Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark one)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

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 333-126019-09

 


MAGNACHIP SEMICONDUCTOR LLC

(Exact name of Registrant as specified in its charter)

 


 

Delaware   83-0406195

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

c/o MagnaChip Semiconductor S.A.

74, rue de Merl, B.P. 709, L-2017

Luxembourg, Grand Duchy of Luxembourg

  Not Applicable
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (352) 45-62-62

 


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 is a large accelerated filer, an accelerated filer, or a non accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

As of November 1, 2007, the registrant had 52,831,721.5470 of the registrant’s common units outstanding.

 



Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

TABLE OF CONTENTS

 

          Page No.

PART I FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

   3
  

Condensed Consolidated Statements of Operations

   3
  

Condensed Consolidated Balance Sheets

   4
  

Condensed Consolidated Statements of Changes in Unitholders’ Equity

   5
  

Condensed Consolidated Statements of Cash Flows

   7
  

Notes to Condensed Consolidated Financial Statements

   8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   37

Item 4T.

  

Controls and Procedures

   37

PART II OTHER INFORMATION

  

Item 1A.

  

Risk Factors

   38

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   46

Item 6.

  

Exhibits

   46

SIGNATURES

   47

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited; in thousands of US dollars, except unit data)

 

     Three months ended     Nine months ended  
     September 30,
2007
    October 1,
2006
    September 30,
2007
    October 1,
2006
 

Net sales

   $ 200,045     $ 171,283     $ 545,881     $ 582,039  

Cost of sales

     168,702       150,422       471,861       500,579  
                                

Gross profit

     31,343       20,861       74,020       81,460  
                                

Selling, general and administrative expenses

     23,644       22,812       71,904       66,368  

Research and development expenses

     33,437       32,016       101,089       95,868  

Restructuring and impairment charges

     —         264       12,084       93,948  
                                

Operating loss

     (25,738 )     (34,231 )     (111,057 )     (174,724 )
                                

Other income (expenses)

        

Interest expense, net

     15,336       13,946       44,704       43,031  

Foreign currency gain (loss), net

     4,855       2,157       11,332       40,914  
                                

Loss before income taxes

     (36,219 )     (46,020 )     (144,429 )     (176,841 )
                                

Income tax expenses

     2,547       1,698       6,643       6,831  
                                

Net loss

   $ (38,766 )   $ (47,718 )   $ (151,072 )   $ (183,672 )
                                

Dividends accrued on preferred units

     3,010       2,731       8,863       8,070  
                                

Net loss attributable to common units

   $ (41,776 )   $ (50,449 )   $ (159,935 )   $ (191,742 )
                                

Net loss per common units

- Basic and diluted

   $ (0.79 )   $ (0.96 )   $ (3.03 )   $ (3.62 )
                                

Weighted average number of units

- Basic and diluted

     52,814,383       52,720,976       52,769,273       52,975,152  

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited; in thousands of US dollars, except unit data)

 

     September 30,
2007
    December 31,
2006
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 61,934     $ 89,173  

Accounts receivable, net

     124,342       76,665  

Inventories, net

     94,100       57,846  

Other receivables

     7,050       6,754  

Other current assets

     10,775       13,626  
                

Total current assets

     298,201       244,064  
                

Property, plant and equipment, net

     281,022       336,279  

Intangible assets, net

     115,496       139,729  

Other non-current assets

     47,541       49,981  
                

Total assets

   $ 742,260     $ 770,053  
                

Liabilities and Unitholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 121,221     $ 62,399  

Other accounts payable

     31,713       32,423  

Accrued expenses

     30,181       23,647  

Short-term borrowings

     50,601       —    

Other current liabilities

     5,162       2,980  
                

Total current liabilities

     238,878       121,449  
                

Long-term borrowings

     750,000       750,000  

Accrued severance benefits, net

     72,307       62,836  

Other non-current liabilities

     7,039       2,935  
                

Total liabilities

     1,068,224       937,220  
                

Commitments and contingencies

    

Series A redeemable convertible preferred units; 60,000 units authorized, 50,091 units issued and 0 unit outstanding at September 30, 2007 and December 31, 2006

     —         —    

Series B redeemable convertible preferred units; 550,000 units authorized, 450,692 units issued and 93,997 units outstanding at September 30, 2007 and December 31, 2006

     126,237       117,374  
                

Total redeemable convertible preferred units

     126,237       117,374  
                

Unitholders’ equity

    

Common units; 65,000,000 units authorized, 52,831,722 and 52,720,784 units issued and outstanding at September 30, 2007 and December 31, 2006

     52,832       52,721  

Additional paid-in capital

     2,698       2,451  

Accumulated deficit

     (531,803 )     (370,314 )

Accumulated other comprehensive income

     24,072       30,601  
                

Total unitholders’ equity

     (452,201 )     (284,541 )
                

Total liabilities, redeemable convertible preferred units and unitholders’ equity

   $ 742,260     $ 770,053  
                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Changes in Unitholders’ Equity

(Unaudited; in thousands of US dollars, except unit data)

 

     Common Units   

Additional
Paid-In

Capital

   Accumulated
deficit
    Accumulated
Other
Comprehensive
Income
    Total  
     Units    Amount          

Three months ended September 30, 2007

               

Balance at July 2, 2007

   52,800,784    $ 52,801    $ 2,521    $ (490,027 )   $ 26,143     $ (408,562 )

Exercise of unit options

   30,938      31      —        —         —         31  

Unit-based compensation

   —        —        177      —         —         177  

Dividends accrued on preferred units

   —        —        —        (3,010 )     —         (3,010 )

Comprehensive income (loss):

               

Net loss

   —        —        —        (38,766 )     —         (38,766 )

Fair valuation of derivatives

   —        —        —        —         (1,326 )     (1,326 )

Foreign currency translation adjustments

   —        —        —        —         (745 )     (745 )
                     

Total comprehensive loss

                  (40,837 )
                                           

Balance at September 30, 2007

   52,831,722    $ 52,832    $ 2,698    $ (531,803 )   $ 24,072     $ (452,201 )
                                           

Nine months ended September 30, 2007

               

Balance at January 1, 2007

   52,720,784    $ 52,721    $ 2,451    $ (370,314 )   $ 30,601     $ (284,541 )

Exercise of unit options

   110,938      111      —        —         —         111  

Unit-based compensation

   —        —        247      —         —         247  

Dividends accrued on preferred units

   —        —        —        (8,863 )     —         (8,863 )

Impact on beginning accumulated deficit upon adoption of FIN 48

   —        —        —        (1,554 )     —         (1,554 )

Comprehensive income (loss):

               

Net loss

   —        —        —        (151,072 )     —         (151,072 )

Fair valuation of derivatives

   —        —        —        —         (2,260 )     (2,260 )

Foreign currency translation adjustments

   —        —        —        —         (4,269 )     (4,269 )
                     

Total comprehensive loss

                  (157,601 )
                                           

Balance at September 30, 2007

   52,831,722    $ 52,832    $ 2,698    $ (531,803 )   $ 24,072     $ (452,201 )
                                           

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Changes in Unitholders’ Equity

(Unaudited; in thousands of US dollars, except unit data)

 

     Common Units     Additional
Paid-In
Capital
    Accumulated
deficit
    Accumulated
Other
Comprehensive
Income
    Total  
     Units     Amount          

Three months ended October 1, 2006

            

Balance at July 2, 2006

   52,720,784     $ 52,721     $ 2,311     $ (271,385 )   $ 36,546     $ (179,807 )

Exercise of unit options

   4,375       4       2       —         —         6  

Repurchase of units issued

   (4,375 )     (4 )     (2 )     —         —         (6 )

Unit-based compensation

   —         —         67       —         —         67  

Dividends accrued on preferred units

   —         —         —         (2,731 )     —         (2,731 )

Comprehensive income (loss):

            

Net loss

   —         —         —         (47,718 )     —         (47,718 )

Fair valuation of derivatives

   —         —         —         —         (3,223 )     (3,223 )

Foreign currency translation adjustments

   —         —         —         —         (1,648 )     (1,648 )
                  

Total comprehensive loss

               (52,589 )
                                              

Balance at October 1, 2006

   52,720,784     $ 52,721     $ 2,378     $ (321,834 )   $ 31,675     $ (235,060 )
                                              

Nine months ended October 1, 2006

            

Balance at January 1, 2006

   53,091,570     $ 53,092     $ 2,169     $ (130,092 )   $ 28,347     $ (46,484 )

