Edgar Filing: MAGNACHIP SEMICONDUCTOR LLC

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Form 10-Q

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 28, 2008

¨	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, a non accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 September 28, 2008, the registrant had 52,923,482.797 of the registrant’s common units outstanding.

MagnaChip Semiconductor LLC and Subsidiaries

TABLE OF CONTENTS


			Page No.
PART I FINANCIAL INFORMATION			3

	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	28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

	Item 4T.	Controls and Procedures	42

PART II OTHER INFORMATION			43

	Item 1A.	Risk Factors	43

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

	Item 6.	Exhibits	51

SIGNATURES			52

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 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
Net sales	$	176,012		$	200,045		$	573,740		$	545,881
Cost of sales		135,505			168,702			436,213			471,861

Gross profit		40,507			31,343			137,527			74,020

Selling, general and administrative expenses		21,226			23,644			63,460			71,904
Research and development expenses		32,199			33,437			104,040			101,089
Restructuring and impairment charges		26,285			—			25,410			12,084

Operating loss		(39,203	)		(25,738	)		(55,383	)		(111,057	)

Other income (expenses)
Interest expense, net		(15,631	)		(15,336	)		(47,142	)		(44,704	)
Foreign currency gain (loss), net		(81,640	)		4,855			(155,653	)		11,332

Loss before income taxes		(136,474	)		(36,219	)		(258,178	)		(144,429	)

Income tax expenses		3,317			2,547			9,103			6,643

Net loss	$	(139,791	)	$	(38,766	)	$	(267,281	)	$	(151,072	)

Dividends accrued on preferred units		3,306			3,010			9,705			8,863

Net loss attributable to common units	$	(143,097	)	$	(41,776	)	$	(276,986	)	$	(159,935	)

Net loss per common units
- Basic and diluted	$	(2.71	)	$	(0.79	)	$	(5.25	)	$	(3.03	)

Weighted average number of units
- Basic and diluted		52,831,904			52,814,383			52,716,486			52,769,273

The accompanying notes are an integral part of these financial statements

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Balance Sheets

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


	September 28, 2008			December 31, 2007
Assets
Current assets
Cash and cash equivalents	$	23,870		$	64,345
Accounts receivable, net		140,441			123,789
Inventories, net		59,768			75,867
Other receivables		5,631			5,771
Other current assets		18,388			10,951

Total current assets		248,098			280,723

Property, plant and equipment, net		204,196			279,669
Intangible assets, net		55,077			104,725
Other non-current assets		39,784			42,766

Total assets	$	547,155		$	707,883

Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable	$	105,894		$	89,977
Other accounts payable		19,525			30,661
Accrued expenses		24,674			18,100
Short-term borrowings		90,000			80,000
Other current liabilities		4,216			6,377

Total current liabilities		244,309			225,115

Long-term borrowings		750,000			750,000
Accrued severance benefits, net		68,566			74,176
Other non-current liabilities		10,212			6,666

Total liabilities		1,073,087			1,055,957

Commitments and contingencies
Series A redeemable convertible preferred units; $1,000 par value; 60,000 units authorized, 50,091 units issued and 0 unit outstanding at September 28, 2008 and December 31, 2007		—			—
Series B redeemable convertible preferred units; $1,000 par value; 550,000 units authorized, 450,692 units issued and 93,997 units outstanding at September 28, 2008 and December 31, 2007		139,110			129,405

Total redeemable convertible preferred units		139,110			129,405


Unitholders’ equity
Common units; $1 par value; 65,000,000 units authorized, 52,923,483 and 52,844,222 units issued and outstanding at September 28, 2008 and December 31, 2007		52,923			52,844
Additional paid-in capital		3,031			3,077
Accumulated deficit		(841,435	)		(564,449	)
Accumulated other comprehensive income		120,439			31,049

Total unitholders’ equity		(665,042	)		(477,479	)

Total liabilities, redeemable convertible preferred units and unitholders’ equity	$	547,155		$	707,883

The accompanying notes are an integral part of these financial statements

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			Additional Paid-In Capital			Accumulated deficit			Accumulated Other Comprehensive Income			Total
Three months ended September 28, 2008
Balance at June 30, 2008	52,919,108		$	52,919		$	2,900		$	(698,338	)	$	67,068		$	(575,451	)
Exercise of unit options	4,375			4			7			—			—			11
Unit-based compensation	—			—			124			—			—			124
Dividends accrued on preferred units	—			—			—			(3,306	)		—			(3,306	)
Comprehensive income (loss)
Net loss	—			—			—			(139,791	)		—			(139,791	)
Foreign currency translation adjustments	—			—			—			—			53,371			53,371

Total comprehensive loss																(86,420	)

Balance at September 28, 2008	52,923,483		$	52,923		$	3,031		$	(841,435	)	$	120,439		$	(665,042	)

Nine months ended September 28, 2008
Balance at January 1, 2008	52,844,222		$	52,844		$	3,077		$	(564,449	)	$	31,049		$	(477,479	)
Exercise of unit options	161,460			161			22			—			—			183
Repurchase of common units	(82,199	)		(82	)		(414	)		—			—			(496	)
Unit-based compensation	—			—			346			—			—			346
Dividends accrued on preferred units	—			—			—			(9,705	)		—			(9,705	)
Comprehensive income (loss)
Net loss	—			—			—			(267,281	)		—			(267,281	)
Fair valuation of derivatives	—			—			—			—			(864	)		(864	)
Foreign currency translation adjustments	—			—			—			—			90,254			90,254

Total comprehensive loss																(177,891	)

Balance at September 28, 2008	52,923,483		$	52,923		$	3,031		$	(841,435	)	$	120,439		$	(665,042	)

The accompanying notes are an integral part of these financial statements

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		Additional Paid-In Capital		Accumulated deficit			Accumulated Other Comprehensive Income			Total
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

MagnaChip Semiconductor LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows

( Unaudited; in thousands of US dollars )


	Nine months ended
	September 28, 2008			September 30, 2007
Cash flows from operating activities
Net loss	$	(267,281	)	$	(151,072	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		62,752			138,787
Provision for severance benefits		13,444			13,985
Amortization of debt issuance costs		2,988			2,913
Loss (gain) on foreign currency translation, net		155,929			(9,623	)
Gain on disposal of property, plant and equipment, net		(3,386	)		—
Impairment charges		26,285			10,106
Other		801			361
Changes in operating assets and liabilities
Accounts receivable		(40,484	)		(46,487	)
Inventories		1,919			(34,528	)
Other receivables		(697	)		(212	)
Deferred tax assets		1,067			655
Accounts payable		27,669			56,699
Other accounts payable		(11,796	)		(5,012	)
Accrued expenses		10,701			6,118
Other current assets		(588	)		8,242
Other current liabilities		753			2,939
Payment of severance benefits		(3,618	)		(5,913	)
Other		(3,186	)		(1,183	)

