approval from the transferred employees’ union to exit from the Fujitsu Defined Benefit Plan and establish the Spansion defined contribution and cash balance plans.

On April 1, 2014, the Company withdrew from the Fujitsu Defined Benefit Plan and set up the Spansion Corporate Defined Contribution Pension Plan and the Spansion Innovates Group Cash Balance Plan, an unfunded defined benefit plan of our MCA Japan business subsidiaries (Spansion Pension Plans). In accordance with the Stock Purchase Agreement with FSL, the plan assets transferred from the Fujitsu Defined Benefit Plan to the Spansion Pension Plans were valued as of March 31, 2014, one day before the transfer. The Company was not subject to any liabilities upon withdrawal from the Fujitsu Defined Benefit Plan.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The Company recognized a gain of $2.5 million in the second quarter of fiscal 2014 relating to better than expected performance of the total fund assets in the pension plan. This gain was recorded as Interest income and other, net in the Company’s Condensed Consolidated Statement of Operations for the three and six months ended June 29, 2014.

The restricted cash that was received as a part of the MCA business acquisition for the underfunded portion of the Fujitsu managed pension plan was $23.2 million. According to the employees’ election and the expected distribution schedule, the Company recorded $6.6 million in Accrued compensation and benefits and $17.7 million in Other long-term liabilities in the Condensed Consolidated Balance Sheet as of June 29, 2014. Restricted cash relating to these distributions has been consequently recorded in short term and long term assets as appropriate.

Spansion Innovates Group Cash balance plan (Defined Benefit Plan)

The Spansion Innovates Group Cash balance plan (Cash Balance Plan) provides for the Company to set up a hypothetical cash balance account (CB account) for each plan participant and accumulates at a percentage of the annual pensionable salary and interest thereon. Only employees transferred as part of the MCA business acquisition are eligible to participate in the cash balance plan.

The pension charges under the Cash Balance Plan are based on certain actuarial assumptions, such as turnover rates, discount rates and other factors. The discount rate assumption is determined by comparing the expected benefit payments to the Japanese corporate bonds yield curve as of April 1, 2014. Actual results that differ from these assumptions will be accumulated and amortized over the future life of the plan participants if they exceed 10% of the PBO.

The Company recorded a service cost and accrued a liability of $0.3 million for the three and six months ended June 29, 2014. The Company expects to expense $1.0 million related to the Cash Balance Plan for the fiscal year ending 2014.

Spansion Corporate Defined Contribution Plan

The Company recorded an expense of $ 0.6 million under this plan for the three and six months ended June 29, 2014 and accrued a liability of $0.2 million as of June 29, 2014.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

13. Income Taxes

The following table presents the Company’s income tax expense (benefit):

	Three Months Ended					Six Months Ended
	June 29, 2014		June 30, 2013			June 29, 2014		June 30, 2013
	(in thousands)

Income tax expense (benefit)	$	3,815	$	(1,635	)	$	6,262	$	753

The Company recorded an income tax expense of $3.8 million and an income tax benefit of $1.6 million for the three months ended June 29, 2014 and June 30, 2013, respectively. The Company’s income tax expense was $6.3 million and $0.8 million for the six months ended June 29, 2014 and June 30, 2013, respectively.

The tax expense for the three months and the six months ended June 29, 2014 was primarily attributable to pre-tax income in foreign jurisdictions, withholding taxes related to Samsung licensing revenue and reserves for uncertain tax positions in foreign jurisdictions.

The tax benefit for the three months ended June 30, 2013 was primarily attributable to the release of reserves for uncertain tax positions in foreign locations due to expiration of the applicable statues of limitations. The tax expense for the six months ended June 30, 2013 was primarily attributable to pre-tax income in foreign jurisdictions and withholding taxes related to Samsung licensing revenue, offset by the release of reserves for uncertain tax positions in foreign locations.

As of June 29, 2014, all of the Company's U.S. deferred tax assets, net of deferred tax liabilities, continue to be subject to a full valuation allowance. The valuation allowance is based on the Company's assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future.

