Edgar Filing: MAGNACHIP SEMICONDUCTOR LLC

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Free Writing Prospectus

Issuer Free Writing Prospectus

Filed Pursuant to Rule 433

Registration No. 333-165467

MagnaChip Semiconductor LLC (the “Company”) has filed a registration statement (including a preliminary prospectus) with the Securities and Exchange Commission (“SEC”) for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the Company has filed with the SEC for more complete information about the company and the offering. You may get these documents for free by visiting EDGAR on the SEC web site at www.sec.gov or by visiting the Company’s investor relations SEC web site link at www.magnachip.com. Alternatively, the Company will arrange to send you the preliminary prospectus if you request it by calling 1-408-625-1262.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

¨	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: 333-168516-09

MagnaChip Semiconductor LLC

(Exact name of registrant as specified in its charter)

Delaware

26-1815025

(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-2146

Luxembourg R.C.S.

Luxembourg B97483

(352) 45-62-62

(Address, zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ¨ Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “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 þ No

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

As of July 31, 2010, the registrant had 307,233,996 common units outstanding.

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

TABLE OF CONTENTS


			Page No.
PART I FINANCIAL INFORMATION			3

	Item 1.	Interim Consolidated Financial Statements (Unaudited)	3

		MagnaChip Semiconductor LLC and Subsidiaries Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 (Successor Company)	3

		MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)	4

		MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Changes in Unitholders’ Equity for the Three and Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)	5

		MagnaChip Semiconductor LLC and Subsidiaries Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 (Successor Company) and June 28, 2009 (Predecessor Company)	7

		MagnaChip Semiconductor LLC and Subsidiaries Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

	Item 4.	Controls and Procedures	60

PART II OTHER INFORMATION			62

	Item 1A.	Risk Factors	62

	Item 6.	Exhibits	75

SIGNATURES			76

PART I—FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements (Unaudited)

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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


	Successor
	June 30, 2010			December 31, 2009
Assets
Current assets
Cash and cash equivalents	$	141,310		$	64,925
Accounts receivable, net		117,711			74,233
Inventories, net		59,972			63,407
Other receivables		3,702			3,433
Prepaid expenses		9,908			12,625
Other current assets		11,097			3,433

Total current assets		343,700			222,056

Property, plant and equipment, net		155,040			156,337
Intangible assets, net		34,837			50,158
Long-term prepaid expenses		10,883			10,542
Other non-current assets		21,491			14,238

Total assets	$	565,951		$	453,331

Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable	$	69,379		$	59,705
Other accounts payable		22,546			7,190
Accrued expenses		31,906			22,114
Current portion of long-term borrowings		—			618
Other current liabilities		7,826			3,937

Total current liabilities		131,657			93,564

Long-term borrowings, net		246,746			61,132
Accrued severance benefits, net		76,394			72,409
Other non-current liabilities		9,234			10,536

Total liabilities		464,031			237,641

Commitments and contingencies
Unitholders’ equity
Common units, no par value, 375,000,000 units authorized, 307,233,996 and 307,083,996 units issued and outstanding at June 30, 2010 and December 31, 2009, respectively		55,453			55,135
Additional paid-in capital		39,224			168,700
Accumulated deficit		(1,609	)		(1,963	)
Accumulated other comprehensive income (loss)		8,852			(6,182	)

Total unitholders’ equity		101,920			215,690

Total liabilities and unitholders’ equity	$	565,951		$	453,331

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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


	Successor						Predecessor
	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
	June 30, 2010						June 28, 2009
Net sales	$	194,700		$	374,185		$	139,693		$	241,152
Cost of sales		130,166			260,293			91,362			171,922

Gross profit		64,534			113,892			48,331			69,230

Selling, general and administrative expenses		15,964			33,872			18,353			33,636
Research and development expenses		20,543			41,074			16,242			33,228
Restructuring and impairment charges		267			603			385			439

Operating income from continuing operations		27,760			38,343			13,351			1,927

Other income (expenses)
Interest expense, net		(6,557	)		(8,606	)		(12,837	)		(27,491	)
Foreign currency gain (loss), net		(48,273	)		(26,657	)		30,791			(9,420	)
Reorganization items, net		—			—			(340	)		(340	)
Others		(950	)		(1,002	)		—			—

		(55,780	)		(36,265	)		17,614			(37,251	)

Income (loss) from continuing operations before income taxes		(28,020	)		2,078			30,965			(35,324	)

Income tax expenses		2,727			1,724			2,387			5,005

Income (loss) from continuing operations		(30,747	)		354			28,578			(40,329	)

Loss from discontinued operations, net of taxes		—			—			966			1,751

Net income (loss)	$	(30,747	)	$	354		$	27,612		$	(42,080	)

Dividends accrued on preferred units		—			—			2,948			6,317

Income (loss) from continuing operations attributable to common units	$	(30,747	)	$	354		$	25,630		$	(46,646	)

Net income (loss) attributable to common units	$	(30,747	)	$	354		$	24,664		$	(48,397	)

Earnings (loss) per common unit from continuing operations
- Basic and diluted	$	(0.10	)	$	0.00		$	0.48		$	(0.88	)

Loss per common unit from discontinued operations
- Basic and diluted	$	—		$	—		$	0.02		$	0.03

Earnings (loss) per common unit—Basic and diluted	$	(0.10	)	$	0.00		$	0.46		$	(0.91	)

Weighted average number of units—Basic		302,558,556			302,501,374			52,923,483			52,923,483
Weighted average number of units—Diluted		302,558,556			312,480,377			52,923,483			52,923,483

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY

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


	Common Units			Additional Paid-In Capital			Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income (loss)			Total
	Units	Amount		Additional Paid-In Capital			Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income (loss)			Total
Three Months Ended June 30, 2010
Balance at April 1, 2010	307,233,996	$	55,453	$	169,265		$	29,138		$	(22,411	)	$	231,445
(Successor Company)
Unit-based compensation	—		—		656			—			—			656
Distribution to unitholders	—		—		(130,697	)		—			—			(130,697	)
Comprehensive income:
Net loss	—		—		—			(30,747	)		—			(30,747	)
Fair valuation of derivatives	—		—		—			—			(2,090	)		(2,090	)
Foreign currency translation adjustments	—		—		—			—			33,329			33,329
Unrealized gains on investments	—		—		—			—			24			24

Total comprehensive income														516

Balance at June 30, 2010	307,233,996	$	55,453	$	39,224		$	(1,609	)	$	8,852		$	101,920

Six Months Ended June 30, 2010
Balance at January 1, 2010	307,083,996	$	55,135	$	168,700		$	(1,963	)	$	(6,182	)	$	215,690
(Successor Company)
Unit-based compensation	150,000		318		1,221			—			—			1,539
Distribution to unitholders	—		—		(130,697	)		—			—			(130,697	)
Comprehensive income:
Net income	—		—		—			354			—			354
Fair valuation of derivatives	—		—		—			—			(3,524	)		(3,524	)
Foreign currency translation adjustments	—		—		—			—			18,422			18,422
Unrealized gains on investments	—		—		—			—			136			136