Net cash used in operating activities		(26,728	)		(13,225	)

Cash flows from investing activities
Purchase of property, plant and equipment		(24,894	)		(63,967	)
Payment for intellectual property registration		(970	)		(955	)
Proceeds from disposal of property, plant and equipment		3,390			278
Other		(367	)		208

Net cash used in investing activities		(22,841	)		(64,436	)

Cash flows from financing activities
Exercise of unit options		183			111
Repurchase of common units		(496	)		—
Proceeds from short-term borrowings		175,000			70,397
Repayment of short-term borrowings		(165,000	)		(20,000	)

Net cash provided by financing activities		9,687			50,508
Effect of exchange rates on cash and cash equivalents		(593	)		(86	)

Net decrease in cash and cash equivalents		(40,475	)		(27,239	)

Cash and cash equivalents
Beginning of the period		64,345			89,173

End of the period	$	23,870		$	61,934

The accompanying notes are an integral part of these financial statements

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. The results of operations for the nine-month period ended September 28, 2008 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51” (“SFAS 160”). SFAS 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 160 on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits all entities to choose to measure many financial instruments and certain other items at fair value and consequently report unrealized gains and losses on these items in earnings. SFAS 159 was effective for the Company’s fiscal year beginning January 1, 2008. The Company has not elected the fair value option to measure certain financial instruments. The adoption of SFAS 159 does not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

The Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) on January 1, 2008. SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures, however the application of this statement may change current practice. In February 2008, the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until 2009. Accordingly, the Company’s adoption of this standard in 2008 was limited to financial assets and liabilities, which primarily affects the valuation of its derivative contract. The adoption of SFAS 157 does not have a material effect on the Company’s financial condition or results of operations. The Company is still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore has not yet determined the impact that it will have on its consolidated financial statements upon full adoption in 2009. Nonfinancial assets and liabilities for which the Company has not applied the provisions of SFAS 157 include those measured at fair value in impairment testing and those initially measured at fair value in a business combination.

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 28, 2008 and December 31, 2007 consist of the following:


	September 28, 2008			December 31, 2007
Finished goods	$	12,503		$	19,557
Semi-finished goods and work-in-process		52,984			56,877
Raw materials		7,123			7,498
Materials in-transit		360			555
Less: valuation allowances		(13,202	)		(8,620	)

Inventories, net	$	59,768		$	75,867

3. Property, Plant and Equipment

Property, plant and equipment as of September 28, 2008 and December 31, 2007 comprise the following:


	September 28, 2008			December 31, 2007
Buildings and related structures	$	121,765		$	150,951
Machinery and equipment		350,463			429,259
Vehicles and others		45,024			54,556

		517,252			634,766
Less: accumulated depreciation		(323,062	)		(367,501	)
Land		10,006			12,404

Property, plant and equipment, net	$	204,196		$	279,669

During the third quarter ended September 28, 2008, the Company recognized impairment charges on tangible assets of $10,169 thousand under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). The impairment charges were recorded related to the closure of the Company’s Imaging Solutions Division, which generated losses and is expected to be closed by the second fiscal quarter of 2009.

4. Intangible Assets

Intangible assets as of September 28, 2008 and December 31, 2007 are as follows:


	September 28, 2008			December 31, 2007
Technology	$	15,399		$	21,157
Customer relationships		120,364			169,300
Goodwill		14,245			14,245
Intellectual property assets		6,439			9,320
Less: accumulated amortization		(101,370	)		(109,297	)

Intangible assets, net	$	55,077		$	104,725

During the third quarter ended September 28, 2008, the Company recognized impairment charges on intangible assets of $16,116 thousand under SFAS 144. The impairment charges were recorded related to the closure of the Company’s Imaging Solutions Division, which generated losses and is expected to be closed by the second fiscal quarter of 2009.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

Goodwill has resulted from the acquisition of ISRON Corporation on March 6, 2005. On an ongoing basis, the Company evaluates goodwill at the reporting unit level for indications of potential impairment. Goodwill is tested for impairment based on the present value of discounted cash flows, and, if impaired, written down to fair value based on discounted cash flows. The Company performs its annual goodwill impairment test during the first quarter of each fiscal year, as well as any additional impairment test required on an event-driven basis. In the first quarter of each of fiscal 2008 and 2007, the Company performed its annual goodwill impairment test and determined that goodwill was not impaired.

5. 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. As of September 28, 2008 and December 31, 2007, the Company had borrowed $90 million and $80 million, respectively, 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.

Short-term borrowings as of September 28, 2008 and December 31, 2007 are presented as below:


	As of September 28, 2008		Amount of principal
	Maturity	Annual interest rate (%)	September 28, 2008		December 31, 2007
Euro dollar Revolving Loan	2008-08-29 ~ 2008-10-24	3 month LIBOR + 4.75	$	88,000	$	30,000
ABR Revolving Loan	2008-09-25 ~ 2008-12-31	ABR + 3.75		2,000		50,000

			$	90,000	$	80,000

6. 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 28, 2008 and December 31, 2007 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
6 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.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

As of September 28, 2008, 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 28, 2008, the Company and all of 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”) to hedge the effect of the volatility of the 3-month London Inter-Bank Offering Rate (“LIBOR”) resulting from the Company’s $300 million of Floating Rate Second Priority Senior Secured Notes. Under the terms of the Swap, the Company received a variable interest rate equal to the three-month LIBOR rate plus 3.25%. In exchange, the Company paid interest at a fixed rate of 7.34%. The Swap effectively replaced the variable interest rate on the notes with a fixed interest rate through the expiration date of the Swap on June 15, 2008.

The Swap qualified as a cash flow hedge under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, since at both the inception of the hedge and on an ongoing basis, the hedging relationship was expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. The Company utilized 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.”