Exercise of unit options

   46,062       46       42       —         —         88  

Repurchase of units issued

   (416,848 )     (417 )     (3 )     —         —         (420 )

Unit-based compensation

   —         —         170       —         —         170  

Dividends accrued on preferred units

   —         —         —         (8,070 )     —         (8,070 )

Comprehensive income (loss):

            

Net loss

   —         —         —         (183,672 )     —         (183,672 )

Fair valuation of derivatives

   —         —         —         —         87       87  

Foreign currency translation adjustments

   —         —         —         —         3,241       3,241  
                  

Total comprehensive loss

               (180,344 )
                                              

Balance at October 1, 2006

   52,720,784     $ 52,721     $ 2,378     $ (321,834 )   $ 31,675     $ (235,060 )
                                              

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands of US dollars)

 

     Nine months ended  
     September 30, 2007     October 1, 2006  

Cash flows from operating activities

    

Net loss

   $ (151,072 )   $ (183,672 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

    

Depreciation and amortization

     138,787       145,481  

Provision for severance benefits

     13,985       10,031  

Amortization of debt issuance costs

     2,913       2,760  

Gain on foreign currency translation, net

     (9,623 )     (43,297 )

Impairment charges

     10,106       92,540  

Other

     361       1,443  

Changes in operating assets and liabilities

    

Accounts receivable

     (46,487 )     36,804  

Inventories

     (34,528 )     34,495  

Other receivables

     (212 )     3,230  

Deferred tax assets

     655       1,405  

Accounts payable

     56,699       (39,955 )

Other accounts payable

     (5,012 )     (16,870 )

Accrued expenses

     6,118       2,879  

Other current assets

     8,242       (1,255 )

Other current liabilities

     2,939       (5,100 )

Payment of severance benefits

     (5,913 )     (7,116 )

Other

     (1,183 )     2,768  
                

Net cash provided by (used in) operating activities

     (13,225 )     36,571  
                

Cash flows from investing activities

    

Purchase of plant, property and equipment

     (63,967 )     (26,274 )

Payments for intellectual property registration

     (955 )     (1,746 )

Proceeds from disposal of plant, property and equipment

     278       2,748  

Proceeds from disposal of intangible assets

     —         2,801  

Decrease in restricted cash

     —         2,985  

Other

     208       (700 )
                

Net cash used in investing activities

     (64,436 )     (20,186 )
                

Cash flows from financing activities

    

Exercise of unit options

     111       88  

Repurchase of common units

     —         (420 )

Proceeds from short-term borrowings

     70,397       —    

Repayment of short-term borrowings

     (20,000 )     —    
                

Net cash provided by (used in) financing activities

     50,508       (332 )

Effect of exchange rates on cash and cash equivalents

     (86 )     4,862  
                

Net increase (decrease) in cash and cash equivalents

     (27,239 )     20,915  
                

Cash and cash equivalents

    

Beginning of the period

     89,173       86,574  
                

End of the period

   $ 61,934     $ 107,489  
                

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited; tabular dollars in thousands, except unit data)

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of MagnaChip Semiconductor LLC and its subsidiaries (the “Company”) have been prepared in accordance with Accounting Principle Board (“APB”) Opinion No. 28, Interim Financial Reporting regarding interim financial information and, accordingly, do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary to fairly present the information required to be set forth therein. All inter-company accounts and transactions have been eliminated. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the SEC on March 30, 2007. The results of operations for the three and nine-month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for a full year or for any other periods.

Recent accounting pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. This Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption may have on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy, as defined and may be required to provide additional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption may have on its consolidated financial statements.

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

2. Inventories

Inventories as of September 30, 2007 and December 31, 2006 consist of the following:

 

     September 30, 2007     December 31, 2006  

Finished goods

   $ 23,010     $ 16,169  

Semi-finished goods and work-in-process

     72,517       39,492  

Raw materials

     9,259       11,774  

Materials in-transit

     1,581       2,063  

Less: valuation allowances

     (12,267 )     (11,652 )
                

Inventories, net

   $ 94,100     $ 57,846  
                

3. Property, Plant and Equipment

Property, plant and equipment as of September 30, 2007 and December 31, 2006 comprise the following:

 

     September 30, 2007     December 31, 2006  

Buildings and related structures

   $ 154,619     $ 162,383  

Machinery and equipment

     425,973       369,683  

Vehicles and others

     53,321       42,772  
                
     633,913       574,838  

Less: accumulated depreciation

     (365,596 )     (252,814 )

Land

     12,705       12,481  

Construction in-progress

     —         1,774  
                

Property, plant and equipment, net

   $ 281,022     $ 336,279  
                

4. Intangible Assets

Intangible assets as of September 30, 2007 and December 31, 2006 are as follows:

 

     September 30, 2007     December 31, 2006  

Technology

   $ 21,672     $ 21,289  

Customer relationships

     172,817       170,209  

Goodwill

     14,245       15,095  

Intellectual property assets

     9,991       9,742  

Less: accumulated amortization

     (103,229 )     (76,606 )
                

Intangible assets, net

   $ 115,496     $ 139,729  
                

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

5. Product Warranties

The Company records, in other current liabilities, warranty liabilities for the estimated costs that may be incurred under its basic limited warranty. This warranty covers defective products, and related liabilities are accrued when product revenues are recognized. Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and repair costs per claim to satisfy the Company’s warranty obligation. As these factors are impacted by actual experience and future expectations, the Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts when necessary.

Changes in accrued warranty liabilities are as follows:

 

     Three months ended     Nine months ended  
     September 30, 2007     October 1, 2006     September 30, 2007     October 1, 2006  

Beginning balance

   $ 180     $ 207     $ 112     $ 1,036  

Addition to (reversal of) warranty reserve

     40       12       346       (563 )

Payments made

     (31 )     (69 )     (272 )     (377 )

Translation adjustments

     1       2       4       56  
                                

Ending balance

   $ 190     $ 152     $ 190     $ 152  
                                

6. Short-term borrowings

On December 23, 2004, the Company and its subsidiaries, including MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, entered into a senior credit agreement with a syndicate of banks, financial institutions and other entities providing for a $100 million senior secured revolving credit facility. Interest is charged at current rates when drawn upon.

Presently, borrowings under the credit agreement bear interest equal to the 3-month London Inter-bank Offering Rate (“LIBOR”) plus 4.75% or Alternate Base Rate (“ABR”) plus 3.75%. Additionally, the Company is required to pay the administrative agent for the account of each lender a commitment fee equal to 0.5% on the average daily unused amount of the commitment of each Lender during the period from December 23, 2004 to but excluding the date on which such commitments terminate. At September 30, 2007, the Company had borrowed $50.6 million under this credit agreement.

Borrowings under the senior secured credit facility are subject to significant conditions, including compliance with financial ratios and other covenants and obligations.

On September 28, 2007, the Company entered into the Eighth Amendment to Credit Agreement, dated as of September 28, 2007 (the “Eighth Amendment”), with MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, the Subsidiary Guarantors party thereto, the Lenders party thereto, and UBS AG, Stamford Branch, as administrative agent and collateral agent. Under the Eighth Amendment, among other things, the financial covenants regarding total leverage, interest coverage, capital expenditure limitations and minimum levels of EBITDA and liquidity were modified. In addition, the monthly requirement of the obligors to provide certain financial and other reports to the lenders were modified.

Details of short-term borrowings as of September 30, 2007 are presented as below:

 

     Maturity    Annual interest rate (%)    Amount of
principal

Euro dollar Revolving Loan

   2007-12-21    3 month LIBOR + 4.75    $ 20,000

ABR Revolving Loan

   2007-12-28    ABR + 3.75      20,000

Banker’s Usance

           10,601
            
         $ 50,601
            

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

7. Long-term Borrowings

On December 23, 2004, two of the Company’s subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company issued $500 million aggregate principal amount of Second Priority Senior Secured Notes consisting of $300 million aggregate principal amount of Floating Rate Second Priority Senior Secured Notes and $200 million aggregate principal amount of 6  7/8% Second Priority Senior Secured Notes. At the same time, such subsidiaries issued $250 million aggregate principal amount of 8% Senior Subordinated Notes.