Total comprehensive income														15,388

Balance at June 30, 2010	307,233,996	$	55,453	$	39,224		$	(1,609	)	$	8,852		$	101,920

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY

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


	Common Units			Additional Paid-In Capital		Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income (loss)			Total
	Units	Amount		Additional Paid-In Capital		Retained Earnings (Accumulated deficit)			Accumulated Other Comprehensive Income (loss)			Total
Three Months Ended June 28, 2009
Balance at March 30, 2009	52,923,483	$	52,923	$	3,261	$	(1,068,068	)	$	176,814		$	(835,070	)
(Predecessor Company)
Unit-based compensation	—		—		56		—			—			56
Dividends accrued on preferred units	—		—		—		(2,948	)		—			(2,948	)
Comprehensive income:
Net income	—		—		—		27,612			—			27,612
Foreign currency translation adjustments	—		—		—		—			(21,778	)		(21,778	)
Unrealized gains on investments	—		—		—		—			464			464

Total comprehensive income													6,298

Balance at June 28, 2009	52,923,483	$	52,923	$	3,317	$	(1,043,404	)	$	155,500		$	(831,664	)

Six Months Ended June 28, 2009
Balance at January 1, 2009	52,923,483		52,923		3,150		(995,007	)		151,135			(787,799	)
(Predecessor Company)
Unit-based compensation	—		—		167		—			—			167
Dividends accrued on preferred units	—		—		—		(6,317	)		—			(6,317	)
Comprehensive loss:
Net loss	—		—		—		(42,080	)		—			(42,080	)
Foreign currency translation adjustments	—		—		—		—			3,901			3,901
Unrealized gains on investments										464			464

Total comprehensive loss													(37,715	)

Balance at June 28, 2009	52,923,483	$	52,923	$	3,317	$	(1,043,404	)	$	155,500		$	(831,664	)

The accompanying notes are an integral part of these consolidated financial statements

MAGNACHIP SEMICONDUCTOR LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands of US dollars)


	Six Months Ended
	Successor			Predecessor
	June 30, 2010			June 28, 2009
Cash flows from operating activities
Net income (loss)	$	354		$	(42,080	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		29,985			22,167
Provision for severance benefits		9,380			3,738
Amortization of debt issuance costs and original issue discount		449			499
Loss on foreign currency translation, net		29,975			9,758
Loss (gain) on disposal of property, plant and equipment, net		(9	)		82
Loss on disposal of intangible assets, net		7			74
Restructuring and impairment charges		603			—
Unit-based compensation		2,752			167
Cash used for reorganization items		1,475			—
Noncash reorganization items		—			340
Other		740			1,077
Changes in operating assets and liabilities
Accounts receivable		(45,243	)		(13,972	)
Inventories		1,342			7,899
Other receivables		119			343
Deferred tax assets		618			1,623
Accounts payable		7,542			8,520
Other accounts payable		11,330			(2,884	)
Accrued expenses		7,841			25,542
Long term other payable		(1,531	)		405
Other current assets		(92	)		517
Other current liabilities		(1,172	)		5,081
Payment of severance benefits		(2,760	)		(3,207	)
Other		(1,324	)		(184	)

Net cash provided by operating activities before reorganization items		52,381			25,505

Cash used for reorganization items		(1,475	)		—

Net cash provided by operating activities		50,906			25,505

Cash flows from investing activities
Proceeds from disposal of plant, property and equipment		13			282
Proceeds from disposal of intangible assets		—			1
Purchase of plant, property and equipment		(20,509	)		(2,082	)
Payment for intellectual property registration		(245	)		(155	)
Increase in restricted cash		—			(17,524	)
Decrease (increase) in short-term financial instruments		329			(324	)
Decrease in guarantee deposits		999			608
Other		(778	)		3

Net cash used in investing activities		(20,191	)		(19,191	)

Cash flows from financing activities
Proceeds from issuance of senior notes		246,685			—
Debt issuance costs paid		(8,313	)		—
Repayment of long-term borrowings		(61,750	)		—
Distribution to unitholders		(130,697	)		—

Net cash provided by financing activities		45,925			—
Effect of exchange rates on cash and cash equivalents		(255	)		(914	)

Net increase in cash and cash equivalents		76,385			5,400

Cash and cash equivalents
Beginning of the period		64,925			4,037

End of the period	$	141,310		$	9,437

Supplemental cash flow information
Cash paid for interest	$	3,333		$	2,958

Cash paid (refunded) for income taxes	$	(270	)	$	4,896

The accompanying notes are an integral part of these consolidated financial statements

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements

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

1. General

The Company

MagnaChip Semiconductor LLC (together with its subsidiaries, the “Company”) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. The Company’s business is comprised of three key segments: Display Solutions, Power Solutions and Semiconductor Manufacturing Services. The Company’s Display Solutions products include display drivers for use in a wide range of flat panel displays and mobile multimedia devices. The Company’s Power Solutions products include discrete and integrated circuit solutions for power management in high-volume consumer applications. The Company’s Semiconductor Manufacturing Services segment provides specialty analog and mixed-signal foundry services for fabless semiconductor companies that serve the consumer, computing and wireless end markets.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These interim consolidated financial statements include all adjustments consisting only of normal recurring adjustments and the elimination of all intercompany accounts and transactions which are, in the opinion of management, necessary to provide a fair presentation of financial condition and results of operations for the periods presented. These interim consolidated financial statements are presented in accordance with ASC 270, “Interim Reporting,” (“ASC 270”) and, accordingly, do not include all of the information and note disclosures required by US GAAP for complete financial statements. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The year-end 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 January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-06 (ASU 2010-06), which amends the disclosure requirements of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) as of January 1, 2010. ASU 2010-06 requires new disclosures for any transfers of fair value into and out of Level 1 and 2 fair value measurements and separate presentation of purchases, sales, issuances and settlements within the reconciliation of Level 3 unobservable inputs. The Company previously adopted ASC 820 on January 1, 2008 and January 1, 2009 for financial assets and liabilities and for nonfinancial assets and liabilities, respectively. ASU 2010-06 is effective for annual and interim periods beginning after December 15, 2009, except for the Level 3 reconciliation which is effective for annual and interim periods beginning after December 15, 2010. The adoption of ASU 2010-06 as of January 1, 2010 did not have a material effect on the Company’s financial condition or results of operations. The Company does not expect the adoption of ASU 2010-06 in relation to the Level 3 reconciliation to have a material impact on the Company’s financial condition or results of operations.