The Swap agreement expired on June 15, 2008.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

7. 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 28, 2008, 98% 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 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
Beginning balance		$	72,109		$	70,182		$	75,869		$	64,642
Provisions			6,553			4,605			13,444			13,985
Severance payments			(823	)		(1,511	)		(3,618	)		(5,913	)
Effect of foreign currency translation and other			(7,932	)		763			(15,788	)		1,325

Ending balance			69,907			74,039			69,907			74,039

Less:	Cumulative contributions to the National Pension Fund		(607	)		(813	)		(607	)		(813	)
	Group Severance insurance plan		(734	)		(919	)		(734	)		(919	)

		$	68,566		$	72,307		$	68,566		$	72,307

The severance benefits are funded approximately 1.92% and 2.34% as of September 28, 2008 and September 30, 2007, 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 has liability to pay the following future benefits to its employees upon their normal retirement age:


	Severance benefit
2009	$	51
2010		34
2011		68
2012		140
2013		173
2014 – 2018		6,654

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.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

8. 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 28, 2008 and September 30, 2007 are as follows:


	Three months ended
	September 28, 2008			September 30, 2007
	Units	Amount		Units	Amount
Beginning of period	93,997	$	135,804	93,997	$	123,227
Accrual of preferred dividends	—		3,306	—		3,010

End of period	93,997	$	139,110	93,997	$	126,237


	Nine months ended
	September 28, 2008			September 30, 2007
	Units	Amount		Units	Amount
Beginning of period	93,997	$	129,405	93,997	$	117,374
Accrual of preferred dividends	—		9,705	—		8,863

End of period	93,997	$	139,110	93,997	$	126,237

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.

9. 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 28, 2008 and September 30, 2007:


	Three months ended						Nine months ended
	September 28, 2008			September 30, 2007			September 28, 2008			September 30, 2007
Net loss	$	(139,791	)	$	(38,766	)	$	(267,281	)	$	(151,072	)
Dividends to preferred unitholders		3,306			3,010			9,705			8,863

Net loss attributable to common units	$	(143,097	)	$	(41,776	)	$	(276,986	)	$	(159,935	)

Weighted-average common units outstanding		52,831,904			52,814,383			52,716,486			52,769,273

Basic and diluted loss per unit	$	(2.71	)	$	(0.79	)	$	(5.25	)	$	(3.03	)

The following outstanding redeemable convertible preferred units issued, options granted and restricted units 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 28, 2008	September 30, 2007
Redeemable convertible preferred units	93,997	93,997
Options	4,867,288	4,956,434
Restricted units	91,531	356,749

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

10. Restructuring and Impairment Charges

Assets impairment

A. Imaging Solutions Division

During the third quarter ended September 28, 2008, the Company recognized impairment charges of $26,285 thousand under SFAS 144. The impairment charges were recorded related to the closure of the Company’s Imaging Solutions Division that has generated losses and that we expect to be closed by the second fiscal quarter of 2009.

B. Five-Inch Wafer Fabrication Facilities

In the second quarter of 2007, the Company recognized impairment charges of $10,106 thousand under SFAS 144. The impairment charges were recorded related to the closure of one of the Company’s five-inch wafer fabrication facilities that has generated losses and no longer supported the Company’s strategic technology roadmap.

SFAS 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. All of the net book value of the Imaging Solutions Division asset group was entirely written off during the third quarter ended September 28, 2008. The net book value of the five-inch wafer fabrication asset group before the impairment charges as of July 1, 2007 was approximately $10,228 thousand.

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

During the three months ended July 1, 2007, the Company recognized $1,978 thousand of restructuring accruals under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). The restructuring charges were related to the closure of the Company’s five-inch wafer fabrication facilities and those charges consisted of one-time termination benefits, transfer of machinery and other associated costs. Up to the first quarter of 2008, actual payments were charged against the restructuring accruals and the Company believes the restructuring activities were substantially completed as of March 30, 2008. Accordingly, the Company reversed $875 thousand of unused restructuring accruals.

11. Uncertainty in Income Taxes

The Company’s subsidiaries file income tax returns in Korea, Japan, Taiwan, U.S. and other various 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 FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $1,554 thousand of liabilities for unrecognized tax benefit, which are related to the temporary difference arising from the timing of expensing certain inventories. Such liabilities were accounted for as an increase to the January 1, 2007 balance of accumulated deficits. As of September 28, 2008 and September 30, 2007, the Company recorded $1,488 thousand and $1,724 thousand of liabilities for unrecognized tax benefits, respectively.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $36 thousand and $112 thousand of interest and penalties as income tax expenses for the three and nine months ended September 28, 2008, respectively. And it also recognized $41 thousand and $121 thousand of interest and penalties as income tax expenses for the three and nine months ended September 30, 2007, respectively. Total interest and penalties accrued as of September 28, 2008, September 30, 2007 and as of the FIN 48 adoption date were $658 thousand, $670 thousand and $530 thousand, respectively.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

12. 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, Semiconductor Manufacturing Services and Power Solutions. On October 6, 2008, the Company announced the closure of the Company’s Imaging Solutions business segment, subject to support for existing customers. The Company expects the Imaging Solutions business segment to be closed by the second fiscal quarter of 2009. 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. The Power Solutions segment’s primary products are MOSFETs, analog switches, DC-DC converters and linear regulators. 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 No. 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 28, 2008			September 30, 2007
Net Sales
Display Solutions	$	76,344		$	79,344
Imaging Solutions		18,375			22,425
Semiconductor Manufacturing Services		77,308			84,770
Power Solutions		2,934			—
All other		1,051			13,506

Total segment net sales	$	176,012		$	200,045

Gross Profit (Loss)
Display Solutions	$	14,569		$	4,660
Imaging Solutions		(766	)		2,666
Semiconductor Manufacturing Services		25,934			17,184
Power Solutions		(285	)		—
All other		1,055			6,833

Total segment gross profit	$	40,507		$	31,343


	Nine months ended
	September 28, 2008			September 30, 2007
Net Sales
Display Solutions	$	253,967		$	223,327
Imaging Solutions		63,585			51,568
Semiconductor Manufacturing Services		246,846			217,611
Power Solutions		5,025			—
All other		4,317			53,375

Total segment net sales	$	573,740		$	545,881

Gross Profit (Loss)
Display Solutions	$	53,085		$	19,885
Imaging Solutions		(1,737	)		2,517
Semiconductor Manufacturing Services		83,032			31,747
Power Solutions		77			—
All other		3,070			19,871

Total segment gross profit	$	137,527		$	74,020

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements - (Continued)

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

As of September 28, 2008, approximately 99% of the Company’s property, plant and equipment were located in Korea.

Net sales from the Company’s ten largest customers accounted for 59.4% and 56.7% for the three months ended September 28, 2008 and September 30, 2007, respectively, and 58.8% and 61.6% for the nine months ended September 28, 2008 and September 30, 2007, respectively.

The Company recorded $38.4 million and $35.7 million of sales to one customer within the Display Solutions segment, which represents greater than 10% of net sales, for the three months ended September 28, 2008 and September 30, 2007, respectively, and $129.6 million and $131.1 million for the nine months ended September 28, 2008 and September 30, 2007, respectively.

13. 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 (subsequently extended for an additional year), 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, the Company accrued $3,545 thousand and $890 thousand of accrued expenses under these agreements, respectively. 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 First Amendment to Advisory Agreement (the “Amendment”) 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 amount of the termination fee will be determined through discussions between the parties to the advisory agreements, and the Company currently expects the termination fee will be approximately $9.8 million.