Details of long-term borrowings as of September 30, 2007 and December 31, 2006 are presented as below:

 

     Maturity    Annual interest rate (%)    Amount of
principal

Floating Rate Second Priority Senior Secured Notes

   2011    3 month LIBOR + 3.250    $ 300,000

 7/8% Second Priority Senior Secured Notes

   2011    6.875      200,000

8% Senior Subordinated Notes

   2014    8.000      250,000
            
         $ 750,000
            

The senior secured revolving credit facility and Second Priority Senior Secured Notes are collateralized by substantially all of the assets of the Company. The notes are due in full upon maturity.

Each indenture governing the notes contains covenants that limit the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make other distributions on its capital stock or repurchase, repay or redeem its capital stock, (iii) make certain investments, (iv) incur liens, (v) enter into certain types of transactions with affiliates, (vi) create restrictions on the payment of dividends or other amounts to the Company by its subsidiaries, and (vii) sell all or substantially all of its assets or merge with or into other companies.

As of September 30, 2007, the Company and all of its subsidiaries except for MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed each series of the Second Priority Senior Secured Notes on a second priority senior secured basis. As of September 30, 2007, the Company and its subsidiaries except for MagnaChip Semiconductor Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited have jointly and severally guaranteed the Senior Subordinated Notes on an unsecured, senior subordinated basis. In addition, the Company and each of its current and future direct and indirect subsidiaries (subject to certain exceptions) will be guarantors of the Second Priority Senior Secured Notes and Senior Subordinated Notes.

Interest Rate Swap

Effective June 27, 2005, the Company entered into an interest rate swap agreement (the “Swap”) that converted the variable interest rate of three-month LIBOR plus 3.25% to a fixed interest rate of 7.34% on the Company’s Floating Rate Second Priority Senior Secured Notes (the “Notes”). This Swap will be in effect until June 15, 2008.

The Swap qualifies as an effective cash flow hedge under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Company is utilizing the “hypothetical derivative method” to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.” Under this methodology, the actual swap was effective when compared to the hypothetical hedge.

For the nine-month period ended September 30, 2007, the Company recorded changes in the fair value of the Swap amounting to $2,260 thousand, under other comprehensive income in the accompanying condensed consolidated financial statements. In addition, during the same period, the Company recognized interest income of $2,888 thousand, which represents the differences between fixed and variable rates.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

8. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary. Pursuant to the Labor Standards Act of Korea, most employees and executive officers with one or more years of service are entitled to severance benefits upon the termination of their employment based on their length of service and rate of pay. As of September 30, 2007, 96% of all employees of the Company were eligible for severance benefits.

Changes in the carrying value of accrued severance benefits are as follows:

 

     Three months ended     Nine months ended  
     September 30,
2007
    October 1,
2006
    September 30,
2007
    October 1,
2006
 

Beginning balance

   $ 70,182     $ 60,793     $ 64,642     $ 56,967  

Provisions

     4,605       4,675       13,985       10,031  

Severance payments

     (1,511 )     (2,557 )     (5,913 )     (7,116 )

Effect of foreign currency translation and other

     763       669       1,325       3,698  
                                

Ending balance

     74,039       63,580       74,039       63,580  
                                

Less: Cumulative contributions to the National Pension Fund

     (813 )     (866 )     (813 )     (866 )

Group Severance insurance plan

     (919 )     (936 )     (919 )     (936 )
                                
   $ 72,307     $ 61,778     $ 72,307     $ 61,778  
                                

The severance benefits are funded approximately 2.34% and 2.83% as of September 30, 2007 and October 1, 2006, respectively, through the Company’s National Pension Fund and group severance insurance plan which will be used exclusively for payment of severance benefits to eligible employees. These amounts have been deducted from the accrued severance benefit balance.

The Company expects to pay the following future benefits to its employees upon their normal retirement age:

 

     Severance benefit

2008

   $ —  

2009

     71

2010

     228

2011

     81

2012

     161

2013 – 2017

     5,289

The above amounts were determined based on the employees’ current salary rates and the number of service years that will be accumulated upon their retirement dates. These amounts do not include amounts that might be paid to employees that will cease working with the Company before their normal retirement ages.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

9. Redeemable Convertible Preferred Units

The Company issued 49,727 units as Series A redeemable convertible preferred units (the “Series A”) and 447,420 units as Series B redeemable convertible preferred units (the “Series B”) on September 23, 2004 and additionally issued 364 units of Series A and 3,272 units of Series B on November 30, 2004, respectively. All of Series A were redeemed by cash on December 27, 2004 and some of the Series B were redeemed by cash on December 15, 2004 and December 27, 2004.

Changes in Series B for the three and nine months ended September 30, 2007 and October 1, 2006 are as follows:

 

     Three months ended
     September 30, 2007    October 1, 2006
     Units    Amount    Units    Amount

Beginning of period

   93,997    $ 123,227    93,997    $ 111,801

Accrual of preferred dividends

   —        3,010    —        2,731
                       

End of period

   93,997    $ 126,237    93,997    $ 114,532
                       

 

     Nine months ended
     September 30, 2007    October 1, 2006
     Units    Amount    Units    Amount

Beginning of period

   93,997    $ 117,374    93,997    $ 106,462

Accrual of preferred dividends

   —        8,863    —        8,070
                       

End of period

   93,997    $ 126,237    93,997    $ 114,532
                       

The Series B were issued to the original purchasers of the Company in 2004. Holders of Series B receive dividends which are cumulative, whether or not earned or declared by the board of directors. The cumulative cash dividends accrue at the rate of 10% per unit per annum on the Series B original issue price, compounded semi-annually.

10. Earnings per Unit

The following table illustrates the computation of basic and diluted loss per common unit for the three-month and nine-month periods ended September 30, 2007 and October 1, 2006:

 

     Three months ended     Nine months ended  
     September 30,
2007
    October 1,
2006
    September 30,
2007
    October 1,
2006
 

Net loss

   $ (38,766 )   $ (47,718 )   $ (151,072 )   $ (183,672 )

Dividends to preferred unitholders

     3,010       2,731       8,863       8,070  
                                

Net loss attributable to common units

   $ (41,776 )   $ (50,449 )   $ (159,935 )   $ (191,742 )
                                

Weighted-average common units outstanding

     52,814,383       52,720,976       52,769,273       52,975,152  
                                

Basic and diluted loss per unit

   $ (0.79 )   $ (0.96 )   $ (3.03 )   $ (3.62 )
                                

 

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Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

The following outstanding redeemable convertible preferred units issued, options granted and warrants issued were excluded from the computation of diluted loss per unit as they would have an anti-dilutive effect on the calculation:

 

     Nine months ended
     September 30, 2007    October 1, 2006

Redeemable convertible preferred units

   93,997    93,997

Options

   4,956,434    4,909,152

Warrant

   —      5,079,254

In connection with the acquisition of the Company’s business from Hynix Semiconductor Inc. on October 6, 2004, the Company issued a warrant to Hynix which enabled Hynix to purchase 5,079,254 common units of the Company at an exercise price of $1.00 per unit. This warrant expired unexercised in accordance with its terms on October 6, 2006.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

11. Restructuring and Impairment Charges

Assets impairment

In the Second Quarter of 2007, the Company recognized impairment charges of $10,106 thousand under SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS No. 144”). The Impairment charges were recorded related to the closure of the Company’s 5-inch wafer fabrication facility that has generated losses and no longer supported the Company’s strategic technology roadmap. In the Second Quarter of 2006, the Company recorded impairment charges of $92,540 thousand under SFAS No. 144. The impairment charges were recorded against one of the Company’s asset groups comprising of a fabrication facility and certain related technology and customer-based intangible assets, in the Company’s Image Solutions businesses.

SFAS No. 144 requires the Company to evaluate the recoverability of certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The net book value of the asset group before the impairment charges as of July 1, 2007 and July 2, 2006 were approximately $10,228 and $185,985 thousand, respectively.

The impairment charge was measured as an excess of the carrying value of the asset group over its fair value. The fair value of the asset group was estimated using a present value technique, where expected future cash flows from the use and eventual disposal of the asset group were discounted by an interest rate commensurate with the risk of the cash flows.

Restructuring

In the second quarter of 2007, the Company recognized $1,978 thousand of restructuring under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). The restructuring charges were related to the closure of the Company’s 5-inch wafer fabrication facilities to be completed within the next several months. These charges consist of one-time termination benefits, transfer of machinery and other associated costs. In the second quarter of 2006, the Company recorded restructuring charges of $1,144 thousand in accordance with SFAS No. 146. These charges were incurred in association with changes in the Company’s management and the early retirement of certain employees.

12. Uncertainty in Income Taxes

The Company, including its subsidiaries files income tax returns in Korea, Japan, Taiwan, U.S. and various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for all years since the beginning of its operation in October 2004.