In June 2009, the FASB issued ASC 810, “Consolidation,” (“ASC 810”), which (1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, (2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and (3) requires additional disclosures about an enterprise’s involvement in variable interest entities. The Company was required to adopt ASC 810 as of the beginning of 2010. The adoption of ASC 810 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

3. Voluntary Reorganization under Chapter 11

On June 12, 2009, MagnaChip Semiconductor LLC (the “Parent”), MagnaChip Semiconductor B.V., MagnaChip Semiconductor S.A. and certain other subsidiaries of the Parent in the U.S. (the “Debtors”), filed a voluntary petition for relief in the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 of the U.S. Bankruptcy Code. The court approved a plan of reorganization proposed by the Creditors’ Committee on September 25, 2009 (the “Plan of Reorganization”), and the Plan of Reorganization became effective and the Debtors emerged from Chapter 11 reorganization proceedings (the “Reorganization Proceedings”) on November 9, 2009 (the “Reorganization Effective Date”). On the Reorganization Effective Date, the Company implemented fresh-start reporting in accordance with Accounting Standards Codification (“ASC”) 852, “Reorganizations,” (“ASC 852”).

All conditions required for the adoption of fresh-start reporting were met upon emergence from the Reorganization Proceedings on the Reorganization Effective Date. The Company is permitted to select an accounting convenience date (“the Fresh-Start Adoption Date”) proximate to the emergence date for purposes of fresh-start reporting, provided that an analysis of the activity between the date of emergence and an accounting convenience date does not result in a material difference in the fresh-start reporting results. The Company evaluated transaction activity between October 25, 2009 and the Reorganization Effective Date and concluded an accounting convenience date of October 25, 2009 which was the Company’s October accounting period end was appropriate.

As a result, the fair value of the Predecessor Company’s assets became the new basis for the Successor Company’s consolidated statement of financial position as of the Fresh-Start Adoption Date, and all operations beginning on or after October 26, 2009 are related to the Successor Company.

As a result of the application of fresh-start reporting in accordance with ASC 852, the financial statements prior to and including October 25, 2009 represent the operations of the Predecessor Company and are not comparable with the financial statements for periods on or after October 25, 2009. References to the “Successor Company” refer to the Company on or after October 25, 2009, after giving effect to the application of fresh-start reporting. References to the “Predecessor Company” refer to the Company prior to and including October 25, 2009.

4. Inventories

Inventories as of June 30, 2010 and December 31, 2009 consist of the following:


	Successor
	June 30, 2010			December 31, 2009
Finished goods	$	8,338		$	19,474
Semi-finished goods and work-in-process		47,353			42,604
Raw materials		8,999			5,844
Materials in-transit		213			64
Less: inventory reserve		(4,931	)		(4,579	)

Inventories, net	$	59,972		$	63,407

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

5. Property, Plant and Equipment

Property, plant and equipment as of June 30, 2010 and December 31, 2009 comprise the following:


	Successor
	June 30, 2010			December 31, 2009
Buildings and related structures	$	69,533		$	72,076
Machinery and equipment		87,196			71,505
Vehicles and others		4,245			3,043

		160,974			146,624
Less: accumulated depreciation		(20,502	)		(5,388	)
Land		14,568			15,101

Property, plant and equipment, net	$	155,040		$	156,337

6. Intangible Assets

Intangible assets as of June 30, 2010 and December 31, 2009 are as follows:


	Successor
	June 30, 2010			December 31, 2009
Technology	$	17,499		$	14,942
Customer relationships		25,516			26,448
Intellectual property assets		4,867			4,779
In-process research and development		5,836			9,829
Less: accumulated amortization		(18,881	)		(5,840	)

Intangible assets, net	$	34,837		$	50,158

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

7. Derivative Financial Instruments

Effective January 11, 2010, the Company’s Korean subsidiary entered into option and forward contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues. Total notional amounts for the options and forward contracts were $50 million and $135 million, respectively, and monthly settlements for the contracts were and will be made from February to December 2010.

Effective May 25, 2010, the Company’s Korean subsidiary entered into another option and forward contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues. Total notional amounts for the options and forward contracts were $30 million and $78 million, respectively, and monthly settlements for the contracts will be made from January to June 2011.

The option and forward contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” (“ASC 815”), since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The Company is utilizing the “hypothetical derivative” method to measure the effectiveness by comparing the changes in value of the actual derivative versus the change in fair value of the “hypothetical derivative.”

The fair values of the Company’s outstanding option and forward contracts recorded as assets and liabilities are as follows:


Derivatives designated as hedging instruments under ASC 815:		June 30, 2010
Asset Derivatives:
Options	Other current assets	$	205
Forwards	Other current assets	$	1,696
Liability Derivatives:
Forwards	Other current liabilities	$	5,021

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the three months ended June 30, 2010:


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)			Location of Loss Reclassified from AOCI into Statements of Operations (Effective Portion)	Amount of Loss Reclassified from AOCI into Statements of Operations (Effective Portion)			Location of Loss Recognized in Statements of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Statements of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Options	$	(622	)	Net sales	$	(167	)	Other income (expenses) — Others	$	(28	)
Forwards		(1,468	)	Net sales		(1,092	)	Other income (expenses) — Others		(922	)

Total	$	(2,090	)		$	(1,259	)		$	(950	)

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the six months June 30, 2010:


Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Statements of Operations (Effective Portion)	Amount of Loss Reclassified from AOCI into Statements of Operations (Effective Portion)			Location of Loss Recognized in Statements of Operations on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Statements of Operations on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Options	$	(1,138	)	Net sales	$	(183	)	Other income (expenses) — Others	$	(62	)
Forwards		(2,386	)	Net sales		(1,695	)	Other income (expenses) — Others		(945	)

Total	$	(3,524	)		$	(1,878	)		$	(1,007	)

The Company’s option and forward contracts are subject to termination upon the occurrence of the following events:

(i) On the last day of a fiscal quarter, the sum of qualified and unrestricted cash and cash equivalents held by the Company is less than $30 million.

(ii) The rating of the Company’s debt is B- or lower by Standard & Poor’s Ratings Group or any successor rating agency thereof (“S&P”) or B3 or lower by Moody’s Investor Services, Inc. or any successor rating agency thereof (“Moody’s”) or the Company’s debt ceases to be assigned a rating by either S&P or Moody’s.

In addition, the Company is required to deposit cash collateral with Goldman Sachs International Bank, the counterparty to the option and forward contracts, for any exposure in excess of $5 million.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

8. Fair Value Measurements

ASC 820 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. ASC 820 requires, among other things, the Company’s valuation techniques used to measure fair value to maximize the use of observable inputs and minimize the use of unobservable inputs.

The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:


Level 1		Unadjusted quoted prices for identical instruments in active markets.

Level 2		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations for which inputs are observable or for which significant value drivers are observable.

Level 3		Significant inputs to the valuation model are unobservable.