The Company has made a contingent commitment to its employees that it will pay an incentive of approximately $30 million in total in the event of an initial public offering of the Company’s equity. This incentive payment is subject to management’s discretion and would be distributed to all employees other than senior management.

14. Liquidity and Capital Resources

The Company has funded its operations largely through the issuance of debt. The Company has incurred substantial losses and negative cash flows from its operations and has an accumulated deficit of $841.4 million as of September 28, 2008. For the nine months ended September 28, 2008, the Company incurred a loss from operations of $55.4 million and negative cash flows from operations of $26.7 million. The business climate in 2008 continues to be extremely difficult. The Company expects operating losses and negative cash flows from operations to continue in the short-term, and as a result, the Company could default under its senior secured credit facility, Second Priority Senior Secured Notes, and Senior Subordinated Notes. The Company’s management currently forecasts that the Company will fail to meet certain of its financial covenants under its senior secured credit facility as of October 31, 2008. Failure to negotiate a waiver or forbearance of any resulting default under the senior secured credit facility would permit the agent and the lenders under the senior secured credit facility to accelerate the maturity of all outstanding amounts under such facility and demand immediate payment. If all of the obligations under the senior secured credit facility are accelerated, the trustee under the indentures governing the Company’s Second Priority Senior Secured Notes and Senior Subordinated Notes, or the requisite number of noteholders, may also demand immediate payment of all outstanding amounts under such notes. The Company is currently unable to make such a payment.

In addition, failure to generate sufficient revenue, potentially raise additional capital, restructure debt or lease agreements, or reduce operating expenses could have a material adverse effect on the Company’s financial condition. Accordingly, the Company has retained financial and legal advisors to assist the Company in evaluating options to improve the Company’s financial condition, and the Company is currently in negotiations with its lenders.

The Board of Directors of the Company has engaged Miller Buckfire & Co., LLC to assist in reviewing the Company’s strategic and financial alternatives. From an operational perspective, the Company continues to address cost management, cash and working capital management, and the timely release of new products. However, there can be no assurance that any of the strategic alternatives being considered by the Company will be successful or that the Company’s results of operations, cash flows and financial position will improve absent successful execution of some or all of the alternatives under consideration.

As of September 28, 2008, the Company was compliant with all of its financial covenants under the terms of its senior secured credit facility, Second Priority Senior Secured Notes, and Senior Subordinated Notes. Accordingly, amounts outstanding under the Second Priority Senior Secured Notes and Senior Subordinated Notes have been classified as non-current obligations in the Company’s September 28, 2008, balance sheet.

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 28, 2008 and December 31, 2007, condensed consolidating statements of operations for the three months and nine months ended September 28, 2008 and September 30, 2007 and condensed consolidating statement of cash flows for the nine months ended September 28, 2008 and September 30, 2007 of those entities that guarantee the Senior Subordinated Notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.

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 28, 2008


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	170,869		$	100,621		$	(95,478	)	$	176,012
Cost of sales		—			—			134,491			88,006			(86,992	)		135,505

Gross profit		—			—			36,378			12,615			(8,486	)		40,507

Selling, general and administrative expenses		79			193			16,930			4,188			(164	)		21,226
Research and development expenses		—			—			33,024			7,666			(8,491	)		32,199
Restructuring and impairment charges		—			—			23,973			2,312			—			26,285

Operating income (loss)		(79	)		(193	)		(37,549	)		(1,551	)		169			(39,203	)

Other income (expenses)		—			(16,197	)		(96,897	)		15,823			—			(97,271	)

Income (loss) before income taxes, equity in earnings (loss) of related equity investment		(79	)		(16,390	)		(134,446	)		14,272			169			(136,474	)

Income tax expenses (benefit)		—			(320	)		35			3,602			—			3,317

Loss before equity in loss of related investment		(79	)		(16,070	)		(134,481	)		10,670			169			(139,791	)

Loss of related investment		(139,712	)		(120,731	)		—			(134,342	)		394,785			—

Net loss	$	(139,791	)	$	(136,801	)	$	(134,481	)	$	(123,672	)	$	394,954		$	(139,791	)

Dividends accrued on preferred units		3,306			—			—			—			—			3,306

Net loss attributable to common units	$	(143,097	)	$	(136,801	)	$	(134,481	)	$	(123,672	)	$	394,954		$	(143,097	)

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 28, 2008


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	553,846		$	308,106		$	(288,212	)	$	573,740
Cost of sales		—			—			430,348			268,451			(262,586	)		436,213

Gross profit		—			—			123,498			39,655			(25,626	)		137,527

Selling, general and administrative expenses		292			887			51,355			11,451			(525	)		63,460
Research and development expenses		—			—			106,215			23,591			(25,766	)		104,040
Restructuring and impairment charges		—			—			23,098			2,312			—			25,410

Operating income (loss)		(292	)		(887	)		(57,170	)		2,301			665			(55,383	)

Other income (expenses)		—			(6,644	)		(198,655	)		2,504			—			(202,795	)

Income (loss) before income taxes, equity in earnings (loss) of related equity investment		(292	)		(7,531	)		(255,825	)		4,805			665			(258,178	)

Income tax expenses		—			284			116			8,703			—			9,103

Income (loss) before equity in loss of related investment		(292	)		(7,815	)		(255,941	)		(3,898	)		665			(267,281	)

Loss of related investment		(266,989	)		(256,803	)		—			(254,503	)		778,295			—

Net loss	$	(267,281	)	$	(264,618	)	$	(255,941	)	$	(258,401	)	$	778,960		$	(267,281	)

Dividends accrued on preferred units		9,705			—			—			—			—			9,705

Net loss attributable to common units	$	(276,986	)	$	(264,618	)	$	(255,941	)	$	(258,401	)	$	778,960		$	(276,986	)

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 charges		—			—			—			—			—			—

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

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

Income (loss) before income taxes, equity in earning (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	)

Earning (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	)

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 charges		—			—			12,084			—			—			12,084

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

Other income (expenses)		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	)

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 28, 2008


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	250		$	57		$	20,697		$	2,866		$	—		$	23,870
Accounts receivable, net		—			—			146,993			94,140			(100,692	)		140,441
Inventories, net		—			—			59,506			262			—			59,768
Other receivables		—			718			8,492			5,990			(9,569	)		5,631
Short-term inter-company loans		—			90,000			—			90,000			(180,000	)		—
Other current assets		3,185			11,230			15,574			14,458			(26,059	)		18,388