The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109, on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized a $1,554 thousand increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of accumulated deficits. The total amount of unrecognized tax benefits as of the date of adoption was $6,773 thousand and it is related to the temporary difference arising from timing of expensing certain inventories. There was no change in total amount of unrecognized tax benefits during the three months ended September 30, 2007.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $41 thousand and $121 thousand of interest and penalties, respectively, for the three and nine months ended September 30, 2007. Total interest and penalties accrued as of September 30, 2007 and as of the FIN No. 48 adoption date were $670 thousand and $530 thousand respectively.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

13. Segment Information

The Company has determined, based on the nature of its operations and products offered to customers, that its reportable segments are Display Solutions, Imaging Solutions, and Semiconductor Manufacturing Services. The Display Solutions segment’s primary products are flat panel display drivers and the Imaging Solutions segment’s primary products are CMOS image sensors. The Semiconductor Manufacturing Service segment provides for wafer foundry services to clients. Net sales and gross profit for the “All other” category primarily relates to certain business activities that do not constitute operating or reportable segments.

The Company’s chief operating decision maker (“CODM”) as defined by SFAS 131, Disclosure about Segments of an Enterprise and Relate Information, allocates resources to and assesses the performance of each segment using information about its revenue and gross profit. The Company does not identify or allocate assets by segments, nor does the CODM evaluate operating segments using discrete asset information. In addition, the Company does not allocate operating expense, interest income or expense, other income or expense, or income tax to the segments. Management does not evaluate segments based on these criteria.

The following sets forth information relating to the reportable segments:

 

     Three months ended
     September 30, 2007    October 1, 2006

Net Sales

     

Display Solutions

   $ 79,344    $ 56,056

Imaging Solutions

     22,425      12,691

Semiconductor Manufacturing Services

     84,770      84,440

All other

     13,506      18,096
             

Total segment net sales

   $ 200,045    $ 171,283
             

Gross Profit

     

Display Solutions

   $ 4,660    $ 5,238

Imaging Solutions

     2,666      2,708

Semiconductor Manufacturing Services

     17,184      5,037

All other

     6,833      7,878
             

Total segment gross profit

   $ 31,343    $ 20,861
             

 

     Nine months ended  
     September 30, 2007    October 1, 2006  

Net Sales

     

Display Solutions

   $ 223,327    $ 215,116  

Imaging Solutions

     51,568      47,691  

Semiconductor Manufacturing Services

     217,611      280,838  

All other

     53,375      38,394  
               

Total segment net sales

   $ 545,881    $ 582,039  
               

Gross Profit

     

Display Solutions

   $ 19,885    $ 31,308  

Imaging Solutions

     2,517      (5,302 )

Semiconductor Manufacturing Services

     31,747      46,259  

All other

     19,871      9,195  
               

Total segment gross profit

   $ 74,020    $ 81,460  
               

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

14. Commitments and Contingencies

Advisory agreements were entered into as of October 6, 2004 by and between the Company and each of the advisors including Court Square Advisor, LLC (successor in interest to CVC Management LLC) (“Court Square”), CVC Capital Partners Asia Limited (“CVC Capital”) and Francisco Partners Management LLC (“Francisco Partners”). The Company was to pay each of Court Square and Francisco Partners an annual advisory fee the amount of which shall be the greater of $1,379,163 per annum or 0.14777% per annum of annual consolidated revenue, and is also to pay CVC Capital an annual advisory fee the amount of which shall be the greater of $741,673 per annum or 0.07946% per annum of annual consolidated revenue plus reasonable out-of-pocket expenses for an initial term of 10 years, subject to termination by either party upon written notice 90 days prior to the expiration of the initial term or any extension thereof. During the year ended December 31, 2005 and the three-month period ended December 31, 2004 (successor company), the Company accrued $3,545 thousand and $890 thousand of accrued expenses under these agreements, respectively, which is included in selling, general and administrative expenses in the accompanying consolidated financial statements. During the year ended December 31, 2006, due to lower financial performances, the advisors agreed to waive the advisory fee and, therefore, the Company did not accrue any expenses. Effective June 30, 2007, the parties to the advisory agreements entered into that certain the First Amendment to Advisory Agreement under which all rights and obligations of the parties terminate except for indemnity and liability provisions. The Amendment provides that upon a sale of the Company to an unaffiliated third party or a firmly underwritten public offering of common equity of the Company with net proceeds of $50 million or more, the Company must pay a termination fee to the advisors in the amount of all advisory fees not paid under the advisory agreements plus the net present value of all advisory fees that would have been payable through October 6, 2014 had the advisory agreements not been amended.

The Company has committed to its employees that it will pay an incentive to all non-executive employees upon the occurrence of certain specified events.

15. Condensed Consolidating Financial Statements

The senior secured credit facility and Second Priority Senior Secured Notes are each fully and unconditionally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor (Shanghai) Company Limited. The Senior Subordinated Notes are fully and unconditionally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited. The Senior Subordinated Notes are structurally subordinated to the creditors of our principal manufacturing subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for a majority of our net sales and substantially all of our assets.

Below are condensed consolidating balance sheets as of September 30, 2007 and December 31, 2006, condensed consolidating statements of operations for the three months and nine months ended September 30, 2007 and October 1, 2006 and condensed consolidating statement of cash flows for the nine months ended September 30, 2007 and October 1, 2006 of those entities that guarantee the Senior Subordinated Notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2007

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers    

Non-

Guarantors

    Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 197,287     $ 98,087     $ (95,329 )   $ 200,045  

Cost of sales

     —         —         170,083       86,651       (88,032 )     168,702  
                                                

Gross profit

     —         —         27,204       11,436       (7,297 )     31,343  
                                                

Selling, general and administrative expenses

     76       365       19,741       3,589       (127 )     23,644  

Research and development expenses

     —         —         33,737       6,456       (6,756 )     33,437  

Restructuring and impairment charge

     —         —         —         —         —         —    
                                                

Operating income (loss)

     (76 )     (365 )     (26,274 )     1,391       (414 )     (25,738 )
                                                

Other income (expense)

     1       7,142       (8,030 )     (9,594 )     —         (10,481 )
                                                

Income (loss) before income taxes, equity in earnings (loss) of related equity investment

     (75 )     6,777       (34,304 )     (8,203 )     (414 )     (36,219 )
                                                

Income tax expenses

     —         43       81       2,423       —         2,547  
                                                

Loss before equity in loss of related investment

     (75 )     6,734       (34,385 )     (10,626 )     (414 )     (38,766 )
                                                

Earnings (loss) of related investment

     (38,691 )     (45,603 )     —         (34,782 )     119,076       —    
                                                

Net loss

   $ (38,766 )   $ (38,869 )   $ (34,385 )   $ (45,408 )   $ 118,662     $ (38,766 )
                                                

Dividends accrued on preferred units

     3,010       —         —         —         —         3,010  
                                                

Net loss attributable to common units

   $ (41,776 )   $ (38,869 )   $ (34,385 )   $ (45,408 )   $ 118,662     $ (41,776 )
                                                

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the nine months ended September 30, 2007

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers    

Non-

Guarantors

    Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 532,544     $ 235,186     $ (221,849 )   $ 545,881  

Cost of sales

     —         —         471,123       204,483       (203,745 )     471,861  
                                                

Gross profit

     —         —         61,421       30,703       (18,104 )     74,020  
                                                

Selling, general and administrative expenses

     321       926       60,448       10,272       (63 )     71,904  

Research and development expenses

     —         —         101,813       16,681       (17,405 )     101,089  

Restructuring and impairment charge

     —         —         12,084       —         —         12,084  
                                                

Operating income (loss)

     (321 )     (926 )     (112,924 )     3,750       (636 )     (111,057 )
                                                

Other income (expense)

     1       4,512       (28,045 )     (9,840 )     —         (33,372 )
                                                

Income (loss) before income taxes, equity in earnings (loss) of related equity investment

     (320 )     3,586       (140,969 )     (6,090 )     (636 )     (144,429 )
                                                

Income tax expenses

     —         128       115       6,400       —         6,643  
                                                

Loss before equity in loss of related investment

     (320 )     3,458       (141,084 )     (12,490 )     (636 )     (151,072 )
                                                

Loss of related investment

     (150,752 )     (154,605 )     —         (141,451 )     446,808       —    
                                                

Net loss

   $ (151,072 )   $ (151,147 )   $ (141,084 )   $ (153,941 )   $ 446,172     $ (151,072 )
                                                