As of December 29, 2013, the Company had U.S. federal and state net operating loss carry forwards of approximately $1,024 million and $219.8 million, respectively. Approximately $489.7 million of the federal net operating loss carry forwards are subject to an annual limitation of $27.2 million. These federal and state net operating losses, if not utilized, expire from 2016 to 2033. The Company also has U.S. federal credit carryovers of $3.3 million, which expire from 2020 to 2033. The Company also has state tax credits of $18.2 million, which includes California state tax credits of $17.5 million, which can be carried forward indefinitely.

If the Company were to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, its ability to utilize its federal net operating loss carry forwards could be limited under certain provisions of the Internal Revenue Code. As a result, the Company could incur greater tax liabilities than it would in the absence of such a limitation and any incurred liabilities could materially adversely affect the Company’s results of operations and financial condition.

14. Restructuring and Others

Fiscal 2013 Restructuring Plan

Beginning in the third quarter of fiscal 2013, in an effort to lower its expense levels, given the competitive pricing pressures and slower than expected growth in Japan revenues from Flash products, the Company implemented a reduction in force to rationalize its global workforce.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

The following tables present a summary of restructuring activities related to 2013 restructuring plan described above:

	Three Months Ended			Six Months Ended
	June 29, 2014			June 29, 2014
	(in thousands)
Accrued restructuring balance, beginning of period	$	58		$	844
Non-cash adjustments		(17	)		(31	)
Cash payments		(2	)		(774	)
Accrued restructuring balance, end of period	$	39		$	39

15. Capital Structure

Effective January 22, 2014, SLS Spansion Holdings, LLC and its affiliates were no longer holders of at least 5% of the Company’s voting securities. Consequently, the one outstanding share of Class B Common Stock was converted into one share of Class A Common Stock.

16. Commitments and Contingencies

Purchase Commitments

The Company had $117.0 million of purchase commitments with certain suppliers, primarily for inventory items as of June 29, 2014.

Guarantees and Indemnifications

In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved with respect to each particular agreement. Historically, payments under these types of agreements have not had a material adverse effect on the Company’s business, results of operations or financial condition.

Income Taxes

The Company is subject to audit by the Internal Revenue Service (IRS) and various other tax authorities. The Company has reserved for potential adjustments to the provision for income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities, and the Company believes that the final outcome of these examinations or agreements will not have a material effect on the Company’s results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of tax benefits in the period the Company determines the liabilities are no longer necessary. If the estimates of the federal, state, and foreign income tax liabilities are less than the ultimate assessment, a further charge to expense would result.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

Product Warranties

The Company generally offers a one-year limited warranty for all its products. During the three and six months ended June 29, 2014 and June 30, 2014, changes in the Company’s reserve for product warranty were as follows:

	Three Months Ended						Six Months Ended
	June 29, 2014			June 30, 2013			June 29, 2014			June 30, 2013
	(in thousands)
Balance at beginning of period	$	2,478		$	1,578		$	2,055		$	2,124
Provision for warranties issued		804			304			1,371			600
Settlements made		(242	)		(779	)		(449	)		(1,585	)
Changes in reserve for pre-existing warranties during the period		(527	)		24			(464	)		(12	)
Balance at end of period	$	2,513		$	1,127		$	2,513		$	1,127

Legal Matters

In the Matter of Certain Flash Memory Chips and Products Containing the Same, U.S International Trade Commission (Investigation No. 337-TA-893).

On August 1, 2013, Spansion LLC, a wholly owned subsidiary of the Company (Spansion LLC), filed a complaint pursuant to Section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. § 1337 (Section 337), to request the United States International Trade Commission ( ITC) to institute an investigation relating to the unlawful importation into the United States, the sale for importation, and/or the sale within the United States after importation of certain Macronix flash memory chips (Macronix Chips) that infringe certain claims of six valid patents held by Spansion LLC, and/or are made, produced or processed under, or by means of, a process covered by the claims of those patents, and products containing the Macronix Chips.