Total current assets		3,435			102,005			251,262			207,716			(316,320	)		248,098

Property, plant and equipment, net		—			—			201,508			2,688			—			204,196
Intangible assets, net		—			—			38,394			16,812			(129	)		55,077
Investments in subsidiaries		(525,615	)		(597,905	)		—			(408,743	)		1,532,263			—
Long-term inter-company loans		—			809,664			—			635,574			(1,445,238	)		—
Other non-current assets		—			11,618			36,380			9,204			(17,418	)		39,784

Total assets	$	(522,180	)	$	325,382		$	527,544		$	463,251		$	(246,842	)	$	547,155

Liabilities and Unitholders’ equity
Current liabilities
Accounts payable	$	—		$	—		$	128,419		$	78,167		$	(100,692	)	$	105,894
Other accounts payable		3,692			5			23,133			2,264			(9,569	)		19,525
Accrued expenses		61			11,108			22,542			13,800			(22,837	)		24,674
Short-term Borrowings		—			90,000			90,000			90,000			(180,000	)		90,000
Other current liabilities		(1	)		96			1,763			5,580			(3,222	)		4,216

Total current liabilities		3,752			101,209			265,857			189,811			(316,320	)		244,309

Long-term borrowings		—			750,000			621,000			824,238			(1,445,238	)		750,000
Accrued severance benefits, net		—			—			67,864			702			—			68,566
Other non-current liabilities		—			—			8,768			18,862			(17,418	)		10,212

Total liabilities		3,752			851,209			963,489			1,033,613			(1,778,976	)		1,073,087
Commitments and contingencies
Series A redeemable convertible preferred units		—			—			—			—			—			—
Series B redeemable convertible preferred units		139,110			—			—			—			—			139,110

Total redeemable convertible preferred units		139,110			—			—			—			—			139,110

Unitholders’ equity
Common units		52,923			136,229			39,005			55,778			(231,012	)		52,923
Additional paid-in capital		3,031			2,153			156,129			108,285			(266,567	)		3,031
Accumulated deficit		(841,435	)		(785,399	)		(747,886	)		(859,800	)		2,393,085			(841,435	)
Accumulated other comprehensive income		120,439			121,190			116,807			125,375			(363,372	)		120,439

Total unitholders’ equity		(665,042	)		(525,827	)		(435,945	)		(570,362	)		1,532,134			(665,042	)

Total liabilities, redeemable convertible preferred units and unitholders’ equity	$	(522,180	)	$	325,382		$	527,544		$	463,251		$	(246,842	)	$	547,155

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, 2007


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	163		$	31,248		$	24,301		$	8,633		$	—		$	64,345
Accounts receivable, net		—			—			131,101			68,156			(75,468	)		123,789
Inventories, net		—			—			71,930			4,598			(661	)		75,867
Other receivables		—			717			5,846			12,702			(13,494	)		5,771
Short-term inter-company loan		—			50,000			—			50,000			(100,000	)		—
Other current assets		1,129			9,037			9,309			6,047			(14,571	)		10,951

Total current assets		1,292			91,002			242,487			150,136			(204,194	)		280,723

Property, plant and equipment, net		—			—			275,997			3,672			—			279,669
Intangible assets, net		—			—			86,571			18,328			(174	)		104,725
Investments in subsidiaries		(348,345	)		(431,611	)		—			(243,130	)		1,023,086			—
Long-term inter-company loans		—			809,754			—			634,837			(1,444,591	)		—
Other non-current assets		—			13,897			38,866			9,823			(19,820	)		42,766

Total assets	$	(347,053	)	$	483,042		$	643,921		$	573,666		$	(645,693	)	$	707,883

Liabilities and Unitholders’ equity
Current liabilities
Accounts payable	$	—		$	—		$	101,056		$	64,389		$	(75,468	)	$	89,977
Other accounts payable		1,021			5			40,381			2,748			(13,494	)		30,661
Accrued expenses		—			3,389			16,412			9,647			(11,348	)		18,100
Short-term borrowings		—			80,000			50,000			50,000			(100,000	)		80,000
Other current liabilities		—			503			3,714			5,383			(3,223	)		6,377

Total current liabilities		1,021			83,897			211,563			132,167			(203,533	)		225,115

Long-term borrowings		—			750,000			621,000			823,591			(1,444,591	)		750,000
Accrued severance benefits, net		—			—			73,700			476			—			74,176
Other non-current liabilities		—			—			4,867			21,619			(19,820	)		6,666

Total liabilities		1,021			833,897			911,130			977,853			(1,667,944	)		1,055,957
Commitments and contingencies
Series A redeemable convertible preferred units		—			—			—			—			—			—
Series B redeemable convertible preferred units		129,405			—			—			—			—			129,405

Total redeemable convertible preferred units		129,405			—			—			—			—			129,405

Unitholders’ equity
Common units		52,844			136,229			39,005			55,778			(231,012	)		52,844
Additional paid-in capital		3,077			1,899			155,888			107,946			(265,733	)		3,077
Accumulated deficit		(564,449	)		(520,781	)		(491,945	)		(601,399	)		1,614,125			(564,449	)
Accumulated other comprehensive income		31,049			31,798			29,843			33,488			(95,129	)		31,049

Total unitholders’ equity		(477,479	)		(350,855	)		(267,209	)		(404,187	)		1,022,251			(477,479	)

Total liabilities, redeemable convertible preferred units and unitholders’ equity	$	(347,053	)	$	483,042		$	643,921		$	573,666		$	(645,693	)	$	707,883

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 28, 2008


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Cash flow from operating activities:
Net loss	$	(267,281	)	$	(264,618	)	$	(255,941	)	$	(258,401	)	$	778,960		$	(267,281	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		—			—			60,134			2,618			—			62,752
Provision for severance benefits		—			—			13,189			255			—			13,444
Amortization of debt issuance costs		—			2,278			710			—			—			2,988
Loss on foreign currency translation, net		—			90			155,359			480			—			155,929
Loss (gain) on disposal of property, plant and equipment, net		—			—			(3,387	)		1			—			(3,386	)
Impairment charge		—			—			23,973			2,312			—			26,285
Loss of related investment		266,989			256,803			—			254,503			(778,295	)		—
Other		17			(1	)		829			(44	)		—			801
Changes in operating assets and liabilities:
Accounts receivable		—			—			(41,096	)		(24,612	)		25,224			(40,484	)
Inventories		—			—			(1,849	)		4,431			(663	)		1,919
Other receivables		—			—			(3,492	)		6,720			(3,925	)		(697	)
Deferred tax assets		—			—			—			1,067			—			1,067
Accounts payable		—			—			40,310			12,583			(25,224	)		27,669
Other accounts payable		2,671			—			(17,880	)		(512	)		3,925			(11,796	)
Accrued expenses		61			7,720			10,287			4,122			(11,489	)		10,701
Other current assets		(2,057	)		(3,183	)		3,685			(8,137	)		9,104			(588	)
Other current liabilities		—			(408	)		(1,554	)		226			2,489			753
Payment of severance benefits		—			—			(3,564	)		(54	)		—			(3,618	)
Other		—			128			(4,400	)		(3,848	)		4,934			(3,186	)