Dividends accrued on preferred units

     8,863       —         —         —         —         8,863  
                                                

Net loss attributable to common units

   $ (159,935 )   $ (151,147 )   $ (141,084 )   $ (153,941 )   $ 446,172     $ (159,935 )
                                                

 

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MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the three months ended October 1, 2006

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers     Non-Guarantors     Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 163,459     $ 90,972     $ (83,148 )   $ 171,283  

Cost of sales

     —         —         147,484       77,306       (74,368 )     150,422  
                                                

Gross profit

     —         —         15,975       13,666       (8,780 )     20,861  
                                                

Selling, general and administrative expenses

     18       231       19,197       3,420       (54 )     22,812  

Research and development expenses

     —         —         37,053       3,828       (8,865 )     32,016  

Restructuring and impairment charges

     —         —         264       —         —         264  
                                                

Operating income (loss)

     (18 )     (231 )     (40,539 )     6,418       139       (34,231 )
                                                

Other income (expenses)

     2       (4,287 )     (10,787 )     3,283       —         (11,789 )
                                                

Income (loss) before income taxes, equity in loss of related equity investment

     (16 )     (4,518 )     (51,326 )     9,701       139       (46,020 )
                                                

Income tax expenses

     —         40       50       1,608       —         1,698  
                                                

Income (loss) before equity in loss of related Investment

     (16 )     (4,558 )     (51,376 )     8,093       139       (47,718 )
                                                

Loss of related investment

     (47,702 )     (48,981 )     —         (51,473 )     148,156       —    
                                                

Net loss

   $ (47,718 )   $ (53,539 )   $ (51,376 )   $ (43,380 )   $ 148,295     $ (47,718 )
                                                

Dividends accrued on preferred units

     2,731       —         —         —         —         2,731  
                                                

Net loss attributable to common units

   $ (50,449 )   $ (53,539 )   $ (51,376 )   $ (43,380 )   $ 148,295     $ (50,449 )
                                                

 

20


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Operations

For the nine months ended October 1, 2006

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers     Non-
Guarantors
    Guarantors     Eliminations     Consolidated  

Net sales

   $ —       $ —       $ 561,282     $ 291,357     $ (270,600 )   $ 582,039  

Cost of sales

     —         —         494,361       263,159       (256,941 )     500,579  
                                                

Gross profit

     —         —         66,921       28,198       (13,659 )     81,460  
                                                

Selling, general and administrative expenses

     86       748       56,969       8,619       (54 )     66,368  

Research and development expenses

     —         —         99,798       10,813       (14,743 )     95,868  

Restructuring and impairment charges

     —         —         93,723       225       —         93,948  
                                                

Operating income (loss)

     (86 )     (748 )     (183,569 )     8,541       1,138       (174,724 )
                                                

Other income (expenses)

     2       6,134       2,481       (10,734 )     —         (2,117 )
                                                

Income (loss) before income taxes, equity in loss of related equity investment

     (84 )     5,386       (181,088 )     (2,193 )     1,138       (176,841 )
                                                

Income tax expenses

     —         122       50       6,659       —         6,831  
                                                

Income (loss) before equity in loss of related Investment

     (84 )     5,264       (181,138 )     (8,852 )     1,138       (183,672 )
                                                

Loss of related investment

     (183,588 )     (193,848 )     —         (181,611 )     559,047       —    
                                                

Net loss

   $ (183,672 )   $ (188,584 )   $ (181,138 )   $ (190,463 )   $ 560,185     $ (183,672 )
                                                

Dividends accrued on preferred units

     8,070       —         —         —         —         8,070  
                                                

Net loss attributable to common units

   $ (191,742 )   $ (188,584 )   $ (181,138 )   $ (190,463 )   $ 560,185     $ (191,742 )
                                                

 

21


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Balance Sheet

September 30, 2007

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers    

Non-

Guarantors

    Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 278     $ 22,091     $ 34,888     $ 4,677     $ —       $ 61,934  

Accounts receivable, net

     —         —         127,648       56,286       (59,592 )     124,342  

Inventories, net

     —         —         89,563       5,042       (505 )     94,100  

Other receivables

     —         718       6,349       19,732       (19,749 )     7,050  

Short-term inter-company loans

     —         20,000       —         20,000       (40,000 )     —    

Other current assets

     1       15,773       11,048       10,700       (26,747 )     10,775  
                                                

Total current assets

     279       58,582       269,496       116,437       (146,593 )     298,201  
                                                

Property, plant and equipment, net

     —         —         278,077       2,945       —         281,022  

Intangible assets, net

     —         —         96,477       19,202       (183 )     115,496  

Investments in subsidiaries

     (326,133 )     (406,325 )     —         (225,189 )     957,647       —    

Long-term inter-company loans

     —         804,809       —         634,445       (1,439,254 )     —    

Other non-current assets

     —         16,942       41,417       9,814       (20,632 )     47,541  
                                                

Total assets

   $ (325,854 )   $ 474,008     $ 685,467     $ 557,654     $ (649,015 )   $ 742,260  
                                                

Liabilities and Unitholders’ equity

            

Current liabilities

            

Accounts payable

   $ —       $ —       $ 128,517     $ 52,296     $ (59,592 )   $ 121,221  

Other accounts payable

     —         5       49,234       2,223       (19,749 )     31,713  

Accrued expenses

     110       11,674       24,264       17,657       (23,524 )     30,181  

Short-term Borrowings

     —         40,000       30,601       20,000       (40,000 )     50,601  

Other current liabilities

     —         462       2,913       5,010       (3,223 )     5,162  
                                                

Total current liabilities

     110       52,141       235,529       97,186       (146,088 )     238,878  
                                                

Long-term borrowings

     —         750,000       621,000       818,254       (1,439,254 )     750,000  

Accrued severance benefits, net

     —         —         71,878       429       —         72,307  

Other non-current liabilities

     —         —         5,287       22,384       (20,632 )     7,039  
                                                

Total liabilities

     110       802,141       933,694       938,253       (1,605,974 )     1,068,224  

Commitments and contingencies

            

Series A redeemable convertible preferred units

     —         —         —         —         —         —    

Series B redeemable convertible preferred units

     126,237       —         —         —         —         126,237  
                                                

Total redeemable convertible preferred units

     126,237       —         —         —         —         126,237  
                                                

Unitholders’ equity

            

Common units

     52,832       136,229       39,005       55,778       (231,012 )     52,832  

Additional paid-in capital

     2,698       1,629       155,618       107,659       (264,906 )     2,698  

Accumulated deficit

     (531,803 )     (490,813 )     (465,996 )     (567,983 )     1,524,792       (531,803 )

Accumulated other comprehensive income

     24,072       24,822       23,146       23,947       (71,915 )     24,072  
                                                

Total unitholders’ equity

     (452,201 )     (328,133 )     (248,227 )     (380,599 )     956,959       (452,201 )
                                                

Total liabilities, redeemable convertible preferred units and unitholders’ equity

   $ (325,854 )   $ 474,008     $ 685,467     $ 557,654     $ (649,015 )   $ 742,260  
                                                

 

22


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Balance Sheet

December 31, 2006

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers    

Non-

Guarantors

    Guarantors     Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents

   $ 321     $ 892     $ 72,608     $ 15,352     $ —       $ 89,173  

Accounts receivable, net

     —         —         86,488       34,971       (44,794 )     76,665  

Inventories, net

     —         —         55,676       2,208       (38 )     57,846  

Other receivables

     —         718       5,244       28,133       (27,341 )     6,754  

Other current assets

     58       15,862       12,843       6,692       (21,829 )     13,626  
                                                

Total current assets

     379       17,472       232,859       87,356       (94,002 )     244,064  
                                                

Property, plant and equipment, net

     —         —         334,809       1,470       —         336,279  

Intangible assets, net

     —         —         117,101       22,628       —         139,729  

Investments in subsidiaries

     (167,545 )     (246,126 )     —         (77,489 )     491,160       —    

Long-term inter-company loans

     —         791,648       —         633,987       (1,425,635 )     —    

Other non-current assets

     —         21,349       41,972       9,702       (23,042 )     49,981  
                                                

Total assets

   $ (167,166 )   $ 584,343     $ 726,741     $ 677,654     $ (1,051,519 )   $ 770,053  
                                                

Liabilities and Unitholders’ equity

            

Current liabilities

            