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and the basis for that measurement:


	Carrying Value June 30, 2010		Fair Value Measurement June 30, 2010		Quoted Prices in Active Markets for Identical Asset (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Current derivative assets	$	1,901	$	1,901	$	—	$	1,901	$	—
Available-for-sale securities		691		691		691		—		—
Liabilities:
Current derivative liabilities		5,021		5,021		—		5,021		—

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

9. Long-Term Borrowings

Long-term borrowings as of June 30, 2010 and December 31, 2009 are as follows:


	Successor
	June 30, 2010			December 31, 2009
New term loan	$	—		$	61,750
10.5% senior notes due April 2018		250,000			—
Current portion of long-term borrowings		—			(618	)

		250,000			61,132
Discount on 10.5% senior notes due April 2018		(3,254	)		—

Long-term borrowings, net of unamortized discount	$	246,746		$	61,132

New Term Loan

In connection with the Predecessor Company’s reorganization in 2009, in complete satisfaction of the first lien lender claims arising from the senior secured credit facility (included in short-term borrowings) of $95 million, the Company made a cash payment of $33,250 thousand to the senior secured credit facility lenders and, together with its subsidiaries, including MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, as borrowers, entered into a $61,750 thousand Amended and Restated Credit Agreement (the “Credit Agreement” or the “new term loan”) with Avenue Investments, LP, Goldman Sachs Lending Partners LLC and Citicorp North America, Inc.

Long-term borrowings as of December 31, 2009 consisted of Eurodollar loans at an annual interest rate of 6 month LIBOR + 12% to Avenue Investments, LP, Goldman Sachs Lending Partners LLC and Citicorp North America, Inc. in the principal amount of $42,055 thousand, $12,285 thousand and $7,410 thousand, respectively.

On April 9, 2010, the new term loan of $61,596 thousand was fully repaid by the Company with the proceeds from issuance of new 10.5% senior notes. In connection with the repayment of the new term loan, $210 thousand of relevant debt issuance costs were written off.

As of the early repayment date, the Company and all of its subsidiaries except for MagnaChip Semiconductor (Shanghai) Company Limited jointly and severally guaranteed, as a primary obligor, the payment and performance of the borrower’s obligations under the Credit Agreement.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

10.5% Senior Notes

On April 9, 2010, two of the Company’s wholly-owned subsidiaries, MagnaChip Semiconductor S.A. and MagnaChip Semiconductor Finance Company, issued $250 million aggregate principal amount of 10.5% senior notes due April 15, 2018 at a price of 98.674%. Interest on the notes will accrue at a rate of 10.5% per annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2010. $250 million of principle amount will be paid in full at April 15, 2018. The obligations under the senior notes are fully and unconditionally guaranteed on an unsecured senior basis by the Company and all of its subsidiaries except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

Of the $238,372 thousand of net proceeds, which represents $250 million of principal amount net of $3,315 thousand of original issue discount and $8,313 thousand of debt issuance costs, $130,697 thousand was used to make a distribution to the Company’s stockholders and $61,596 thousand was used to repay all outstanding borrowings under the new term loan. The remaining proceeds of $46,079 thousand were retained to fund working capital and for general corporate purposes.

The Company can optionally redeem all or a part of the notes according to the following schedule: (i) at any time prior to April 15, 2013, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of notes issued under the indenture at a redemption price equal to 110.5% of the principal amount of the notes redeemed, plus accrued and unpaid interest and special interest, if any, to the date of redemption; (ii) at any time prior to April 15, 2014, the Company may on any one or more occasions redeem all or a part of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed, plus the applicable premium as of, and accrued and unpaid interest and special interest, if any, to the date of redemption; and (iii) on or after April 15, 2014, the Company may on any one or more occasions redeem all or a part of the notes, at a redemption price equal to 105.25%, 102.625% and 100% of the principal amount of the notes redeemed in 2014, 2015 and 2016 and thereafter, respectively, plus accrued and unpaid interest and special interest, if any, on the notes redeemed, to the applicable date of redemption.

The indenture relating to the Company’s $250 million senior notes contains covenants that limit ability of the Parent, co-issuers and the restricted subsidiaries to: (i) declare or pay any dividend or make any payment or distribution on account of or purchase or redeem the Company’s capital stock or equity interests of the restricted subsidiaries; (ii) make any principal payment on, or redeem or repurchase, prior to any scheduled repayment, sinking fund payment or maturity, any subordinated indebtedness; (iii) make certain investments, including capital expenditures; (iv) incur additional indebtedness and issue certain types of capital stock; (v) create or incur any lien (except for permitted liens) that secures obligations under any indebtedness or related guarantee; (vi) merge with or into or sell all or substantially all of the Company’s assets to other companies; (vii) enter into certain types of transactions with affiliates; (viii) guarantee the payment of any indebtedness; (ix) enter into sale-leaseback transactions; (x) enter into agreements that would restrict the ability of the restricted subsidiaries to make distributions with respect to their equity, to make loans to the Parent, co-issuers or other restricted subsidiaries or to transfer assets to the Parent, co-issuers or other restricted subsidiaries; and (xi) designate unrestricted subsidiaries.

These covenants will be subject to a number of exceptions and qualifications. Certain of these restrictive covenants will terminate if the notes are rated investment grade at any time.

As of June 30, 2010, the Company is compliant with all of its covenant requirements.

Of the $250 million aggregate principal amount, funds affiliated with Avenue Capital Management II, L.P. purchased $35 million principal amount.

In connection with the issuance of the senior notes, the Company capitalized certain costs and fees, which are being amortized using the effective interest method over its respective term, 2010 to 2018. Amortization costs, which were included in interest expense in the accompanying statements of operations, amounted to $153 thousand for the three and six months ended June 30, 2010. The remaining capitalized costs as of June 30, 2010 were $8,160 thousand.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

10. Accrued Severance Benefits

The majority of accrued severance benefits is for employees in the Company’s Korean subsidiary, MagnaChip Semiconductor Ltd. (Korea). Pursuant to the Employee Retirement Benefit Security 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 June 30, 2010, 98.5% of all employees of the Company were eligible for severance benefits.

Changes in accrued severance benefits for each period are as follows:


		Successor						Predecessor
		Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
		June 30, 2010						June 28, 2009
Beginning balance		$	78,106		$	73,646		$	58,546		$	63,147
Provisions			6,214			9,380			2,749			3,738
Severance payments			(1,668	)		(2,760	)		(1,521	)		(3,207	)
Translation adjustments			(5,114	)		(2,728	)		2,838			(1,066	)

			77,538			77,538			62,612			62,612

Less:	Cumulative contributions to the National Pension Fund		(476	)		(476	)		(496	)		(496	)
	Group Severance insurance plan		(668	)		(668	)		(634	)		(634	)

Accrued severance benefits, net		$	76,394		$	76,394		$	61,482		$	61,482

The severance benefits are funded approximately 1.48% and 1.80% as of June 30, 2010 and June 28, 2009, 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 is liable to pay the following future benefits to its non-executive employees upon their normal retirement age:


	Severance benefit
Remainder of 2010	$	32
2011		—
2012		132
2013		—
2014		275
2015		304
2016 – 2020		10,225

The above amounts were determined based on the non-executive 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 non-executive employees that will cease working with the Company before their normal retirement ages.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

11. Redeemable Convertible Preferred Units

Predecessor Company

Changes in Series B units for each period are as follows:


	Three Months Ended			Six Months Ended
	June 28, 2009			June 28, 2009
	Units	Amount		Units	Amount
Beginning of period	93,997	$	146,038	93,997	$	142,669
Accrual of preferred dividends	—		2,948	—		6,317

End of period	93,997	$	148,986	93,997	$	148,986

The Series B units were retired without consideration as part of the Company’s reorganization in 2009.