Net cash provided by (used in) operating activities		400			(1,191	)		(24,687	)		(6,290	)		5,040			(26,728	)

Cash flows from investing activities:
Purchase of plant, property and equipment		—			—			(23,105	)		(1,789	)		—			(24,894	)
Payment for intellectual property registration		—			—			(714	)		(256	)		—			(970	)
Proceeds from disposal of property, plant and equipment		—			—			3,391			(1	)		—			3,390
Other		—			(40,000	)		(276	)		(40,091	)		80,000			(367	)

Net cash used in investing activities		—			(40,000	)		(20,704	)		(42,137	)		80,000			(22,841	)

Cash flows from financing activities:
Exercise of unit options		183			—			—			—			—			183
Repurchase of common stock		(496	)		—			—			—			—			(496	)
Proceeds from short-term borrowings		—			170,000			150,000			145,000			(290,000	)		175,000
Repayment of short-term borrowings		—			(160,000	)		(110,000	)		(105,000	)		210,000			(165,000	)

Net cash provided by (used in) financing activities		(313	)		10,000			40,000			40,000			(80,000	)		9,687
Effect of exchange rates on cash and cash equivalents		—			—			1,787			2,660			(5,040	)		(593	)

Net increase (decrease) in cash and cash equivalents		87			(31,191	)		(3,604	)		(5,767	)		—			(40,475	)

Cash and cash equivalents:
Beginning of the period		163			31,248			24,301			8,633			—			64,345

End of the period	$	250		$	57		$	20,697		$	2,866		$	—		$	23,870

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

16. Subsequent Event

On October 6, 2008, the Company announced the closure of its Imaging Solution business segment, subject to support for existing customers. In connection with this action, the Company recorded impairment charges of $26.3 million at the end of the third quarter ended September 28, 2008, in accordance with SFAS 144. The Company expects to record restructuring charges in the fourth quarter, in accordance with SFAS 146, related to one-time employee termination benefits, costs associated with the closing of the facilities and contract terminations, which are expected to be paid over the next 18 months.

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 a Korea-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 management.

The variety of analog and mixed-signal semiconductor products and services we offer is based on a technology platform and strategy that allows us to address multiple end markets and to develop and introduce new products quickly. We believe that our manufacturing integration and broad intellectual property enable us to respond quickly to our consumer electronics and semiconductor customers’ needs. To maintain and increase our profitability, we must forecast trends in consumer product demand and invest in relevant research and development activities and in appropriate capital equipment. We expect to maintain or increase our expenditures on research and development in future periods to establish our position as a leading provider of semiconductor products and services in the segments in which we compete.

The semiconductor markets in which we compete are characterized by the use of advanced production technology and rapid technological advances. The prices of our products tend to decrease regularly over their useful lives, and such price decreases can be significant as new generations of products are introduced. We manage our pricing, production and product development activities so as to benefit from, or at least mitigate any adverse impact of, declining market prices for our products. For example, in some periods we are able to offset the impact of declining selling prices for existing products through the introduction of new products that command selling prices above the average selling price of our existing products. In addition, we seek to manage our inventories and manufacturing capacity so as to preclude losses from inevitable product and productive capacity obsolescence.

Demand for our products and services is driven primarily by overall demand for the consumer end products in which our products are used and, consequently, can be adversely affected by periods of weak consumer spending in developed countries. Nonetheless, the consumer electronics market is large and rapidly growing, driven by consumers seeking to enjoy rich media content, such as digital and high definition audio and video, mobile television, games and digital photography. As a company, we seek to

address market segments with higher growth rates than the overall consumer electronics industry. In recent years, we have experienced increasing demand from OEMs and consumers in developing countries such as China and India, and we expect to derive a substantial portion of our growth in the next decade from growing demand in such markets. We also expect that new competitors will emerge in these markets that may place increased pressure on the pricing for our products and services, but we believe that the competitive offerings will be, at least initially, of lower quality than the products and services that we offer, and that the impact from the increased competition will be more than offset by demand arising from such markets. Further, we believe we are well-positioned geographically to capture this demand, with our Korea-based operations.

Within particular operating segments and products, net sales are driven by “design wins” in which we or another company is selected by an electronics OEM or other potential customer to supply its demand of a particular product. These competitions typically determine the semiconductor supplier for the life of a particular end product and specify in many cases the production volume and pricing of a particular semiconductor product throughout the life of the end product. In any given period, our net sales depend heavily upon the end-market demand for the goods in which our products are used and the inventory levels maintained by our customers.

Our products and services require investments in capital equipment. We focus on specialty technologies, however, that do not require investments in leading edge manufacturing equipment, and as a result, our business tends not to be as subject to the pronounced boom and bust cycles characteristic of other semiconductor markets, in which the introduction of substantial, high-fixed cost capacity can cause product prices to plunge dramatically. In general, we seek to invest in manufacturing capacity that can be used for multiple high-value applications over an extended period of time. We believe this capital investment strategy enables us to optimize our capital investments and facilitates deeper and more diversified product and service offerings.

Our success going forward will depend upon our ability to adapt to future challenges such as the emergence of new competitors for our products and services or the consolidation of current competitors. Additionally, we must innovate to remain ahead of, or at least rapidly adapt to, technological breakthroughs that may lead to a step function change in the technology necessary to deliver our products and services. We believe that our established relationships and close collaboration with leading customers, such as LG Display (formerly LG.Philips LCD), Sharp, and Samsung, enhance our visibility into new product opportunities, market and technology trends and improve our ability to meet these challenges successfully.

We have funded our operations largely through the issuance of debt and we have incurred substantial losses and negative cash flows from operations. We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. There is substantial doubt as to whether we can raise new capital or debt in the current environment given that the capital and credit markets have been experiencing extreme unprecedented volatility and disruption.

Business Segments

We report in four separate business segments because we derive our revenues from four principal business lines: Display Solutions, Imaging Solutions, Semiconductor Manufacturing Services, and Power Solutions. We have identified these 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. On October 6, 2008, we announced the closure of our Imaging Solution business segment, subject to support for existing customers. We expect the Imaging Solutions business segment to be closed by the second fiscal quarter of 2009.