Accounts payable

   $ —       $ —       $ 67,002     $ 40,191     $ (44,794 )   $ 62,399  

Other accounts payable

     —         6       51,803       7,955       (27,341 )     32,423  

Accrued expenses

     1       3,135       22,040       17,078       (18,607 )     23,647  

Other current liabilities

     —         333       1,844       4,025       (3,222 )     2,980  
                                                

Total current liabilities

     1       3,474       142,689       69,249       (93,964 )     121,449  
                                                

Long-term borrowings

     —         750,000       621,000       804,635       (1,425,635 )     750,000  

Accrued severance benefits, net

     —         —         62,550       286       —         62,836  

Other non-current liabilities

     —         —         1,191       24,786       (23,042 )     2,935  
                                                

Total liabilities

     1       753,474       827,430       898,956       (1,542,641 )     937,220  

Commitments and contingencies

            

Series A redeemable convertible preferred units

     —         —         —         —         —         —    

Series B redeemable convertible preferred units

     117,374       —         —         —         —         117,374  
                                                

Total redeemable convertible preferred units

     117,374       —         —         —         —         117,374  
                                                

Unitholders’ equity

            

Common units

     52,721       136,229       39,005       55,778       (231,012 )     52,721  

Additional paid-in capital

     2,451       1,401       155,415       108,239       (265,055 )     2,451  

Accumulated deficit

     (370,314 )     (338,112 )     (323,358 )     (412,488 )     1,073,958       (370,314 )

Accumulated other comprehensive income

     30,601       31,351       28,249       27,169       (86,769 )     30,601  
                                                

Total unitholders’ equity

     (284,541 )     (169,131 )     (100,689 )     (221,302 )     491,122       (284,541 )
                                                

Total liabilities, redeemable convertible preferred units and unitholders’ equity

   $ (167,166 )   $ 584,343     $ 726,741     $ 677,654     $ (1,051,519 )   $ 770,053  
                                                

 

23


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Cash Flows

For the nine months ended September 30, 2007

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers    

Non-

Guarantors

    Guarantors     Eliminations     Consolidated  

Cash flow from operating activities:

            

Net loss

   $ (151,072 )   $ (151,147 )   $ (141,084 )   $ (153,941 )   $ 446,172     $ (151,072 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

            

Depreciation and amortization

     —         —         135,507       3,280       —         138,787  

Provision for severance benefits

     —         —         13,857       128       —         13,985  

Amortization of debt issuance costs

     —         2,180       733       —         —         2,913  

(Gain) loss on foreign currency translation, net

     —         (13,161 )     (10,042 )     13,580       —         (9,623 )

Impairment charges

     —         —         10,130       —         (24 )     10,106  

Loss of related investment

     150,752       154,605       —         141,451       (446,808 )     —    

Other

     —         —         238       123       —         361  

Changes in operating assets and liabilities:

            

Accounts receivable

     —         —         (40,196 )     (21,089 )     14,798       (46,487 )

Inventories

     —         —         (32,252 )     (2,742 )     466       (34,528 )

Other receivables

     —         —         (1,017 )     8,397       (7,592 )     (212 )

Deferred tax assets

     —         —         —         655       —         655  

Accounts payable

     —         —         59,565       11,932       (14,798 )     56,699  

Other accounts payable

     —         —         (7,710 )     (4,894 )     7,592       (5,012 )

Accrued expenses

     110       8,539       1,838       548       (4,917 )     6,118  

Other current assets

     58       89       9,364       (3,792 )     2,523       8,242  

Other current liabilities

     —         128       1,028       (602 )     2,385       2,939  

Payment of severance benefits

     —         —         (5,913 )     —         —         (5,913 )

Other

     —         (34 )     (55 )     (1,696 )     602       (1,183 )
                                                

Net cash provided by (used in) operating activities

     (152 )     1,199       (6,009 )     (8,662 )     399       (13,225 )
                                                

Cash flows from investing activities:

            

Purchase of plant, property and equipment

     —         —         (62,285 )     (1,682 )     —         (63,967 )

Payment for intellectual property registration

     —         —         (1,115 )     (34 )     194       (955 )

Proceeds from disposal of plant, property and equipment

     —         —         699       (421 )     —         278  

Increase in short-term loans

     —         (20,000 )     —         (20,000 )     40,000       —    

Other

     —         —         787       (579 )     —         208  
                                                

Net cash provided by (used in) investing activities

     —         (20,000 )     (61,914 )     (22,716 )     40,194       (64,436 )
                                                

Cash flows from financing activities:

            

Exercise of unit options

     111       —         —         —         —         111  

Proceeds from short-term borrowings

     —         40,000       30,397       20,000       (20,000 )     70,397  

Repayment of short-term borrowings

     —         —         —         —         (20,000 )     (20,000 )
                                                

Net cash provided by (used in) financing activities

     111       40,000       30,397       20,000       (40,000 )     50,508  

Effect of exchange rates on cash and cash equivalents

     (2 )     —         (194 )     703       (593 )     (86 )
                                                

Net increase (decrease) in cash and cash equivalents

     (43 )     21,199       (37,720 )     (10,675 )     —         (27,239 )
                                                

Cash and cash equivalents:

            

Beginning of the period

     321       892       72,608       15,352       —         89,173  
                                                

End of the period

   $ 278     $ 22,091     $ 34,888     $ 4,677     $ —       $ 61,934  
                                                

 

24


Table of Contents

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – (Continued)

(Unaudited; tabular dollars in thousands, except unit data)

 

Condensed Consolidating Statement of Cash Flows

For the nine months ended October 1, 2006

 

    

MagnaChip
Semiconductor
LLC

(Parent)

    Co-Issuers     Non-
Guarantors
    Guarantors     Eliminations     Consolidated  

Cash flow from operating activities

            

Net loss

   $ (183,672 )   $ (188,584 )   $ (181,138 )   $ (190,463 )   $ 560,185     $ (183,672 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

            

Depreciation and amortization

     —         —         142,376       3,105       —         145,481  

Provision for severance benefits

     —         —         10,029       2       —         10,031  

Amortization of debt issuance costs

     —         2,084       676       —         —         2,760  

Loss (gain) on foreign currency translation, net

     —         (10,882 )     (43,674 )     11,259       —         (43,297 )

Impairment of long-lived assets

     —         —         92,540       —         —         92,540  

Loss of related investment

     183,588       193,848       —         181,611       (559,047 )     —    

Other

     —         —         1,687       (2,663 )     2,419       1,443  

Changes in operating assets and liabilities

            

Accounts receivable

     —         —         42,450       14,719       (20,365 )     36,804  

Inventories

     —         —         32,150       3,444       (1,099 )     34,495  

Other receivables

     1,603       —         4,070       4,173       (6,616 )     3,230  

Deferred tax assets

     —         —         —         1,405       —         1,405  

Accounts payable

     —         —         (36,691 )     (23,629 )     20,365       (39,955 )

Other accounts payable

     (1,000 )     (435 )     (23,807 )     1,756       6,616       (16,870 )

Accrued expenses

     17       8,457       1,721       1,278       (8,594 )     2,879  

Other current assets

     —         (3,778 )     (320 )     (6,197 )     9,040       (1,255 )

Other current liabilities

     —         122       (1,794 )     (2,982 )     (446 )     (5,100 )

Payment of severance benefits

     —         —         (7,116 )     —         —         (7,116 )

Other

     —         (184 )     5,533       (162 )     (2,419 )     2,768  
                                                

Net cash provided by (used in) operating activities

     536       648       38,692       (3,344 )     39       36,571  
                                                

Cash flows from investing activities

            

Purchase of plant, property and equipment

     —         —         (25,574 )     (700 )     —         (26,274 )

Payments for intellectual property registration

     —         —         (1,687 )     (59 )     —         (1,746 )

Proceeds from disposal of plant, property and equipment

     —         —         2,748       —         —         2,748  

Proceeds from disposal of intangible assets

     —         —         2,801       —         —         2,801  

Decrease in restricted cash

     —         —         2,985       —         —         2,985  

Other

     —         —         (704 )     4       —         (700 )
                                                

Net cash used in investing activities

     —         —         (19,431 )     (755 )     —         (20,186 )
                                                

Cash flows from financing activities

            

Exercise of unit options

     88       —         —         —         —         88  

Repurchase of common units

     (420 )     —         —         —         —         (420 )
                                                

Net cash used in financing activities

     (332 )     —         —         —         —         (332 )

Effect of exchange rate on cash and cash equivalents

     —         —         5,524       (623 )     (39 )     4,862  
                                                

Net increase (decrease) in cash and cash equivalents

     204       648       24,785       (4,722 )     —         20,915  
                                                

Cash and cash equivalents

            

Beginning of the period

     209       841       63,435       22,089       —         86,574  
                                                

End of the period

   $ 413     $ 1,489     $ 88,220     $ 17,367     $ —       $ 107,489  
                                                

 

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Table of Contents

PART I. Financial Information – (continued)

 

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.