12. Discontinued Operations

On October 6, 2008, the Company announced the closure of its Imaging Solutions business segment. As of December 31, 2008, Imaging Solutions business segment qualified as a discontinued operation component of the Company under ASC 360, “Property, Plant and Equipment,” (“ASC 360”). As a result, the results of operations of the Imaging Solutions business segment were classified as discontinued operations.

The results of operations of the Company’s discontinued Imaging Solutions business consist of the following:


	Predecessor
	Three Months Ended		Six Months Ended
	June 28, 2009
Net sales	$	1,341	$	2,254
Cost of sales		2,071		3,377
Selling, general and administrative expenses		236		628

Loss from discontinued operations, net of taxes	$	966	$	1,751

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

13. Restructuring and Impairment Charges

Successor Company

2010 Restructuring and Impairment Charges

The Company recognized $267 and $603 thousand of impairment charge for the three and six months ended June 30, 2010, respectively, for the two and four abandoned IPR&D projects which were recorded as a result of its adoption of fresh-start reporting as of October 25, 2009.

Predecessor Company

2009 Restructuring and Impairment Charges

On March 31, 2009, the Company announced the closure of the Tokyo office of its subsidiary, MagnaChip Semiconductor Inc. (Japan). In connection with this closure, the Company recognized $385 thousand and $439 thousand of restructuring charges, which consisted of one-time termination benefits and other related costs under ASC 420, “Exit or Disposal Cost Obligations,” (“ASC 420”), for the three and six months ended June 28, 2009. There was no remaining accrual as of June 28, 2009.

14. Uncertainty in Income Taxes

The Company’s subsidiaries file income tax returns in Korea, Japan, Taiwan, the U.S. and in various other jurisdictions. The Company is subject to income tax examinations by tax authorities of these jurisdictions for the applicable statute of limitations since the beginning of its operation as an independent company in October 2004.

As of June 30, 2010 and December 31, 2009, the Company recorded $867 thousand and $1,997 thousand of liabilities for unrecognized tax benefits, respectively. For the six months ended June 30, 2010, the Company reversed $1,640 thousand of liabilities due to the lapse of the applicable statute of limitations.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as income tax expenses. The Company recognized $88 thousand and $64 thousand of interest and penalties as income tax expenses for the three and six months ended June 30, 2010, respectively. And it also recognized $55 thousand and $147 thousand of interest and penalties as income tax expenses for the three and six months ended June 28, 2009, respectively. Total interest and penalties accrued as of June 30, 2010 and December 31, 2009 were $194 thousand and $946 thousand, respectively.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

15. Geographic and Segment Information

The following sets forth information relating to the reportable segments:


	Three Months Ended
	Successor		Predecessor
	June 30, 2010		June 28, 2009
Net Sales
Display Solutions	$	80,584	$	74,187
Semiconductor Manufacturing Services		101,564		62,963
Power Solutions		12,040		1,685
All other		512		858

Total segment net sales	$	194,700	$	139,693

Gross Profit
Display Solutions	$	22,122	$	22,435
Semiconductor Manufacturing Services		39,452		25,816
Power Solutions		2,448		(778	)
All other		512		858

Total segment gross profit	$	64,534	$	48,331


	Six Months Ended
	Successor		Predecessor
	June 30, 2010		June 28, 2009
Net Sales
Display Solutions	$	157,314	$	133,807
Semiconductor Manufacturing Services		194,765		103,100
Power Solutions		21,074		2,618
All other		1,032		1,627

Total segment net sales	$	374,185	$	241,152

Gross Profit
Display Solutions	$	36,553	$	36,109
Semiconductor Manufacturing Services		72,296		31,993
Power Solutions		4,011		(499	)
All other		1,032		1,627

Total segment gross profit	$	113,892	$	69,230

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

The following is a summary of net sales by region, based on the location of the customer:


	Three Months Ended
	Successor		Predecessor
	June 30, 2010		June 28, 2009
Korea	$	101,310	$	74,909
Asia Pacific		52,687		43,529
Japan		12,796		9,254
North America		23,686		11,126
Europe		4,003		875
Africa		218		—

Total	$	194,700	$	139,693


	Six Months Ended
	Successor		Predecessor
	June 30, 2010		June 28, 2009
Korea	$	198,970	$	134,607
Asia Pacific		101,161		65,288
Japan		22,991		16,769
North America		44,066		19,708
Europe		6,779		4,780
Africa		218		—

Total	$	374,185	$	241,152

Net sales from the Company’s top ten largest customers accounted for 64.3% and 68.4% for the three months ended June 30, 2010 and June 28, 2009, respectively, and 64.2% and 70.1% for the six months ended June 30, 2010 and June 28, 2009, respectively.

The Company recorded $35,315 thousand and $40,178 thousand of sales to one customer within its Display Solutions segment, which represents greater than 10% of net sales, for the three months ended June 30, 2010 and June 28, 2009, respectively, and $70,893 thousand and $73,962 thousand for the six months ended June 30, 2010 and June 28, 2009, respectively.

Over 99% of the Company’s property, plant and equipment are located in Korea as of June 30, 2010.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

16. Commitments and Contingencies

Samsung Fiber Optics has made a claim against the Company for the infringement of the certain patent rights of Caltech in relation to imaging sensor products provided by the Company to Samsung Fiber Optics. The Company believes it is probable that the pending claim will have an unfavorable outcome and further believes the associated loss can be reasonably estimated according to ASC 450 “Contingencies” (“ASC 450”). The Company recorded $718 thousand of estimated liabilities as of June 30, 2010 and December 31, 2009 in accrued expenses in the accompanying balance sheets, as the Company believes its accrual is its best estimate if the final outcome is unfavorable. Estimation was based on the most recent communication with Samsung Fiber Optics. Accordingly, the Company cannot provide assurance that the estimated liabilities will be realized, and actual results could vary materially.