•

Semiconductor Manufacturing Services: Our Semiconductor Manufacturing Services segment manufactures wafers for analog and mixed-signal semiconductor companies based on their designs. The activities conducted within this segment are, in substance, identical to those conducted in our Display Solution and Imaging Solution businesses. The only difference is that, in the Semiconductor Manufacturing Services segment, the product designs originate from our customers. The customers provide us with their designs, and we manufacture and sell the products to the customers based upon such designs. We offer over 180 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.

•

Power Solutions: Our Power Solutions segment produces MOSFETs, analog switches, DC-DC converters and linear regulators, such as LDOs. Our power solutions products are designed for applications such as mobile phones, LCD televisions, and desktop computers, and allow electronics manufacturers to achieve specific design goals of high efficiency and low standby power consumption. Going forward, we expect to expand our power management product portfolio through the addition, for example, of more advanced DC-DC products.

Results of Operations

The following table sets forth consolidated results of operations for the three months ended September 28, 2008 and September 30, 2007:


	Three months ended September 28, 2008					Three months ended September 30, 2007
	Amount			% of net sales		Amount			% of net sales		Change Amount
	*(in millions; %)*
Net sales	$	176.0		100.0	%	$	200.0		100.0	%	$	(24.0	)
Cost of sales		135.5		77.0			168.7		84.4			(33.2	)

Gross profit		40.5		23.0			31.3		15.6			9.2

Selling, general and administrative expenses		21.2		12.1			23.6		11.8			(2.4	)
Research and development expenses		32.2		18.3			33.4		16.7			(1.2	)
Restructuring and impairment charges		26.3		14.9			—		—			26.3

Operating loss		(39.2	)	(22.3	)		(25.7	)	(12.9	)		(13.5	)
Interest expense, net		15.6		8.9			15.3		7.7			0.3
Foreign currency gain (loss), net		(81.6	)	(46.4	)		4.9		2.5			(86.5	)

Loss before income taxes		(136.5	)	(77.5	)		(36.2	)	(18.2	)		(100.3	)
Income tax expenses		3.3		1.9			2.5		1.3			0.8

Net loss	$	(139.8	)	(79.4	)%	$	(38.8	)	(19.5	)%	$	(101.0	)

Net Sales


	Three months ended September 28, 2008				Three months ended September 30, 2007
	Amount		% of Total		Amount		% of Total		Change Amount
	*(in millions; %)*
Display Solutions	$	76.3	43.4	%	$	79.3	39.7	%	$	(3.0	)
Imaging Solutions		18.4	10.4			22.4	11.2			(4.1	)
Semiconductor Manufacturing Services		77.3	43.9			84.8	42.4			(7.5	)
Power Solutions		2.9	1.7			—	—			2.9
All other		1.1	0.6			13.5	6.7			(12.5	)

	$	176.0	100.0	%	$	200.0	100.0	%	$	(24.0	)

We derive a majority of our net sales from four operating segments: Display Solutions, Imaging Solutions, Semiconductor Manufacturing Services and Power Solutions. 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 28, 2008 decreased $24.0 million, or 12.0% compared to the three months ended September 30, 2007. Net sales generated in the four operating segments during the current quarter were $175.0 million, a decrease of $11.6 million or 6.2% from the net sales of the three operating segments from which we earned revenues for the prior-year quarter. The decline in revenue was principally due to a reduction of inventory levels in the supply chain as our customers responded to the uncertainty associated with the current economic crisis. We continue to add new accounts and to offer new products and services, which we expect to contribute to market share improvement long term.

Display Solutions. Net sales from Display Solutions for the three months ended September 28, 2008 were $76.3 million, a $3.0 million or 3.8% decrease from $79.3 million for the three months ended September 30, 2007. The decrease resulted from a 15.5% decrease in average selling prices, primarily from display driver products for LCD televisions and PC monitors, coupled with a 6.5% sales volume decrease. We continue to add product features, such as development of touch panel solutions, to meet customer needs and also have developed, what we believe to be, leading low power consumption capabilities and important AMOLED technologies that enable next generation panels.

Imaging Solutions. Net sales from Imaging Solutions decreased $4.1 million in the current quarter, or 18.1% compared to net sales generated in the prior year quarter. This decrease resulted from a 23.1% sales volume decrease mainly caused by small form factor VGA products, and was partially offset by a 6.3% increase in average selling prices. On October 6, 2008, we announced the closure of our Imaging Solution business segment, subject to support for existing customers. We expect the Imaging Solutions business segment to be closed by the second fiscal quarter of 2009.

Semiconductor Manufacturing Services. Net sales from Semiconductor Manufacturing Services for the third quarter of 2008 were $77.3 million, a $7.5 million or 8.8% decrease compared to net sales of $84.8 million for the prior year quarter. This decrease was due to a 3.2% decrease in average selling prices, coupled with a 3.0% sales volume decrease. We expect that the current economic downturn and the resulting impacts to the overall analog semiconductor market in particular, will negatively impact our semiconductor manufacturing service business.

Power Solutions. Net sales from Power Solutions for the third quarter of 2008 were $2.9 million. We have built our new product pipeline with the launch of our 30V and 40V MOSFET series and development of LDO and USB solutions. We finished development of our high voltage MOSFET technology and expect our first products using this technology to be released in the forth quarter.

All other. Net sales from All other for the three months ended September 28, 2008 were $1.1 million compared to $13.5 million for the three months ended September 30, 2007. This decrease of $12.5 million was primarily due to a $12.0 million decrease in unit processing services rendered to Hynix as Hynix increased its internal capacity. We rendered no unit processing services to Hynix during the three months ended September 30, 2008.

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 the three months ended September 28, 2008 and September 30, 2007, respectively:


	Three months ended September 28, 2008				Three months ended September 30, 2007
	Amount		% of Total		Amount		% of Total
	*(in millions; %)*
Korea	$	83.6	47.5	%	$	102.2	51.1	%
Asia Pacific		51.6	29.3			53.5	26.8
Japan		18.0	10.2			21.9	11.0
North America		19.1	10.9			16.1	8.0
Europe		3.6	2.1			6.3	3.1

Total net revenues	$	176.0	100.0	%	$	200.0	100.0	%

Gross Profit


	Three months ended September 28, 2008					Three months ended September 30, 2007				Change Amount
	Amount			% of net sales		Amount		% of net sales		Change Amount
	*(in millions; %)*
Display Solutions	$	14.6		19.1	%	$	4.7	5.8	%	$	9.9
Imaging Solutions		(0.8	)	(4.2	)		2.7	12.1			(3.4	)
Semiconductor Manufacturing Services		25.9		33.5			17.2	20.3			8.8
Power Solutions		(0.3	)	(9.7	)		—	—			(0.3	)
All other		1.1		100.4			6.8	50.4			(5.8	)

	$	40.5		23.0	%	$	31.3	15.6	%	$	9.2

Total gross profit increased $9.2 million in the third quarter of 2008, or 29.2%, compared to the gross profit generated in the prior-year quarter. Gross profit percentage for the current quarter was 23.0% of net sales, an increase of 7.4% from 15.6% for the prior-year quarter. This increase in gross profit percentage was primarily attributable to an overall decrease in unit costs due to a decrease in overall production costs, especially from decrease in depreciation expense. We expect our gross profit to benefit in the next several quarters from the sale of inventory reflecting our reduced cost structure as well as due to increased capacity utilization.