These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in this section and the “Risk Factors” and elsewhere in this report.

All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information or future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Overview

We are an Asia-based designer and manufacturer of analog and mixed-signal semiconductor products for high volume consumer applications, such as mobile phones, digital televisions, flat panel displays, notebook computers, mobile multimedia devices and digital cameras. Our analog and mixed-signal semiconductor products and services enable the high resolution display of images and video, conversion of analog signals, such as light and sound, into digital data as well as manage power consumption. Our display driver solutions cover a wide range of display sizes used in high definition liquid crystal display, or LCD, televisions, flat panel displays, notebook computers and mobile communications and entertainment devices. Our image sensor solutions are highly integrated and designed to provide brighter, sharper and more colorful image quality in a variety of light conditions for use primarily in mobile handset, PC and notebook computer camera applications and security systems. We have also utilized our technology platform and manufacturing process expertise to design power management solutions in order to expand our market opportunity and address more of our customers’ needs. We offer semiconductor manufacturing services to providers of analog and mixed-signal semiconductors that require differentiated, specialty process technologies such as high voltage CMOS, embedded memory and power.

The variety of analog and mixed-signal semiconductor products and services we offer is based on a technology platform that allows us to address multiple end markets and to develop and introduce new products quickly. With manufacturing operations in Korea and design centers in Korea and Japan, our proximity to the global consumer electronics supply chain allows us to service and capture additional demand from existing and new customers. Our manufacturing integration and broad intellectual property enable us to respond quickly to our consumer electronics and semiconductor customers’ needs.

Business Segments

We report in three separate business segments because we derive our revenues from three principal business lines: Display Solutions, Imaging Solutions and Semiconductor Manufacturing Services. Additionally, we have a fourth operating segment, Power Solutions, from which we expect to begin earning revenues in 2008. We have identified those segments based on how we allocate resources and assess our performance.

 

   

Display Solutions: Our Display Solutions segment offers flat panel display drivers for a wide range of small to large panel displays used in digital televisions, mobile phones, LCD monitors, notebook computers and mobile multimedia devices, such as handheld games. Our products cover a broad range of interfaces, packages and technologies including AMOLED, LTPS and TFT technologies.

 

   

Imaging Solutions: Our Imaging Solutions segment covers a broad spectrum of videographics array, or VGA; 1.3, 2.1 and 3.2 megapixel, or MP; CMOS image sensors for large and rapidly growing camera-equipped applications, such as mobile handsets, PCs, digital cameras, notebook computers and security cameras. Our image sensors are designed to provide brighter, sharper and more colorful image quality for use primarily in applications that require a small form factor, low power consumption and high sensitivity in a variety of light conditions.

 

   

Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment manufactures wafers for analog and mixed-signal semiconductor companies based on their designs. We offer 170 process flows to our manufacturing services customers. We also often partner with key customers to jointly develop or customize specialized processes that enable our customers to improve their products and allow us to develop unique manufacturing expertise. Our manufacturing services offering is targeted at customers who require differentiated, specialty analog and mixed-signal process technologies such as high voltage CMOS, embedded memory and power. These customers typically serve high growth and high volume applications in the consumer, computing, wireless and industrial end markets.

 

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Results of Operations – Comparison of Three-Month Periods Ended September 30, 2007 and October 1, 2006.

The following table sets forth consolidated results of operations for the three months ended September 30, 2007 and October 1, 2006:

 

     Three months ended
September 30, 2007
    Three months ended
October 1, 2006
       
     Amount     % of
net sales
    Amount     % of
net sales
   

Change

Amount

 
     (in millions; %)  

Net sales

   $ 200.0     100.0 %   $ 171.3     100.0 %   $ 28.7  

Cost of sales

     168.7     84.4       150.4     87.8       18.3  
                            

Gross profit

     31.3     15.6       20.9     12.2       10.4  
                            

Selling, general and administrative expenses

     23.6     11.8       22.8     13.3       0.8  

Research and development expenses

     33.4     16.7       32.0     18.7       1.4  

Restructuring and impairment charges

     —       —         0.3     0.2       (0.3 )
                            

Operating loss

     (25.7 )   (12.9 )     (34.2 )   (20.0 )     8.5  

Interest expense, net

     15.3     7.7       13.9     8.1       (1.4 )

Foreign currency gain, net

     4.9     2.5       2.2     1.3       2.7  
                            

Loss before income taxes

     (36.2 )   (18.2 )     (46.0 )   (26.9 )     9.8  

Income tax expenses

     2.5     1.3       1.7     1.0       0.8  
                            

Net loss

   $ (38.8 )   (19.5 )%   $ (47.7 )   (27.9 )%   $ 8.9  
                            

Net Sales

 

    

Three months ended

September 30, 2007

    Three months ended
October 1, 2006
       
     Amount   

% of

total

    Amount   

% of

net sales

   

Change

Amount

 
     (in millions; %)  

Display Solutions

   $ 79.3    39.7 %   $ 56.1    32.7 %   $ 23.2  

Imaging Solutions

     22.4    11.2       12.7    7.4       9.7  

Semiconductor Manufacturing Services

     84.8    42.4       84.4    49.3       0.4  

All other

     13.5    6.7       18.1    10.6       (4.6 )
                          
   $ 200.0    100.0 %   $ 171.3    100.0 %   $ 28.7  
                          

We derive a majority of our net sales from three operating segments: Display Solutions, Imaging Solutions and Semiconductor Manufacturing Services. The “All other” category represents certain business activities other than these business segments, principally composed of rental and unit processing.

Total net sales for the three months ended September 30, 2007 increased $28.7 million, or 16.8% compared to the three months ended October 1, 2006. Net sales generated in the three operating segments during the most recently completed quarter were $186.5 million, an increase of $33.3 million or 21.7% from the net sales of the three operating segments for the prior-year quarter.

Display Solutions. Net sales from Display Solutions for the three months ended September 30, 2007 were $79.3 million, a $23.2 million or 41.4% increase from $56.1 million for the three months ended October 1, 2006. This sales increase in our display driver business was primarily attributable to higher volume from both new products and new customers as well as higher volume from existing design wins.

Imaging Solutions. Imaging Solutions net sales increased $9.7 million in the most recently completed quarter, or 76.4% compared to net sales generated in the prior-year quarter. This sales increase in our imaging solution business was primarily attributable to an increase in small form factor VGA product sales and 1.3 megapixel design wins.

Semiconductor Manufacturing Services. Net sales from Semiconductor Manufacturing Services for the third quarter of 2007 were $84.8 million, a $0.4 million or 0.5% slight increase compared to net sales of $84.4 million for the prior-year quarter. This increase was due to an increase in sales volume and the addition of several new customers.

 

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All other. Net sales from All other for the three months ended September 30, 2007 were $13.5 million compared to $18.1 million for the three months ended October 1, 2006.

Net Sales by Geographic Region

The following table sets forth our net sales by geographic region, and the percentage of total net sales represented by each geographic region for each of the three months ended September 30, 2007 and October 1, 2006:

 

    

Three months ended

September 30, 2007

   

Three months ended

October 1, 2006

 
      Amount    % of Total     Amount    % of Total  
     (in millions; %)  

Korea

   $ 102.2    51.1 %   $ 90.7    52.9 %

Asia Pacific

     53.5    26.8       39.1    22.8  

Japan

     21.9    11.0       21.1    12.3  

North America

     16.1    8.0       15.7    9.2  

Europe

     6.3    3.1       4.7    2.8  
                  

Total net revenues

   $ 200.0    100.0 %   $ 171.3    100.0 %
                  

Gross Profit

 

     Three months ended
September 30, 2007
    Three months ended
October 1, 2006
       
     Amount    % of
net sales
    Amount    % of
net sales
    Change
Amount
 
     (in millions; %)  

Display solutions

   $ 4.7    5.8 %   $ 5.2    9.3 %   $ (0.5 )

Imaging solutions

     2.7    12.1       2.7    21.3       0.0  

Semiconductor Manufacturing Services

     17.2    20.3       5.0    5.9       12.2  

All other

     6.8    50.4       7.9    43.6       (1.1 )
                          
   $ 31.3    15.6 %   $ 20.9    12.2 %   $ 10.4  
                          

Total gross profit increased $10.4 million in the third quarter of 2007, or 49.8%, compared to the gross profit generated in the third quarter of 2006. Gross profit percentage for the most recently completed quarter was 15.6% of net sales, an increase of 3.4% from 12.2% for the prior-year quarter. This increase in gross profit percentage was mainly attributable to higher utilization of our fabrication facilities.