17. Earnings (loss) per Unit

The following table illustrates the computation of basic and diluted earnings (loss) per common unit:


	Three Months Ended
	Successor			Predecessor
	June 30, 2010			June 28, 2009
Income (loss) from continuing operations	$	(30,747	)	$	28,578
Loss from discontinued operations, net of taxes		—			(966	)

Net income (loss)		(30,747	)		27,612
Dividends accrued on preferred unitholders		—			(2,948	)

Income (loss) from continuing operations attributable to common units	$	(30,747	)	$	25,630

Net income (loss) attributable to common units	$	(30,747	)	$	24,664

Weighted average common units outstanding-basic and diluted		302,558,556			52,923,483

Basic and diluted earnings (loss) per unit from continuing operations	$	(0.10	)	$	0.48

Basic and diluted loss per unit from discontinued operations	$	—		$	(0.02	)

Basic and diluted net earnings (loss) per unit	$	(0.10	)	$	0.46

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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


	Six Months Ended
	Successor		Predecessor
	June 30, 2010		June 28, 2009
Income (loss) from continuing operations	$	354	$	(40,329	)
Loss from discontinued operations, net of taxes		—		(1,751	)

Net income (loss)		354		(42,080	)
Dividends accrued on preferred unitholders		—		(6,317	)

Income (loss) from continuing operations attributable to common units	$	354	$	(46,646	)

Net income (loss) attributable to common units	$	354	$	(48,397	)

Weighted average common units outstanding-basic		302,501,374		52,923,483

Weighted average common units outstanding-diluted		312,480,377		52,923,483

Basic and diluted earnings (loss) per unit from continuing operations	$	0.00	$	(0.88	)

Basic and diluted earnings (loss) per unit from discontinued operations	$	—	$	(0.03	)

Basic and diluted net earnings (loss) per unit	$	0.00	$	(0.91	)

The following outstanding unit options and warrants were excluded from the computation of diluted earnings (loss) per unit of Successor Company, as they would have an anti-dilutive effect on the calculation. The following outstanding redeemable convertible preferred units and unit options were excluded from the computation of diluted earnings (loss) per unit of Predecessor Company as they were out of money position considering the Reorganization Proceedings of Predecessor Company:


	Six Months Ended
	Successor	Predecessor
	June 30, 2010	June 28, 2009
Redeemable convertible preferred units	—	93,997
Options	914,000	3,882,506
Warrants	15,000,000	—

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

18. Subsequent Events

The Company has evaluated subsequent events requiring recognition or disclosure in the consolidated financial statements during the period from July 1, 2010 through September 3, 2010, the date the unaudited interim consolidated financial statements were available to be issued.

A. Form S-4 Filing in Connection With the 10.5% Senior Notes

On August 4, 2010, the Company filed a registration statement on Form S-4 that set forth the terms and conditions under which the Company offered to exchange up to $250 million aggregate principal amount of 10.5% Senior Notes due 2018, which will be registered under the Securities Act (the “new notes”), for an equal principal amount of the Company’s outstanding unregistered 10.5% Senior Notes due 2018, which the Company issued on April 9, 2010 (the “old notes”). The terms of the new notes are substantially identical to the terms of the old notes (including principal amount, interest rate, maturity and redemption rights), except that the new notes will be registered under the Securities Act and will bear a separate CUSIP number, and the transfer restrictions, registration rights and related special interest terms applicable to the old notes will not apply to the new notes. The new notes will evidence the same indebtedness as the old notes which they will replace, and both the old notes and the new notes are governed by the same indenture.

B. Cash Flow Hedge Transactions

Effective August 12, 2010, the Company’s Korean subsidiary entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues. Total notional amounts for the zero cost collar contracts were $108 million and monthly settlements for the contracts will be made from July to December 2011. Under the Company’s hedge strategy utilizing these zero cost collar contracts, appreciation of the Korean won against the U.S. dollar beyond 1,100:1 and depreciation of Korean won against U.S. dollar below 1,348:1 were designated as the risk being hedged.

C. Capital Lease Agreement

On August 31, 2010, the Company’s Korean subsidiary (the “lessee”) entered into a capital lease agreement with MMT First Company Limited for the use of semiconductor equipment. The lease term is two years, and the total amount of lease payments to be paid on a quarterly basis over the lease term is $11,437 thousand. The lease was categorized as a capital lease because the lease provides that the ownership of the equipment transfers to the lessee upon expiration of the lease term.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

19. Condensed Consolidating Financial Information

The $250 million senior notes are fully and unconditionally, jointly and severally guaranteed by the Company and all of its subsidiaries, except for MagnaChip Semiconductor, Ltd. (Korea) and MagnaChip Semiconductor (Shanghai) Company Limited.

The senior notes are structurally subordinated to the creditors of the Company’s principal manufacturing and selling subsidiary, MagnaChip Semiconductor, Ltd. (Korea), which accounts for substantially all of the Company’s net sales and assets.

Below are condensed consolidating balance sheets as of June 30, 2010 and December 31, 2009, condensed consolidating statements of operations for the three months and six months ended June 30, 2010 and June 28, 2009 and condensed consolidating statement of cash flows for the six months ended June 30, 2010 and June 28, 2009 of those entities that guarantee the senior notes, those that do not, MagnaChip Semiconductor LLC, and the co-issuers.

For the purpose of the guarantor financial information, the investments in subsidiaries are accounted for under the equity method.

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Balance Sheet

June 30, 2010

(Successor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	73		$	46,596		$	82,448		$	12,193		$	—		$	141,310
Accounts receivable, net		—			—			155,751			55,483			(93,523	)		117,711
Inventories, net		—			—			59,956			174			(158	)		59,972
Other receivables		710			718			19,786			2,774			(20,286	)		3,702
Prepaid expenses		37			5			12,658			105			(2,897	)		9,908
Short-term intercompany loan		—			95,000			—			95,000			(190,000	)		—
Other current assets		5,509			102,276			3,479			97,524			(197,691	)		11,097

Total current assets		6,329			244,595			334,078			263,253			(504,555	)		343,700

Property, plant and equipment, net		—			—			154,683			357			—			155,040
Intangible assets, net		—			—			34,223			614			—			34,837
Long-term prepaid expenses		—			—			21,480			—			(10,597	)		10,883
Investment in subsidiaries		(594,889	)		(667,901	)		—			(520,778	)		1,783,568			—
Long-term intercompany loan		697,125			778,693			—			621,000			(2,096,818	)		—
Other non-current assets		—			8,160			5,987			7,344			—			21,491

Total Assets	$	108,565		$	363,547		$	550,451		$	371,790		$	(828,402	)	$	565,951

Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	123,934		$	38,913		$	(93,468	)	$	69,379
Other accounts payable		6,545			7,730			23,145			5,412			(20,286	)		22,546
Accrued expenses		100			5,985			119,304			104,263			(197,746	)		31,906
Short-term intercompany borrowings		—			—			95,000			95,000			(190,000	)		—
Other current liabilities		—			—			6,913			3,810			(2,897	)		7,826

Total current liabilities		6,645			13,715			368,296			247,398			(504,397	)		131,657

Long-term borrowings		—			943,871			621,000			778,693			(2,096,818	)		246,746
Accrued severance benefits, net		—			—			75,173			1,221			—			76,394
Other non-current liabilities		—			—			6,707			13,124			(10,597	)		9,234