Display Solutions. Gross profit percentage for Display Solutions for the three months ended September 28, 2008 improved to 19.1% compared to 5.8% for the three months ended September 30, 2007 due to a decrease in unit costs that resulted from a decrease in overall production costs, especially from depreciation expenses.

Imaging Solutions. Gross profit percentage for Imaging Solutions was minus 4.2% in the third quarter ended September 28, 2008 compared to 12.1% of positive gross profit percentage for the three months ended September 30, 2007. This change was due to a 23.1% decrease in sales volume and higher unit costs resulting from new design products. On October 6, 2008, we announced the closure of our Imaging Solution business segment, subject to support for existing customers. We expect the Imaging Solutions business segment to be closed by the second fiscal quarter of 2009.

Semiconductor Manufacturing Services. Gross profit percentage for Semiconductor Manufacturing Services improved to 33.5% in the third quarter of 2008 from 20.3% in the prior-year quarter. This increase was due to decrease in unit costs, resulting from decrease in overall production costs, especially from depreciation expenses.

Power Solutions. Gross profit percentage for Power Solutions was minus 9.7% for the three months ended September 30, 2008.

All other. Gross profit percentage for All other for the current period increased to 100.4% from 50.4% in the third quarter of 2007. This improvement in gross profit percentage was mainly attributable to lower fixed cost per unit.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $21.2 million or 12.1% of net sales for the three months ended September 28, 2008, compared to $23.6 million or 11.8% for the three months ended September 30, 2007. The decrease of $2.4 million or 10.2% from the prior-year quarter resulted from reductions of various expenses including depreciation and amortization, contingency losses, outside service fees and sales commissions.

Research and Development Expenses. Research and development expenses for the current quarter were $32.2 million, a decrease of $1.2 million or 3.7% from $33.4 million for the prior year quarter mainly due to $1.2 million decrease in depreciation and amortization expense. As a percentage of net sales, research and development expenses for the current quarter increased to 18.3% compared to 16.7% for the prior-year quarter. We expect research and development expenses in 2008 to be generally consistent with the levels in 2007 on a percentage of net sales basis.

Restructuring and Impairment Charges. During the third quarter ended September 28, 2008, we recognized impairment charges of $26.3 million under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). The impairment charges were recorded related to the closure of our Imaging Solutions Division, which generated losses and is expected to be closed by the second fiscal quarter of 2009.

Other Income (Expense)

Interest Expense, Net. Net interest expense was $15.6 million during the three months ended September 28, 2008 compared to $15.3 million for the three months ended September 30, 2007. Interest expense was incurred to service to our notes in the amount of $750.0 million and drawings under our senior secured facility. At September 28, 2008, the notes bore interest at a weighted average interest rate of 6.87%. Drawings under our senior secured credit facility bore interest at September 28, 2008 at either three-month LIBOR plus 4.75% or ABR plus 3.75%. The increase in net interest expense was mainly due to an increase in interest expense driven by drawdowns from our senior secured credit facility and a decrease in interest income from financial assets including cash and cash equivalents.

Foreign Currency Gain (Loss), Net. Net foreign currency loss for the three months ended September 28, 2008 was $81.6 million, compared to net foreign exchange gain of $4.9 million for the three months ended September 30, 2007.

A substantial portion of our net foreign currency gain or loss is non-cash translation gain or loss recorded for intercompany borrowings at our Korean subsidiary and is affected by changes in the exchange rate between the Korea won and the U.S. dollar. Foreign currency translation loss from the intercompany borrowings was included in determining our consolidated net income since the intercompany borrowings were not considered long-term investments in nature because management intended to repay these intercompany borrowings at their maturity dates. The Korean won to U.S. dollar exchange rates were 1,160.1:1 and 913.6:1 using the noon buying rate in effect as of September 28, 2008 and September 30, 2007, respectively, as quoted by the Federal Reserve Bank of New York.

Income Tax Expenses

Income Tax Expenses. Income tax expenses for the three months ended September 28, 2008 were $3.3 million, compared to $2.5 million for the three months ended September 30, 2007. Income tax expenses for this period were comprised of $1.5 million of current income taxes incurred in various jurisdictions in which we operate, $1.6 million of withholding taxes mostly paid on intercompany interest payments and $0.2 million of income tax increase effect from the change of deferred tax assets. Due to the uncertainty of the utilization of foreign tax credits, we did not recognize these withholding taxes as deferred assets.

Results of Operations – Comparison of Nine-Month Periods Ended September 28, 2008 and September 30, 2007.

The following table sets forth consolidated result of operations for the nine months ended September 28, 2008 and September 30, 2007:


	Nine months ended September 28, 2008					Nine months ended September 30, 2007					Change Amount
	Amount			% of net sales		Amount			% of net sales		Change Amount
	*(in millions; %)*
Net sales	$	573.7		100.0	%	$	545.9		100.0	%	$	27.9
Cost of sales		436.2		76.0			471.9		86.4			(35.6	)

Gross profit		137.5		24.0			74.0		13.6			63.5

Selling, general and administrative expenses		63.5		11.1			71.9		13.2			(8.4	)
Research and development expenses		104.0		18.1			101.1		18.5			3.0
Restructuring and impairment charges		25.4		4.4			12.1		2.2			13.3

Operating loss		(55.4	)	(9.7	)		(111.1	)	(20.3	)		55.7
Interest expense, net		47.1		8.2			44.7		8.2			2.4
Foreign currency gain (loss), net		(155.7	)	(27.1	)		11.3		2.1			(167.0	)

Loss before income taxes		(258.2	)	(45.0	)		(144.4	)	(26.4	)		(113.7	)
Income tax expenses		9.1		1.6			6.6		1.2			2.5

Net loss	$	(267.3	)	(46.6	)%	$	(151.1	)	(27.7	)%	$	(116.2	)

Net Sales


	Nine months ended September 28, 2008				Nine months ended September 30, 2007				Change Amount
	Amount		% of Total		Amount		% of total		Change Amount
	*(in millions; %)*
Display Solutions	$	254.0	44.3	%	$	223.3	40.9	%	$	30.6
Imaging Solutions		63.6	11.1			51.6	9.5			12.0

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