On September 9, 2013, the ITC instituted its investigation, naming the following entities as Respondents in the investigation: Macronix International Co, Ltd., of Hsin-chu, Taiwan; Macronix America, Inc., of Milpitas, CA; Macronix Asia Limited of Kanagawa Pref., Japan; Macronix (Hong Kong) Co., Ltd., of Sa Tin, N.T., Hong Kong; Acer Inc. of New Taipei City, Taiwan; Acer America Corporation of San Jose, CA; ASUSTek Computer Inc. of Taipei, Taiwan; Asus Computer International of Fremont, CA; Belkin International, Inc., of Playa Vista, CA; D-Link Corporation of Taipei City, Taiwan; D-Link System, Inc., of Fountain Valley, CA; Netgear Inc., San Jose, CA; Nintendo Co., Ltd., of Kyoto, Japan; and Nintendo of America, Inc., of Redmond, WA.

Through this investigation, Spansion LLC seeks a general exclusion order to exclude from importation all infringing Macronix Chips and downstream products containing such chips. In the event that the ITC is unwilling to issue a general exclusion order, Spansion LLC requests a limited exclusion order be entered against each named Respondent and its subsidiaries and affiliates in order to remedy the Respondents’ violation of Section 337 and to prevent future violations by Respondents. Spansion LLC has also asked the ITC to issue a cease and desist order to ensure compliance with the requested exclusion orders.

Trial is presently set to commence on October 2, 2014. The ITC has entered a target date of May 22, 2015, for completion of its investigation.

The U.S. Patent and Trademark Office (PTO) has initiated inter partes review with respect to certain claims under four of the six patents involved in this investigation in response to petitions filed by Macronix. On May 7, 2014, the U.S. PTO initiated inter partes review of claims 1-14 of U.S. Patent No. 6,459,625. On May 8, 2014, the U.S. PTO initiated inter partes review of claims 1-4 of U.S. Patent No. 6,369,416; claims 1, 3-5, 7, 20, and 28 of U.S. Patent No. 6,731,536; and claims 1-6 and 8-13 of U.S. Patent No. 7,151,027, in response to petitions filed by Macronix. A second petition for inter partes review of claims 7 and 14 of U.S. Patent No. 7,151,027 was filed by Macronix on June 4, 2014, together with a Motion for Joinder, seeking to join the earlier filed petition and the already instituted review of the same patent. Absent a showing of good cause for delay, and depending on the decision on the Motion for Joinder, a final decision is expected in each of these inter partes review proceedings by May 8, 2015.

Spansion LLC v. Macronix International Co., Ltd. et. al., U.S. District Court, Northern District of California (No. 3:13-cv-03566).

On August 1, 2013, Spansion LLC filed a complaint in the U.S. District Court, Northern District of California (San Jose Division), Case No. 3:13-cv-03566-JST, against Macronix International Co., Ltd., Macronix America, Inc., Acer Inc., Acer America Corporation, ASUSTek Computer Inc., Asus Computer International (America), Belkin International, Inc., D-Link Systems, NETGEAR Inc., Nintendo Co., Ltd., and Nintendo of America, Inc. for infringement of the patents involved in the ITC Investigation No. 337-TA-893 (ITC -893 Investigation), discussed above. Spansion LLC has asked for monetary damages as well as permanent injunctive relief to prevent further infringing activity.

Spansion Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)(Unaudited)

On August 29, 2013, Spansion LLC amended its original complaint to delete certain defendants, resulting in the eleven party defendants identified above (Defendants), and to make certain additional allegations.

On October 8, 2013, pursuant to 28 U.S.C. § 1659, each of the Defendants asserted its statutory right to a mandatory stay of all proceedings in the Northern District of California action until the conclusion of the ITC -893 Investigation. Because the requested stay is mandated by statute, Spansion LLC did not oppose the motion and the requested stay was granted.

Macronix International Co., LTD. v. Spansion Inc. et. al., U.S. District Court, Northern District of California (No. 4:14-cv-01890).