Total liabilities		6,645			957,586			1,071,176			1,040,436			(2,611,812	)		464,031

Commitments and contingencies
Unitholders’ equity
Common units		55,453			136,229			39,005			51,976			(227,210	)		55,453
Additional paid-in capital		39,224			(735,016	)		(538,379	)		(733,394	)		2,006,789			39,224
Retained earnings (accumulated deficit)		(1,609	)		(4,104	)		(29,773	)		3,938			29,939			(1,609	)
Accumulated other comprehensive income		8,852			8,852			8,422			8,834			(26,108	)		8,852

Total unitholders’ equity		101,920			(594,039	)		(520,725	)		(668,646	)		1,783,410			101,920

Total liabilities and unitholders’ equity	$	108,565		$	363,547		$	550,451		$	371,790		$	(828,402	)	$	565,951

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Balance Sheet

December 31, 2009

(Successor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	136		$	24		$	45,443		$	19,322		$	—		$	64,925
Accounts receivable, net		—			—			122,500			66,872			(115,139	)		74,233
Inventories, net		—			—			59,914			4,098			(605	)		63,407
Other receivables		710			718			7,061			3,617			(8,673	)		3,433
Prepaid expenses		165			85			14,122			1,150			(2,897	)		12,625
Short-term intercompany loan		—			95,000			—			95,000			(190,000	)		—
Other current assets		16			72,614			776			72,868			(142,841	)		3,433

Total current assets		1,027			168,441			249,816			262,927			(460,155	)		222,056

Property, plant and equipment, net		—			—			155,951			386			—			156,337
Intangible assets, net		—			—			49,459			699			—			50,158
Long-term prepaid expenses		—			—			22,576			—			(12,034	)		10,542
Investment in subsidiaries		(608,843	)		(690,259	)		—			(517,520	)		1,816,622			—
Long-term intercompany loan		824,091			806,355			—			621,000			(2,251,446	)		—
Other non-current assets		—			234			5,753			8,251			—			14,238

Total Assets	$	216,275		$	284,771		$	483,555		$	375,743		$	(907,013	)	$	453,331

Liabilities and Unitholders’ Equity
Current liabilities
Accounts payable	$	—		$	—		$	106,792		$	67,975		$	(115,062	)	$	59,705
Other accounts payable		485			5,551			6,337			3,490			(8,673	)		7,190
Accrued expenses		100			1,134			89,045			74,753			(142,918	)		22,114
Short-term intercompany borrowings		—			—			95,000			95,000			(190,000	)		—
Current portion of long-term debt		—			618			—			—			—			618
Other current liabilities		—			—			2,935			3,899			(2,897	)		3,937

Total current liabilities		585			7,303			300,109			245,117			(459,550	)		93,564

Long-term borrowings		—			885,224			621,000			806,354			(2,251,446	)		61,132
Accrued severance benefits, net		—			—			71,362			1,047			—			72,409
Other non-current liabilities		—			—			8,550			14,020			(12,034	)		10,536

Total liabilities		585			892,527			1,001,021			1,066,538			(2,723,030	)		237,641

Commitments and contingencies
Unitholders’ equity
Common units		55,135			136,229			39,005			51,976			(227,210	)		55,135
Additional paid-in capital		168,700			(735,940	)		(539,175	)		(734,525	)		2,009,640			168,700
Accumulated deficit		(1,963	)		(1,871	)		(11,636	)		(2,056	)		15,563			(1,963	)
Accumulated other comprehensive income		(6,182	)		(6,174	)		(5,660	)		(6,190	)		18,024			(6,182	)

Total unitholders’ equity		215,690			(607,756	)		(517,466	)		(690,795	)		1,816,017			215,690

Total liabilities and unitholders’ equity	$	216,275		$	284,771		$	483,555		$	375,743		$	(907,013	)	$	453,331

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Statement of Operations

For the three months ended June 30, 2010

(Successor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	194,845		$	6,923		$	(7,068	)	$	194,700
Cost of sales		—			—			130,178			1,224			(1,236	)		130,166

Gross profit		—			—			64,667			5,699			(5,832	)		64,534

Selling, general and administrative expenses		615			389			15,591			2,167			(2,798	)		15,964
Research and development expenses		—			—			21,457			2,112			(3,026	)		20,543
Restructuring and impairment charges		—			—			267			—			—			267

Operating income (loss)		(615	)		(389	)		27,352			1,420			(8	)		27,760

Other income (expense)		3,734			(9,540	)		(64,123	)		14,149			—			(55,780	)

Income (loss) before income taxes, equity in loss of related equity investment		3,119			(9,929	)		(36,771	)		15,569			(8	)		(28,020	)

Income tax expenses		—			—			12			2,715			—			2,727

Income (loss) before equity in loss of related investment		3,119			(9,929	)		(36,783	)		12,854			(8	)		(30,747	)

Loss of related investment		(33,866	)		(24,098	)		—			(36,791	)		94,755			—

Net loss	$	(30,747	)	$	(34,027	)	$	(36,783	)	$	(23,937	)	$	94,747		$	(30,747	)

Net loss attributable to common units	$	(30,747	)	$	(34,027	)	$	(36,783	)	$	(23,937	)	$	94,747		$	(30,747	)

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Statement of Operations

For the six months ended June 30, 2010

(Successor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	369,659		$	18,605		$	(14,079	)	$	374,185
Cost of sales		—			—			256,682			6,917			(3,306	)		260,293

Gross profit		—			—			112,977			11,688			(10,773	)		113,892

Selling, general and administrative expenses		1,178			525			32,855			4,754			(5,440	)		33,872
Research and development expenses		—			—			42,857			4,282			(6,065	)		41,074
Restructuring and impairment charges		—			—			603			—			—			603

Operating income (loss)		(1,178	)		(525	)		36,662			2,652			732			38,343

Other income (expense)		3,734			(8,117	)		(56,746	)		24,864			—			(36,265	)

Income (loss) before income taxes, equity in earnings (loss) of related equity investment		2,556			(8,642	)		(20,084	)		27,516			732			2,078

Income tax expenses (benefits)		—			—			(1,947	)		3,671			—			1,724

Income (loss) before equity in earnings (loss) of related investment		2,556			(8,642	)		(18,137	)		23,845			732			354

Earnings (loss) of related investment		(2,202	)		6,409			—			(17,851	)		13,644			—

Net income (loss)	$	354		$	(2,233	)	$	(18,137	)	$	5,994		$	14,376		$	354

Net income (loss) attributable to common units	$	354		$	(2,233	)	$	(18,137	)	$	5,994		$	14,376		$	354

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Statement of Operations

For the three months ended June 28, 2009

(Predecessor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	137,819		$	51,317		$	(49,443	)	$	139,693
Cost of sales		—			—			91,940			44,216			(44,794	)		91,362