Display Solutions. Gross profit percentage for Display Solutions for the three months ended September 30, 2007 declined to 5.8% compared to 9.3% for the three months ended October 1, 2006. This decline in gross profit percentage was primarily attributable to average selling price erosion.

Imaging Solutions. Gross profit percentage for Imaging Solutions for the three months ended September 30, 2007 declined to 12.1% compared to 21.3% for the three months ended October 1, 2006. This decline in gross profit percentage was mainly due to a decrease in average selling price, coupled with product mix changes.

Semiconductor Manufacturing Services. Gross profit for Semiconductor Manufacturing Services increased to 20.3% in the third quarter of 2007 from 5.9% in the third quarter of 2006. The improvement in gross profit percentage was attributable to reduced fixed costs arising out of the higher utilization of our fabrication facilities.

All other. Gross profit percentage for All other for the current period increased to 50.4% from 43.6% in the third quarter of 2006. This improvement in gross profit percentage was mainly due to higher factory utilization compared to the prior year’s third quarter.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general, and administrative expenses were $23.6 million or 11.8% of net sales for the three months ended September 30, 2007, compared to $22.8 million or 13.3% for the three months ended October 1, 2006. The increase of $0.8 million or 3.5% from the prior-year quarter was mainly attributable to increased employee compensation and benefits.

Research and Development Expenses. Research and development expenses for the most recently completed quarter were $33.4 million, an increase of $1.4 million or 4.4% from $32.0 million for the prior year quarter. As a percentage of net sales, research and development expenses for the most recently completed quarter decreased to 16.7% compared to 18.7% for the prior-year quarter.

Restructuring and Impairment Charges. During the three months ended October 1, 2006, we recorded restructuring charges of $0.3 million. The restructuring charges related to termination benefits provided to certain employees under an early retirement program.

 

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Table of Contents

Net Interest Expense and Net Foreign Currency Gain or Loss

Net Interest Expense. Net interest expense was $15.3 million during the three-month period ended September 30, 2007, an increase of $1.4 million from $13.9 million for the three-month period ended October 1, 2006. Substantially all of our interest expense was used to serve our long-term borrowings of $750.0 million and drawings under our senior secured credit facility at a weighted-average interest rate of 7.81%. The increase in net interest expense was mainly due to a decrease in interest income from financial assets including cash and cash equivalents.

Net Foreign Currency Gain or Loss. Net foreign currency gain for the three months ended September 30, 2007 was $4.9 million, compared to net foreign currency gain of $2.2 million for the three months ended October 1, 2006. A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss recorded for intercompany borrowings at our Korea subsidiary and is affected by changes in the exchange rate between the Korean won and U.S. dollar.

Income Tax Expenses

Income Tax Expenses. Income tax expenses for the most recently completed quarter were $2.5 million, compared to income tax expenses of $1.7 million for the same quarter of 2006. Our income tax expenses are mostly composed of withholding taxes on inter-company interest payments and changes in deferred tax assets. Due to the uncertainty of utilization of foreign tax credits, we treated these withholding taxes as current tax expenses.

 

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Table of Contents

Results of Operations – Comparison of nine months ended September 30, 2007 and October 1, 2006

The following table sets forth consolidated results of operations for the nine months ended September 30, 2007 and October 1, 2006:

 

     Nine months ended
September 30, 2007
    Nine months ended
October 1, 2006
   

Change

Amount

 
     Amount     % of
net sales
    Amount     % of
net sales
   
     (in millions; %)  

Net sales

   $ 545.9     100.0 %   $ 582.0     100.0 %   $ (36.2 )

Cost of sales

     471.9     86.4       500.6     86.0       (28.7 )
                            

Gross profit

     74.0     13.6       81.5     14.0       (7.4 )
                            

Selling, general and administrative expenses

     71.9     13.2       66.4     11.4       5.5  

Research and development expenses

     101.1     18.5       95.9     16.5       5.2  

Restructuring and impairment charges

     12.1     2.2       93.9     16.1       (81.9 )
                            

Operating loss

     (111.1 )   (20.3 )     (174.7 )   (30.0 )     63.7  

Interest expense, net

     44.7     8.2       43.0     7.4       (1.7 )

Foreign currency gain, net

     11.3     2.1       40.9     7.0       (29.6 )
                            

Loss before income taxes

     (144.4 )   (26.4 )     (176.8 )   (30.4 )     32.4  

Income tax expenses

     6.6     1.2       6.8     1.2       (0.2 )
                            

Net loss

   $ (151.1 )   (27.7 )%   $ (183.7 )   (31.6 )%   $ 32.6  
                            
Net Sales           
     Nine months ended
September 30, 2007
    Nine months ended
October 1, 2006
   

Change

Amount

 
     Amount     % of
Total
    Amount     % of
total
   
     (in millions; %)  

Display Solutions

   $ 223.3     40.9 %   $ 215.1     37.0 %   $ 8.2  

Imaging Solutions

     51.6     9.5       47.7     8.2       3.9  

Semiconductor Manufacturing Services

     217.6     39.9       280.8     48.3       (63.2 )

All other

     53.4     9.8       38.4     6.6       15.0  
                            
   $ 545.9     100.0 %   $ 582.0     100.0 %   $ (36.2 )
                            

Net sales for the nine months ended September 30, 2007 decreased $36.2 million, or 6.2% compared to the nine months ended October 1, 2006. Net sales generated in the three operating segments during the current period were $492.5 million, a decrease of $51.1 million or 9.4% from the net sales of our three reportable segments for the prior-year period, primarily due to a decrease in sales in the Semiconductor Manufacturing Services segment offset by an increase in sales from the Display Solutions and Imaging Solutions segments.

Display Solutions.    Net sales from Display Solutions for the nine months ended September 30, 2007 were $223.3 million, a $8.2 million or 3.8% increase from $215.1 million for the nine months ended October 1, 2006. The increase resulted primarily from increased sales volume of our display driver products for LCD televisions and PC monitors and was partially offset by decrease in average selling prices of our display driver products for notebook computers and small panel displays.

Imaging Solutions.    Net sales from Imaging Solutions increased $3.9 million in the current period, or 8.2%, compared to net sales generated in the prior-year period. This increase was primarily due to significantly higher sales of small form factor VGA products and, to a lesser extent, higher 1.3 MP product sales due to an increase in market demand for mobile phones and PC cameras. This revenue increase from these products was partially offset by a sharp decrease in 1.0 MP product sales due to a shift in market demand to 1.3 MP products.

Semiconductor Manufacturing Services.    Net sales from Semiconductor Manufacturing Services for the nine months ended September 30, 2007 were $217.6 million, a $63.2 million, or a 22.5%, decrease compared to net sales of $280.8 million for the nine months ended October 1, 2006. This decrease was primarily due to a decline in sales volume as a result of higher inventory balances held by our customers in the analog and power end markets in the first quarter of 2007, as compared to the same period of the prior year and to a lesser extent, a decrease in the average selling prices of our products.

 

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Table of Contents

All other. Net sales from All other for the nine months ended September 30, 2007 were $53.4 million compared to $38.4 million for the nine months ended October 1, 2006. This increase of $15.0 million substantially represents the revenue increase from our unit processing service.

Net Sales by Geographic Region

The following table sets forth our net sales by geographic region and the percentage of total net sales represented by each geographic region for each of the nine months ended September 30, 2007 and October 1, 2006:

 

    

Nine months ended

September 30, 2007

   

Nine months ended

October 1, 2006

 
      Amount    % of Total     Amount    % of Total  
     (in millions; %)  

Korea

   $ 318.9    58.4 %   $ 305.8    52.5 %

Asia Pacific

     129.7    23.8       142.4    24.5  

Japan

     45.2    8.3       66.7    11.5  

North America

     38.3    7.0       52.9    9.1  

Europe

     13.8    2.5       14.2    2.4  
                  

Total net revenues

   $ 545.9    100.0 %   $ 582.0    100.0