Gross profit		—			—			45,879			7,101			(4,649	)		48,331

Selling, general and administrative expenses		2,178			(10	)		14,693			3,204			(1,712	)		18,353
Research and development expenses		—			—			15,771			2,404			(1,933	)		16,242
Restructuring and impairment charges		—			—			—			385			—			385

Operating income (loss)		(2,178	)		10			15,415			1,108			(1,004	)		13,351

Other income (expense)		—			8,757			14,057			(5,200	)		—			17,614

Income (loss) before income taxes, equity in earnings of related equity investment		(2,178	)		8,767			29,472			(4,092	)		(1,004	)		30,965

Income tax expenses (benefits)		—			—			26			2,361			—			2,387

Income (loss) before equity in earnings of related investment		(2,178	)		8,767			29,446			(6,453	)		(1,004	)		28,578

Earnings of related investment		29,790			20,751			—			28,132			(78,673	)		—

Income from continuing operations		27,612			29,518			29,446			21,679			(79,677	)		28,578

Income (loss) from discontinued operation, net of tax		—			—			(1,107	)		271			(130	)		(966	)

Net income	$	27,612		$	29,518		$	28,339		$	21,950		$	(79,807	)	$	27,612

Dividends accrued on preferred units		2,948			—			—			—			—			2,948

Income from continuing operations attributable to common units	$	24,664		$	29,518		$	29,446		$	21,679		$	(79,677	)	$	25,630

Net income attributable to common units	$	24,664		$	29,518		$	28,339		$	21,950		$	(79,807	)	$	24,664

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Statement of Operations

For the six months ended June 28, 2009

(Predecessor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Net sales	$	—		$	—		$	233,645		$	91,708		$	(84,201	)	$	241,152
Cost of sales		—			—			171,059			76,146			(75,283	)		171,922

Gross profit		—			—			62,586			15,562			(8,918	)		69,230

Selling, general and administrative expenses		2,661			41			26,702			6,610			(2,378	)		33,636
Research and development expenses		—			—			33,338			5,909			(6,019	)		33,228
Restructuring and impairment charges		—			—			—			439			—			439

Operating income (loss)		(2,661	)		(41	)		2,546			2,604			(521	)		1,927

Other income (expense)		—			2,485			(43,029	)		3,293			—			(37,251	)

Income (loss) before income taxes, equity in loss of related equity investment		(2,661	)		2,444			(40,483	)		5,897			(521	)		(35,324	)

Income tax expenses		—			—			52			4,953			—			5,005

Income (loss) before equity in loss of related investment		(2,661	)		2,444			(40,535	)		944			(521	)		(40,329	)

Loss of related investment		(39,419	)		(42,091	)		—			(42,258	)		123,768			—

Loss from continuing operation		(42,080	)		(39,647	)		(40,535	)		(41,314	)		123,247			(40,329	)

Income (loss) from discontinued operation, net of taxes		—			—			(1,616	)		45			(180	)		(1,751	)

Net loss	$	(42,080	)	$	(39,647	)	$	(42,151	)	$	(41,269	)	$	123,067		$	(42,080	)

Dividends accrued on preferred units		6,317			—			—			—			—			6,317

Loss from continuing operations attributable to common units	$	(48,397	)	$	(39,647	)	$	(40,535	)	$	(41,314	)	$	123,247		$	(46,646	)

Net loss attributable to common units	$	(48,397	)	$	(39,647	)	$	(42,151	)	$	(41,269	)	$	123,067		$	(48,397	)

MagnaChip Semiconductor LLC and Subsidiaries

Notes to Consolidated Financial Statements - (Continued)

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

Condensed Consolidating Statement of Cash Flows

For the six months ended June 30, 2010

(Successor Company)


	MagnaChip Semiconductor LLC (Parent)			Co-Issuers			Non-Guarantors			Guarantors			Eliminations			Consolidated
Cash flow from operating activities
Net income (loss)	$	354		$	(2,233	)	$	(18,137	)	$	5,994		$	14,376		$	354
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization		—			—			29,846			139			—			29,985
Provision for severance benefits		—			—			9,225			155			—			9,380
Amortization of debt issuance costs		—			449			—			—			—			449
Loss (gain) on foreign currency translation, net		—			27,659			29,510			(27,194	)		—			29,975
Gain on disposal of property, plant and equipment, net		—			—			(9	)		—			—			(9	)
Loss on disposal of intangible assets, net		—			—			7			—			—			7
Restructuring and impairment charges		—			—			603			—			—			603
Unit-based compensation		407			—			2,010			335			—			2,752
Cash used for reorganization items		—			—			51			1,424			—			1,475
Loss (earnings) of related investment		2,202			(6,409	)		—			17,851			(13,644	)		—
Other		13			(11	)		757			(19	)		—			740
Changes in operating assets and liabilities
Accounts receivable, net		—			—			(35,220	)		11,593			(21,616	)		(45,243	)
Inventories, net		—			—			(2,189	)		4,290			(759	)		1,342
Other receivables		—			—			(12,339	)		845			11,613			119
Deferred tax assets		—			—			—			618			—			618
Accounts payable		—			—			15,050			(29,102	)		21,594			7,542
Other accounts payable		5,510			2,181			13,022			2,230			(11,613	)		11,330
Accrued expenses		—			4,851			28,509			29,443			(54,962	)		7,841
Long term other payable		—			—			—			72			(1,603	)		(1,531	)
Other current assets		(4,805	)		(29,584	)		3,737			(24,144	)		54,704			(92	)
Other current liabilities		—			—			(1,043	)		(129	)		—			(1,172	)
Payment of severance benefits		—			—			(2,731	)		(29	)		—			(2,760	)
Other		—			—			467			(1,791	)		—			(1,324	)

Net cash provided by (used in) operating activities before reorganization items		3,681			(3,097	)		61,126			(7,419	)		(1,910	)		52,381

Cash used for reorganization items		—			—			(51	)		(1,424	)		—			(1,475	)

Net cash provided by (used in) operating activities		3,681			(3,097	)		61,075			(8,843	)		(1,910	)		50,906

Cash flows from investing activities
Proceeds from disposal of plant, property and equipment		—			—			13			—			—			13
Purchases of plant, property and equipment		—			—			(20,505	)		(4	)		—			(20,509	)
Payment for intellectual property registration		—			—			(245	)		—			—			(245	)
Decrease in short-term financial instruments		—			—			—			329			—			329
Decrease in guarantee deposits		—			—			219			780			—			999
Collection of long-term intercompany loans		126,953			—			—			—			(126,953	)		—
Other		—			—			(693	)		(85	)		—			(778	)

Net cash provided by (used in) investing activities		126,953			—			(21,211	)		1,020			(126,953	)		(20,191	)

Cash flow from financing activities
Proceeds from issuance of senior notes		—			246,685			—			—			—			246,685
Debt issuance costs paid		—			(8,313	)		—

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